(as lessor) a yearly fixed rental of ₱635.

00 per hectare plus a variable component

Republic of the Philippines equivalent to 1% of net sales from 1988 to 1996, and ½% from 1997 to 2007.3

SUPREME COURT On January 29, 1998, the parties executed an Addendum to the Lease Agreement
(Addendum) which provided for the extension of the lease contract for another 25
Manila years from January 1, 2008 to December 2032. The Addendum was signed by
Antonio Dayday, Chairman of the NGEI Coop, and respondent Dennis Villareal
THIRD DIVISION
(Villareal), the President of FPPI, and witnessed by DAR Undersecretary Artemio
Adasa. The annual lease rental remained at ₱635.00 per hectare, but the package of
G.R. No. 184950 October 11, 2012
economic benefits for the bona fide members of NGEI Coop was amended and
increased, as follows:
NGEI MULTI-PURPOSE COOPERATIVE INC. AND HERNANCITO RONQUILLO,
Petitioners,
Years Covered Amount (Per Hectare)
vs.

FILIPINAS PALMOIL PLANTATION INC. AND DENNIS VILLAREAL, Respondents. 1998 – 2002 P1,865.00

DECISION

MENDOZA, J.: 2003 – 2006 P2,365.00

This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing
the May 9, 2008 Decision1of the Court of Appeals (CA) in CA-G.R. SP No. 99552 and 2007 – 2011 P2,865.00
its October 3, 2008 Resolution2 denying the motion for reconsideration thereof.

The Facts 2012 – 2016 P3,365.00

On December 2, 1988, the petitioner NGEI Multi-Purpose Cooperative Inc. (NGEI

Coop), a duly-registered agrarian reform workers’ cooperative, was awarded by the
2017 – 2021 P3,865.00
Department of Agrarian Reform (DAR) 3,996.6940 hectares of agricultural land for
palm oil plantations located in Rosario and San Francisco, Agusan del Sur.

On March 7, 1990, NGEI Coop entered into a lease agreement with respondent 2022 – 2026 P4,365.00
Filipinas Palmoil Plantation, Inc. (FPPI), formerly known as NDC Gutrie Plantation,
Inc., over the subject property commencing on September 27, 1988 and ending on
December 31, 2007. Under the lease agreement, FPPI (as lessee) shall pay NGEI Coop 2027 – 2031 P4,865.00

1|Page
 4 On appeal, the DARAB Central Office rendered the October 9, 2006 Decision. 6 It
2032 P5,365.00
found no reversible error on the findings of fact and law by the Regional Adjudicator
and disposed the case as follows:

On June 20, 2002, NGEI Coop and petitioner Hernancito Ronquillo (Ronquillo) filed a WHEREFORE, premises considered, the instant Appeal is DENIED for lack of merit
complaint for the Nullification of the Lease Agreement and the Addendum to the and the assailed Order dated March 22, 2004 is hereby affirmed.
Lease Agreement before the Department of Agrarian Reform Adjudication Board
(DARAB) Regional Adjudicator of San Francisco, Agusan del Sur (Regional SO ORDERED.7
Adjudicator). The case was docketed as DARAB Case No. XIII (03)–176. The
After their motion for reconsideration was denied, the petitioners appealed to the
petitioners alleged, among others, that the Addendum was null and void because
CA via a petition for review under Rule 43 of the Rules of Court.
Antonio Dayday had no authority to enter into the agreement; that said Addendum
was approved neither by the farm worker-beneficiaries nor by the Presidential
On May 9, 2008, the CA rendered the assailed decision upholding the validity and
Agrarian Reform Council (PARC) Executive Committee, as required by DAR
binding effect of the Addendum as it was freely and voluntarily executed between
Administrative Order (A.O.) No. 5, Series of 1997; that the annual rental and the
the parties, devoid of any vices of consent. The CA sustained its validity on the basis
package of economic benefits were onerous and unjust to them; and that the lease
of the civil law principle of mutuality of contracts that the parties were bound by the
agreement and the Addendum unjustly deprived them of their right to till their own
terms and conditions unequivocally expressed in the addendum which was the law
land for an exceedingly long period of time, contrary to the intent of Republic Act
between them.
(R.A.) No. 6657, as amended by R.A. No. 7905.
In dismissing the petition, the CA ratiocinated that the findings of fact of the Regional
In its Decision,5 dated February 3, 2004, the Regional Adjudicator declared the
Adjudicator and the DARAB were supported by substantial evidence. Citing the case
Addendum as null and void for having been entered into by Antonio Dayday without
of Sps. Joson v. Mendoza,8 the CA held that such findings of the agrarian court being
the express authority of NGEI Coop, and for having been executed in violation of the
supported by substantial evidence were conclusive and binding on it.
Rules under A.O. No. 5, Series of 1997.
The petitioners filed a motion for reconsideration of the said decision on the
FPPI filed a motion for reconsideration. The Regional Adjudicator, finding merit in
grounds, among others, that the findings of fact of the Regional Adjudicator were in
the said motion, reversed his earlier decision in an Order, dated March 22, 2004. He
conflict with those of the DARAB and were not supported by the evidence on record;
dismissed the complaint for the nullification of the Addendum on the grounds of
and that the conclusions of law were not in accordance with applicable law and
prescription and lack of cause of action. The Regional Adjudicator further opined that
existing jurisprudence. The motion, however, was denied for lack of merit by the CA
the Addendum was valid and binding on both the NGEI Coop and FPPI and, the
in its Resolution, dated October 3, 2008.
petitioners having enjoyed the benefits under the Addendum for more than four (4)
years before filing the complaint, were considered to have waived their rights to
Hence, NGEI Coop and Ronquillo interpose the present petition before this Court
assail the agreement.
anchored on the following GROUNDS

The petitioners moved for a reconsideration of the said order but the Regional (I)
Adjudicator denied it in the Order dated April 28, 2004.
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT THE
ASSAILED ADDENDUM IS VOID AB-INITIO, THE SAME HAVING BEEN EXECUTED

2|Page
WITHOUT THE CONSENT OF ONE OF THE PARTIES THERETO (Petitioner NGEI-MPC),
BY REASON OF THE ABSENCE OF AUTHORITY TO EXECUTE THE SAME GIVEN BY SAID
PARTY TO THE SUBSCRIBING INDIVIDUAL (Dayday) AND THE FACT THAT THE
ADDENDUM WAS NEVER RATIFIED BY THE GENERAL MEMBERSHIP OF NGEI-MPC.
(II)
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
ADDENDUM TO LEASE AGREEMENT IS NULL AND VOID FOR BEING CONTRARY TO
LAW, MORALS, GOOD CUSTOMS, AND PUBLIC POLICY.
(III)
THE HONORABLE COURT OF APPEALS, WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION, SERIOUSLY ERRED IN HOLDING
THAT THE DECISION OF THE DARAB IS SUPPORTED BY SUBSTANTIAL EVIDENCE.
(IV)
WHETHER OR NOT PETITIONERS’ CAUSE OF ACTION HAS PRESCRIBED. 9
The sole issue for the Court’s resolution is whether the CA committed reversible
error of law when it affirmed the decision of the DARAB which upheld the order of
the Regional Adjudicator dismissing the petitioners’ complaint for the nullification of
the Addendum.
The Court finds the petition bereft of merit.
The petitioners contend that the CA gravely erred in upholding the validity of the
Addendum. They allege that the yearly lease rental of P635.00 per hectare stipulated
in the Addendum was unconscionable because it violated the prescribed minimum
rental rates under DAR A.O. No. 5, Series of 1997 and R.A. No. 3844 which mandate
that the lease rental should not be less than the yearly amortization and taxes. They
also argue that it constitutes an infringement on the policy of the State to promote
social justice for the welfare and dignity of farmers and farm workers.
Relying on the same A.O. No. 5, the petitioners further argue that the Addendum
with another 25 years of extension period was invalid for lack of approval by the
PARC Executive Committee; that Antonio Dayday had no authority to enter into the
Addendum on behalf of NGEI Coop; that the authority given, if any, was merely for
a review of the lease agreement and to negotiate with FPPI on the specific issue of
land lease rental through a negotiating panel or committee, to which Dayday was a
member; that Dayday’s act of signing for, and in behalf of, NGEI Coop being ultra
vires was null and void; that it was Vicente Flora who was authorized to sign the
Addendum as shown in Resolution No. 1, Series of 1998; that the Addendum was not
ratified through the use of attendance sheets for meal and transportation allowance;
that neither did NGEI Coop and its members ratify the Addendum by their receipt of
its so-called economic benefits; and that their acceptance of the benefits under the
agreement was not an indication of waiver of their right to pursue their claims
against FPPI considering their consistent actions to contest the subject Addendum.
The respondents, on the other hand, posit in their Comment10 and reiterated in their
Memorandum11 that by raising factual issues, the petitioners were seeking a review
of the factual findings of the Regional Adjudicator and the DARAB which is proscribed
in a petition for review under Rule 45 of the Rules of Court. They add that the findings
of the said administrative agencies, having been sustained by the CA in the assailed
decision and supported by substantial evidence, should be respected.
The respondents further state that the CA correctly ruled that the Addendum was a
valid and binding contract. They claim that the package of economic benefits under
the Addendum was not unconscionable or contrary to public policy.
Indeed, the issues raised in this petition are mainly factual in nature. Factual issues
are not proper subjects of the Court’s power of judicial review. Well-settled is the
rule that only questions of law can be raised in a petition for review under Rule 45
of the Rules of Civil Procedure.12 It is, thus, beyond the Court’s jurisdiction to review
the factual findings of the Regional Adjudicator, the DARAB and the CA as regards
the validity and the binding effect of the Addendum. Whether or not the person who
signed the Addendum on behalf of the NGEI Coop was authorized to do so; whether
or not the NGEI Coop members ratified the Addendum; whether or not the rental
rates prescribed in the Addendum were unconscionably low so as to be illegal, and
whether or not the NGEI Coop had consistently assailed the validity of the Addendum
even prior to the filing of the complaint with the Regional Adjudicator, are issues of
fact which cannot be passed upon by the Court for the simple reason that the Court
is not a trier of facts.
3|Page
As held in the recent case of Carpio v. Sebastian,13 thus:
x x x It bears stressing that in a petition for review on certiorari, the scope of this
Court’s judicial review of decisions of the Court of Appeals is generally confined only
to errors of law, and questions of fact are not entertained. We elucidated on our
fidelity to this rule, and we said:
Thus, only questions of law may be brought by the parties and passed upon by this
Court in the exercise of its power to review. Also, judicial review by this Court does
not extend to a reevaluation of the sufficiency of the evidence upon which the
proper x x x tribunal has based its determination.
It is aphoristic that a re-examination of factual findings cannot be done through a
petition for review on certiorari under Rule 45 of the Rules of Court because as
earlier stated, this Court is not a trier of facts; it reviews only questions of law. The
Supreme Court is not duty-bound to analyze and weigh again the evidence
considered in the proceedings below.14
In the present case, the Court finds no cogent reason to depart from the
aforementioned settled rule. The DARAB made the following findings, viz:
This Board finds that the said "Addendum to the Lease Agreement" is valid and
binding to both parties. While the complainant impugns the validity of the
"Addendum" based on the ground that Chairman Dayday was not authorized by the
Cooperative to enter into the Agreement, based on the records, a series of
Resolution was made authorizing the Chairman to enter into the said "Addendum."
Granting en arguendo that Chairman Dayday was not authorized to enter into the
said Agreement, the fact remains that the terms and stipulations in the Addendum
had been observed and enforced by the parties for several years. Both parties have
benefited from the said contract. If indeed Chairman Dayday was not authorized to
enter into said Agreement, why does the Cooperative have to wait for four (4) years
to impugn the validity of the Contract. Thus, the Adjudicator a quo is correct in his
findings that:
As already discussed in the assailed Order, whatever procedural defects that may
have attended the final execution of the addendum, these are considered waived
and/or impliedly accepted or consented to by Complainants when its General
assembly ratified its execution and lived with for the next four (4) years.
Further the Adjudicator a quo is correct in his findings that:
It has to be impressed once more, that the Complaint is really one for the
cancellation of the Addendum to the original lease agreement. The negotiations that
led to its execution is in fact a re-negotiation of the old lease contract, and not a
negotiated original lease requiring the approval of the PARC Executive Committee.
The re-negotiation that culminated in the execution of the addendum requires only
the recommendation of the PARCCOM and the DAR, (AO No. 5, S-1997). It cannot be
gainsaid, therefore, that both PARCCOM and the DAR after a long and tedious re-
negotiation had no knowledge of such re-negotiation, but for reasons unknown,
both have kept their peace, thus, allowing the addendum to be ratified, enforced
and implemented. On the other hand, the arguments, that said addendum being
void ab initio may be assailed at anytime cannot be conceded. First, because said
addendum has not been officially or legally declared as a nullity. It is not nullified just
because a subsequent resolution of the
Coop Board abrogated the Addendum. To annul a Contract cannot be done
unilaterally, in fact the reason why this case was filed. On the contrary, having been
forged in 1998, complainants waited until 2002 to assail its validity, and in the
meantime, their action to do so had prescribed pursuant to Section 28 of RA 3844,
the law governing leasehold. The other assigned alleged errors having been fully
discussed in the assailed Order of March 22, 2004, the same need no longer be
traversed.
Finding no reversible error on the finding of facts and law made by the Adjudicator
a quo this Board hereby affirms the Order dated March 22, 2004.15
It is well to emphasize that the above-quoted factual findings and conclusions of the
DARAB affirming those of the Regional Adjudicator were sustained by the CA in the
assailed decision. The Court is in accord with the CA when it wrote:
In appeals in agrarian cases, the only function of this Court is to determine whether
the findings of fact of the Department of Agrarian Reform Adjudication Board
(DARAB) are supported by substantial evidence – it cannot make its own findings of
4|Page
fact and substitute the same for the findings of the DARAB. And substantial evidence
has been defined to be such relevant evidence as a reasonable mind might accept as
adequate to support a conclusion and its absence is not shown by stressing that
there is contrary evidence on record, direct or circumstantial; and where the findings
of the agrarian court are supported by substantial evidence, such findings are
conclusive and binding on the appellate court.16
Considering that the findings of the Regional Adjudicator and the DARAB are uniform
in all material respects, these findings should not be disturbed. More so in this case
where such findings were sustained by the CA for being supported by substantial
evidence and in accord with law and jurisprudence.
Verily, the factual findings of administrative officials and agencies that have acquired
expertise in the performance of their official duties and the exercise of their primary
jurisdiction are generally accorded not only respect but, at times, even finality if such
findings are supported by substantial evidence.17 The factual findings of these quasi-
judicial agencies, especially when affirmed by the CA, are binding on the Court. The
recognized exceptions to this rule are: (1) when there is grave abuse of discretion;
(2) when the findings are grounded on speculation; (3) when the inference made is
manifestly mistaken; (4) when the judgment of the Court of Appeals is based on a
misapprehension of facts; (5) when the factual findings are conflicting; (6) when the
Court of Appeals went beyond the issues of the case and its findings are contrary to
the admissions of the parties; (7) when the Court of Appeals overlooked undisputed
facts which, if properly considered, would justify a different conclusion; (8) when the
facts set forth by the petitioner are not disputed by the respondent; and (9) when
the findings of the Court of Appeals are premised on the absence of evidence and
are contradicted by the evidence on record.18 None of these circumstances is
obtaining in this case.
The Court understands the predicament of these farmer-beneficiaries of NGEI Coop.
Under the prevailing circumstances, however, it cannot save them from the
consequences of the binding lease agreement, the Addendum. The petitioners,
having freely and willingly entered into the Addendum with FPPI, cannot and should
not now be permitted to renege on their compliance under it, based on the
supposition that its terms are unconscionable. The contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of
them.19
It is basic that a contract is the law between the parties. Obligations arising from
contracts have the force of law between the contracting parties and should be
complied with in good faith. Unless the stipulations in a contract are contrary to law,
morals, good customs, public order or public policy, the same are binding as between
the parties.20 The Court quotes with approval the ruling of the CA on this matter, to
wit:
Indeed, the terms and conditions between the parties unequivocally expressed in
the Addendum must govern their contractual relations for these serve as the terms
of the agreement, which are binding and conclusive on them.
Consequently, petitioners cannot unilaterally change the tenor of the terms and
conditions of the Addendum or cancel it altogether after having gone through the
solemnities and formalities for its perfection. In fact, the Addendum had been
consummated upon performance by the parties of the prestations and after they
had already reaped the mutual benefits arising from the contract. Mutuality is one
of the characteristics of a contract, and its validity or performance or compliance
cannot be left to the will of only one of the parties. It is a long established doctrine
that the law does not relieve a party from the effects of an unwise, foolish, or
disastrous contract, entered into with all the required formalities and with full
awareness of what he was doing.21(Underscoring supplied)
It must be stressed that the Addendum was found to be a valid and binding contract.
The petitioners failed to show that the Addendum’s stipulated rental rates and
economic benefits violated any law or public policy. The Addendum should,
therefore, be given full force and effect, without prejudice to a renegotiation of the
terms of the leasehold agreement in accordance with the provisions of
Administrative Order No. 5, Series of 1997, governing their Addendum, as regards
the contracting procedures and fixing of lease rental in lands planted to palm oil
trees, specifically:
IV. POLICIES AND GOVERNING PRINCIPLES
xxx
5|Page
D. Renegotiation of the amount of lease rental shall be undertaken by the parties had enjoyed the benefits accorded under it, and both raised the ground of
every five (5) years, subject to the recommendation of the PARCCOM and review by prescription of the petitioners' cause of action pursuant to Section 38, R.A. No. 3844.
the DAR.
All told, the Court, after a careful review of the records, finds no reversible error in
Lease rental on the leased lands may be renegotiated by the contracting parties even the assailed decision of the CA .
prior to the termination of the contract on the following grounds: (a) domestic
inflation rate of seven percent (7%) or more; (b) drop in the world prices of the WHEREFORE, the petition is DENIED.
commodity by at least twenty percent (20%); and (c) other valid reasons.
SO ORDERED.
E. Any conflict that may arise from the implementation of the lease contract shall be
referred to the PARCCOM by any of the contracting parties for mediation and JOSE CATRAL MENDOZA
resolution. In the event of failure to resolve the issue, any of the parties may file an
Associate Justice
action with the Department of Agrarian Reform Adjudication Board (DARAB) for
adjudication pursuant to Section 50 of R.A. No. 6657.
WE CONCUR:
Anent the issue of prescription, Section 38 of R.A. No. 3844 (The Agricultural Land
PRESBITERO J. VELASCO, JR.
Reform Code), the applicable law to agricultural leasehold relations, provides:
Associate Justice
Section 38. Statute of Limitations - An action to enforce any cause of action under
this Code shall be barred if not commenced within three years after such cause of Chairperson
action accrued. (Underscoring supplied)

On the basis of the aforequoted provision, the petitioners' cause of action to have DIOSDADO M. PERALTA ROBERTO A. ABAD
the Addendum, an agricultural leasehold arrangement between NGEI Coop and FPPI, Associate Justice Associate Justice
declared null and void has already prescribed. To recall, the Addendum was executed
on January 29, 1998 and the petitioners tiled their complaint with the Regional
Adjudicator on June 20, 2002, or more than four years after the cause of action JOSE PORTUGAL PEREZ*
accrued. Evidently, prescription has already set in. Inasmuch as the validity of the
Addendum was sustained by the CA as devoid of any vice or defect, Article 1410 of Associate Justice
the Civil Code on imprescriptibility of actions for declaration of inexistence of
ATTESTATION
contracts, relied upon by the petitioners, is not applicable.1âwphi1

I attest that the conclusions in the above Decision had been reached in consultation
On a final note, the petitioners faulted the CA for failure to re-assess the facts of the
before the case was assigned to the writer of the opinion of the Court’s Division.
case despite the conflicting findings of the Regional Adjudicator and the DARAB. Such
imputation of error deserves no merit because, in truth and in fact, no such conflict
PRESBITERO J. VELASCO, JR.
exists. Contrary to the petitioners' claim, both tribunals declared the validity of the
Addendum being in existence for several years and on the basis that the petitioners Associate Justice

6|Page
Chairperson, Third Division

CERTIFICATION

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

MARIA LOURDES P. A. SERENO

Chief Justice

7|Page
Republic of the Philippines Retirement Authority (PLRA), to petitioner’s branch in Escolta to open a savings
SUPREME COURT account, as required by the PLRA.13 Since Liu Chiu Fang could speak only in
Manila Mandarin, respondent Rosales acted as an interpreter for her.14

SECOND DIVISION On March 3, 2003, respondents opened with petitioner’s Pritil-Tondo Branch a
Joint Dollar Account15 with an initial deposit of US$14,000.00.16
G.R. No. 183204 January 13, 2014
On July 31, 2003, petitioner issued a "Hold Out" order against respondents’
THE METROPOLITAN BANK AND TRUST COMPANY, Petitioner, accounts.17
vs.
ANA GRACE ROSALES AND YO YUK TO, Respondents. On September 3, 2003, petitioner, through its Special Audit Department Head
Antonio Ivan Aguirre, filed before the Office of the Prosecutor of Manila a criminal
DECISION case for Estafa through False Pretences, Misrepresentation, Deceit, and Use of
Falsified Documents, docketed as I.S. No. 03I-25014,18 against respondent
DEL CASTILLO, J.: Rosales.19 Petitioner accused respondent Rosales and an unidentified woman as
the ones responsible for the unauthorized and fraudulent withdrawal of
Bank deposits, which are in the nature of a simple loan or mutuum,1 must be paid US$75,000.00 from Liu Chiu Fang’s dollar account with petitioner’s Escolta
upon demand by the depositor.2 Branch.20 Petitioner alleged that on February 5, 2003, its branch in Escolta
received from the PLRA a Withdrawal Clearance for the dollar account of Liu Chiu
This Petition for Review on Certiorari3 under Rule 45 of the Rules of Court assails Fang;21 that in the afternoon of the same day, respondent Rosales went to
the April 2, 2008 Decision4 and the May 30, 2008 Resolution5 of he Court of petitioner’s Escolta Branch to inform its Branch Head, Celia A. Gutierrez (Gutierrez),
Appeals CA) in CA-G.R. CV No. 89086. that Liu Chiu Fang was going to withdraw her dollar deposits in cash;22 that
Gutierrez told respondent Rosales to come back the following day because the
Factual Antecedents bank did not have enough dollars;23 that on February 6, 2003, respondent Rosales
accompanied an unidentified impostor of Liu Chiu Fang to the bank;24 that the
Petitioner Metropolitan Bank and Trust Company is a domestic banking impostor was able to withdraw Liu Chiu Fang’s dollar deposit in the amount of
corporation duly organized and existing under the laws of the Philippines.6 US$75,000.00;25 that on March 3, 2003, respondents opened a dollar account with
Respondent Ana Grace Rosales (Rosales) is the owner of China Golden Bridge petitioner; and that the bank later discovered that the serial numbers of the dollar
Travel Services,7 a travel agency.8 Respondent Yo Yuk To is the mother of notes deposited by respondents in the amount of US$11,800.00 were the same as
respondent Rosales.9 those withdrawn by the impostor.26

In 2000, respondents opened a Joint Peso Account10 with petitioner’s Pritil-Tondo
Branch.11 As of August 4, 2004, respondents’ Joint Peso Account showed a balance
of ₱2,515,693.52.12
In May 2002, respondent Rosales accompanied her client Liu Chiu Fang, a
Taiwanese National applying for a retiree’s visa from the Philippine Leisure and
Respondent Rosales, however, denied taking part in the fraudulent and
unauthorized withdrawal from the dollar account of Liu Chiu Fang.27 Respondent
Rosales claimed that she did not go to the bank on February 5, 2003.28 Neither did
she inform Gutierrez that Liu Chiu Fang was going to close her account.29
Respondent Rosales further claimed that after Liu Chiu Fang opened an account

8|Page
with petitioner, she lost track of her.30 Respondent Rosales’ version of the events
that transpired thereafter is as follows:
On February 6, 2003, she received a call from Gutierrez informing her that Liu Chiu
Fang was at the bank to close her account.31 At noon of the same day, respondent
Rosales went to the bank to make a transaction.32 While she was transacting with
the teller, she caught a glimpse of a woman seated at the desk of the Branch
Operating Officer, Melinda Perez (Perez).33 After completing her transaction,
respondent Rosales approached Perez who informed her that Liu Chiu Fang had
closed her account and had already left.34 Perez then gave a copy of the
Withdrawal Clearance issued by the PLRA to respondent Rosales.35 On June 16,
2003, respondent Rosales received a call from Liu Chiu Fang inquiring about the
extension of her PLRA Visa and her dollar account.36 It was only then that Liu Chiu
Fang found out that her account had been closed without her knowledge.37
Respondent Rosales then went to the bank to inform Gutierrez and Perez of the
unauthorized withdrawal.38 On June 23, 2003, respondent Rosales and Liu Chiu
Fang went to the PLRA Office, where they were informed that the Withdrawal
Clearance was issued on the basis of a Special Power of Attorney (SPA) executed by
Liu Chiu Fang in favor of a certain Richard So.39 Liu Chiu Fang, however, denied
executing the SPA.40 The following day, respondent Rosales, Liu Chiu Fang,
Gutierrez, and Perez met at the PLRA Office to discuss the unauthorized
withdrawal.41 During the conference, the bank officers assured Liu Chiu Fang that
the money would be returned to her.42
On December 15, 2003, the Office of the City Prosecutor of Manila issued a
Resolution dismissing the criminal case for lack of probable cause.43 Unfazed,
petitioner moved for reconsideration.
On September 10, 2004, respondents filed before the Regional Trial Court (RTC) of
Manila a Complaint44 for Breach of Obligation and Contract with Damages,
docketed as Civil Case No. 04110895 and raffled to Branch 21, against petitioner.
Respondents alleged that they attempted several times to withdraw their deposits
but were unable to because petitioner had placed their accounts under "Hold Out"
status.45 No explanation, however, was given by petitioner as to why it issued the
"Hold Out" order.46 Thus, they prayed that the "Hold Out" order be lifted and that
they be allowed to withdraw their deposits.47 They likewise prayed for actual,
moral, and exemplary damages, as well as attorney’s fees.48
Petitioner alleged that respondents have no cause of action because it has a valid
reason for issuing the "Hold Out" order.49 It averred that due to the fraudulent
scheme of respondent Rosales, it was compelled to reimburse Liu Chiu Fang the
amount of US$75,000.0050 and to file a criminal complaint for Estafa against
respondent Rosales.51
While the case for breach of contract was being tried, the City Prosecutor of Manila
issued a Resolution dated February 18, 2005, reversing the dismissal of the criminal
complaint.52 An Information, docketed as Criminal Case No. 05-236103,53 was
then filed charging respondent Rosales with Estafa before Branch 14 of the RTC of
Manila.54
Ruling of the Regional Trial Court
On January 15, 2007, the RTC rendered a Decision55 finding petitioner liable for
damages for breach of contract.56 The RTC ruled that it is the duty of petitioner to
release the deposit to respondents as the act of withdrawal of a bank deposit is an
act of demand by the creditor.57 The RTC also said that the recourse of petitioner
is against its negligent employees and not against respondents.58 The dispositive
portion of the Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered ordering
[petitioner] METROPOLITAN BANK & TRUST COMPANY to allow [respondents] ANA
GRACE ROSALES and YO YUK TO to withdraw their Savings and Time Deposits with
the agreed interest, actual damages of ₱50,000.00, moral damages of ₱50,000.00,
exemplary damages of ₱30,000.00 and 10% of the amount due [respondents] as
and for attorney’s fees plus the cost of suit.
The counterclaim of [petitioner] is hereby DISMISSED for lack of merit.
SO ORDERED.59
Ruling of the Court of Appeals
Aggrieved, petitioner appealed to the CA.
9|Page
On April 2, 2008, the CA affirmed the ruling of the RTC but deleted the award of
actual damages because "the basis for [respondents’] claim for such damages is the
professional fee that they paid to their legal counsel for [respondent] Rosales’
defense against the criminal complaint of [petitioner] for estafa before the Office
of the City Prosecutor of Manila and not this case."60 Thus, the CA disposed of the
case in this wise:
WHEREFORE, premises considered, the Decision dated January 15, 2007 of the RTC,
Branch 21, Manila in Civil Case No. 04-110895 is AFFIRMED with MODIFICATION
that the award of actual damages to [respondents] Rosales and Yo Yuk To is hereby
DELETED.
SO ORDERED.61
Petitioner sought reconsideration but the same was denied by the CA in its May 30,
2008 Resolution.62
Issues
Hence, this recourse by petitioner raising the following issues:
A. THE [CA] ERRED IN RULING THAT THE "HOLD-OUT" PROVISION IN THE
APPLICATION AND AGREEMENT FOR DEPOSIT ACCOUNT DOES NOT APPLY IN THIS
CASE.
B. THE [CA] ERRED WHEN IT RULED THAT PETITIONER’S EMPLOYEES WERE
NEGLIGENT IN RELEASING LIU CHIU FANG’S FUNDS.
C. THE [CA] ERRED IN AFFIRMING THE AWARD OF MORAL DAMAGES, EXEMPLARY
DAMAGES, AND ATTORNEY’S FEES.63
Petitioner’s Arguments
Petitioner contends that the CA erred in not applying the "Hold Out" clause
stipulated in the Application and Agreement for Deposit Account.64 It posits that
the said clause applies to any and all kinds of obligation as it does not distinguish
between obligations arising ex contractu or ex delictu.65 Petitioner also contends
that the fraud committed by respondent Rosales was clearly established by
evidence;66 thus, it was justified in issuing the "Hold-Out" order.67 Petitioner
likewise denies that its employees were negligent in releasing the dollars.68 It
claims that it was the deception employed by respondent Rosales that caused
petitioner’s employees to release Liu Chiu Fang’s funds to the impostor.69
Lastly, petitioner puts in issue the award of moral and exemplary damages and
attorney’s fees. It insists that respondents failed to prove that it acted in bad faith
or in a wanton, fraudulent, oppressive or malevolent manner.70
Respondents’ Arguments
Respondents, on the other hand, argue that there is no legal basis for petitioner to
withhold their deposits because they have no monetary obligation to petitioner.71
They insist that petitioner miserably failed to prove its accusations against
respondent Rosales.72 In fact, no documentary evidence was presented to show
that respondent Rosales participated in the unauthorized withdrawal.73 They also
question the fact that the list of the serial numbers of the dollar notes fraudulently
withdrawn on February 6, 2003, was not signed or acknowledged by the alleged
impostor.74 Respondents likewise maintain that what was established during the
trial was the negligence of petitioner’s employees as they allowed the withdrawal
of the funds without properly verifying the identity of the depositor.75
Furthermore, respondents contend that their deposits are in the nature of a loan;
thus, petitioner had the obligation to return the deposits to them upon demand.76
Failing to do so makes petitioner liable to pay respondents moral and exemplary
damages, as well as attorney’s fees.77
Our Ruling
The Petition is bereft of merit.
At the outset, the relevant issues in this case are (1) whether petitioner breached
its contract with respondents, and (2) if so, whether it is liable for damages. The
issue of whether petitioner’s employees were negligent in allowing the withdrawal
of Liu Chiu Fang’s dollar deposits has no bearing in the resolution of this case. Thus,
we find no need to discuss the same.
10 | P a g e
The "Hold Out" clause does not apply
to the instant case.
Petitioner claims that it did not breach its contract with respondents because it has
a valid reason for issuing the "Hold Out" order. Petitioner anchors its right to
withhold respondents’ deposits on the Application and Agreement for Deposit
Account, which reads:
Authority to Withhold, Sell and/or Set Off:
The Bank is hereby authorized to withhold as security for any and all obligations
with the Bank, all monies, properties or securities of the Depositor now in or which
may hereafter come into the possession or under the control of the Bank, whether
left with the Bank for safekeeping or otherwise, or coming into the hands of the
Bank in any way, for so much thereof as will be sufficient to pay any or all
obligations incurred by Depositor under the Account or by reason of any other
transactions between the same parties now existing or hereafter contracted, to sell
in any public or private sale any of such properties or securities of Depositor, and to
apply the proceeds to the payment of any Depositor’s obligations heretofore
mentioned.
xxxx
JOINT ACCOUNT
xxxx
The Bank may, at any time in its discretion and with or without notice to all of the
Depositors, assert a lien on any balance of the Account and apply all or any part
thereof against any indebtedness, matured or unmatured, that may then be owing
to the Bank by any or all of the Depositors. It is understood that if said
indebtedness is only owing from any of the Depositors, then this provision
constitutes the consent by all of the depositors to have the Account answer for the
said indebtedness to the extent of the equal share of the debtor in the amount
credited to the Account.78
Petitioner’s reliance on the "Hold Out" clause in the Application and Agreement for
Deposit Account is misplaced.
The "Hold Out" clause applies only if there is a valid and existing obligation arising
from any of the sources of obligation enumerated in Article 115779 of the Civil
Code, to wit: law, contracts, quasi-contracts, delict, and quasi-delict. In this case,
petitioner failed to show that respondents have an obligation to it under any law,
contract, quasi-contract, delict, or quasi-delict. And although a criminal case was
filed by petitioner against respondent Rosales, this is not enough reason for
petitioner to issue a "Hold Out" order as the case is still pending and no final
judgment of conviction has been rendered against respondent Rosales. In fact, it is
significant to note that at the time petitioner issued the "Hold Out" order, the
criminal complaint had not yet been filed. Thus, considering that respondent
Rosales is not liable under any of the five sources of obligation, there was no legal
basis for petitioner to issue the "Hold Out" order. Accordingly, we agree with the
findings of the RTC and the CA that the "Hold Out" clause does not apply in the
instant case.
In view of the foregoing, we find that petitioner is guilty of breach of contract when
it unjustifiably refused to release respondents’ deposit despite demand. Having
breached its contract with respondents, petitioner is liable for damages.
Respondents are entitled to moral and
exemplary damages and attorney’s fees.1âwphi1
In cases of breach of contract, moral damages may be recovered only if the
defendant acted fraudulently or in bad faith,80 or is "guilty of gross negligence
amounting to bad faith, or in wanton disregard of his contractual obligations."81
In this case, a review of the circumstances surrounding the issuance of the "Hold
Out" order reveals that petitioner issued the "Hold Out" order in bad faith. First of
all, the order was issued without any legal basis. Second, petitioner did not inform
respondents of the reason for the "Hold Out."82 Third, the order was issued prior
to the filing of the criminal complaint. Records show that the "Hold Out" order was
issued on July 31, 2003,83 while the criminal complaint was filed only on
September 3, 2003.84 All these taken together lead us to conclude that petitioner
11 | P a g e
acted in bad faith when it breached its contract with respondents. As we see it Associate Justice
then, respondents are entitled to moral damages. Chairperson

As to the award of exemplary damages, Article 222985 of the Civil Code provides ARTURO D. BRION
that exemplary damages may be imposed "by way of example or correction for the Associate Justice JOSE PORTUGAL PEREZ
public good, in addition to the moral, temperate, liquidated or compensatory Associate Justice
damages." They are awarded only if the guilty party acted in a wanton, fraudulent, ESTELA M. PERLAS-BERNABE
reckless, oppressive or malevolent manner.86 Associate Justice

In this case, we find that petitioner indeed acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner when it refused to release the deposits of
respondents without any legal basis. We need not belabor the fact that the banking
industry is impressed with public interest.87 As such, "the highest degree of
diligence is expected, and high standards of integrity and performance are even
required of it."88 It must therefore "treat the accounts of its depositors with
meticulous care and always to have in mind the fiduciary nature of its relationship
with them."89 For failing to do this, an award of exemplary damages is justified to
set an example.

The award of attorney's fees is likewise proper pursuant to paragraph 1, Article

220890 of the Civil Code.

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

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

MARIANO C. DEL CASTILLO

Associate Justice

WE CONCUR:

ANTONIO T. CARPIO

12 | P a g e
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 193723 July 20, 2011
GENERAL MILLING CORPORATION, Petitioner,
vs.
SPS. LIBRADO RAMOS and REMEDIOS RAMOS, Respondents.
DECISION
VELASCO, JR., J.:
The Case
This is a petition for review of the April 15, 2010 Decision of the Court of Appeals
(CA) in CA-G.R. CR-H.C. No. 85400 entitled Spouses Librado Ramos & Remedios
Ramos v. General Milling Corporation, et al., which affirmed the May 31, 2005
Decision of the Regional Trial Court (RTC), Branch 12 in Lipa City, in Civil Case No.
00-0129 for Annulment and/or Declaration of Nullity of Extrajudicial Foreclosure
Sale with Damages.
The Facts
On August 24, 1989, General Milling Corporation (GMC) entered into a Growers
Contract with spouses Librado and Remedios Ramos (Spouses Ramos). Under the
contract, GMC was to supply broiler chickens for the spouses to raise on their land
in Barangay Banaybanay, Lipa City, Batangas.1 To guarantee full compliance, the
Growers Contract was accompanied by a Deed of Real Estate Mortgage over a
piece of real property upon which their conjugal home was built. The spouses
further agreed to put up a surety bond at the rate of PhP 20,000 per 1,000 chicks
delivered by GMC. The Deed of Real Estate Mortgage extended to Spouses Ramos a
maximum credit line of PhP 215,000 payable within an indefinite period with an
interest of twelve percent (12%) per annum.2
The Deed of Real Estate Mortgage contained the following provision:
WHEREAS, the MORTGAGOR/S has/have agreed to guarantee and secure the full
and faithful compliance of [MORTGAGORS’] obligation/s with the MORTGAGEE by a
First Real Estate Mortgage in favor of the MORTGAGEE, over a 1 parcel of land and
the improvements existing thereon, situated in the Barrio/s of -Banaybanay,
Municipality of Lipa City, Province of Batangas, Philippines, his/her/their title/s
thereto being evidenced by Transfer Certificate/s No./s T-9214 of the Registry of
Deeds for the Province of Batangas in the amount of TWO HUNDRED FIFTEEN
THOUSAND (P 215,000.00), Philippine Currency, which the maximum credit line
payable within a x x x day term and to secure the payment of the same plus
interest of twelve percent (12%) per annum.
Spouses Ramos eventually were unable to settle their account with GMC. They
alleged that they suffered business losses because of the negligence of GMC and its
violation of the Growers Contract.3
On March 31, 1997, the counsel for GMC notified Spouses Ramos that GMC would
institute foreclosure proceedings on their mortgaged property.4
On May 7, 1997, GMC filed a Petition for Extrajudicial Foreclosure of Mortgage. On
June 10, 1997, the property subject of the foreclosure was subsequently sold by
public auction to GMC after the required posting and publication.5 It was
foreclosed for PhP 935,882,075, an amount representing the losses on chicks and
feeds exclusive of interest at 12% per annum and attorney’s fees.6 To complicate
matters, on October 27, 1997, GMC informed the spouses that its Agribusiness
Division had closed its business and poultry operations.7
On March 3, 2000, Spouses Ramos filed a Complaint for Annulment and/or
Declaration of Nullity of the Extrajudicial Foreclosure Sale with Damages. They
contended that the extrajudicial foreclosure sale on June 10, 1997 was null and
void, since there was no compliance with the requirements of posting and
publication of notices under Act No. 3135, as amended, or An Act to Regulate the
Sale of Property under Special Powers Inserted in or Annexed to Real Estate
Mortgages. They likewise claimed that there was no sheriff’s affidavit to prove
compliance with the requirements on posting and publication of notices. It was
13 | P a g e
further alleged that the Deed of Real Estate Mortgage had no fixed term. A prayer
for moral and exemplary damages and attorney’s fees was also included in the
complaint.8 Librado Ramos alleged that, when the property was foreclosed, GMC
did not notify him at all of the foreclosure.9
During the trial, the parties agreed to limit the issues to the following: (1) the
validity of the Deed of Real Estate Mortgage; (2) the validity of the extrajudicial
foreclosure; and (3) the party liable for damages.10
In its Answer, GMC argued that it repeatedly reminded Spouses Ramos of their
liabilities under the Growers Contract. It argued that it was compelled to foreclose
the mortgage because of Spouses Ramos’ failure to pay their obligation. GMC
insisted that it had observed all the requirements of posting and publication of
notices under Act No. 3135.11
The Ruling of the Trial Court
Holding in favor of Spouses Ramos, the trial court ruled that the Deed of Real
Estate Mortgage was valid even if its term was not fixed. Since the duration of the
term was made to depend exclusively upon the will of the debtors-spouses, the
trial court cited jurisprudence and said that "the obligation is not due and payable
until an action is commenced by the mortgagee against the mortgagor for the
purpose of having the court fix the date on and after which the instrument is
payable and the date of maturity is fixed in pursuance thereto."12
The trial court held that the action of GMC in moving for the foreclosure of the
spouses’ properties was premature, because the latter’s obligation under their
contract was not yet due.
The trial court awarded attorney’s fees because of the premature action taken by
GMC in filing extrajudicial foreclosure proceedings before the obligation of the
spouses became due.
The RTC ruled, thus:
WHEREFORE, premises considered, judgment is rendered as follows:
1. The Extra-Judicial Foreclosure Proceedings under docket no. 0107-97 is hereby
declared null and void;
2. The Deed of Real Estate Mortgage is hereby declared valid and legal for all
intents and puposes;
3. Defendant-corporation General Milling Corporation is ordered to pay Spouses
Librado and Remedios Ramos attorney’s fees in the total amount of P 57,000.00
representing acceptance fee of P30,000.00 and P3,000.00 appearance fee for nine
(9) trial dates or a total appearance fee of P 27,000.00;
4. The claims for moral and exemplary damages are denied for lack of merit.
IT IS SO ORDERED.13
The Ruling of the Appellate Court
On appeal, GMC argued that the trial court erred in: (1) declaring the extrajudicial
foreclosure proceedings null and void; (2) ordering GMC to pay Spouses Ramos
attorney’s fees; and (3) not awarding damages in favor of GMC.
The CA sustained the decision of the trial court but anchored its ruling on a
different ground. Contrary to the findings of the trial court, the CA ruled that the
requirements of posting and publication of notices under Act No. 3135 were
complied with. The CA, however, still found that GMC’s action against Spouses
Ramos was premature, as they were not in default when the action was filed on
May 7, 1997.14
The CA ruled:
In this case, a careful scrutiny of the evidence on record shows that defendant-
appellant GMC made no demand to spouses Ramos for the full payment of their
obligation. While it was alleged in the Answer as well as in the Affidavit constituting
the direct testimony of Joseph Dominise, the principal witness of defendant-
appellant GMC, that demands were sent to spouses Ramos, the documentary
evidence proves otherwise. A perusal of the letters presented and offered as
14 | P a g e
evidence by defendant-appellant GMC did not "demand" but only request spouses
Ramos to go to the office of GMC to "discuss" the settlement of their account.15
According to the CA, however, the RTC erroneously awarded attorney’s fees to
Spouses Ramos, since the presumption of good faith on the part of GMC was not
overturned.
The CA disposed of the case as follows:
WHEREFORE, and in view of the foregoing considerations, the Decision of the
Regional Trial Court of Lipa City, Branch 12, dated May 21, 2005 is hereby
AFFIRMED with MODIFICATION by deleting the award of attorney’s fees to
plaintiffs-appellees spouses Librado Ramos and Remedios Ramos.16
Hence, We have this appeal.
The Issues
A. WHETHER [THE CA] MAY CONSIDER ISSUES NOT ALLEGED AND DISCUSSED IN
THE LOWER COURT AND LIKEWISE NOT RAISED BY THE PARTIES ON APPEAL,
THEREFORE HAD DECIDED THE CASE NOT IN ACCORD WITH LAW AND APPLICABLE
DECISIONS OF THE SUPREME COURT.
B. WHETHER [THE CA] ERRED IN RULING THAT PETITIONER GMC MADE NO
DEMAND TO RESPONDENT SPOUSES FOR THE FULL PAYMENT OF THEIR
OBLIGATION CONSIDERING THAT THE LETTER DATED MARCH 31, 1997 OF
PETITIONER GMC TO RESPONDENT SPOUSES IS TANTAMOUNT TO A FINAL
DEMAND TO PAY, THEREFORE IT DEPARTED FROM THE ACCEPTED AND USUAL
COURSE OF JUDICIAL PROCEEDINGS.17
The Ruling of this Court
Can the CA consider matters not alleged?
GMC asserts that since the issue on the existence of the demand letter was not
raised in the trial court, the CA, by considering such issue, violated the basic
requirements of fair play, justice, and due process.18
In their Comment,19 respondents-spouses aver that the CA has ample authority to
rule on matters not assigned as errors on appeal if these are indispensable or
necessary to the just resolution of the pleaded issues.
In Diamonon v. Department of Labor and Employment,20 We explained that an
appellate court has a broad discretionary power in waiving the lack of assignment
of errors in the following instances:
(a) Grounds not assigned as errors but affecting the jurisdiction of the court over
the subject matter;
(b) Matters not assigned as errors on appeal but are evidently plain or clerical
errors within contemplation of law;
(c) Matters not assigned as errors on appeal but consideration of which is
necessary in arriving at a just decision and complete resolution of the case or to
serve the interests of a justice or to avoid dispensing piecemeal justice;
(d) Matters not specifically assigned as errors on appeal but raised in the trial court
and are matters of record having some bearing on the issue submitted which the
parties failed to raise or which the lower court ignored;
(e) Matters not assigned as errors on appeal but closely related to an error
assigned;
(f) Matters not assigned as errors on appeal but upon which the determination of a
question properly assigned, is dependent.
Paragraph (c) above applies to the instant case, for there would be a just and
complete resolution of the appeal if there is a ruling on whether the Spouses
Ramos were actually in default of their obligation to GMC.
Was there sufficient demand?
We now go to the second issue raised by GMC. GMC asserts error on the part of
the CA in finding that no demand was made on Spouses Ramos to pay their
15 | P a g e
obligation. On the contrary, it claims that its March 31, 1997 letter is akin to a
demand.
We disagree.
There are three requisites necessary for a finding of default. First, the obligation is
demandable and liquidated; second, the debtor delays performance; and third, the
creditor judicially or extrajudicially requires the debtor’s performance.21
According to the CA, GMC did not make a demand on Spouses Ramos but merely
requested them to go to GMC’s office to discuss the settlement of their account. In
spite of the lack of demand made on the spouses, however, GMC proceeded with
the foreclosure proceedings. Neither was there any provision in the Deed of Real
Estate Mortgage allowing GMC to extrajudicially foreclose the mortgage without
need of demand.
Indeed, Article 1169 of the Civil Code on delay requires the following:
Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfilment of their
obligation.
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; x x x
As the contract in the instant case carries no such provision on demand not being
necessary for delay to exist, We agree with the appellate court that GMC should
have first made a demand on the spouses before proceeding to foreclose the real
estate mortgage.
Development Bank of the Philippines v. Licuanan finds application to the instant
case:
The issue of whether demand was made before the foreclosure was effected is
essential.1avvphi1 If demand was made and duly received by the respondents and
the latter still did not pay, then they were already in default and foreclosure was
proper. However, if demand was not made, then the loans had not yet become due
and demandable. This meant that respondents had not defaulted in their payments
and the foreclosure by petitioner was premature. Foreclosure is valid only when
the debtor is in default in the payment of his obligation.22
In turn, whether or not demand was made is a question of fact.23 This petition
filed under Rule 45 of the Rules of Court shall raise only questions of law. For a
question to be one of law, it must not involve an examination of the probative
value of the evidence presented by the litigants or any of them. The resolution of
the issue must rest solely on what the law provides on the given set of
circumstances. Once it is clear that the issue invites a review of the evidence
presented, the question posed is one of fact.24 It need not be reiterated that this
Court is not a trier of facts.25 We will defer to the factual findings of the trial court,
because petitioner GMC has not shown any circumstances making this case an
exception to the rule.
WHEREFORE, the petition is DENIED. The CA Decision in CA-G.R. CR-H.C. No. 85400
is AFFIRMED.
SO ORDERED.
PRESBITERO J. VELASCO, JR.
Associate Justice
WE CONCUR:
ANTONIO T. CARPIO*
Associate Justice
TERESITA J. LEONARDO-DE CASTRO**
Associate Justice ROBERTO A. ABAD
Associate Justice
JOSE CATRAL MENDOZA
Associate Justice
ATTESTATION
16 | P a g e
I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the
Court’s Division.

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson

CERTIFICATION

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

RENATO C. CORONA
Chief Justice

17 | P a g e
FIRST DIVISION
G.R. No. 153004 November 5, 2004
SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner,
vs.
ERNESTO V. SANTOS and RIVERLAND, INC., respondents.
DECISION
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,3 dated
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
Agreement4 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
18 | P a g e
of Makati City, Branch 62, issued a Decision6 approving 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 Decision9 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.
SO ORDERED.
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
19 | P a g e
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.]
...
20 | P a g e
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.
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.
SO ORDERED.
Davide, Jr. C.J. (Chairman), Ynares-Santiago and Carpio, JJ., concur.
Azcuna, J., on leave.

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.

21 | P a g e
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 176868 July 26, 2010
SOLAR HARVEST, INC., Petitioner,
vs.
DAVAO CORRUGATED CARTON CORPORATION, Respondent.
DECISION
NACHURA, J.:
Petitioner seeks a review of the Court of Appeals (CA) Decision1 dated September
21, 2006 and Resolution2 dated February 23, 2007, which denied petitioner’s
motion for reconsideration. The assailed Decision denied petitioner’s claim for
reimbursement for the amount it paid to respondent for the manufacture of
corrugated carton boxes.
The case arose from the following antecedents:
In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an
agreement with respondent, Davao Corrugated Carton Corporation, for the
purchase of corrugated carton boxes, specifically designed for petitioner’s business
of exporting fresh bananas, at US$1.10 each. The agreement was not reduced into
writing. To get the production underway, petitioner deposited, on March 31, 1998,
US$40,150.00 in respondent’s US Dollar Savings Account with Westmont Bank, as
full payment for the ordered boxes.
Despite such payment, petitioner did not receive any boxes from respondent. On
January 3, 2001, petitioner wrote a demand letter for reimbursement of the
amount paid.3 On February 19, 2001, respondent replied that the boxes had been
completed as early as April 3, 1998 and that petitioner failed to pick them up from
the former’s warehouse 30 days from completion, as agreed upon. Respondent
mentioned that petitioner even placed an additional order of 24,000 boxes, out of
which, 14,000 had been manufactured without any advanced payment from
petitioner. Respondent then demanded petitioner to remove the boxes from the
factory and to pay the balance of US$15,400.00 for the additional boxes and
₱132,000.00 as storage fee.
On August 17, 2001, petitioner filed a Complaint for sum of money and damages
against respondent. The Complaint averred that the parties agreed that the boxes
will be delivered within 30 days from payment but respondent failed to
manufacture and deliver the boxes within such time. It further alleged
6. That repeated follow-up was made by the plaintiff for the immediate production
of the ordered boxes, but every time, defendant [would] only show samples of
boxes and ma[k]e repeated promises to deliver the said ordered boxes.
7. That because of the failure of the defendant to deliver the ordered boxes,
plaintiff ha[d] to cancel the same and demand payment and/or refund from the
defendant but the latter refused to pay and/or refund the US$40,150.00 payment
made by the former for the ordered boxes.41avvphi1
In its Answer with Counterclaim,5 respondent insisted that, as early as April 3,
1998, it had already completed production of the 36,500 boxes, contrary to
petitioner’s allegation. According to respondent, petitioner, in fact, made an
additional order of 24,000 boxes, out of which, 14,000 had been completed
without waiting for petitioner’s payment. Respondent stated that petitioner was to
pick up the boxes at the factory as agreed upon, but petitioner failed to do so.
Respondent averred that, on October 8, 1998, petitioner’s representative, Bobby
Que (Que), went to the factory and saw that the boxes were ready for pick up. On
February 20, 1999, Que visited the factory again and supposedly advised
respondent to sell the boxes as rejects to recoup the cost of the unpaid 14,000
boxes, because petitioner’s transaction to ship bananas to China did not
materialize. Respondent claimed that the boxes were occupying warehouse space
and that petitioner should be made to pay storage fee at ₱60.00 per square meter
for every month from April 1998. As counterclaim, respondent prayed that
judgment be rendered ordering petitioner to pay $15,400.00, plus interest, moral
and exemplary damages, attorney’s fees, and costs of the suit.
22 | P a g e
In reply, petitioner denied that it made a second order of 24,000 boxes and that
respondent already completed the initial order of 36,500 boxes and 14,000 boxes
out of the second order. It maintained that
respondent only manufactured a sample of the ordered boxes and that respondent
could not have produced 14,000 boxes without the required pre-payments.6
During trial, petitioner presented Que as its sole witness. Que testified that he
ordered the boxes from respondent and deposited the money in respondent’s
account.7 He specifically stated that, when he visited respondent’s factory, he saw
that the boxes had no print of petitioner’s logo.8 A few months later, he followed-
up the order and was told that the company had full production, and thus, was
promised that production of the order would be rushed. He told respondent that it
should indeed rush production because the need for the boxes was urgent.
Thereafter, he asked his partner, Alfred Ong, to cancel the order because it was
already late for them to meet their commitment to ship the bananas to China.9 On
cross-examination, Que further testified that China Zero Food, the Chinese
company that ordered the bananas, was sending a ship to Davao to get the
bananas, but since there were no cartons, the ship could not proceed. He said that,
at that time, bananas from Tagum Agricultural Development Corporation (TADECO)
were already there. He denied that petitioner made an additional order of 24,000
boxes. He explained that it took three years to refer the matter to counsel because
respondent promised to pay.10
For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que in
Davao in October 1998 to inspect the boxes and that the latter got samples of
them. In February 2000, they inspected the boxes again and Que got more
samples. Estanislao said that petitioner did not pick up the boxes because the ship
did not arrive.11 Jaime Tan (Tan), president of respondent, also testified that his
company finished production of the 36,500 boxes on April 3, 1998 and that
petitioner made a second order of 24,000 boxes. He said that the agreement was
for respondent to produce the boxes and for petitioner to pick them up from the
warehouse.12 He also said that the reason why petitioner did not pick up the boxes
was that the ship that was to carry the bananas did not arrive.13 According to him,
during the last visit of Que and Estanislao, he asked them to withdraw the boxes
immediately because they were occupying a big space in his plant, but they,
instead, told him to sell the cartons as rejects. He was able to sell 5,000 boxes at
₱20.00 each for a total of ₱100,000.00. They then told him to apply the said
amount to the unpaid balance.
In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that respondent
did not commit any breach of faith that would justify rescission of the contract and
the consequent reimbursement of the amount paid by petitioner. The RTC said that
respondent was able to produce the ordered boxes but petitioner failed to obtain
possession thereof because its ship did not arrive. It thus dismissed the complaint
and respondent’s counterclaims, disposing as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of
defendant and against the plaintiff and, accordingly, plaintiff’s complaint is hereby
ordered DISMISSED without pronouncement as to cost. Defendant’s counterclaims
are similarly dismissed for lack of merit.
SO ORDERED.14
Petitioner filed a notice of appeal with the CA.
On September 21, 2006, the CA denied the appeal for lack of merit.15 The
appellate court held that petitioner failed to discharge its burden of proving what it
claimed to be the parties’ agreement with respect to the delivery of the boxes.
According to the CA, it was unthinkable that, over a period of more than two years,
petitioner did not even demand for the delivery of the boxes. The CA added that
even assuming that the agreement was for respondent to deliver the boxes,
respondent would not be liable for breach of contract as petitioner had not yet
demanded from it the delivery of the boxes.16
Petitioner moved for reconsideration,17 but the motion was denied by the CA in its
Resolution of February 23, 2007.18
In this petition, petitioner insists that respondent did not completely manufacture
the boxes and that it was respondent which was obliged to deliver the boxes to
TADECO.
We find no reversible error in the assailed Decision that would justify the grant of
this petition.
23 | P a g e

Petitioner’s claim for reimbursement is actually one for rescission (or resolution) of
contract under Article 1191 of the Civil Code, which reads:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage
Law.
The right to rescind a contract arises once the other party defaults in the
performance of his obligation. In determining when default occurs, Art. 1191
should be taken in conjunction with Art. 1169 of the same law, which provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.
However, the demand by the creditor shall not be necessary in order that delay
may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears that
the designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond
his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply
or is not ready to comply in a proper manner with what is incumbent upon him.
From the moment one of the parties fulfills his obligation, delay by the other
begins.
In reciprocal obligations, as in a contract of sale, the general rule is that the
fulfillment of the parties’ respective obligations should be simultaneous. Hence, no
demand is generally necessary because, once a party fulfills his obligation and the
other party does not fulfill his, the latter automatically incurs in delay. But when
different dates for performance of the obligations are fixed, the default for each
obligation must be determined by the rules given in the first paragraph of the
present article,19 that is, the other party would incur in delay only from the
moment the other party demands fulfillment of the former’s obligation. Thus, even
in reciprocal obligations, if the period for the fulfillment of the obligation is fixed,
demand upon the obligee is still necessary before the obligor can be considered in
default and before a cause of action for rescission will accrue.
Evident from the records and even from the allegations in the complaint was the
lack of demand by petitioner upon respondent to fulfill its obligation to
manufacture and deliver the boxes. The Complaint only alleged that petitioner
made a "follow-up" upon respondent, which, however, would not qualify as a
demand for the fulfillment of the obligation. Petitioner’s witness also testified that
they made a follow-up of the boxes, but not a demand. Note is taken of the fact
that, with respect to their claim for reimbursement, the Complaint alleged and the
witness testified that a demand letter was sent to respondent. Without a previous
demand for the fulfillment of the obligation, petitioner would not have a cause of
action for rescission against respondent as the latter would not yet be considered
in breach of its contractual obligation.
Even assuming that a demand had been previously made before filing the present
case, petitioner’s claim for reimbursement would still fail, as the circumstances
would show that respondent was not guilty of breach of contract.
24 | P a g e
The existence of a breach of contract is a factual matter not usually reviewed in a
petition for review under Rule 45.20 The Court, in petitions for review, limits its
inquiry only to questions of law. After all, it is not a trier of facts, and findings of
fact made by the trial court, especially when reiterated by the CA, must be given
great respect if not considered as final.21 In dealing with this petition, we will not
veer away from this doctrine and will thus sustain the factual findings of the CA,
which we find to be adequately supported by the evidence on record.
As correctly observed by the CA, aside from the pictures of the finished boxes and
the production report thereof, there is ample showing that the boxes had already
been manufactured by respondent. There is the testimony of Estanislao who
accompanied Que to the factory, attesting that, during their first visit to the
company, they saw the pile of petitioner’s boxes and Que took samples thereof.
Que, petitioner’s witness, himself confirmed this incident. He testified that Tan
pointed the boxes to him and that he got a sample and saw that it was blank. Que’s
absolute assertion that the boxes were not manufactured is, therefore, implausible
and suspicious.
In fact, we note that respondent’s counsel manifested in court, during trial, that his
client was willing to shoulder expenses for a representative of the court to visit the
plant and see the boxes.22 Had it been true that the boxes were not yet
completed, respondent would not have been so bold as to challenge the court to
conduct an ocular inspection of their warehouse. Even in its Comment to this
petition, respondent prays that petitioner be ordered to remove the boxes from its
factory site,23 which could only mean that the boxes are, up to the present, still in
respondent’s premises.
We also believe that the agreement between the parties was for petitioner to pick
up the boxes from respondent’s warehouse, contrary to petitioner’s allegation.
Thus, it was due to petitioner’s fault that the boxes were not delivered to TADECO.
Petitioner had the burden to prove that the agreement was, in fact, for respondent
to deliver the boxes within 30 days from payment, as alleged in the Complaint. Its
sole witness, Que, was not even competent to testify on the terms of the
agreement and, therefore, we cannot give much credence to his testimony. It
appeared from the testimony of Que that he did not personally place the order
with Tan, thus:
Q. No, my question is, you went to Davao City and placed your order there?
A. I made a phone call.
Q. You made a phone call to Mr. Tan?
A. The first time, the first call to Mr. Alf[re]d Ong. Alfred Ong has a contact with Mr.
Tan.
Q. So, your first statement that you were the one who placed the order is not true?
A. That’s true. The Solar Harvest made a contact with Mr. Tan and I deposited the
money in the bank.
Q. You said a while ago [t]hat you were the one who called Mr. Tan and placed the
order for 36,500 boxes, isn’t it?
A. First time it was Mr. Alfred Ong.
Q. It was Mr. Ong who placed the order[,] not you?
A. Yes, sir.24
Q. Is it not a fact that the cartons were ordered through Mr. Bienvenido Estanislao?
A. Yes, sir.25
Moreover, assuming that respondent was obliged to deliver the boxes, it could not
have complied with such obligation. Que, insisting that the boxes had not been
manufactured, admitted that he did not give respondent the authority to deliver
the boxes to TADECO:
Q. Did you give authority to Mr. Tan to deliver these boxes to TADECO?
A. No, sir. As I have said, before the delivery, we must have to check the carton, the
quantity and quality. But I have not seen a single carton.
25 | P a g e
 ANTONIO EDUARDO B. NACHURA
Q. Are you trying to impress upon the [c]ourt that it is only after the boxes are Associate Justice
completed, will you give authority to Mr. Tan to deliver the boxes to TADECO[?]
WE CONCUR:
A. Sir, because when I checked the plant, I have not seen any carton. I asked Mr.
Tan to rush the carton but not…26 ANTONIO T. CARPIO
Associate Justice
Q. Did you give any authority for Mr. Tan to deliver these boxes to TADECO? Chairperson

A. Because I have not seen any of my carton. DIOSDADO M. PERALTA

Associate Justice ROBERTO A. ABAD
Q. You don’t have any authority yet given to Mr. Tan? Associate Justice
JOSE CATRAL MENDOZA
A. None, your Honor.27 Associate Justice

Surely, without such authority, TADECO would not have allowed respondent to ATTESTATION
deposit the boxes within its premises.
I attest that the conclusions in the above Decision were reached in consultation
In sum, the Court finds that petitioner failed to establish a cause of action for before the case was assigned to the writer of the opinion of the Court’s Division.
rescission, the evidence having shown that respondent did not commit any breach
of its contractual obligation. As previously stated, the subject boxes are still within ANTONIO T. CARPIO
respondent’s premises. To put a rest to this dispute, we therefore relieve Associate Justice
respondent from the burden of having to keep the boxes within its premises and, Chairperson, Second Division
consequently, give it the right to dispose of them, after petitioner is given a period
of time within which to remove them from the premises. CERTIFICATION

WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Pursuant to Section 13, Article VIII of the Constitution and the Division
Decision dated September 21, 2006 and Resolution dated February 23, 2007 are Chairperson's Attestation, I certify that the conclusions in the above Decision had
AFFIRMED. In addition, petitioner is given a period of 30 days from notice within been reached in consultation before the case was assigned to the writer of the
which to cause the removal of the 36,500 opinion of the Court’s Division.

boxes from respondent’s warehouse. After the lapse of said period and petitioner RENATO C. CORONA
fails to effect such removal, respondent shall have the right to dispose of the boxes Chief Justice
in any manner it may deem fit.

SO ORDERED.

26 | P a g e
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
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.
DECISION
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;
27 | P a g e

"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." 4
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
28 | P a g e
"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:
29 | P a g e

"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
30 | P a g e
(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.
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.
31 | P a g e
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.

xxx xxx xxx

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 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. LLpr
SO ORDERED.
Narvasa, C .J ., Padilla, Regalado and Nocon, JJ ., concur.

32 | P a g e
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 191431 March 13, 2013
RODOLFO G. CRUZ and ESPERANZA IBIAS, Petitioners,
vs.
ATTY. DELFIN GRUSPE, Respondent.
DECISION
BRION, J.:
Before the Court is the petition for review on certiorari1 filed under Rule 45 of the
Rules of Court, assailing the decision2 dated July 30, 2009 and the resolution3
dated February 19, 2010 of the Court of Appeals (CA) in CA-G.R. CV No. 86083. The
CA rulings affirmed with modification the decision dated September 27, 2004 of
the Regional Trial Court (RTC) of Bacoor, Cavite, Branch 19, in Civil Case No. BCV-
99-146 which granted respondent Atty. Delfin Grupe’s claim for payment of sum of
money against petitioners Rodolfo G. Cruz and Esperanza Ibias.4
THE FACTUAL BACKGROUND
The claim arose from an accident that occurred on October 24, 1999, when the
mini bus owned and operated by Cruz and driven by one Arturo Davin collided with
the Toyota Corolla car of Gruspe; Gruspe’s car was a total wreck. The next day, on
October 25, 1999, Cruz, along with Leonardo Q. Ibias went to Gruspe’s office,
apologized for the incident, and executed a Joint Affidavit of Undertaking
promising jointly and severally to replace the Gruspe’s damaged car in 20 days, or
until November 15, 1999, of the same model and of at least the same quality; or,
alternatively, they would pay the cost of Gruspe’s car amounting to ₱350,000.00,
with interest at
12% per month for any delayed payment after November 15, 1999, until fully
paid.5 When Cruz and Leonardo failed to comply with their undertaking, Gruspe
filed a complaint for collection of sum of money against them on November 19,
1999 before the RTC.
In their answer, Cruz and Leonardo denied Gruspe’s allegation, claiming that
Gruspe, a lawyer, prepared the Joint Affidavit of Undertaking and forced them to
affix their signatures thereon, without explaining and informing them of its
contents; Cruz affixed his signature so that his mini bus could be released as it was
his only means of income; Leonardo, a barangay official, accompanied Cruz to
Gruspe’s office for the release of the mini bus, but was also deceived into signing
the Joint Affidavit of Undertaking.
Leonardo died during the pendency of the case and was substituted by his widow,
Esperanza. Meanwhile, Gruspe sold the wrecked car for ₱130,000.00.
In a decision dated September 27, 2004, the RTC ruled in favor of Gruspe and
ordered Cruz and Leonardo to pay ₱220,000.00,6 plus 15% per annum from
November 15, 1999 until fully paid, and the cost of suit.
On appeal, the CA affirmed the RTC decision, but reduced the interest rate to 12%
per annum pursuant to the Joint Affidavit of Undertaking.7 It declared that despite
its title, the Joint Affidavit of Undertaking is a contract, as it has all the essential
elements of consent, object certain, and consideration required under Article 1318
of the Civil
Code. The CA further said that Cruz and Leonardo failed to present evidence to
support their contention of vitiated consent. By signing the Joint Affidavit of
Undertaking, they voluntarily assumed the obligation for the damage they caused
to Gruspe’s car; Leonardo, who was not a party to the incident, could have refused
to sign the affidavit, but he did not.
THE PETITION
In their appeal by certiorari with the Court, Cruz and Esperanza assail the CA ruling,
contending that the Joint Affidavit of Undertaking is not a contract that can be the
basis of an obligation to pay a sum of money in favor of Gruspe. They consider an
33 | P a g e
affidavit as different from a contract: an affidavit’s purpose is simply to attest to
facts that are within his knowledge, while a contract requires that there be a
meeting of the minds between the two contracting parties.
Even if the Joint Affidavit of Undertaking was considered as a contract, Cruz and
Esperanza claim that it is invalid because Cruz and Leonardo’s consent thereto was
vitiated; the contract was prepared by Gruspe who is a lawyer, and its contents
were never explained to them. Moreover, Cruz and Leonardo were simply forced to
affix their signatures, otherwise, the mini van would not be released.
Also, they claim that prior to the filing of the complaint for sum of money, Gruspe
did not make any demand upon them. Hence, pursuant to Article 1169 of the Civil
Code, they could not be considered in default. Without this demand, Cruz and
Esperanza contend that Gruspe could not yet take any action.
THE COURT’S RULING
The Court finds the petition partly meritorious and accordingly modifies the
judgment of the CA.
Contracts are obligatory no matter what their forms may be, whenever the
essential requisites for their validity are present. In determining whether a
document is an affidavit or a contract, the Court looks beyond the title of the
document, since the denomination or title given by the parties in their document is
not conclusive of the nature of its contents.8 In the construction or interpretation
of an instrument, the intention of the parties is primordial and is to be pursued. If
the terms of the document are clear and leave no doubt on the intention of the
contracting parties, the literal meaning of its stipulations shall control. If the words
appear to be contrary to the parties’ evident intention, the latter shall prevail over
the former.9
A simple reading of the terms of the Joint Affidavit of Undertaking readily discloses
that it contains stipulations characteristic of a contract. As quoted in the CA
decision,10 the Joint Affidavit of Undertaking contained a stipulation where Cruz
and Leonardo promised to replace the damaged car of Gruspe, 20 days from
October 25, 1999 or up to November 15, 1999, of the same model and of at least
the same quality. In the event that they cannot replace the car within the same
period, they would pay the cost of Gruspe’s car in the total amount of ₱350,000.00,
with interest at 12% per month for any delayed payment after November 15, 1999,
until fully paid. These, as read by the CA, are very simple terms that both Cruz and
Leonardo could easily understand.
There is also no merit to the argument of vitiated consent.1âwphi1 An allegation of
vitiated consent must be proven by preponderance of evidence; Cruz and Leonardo
failed to support their allegation.
Although the undertaking in the affidavit appears to be onerous and lopsided, this
does not necessarily prove the alleged vitiation of consent. They, in fact, admitted
the genuineness and due execution of the Joint Affidavit and Undertaking when
they said that they signed the same to secure possession of their vehicle. If they
truly believed that the vehicle had been illegally impounded, they could have
refused to sign the Joint Affidavit of Undertaking and filed a complaint, but they did
not. That the release of their mini bus was conditioned on their signing the Joint
Affidavit of Undertaking does not, by itself, indicate that their consent was forced –
they may have given it grudgingly, but it is not indicative of a vitiated consent that
is a ground for the annulment of a contract.
Thus, on the issue of the validity and enforceability of the Joint Affidavit of
Undertaking, the CA did not commit any legal error that merits the reversal of the
assailed decision.
Nevertheless, the CA glossed over the issue of demand which is material in the
computation of interest on the amount due. The RTC ordered Cruz and Leonardo to
pay Gruspe "₱350,000.00 as cost of the car xxx plus fifteen percent (15%) per
annum from November 15, 1999 until fully paid."11 The 15% interest (later
modified by the CA to be 12%) was computed from November 15, 1999 – the date
stipulated in the Joint Affidavit of Undertaking for the payment of the value of
Gruspe’s car. In the absence of a finding by the lower courts that Gruspe made a
demand prior to the filing of the complaint, the interest cannot be computed from
November 15, 1999 because until a demand has been made, Cruz and Leonardo
could not be said to be in default.12 "In order that the debtor may be in default, it
is necessary that the following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays performance; and
(3) that the creditor requires the performance judicially and extrajudicially."13
34 | P a g e
Default generally begins from the moment the creditor demands the performance I attest that the conclusions in the above Decision had been reached in
of the obligation. In this case, demand could be considered to have been made consultation before the case was assigned to the writer of the opinion of the
upon the filing of the complaint on November 19, 1999, and it is only from this date Court’s Division.
that the interest should be computed.
ANTONIO T. CARPIO
Although the CA upheld the Joint Affidavit of Undertaking, we note that it imposed Associate Justice
interest rate on a per annum basis, instead of the per month basis that was stated Chairperson
in the Joint Affidavit of Undertaking without explaining its reason for doing so.14
Neither party, however, questioned the change. Nonetheless, the Court affirms the CERTIFICATION
change in the interest rate from 12% per month to 12% per annum, as we find the
interest rate agreed upon in the Joint Affidavit of Undertaking excessive.15 Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson
Attest8tiort, it :s hereby certified that the conclusions in the above Decision had
WHEREFORE, we AFFIRM the decision dated July 30, 2009 and the resolution dated been re2ched in consultation before the case was ... assigned to the writer of the
February 19, 2010 of the Court of Appeals in CA-G.R. CV No. 86083, subject to the opinion of the Court's Division.
Modification that the twelve percent (12%) per annum interest imposed on the
amount due shall accrue only from November 19, 1999, when judicial demand was MARIA LOURDES P. A. SERENO
made. Chief Justice

SO ORDERED.

ARTURO D. BRION
Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice

MARIANO C. DEL CASTILLO

Associate Justice MARTIN S. VILLARAMA, JR.*
Associate Justice
ESTELA M PERLAS-BERNABE
Associate Justice

ATTESTATION

35 | P a g e
Republic of the Philippines In G.R. No. 184458, Rivera persists in his contention that there was no valid
SUPREME COURT promissory note and questions the entire ruling of the lower courts. On the other
Manila hand, petitioners in G.R. No. 184472, Spouses Salvador and Violeta Chua (Spouses
Chua), take exception to the appellate court’s reduction of the stipulated interest
FIRST DIVISION rate of sixty percent (60%) to twelve percent (12%) per annum.

G.R. No. 184458 January 14, 2015 We proceed to the facts.

RODRIGO RIVERA, Petitioner, The parties were friends of long standing having known each other since 1973:
vs. Rivera and Salvador are kumpadres, the former is the godfather of the Spouses
SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA, Respondents. Chua’s son.

x-----------------------x On 24 February 1995, Rivera obtained a loan from the Spouses Chua:

G.R. No. 184472 PROMISSORY NOTE

SPS. SALVADOR CHUA and VIOLETA S. CHUA, Petitioners, 120,000.00

vs.
RODRIGO RIVERA, Respondent. FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C.
CHUA and VIOLETA SY CHUA, the sum of One Hundred Twenty Thousand Philippine
DECISION Currency (₱120,000.00) on December 31, 1995.

PEREZ, J.:
Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the
Rules of Court assailing the Decision1 of the Court of Appeals in CA-G.R. SP No.
90609 which affirmed with modification the separate rulings of the Manila City trial
courts, the Regional Trial Court, Branch 17 in Civil Case No. 02-1052562 and the
Metropolitan Trial Court (MeTC), Branch 30, in Civil Case No. 163661,3 a case for
collection of a sum of money due a promissory note. While all three (3) lower
courts upheld the validity and authenticity of the promissory note as duly signed by
the obligor, Rodrigo Rivera (Rivera), petitioner in G.R. No. 184458, the appellate
court modified the trial courts’ consistent awards: (1) the stipulated interest rate of
sixty percent (60%) reduced to twelve percent (12%) per annumcomputed from the
date of judicial or extrajudicial demand, and (2) reinstatement of the award of
attorney’s fees also in a reduced amount of ₱50,000.00.
It is agreed and understood that failure on my part to pay the amount of
(120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I
agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the
date of default until the entire obligation is fully paid for.
Should this note be referred to a lawyer for collection, I agree to pay the further
sum equivalent to twenty percent (20%) of the total amount due and payable as
and for attorney’s fees which in no case shall be less than ₱5,000.00 and to pay in
addition the cost of suit and other incidental litigation expense.
Any action which may arise in connection with this note shall be brought in the
proper Court of the City of Manila.
Manila, February 24, 1995[.]

36 | P a g e
(SGD.) RODRIGO RIVERA4
In October 1998, almost three years from the date of payment stipulated in the
promissory note, Rivera, as partial payment for the loan, issued and delivered to
the SpousesChua, as payee, a check numbered 012467, dated 30 December 1998,
drawn against Rivera’s current account with the Philippine Commercial
International Bank (PCIB) in the amount of ₱25,000.00.
On 21 December 1998, the Spouses Chua received another check presumably
issued by Rivera, likewise drawn against Rivera’s PCIB current account, numbered
013224, duly signed and dated, but blank as to payee and amount. Ostensibly, as
per understanding by the parties, PCIB Check No. 013224 was issued in the amount
of ₱133,454.00 with "cash" as payee. Purportedly, both checks were simply partial
payment for Rivera’s loan in the principal amount of ₱120,000.00.
Upon presentment for payment, the two checks were dishonored for the reason
"account closed."
As of 31 May 1999, the amount due the Spouses Chua was pegged at ₱366,000.00
covering the principal of ₱120,000.00 plus five percent (5%) interest per month
from 1 January 1996 to 31 May 1999.
The Spouses Chua alleged that they have repeatedly demanded payment from
Rivera to no avail. Because of Rivera’s unjustified refusal to pay, the Spouses Chua
were constrained to file a suit on 11 June 1999. The case was raffled before the
MeTC, Branch 30, Manila and docketed as Civil Case No. 163661.
In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never
executed the subject Promissory Note; (2) in all instances when he obtained a loan
from the Spouses Chua, the loans were always covered by a security; (3) at the
time of the filing of the complaint, he still had an existing indebtedness to the
Spouses Chua, secured by a real estate mortgage, but not yet in default; (4) PCIB
Check No. 132224 signed by him which he delivered to the Spouses Chua on 21
December 1998, should have been issued in the amount of only 1,300.00,
representing the amount he received from the Spouses Chua’s saleslady; (5)
contrary to the supposed agreement, the Spouses Chua presented the check for
payment in the amount of ₱133,454.00; and (6) there was no demand for payment
of the amount of ₱120,000.00 prior to the encashment of PCIB Check No.
0132224.5
In the main, Rivera claimed forgery of the subject Promissory Note and denied his
indebtedness thereunder.
The MeTC summarized the testimonies of both parties’ respective witnesses:
[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence
(consisting of the testimonies of [the spouses] Chua and NBI Senior Documents
Examiner Antonio Magbojos). x x x
xxxx
Witness Magbojos enumerated his credentials as follows: joined the NBI (1987);
NBI document examiner (1989); NBI Senior Document Examiner (1994 to the date
he testified); registered criminologist; graduate of 18th Basic Training Course [i]n
Questioned Document Examination conducted by the NBI; twice attended a
seminar on US Dollar Counterfeit Detection conducted by the US Embassy in
Manila; attended a seminar on Effective Methodology in Teaching and Instructional
design conducted by the NBI Academy; seminar lecturer on Questioned
Documents, Signature Verification and/or Detection; had examined more than a
hundred thousand questioned documents at the time he testified.
Upon [order of the MeTC], Mr. Magbojos examined the purported signature of
[Rivera] appearing in the Promissory Note and compared the signature thereon
with the specimen signatures of [Rivera] appearing on several documents. After a
thorough study, examination, and comparison of the signature on the questioned
document (Promissory Note) and the specimen signatures on the documents
submitted to him, he concluded that the questioned signature appearing in the
Promissory Note and the specimen signatures of [Rivera] appearing on the other
documents submitted were written by one and the same person. In connection
with his findings, Magbojos prepared Questioned Documents Report No. 712-1000
dated 8 January 2001, with the following conclusion: "The questioned and the
standard specimen signatures RODGRIGO RIVERA were written by one and the
same person."
37 | P a g e
[Rivera] testified as follows: he and [respondent] Salvador are "kumpadres;" in May
1998, he obtained a loan from [respondent] Salvador and executed a real estate
mortgage over a parcel of land in favor of [respondent Salvador] as collateral; aside
from this loan, in October, 1998 he borrowed ₱25,000.00 from Salvador and issued
PCIB Check No. 126407 dated 30 December 1998; he expressly denied execution of
the Promissory Note dated 24 February 1995 and alleged that the signature
appearing thereon was not his signature; [respondent Salvador’s] claim that PCIB
Check No. 0132224 was partial payment for the Promissory Note was not true, the
truth being that he delivered the check to [respondent Salvador] with the space for
amount left blank as he and [respondent] Salvador had agreed that the latter was
to fill it in with the amount of ₱1,300.00 which amount he owed [the spouses
Chua]; however, on 29 December 1998 [respondent] Salvador called him and told
him that he had written ₱133,454.00 instead of ₱1,300.00; x x x. To rebut the
testimony of NBI Senior Document Examiner Magbojos, [Rivera] reiterated his
averment that the signature appearing on the Promissory Note was not his
signature and that he did not execute the Promissory Note.6
After trial, the MeTC ruled in favor of the Spouses Chua:
WHEREFORE, [Rivera] is required to pay [the spouses Chua]: ₱120,000.00 plus
stipulated interest at the rate of 5% per month from 1 January 1996, and legal
interest at the rate of 12% percent per annum from 11 June 1999, as actual and
compensatory damages; 20% of the whole amount due as attorney’s fees.7
On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the
MeTC, but deleted the award of attorney’s fees to the Spouses Chua:
WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted,
the rest of the Decision dated October 21, 2002 is hereby AFFIRMED.8
Both trial courts found the Promissory Note as authentic and validly bore the
signature of Rivera. Undaunted, Rivera appealed to the Court of Appeals which
affirmed Rivera’s liability under the Promissory Note, reduced the imposition of
interest on the loan from 60% to 12% per annum, and reinstated the award of
attorney’s fees in favor of the Spouses Chua:
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the
MODIFICATION that the interest rate of 60% per annum is hereby reduced to12%
per annum and the award of attorney’s fees is reinstated atthe reduced amount of
₱50,000.00 Costs against [Rivera].9
Hence, these consolidated petitions for review on certiorariof Rivera in G.R. No.
184458 and the Spouses Chua in G.R. No. 184472, respectively raising the following
issues:
A. In G.R. No. 184458
1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING
THE RULING OF THE RTC AND M[e]TC THAT THERE WAS A VALID PROMISSORY
NOTE EXECUTED BY [RIVERA].
2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
THAT DEMAND IS NO LONGER NECESSARY AND IN APPLYING THE PROVISIONS OF
THE NEGOTIABLE INSTRUMENTS LAW.
3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING
ATTORNEY’S FEES DESPITE THE FACT THAT THE SAME HAS NO BASIS IN FACT AND
IN LAW AND DESPITE THE FACT THAT [THE SPOUSES CHUA] DID NOT APPEAL FROM
THE DECISION OF THE RTC DELETING THE AWARD OF ATTORNEY’S FEES.10
B. In G.R. No. 184472
[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS
LEGAL ERROR WHEN IT MODIFIED THE APPEALED JUDGMENT BY REDUCING THE
INTEREST RATE FROM 60% PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT
THAT RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE SAID
STIPULATED RATE OF INTEREST IS EXORBITANT, UNCONSCIONABLE,
UNREASONABLE, INEQUITABLE, ILLEGAL, IMMORAL OR VOID.11
As early as 15 December 2008, wealready disposed of G.R. No. 184472 and denied
the petition, via a Minute Resolution, for failure to sufficiently show any reversible
error in the ruling of the appellate court specifically concerning the correct rate of
interest on Rivera’s indebtedness under the Promissory Note.12
38 | P a g e

On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.
Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera
questioning the entire ruling of the Court of Appeals in CA-G.R. SP No. 90609.
Rivera continues to deny that heexecuted the Promissory Note; he claims that
given his friendship withthe Spouses Chua who were money lenders, he has been
able to maintain a loan account with them. However, each of these loan
transactions was respectively "secured by checks or sufficient collateral."
Rivera points out that the Spouses Chua "never demanded payment for the loan
nor interest thereof (sic) from [Rivera] for almost four (4) years from the time of
the alleged default in payment [i.e., after December 31, 1995]."13
On the issue of the supposed forgery of the promissory note, we are not inclined to
depart from the lower courts’ uniform rulings that Rivera indeed signed it.
Rivera offers no evidence for his asseveration that his signature on the promissory
note was forged, only that the signature is not his and varies from his usual
signature. He likewise makes a confusing defense of having previously obtained
loans from the Spouses Chua who were money lenders and who had allowed him a
period of "almost four (4) years" before demanding payment of the loan under the
Promissory Note.
First, we cannot give credence to such a naked claim of forgery over the testimony
of the National Bureau of Investigation (NBI) handwriting expert on the integrity of
the promissory note. On that score, the appellate court aptly disabled Rivera’s
contention:
[Rivera] failed to adduce clear and convincing evidence that the signature on the
promissory note is a forgery. The fact of forgery cannot be presumed but must be
proved by clear, positive and convincing evidence. Mere variance of signatures
cannot be considered as conclusive proof that the same was forged. Save for the
denial of Rivera that the signature on the note was not his, there is nothing in the
records to support his claim of forgery. And while it is true that resort to experts is
not mandatory or indispensable to the examination of alleged forged documents,
the opinions of handwriting experts are nevertheless helpful in the court’s
determination of a document’s authenticity.
To be sure, a bare denial will not suffice to overcome the positive value of the
promissory note and the testimony of the NBI witness. In fact, even a perfunctory
comparison of the signatures offered in evidence would lead to the conclusion that
the signatures were made by one and the same person.
It is a basic rule in civil cases that the party having the burden of proof must
establish his case by preponderance of evidence, which simply means "evidence
which is of greater weight, or more convincing than that which is offered in
opposition to it."
Evaluating the evidence on record, we are convinced that [the Spouses Chua] have
established a prima faciecase in their favor, hence, the burden of evidence has
shifted to [Rivera] to prove his allegation of forgery. Unfortunately for [Rivera], he
failed to substantiate his defense.14 Well-entrenched in jurisprudence is the rule
that factual findings of the trial court, especially when affirmed by the appellate
court, are accorded the highest degree of respect and are considered conclusive
between the parties.15 A review of such findings by this Court is not warranted
except upon a showing of highly meritorious circumstances, such as: (1) when the
findings of a trial court are grounded entirely on speculation, surmises or
conjectures; (2) when a lower court's inference from its factual findings is
manifestly mistaken, absurd or impossible; (3) when there is grave abuse of
discretion in the appreciation of facts; (4) when the findings of the appellate court
go beyond the issues of the case, or fail to notice certain relevant facts which, if
properly considered, will justify a different conclusion; (5) when there is a
misappreciation of facts; (6) when the findings of fact are conclusions without
mention of the specific evidence on which they are based, are premised on the
absence of evidence, or are contradicted by evidence on record.16 None of these
exceptions obtains in this instance. There is no reason to depart from the separate
factual findings of the three (3) lower courts on the validity of Rivera’s signature
reflected in the Promissory Note.
Indeed, Rivera had the burden ofproving the material allegations which he sets up
in his Answer to the plaintiff’s claim or cause of action, upon which issue is joined,
whether they relate to the whole case or only to certain issues in the case.17
39 | P a g e

In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the
testimony of a handwriting expert from the NBI. While it is true that resort to
experts is not mandatory or indispensable to the examination or the comparison of
handwriting, the trial courts in this case, on its own, using the handwriting expert
testimony only as an aid, found the disputed document valid.18
Hence, the MeTC ruled that:
[Rivera] executed the Promissory Note after consideration of the following:
categorical statement of [respondent] Salvador that [Rivera] signed the Promissory
Note before him, in his ([Rivera’s]) house; the conclusion of NBI Senior Documents
Examiner that the questioned signature (appearing on the Promissory Note) and
standard specimen signatures "Rodrigo Rivera" "were written by one and the same
person"; actual view at the hearing of the enlarged photographs of the questioned
signature and the standard specimen signatures.19
Specifically, Rivera insists that: "[i]f that promissory note indeed exists, it is beyond
logic for a money lender to extend another loan on May 4, 1998 secured by a real
estate mortgage, when he was already in default and has not been paying any
interest for a loan incurred in February 1995."20
We disagree.
It is likewise likely that precisely because of the long standing friendship of the
parties as "kumpadres," Rivera was allowed another loan, albeit this time secured
by a real estate mortgage, which will cover Rivera’s loan should Rivera fail to pay.
There is nothing inconsistent with the Spouses Chua’s two (2) and successive loan
accommodations to Rivera: one, secured by a real estate mortgage and the other,
secured by only a Promissory Note.
Also completely plausible is thatgiven the relationship between the parties, Rivera
was allowed a substantial amount of time before the Spouses Chua demanded
payment of the obligation due under the Promissory Note.
In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of
forgery and a discordant defense to assail the authenticity and validity of the
Promissory Note. Although the burden of proof rested on the Spouses Chua having
instituted the civil case and after they established a prima facie case against Rivera,
the burden of evidence shifted to the latter to establish his defense.21
Consequently, Rivera failed to discharge the burden of evidence, refute the
existence of the Promissory Note duly signed by him and subsequently, that he did
not fail to pay his obligation thereunder. On the whole, there was no question left
on where the respective evidence of the parties preponderated—in favor of
plaintiffs, the Spouses Chua. Rivera next argues that even assuming the validity of
the Promissory Note, demand was still necessary in order to charge him liable
thereunder. Rivera argues that it was grave error on the part of the appellate court
to apply Section 70 of the Negotiable Instruments Law (NIL).22
We agree that the subject promissory note is not a negotiable instrument and the
provisions of the NIL do not apply to this case. Section 1 of the NIL requires the
concurrence of the following elements to be a negotiable instrument:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
On the other hand, Section 184 of the NIL defines what negotiable promissory note
is: SECTION 184. Promissory Note, Defined. – A negotiable promissory note within
the meaning of this Act is an unconditional promise in writing made by one person
to another, signed by the maker, engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to order or to bearer. Where a
note is drawn to the maker’s own order, it is not complete until indorsed by him.
The Promissory Note in this case is made out to specific persons, herein
respondents, the Spouses Chua, and not to order or to bearer, or to the order of
the Spouses Chua as payees. However, even if Rivera’s Promissory Note is not a
40 | P a g e
negotiable instrument and therefore outside the coverage of Section 70 of the NIL
which provides that presentment for payment is not necessary to charge the
person liable on the instrument, Rivera is still liable under the terms of the
Promissory Note that he issued.
The Promissory Note is unequivocal about the date when the obligation falls due
and becomes demandable—31 December 1995. As of 1 January 1996, Rivera had
already incurred in delay when he failed to pay the amount of ₱120,000.00 due to
the Spouses Chua on 31 December 1995 under the Promissory Note.
Article 1169 of the Civil Code explicitly 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 declare; or
(2) When from the nature and the circumstances of the obligation it appears that
the designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond
his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply
or is not ready to comply in a proper manner with what is incumbent upon him.
From the moment one of the parties fulfills his obligation, delay by the other
begins. (Emphasis supplied)
There are four instances when demand is not necessary to constitute the debtor in
default: (1) when there is an express stipulation to that effect; (2) where the law so
provides; (3) when the period is the controlling motive or the principal inducement
for the creation of the obligation; and (4) where demand would be useless. In the
first two paragraphs, it is not sufficient that the law or obligation fixes a date for
performance; it must further state expressly that after the period lapses, default
will commence.
We refer to the clause in the Promissory Note containing the stipulation of interest:
It is agreed and understood that failure on my part to pay the amount of
(₱120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I
agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the
date of default until the entire obligation is fully paid for.23
which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the
"date of default" until the entire obligation is fully paid for. The parties evidently
agreed that the maturity of the obligation at a date certain, 31 December 1995, will
give rise to the obligation to pay interest. The Promissory Note expressly provided
that after 31 December 1995, default commences and the stipulation on payment
of interest starts.
The date of default under the Promissory Note is 1 January 1996, the day following
31 December 1995, the due date of the obligation. On that date, Rivera became
liable for the stipulated interest which the Promissory Note says is equivalent to 5%
a month. In sum, until 31 December 1995, demand was not necessary before
Rivera could be held liable for the principal amount of ₱120,000.00. Thereafter, on
1 January 1996, upon default, Rivera became liable to pay the Spouses Chua
damages, in the form of stipulated interest.
The liability for damages of those who default, including those who are guilty of
delay, in the performance of their obligations is laid down on Article 117024 of the
Civil Code.
Corollary thereto, Article 2209 solidifies the consequence of payment of interest as
an indemnity for damages when the obligor incurs in delay:
Art. 2209. If the obligation consists inthe payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the
contrary, shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six percent per annum. (Emphasis supplied)
41 | P a g e
Article 2209 is specifically applicable in this instance where: (1) the obligation is for
a sum of money; (2) the debtor, Rivera, incurred in delay when he failed to pay on
or before 31 December 1995; and (3) the Promissory Note provides for an
indemnity for damages upon default of Rivera which is the payment of a
5%monthly interest from the date of default.
We do not consider the stipulation on payment of interest in this case as a penal
clause although Rivera, as obligor, assumed to pay additional 5% monthly interest
on the principal amount of ₱120,000.00 upon default.
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 isno stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.
The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.
The penal clause is generally undertaken to insure performance and works as
either, or both, punishment and reparation. It is an exception to the general rules
on recovery of losses and damages. As an exception to the general rule, a penal
clause must be specifically set forth in the obligation.25
In high relief, the stipulation in the Promissory Note is designated as payment of
interest, not as a penal clause, and is simply an indemnity for damages incurred by
the Spouses Chua because Rivera defaulted in the payment of the amount of
₱120,000.00. The measure of damages for the Rivera’s delay is limited to the
interest stipulated in the Promissory Note. In apt instances, in default of
stipulation, the interest is that provided by law.26
In this instance, the parties stipulated that in case of default, Rivera will pay
interest at the rate of 5% a month or 60% per annum. On this score, the appellate
court ruled:
It bears emphasizing that the undertaking based on the note clearly states the date
of payment tobe 31 December 1995. Given this circumstance, demand by the
creditor isno longer necessary in order that delay may exist since the contract itself
already expressly so declares. The mere failure of [Spouses Chua] to immediately
demand or collect payment of the value of the note does not exonerate [Rivera]
from his liability therefrom. Verily, the trial court committed no reversible error
when it imposed interest from 1 January 1996 on the ratiocination that [Spouses
Chua] were relieved from making demand under Article 1169 of the Civil Code.
xxxx
As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum
in addition to legal interests and attorney’s fees is, indeed, highly iniquitous and
unreasonable. Stipulated interest rates are illegal if they are unconscionable and
the Court is allowed to temper interest rates when necessary. Since the interest
rate agreed upon is void, the parties are considered to have no stipulation
regarding the interest rate, thus, the rate of interest should be 12% per annum
computed from the date of judicial or extrajudicial demand.27
The appellate court found the 5% a month or 60% per annum interest rate, on top
of the legal interest and attorney’s fees, steep, tantamount to it being illegal,
iniquitous and unconscionable. Significantly, the issue on payment of interest has
been squarely disposed of in G.R. No. 184472 denying the petition of the Spouses
Chua for failure to sufficiently showany reversible error in the ruling of the
appellate court, specifically the reduction of the interest rate imposed on Rivera’s
indebtedness under the Promissory Note. Ultimately, the denial of the petition in
G.R. No. 184472 is res judicata in its concept of "bar by prior judgment" on whether
the Court of Appeals correctly reduced the interest rate stipulated in the
Promissory Note.
Res judicata applies in the concept of "bar by prior judgment" if the following
requisites concur: (1) the former judgment or order must be final; (2) the judgment
or order must be on the merits; (3) the decision must have been rendered by a
court having jurisdiction over the subject matter and the parties; and (4) there
must be, between the first and the second action, identity of parties, of subject
matter and of causes of action.28
42 | P a g e

In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of
parties and subject matter raising specifically errors in the Decision of the Court of
Appeals. Where the Court of Appeals’ disposition on the propriety of the reduction
of the interest rate was raised by the Spouses Chua in G.R. No. 184472, our ruling
thereon affirming the Court of Appeals is a "bar by prior judgment."
At the time interest accrued from 1 January 1996, the date of default under the
Promissory Note, the then prevailing rate of legal interest was 12% per annum
under Central Bank (CB) Circular No. 416 in cases involving the loan or for bearance
of money.29 Thus, the legal interest accruing from the Promissory Note is 12% per
annum from the date of default on 1 January 1996. However, the 12% per
annumrate of legal interest is only applicable until 30 June 2013, before the advent
and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013
reducing the rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar
v. Gallery Frames,30 BSP Circular No. 799 is prospectively applied from 1 July 2013.
In short, the applicable rate of legal interest from 1 January 1996, the date when
Rivera defaulted, to date when this Decision becomes final and executor is divided
into two periods reflecting two rates of legal interest: (1) 12% per annum from 1
January 1996 to 30 June 2013; and (2) 6% per annum FROM 1 July 2013 to date
when this Decision becomes final and executory.
As for the legal interest accruing from 11 June 1999, when judicial demand was
made, to the date when this Decision becomes final and executory, such is likewise
divided into two periods: (1) 12% per annum from 11 June 1999, the date of judicial
demand to 30 June 2013; and (2) 6% per annum from 1 July 2013 to date when this
Decision becomes final and executor.31 We base this imposition of interest on
interest due earning legal interest on Article 2212 of the Civil Code which provides
that "interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent on this point."
From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera
to the Spouses Chua could already be determined with reasonable certainty given
the wording of the Promissory Note.32
We cite our recent ruling in Nacar v. Gallery Frames:33
I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or for bearance 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 extra judicial demand under and subject to the provisions ofArticle 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.1âwphi1 No interest, however,
shall be adjudged on unliquidated claims or damages, except when or until the
demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code),
but when such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date the judgment of
the court is made (at which time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged. 3. When the
judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2,
above, shall be 6% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a for bearance of credit. And,
in addition to the above, judgments that have become final and executory prior to
July 1, 2013, shall not be disturbed and shall continue to be implemented applying
the rate of interest fixed therein. (Emphasis supplied)
43 | P a g e
On the reinstatement of the award of attorney’s fees based on the stipulation in
the Promissory Note, weagree with the reduction thereof but not the ratiocination
of the appellate court that the attorney’s fees are in the nature of liquidated
damages or penalty. The interest imposed in the Promissory Note already answers
as liquidated damages for Rivera’s default in paying his obligation. We award
attorney’s fees, albeit in a reduced amount, in recognition that the Spouses Chua
were compelled to litigate and incurred expenses to protect their interests.34 Thus,
the award of ₱50,000.00 as attorney’s fees is proper.
For clarity and to obviate confusion, we chart the breakdown of the total amount
owed by Rivera to the Spouses Chua:
Face value of the Promissory Note Stipulated Interest A & B Interest due
earning legal interest A & B Attorney’s fees Total
Amount
February 24, 1995 to
December 31, 1995 A. January 1, 1996 to
June 30, 2013
(2) legal interest of 12% per annumof the principal amount of ₱120,000.00
reckoned from 1 January 1996 until 30 June 2013;
(3) legal interest of 6% per annumof the principal amount of ₱120,000.00 form 1
July 2013 to date when this Decision becomes final and executory;
(4) 12% per annumapplied to the total of paragraphs 2 and 3 from 11 June 1999,
date of judicial demand, to 30 June 2013, as interest due earning legal interest;
(5) 6% per annumapplied to the total amount of paragraphs 2 and 3 from 1 July
2013 to date when this Decision becomes final and executor, asinterest due
earning legal interest;
(6) Attorney’s fees in the amount of ₱50,000.00; and
(7) 6% per annum interest on the total of the monetary awards from the finality of
this Decision until full payment thereof.

B. July 1 2013 to date when this Decision becomes final and executory A. Costs against petitioner Rodrigo Rivera.
June 11, 1999 (date of judicial demand) to June 30, 2013
B. July 1, 2013 to date when this Decision becomes final and executory SO ORDERED.
Wholesale Amount
₱120,000.00 A. 12 % per annumon the principal amount of ₱120,000.00 JOSE PORTUGAL PEREZ
B. 6% per annumon the principal amount of ₱120,000.00 A. 12% per annumon Associate Justice
the total amount of column 2
B. 6% per annumon the total amount of column 235 ₱50,000.00 WE CONCUR:
Total amount of Columns 1-4
The total amount owing to the Spouses Chua set forth in this Decision shall further MARIA LOURDES P.A. SERENO
earn legal interest at the rate of 6% per annum computed from its finality until full Chief Justice
payment thereof, the interim period being deemed to be a forbearance of credit. Chairperson

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court TERESITA J. LEONARDO-DE CASTRO
of Appeals in CA-G.R. SP No. 90609 is MODIFIED. Petitioner Rodrigo Rivera is Associate Justice LUCAS P. BERSAMIN
ordered to pay respondents Spouse Salvador and Violeta Chua the following: Associate Justice
ESTELA M. PERLAS-BERNABE
(1) the principal amount of ₱120,000.00; Associate Justice

44 | P a g e
CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions
in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court's Div.ision.

MARIA LOURDES P.A. SERENO

Chief Justice

45 | P a g e
SECOND DIVISION Manila

G.R. No. 145483 November 19, 2004 SUBJECT: PARTS FOR ENGINE MODEL
MITSUBISHI 6UET 52/60
LORENZO SHIPPING CORP., petitioner,
vs. Dear Mr. Go:
BJ MARTHEL INTERNATIONAL, INC., respondent.
We are pleased to submit our offer for your above subject requirements.

DECISION Description

Qty.
CHICO-NAZARIO, J.:
Unit Price
This is a petition for review seeking to set aside the Decision1 of the Court of
Appeals in CA-G.R. CV No. 54334 and its Resolution denying petitioner's motion for Total Price
reconsideration.
Nozzle Tip
The factual antecedents of this case are as follows:
6 pcs.
Petitioner Lorenzo Shipping Corporation is a domestic corporation engaged in
coastwise shipping. It used to own the cargo vessel M/V Dadiangas Express. P 5,520.00

Upon the other hand, respondent BJ Marthel International, Inc. is a business entity 33,120.00
engaged in trading, marketing, and selling of various industrial commodities. It is
also an importer and distributor of different brands of engines and spare parts. Plunger & Barrel

From 1987 up to the institution of this case, respondent supplied petitioner with 6 pcs.
spare parts for the latter's marine engines. Sometime in 1989, petitioner asked
respondent for a quotation for various machine parts. Acceding to this request, 27,630.00
respondent furnished petitioner with a formal quotation,2 thus:
165,780.00
May 31, 1989
Cylinder Head
MINQ-6093
LORENZO SHIPPING LINES 2 pcs.
Pier 8, North Harbor

46 | P a g e
1,035,000.00 Name of Description

2,070,000.00 Qty.

Cylinder Liner Amount

1 set CYL. LINER M/E

477,000.00 1 SET

TOTAL PRICE FOB P477,000.00

MANILA ___________ NOTHING FOLLOW

P2,745,900.00 INV. #

DELIVERY: Within 2 months after receipt of firm order. TERM OF PAYMENT: 25% DOWN PAYMENT

TERMS: 25% upon delivery, balance payable in 5 bi-monthly equal 5 BI-MONTHLY INSTALLMENT[S]

Installment[s] not to exceed 90 days. Instead of paying the 25% down payment for the first cylinder liner, petitioner
issued in favor of respondent ten postdated checks4 to be drawn against the
We trust you find our above offer acceptable and look forward to your most valued former's account with Allied Banking Corporation. The checks were supposed to
order. represent the full payment of the aforementioned cylinder liner.

Very truly yours, Subsequently, petitioner issued Purchase Order No. 14011,5 dated 15 January
1990, for yet another unit of cylinder liner. This purchase order stated the term of
(SGD) HENRY PAJARILLO payment to be "25% upon delivery, balance payable in 5 bi-monthly equal
installment[s]."6 Like the purchase order of 02 November 1989, the second
Sales Manager purchase order did not state the date of the cylinder liner's delivery.

Petitioner thereafter issued to respondent Purchase Order No. 13839,3 dated 02
November 1989, for the procurement of one set of cylinder liner, valued at
P477,000, to be used for M/V Dadiangas Express. The purchase order was co-
signed by Jose Go, Jr., petitioner's vice-president, and Henry Pajarillo. Quoted
hereunder is the pertinent portion of the purchase order:
On 26 January 1990, respondent deposited petitioner's check that was postdated
18 January 1990, however, the same was dishonored by the drawee bank due to
insufficiency of funds. The remaining nine postdated checks were eventually
returned by respondent to petitioner.

47 | P a g e
The parties presented disparate accounts of what happened to the check which
was previously dishonored. Petitioner claimed that it replaced said check with a
good one, the proceeds of which were applied to its other obligation to
respondent. For its part, respondent insisted that it returned said postdated check
to petitioner.
Respondent thereafter placed the order for the two cylinder liners with its principal
in Japan, Daiei Sangyo Co. Ltd., by opening a letter of credit on 23 February 1990
under its own name with the First Interstate Bank of Tokyo.
On 20 April 1990, Pajarillo delivered the two cylinder liners at petitioner's
warehouse in North Harbor, Manila. The sales invoices7 evidencing the delivery of
the cylinder liners both contain the notation "subject to verification" under which
the signature of Eric Go, petitioner's warehouseman, appeared.
Respondent thereafter sent a Statement of Account dated 15 November 19908 to
petitioner. While the other items listed in said statement of account were fully paid
by petitioner, the two cylinder liners delivered to petitioner on 20 April 1990
remained unsettled. Consequently, Mr. Alejandro Kanaan, Jr., respondent's vice-
president, sent a demand letter dated 02 January 19919 to petitioner requiring the
latter to pay the value of the cylinder liners subjects of this case. Instead of heeding
the demand of respondent for the full payment of the value of the cylinder liners,
petitioner sent the former a letter dated 12 March 199110 offering to pay only
P150,000 for the cylinder liners. In said letter, petitioner claimed that as the
cylinder liners were delivered late and due to the scrapping of the M/V Dadiangas
Express, it (petitioner) would have to sell the cylinder liners in Singapore and pay
the balance from the proceeds of said sale.
Shortly thereafter, another demand letter dated 27 March 199111 was furnished
petitioner by respondent's counsel requiring the former to settle its obligation to
respondent together with accrued interest and attorney's fees.
Due to the failure of the parties to settle the matter, respondent filed an action for
sum of money and damages before the Regional Trial Court (RTC) of Makati City. In
its complaint,12 respondent (plaintiff below) alleged that despite its repeated oral
and written demands, petitioner obstinately refused to settle its obligations.
Respondent prayed that petitioner be ordered to pay for the value of the cylinder
liners plus accrued interest of P111,300 as of May 1991 and additional interest of
14% per annum to be reckoned from June 1991 until the full payment of the
principal; attorney's fees; costs of suits; exemplary damages; actual damages; and
compensatory damages.
On 25 July 1991, and prior to the filing of a responsive pleading, respondent filed
an amended complaint with preliminary attachment pursuant to Sections 2 and 3,
Rule 57 of the then Rules of Court.13 Aside from the prayer for the issuance of writ
of preliminary attachment, the amendments also pertained to the issuance by
petitioner of the postdated checks and the amounts of damages claimed.
In an Order dated 25 July 1991,14 the court a quo granted respondent's prayer for
the issuance of a preliminary attachment. On 09 August 1991, petitioner filed an
Urgent Ex-Parte Motion to Discharge Writ of Attachment15 attaching thereto a
counter-bond as required by the Rules of Court. On even date, the trial court issued
an Order16 lifting the levy on petitioner's properties and the garnishment of its
bank accounts.
Petitioner afterwards filed its Answer17 alleging therein that time was of the
essence in the delivery of the cylinder liners and that the delivery on 20 April 1990
of said items was late as respondent committed to deliver said items "within two
(2) months after receipt of firm order"18 from petitioner. Petitioner likewise
sought counterclaims for moral damages, exemplary damages, attorney's fees plus
appearance fees, and expenses of litigation.
Subsequently, respondent filed a Second Amended Complaint with Preliminary
Attachment dated 25 October 1991.19 The amendment introduced dealt solely
with the number of postdated checks issued by petitioner as full payment for the
first cylinder liner it ordered from respondent. Whereas in the first amended
complaint, only nine postdated checks were involved, in its second amended
complaint, respondent claimed that petitioner actually issued ten postdated
checks. Despite the opposition by petitioner, the trial court admitted respondent's
Second Amended Complaint with Preliminary Attachment.20
Prior to the commencement of trial, petitioner filed a Motion (For Leave To Sell
Cylinder Liners)21 alleging therein that "[w]ith the passage of time and with no
definite end in sight to the present litigation, the cylinder liners run the risk of
48 | P a g e
obsolescence and deterioration"22 to the prejudice of the parties to this case.
Thus, petitioner prayed that it be allowed to sell the cylinder liners at the best
possible price and to place the proceeds of said sale in escrow. This motion,
unopposed by respondent, was granted by the trial court through the Order of 17
March 1991.23
After trial, the court a quo dismissed the action, the decretal portion of the
Decision stating:
WHEREFORE, the complaint is hereby dismissed, with costs against the plaintiff,
which is ordered to pay P50,000.00 to the defendant as and by way of attorney's
fees.24
The trial court held respondent bound to the quotation it submitted to petitioner
particularly with respect to the terms of payment and delivery of the cylinder
liners. It also declared that respondent had agreed to the cancellation of the
contract of sale when it returned the postdated checks issued by petitioner.
Respondent's counterclaims for moral, exemplary, and compensatory damages
were dismissed for insufficiency of evidence.
Respondent moved for the reconsideration of the trial court's Decision but the
motion was denied for lack of merit.25
Aggrieved by the findings of the trial court, respondent filed an appeal with the
Court of Appeals26 which reversed and set aside the Decision of the court a quo.
The appellate court brushed aside petitioner's claim that time was of the essence in
the contract of sale between the parties herein considering the fact that a
significant period of time had lapsed between respondent's offer and the issuance
by petitioner of its purchase orders. The dispositive portion of the Decision of the
appellate court states:
WHEREFORE, the decision of the lower court is REVERSED and SET ASIDE. The
appellee is hereby ORDERED to pay the appellant the amount of P954,000.00, and
accrued interest computed at 14% per annum reckoned from May, 1991.27
The Court of Appeals also held that respondent could not have incurred delay in
the delivery of cylinder liners as no demand, judicial or extrajudicial, was made by
respondent upon petitioner in contravention of the express provision of Article
1169 of the Civil Code which 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.
Likewise, the appellate court concluded that there was no evidence of the alleged
cancellation of orders by petitioner and that the delivery of the cylinder liners on
20 April 1990 was reasonable under the circumstances.
On 22 May 2000, petitioner filed a motion for reconsideration of the Decision of
the Court of Appeals but this was denied through the resolution of 06 October
2000.28 Hence, this petition for review which basically raises the issues of whether
or not respondent incurred delay in performing its obligation under the contract of
sale and whether or not said contract was validly rescinded by petitioner.
That a contract of sale was entered into by the parties is not disputed. Petitioner,
however, maintains that its obligation to pay fully the purchase price was
extinguished because the adverted contract was validly terminated due to
respondent's failure to deliver the cylinder liners within the two-month period
stated in the formal quotation dated 31 May 1989.
The threshold question, then, is: Was there late delivery of the subjects of the
contract of sale to justify petitioner to disregard the terms of the contract
considering that time was of the essence thereof?
In determining whether time is of the essence in a contract, the ultimate criterion
is the actual or apparent intention of the parties and before time may be so
regarded by a court, there must be a sufficient manifestation, either in the contract
itself or the surrounding circumstances of that intention.29 Petitioner insists that
although its purchase orders did not specify the dates when the cylinder liners
were supposed to be delivered, nevertheless, respondent should abide by the term
of delivery appearing on the quotation it submitted to petitioner.30 Petitioner
theorizes that the quotation embodied the offer from respondent while the
purchase order represented its (petitioner's) acceptance of the proposed terms of
the contract of sale.31 Thus, petitioner is of the view that these two documents
49 | P a g e
"cannot be taken separately as if there were two distinct contracts."32 We do not
agree.
It is a cardinal rule in interpretation of contracts that if the terms thereof are clear
and leave no doubt as to the intention of the contracting parties, the literal
meaning shall control.33 However, in order to ascertain the intention of the
parties, their contemporaneous and subsequent acts should be considered.34
While this Court recognizes the principle that contracts are respected as the law
between the contracting parties, this principle is tempered by the rule that the
intention of the parties is primordial35 and "once the intention of the parties has
been ascertained, that element is deemed as an integral part of the contract as
though it has been originally expressed in unequivocal terms."36
In the present case, we cannot subscribe to the position of petitioner that the
documents, by themselves, embody the terms of the sale of the cylinder liners.
One can easily glean the significant differences in the terms as stated in the formal
quotation and Purchase Order No. 13839 with regard to the due date of the down
payment for the first cylinder liner and the date of its delivery as well as Purchase
Order No. 14011 with respect to the date of delivery of the second cylinder liner.
While the quotation provided by respondent evidently stated that the cylinder
liners were supposed to be delivered within two months from receipt of the firm
order of petitioner and that the 25% down payment was due upon the cylinder
liners' delivery, the purchase orders prepared by petitioner clearly omitted these
significant items. The petitioner's Purchase Order No. 13839 made no mention at
all of the due dates of delivery of the first cylinder liner and of the payment of 25%
down payment. Its Purchase Order No. 14011 likewise did not indicate the due
date of delivery of the second cylinder liner.
In the case of Bugatti v. Court of Appeals,37 we reiterated the principle that "[a]
contract undergoes three distinct stages – preparation or negotiation, its
perfection, and finally, its consummation. Negotiation begins from the time the
prospective contracting parties manifest their interest in the contract and ends at
the moment of agreement of the parties. The perfection or birth of the contract
takes place when the parties agree upon the essential elements of the contract.
The last stage is the consummation of the contract wherein the parties fulfill or
perform the terms agreed upon in the contract, culminating in the extinguishment
thereof."
In the instant case, the formal quotation provided by respondent represented the
negotiation phase of the subject contract of sale between the parties. As of that
time, the parties had not yet reached an agreement as regards the terms and
conditions of the contract of sale of the cylinder liners. Petitioner could very well
have ignored the offer or tendered a counter-offer to respondent while the latter
could have, under the pertinent provision of the Civil Code,38 withdrawn or
modified the same. The parties were at liberty to discuss the provisions of the
contract of sale prior to its perfection. In this connection, we turn to the
testimonies of Pajarillo and Kanaan, Jr., that the terms of the offer were, indeed,
renegotiated prior to the issuance of Purchase Order No. 13839.
During the hearing of the case on 28 January 1993, Pajarillo testified as follows:
Q: You testified Mr. Witness, that you submitted a quotation with defendant
Lorenzo Shipping Corporation dated rather marked as Exhibit A stating the terms of
payment and delivery of the cylinder liner, did you not?
A: Yes sir.
Q: I am showing to you the quotation which is marked as Exhibit A there appears in
the quotation that the delivery of the cylinder liner will be made in two months'
time from the time you received the confirmation of the order. Is that correct?
A: Yes sir.
Q: Now, after you made the formal quotation which is Exhibit A how long a time
did the defendant make a confirmation of the order?
A: After six months.
Q: And this is contained in the purchase order given to you by Lorenzo Shipping
Corporation?
A: Yes sir.
50 | P a g e
Q: Now, in the purchase order dated November 2, 1989 there appears only the
date the terms of payment which you required of them of 25% down payment,
now, it is stated in the purchase order the date of delivery, will you explain to the
court why the date of delivery of the cylinder liner was not mentioned in the
purchase order which is the contract between you and Lorenzo Shipping
Corporation?
A: When Lorenzo Shipping Corporation inquired from us for that cylinder liner, we
have inquired [with] our supplier in Japan to give us the price and delivery of that
item. When we received that quotation from our supplier it is stated there that
they can deliver within two months but we have to get our confirmed order within
June.
Q: But were you able to confirm the order from your Japanese supplier on June of
that year?
A: No sir.
Q: Why? Will you tell the court why you were not able to confirm your order with
your Japanese supplier?
A: Because Lorenzo Shipping Corporation did not give us the purchase order for
that cylinder liner.
Q: And it was only on November 2, 1989 when they gave you the purchase order?
A: Yes sir.
Q: So upon receipt of the purchase order from Lorenzo Shipping Lines in 1989 did
you confirm the order with your Japanese supplier after receiving the purchase
order dated November 2, 1989?
A: Only when Lorenzo Shipping Corporation will give us the down payment of
25%.39
For his part, during the cross-examination conducted by counsel for petitioner,
Kanaan, Jr., testified in the following manner:
WITNESS: This term said 25% upon delivery. Subsequently, in the final contract,
what was agreed upon by both parties was 25% down payment.
Q: When?
A: Upon confirmation of the order.
...
Q: And when was the down payment supposed to be paid?
A: It was not stated when we were supposed to receive that. Normally, we expect
to receive at the earliest possible time. Again, that would depend on the
customers. Even after receipt of the purchase order which was what happened
here, they re-negotiated the terms and sometimes we do accept that.
Q: Was there a re-negotiation of this term?
A: This offer, yes. We offered a final requirement of 25% down payment upon
delivery.
Q: What was the re-negotiated term?
A: 25% down payment
Q: To be paid when?
A: Supposed to be paid upon order.40
The above declarations remain unassailed. Other than its bare assertion that the
subject contracts of sale did not undergo further renegotiation, petitioner failed to
proffer sufficient evidence to refute the above testimonies of Pajarillo and Kanaan,
Jr.
Notably, petitioner was the one who caused the preparation of Purchase Orders
No. 13839 and No. 14011 yet it utterly failed to adduce any justification as to why
51 | P a g e
said documents contained terms which are at variance with those stated in the
quotation provided by respondent. The only plausible reason for such failure on the
part of petitioner is that the parties had, in fact, renegotiated the proposed terms
of the contract of sale. Moreover, as the obscurity in the terms of the contract
between respondent and petitioner was caused by the latter when it omitted the
date of delivery of the cylinder liners in the purchase orders and varied the term
with respect to the due date of the down payment,41 said obscurity must be
resolved against it.42
Relative to the above discussion, we find the case of Smith, Bell & Co., Ltd. v.
Matti,43 instructive. There, we held that –
When the time of delivery is not fixed or is stated in general and indefinite terms,
time is not of the essence of the contract. . . .
In such cases, the delivery must be made within a reasonable time.
The law implies, however, that if no time is fixed, delivery shall be made within a
reasonable time, in the absence of anything to show that an immediate delivery
intended. . . .
We also find significant the fact that while petitioner alleges that the cylinder liners
were to be used for dry dock repair and maintenance of its M/V Dadiangas Express
between the later part of December 1989 to early January 1990, the record is
bereft of any indication that respondent was aware of such fact. The failure of
petitioner to notify respondent of said date is fatal to its claim that time was of the
essence in the subject contracts of sale.
In addition, we quote, with approval, the keen observation of the Court of Appeals:
. . . It must be noted that in the purchase orders issued by the appellee, dated
November 2, 1989 and January 15, 1990, no specific date of delivery was indicated
therein. If time was really of the essence as claimed by the appellee, they should
have stated the same in the said purchase orders, and not merely relied on the
quotation issued by the appellant considering the lapse of time between the
quotation issued by the appellant and the purchase orders of the appellee.
In the instant case, the appellee should have provided for an allowance of time and
made the purchase order earlier if indeed the said cylinder liner was necessary for
the repair of the vessel scheduled on the first week of January, 1990. In fact, the
appellee should have cancelled the first purchase order when the cylinder liner was
not delivered on the date it now says was necessary. Instead it issued another
purchase order for the second set of cylinder liner. This fact negates appellee's
claim that time was indeed of the essence in the consummation of the contract of
sale between the parties.44
Finally, the ten postdated checks issued in November 1989 by petitioner and
received by the respondent as full payment of the purchase price of the first
cylinder liner supposed to be delivered on 02 January 1990 fail to impress. It is not
an indication of failure to honor a commitment on the part of the respondent. The
earliest maturity date of the checks was 18 January 1990. As delivery of said checks
could produce the effect of payment only when they have been cashed,45
respondent's obligation to deliver the first cylinder liner could not have arisen as
early as 02 January 1990 as claimed by petitioner since by that time, petitioner had
yet to fulfill its undertaking to fully pay for the value of the first cylinder liner. As
explained by respondent, it proceeded with the placement of the order for the
cylinder liners with its principal in Japan solely on the basis of its previously
harmonious business relationship with petitioner.
As an aside, let it be underscored that "[e]ven where time is of the essence, a
breach of the contract in that respect by one of the parties may be waived by the
other party's subsequently treating the contract as still in force."46 Petitioner's
receipt of the cylinder liners when they were delivered to its warehouse on 20 April
1990 clearly indicates that it considered the contract of sale to be still subsisting up
to that time. Indeed, had the contract of sale been cancelled already as claimed by
petitioner, it no longer had any business receiving the cylinder liners even if said
receipt was "subject to verification." By accepting the cylinder liners when these
were delivered to its warehouse, petitioner indisputably waived the claimed delay
in the delivery of said items.
We, therefore, hold that in the subject contracts, time was not of the essence. The
delivery of the cylinder liners on 20 April 1990 was made within a reasonable
period of time considering that respondent had to place the order for the cylinder
52 | P a g e
liners with its principal in Japan and that the latter was, at that time, beset by
heavy volume of work.47
There having been no failure on the part of the respondent to perform its
obligation, the power to rescind the contract is unavailing to the petitioner. Article
1191 of the New Civil Code runs as follows:
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 law explicitly gives either party the right to rescind the contract only upon the
failure of the other to perform the obligation assumed thereunder.48 The right,
however, is not an unbridled one. This Court in the case of University of the
Philippines v. De los Angeles,49 speaking through the eminent civilist Justice J.B.L.
Reyes, exhorts:
Here, there is no showing that petitioner notified respondent of its intention to
rescind the contract of sale between them. Quite the contrary, respondent's act of
proceeding with the opening of an irrevocable letter of credit on 23 February 1990
belies petitioner's claim that it notified respondent of the cancellation of the
contract of sale. Truly, no prudent businessman would pursue such action knowing
that the contract of sale, for which the letter of credit was opened, was already
rescinded by the other party.
WHEREFORE, premises considered, the instant Petition for Review on Certiorari is
DENIED. The Decision of the Court of Appeals, dated 28 April 2000, and its
Resolution, dated 06 October 2000, are hereby AFFIRMED. No costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.

Of course, it must be understood that the act of a party in treating a contract as

cancelled or resolved on account of infractions by the other contracting party must
be made known to the other and is always provisional, being ever subject to
scrutiny and review by the proper court. If the other party denied that rescission is
justified, it is free to resort to judicial action in its own behalf, and bring the matter
to court. Then, should the court, after due hearing, decide that the resolution of
the contract was not warranted, the responsible party will be sentenced to
damages; in the contrary case, the resolution will be affirmed, and the consequent
indemnity awarded to the party prejudiced. (Emphasis supplied)

In other words, the party who deems the contract violated may consider it resolved
or rescinded, and act accordingly, without previous court action, but it proceeds at
its own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in
law. But the law definitely does not require that the contracting party who believes
itself injured must first file suit and wait for a judgment before taking extrajudicial
steps to protect its interest. Otherwise, the party injured by the other's breach will
have to passively sit and watch its damages accumulate during the pendency of the
suit until the final judgment of rescission is rendered when the law itself requires
that he should exercise due diligence to minimize its own damages.50

53 | P a g e
Republic of the Philippines When Sofia returned to the United States, she discovered that the wire she had
SUPREME COURT caused the defendant to send, had not been received. She and the other plaintiffs
Manila 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
SECOND DIVISION 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
G.R. No. 73867 February 29, 1988 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.
TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner,
vs. The Court of First Instance of Pangasinan, after trial, ordered the defendant (now
IGNACIO CASTRO, SR., SOFIA C. CROUCH, IGNACIO CASTRO JR., AURORA CASTRO, petitioner) to pay the plaintiffs (now private respondents) damages, as follows,
SALVADOR CASTRO, MARIO CASTRO, CONRADO CASTRO, ESMERALDA C. FLORO, with interest at 6% per annum:
AGERICO CASTRO, ROLANDO CASTRO, VIRGILIO CASTRO AND GLORIA CASTRO, and
HONORABLE INTERMEDIATE APPELLATE COURT, respondents. 1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and
P20,000.00 as moral damages.

PADILLA, J.: 2. Ignacio Castro Sr., P20,000.00 as moral damages.

Petition for review on certiorari of the decision * of the Intermediate Appellate 3. Ignacio Castro Jr., P20,000.00 as moral damages.
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, 4. Aurora Castro, P10,000.00 moral damages.
Inc., Defendant-Appellant."
5. Salvador Castro, P10,000.00 moral damages.
The facts of the case are as follows:
6. Mario Castro, P10,000.00 moral damages.
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 7. Conrado Castro, P10,000 moral damages.
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, 8. Esmeralda C. Floro, P20,000.00 moral damages.
Scottsburg, Indiana, U.S.A., 47170 announcing Consolacion's death. The telegram
was accepted by the defendant in its Dagupan office, for transmission, after 9. Agerico Castro, P10,000.00 moral damages.
payment of the required fees or charges.
10. Rolando Castro, P10,000.00 moral damages.
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 11. Virgilio Castro, P10,000.00 moral damages.
the deceased, then all residing in the United States, returned for the burial.
12. Gloria Castro, P10,000.00 moral damages.

54 | P a g e

Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in
the amount of P1,000.00 to each of the plaintiffs and costs. 2
On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's
decision but eliminated the award of P16,000.00 as compensatory damages to
Sofia C. Crouch and the award of P1,000.00 to each of the private respondents as
exemplary damages. The award of P20,000.00 as moral damages to each of Sofia C.
Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also reduced to P120,000. 00
for each. 3
Petitioner appeals from the judgment of the appellate court, contending that the
award of moral damages should be eliminated as defendant's negligent act was not
motivated by "fraud, malice or recklessness."
In other words, under petitioner's theory, it can only be held liable for P 31.92, the
fee or charges paid by Sofia C. Crouch for the telegram that was never sent to the
addressee thereof.
Petitioner's contention is without merit.
Art. 1170 of the Civil Code provides that "those who in the performance of their
obligations are guilty of fraud, negligence or delay, and those who in any manner
contravene the tenor thereof, are liable for damages." Art. 2176 also provides that
"whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done."
In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a
contract whereby, for a fee, petitioner undertook to send said private respondent's
message overseas by telegram. This, petitioner did not do, despite performance by
said private respondent of her obligation by paying the required charges. Petitioner
was therefore guilty of contravening its obligation to said private respondent and is
thus liable for damages.
This liability is not limited to actual or quantified damages. To sustain petitioner's
contrary position in this regard would result in an inequitous situation where
petitioner will only be held liable for the actual cost of a telegram fixed thirty (30)
years ago.
We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral
damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury. Though incapable of pecuniary computation, moral damages may be
recovered if they are the proximate results of the defendant's wrongful act or
omission." (Emphasis supplied).
Here, petitioner's act or omission, which amounted to gross negligence, was
precisely the cause of the suffering private respondents had to undergo.
As the appellate court properly observed:
[Who] can seriously dispute the shock, the mental anguish and the sorrow that the
overseas children must have suffered upon learning of the death of their mother
after she had already been interred, without being given the opportunity to even
make a choice on whether they wanted to pay her their last respects? There is no
doubt that these emotional sufferings were proximately caused by appellant's
omission and substantive law provides for the justification for the award of moral
damages. 4
We also sustain the trial court's award of P16,000.00 as compensatory damages to
Sofia C. Crouch representing the expenses she incurred when she came to the
Philippines from the United States to testify before the trial court. Had petitioner
not been remiss in performing its obligation, there would have been no need for
this suit or for Mrs. Crouch's testimony.
The award of exemplary damages by the trial court is likewise justified and,
therefore, sustained in the amount of P1,000.00 for each of the private
respondents, as a warning to all telegram companies to observe due diligence in
transmitting the messages of their customers.
WHEREFORE, the petition is DENIED. The decision appealed from is modified so
that petitioner is held liable to private respondents in the following amounts:
55 | P a g e
(1) P10,000.00 as moral damages, to each of private respondents; [I] concur.In addition to compensatory and exemplary damages, moral damages
are recoverable in actions for breach of contract, as in this case, where the breach
(2) P1,000.00 as exemplary damages, to each of private respondents; has been wanton and reckless, tantamount to bad faith.

(3) P16,000.00 as compensatory damages, to private respondent Sofia C.

Crouch;

(4) P5,000.00 as attorney's fees; and

(5) Costs of suit.

SO ORDERED.

Yap (Chairman), Paras and Sarmiento, JJ., concur.

Separate Opinions

MELENCIO-HERRERA, J., concurring.

[I] concur.In addition to compensatory and exemplary damages, moral damages

are recoverable in actions for breach of contract, as in this case, where the breach
has been wanton and reckless, tantamount to bad faith.

Separate Opinions

MELENCIO-HERRERA, J., concurring.

56 | P a g e
Republic of the Philippines
SUPREME COURT All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed
Manila and debited by RCBC from private respondent's account, except for RCBC Check
No. 279805 representing the payment for August 10, 1991, which was unsigned.
FIRST DIVISION Previously, the amount represented by RCBC Check No. 279805 was debited from
private respondent's account but was later recalled and re-credited, to him.
Because of the recall, the last two checks, dated February 10, 1993 and March 10,
1993, were no longer presented for payment. This was purportedly in conformity
G.R. No. 133107 March 25, 1999 with petitioner bank's procedure that once a client's account was forwarded to its
account representative, all remaining checks outstanding as of the date the
RIZAL COMMERCIAL BANKING CORPORATION, petitioner, account was forwarded were no longer presented for patent.
vs.
COURT OF APPEALS and FELIPE LUSTRE, respondents. On the theory that respondent defaulted in his payments, the check representing
the payment for August 10, 1991 being unsigned, petitioner, in a letter dated
January 21, 1993, demanded from private respondent the payment of the balance
of the debt, including liquidated damages. The latter refused, prompting petitioner
KAPUNAN, J.: to file an action for replevin and damages before the Pasay City Regional Trial Court
(RTC). Private respondent, in his Answer, interposed a counterclaim for damages.
A simple telephone call and an ounce of good faith on the part of petitioner could
have prevented the present controversy. After trial, the. RTC 3 rendered a decision disposing of the case as follows:

On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota WHEREFORE, in view of the foregoing, judgment is hereby, rendered as follows:
Corolla from Toyota Shaw, Inc. for which he made a down payment of P164,620.00,
the balance of the purchase price to be paid in 24 equal monthly installments. I. The complaint; for lack of cause of action, is hereby DISMISSED and
Private respondent thus issued 24 postdated checks for the amount of P14,976.00 plaintiff RCBC is hereby ordered,
each. The first was dated April 10, 1991; subsequent checks were dated every 10th
day of each succeeding month. A. To accept the payment equivalent to the three checks amounting to a
total of P44,938.00, without interest.
To secure the balance, private respondent executed a promissory note 1 and a
contract of chattel mortgage 2 over the vehicle in favor of Toyota Shaw, Inc. The B. To release/cancel the mortgage on the car . . . upon payment of the
contract of chattel mortgage, in paragraph 11 thereof, provided for an acceleration amount of P44,938.00, without interest.
clause stating that should the mortgagor default in the payment of any installment,
the whole amount remaining unpaid shall become due. In addition, the mortgagor C. To pay the cost of suit.
shall be liable for 25% of the principal due as liquidated damages.
II. On The Counterclaim.
On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and interests in the
chattel mortgage to petitioner Rizal Commercial Banking Corporation (RCBC).

57 | P a g e
A. Plaintiff RCBC to pay Atty. Lustre the amount of P200,000.00 as moral
damages.
B. RCBC to pay P100,000.00 as exemplary damages.
C. RCBC to pay Atty. Obispo P50,000.00 as Attorney's fees. Atty. Lustre is
not entitled to any fee for lawyering for himself.
All awards for damages are subject to payment of fees to be assessed by the Clerk
of Court, RTC, Pasay City.
SO ORDERED.
On appeal by petitioner, the Court of Appeals affirmed the decision of the RTC,
thus:
We . . . concur with the trial court's ruling that the Chattel Mortgage contract being
a contract of adhesion — that is, one wherein a party, usually a corporation,
prepares the stipulations in the contract, while the other party merely affixes his
signature or his "adhesion" thereto . . . — is to be strictly construed against
appellant bank which prepared the form Contract . . . Hence . . . paragraph 11 of
the Chattel Mortgage contract [containing the acceleration clause] should be
construed to cover only deliberate and advertent failure on the part of the
mortgagor to pay an amortization as it became due in line with the consistent
holding of the Supreme Court construing obscurities and ambiguities in the
restrictive sense against the drafter thereof . . . in the light of Article 1377 of the
Civil Code.
In the case at bench, plaintiff-appellant's imputation of default to defendant-
appellee rested solely on the fact that the 5th check issued by appellee . . . was
recalled for lack of signature. However, the check was recalled only after the
amount covered thereby had been deducted from defendant-appellee's account,
as shown by the testimony of plaintiff's own witness Francisco Bulatao who was in
charge of the preparation of the list and trial balances of bank customers . . . . The
"default" was therefore not a case of failure to pay, the check being sufficiently
funded, and which amount was in fact already debited [sic] from appellee's
account by the appellant bank which subsequently re-credited the amount to
defendant-appelle's account for lack of signature. All these actions RCBC did on its
own without notifying defendant until sixteen (16) months later when it wrote its
demand letter dated January 21, 1993.
Clearly, appellant bank was remiss in the performance, of its functions for it could
have easily called the defendant's attention to the lack of signature on the check
and sent the check to or summoned, the latter to affix his signature. It is also to be
noted that the demand letter contains no explanation as to how defendant-
appellee incurred arrearages in the amount of P66,255.70, which is why defendant-
appellee made a protest notation thereon.
Notably, all the other checks issued by the appellee dated subsequent to August
10, 1991 and dated earlier than the demand letter, were duly encashed. This fact
should have already prompted the appellant bank to review its action relative to
the unsigned check. . . . 4
We take exception to the application by both the trial and appellate courts of
Article 1377 of the Civil Code, which states:
The interpretation of obscure words or stipulations in a contract shall not favor the
party who caused the obscurity.
It bears stressing that a contract of adhesion is just as binding as ordinary
contracts. 5 It is true that we have, on occasion, struck down such contracts as void
when the weaker party is imposed upon in dealing with the dominant bargaining
party and is reduced to the alternative of taking it or leaving it, completely
deprived of the opportunity to bargain on equal footing. 6 Nevertheless, contracts
of adhesion are not invalid per se; 7 they are not entirely prohibited. 8 The one
who adheres to the contract is in reality free to reject it entirely; if he adheres, he
gives his consent. 9
While ambiguities in a contract of adhesion are to be construed against the party
that prepared the same, 10 this rule applies only if the stipulations in such contract
are obscure or ambiguous. If the terms thereof are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its stipulations shall
control. 11 In the latter case, there would be no need for construction. 12
58 | P a g e
Here, the terms of paragraph 11 of the Chattel Mortgage Contract 13 are clear.
Said paragraph states:
11. In case the MORTGAGOR fails to pay any of the installments, or to pay
the interest that may be due as provided in the said promissory note, the whole
amount remaining unpaid therein shall immediately become due and payable and
the mortgage on the property (ies) herein-above described may be foreclosed by
the MORTGAGEE, or the MORTGAGEE may take any other legal action to enforce
collection of the obligation hereby secured, and in either case the MORTGAGOR
further agrees to pay the MORTGAGEE an additional sum of 25% of the principal
due and unpaid, as liquidated damages, which said sum shall become part thereof.
The MORTGAGOR hereby waives reimbursement of the amount heretofore paid by
him/it to the MORTGAGEE.
The above terms leave no room for construction. All that is required is the
application thereof.
Petitioner claims that private respondent's check representing the fifth installment
was "not encashed," 14 such that the installment for August 1991 was not paid. By
virtue of paragraph 11 above, petitioner submits that it "was justified in treating
the entire balance of the obligation as due and
demandable." 15 Despite demand by petitioner, however, private respondent
refused to pay the balance of the debt. Petitioner, in sum imputes delay on the part
of private respondent.
We do not subscribe to petitioner's theory.
Art. 170 of the Civil Code states that those who in the performance of their
obligations are guilty of delay are liable for damages. The delay in the performance
of the obligation, however, must be either malicious or negligent.16 Thus,
assuming that private respondent was guilty of delay in the payment of the value of
unsigned check, private respondent cannot be held liable for damages. There is no
imputation, much less evidence, that private respondent acted with malice or
negligence in failing to sign the check. Indeed, we agree with the Court of Appeals
finding that such omission was mere "in advertence" on the part of private
respondent. Toyota salesperson Jorge Geronimo testified that he even verified
whether private respondent had signed all the checks and in fact returned three or
four unsigned checks to him for signing:
Atty. Obispo:
After these receipts were issued, what else did you do about the transaction?
A: During our transaction with Atty. Lustre, I found out when he issued to
me the 24 checks, I found out 3 to 4 checks are unsigned and I asked him to signed
these checks.
Atty. Obispo:
What did you do?
A: I asked him to sign the checks. After signing the checks, I reviewed again
all the documents, after I reviewed all the documents and found out that all are
completed and the down payments was completed, we realed to him the car. 17
Even when the checks were delivered to petitioner, it did not object to the
unsigned check. In view of the lack of malice or negligence on the part of private
respondent, petitioner's blind and mechanical invocation of paragraph 11 of the
contract of chattel mortgage was unwarranted.
Petitioner's conduct, in the light of the circumstances of this case, can only be
described as mercenary. Petitioner had already debited the value of the unsigned
check from private respondent's account only to re-credit it much later to him.
Thereafter, petitioner encashed checks subsequently dated, then abruptly refused
to encash the last two. More than a year after the date of the unsigned check,
petitioner, claiming delay and invoking paragraph 11, demanded from private
respondent payment of the value of said check and that of the last two checks,
including liquidated damages. As pointed out by the trial court, this whole
controversy could have been avoided if only petitioner bothered to call up private
respondent and ask him to sign the check. Good faith not only in compliance with
its contractual obligations, 18 but also in observance of the standard in human
relations, for every person "to act with justice, give everyone his due, and observe
honesty and good faith." 19 behooved the bank to do so.
59 | P a g e
Failing thus, petitioner is liable for damages caused to private respondent. 20 These
include moral damages for the mental anguish, serious anxiety, besmirched
reputation, wounded feelings and social humiliation suffered by the latter. 21 The
trial court found that private respondent was:

[a] client who has shared transactions for over twenty years with a bank . . ..The
shabby treatment given the defendant is unpardonable since he was put to shame
and embarrassment after the case was filed in Court. He is a lawyer in his own
right, married to another member of the bar. He sired children who are all
professionals in their chosen field. He is known to the community of golfers with
whom he gravitates. Surely the filing of the case made defendant feel so bad and
bothered.

To deter others from emulating petitioner's callous example, we affirm the award
of exemplary damages. 22 As exemplary damages are warranted, so are attorney's
fees. 23

We, however, find excessive the amount of damages awarded by the trial court in
favor of private respondent with respect to his counterclaims and, accordingly,
reduce the same as follows:

(a) Moral damages — from P200,000.00 to P100,000.00

(b) Exemplary damages — from P100,000.00 to P75,000.00

(c) Attorney's fees — from P50,000.00 to P 30,000.00

WHEREFORE, subject to these modifications, the decision of the Court of Appeals is

AFFIRMED.

SO ORDERED.

Davide, Jr., C.J., Melo and Pardo, JJ., concur.

60 | P a g e
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-45637 May 31, 1985
ROBERTO JUNTILLA, petitioner,
vs.
CLEMENTE FONTANAR, FERNANDO BANZON and BERFOL CAMORO, respondents.
Valentin A. Zozobrado for petitioner.
Ruperto N. Alfarara for respondents.
GUTIERREZ, JR., J.:
This is a petition for review, on questions of law, of the decision of the Court of
First Instance of Cebu which reversed the decision of the City Court of Cebu and
exonerated the respondents from any liability arising from a vehicular accident.
The background facts which led to the filing of a complaint for breach of contract
and damages against the respondents are summarized by the Court of First
Instance of Cebu as follows:
The facts established after trial show that the plaintiff was a passenger of the
public utility jeepney bearing plate No. PUJ-71-7 on the course of the trip from
Danao City to Cebu City. The jeepney was driven by defendant Berfol Camoro. It
was registered under the franchise of defendant Clemente Fontanar but was
actually owned by defendant Fernando Banzon. When the jeepney reached
Mandaue City, the right rear tire exploded causing the vehicle to turn turtle. In the
process, the plaintiff who was sitting at the front seat was thrown out of the
vehicle. Upon landing on the ground, the plaintiff momentarily lost consciousness.
When he came to his senses, he found that he had a lacerated wound on his right
palm. Aside from this, he suffered injuries on his left arm, right thigh and on his
back. (Exh. "D"). Because of his shock and injuries, he went back to Danao City but
on the way, he discovered that his "Omega" wrist watch was lost. Upon his arrival
in Danao City, he immediately entered the Danao City Hospital to attend to his
injuries, and also requested his father-in-law to proceed immediately to the place
of the accident and look for the watch. In spite of the efforts of his father-in-law,
the wrist watch, which he bought for P 852.70 (Exh. "B") could no longer be found.
xxx xxx xxx
Petitioner Roberto Juntilla filed Civil Case No. R-17378 for breach of contract with
damages before the City Court of Cebu City, Branch I against Clemente Fontanar,
Fernando Banzon and Berfol Camoro.
The respondents filed their answer, alleging inter alia that the accident that caused
losses to the petitioner was beyond the control of the respondents taking into
account that the tire that exploded was newly bought and was only slightly used at
the time it blew up.
After trial, Judge Romulo R. Senining of the Civil Court of Cebu rendered judgment
in favor of the petitioner and against the respondents. The dispositive portion of
the decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants and the latter are hereby ordered, jointly and severally, to pay the
plaintiff the sum of P750.00 as reimbursement for the lost Omega wrist watch, the
sum of P246.64 as unrealized salary of the plaintiff from his employer, the further
sum of P100.00 for the doctor's fees and medicine, an additional sum of P300.00
for attorney's fees and the costs.
The respondents appealed to the Court of First Instance of Cebu, Branch XIV.
Judge Leonardo B. Canares reversed the judgment of the City Court of Cebu upon a
finding that the accident in question was due to a fortuitous event. The dispositive
portion of the decision reads:
WHEREFORE, judgment is hereby rendered exonerating the defendants from any
liability to the plaintiff without pronouncement as to costs.
61 | P a g e

A motion for reconsideration was denied by the Court of First Instance.
The petitioner raises the following alleged errors committed by the Court of First
Instance of Cebu on appeal—
a. The Honorable Court below committed grave abuse of discretion in
failing to take cognizance of the fact that defendants and/or their employee failed
to exercise "utmost and/or extraordinary diligence" required of common carriers
contemplated under Art. 1755 of the Civil Code of the Philippines.
b. The Honorable Court below committed grave abuse of discretion by
deciding the case contrary to the doctrine laid down by the Honorable Supreme
Court in the case of Necesito et al. v. Paras, et al.
We find the petition impressed with merit.
The City Court and the Court of First Instance of Cebu found that the right rear tire
of the passenger jeepney in which the petitioner was riding blew up causing the
vehicle to fall on its side. The petitioner questions the conclusion of the respondent
court drawn from this finding of fact.
The Court of First Instance of Cebu erred when it absolved the carrier from any
liability upon a finding that the tire blow out is a fortuitous event. The Court of First
Instance of Cebu ruled that:
After reviewing the records of the case, this Court finds that the accident in
question was due to a fortuitous event. A tire blow-out, such as what happened in
the case at bar, is an inevitable accident that exempts the carrier from liability,
there being absence of a showing that there was misconduct or negligence on the
part of the operator in the operation and maintenance of the vehicle involved. The
fact that the right rear tire exploded, despite being brand new, constitutes a clear
case of caso fortuito which can be a proper basis for exonerating the defendants
from liability. ...
The Court of First Instance relied on the ruling of the Court of Appeals in Rodriguez
v. Red Line Transportation Co., CA G.R. No. 8136, December 29, 1954, where the
Court of Appeals ruled that:
A tire blow-out does not constitute negligence unless the tire was already old and
should not have been used at all. Indeed, this would be a clear case of fortuitous
event.
The foregoing conclusions of the Court of First Instance of Cebu are based on a
misapprehension of overall facts from which a conclusion should be drawn. The
reliance of the Court of First Instance on the Rodriguez case is not in order. In La
Mallorca and Pampanga Bus Co. v. De Jesus, et al. (17 SCRA 23), we held that:
Petitioner maintains that a tire blow-out is a fortuitous event and gives rise to no
liability for negligence, citing the rulings of the Court of Appeals in Rodriguez v. Red
Line Transportation Co., CA G.R. No. 8136, December 29, 1954, and People v.
Palapad, CA-G.R. No. 18480, June 27, 1958. These rulings, however, not only are
not binding on this Court but were based on considerations quite different from
those that obtain in the case at bar. The appellate court there made no findings of
any specific acts of negligence on the part of the defendants and confined itself to
the question of whether or not a tire blow-out, by itself alone and without a
showing as to the causative factors, would generate liability. ...
In the case at bar, there are specific acts of negligence on the part of the
respondents. The records show that the passenger jeepney turned turtle and
jumped into a ditch immediately after its right rear tire exploded. The evidence
shows that the passenger jeepney was running at a very fast speed before the
accident. We agree with the observation of the petitioner that a public utility jeep
running at a regular and safe speed will not jump into a ditch when its right rear
tire blows up. There is also evidence to show that the passenger jeepney was
overloaded at the time of the accident. The petitioner stated that there were three
(3) passengers in the front seat and fourteen (14) passengers in the rear.
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
62 | P a g e
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.
In Lasam v. Smith (45 Phil. 657), we laid down the following essential characteristics
of caso fortuito:
xxx xxx xxx
... In a legal sense and, consequently, also in relation to contracts, a caso fortuito
presents the following essential characteristics: (1) The cause of the unforeseen
and unexpected occurrence, or of the failure of the debtor to comply with his
obligation, must be independent of the human will. (2) It must be impossible to
foresee the event which constitutes the caso fortuito, or if it can be foreseen, it
must be impossible to avoid. (3) The occurrence must be such as to render it
impossible for the debtor to fulfill his obligation in a normal manner. And (4) the
obligor (debtor) must be free from any participation in the aggravation of the injury
resulting to the creditor. (5 Encyclopedia Juridica Espanola, 309.)
In the case at bar, the cause of the unforeseen and unexpected occurrence was not
independent of the human will. The accident was caused either through the
negligence of the driver or because of mechanical defects in the tire. Common
carriers should teach their drivers not to overload their vehicles, not to exceed safe
and legal speed limits, and to know the correct measures to take when a tire blows
up thus insuring the safety of passengers at all times. Relative to the contingency of
mechanical defects, we held in Necesito, et al. v. Paras, et al. (104 Phil. 75), that:
... The preponderance of authority is in favor of the doctrine that a passenger is
entitled to recover damages from a carrier for an injury resulting from a defect in
an appliance purchased from a manufacturer, whenever it appears that the defect
would have been discovered by the carrier if it had exercised the degree of care
which under the circumstances was incumbent upon it, with regard to inspection
and application of the necessary tests. For the purposes of this doctrine, the
manufacturer is considered as being in law the agent or servant of the carrier, as
far as regards the work of constructing the appliance. According to this theory, the
good repute of the manufacturer will not relieve the carrier from liability' (10 Am.
Jur. 205, s, 1324; see also Pennsylvania R. Co. v. Roy, 102 U.S. 451; 20 L. Ed. 141;
Southern R. Co. v. Hussey, 74 ALR 1172; 42 Fed. 2d 70; and Ed Note, 29 ALR 788.:
Ann. Cas. 1916E 929).
The rationale of the carrier's liability is the fact that the passenger has neither
choice nor control over the carrier in the selection and use of the equipment and
appliances in use by the carrier. Having no privity whatever with the manufacturer
or vendor of the defective equipment, the passenger has no remedy against him,
while the carrier usually has. It is but logical, therefore, that the carrier, while not
an insurer of the safety of his passengers, should nevertheless be held to answer
for the flaws of his equipment if such flaws were at all discoverable. ...
It is sufficient to reiterate that the source of a common carrier's legal liability is the
contract of carriage, and by entering into the said contract, it binds itself to carry
the passengers safely as far as human care and foresight can provide, using the
utmost diligence of a very cautious person, with a due regard for all the
circumstances. The records show that this obligation was not met by the
respondents.
The respondents likewise argue that the petitioner cannot recover any amount for
failure to prove such damages during the trial. The respondents submit that if the
petitioner was really injured, why was he treated in Danao City and not in Mandaue
City where the accident took place. The respondents argue that the doctor who
issued the medical certificate was not presented during the trial, and hence not
cross-examined. The respondents also claim that the petitioner was not wearing
any wrist watch during the accident.
It should be noted that the City Court of Cebu found that the petitioner had a
lacerated wound on his right palm aside from injuries on his left arm, right thigh
and on his back, and that on his way back to Danao City, he discovered that his
"Omega" wrist watch was lost. These are findings of facts of the City Court of Cebu
which we find no reason to disturb. More so when we consider the fact that the
Court of First Instance of Cebu impliedly concurred in these matters when it
confined itself to the question of whether or not the tire blow out was a fortuitous
event.
63 | P a g e
WHEREFORE, the decision of the Court of First Instance of Cebu, Branch IV
appealed from is hereby REVERSED and SET ASIDE, and the decision of the City
Court of Cebu, Branch I is REINSTATED, with the modification that the damages
shall earn interest at 12% per annum and the attorney's fees are increased to SIX
HUNDRED PESOS (P600.00). Damages shall earn interests from January 27, 1975.

SO ORDERED.

Teehankee (Chairman), Melencio-Herrera, Plana, Relova, De la Fuente and

Alampay, JJ., concur.

64 | P a g e
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. Nos. 103442-45 May 21, 1993
NATIONAL POWER CORPORATION, ET AL., petitioners,
vs.
THE COURT OF APPEALS, GAUDENCIO C. RAYO, ET AL., respondents.
The Solicitor General for plaintiff-appellee.
Ponciano G. Hernandez for private respondents.
DAVIDE, JR., J.:
This is a petition for review on certiorari under Rule 45 of the Revised Rules of
Court urging this Court to set aside the 19 August 1991 consolidated Decision of
the Court of Appeals in CA.-G.R. CV Nos. 27290-931 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.
65 | P a g e
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:
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);.

CONFORMABLY TO THE FOREGOING, the joint decision appealed from is hereby B. Moral damages of five hundred Thousand Pesos (P500,000.00); and.
REVERSED and SET ASIDE, and a new one is hereby rendered:
C. Litigation expenses of Ten Thousand Pesos (P10,000.00);.
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 3. In Civil Case No. SM-953, ordering defendants-appellees to pay, jointly
decision shall become final and executory, the following: and severally, with legal interest from the date when this decision shall have
become final and executory;
A. Actual damages, to wit:
A. Plaintiff-appellant Angel C. Torres:
1) Gaudencio C. Rayo, Two Hundred Thirty One Thousand Two Hundred
Sixty Pesos (P231,260.00); 1) Actual damages of One Hundred Ninety Nine Thousand One Hundred
Twenty Pesos (P199,120.00);
2) Bienvenido P. Pascual, Two Hundred Four Thousand Five Hundred Pesos
(P204.500.00); 2) Moral Damages of One Hundred Fifty Thousand Pesos (P150,000.00);

3) Tomas Manuel, One Hundred Fifty Five Thousand Pesos (P155,000.00); B. Plaintiff-appellant Norberto Torres:

4) Pedro C. Bartolome, One Hundred Forty Seven Thousand Pesos 1) Actual damages of Fifty Thousand Pesos (P50,000.00);
(P147,000.00);.
2) Moral damages of Fifty Thousand Pesos (P50,000.00);
5) Bernardino Cruz, One Hundred Forty Three Thousand Five Hundred Fifty
Two Pesos and Fifty Centavos (P143,552.50); C. Plaintiff-appellant Rodelio Joaquin:

6) Jose Palad, Fifty Seven Thousand Five Hundred Pesos (P57,500.00); 1) Actual damages of One Hundred Thousand Pesos (P100,000.00);

7) Mariano S. Cruz, Forty Thousand Pesos (P40,000.00); 2) Moral damages of One Hundred Thousand Pesos (P100,000.00); and

8) Lucio Fajardo, Twenty nine Thousand Eighty Pesos (P29,080.00); and

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D. Plaintifsf-appellants litigation expenses of Ten Thousand Pesos . . . a patent gross and evident lack of foresight, imprudence and negligence . . . in
(P10,000.00); 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,
4. In Civil case No. SM-1247, ordering defendants-appellees to pay, jointly are all but products of defendants-appellees' headlessness, slovenliness, and
and severally, with legal interest from the date when this decision shall have carelessness. The resulting flash flood and inundation of even areas (sic) one (1)
become final and executory : 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
A. Plaintiffs-appellants Presentacion Lorenzo and Clodualdo Lorenzo: water elevation which would allow room for the expected torrential rains.8

1) Actual damages of Two Hundred Fifty Six Thousand Six Hundred Pesos This conclusion, in turn, is anchored on its findings of fact, to wit:
(P256,600.00);
As early as October 21, 1978, defendants-appellees knew of the impending
2) Moral damages of Fifty Thousand Pesos (P50,000.00); onslaught of and imminent danger posed by typhoon "Kading". For as alleged by
defendants-appellees themselves, the coming of said super typhoon was bannered
B. Plaintiff-appellant Consolacion Guzman : 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
1) Actual damages of One Hundred forty Thousand Pesos (P140,000.00); merited a headline in said newspaper as "Kading's Big Blow expected this
afternoon" (Appellee's Brief, p. 6). Apart from the newspapers, defendants-
2) Moral damages of Fifty Thousand Pesos (P50,000.00); appellees learned of typhoon "Kading' through radio announcements (Civil Case
No. SM-950, TSN, Benjamin Chavez, December 4, 1984, pp. 7-9).
C. Plaintiff-appellant Virginia Guzman :
Defendants-appellees doubly knew that the Angat Dam can safely hold a normal
1) Actual damages of Two Hundred Five Hundred Twenty Pesos maximum headwater elevation of 217 meters (Appellee's brief, p. 12; Civil Case No.
(205,520.00); and SM-951, Exhibit "I-6"; Civil Case No. SM-953, Exhibit "J-6"; Civil Case No. SM-1247,
Exhibit "G-6").
D. Plaintiffs-appellants litigation expenses of Ten Thousand Pesos
(10,000.00). Yet, despite such knowledge, defendants-appellees maintained a reservoir water
elevation even beyond its maximum and safe level, thereby giving no sufficient
In addition, in all the four (4) instant cases, ordering defendants-appellees to pay, allowance for the reservoir to contain the rain water that will inevitably be brought
jointly and severally, plaintiffs-appellants attorney fees in an amount equivalent to by the coming typhoon.
15% of the total amount awarded.
On October 24, 1978, before typhoon "Kading" entered the Philippine area of
No pronouncement as to costs.7 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
The foregoing judgment is based on the public respondent's conclusion that the typhoon "Kading" entered the Philippine area of responsibility, and public storm
petitioners were guilty of: 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

67 | P a g e
from 217.47 to 217.57, with very little opening of the spillways, ranging from 1/2 to
1 meter. On October 26, 1978, when public storm signal number three remained
hoisted over Bulacan, the water elevation still remained at its maximum level of
217.00 to 218.00 with very little opening of the spillways ranging from 1/2 to 2
meters, until at or about midnight, the spillways were suddenly opened at 5
meters, then increasing swiftly to 8, 10, 12, 12.5, 13, 13.5, 14, 14.5 in the early
morning hours of October 27, 1978, releasing water at the rate of 4,500 cubic
meters per second, more or less. On October 27, 1978, water elevation remained
at a range of 218.30 to 217.05 (Civil Case No. SM-950, Exhibits "D" and series, "L",
"M", "N", and "O" and Exhibits "3" and "4"; Civil Case No. SM-951, Exhibits "H" and
"H-1"; Civil Case No. SM-953, Exhibits "I" and "I-1"; Civil Case No. SM 1247, Exhibits
"F" and "F-1").
xxx xxx xxx
From the mass of evidence extant in the record, We are convinced, and so hold
that the flash flood on October 27, 1978, was caused not by rain waters (sic), but
by stored waters (sic) suddenly and simultaneously released from the Angat Dam
by defendants-appellees, particularly from midnight of October 26, 1978 up to the
morning hours of October 27,
1978.9
The appellate court rejected the petitioners' defense that they had sent "early
warning written notices" to the towns of Norzagaray, Angat, Bustos, Plaridel,
Baliwag and Calumpit dated 24 October 1978 which read:
TO ALL CONCERN (sic):
Please be informed that at present our reservoir (dam) is full and that we have
been releasing water intermittently for the past several days.
With the coming of typhoon "Rita" (Kading) we expect to release greater (sic)
volume of water, if it pass (sic) over our place.
In view of this kindly advise people residing along Angat River to keep alert and stay
in safe places.
BENJAMIN L. CHAVEZ
Power Plant Superintendent10
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
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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
69 | P a g e
for loss because of an act of God, he must be free from any previous negligence or
misconduct by which that loss or damage may have been occasioned. (Fish &
Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G. 4379; Limpangco
& Sons v. Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657). 21

Accordingly, petitioners cannot be heard to invoke the act of God or force majeure
to escape liability for the loss or damage sustained by private respondents since
they, the petitioners, were guilty of negligence. The event then was not occasioned
exclusively by an act of God or force majeure; a human factor — negligence or
imprudence — had intervened. The effect then of the force majeure in question
may be deemed to have, even if only partly, resulted from the participation of man.
Thus, the whole occurrence was thereby humanized, as it were, and removed from
the laws applicable to acts of God.

WHEREFORE, for want of merit, the instant petition is hereby DISMISSED and the
Consolidated Decision of the Court of Appeals in CA-G.R. CV Nos. 27290-93 is
AFFIRMED, with costs against the petitioners.

SO ORDERED.

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

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THIRD DIVISION
G.R. No. 138123 March 12, 2002
MINDEX RESOURCES DEVELOPMENT, petitioner,
vs.
EPHRAIM MORILLO, respondent.
PANGANIBAN, J.:
Attorney’s fees cannot be granted simply because one was compelled to sue to
protect and enforce one’s right. The grant must be proven by facts; it cannot
depend on mere speculation or conjecture -- its basis must be stated in the text of
the decision.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the
March 26, 1999 Decision1 of the Court of Appeals (CA) in CA-GR CV No. 46967. The
dispositive portion of the challenged Decision reads as follows:
"WHEREFORE, the appealed decision is AFFIRMED with MODIFICATION that the
legal interest to be paid on the rentals of P76,000.00 and costs of repair in the
amount of P132,750.00 is six (6%) percent per annum from June 22, 1994, the date
of the decision of the court a quo to the date of its finality. Thereafter, if the
amounts adjudged remain unpaid, the interest rate shall be twelve (12%) percent
per annum from the date of finality of the decision until fully paid."2
The Facts
The factual antecedents of the case are summarized by the CA in this wise:
"On February 1991, a verbal agreement was entered into between Ephraim Morillo
and Mindex Resources Corporation (MINDEX for brevity) for the lease of the
former’s 6 x 6 ten-wheeler cargo truck for use in MINDEX’s mining operations in
Binaybay, Bigaan, San Teodoro, Oriental Mindoro, at the stipulated rental of
‘P300.00 per hour for a minimum of eight hours a day or a total of P2,400.00 daily.’
MINDEX had been paying the rentals until April 10, 1991.1âwphi1.nêt
"Unknown to Morillo, on April 11, 1991, the truck was burned by unidentified
persons while it was parked unattended at Sitio Aras, Bigaan, San Teodoro, Oriental
Mindoro, due to mechanical trouble. The findings of the Mindoro Oriental
Integrated National Police in their investigation report read:
‘3. On 121005H April 1991, Mr Alexander Roxas, project coordinator of MINDEX
MINING CORP. reported to this office that on the morning of 12 April 1991 while he
was supposed to report for his Work at their office at Sitio Tibonbon, Bigaan, San
Teodoro, Oriental Mindoro, he x x x noticed that their hired 6 x 6 Ten wheeler
Cargo Truck temporarily parked at Sitio Aras, Bigaan, San Teodoro, Oriental
Mindoro for aplha Engine Trouble was burned on the night of April 11, 1991 by still
unidentified person.
‘x x x xxx xxx
‘5. x x x Based also on the facts gathered and incident scene searched it was also
found out that said 6 x 6 Ten Wheeler Cargo Truck was burned by means of using
coconut leaves and as a result of which said 6 x 6 was totally burned excluding the
engine which was partially damaged by still undetermined amount.’
"Upon learning of the burning incident, Morillo offered to sell the truck to MINDEX
but the latter refused. Instead, it replaced the vehicle’s burned tires and had it
towed to a shop for repair and overhauling.
"On April 15, 1991, Morillo sent a letter to Mr. Arni Isberg, the Finance Manager of
MINDEX, thru Mr. Ramoncito Gozar, Project Manager, proposing the following:
‘x x x xxx xxx
‘I have written to let you know that I am entrusting to you the said vehicle in the
amount of P275,000.00 which is its cost price. I will not charge your company for
the encumbrance of P76,800+ since you used it as my friendly gesture on account
of the unforeseen adversity.
71 | P a g e
‘In view of the tragic happening, I am asking you to pay us, in a way which will not "Through Mr. Gozar, MINDEX responded by a handwritten letter to his cousin
be hard for you to settle to pay us in four installment monthly as follows: Malou (wife of Ephraim Morillo), expressing their reservations on the above
demands due to their tight financial situation. However, he made the following
‘First payment counter offers:

- April 25/91 ‘a) Pay the rental of the 6 x 6 truck (actual) in the amount of P76,000.00.

P[1]50,000.00 ‘b) Repair and overhaul the truck on our own expenses and;

‘Second payment ‘c) Return it to you on (A1) good running condition after repair.’

- May 15/91 "Morillo replied on April 18, 1991, (1) that he will relinquish to MINDEX the
damaged truck; (2) that he is amenable to receive the rental in the amount of
50,000.00 P76,000.00; and (3) that MINDEX will pay fifty thousand pesos (P50,000.00)
monthly until the balance of P275,000.00 is fully paid. It is noteworthy that except
‘Third payme(n)t for his acceptance of the proffered P76,000.00 unpaid rentals, Morillo’s stand has
virtually not been changed as he merely lowered the first payment on the
- June 15/91 P275,000.00 valuation of the truck from P150,000.00 to P50,000.00.

50,000.00 "The parties had since remained intransigent and so on August 1991, Morillo pulled
out the truck from the repair shop of MINDEX and had it repaired elsewhere for
‘Fourth payme(n)t which he spent the total amount of P132,750.00."3 (Citations omitted)

- July 15/91 Ruling of the Trial Court

25,000.00 After evaluating the evidence adduced by both parties, the Regional Trial Court
(RTC) found petitioner responsible for the destruction or loss of the leased 6 x 6
truck and ordered it to pay respondent (1) P76,000 as balance of the unpaid rental
TOTAL for the 6 x 6 truck with interest of 12 percent from June 22, 1994 (the rendition of
the judgment) up to the payment of the amount; (2) P132,750 representing the
P275,000.00 costs of repair and overhaul of the said truck, with interest rate of 12 percent until
fully paid; and (3) P20,000 as attorney’s fees for compelling respondent to secure
‘I promise to relinquish all the necessary documents upon full payment of said the services of counsel in filing his Complaint.
account.
Ruling of the Court of Appeals
‘x x x xxx xxx

72 | P a g e
The appellate court sustained the RTC’s finding that petitioner was not without
fault for the loss and destruction of the truck and, thus, liable therefor. The CA said:
"The burning of the subject truck was impossible to foresee, but not impossible to
avoid. MINDEX could have prevented the incident by immediately towing the truck
to a motor shop for the needed repair or by having it guarded day and night.
Instead, the appellant just left the vehicle where its transfer case broke down. The
place was about twelve (12) kilometers away from the camp site of the appellant
corporation and was sparsely populated. It was guarded only during daytime. It
stayed in that place for two (2) weeks until it was burned on April 11, 1991 while its
transfer case was being repaired elsewhere. It was only after it had been burned
that the appellant had it towed to a repair shop.
"The appellant [respondent] was thus not free from fault for the burning of the
truck. It miserably failed to overcome the presumption of negligence against it.
Neither did it rescind the lease over the truck upon its burning. On the contrary, it
offered to pay P76,000.00 as rentals. It did not also complete the needed repair.
Hence, the appellee was forced to pull out the truck and had it repaired at his own
expense. Since under the law, the ‘lessee shall return the thing leased, upon the
termination of the lease, just as he receive it, ‘the appellant stands liable for the
expenses incurred for the repair in the aggregate amount of P132,750.00."4
Nevertheless, the appellate court modified the Decision of the trial court. The 12
percent interest rate on the P76,000 rentals and the P132,750 repair costs,
imposed by the RTC, was changed by the CA to 6 percent per annum from June 22,
1994 to the date of finality of the said Decision; and 12 percent per annum
thereafter, if the amounts adjudged would remain unpaid from such date of finality
until the rentals and the repair costs were fully paid. It affirmed the award of
attorney’s fees.
Hence, this Petition.5
Issues
In its Memorandum, petitioner raises the following issues for the Court’s
consideration:
"4.1. Whether or not the Court of Appeals gravely erred in finding that petitioner
failed to overcome the presumption of negligence against it considering that the
facts show, as admitted by the respondent, that the burning of the truck was a
fortuitous event.
"4.2. Whether or not the Court of Appeals gravely erred in affirming the decision of
the trial court finding petitioner liable to pay unpaid rentals and cost of repairs.
"4.3. Whether or not the Court of Appeals also erred in affirming the decision of
the trial court finding petitioner liable to pay attorney’s fees."6
This Court’s Ruling
The Petition is partly meritorious; the award of attorney’s fees should be deleted.
First Issue:
Petitioner’s Negligence
Petitioner claims that the burning of the truck was a fortuitous event, for which it
should not be held liable pursuant to Article 11747 of the Civil Code. Moreover, the
letter of respondent dated April 15, 1991, stating that the burning of the truck was
an "unforeseen adversity," was an admission that should exculpate the former
from liability.
We are not convinced. Both the RTC and the CA found petitioner negligent and
thus liable for the loss or destruction of the leased truck. True, both parties may
have suffered from the burning of the truck; however, as found by both lower
courts, the negligence of petitioner makes it responsible for the loss. Well-settled is
the rule that factual findings of the trial court, particularly when affirmed by the
Court of Appeals, are binding on the Supreme Court. Contrary to its allegations,
petitioner has not adequately shown that the RTC and the CA overlooked or
disregarded significant facts and circumstances that, when considered, would alter
the outcome of the disposition.8 Article 1667 of the Civil Code9 holds lessees
responsible for the deterioration or loss of the thing leased, unless they prove that
it took place without their fault.
73 | P a g e
Fortuitous Event Q Now, this Barangay Aras where the 6 x 6 truck had transmission trouble, how
far is it from the camp site of the defendant corporation?
In order for a fortuitous event to exempt one from liability, it is necessary that one
has committed no negligence or misconduct that may have occasioned the loss.10 ALEXANDER ROXAS
An act of God cannot be invoked to protect a person who has failed to take steps to
forestall the possible adverse consequences of such a loss. One’s negligence may A Twelve (12) kilometers, more or less, sir.
have concurred with an act of God in producing damage and injury to another;
nonetheless, showing that the immediate or proximate cause of the damage or Q Is this Barangay Aras populated?
injury was a fortuitous event would not exempt one from liability. When the effect
is found to be partly the result of a person’s participation -- whether by active A Not so many, sir.
intervention, neglect or failure to act -- the whole occurrence is humanized and
removed from the rules applicable to acts of God.11 Q The place where the 6 x 6 truck had transmission trouble, how far is the
nearest house from it?
This often-invoked doctrine of "fortuitous event" or "caso fortuito" has become a
convenient and easy defense to exculpate an obligor from liability. To constitute a A Perhaps three hundred meters, sir.
fortuitous event, the following elements must concur: (a) the cause of the
unforeseen and unexpected occurrence or of the failure of the debtor to comply Q And how many houses are within the three hundred meter radius from the
with obligations must be independent of human will; (b) it must be impossible to place where the truck had engine trouble?
foresee the event that constitutes the caso fortuito or, if it can be foreseen, it must
be impossible to avoid; (c) the occurrence must be such as to render it impossible A Ten, more or less, in scattered.
for the debtor to fulfill obligations in a normal manner; and (d) the obligor must be
free from any participation in the aggravation of the injury or loss.12 Q You said that after hauling several sand to be used in the camp site the 6 x 6
truck had transmission trouble, what did the company do after the truck had that
Article 1174 of the Civil Code states that no person shall be responsible for a engine trouble?
fortuitous event that could not be foreseen or, though foreseen, was inevitable. In
other words, there must be an exclusion of human intervention from the cause of A For at least two weeks the truck was installed in the place where the said
injury or loss.13 truck had engine trouble.

A review of the records clearly shows that petitioner failed to exercise reasonable Q Meaning in Barangay Aras?
care and caution that an ordinarily prudent person would have used in the same
situation. Witness Alexander Roxas testified how petitioner fell short of ordinary A Yes, sir.
diligence in safeguarding the leased truck against the accident, which could have
been avoided in the first place. Pertinent portions of his testimony are reproduced Q Was there any guard in that place by the company during the time that the
hereunder: truck was in that place?

"ATTY. ACERON A Yes, sir, during daytime but at nighttime, there was no guard.

74 | P a g e
Q What happened to that 6 x 6 truck?
A In the month of March, 1991, the company dismissed thirteen (13) to
seventeen (17) employees and these employees came from Barangays Aras,
Botolan, Calsapa, Camatis and Tibonbon and on Aril 11, 1991, the 6 x 6 truck was
burned.
Q How did you come to know that the 6 x 6 truck was burned on April 11, 1991?
A I together with my daughter, I met the service of the company near the
ORMECO and I was informed by the Project Engineer that the 6 x 6 truck was
burned, so, we returned to San Teodoro and have the incident blottered at the
police station.
Q Aside from that, what other action did you undertake in connection with the
burning of the 6 x 6 truck?
A When we were at the police station, the Project Manager of the company
arrived and from the police station we proceeded to the place where the 6 x 6
truck was burned and the Project Manager took pictures of the 6 x 6 truck.
Q Now, did you come to know who was responsible or who were responsible
for the burning of the 6 x 6 truck?
A The responsible is the Mindex Resources Development Corporation, and as far
as I know, the persons who actually burned the said 6 x 6 truck were the dismissed
employees of the Mindex Resources Development Corporation.
Q These dismissed employees of the corporation, why were they employed by
the corporation?
A Because we have to make a road going to the mining site and in the process
of opening the road these dismissed employees happened to be the owners of the
land where the road will pass, so, we paid the land. The corporation likewise gave
jobs to the owners of the land."14
As can be gleaned from the foregoing testimony, petitioner failed to employ
reasonable foresight, diligence and care that would have exempted it from liability
resulting from the burning of the truck. Negligence, as commonly understood, is
that conduct that naturally or reasonably creates undue risk or harm to others. It
may be a failure to observe that degree of care, precaution or vigilance that the
circumstances justly demand;15 or to do any other act that would be done by a
prudent and reasonable person, who is guided by considerations that ordinarily
regulate the conduct of human affairs.16
Second Issue:
Unpaid Rentals and Cost of Repairs
Petitioner proceeds to argue that "it should be deemed to have already paid the
unpaid rentals in the amount of P76,000.00," and that it should not be made to pay
the P132,750 repair and overhaul costs. Nothing in the records, not even in the
documentary evidence it presented, would show that it already paid the aforesaid
amounts. In fact, it seeks to avoid payment of the rental by alleging that
respondent already condoned it in his letter dated April 15, 1991. However, a
perusal of the letter would show that his offer not to charge petitioner for the
P76,000 rental was premised on the condition that it would buy the truck.17
Moreover, the RTC based the P76,000 rental and the costs of repair and overhaul
on Exhibit "B," wherein Chito Gozar, the Project Manager of Mindex Resources
Development Corporation, proposed through a letter dated April 17, 1991, the
following: (1) to pay the P76,000 rental, (2) to repair the truck at the expense of
petitioner, and (3) to return the truck in good running condition after the repair.
Likewise, the nonpayment of the said amount was corroborated by Roxas thus:
"Q During that time when the 6 x 6 truck was already burned and when you
went to the Petron Gasoline Station to inform plaintiff about the burning, was the
plaintiff paid any amount for the rental of the 6 x 6 truck?
A: Before the burning of the 6 x 6 truck, the plaintiff Morillo was already paid
partially and there was a balance of P76,000.00."18
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The P132,750 repair and overhaul costs was correctly granted by the lower courts. sufficient showing of petitioner’s bad faith in refusing to pay the said rentals as well
Article 1667 of the Civil Code holds the lessee responsible for the deterioration or as the repair and overhaul costs.21
loss of the thing leased. In addition, Article 1665 of the same Code provides that
"the lessee shall return the thing leased, upon the termination of the lease, just as WHEREFORE, the Petition is DENIED, but the assailed CA Decision is MODIFIED by
he received it, save what has been lost or impaired by the lapse of time, or by DELETING the award of attorney’s fees. Costs against petitioner.
ordinary wear and tear, or from an inevitable cause."
SO ORDERED.
Courts begin with the assumption that compensatory damages are for pecuniary
losses that result from an act or omission of the defendant. Having been found to Melo, Vitug, Sandoval-Gutierrez, and Carpio, JJ., concur.
be negligent in safeguarding the leased truck, petitioner must shoulder its repair
and overhaul costs to make it serviceable again. Such expenses are duly supported
by receipts; thus, the award of P132,750 is definitely in order.

Third Issue:

Attorney’s Fees

We find the award of attorney’s fees to be improper. The reason which the RTC
gave -- because petitioner had compelled respondent to file an action against it --
falls short of our requirement in Scott Consultants and Resource Development v.
CA,19 from which we quote:

"It is settled that the award of attorney’s fees is the exception rather than the rule
and counsel’s fees are not to be awarded every time a party wins suit. The power
of the court to award attorney’s fees under Article 2208 of the Civil Code demands
factual, legal, and equitable justification; its basis cannot be left to speculation or
conjecture. Where granted, the court must explicitly state in the body of the
decision, and not only in the dispositive portion thereof, the legal reason for the
award of attorney’s fees."

Moreover, a recent case20 ruled that "in the absence of stipulation, a winning
party may be awarded attorney’s fees only in case plaintiff’s action or defendant’s
stand is so untenable as to amount to gross and evident bad faith."

Indeed, respondent was compelled to file this suit to vindicate his rights. However,
such fact by itself will not justify an award of attorney’s fees, when there is no

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Republic of the Philippines
SUPREME COURT Date Document Amount
Manila December 13, 1996 Promissory Note No. 96-213016 ₱2,000,000.00
November 7, 1995 Trust Receipt No. 96-2023657 ₱608,603.04
SECOND DIVISION May 13, 1996 Trust Receipt No. 96-9605228 ₱3,753,777.40
May 24, 1996 Trust Receipt No. 96-9605249 ₱4,602,648.08
G.R. No. 177921 December 4, 2013 March 21, 1997 Trust Receipt No. 97-20472410 ₱7,289,757.79
June 7, 1996 Trust Receipt No. 96-20328011 ₱17,340,360.73
METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S. DYCHIAO AND TIUOH July 26, 1995 Trust Receipt No. 95-20194312 ₱670,709.24
YAN, SPOUSES GUILLERMO AND MERCEDES DYCHIAO, AND SPOUSES VICENTE AND August 31, 1995 Trust Receipt No. 95-20205313 ₱313,797.41
FILOMENA DYCHIAO, Petitioners, November 16, 1995 Trust Receipt No. 96-20243914
vs. ₱13,015,109.87
ALLIED BANK CORPORATION, Respondent. July 3, 1996 Trust Receipt No. 96-20355215 ₱401,608.89
June 20, 1995 Trust Receipt No. 95-20171016 ₱750,089.25
RESOLUTION December 13, 1995 Trust Receipt No. 96-37908917 ₱92,919.00
December 13, 1995 Trust Receipt No. 96/20258118 ₱224,713.58
PERLAS-BERNABE, J.: The interest rate under Promissory Note No. 96-21301 was pegged at 15.25% per
annum (p.a.), with penalty charge of 3% per month in case of default; while the
Assailed in this petition for review on certiorari1 are the Decision2 dated February twelve (12) trust receipts uniformly provided for an interest rate of 14% p.a. and
12, 2007 and the Resolution3 dated May 10, 2007 of the Court of Appeals (CA) in 1% penalty charge. By way of security, the individual petitioners executed several
CA-G.R. CV No. 86896 which reversed and set aside the Decision4 dated January Continuing Guaranty/Comprehensive Surety Agreements19 in favor of Allied Bank.
17, 2006 of the Regional Trial Court of Makati, Branch 57 (RTC) in Civil Case No. 00- Petitioners failed to settle their obligations under the aforementioned promissory
1563, thereby ordering petitioners Metro Concast Steel Corporation (Metro note and trust receipts, hence, Allied Bank, through counsel, sent them demand
Concast), Spouses Jose S. Dychiao and Tiu Oh Yan, Spouses Guillermo and letters,20 all dated December 10, 1998, seeking payment of the total amount of
Mercedes Dychiao, and Spouses Vicente and Filomena Duchiao (individual ₱51,064,093.62, but to no avail. Thus, Allied Bank was prompted to file a complaint
petitioners) to solidarily pay respondent Allied Bank Corporation (Allied Bank) the for collection of sum of money21 (subject complaint) against petitioners before the
aggregate amount of ₱51,064,094.28, with applicable interests and penalty RTC, docketed as Civil Case No. 00-1563. In their second22 Amended Answer,23
charges. petitioners admitted their indebtedness to Allied Bank but denied liability for the
interests and penalties charged, claiming to have paid the total sum of
The Facts ₱65,073,055.73 by way of interest charges for the period covering 1992 to 1997.24

On various dates and for different amounts, Metro Concast, a corporation duly
organized and existing under and by virtue of Philippine laws and engaged in the
business of manufacturing steel,5 through its officers, herein individual petitioners,
obtained several loans from Allied Bank. These loan transactions were covered by a
promissory note and separate letters of credit/trust receipts, the details of which
are as follows:
They also alleged that the economic reverses suffered by the Philippine economy in
1998 as well as the devaluation of the peso against the US dollar contributed
greatly to the downfall of the steel industry, directly affecting the business of
Metro Concast and eventually leading to its cessation. Hence, in order to settle
their debts with Allied Bank, petitioners offered the sale of Metro Concast’s
remaining assets, consisting of machineries and equipment, to Allied Bank, which

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the latter, however, refused. Instead, Allied Bank advised them to sell the
equipment and apply the proceeds of the sale to their outstanding obligations.
Accordingly, petitioners offered the equipment for sale, but since there were no
takers, the equipment was reduced into ferro scrap or scrap metal over the years.
In 2002, Peakstar Oil Corporation (Peakstar), represented by one Crisanta Camiling
(Camiling), expressed interest in buying the scrap metal. During the negotiations
with Peakstar, petitioners claimed that Atty. Peter Saw (Atty. Saw), a member of
Allied Bank’s legal department, acted as the latter’s agent. Eventually, with the
alleged conformity of Allied Bank, through Atty. Saw, a Memorandum of
Agreement25 dated November 8, 2002 (MoA) was drawn between Metro Concast,
represented by petitioner Jose Dychiao, and Peakstar, through Camiling, under
which Peakstar obligated itself to purchase the scrap metal for a total
consideration of ₱34,000,000.00, payable as follows:
(a) ₱4,000,000.00 by way of earnest money – ₱2,000,000.00 to be paid in cash and
the other ₱2,000,000.00 to be paid in two (2) post-dated checks of ₱1,000,000.00
each;26 and
(b) the balance of ₱30,000,000.00 to be paid in ten (10) monthly installments of
₱3,000,000.00, secured by bank guarantees from Bankwise, Inc. (Bankwise) in the
form of separate post-dated checks.27
Unfortunately, Peakstar reneged on all its obligations under the MoA.1âwphi1 In
this regard, petitioners asseverated that:
(a) their failure to pay their outstanding loan obligations to Allied Bank must be
considered as force majeure ; and
(b) since Allied Bank was the party that accepted the terms and conditions of
payment proposed by Peakstar, petitioners must therefore be deemed to have
settled their obligations to Allied Bank. To bolster their defense, petitioner Jose
Dychiao (Jose Dychiao) testified28 during trial that it was Atty. Saw himself who
drafted the MoA and subsequently received29 the ₱2,000,000.00 cash and the two
(2) Bankwise post-dated checks worth ₱1,000,000.00 each from Camiling.
However, Atty. Saw turned over only the two (2) checks and ₱1,500,000.00 in cash
to the wife of Jose Dychiao.30
Claiming that the subject complaint was falsely and maliciously filed, petitioners
prayed for the award of moral damages in the amount of ₱20,000,000.00 in favor
of Metro Concast and at least ₱25,000,000.00 for each individual petitioner,
₱25,000,000.00 as exemplary damages, ₱1,000,000.00 as attorney’s fees,
₱500,000.00 for other litigation expenses, including costs of suit.
The RTC Ruling
After trial on the merits, the RTC, in a Decision31 dated January 17, 2006, dismissed
the subject complaint, holding that the "causes of action sued upon had been paid
or otherwise extinguished." It ruled that since Allied Bank was duly represented by
its agent, Atty. Saw, in all the negotiations and transactions with Peakstar –
considering that Atty. Saw
(a) drafted the MoA,
(b) accepted the bank guarantee issued by Bankwise, and
(c) was apprised of developments regarding the sale and disposition of the scrap
metal – then it stands to reason that the MoA between Metro Concast and
Peakstar was binding upon said bank.
The CA Ruling
Allied Bank appealed to the CA which, in a Decision32 dated February 12, 2007,
reversed and set aside the ruling of the RTC, ratiocinating that there was "no legal
basis in fact and in law to declare that when Bankwise reneged its guarantee under
the [MoA], herein [petitioners] should be deemed to be discharged from their
obligations lawfully incurred in favor of [Allied Bank]."33
The CA examined the MoA executed between Metro Concast, as seller of the ferro
scrap, and Peakstar, as the buyer thereof, and found that the same did not indicate
that Allied Bank intervened or was a party thereto. It also pointed out the fact that
the post-dated checks pursuant to the MoA were issued in favor of Jose Dychiao.
Likewise, the CA found no sufficient evidence on record showing that Atty. Saw was
duly and legally authorized to act for and on behalf of Allied Bank, opining that the
RTC was "indulging in hypothesis and speculation"34 when it made a contrary
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pronouncement. While Atty. Saw received the earnest money from Peakstar, the
receipt was signed by him on behalf of Jose Dychiao.35
It also added that "[i]n the final analysis, the aforesaid checks and receipts were
signed by [Atty.] Saw either as representative of [petitioners] or as partner of the
latter’s legal counsel, and not in anyway as representative of [Allied Bank]."36
Consequently, the CA granted the appeal and directed petitioners to solidarily pay
Allied Bank their corresponding obligations under the aforementioned promissory
note and trust receipts, plus interests, penalty charges and attorney’s fees.
Petitioners sought reconsideration37 which was, however, denied in a
Resolution38 dated May 10, 2007. Hence, this petition.
The Issue Before the Court
At the core of the present controversy is the sole issue of whether or not the loan
obligations incurred by the petitioners under the subject promissory note and
various trust receipts have already been extinguished.
The Court’s Ruling
Article 1231 of the Civil Code states that obligations are extinguished either by
payment or performance, the loss of the thing due, the condonation or remission
of the debt, the confusion or merger of the rights of creditor and debtor,
compensation or novation.
In the present case, petitioners essentially argue that their loan obligations to
Allied Bank had already been extinguished due to Peakstar’s failure to perform its
own obligations to Metro Concast pursuant to the MoA. Petitioners classify
Peakstar’s default as a form of force majeure in the sense that they have, beyond
their control, lost the funds they expected to have received from the Peakstar (due
to the MoA) which they would, in turn, use to pay their own loan obligations to
Allied Bank. They further state that Allied Bank was equally bound by Metro
Concast’s MoA with Peakstar since its agent, Atty. Saw, actively represented it
during the negotiations and execution of the said agreement. Petitioners’
arguments are untenable. At the outset, the Court must dispel the notion that the
MoA would have any relevance to the performance of petitioners’ obligations to
Allied Bank. The MoA is a sale of assets contract, while petitioners’ obligations to
Allied Bank arose from various loan transactions. Absent any showing that the
terms and conditions of the latter transactions have been, in any way, modified or
novated by the terms and conditions in the MoA, said contracts should be treated
separately and distinctly from each other, such that the existence, performance or
breach of one would not depend on the existence, performance or breach of the
other. In the foregoing respect, the issue on whether or not Allied Bank expressed
its conformity to the assets sale transaction between Metro Concast and Peakstar
(as evidenced by the MoA) is actually irrelevant to the issues related to petitioners’
loan obligations to the bank. Besides, as the CA pointed out, the fact of Allied
Bank’s representation has not been proven in this case and hence, cannot be
deemed as a sustainable defense to exculpate petitioners from their loan
obligations to Allied Bank. Now, anent petitioners’ reliance on force majeure,
suffice it to state that Peakstar’s breach of its obligations to Metro Concast arising
from the MoA cannot be classified as a fortuitous event under jurisprudential
formulation. As discussed in Sicam v. Jorge:39
Fortuitous events by definition are extraordinary events not foreseeable or
avoidable.1âwphi1 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. To constitute a fortuitous event, the following
elements must concur: (a) the cause of the unforeseen and unexpected occurrence
or of the failure of the debtor to comply with obligations must be independent of
human will; (b) it must be impossible to foresee the event that constitutes the caso
fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence
must be such as to render it impossible for the debtor to fulfill obligations in a
normal manner; and (d) the obligor must be free from any participation in the
aggravation of the injury or loss.40 (Emphases supplied)
While it may be argued that Peakstar’s breach of the MoA was unforseen by
petitioners, the same us clearly not "impossible"to foresee or even an event which
is independent of human will." Neither has it been shown that said occurrence
rendered it impossible for petitioners to pay their loan obligations to Allied Bank
and thus, negates the former’s force majeure theory altogether. In any case, as
earlier stated, the performance or breach of the MoA bears no relation to the
performance or breach of the subject loan transactions, they being separate and
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distinct sources of obligations. The fact of the matter is that petitioners’ loan CERTIFICATION
obligations to Allied Bank remain subsisting for the basic reason that the former Pursuant to Section 13, Article VIII of the Constitution, and the Division
has not been able to prove that the same had already been paid41 or, in any way, Chairperson’s Attestation, I certify that the conclusions in the above Resolution had
extinguished. In this regard, petitioners’ liability, as adjudged by the CA, must been reached in consultation before the case was assigned to the writer of the
perforce stand. Considering, however, that Allied Bank’s extra-judicial demand on opinion of the Court’s Division.
petitioners appears to have been made only on December 10, 1998, the MARIA LOURDES P.A. SERENO
computation of the applicable interests and penalty charges should be reckoned Chief Justice
only from such date.

WHEREFORE, the petition is DENIED. The Decision dated February 12, 2007 and
Resolution dated May 10, 2007 of the Court of Appeals in CA-G.R. CV No. 86896 are
hereby AFFIRMED with MODIFICATION reckoning the applicable interests and
penalty charges from the date of the extrajudicial demand or on December 10,
1998. The rest of the appellate court’s dispositions stand.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
Chairperson
PRESBITERO J. VELASCO, JR.*
Associate Justice ARTURO D. BRION
Associate Justice
JOSE PORTUGAL PEREZ
Associate Justice
ATTESTATION
I attest that the conclusions in the above Resolution had been reached in
consulation before the case was assigned to the writer of the opinion of the Court’s
Division.
ANTONIO T. CARPIO
Associate Justice
Chairman, Second Division

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