THIRD DIVISION

G.R. No. 159617 August 8, 2007

ROBERTO C. SICAM and AGENCIA de R.C. SICAM, INC., petitioners, vs.
LULU V. JORGE and CESAR JORGE, respondents.
Courts; Judgments; The discretion to decide a case one way or another is broad
enough to justify the adoption of the arguments put forth by one of the parties, as
long as these are legally tenable and supported by law and the facts on records.
To begin with, although it is true that indeed the CA findings were exact
reproductions of the arguments raised in respondents (appellants) brief filed with
the CA, we find the same to be not fatally infirmed. Upon examination of the
Decision, we find that it expressed clearly and distinctly the facts and the law on
which it is based as required by Section 8, Article VIII of the Constitution. The
discretion to decide a case one way or another is broad enough to justify the
adoption of the arguments put forth by one of the parties, as long as these are
legally tenable and supported by law and the facts on records.
Corporation Law; Piercing the Veil of Corporate Fiction; The rule is that the veil of
corporate fiction may be pierced when made as a shield to perpetrate fraud and/or
confuse legitimate issuesthe theory of corporate entity was not meant to
promote unfair objectives or otherwise to shield them.The CA correctly pierced
the veil of the corporate fiction and adjudged petitioner Sicam liable together with
petitioner corporation. The rule is that the veil of corporate fiction may be pierced
when made as a shield to perpetrate fraud and/or confuse legitimate issues. The
theory of corporate entity was not meant to promote unfair objectives or otherwise
to shield them. Notably, the evidence on record shows that at the time respondent
Lulu pawned her jewelry, the pawnshop was owned by petitioner Sicam himself.
As correctly observed by the CA, in all the pawnshop receipts issued to
respondent Lulu in September 1987, all bear the words Agencia de R.C. Sicam,
notwithstanding that the pawnshop was allegedly incorporated in April 1987. The
receipts issued after such alleged incorporation were still in the name of Agencia
de R.C. Sicam, thus inevitably misleading, or at the very least, creating the wrong
impression to respondents and the public as well, that the pawnshop was owned
solely by petitioner Sicam and not by a corporation.
Actions; Judicial Admissions; The general rule that a judicial admission is
conclusive upon the party making it and does not require proof, admits of two
exceptions, to wit(1) when it is shown that such admission was made through
palpable mistake, and (2) when it is shown that no such admission was in fact
made; If a party invokes an admission by an adverse party, but cites the
admission out of context, then the one making the admission may show that he
made no such admission, or that his admission was taken out of context.The
general rule that a judicial admission is conclusive upon the party making it and
does not require proof, admits of two exceptions, to wit: (1) when it is shown that
such admission was made through palpable mistake, and (2) when it is shown that
no such admission was in fact made. The latter exception allows one to contradict
an admission by denying that he made such an admission. The Committee on the
Revision of the Rules of Court explained the second exception in this wise: x x x if
a party invokes an admission by an adverse party, but cites the admission out of
context, then the one making the admission may show that he made no such
admission, or that his admission was taken out of context. x x x that the party can
also show that he made no such admission, i.e., not in the sense in which the
admission is made to appear. That is the reason for the modifier such because if
the rule simply states that the admission may be contradicted by showing that no
admission was made, the rule would not really be providing for a contradiction of
the admission but just a denial. (Emphasis supplied).
Obligations and Contracts; Fortuitous Events; Elements; Words and Phrases;
Fortuitous events by definition are extraordinary events not foreseeable or
avoidableit 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.Fortuitous events by definition are extraordinary events not
foreseeable or avoidable. It is therefore, not enough that the event should not
have been foreseen or anticipated, as is commonly believed but it must be one
impossible to foresee or to avoid. The mere difficulty to foresee the happening is
not impossibility to foresee the same. 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.
Same; Same; 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; When the effect is found to be partly the result of a persons
participationwhether by active intervention, neglect or failure to actthe whole
occurrence is humanized and removed from the rules applicable to acts of God.
The burden of proving that the loss was due to a fortuitous event rests on him who
invokes it. And, in order for a fortuitous event to exempt one from liability, it is
necessary that one has committed no negligence or misconduct that may have
occasioned the loss. It has been held that an act of God cannot be invoked to
protect a person who has failed to take steps to forestall the possible adverse
consequences of such a loss. Ones negligence may have concurred with an act
of God in producing damage and injury to another; nonetheless, showing that the
immediate or proximate cause of the damage or injury was a fortuitous event
would not exempt one from liability. When the effect is found to be partly the result
of a persons participationwhether by active intervention, neglect or failure to
actthe whole occurrence is humanized and removed from the rules applicable to
acts of God.
Same; Same; Pawnshops; Robbery; Robbery per se, just like carnapping, is not a
fortuitous event; Merely presenting the police report on the robbery committed
based on the report of the employees of the pawnshop owner is not sufficient to
establish robbery.Robbery per se, just like carnapping, is not a fortuitous event.
It does not foreclose the possibility of negligence on the part of herein petitioners.
In Co v. Court of Appeals, 291 SCRA 111 (1998), the Court held: It is not a
defense for a repair shop of motor vehicles to escape liability simply because the
damage or loss of a thing lawfully placed in its possession was due to carnapping.
Carnapping per se cannot be considered as a fortuitous event. The fact that a
thing was unlawfully and forcefully taken from anothers rightful possession, as in
cases of carnapping, does not automatically give rise to a fortuitous event. To be
considered as such, carnapping entails more than the mere forceful taking of
anothers property. It must be proved and established that the event was an act of
God or was done solely by third parties and that neither the claimant nor the
person alleged to be negligent has any participation. In accordance with the Rules
of Evidence, the burden of proving that the loss was due to a fortuitous event rests
on him who invokes itwhich in this case is the private respondent. However,
other than the police report of the alleged carnapping incident, no other evidence
was presented by private respondent to the effect that the incident was not due to
its fault. A police report of an alleged crime, to which only private respondent is
privy, does not suffice to establish the carnapping. Neither does it prove that there
was no fault on the part of private respondent notwithstanding the parties
agreement at the pre-trial that the car was carnapped. Carnapping does not
foreclose the possibility of fault or negligence on the part of private respondent.
Just like in Co, petitioners merely presented the police report of the Paraaque
Police Station on the robbery committed based on the report of petitioners
employees which is not sufficient to establish robbery. Such report also does not
prove that petitioners were not at fault.
Same; Same; Same; Article 2123 of the Civil Code provides that with regard to
pawnshops and other establishments which are engaged in making loans secured
by pledges, the special laws and regulations concerning them shall be observed,
and subsidiarily, the provisions on pledge, mortgage and antichresis.Article
2123 of the Civil Code provides that with regard to pawnshops and other
establishments which are engaged in making loans secured by pledges, the
special laws and regulations concerning them shall be observed, and subsidiarily,
the provisions on pledge, mortgage and antichresis. The provision on pledge,
particularly Article 2099 of the Civil Code, provides that the creditor shall take care
of the thing pledged with the diligence of a good father of a family. This means that
petitioners must take care of the pawns the way a prudent person would as to his
own property.
Same; Same; Same; Negligence; Words and Phrases; Negligence is the omission
to do something which a reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would do, or the doing of
something which a prudent and reasonable man would not do.We expounded in
Cruz v. Gangan, 211 SCRA 517 (1992), that negligence is the omission to do
something which a reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would do; or the doing of
something which a prudent and reasonable man would not do. It is want of care
required by the circumstances. A review of the records clearly shows that
petitioners failed to exercise reasonable care and caution that an ordinarily
prudent person would have used in the same situation. Petitioners were guilty of
negligence in the operation of their pawnshop business.
Same; Same; Same; Same; The Central Bank considered it not feasible to require
insurance of pawned articles against burglarythere was no statutory duty
imposed on the pawnshop owner to insure the pawned jewelry.Under Section
17 of Central Bank Circular No. 374, Rules and Regulations for Pawnshops, which
took effect on July 13, 1973, and which was issued pursuant to Presidential
Decree No. 114, Pawnshop Regulation Act, it is provided that pawns pledged must
be insured, to wit: Sec. 17. Insurance of Office Building and Pawns.The place of
business of a pawnshop and the pawns pledged to it must be insured against fire
and against burglary as well as for the latter(sic), by an insurance company
accredited by the Insurance Commissioner. However, this Section was
subsequently amended by CB Circular No. 764 which took effect on October 1,
1980, to wit: Sec. 17. Insurance of Office Building and Pawns.The office
building/premises and pawns of a pawnshop must be insured against fire.
(emphasis supplied). where the requirement that insurance against burglary was
deleted. Obviously, the Central Bank considered it not feasible to require
insurance of pawned articles against burglary. The robbery in the pawnshop
happened in 1987, and considering the above-quoted amendment, there is no
statutory duty imposed on petitioners to insure the pawned jewelry in which case it
was error for the CA to consider it as a factor in concluding that petitioners were
negligent.
Same; Same; Same; Same; The diligence with which the law requires the
individual at all times to govern his conduct varies with the nature of the situation
in which he is placed and the importance of the act which he is to perform.The
preponderance of evidence shows that petitioners failed to exercise the diligence
required of them under the Civil Code. The diligence with which the law requires
the individual at all times to govern his conduct varies with the nature of the
situation in which he is placed and the importance of the act which he is to
perform. Thus, the cases of Austria v. Court of Appeals, 39 SCRA 527 (1971),
Hernandez v. Chairman, Commission on Audit, 179 SCRA 39 (1989), and Cruz v.
Gangan, 211 SCRA 517 (1992), cited by petitioners in their pleadings, where the
victims of robbery were exonerated from liability, find no application to the present
case. [Sicam vs. Jorge, 529 SCRA 443(2007)]
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Roberto C. Sicam, Jr.
(petitioner Sicam) and Agenciade R.C. Sicam, Inc. (petitioner corporation) seeking
to annul the Decision1 of the Court of Appeals dated March 31, 2003, and its
Resolution2 dated August 8, 2003, in CA G.R. CV No. 56633.
It appears that on different dates from September to October 1987, Lulu V. Jorge
(respondent Lulu) pawned several pieces of jewelry with Agenciade R. C. Sicam
located at No. 17 Aguirre Ave., BF Homes Paraaque, Metro Manila, to secure a
loan in the total amount of P59,500.00.
On October 19, 1987, two armed men entered the pawnshop and took away
whatever cash and jewelry were found inside the pawnshop vault. The incident
was entered in the police blotter of the Southern Police District, Paraaque Police
Station as follows:
Investigation shows that at above TDPO, while victims were inside the office,
two (2) male unidentified persons entered into the said office with guns
drawn. Suspects(sic) (1) went straight inside and poked his gun toward
Romeo Sicam and thereby tied him with an electric wire while suspects (sic)
(2) poked his gun toward Divina Mata and Isabelita Rodriguez and ordered
them to lay (sic) face flat on the floor. Suspects asked forcibly the case and
assorted pawned jewelries items mentioned above.
Suspects after taking the money and jewelries fled on board a Marson
Toyota unidentified plate number.3
Petitioner Sicam sent respondent Lulu a letter dated October 19, 1987 informing
her of the loss of her jewelry due to the robbery incident in the pawnshop. On
November 2, 1987, respondent Lulu then wrote a letter4 to petitioner Sicam
expressing disbelief stating that when the robbery happened, all jewelry pawned
were deposited with Far East Bank near the pawnshop since it had been the
practice that before they could withdraw, advance notice must be given to the
pawnshop so it could withdraw the jewelry from the bank. Respondent Lulu then
requested petitioner Sicam to prepare the pawned jewelry for withdrawal on
November 6, 1987 but petitioner Sicam failed to return the jewelry.
On September 28, 1988, respondent Lulu joined by her husband, Cesar Jorge,
filed a complaint against petitioner Sicam with the Regional Trial Court of Makati
seeking indemnification for the loss of pawned jewelry and payment of actual,
moral and exemplary damages as well as attorney's fees. The case was docketed
as Civil Case No. 88-2035.
Petitioner Sicam filed his Answer contending that he is not the real party-in-interest
as the pawnshop was incorporated on April 20, 1987 and known as Agenciade
R.C. Sicam, Inc; that petitioner corporation had exercised due care and diligence
in the safekeeping of the articles pledged with it and could not be made liable for
an event that is fortuitous.
Respondents subsequently filed an Amended Complaint to include petitioner
corporation.
Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is concerned
considering that he is not the real party-in-interest. Respondents opposed the
same. The RTC denied the motion in an Order dated November 8, 1989.5
After trial on the merits, the RTC rendered its Decision6 dated January 12, 1993,
dismissing respondents complaint as well as petitioners counterclaim. The RTC
held that petitioner Sicam could not be made personally liable for a claim arising
out of a corporate transaction; that in the Amended Complaint of respondents,
they asserted that "plaintiff pawned assorted jewelries in defendants' pawnshop";
and that as a consequence of the separate juridical personality of a corporation,
the corporate debt or credit is not the debt or credit of a stockholder.
The RTC further ruled that petitioner corporation could not be held liable for the
loss of the pawned jewelry since it had not been rebutted by respondents that the
loss of the pledged pieces of jewelry in the possession of the corporation was
occasioned by armed robbery; that robbery is a fortuitous event which exempts the
victim from liability for the loss, citing the case of Austria v. Court of Appeals;7 and
that the parties transaction was that of a pledgor and pledgee and under Art. 1174
of the Civil Code, the pawnshop as a pledgee is not responsible for those events
which could not be foreseen.
Respondents appealed the RTC Decision to the CA. In a Decision dated March
31, 2003, the CA reversed the RTC, the dispositive portion of which reads as
follows:
WHEREFORE, premises considered, the instant Appeal is GRANTED, and
the Decision dated January 12, 1993,of the Regional Trial Court of Makati,
Branch 62, is hereby REVERSED and SET ASIDE, ordering the appellees to
pay appellants the actual value of the lost jewelry amounting to P272,000.00,
and attorney' fees of P27,200.00.8
In finding petitioner Sicam liable together with petitioner corporation, the CA
applied the doctrine of piercing the veil of corporate entity reasoning that
respondents were misled into thinking that they were dealing with the pawnshop
owned by petitioner Sicam as all the pawnshop tickets issued to them bear the
words "Agenciade R.C. Sicam"; and that there was no indication on the pawnshop
tickets that it was the petitioner corporation that owned the pawnshop which
explained why respondents had to amend their complaint impleading petitioner
corporation.
The CA further held that the corresponding diligence required of a pawnshop is
that it should take steps to secure and protect the pledged items and should take
steps to insure itself against the loss of articles which are entrusted to its custody
as it derives earnings from the pawnshop trade which petitioners failed to do; that
Austria is not applicable to this case since the robbery incident happened in 1961
when the criminality had not as yet reached the levels attained in the present day;
that they are at least guilty of contributory negligence and should be held liable for
the loss of jewelries; and that robberies and hold-ups are foreseeable risks in that
those engaged in the pawnshop business are expected to foresee.
The CA concluded that both petitioners should be jointly and severally held liable
to respondents for the loss of the pawned jewelry.
Petitioners motion for reconsideration was denied in a Resolution dated August 8,
2003.
Hence, the instant petition for review with the following assignment of errors:
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT OPENED
ITSELF TO REVERSAL, WHEN IT ADOPTED UNCRITICALLY (IN FACT IT
 REPRODUCED AS ITS OWN WITHOUT IN THE MEANTIME
ACKNOWLEDGING IT) WHAT THE RESPONDENTS ARGUED IN THEIR
BRIEF, WHICH ARGUMENT WAS PALPABLY UNSUSTAINABLE.
THE COURT OF APPEALS ERRED, AND WHEN IT DID, IT OPENED
ITSELF TO REVERSAL BY THIS HONORABLE COURT, WHEN IT AGAIN
ADOPTED UNCRITICALLY (BUT WITHOUT ACKNOWLEDGING IT) THE
SUBMISSIONS OF THE RESPONDENTS IN THEIR BRIEF WITHOUT
ADDING ANYTHING MORE THERETO DESPITE THE FACT THAT THE
SAID ARGUMENT OF THE RESPONDENTS COULD NOT HAVE BEEN
SUSTAINED IN VIEW OF UNREBUTTED EVIDENCE ON RECORD.9
Anent the first assigned error, petitioners point out that the CAs finding that
petitioner Sicam is personally liable for the loss of the pawned jewelries is "a
virtual and uncritical reproduction of the arguments set out on pp. 5-6 of the
Appellants brief."10
Petitioners argue that the reproduced arguments of respondents in their
Appellants Brief suffer from infirmities, as follows:
(1) Respondents conclusively asserted in paragraph 2 of their Amended
Complaint that Agencia de R.C. Sicam, Inc. is the present owner of Agencia
de R.C. Sicam Pawnshop, and therefore, the CA cannot rule against said
conclusive assertion of respondents;
(2) The issue resolved against petitioner Sicam was not among those raised
and litigated in the trial court; and
(3) By reason of the above infirmities, it was error for the CA to have pierced
the corporate veil since a corporation has a personality distinct and separate
from its individual stockholders or members.
Anent the second error, petitioners point out that the CA finding on their
negligence is likewise an unedited reproduction of respondents brief which had
the following defects:
(1) There were unrebutted evidence on record that petitioners had observed
the diligence required of them, i.e, they wanted to open a vault with a nearby
bank for purposes of safekeeping the pawned articles but was discouraged
by the Central Bank (CB) since CB rules provide that they can only store the
pawned articles in a vault inside the pawnshop premises and no other place;
 (2) Petitioners were adjudged negligent as they did not take insurance
against the loss of the pledged jelweries, but it is judicial notice that due to
high incidence of crimes, insurance companies refused to cover pawnshops
and banks because of high probability of losses due to robberies;
(3) In Hernandez v. Chairman, Commission on Audit (179 SCRA 39, 45-46),
the victim of robbery was exonerated from liability for the sum of money
belonging to others and lost by him to robbers.
Respondents filed their Comment and petitioners filed their Reply thereto. The
parties subsequently submitted their respective Memoranda.
We find no merit in the petition.
To begin with, although it is true that indeed the CA findings were exact
reproductions of the arguments raised in respondents (appellants) brief filed with
the CA, we find the same to be not fatally infirmed. Upon examination of the
Decision, we find that it expressed clearly and distinctly the facts and the law on
which it is based as required by Section 8, Article VIII of the Constitution. The
discretion to decide a case one way or another is broad enough to justify the
adoption of the arguments put forth by one of the parties, as long as these are
legally tenable and supported by law and the facts on records.11
Our jurisdiction under Rule 45 of the Rules of Court is limited to the review of
errors of law committed by the appellate court. Generally, the findings of fact of the
appellate court are deemed conclusive and we are not duty-bound to analyze and
calibrate all over again the evidence adduced by the parties in the court a quo.12
This rule, however, is not without exceptions, such as where the factual findings of
the Court of Appeals and the trial court are conflicting or contradictory13 as is
obtaining in the instant case.
However, after a careful examination of the records, we find no justification to
absolve petitioner Sicam from liability.
The CA correctly pierced the veil of the corporate fiction and adjudged petitioner
Sicam liable together with petitioner corporation. The rule is that the veil of
corporate fiction may be pierced when made as a shield to perpetrate fraud and/or
confuse legitimate issues. 14 The theory of corporate entity was not meant to
promote unfair objectives or otherwise to shield them.15
Notably, the evidence on record shows that at the time respondent Lulu pawned
her jewelry, the pawnshop was owned by petitioner Sicam himself. As correctly
observed by the CA, in all the pawnshop receipts issued to respondent Lulu in
September 1987, all bear the words "Agenciade R. C. Sicam," notwithstanding
that the pawnshop was allegedly incorporated in April 1987. The receipts issued
after such alleged incorporation were still in the name of "Agenciade R. C. Sicam,"
thus inevitably misleading, or at the very least, creating the wrong impression to
respondents and the public as well, that the pawnshop was owned solely by
petitioner Sicam and not by a corporation.
Even petitioners counsel, Atty. Marcial T. Balgos, in his letter16 dated October 15,
1987 addressed to the Central Bank, expressly referred to petitioner Sicam as the
proprietor of the pawnshop notwithstanding the alleged incorporation in April 1987.
We also find no merit in petitioners' argument that since respondents had alleged
in their Amended Complaint that petitioner corporation is the present owner of the
pawnshop, the CA is bound to decide the case on that basis.
Section 4 Rule 129 of the Rules of Court provides that an admission, verbal or
written, made by a party in the course of the proceedings in the same case, does
not require proof. The admission may be contradicted only by showing that it was
made through palpable mistake or that no such admission was made.
Thus, the general rule that a judicial admission is conclusive upon the party
making it and does not require proof, admits of two exceptions, to wit: (1) when it
is shown that such admission was made through palpable mistake, and (2) when it
is shown that no such admission was in fact made. The latter exception allows
one to contradict an admission by denying that he made such an
admission.17
The Committee on the Revision of the Rules of Court explained the second
exception in this wise:
x x x if a party invokes an "admission" by an adverse party, but cites the
admission "out of context," then the one making the "admission" may show
that he made no "such" admission, or that his admission was taken out of
context.
 x x x that the party can also show that he made no "such admission",
i.e., not in the sense in which the admission is made to appear.
That is the reason for the modifier "such" because if the rule simply states
that the admission may be contradicted by showing that "no admission was
made," the rule would not really be providing for a contradiction of the
admission but just a denial.18 (Emphasis supplied).
While it is true that respondents alleged in their Amended Complaint that petitioner
corporation is the present owner of the pawnshop, they did so only because
petitioner Sicam alleged in his Answer to the original complaint filed against him
that he was not the real party-in-interest as the pawnshop was incorporated in
April 1987. Moreover, a reading of the Amended Complaint in its entirety shows
that respondents referred to both petitioner Sicam and petitioner corporation
where they (respondents) pawned their assorted pieces of jewelry and ascribed to
both the failure to observe due diligence commensurate with the business which
resulted in the loss of their pawned jewelry.
Markedly, respondents, in their Opposition to petitioners Motion to Dismiss
Amended Complaint, insofar as petitioner Sicam is concerned, averred as follows:
Roberto C. Sicam was named the defendant in the original complaint
because the pawnshop tickets involved in this case did not show that the
R.C. Sicam Pawnshop was a corporation. In paragraph 1 of his Answer, he
admitted the allegations in paragraph 1 and 2 of the Complaint. He merely
added "that defendant is not now the real party in interest in this case."
It was defendant Sicam's omission to correct the pawnshop tickets used in
the subject transactions in this case which was the cause of the instant
action. He cannot now ask for the dismissal of the complaint against him
simply on the mere allegation that his pawnshop business is now
incorporated. It is a matter of defense, the merit of which can only be
reached after consideration of the evidence to be presented in due course.19
Unmistakably, the alleged admission made in respondents' Amended Complaint
was taken "out of context" by petitioner Sicam to suit his own purpose. Ineluctably,
the fact that petitioner Sicam continued to issue pawnshop receipts under his
name and not under the corporation's name militates for the piercing of the
corporate veil.
We likewise find no merit in petitioners' contention that the CA erred in piercing the
veil of corporate fiction of petitioner corporation, as it was not an issue raised and
litigated before the RTC.
Petitioner Sicam had alleged in his Answer filed with the trial court that he was not
the real party-in-interest because since April 20, 1987, the pawnshop business
initiated by him was incorporated and known as Agenciade R.C. Sicam. In the pre-
trial brief filed by petitioner Sicam, he submitted that as far as he was concerned,
the basic issue was whether he is the real party in interest against whom the
complaint should be directed.20 In fact, he subsequently moved for the dismissal of
the complaint as to him but was not favorably acted upon by the trial court.
Moreover, the issue was squarely passed upon, although erroneously, by the trial
court in its Decision in this manner:
x x x The defendant Roberto Sicam, Jr likewise denies liability as far as he is
concerned for the reason that he cannot be made personally liable for a
claim arising from a corporate transaction.
This Court sustains the contention of the defendant Roberto C. Sicam, Jr.
The amended complaint itself asserts that "plaintiff pawned assorted
jewelries in defendant's pawnshop." It has been held that " as a
consequence of the separate juridical personality of a corporation, the
corporate debt or credit is not the debt or credit of the stockholder, nor is the
stockholder's debt or credit that of a corporation.21
Clearly, in view of the alleged incorporation of the pawnshop, the issue of whether
petitioner Sicam is personally liable is inextricably connected with the
determination of the question whether the doctrine of piercing the corporate veil
should or should not apply to the case.
The next question is whether petitioners are liable for the loss of the pawned
articles in their possession.
Petitioners insist that they are not liable since robbery is a fortuitous event and
they are not negligent at all.
We are not persuaded.
Article 1174 of the Civil Code provides:
 Art. 1174. Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the obligation
requires the assumption of risk, no person shall be responsible for those
events which could not be foreseen or which, though foreseen, were
inevitable.
Fortuitous events by definition are extraordinary events not foreseeable or
avoidable. It is therefore, not enough that the event should not have been
foreseen or anticipated, as is commonly believed but it must be one impossible to
foresee or to avoid. The mere difficulty to foresee the happening is not
impossibility to foresee the same. 22
To constitute a fortuitous event, the following elements must concur: (a) the cause
of the unforeseen and unexpected occurrence or of the failure of the debtor to
comply with obligations must be independent of human will; (b) it must be
impossible to foresee the event that constitutes the casofortuito or, if it can be
foreseen, it must be impossible to avoid; (c) the occurrence must be such as to
render it impossible for the debtor to fulfill obligations in a normal manner; and, (d)
the obligor must be free from any participation in the aggravation of the injury or
loss. 23
The burden of proving that the loss was due to a fortuitous event rests on him who
invokes it.24 And, in order for a fortuitous event to exempt one from liability, it is
necessary that one has committed no negligence or misconduct that may have
occasioned the loss. 25
It has been held that an act of God cannot be invoked to protect a person who has
failed to take steps to forestall the possible adverse consequences of such a loss.
One's negligence may have concurred with an act of God in producing damage
and injury to another; nonetheless, showing that the immediate or proximate cause
of the damage or injury was a fortuitous event would not exempt one from liability.
When the effect is found to be partly the result of a person's participation --
whether by active intervention, neglect or failure to act -- the whole occurrence is
humanized and removed from the rules applicable to acts of God. 26
Petitioner Sicam had testified that there was a security guard in their pawnshop at
the time of the robbery. He likewise testified that when he started the pawnshop
business in 1983, he thought of opening a vault with the nearby bank for the
purpose of safekeeping the valuables but was discouraged by the Central Bank
since pawned articles should only be stored in a vault inside the pawnshop. The
very measures which petitioners had allegedly adopted show that to them the
possibility of robbery was not only foreseeable, but actually foreseen and
anticipated. Petitioner Sicams testimony, in effect, contradicts petitioners defense
of fortuitous event.
Moreover, petitioners failed to show that they were free from any negligence by
which the loss of the pawned jewelry may have been occasioned.
Robbery per se, just like carnapping, is not a fortuitous event. It does not foreclose
the possibility of negligence on the part of herein petitioners. In Co v. Court of
Appeals,27 the Court held:
It is not a defense for a repair shop of motor vehicles to escape liability
simply because the damage or loss of a thing lawfully placed in its
possession was due to carnapping. Carnapping per se cannot be considered
as a fortuitous event. The fact that a thing was unlawfully and forcefully
taken from another's rightful possession, as in cases of carnapping,
does not automatically give rise to a fortuitous event. To be considered
as such, carnapping entails more than the mere forceful taking of
another's property. It must be proved and established that the event
was an act of God or was done solely by third parties and that neither
the claimant nor the person alleged to be negligent has any
participation. In accordance with the Rules of Evidence, the burden of
proving that the loss was due to a fortuitous event rests on him who
invokes it which in this case is the private respondent. However,
other than the police report of the alleged carnapping incident, no other
evidence was presented by private respondent to the effect that the incident
was not due to its fault. A police report of an alleged crime, to which only
private respondent is privy, does not suffice to establish the carnapping.
Neither does it prove that there was no fault on the part of private respondent
notwithstanding the parties' agreement at the pre-trial that the car was
carnapped. Carnapping does not foreclose the possibility of fault or
negligence on the part of private respondent.28
Just like in Co, petitioners merely presented the police report of the Paraaque
Police Station on the robbery committed based on the report of petitioners'
employees which is not sufficient to establish robbery. Such report also does not
prove that petitioners were not at fault.
On the contrary, by the very evidence of petitioners, the CA did not err in finding
that petitioners are guilty of concurrent or contributory negligence as provided in
Article 1170 of the Civil Code, to wit:
Art. 1170. Those who in the performance of their obligations are guilty of
fraud, negligence, or delay, and those who in any manner contravene the
tenor thereof, are liable for damages.29
Article 2123 of the Civil Code provides that with regard to pawnshops and other
establishments which are engaged in making loans secured by pledges, the
special laws and regulations concerning them shall be observed, and subsidiarily,
the provisions on pledge, mortgage and antichresis.
The provision on pledge, particularly Article 2099 of the Civil Code, provides that
the creditor shall take care of the thing pledged with the diligence of a good father
of a family. This means that petitioners must take care of the pawns the way a
prudent person would as to his own property.
In this connection, Article 1173 of the Civil Code further provides:
Art. 1173. The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds with
the circumstances of the persons, of time and of the place. When negligence
shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2 shall
apply.
If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be
required.
We expounded in Cruz v. Gangan30 that negligence is the omission to do
something which a reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would do; or the doing of
something which a prudent and reasonable man would not do.31 It is want of care
required by the circumstances.
A review of the records clearly shows that petitioners failed to exercise reasonable
care and caution that an ordinarily prudent person would have used in the same
situation. Petitioners were guilty of negligence in the operation of their pawnshop
business. Petitioner Sicam testified, thus:
Court:
Q. Do you have security guards in your pawnshop?
A. Yes, your honor.
Q. Then how come that the robbers were able to enter the premises when
according to you there was a security guard?
A. Sir, if these robbers can rob a bank, how much more a pawnshop.
Q. I am asking you how were the robbers able to enter despite the fact that there
was a security guard?
A. At the time of the incident which happened about 1:00 and 2:00 o'clock in the
afternoon and it happened on a Saturday and everything was quiet in the area
BF Homes Paraaque they pretended to pawn an article in the pawnshop, so
one of my employees allowed him to come in and it was only when it was
announced that it was a hold up.
Q. Did you come to know how the vault was opened?
A. When the pawnshop is official (sic) open your honor the pawnshop is partly
open. The combination is off.
Q. No one open (sic) the vault for the robbers?
A. No one your honor it was open at the time of the robbery.
Q. It is clear now that at the time of the robbery the vault was open the reason
why the robbers were able to get all the items pawned to you inside the vault.
A. Yes sir.32
revealing that there were no security measures adopted by petitioners in the
operation of the pawnshop. Evidently, no sufficient precaution and vigilance were
adopted by petitioners to protect the pawnshop from unlawful intrusion. There was
no clear showing that there was any security guard at all. Or if there was one, that
he had sufficient training in securing a pawnshop. Further, there is no showing that
the alleged security guard exercised all that was necessary to prevent any
untoward incident or to ensure that no suspicious individuals were allowed to enter
the premises. In fact, it is even doubtful that there was a security guard, since it is
quite impossible that he would not have noticed that the robbers were armed with
caliber .45 pistols each, which were allegedly poked at the employees.33
Significantly, the alleged security guard was not presented at all to corroborate
petitioner Sicam's claim; not one of petitioners' employees who were present
during the robbery incident testified in court.
Furthermore, petitioner Sicam's admission that the vault was open at the time of
robbery is clearly a proof of petitioners' failure to observe the care, precaution and
vigilance that the circumstances justly demanded. Petitioner Sicam testified that
once the pawnshop was open, the combination was already off. Considering
petitioner Sicam's testimony that the robbery took place on a Saturday afternoon
and the area in BF Homes Paraaque at that time was quiet, there was more
reason for petitioners to have exercised reasonable foresight and diligence in
protecting the pawned jewelries. Instead of taking the precaution to protect them,
they let open the vault, providing no difficulty for the robbers to cart away the
pawned articles.
We, however, do not agree with the CA when it found petitioners negligent for not
taking steps to insure themselves against loss of the pawned jewelries.
Under Section 17 of Central Bank Circular No. 374, Rules and Regulations for
Pawnshops, which took effect on July 13, 1973, and which was issued pursuant to
Presidential Decree No. 114, Pawnshop Regulation Act, it is provided that pawns
pledged must be insured, to wit:
Sec. 17. Insurance of Office Building and Pawns- The place of business of a
pawnshop and the pawns pledged to it must be insured against fire and
against burglary as well as for the latter(sic), by an insurance company
accredited by the Insurance Commissioner.
However, this Section was subsequently amended by CB Circular No. 764 which
took effect on October 1, 1980, to wit:
Sec. 17 Insurance of Office Building and Pawns The office
building/premises and pawns of a pawnshop must be insured against
fire.(emphasis supplied).
where the requirement that insurance against burglary was deleted. Obviously, the
Central Bank considered it not feasible to require insurance of pawned articles
against burglary.
The robbery in the pawnshop happened in 1987, and considering the above-
quoted amendment, there is no statutory duty imposed on petitioners to insure the
pawned jewelry in which case it was error for the CA to consider it as a factor in
concluding that petitioners were negligent.
Nevertheless, the preponderance of evidence shows that petitioners failed to
exercise the diligence required of them under the Civil Code.
The diligence with which the law requires the individual at all times to govern his
conduct varies with the nature of the situation in which he is placed and the
importance of the act which he is to perform.34 Thus, the cases of Austria v. Court
of Appeals,35Hernandez v. Chairman, Commission on Audit36 and Cruz v.
Gangan37 cited by petitioners in their pleadings, where the victims of robbery were
exonerated from liability, find no application to the present case.
In Austria, Maria Abad received from Guillermo Austria a pendant with diamonds
to be sold on commission basis, but which Abad failed to subsequently return
because of a robbery committed upon her in 1961. The incident became the
subject of a criminal case filed against several persons. Austria filed an action
against Abad and her husband (Abads) for recovery of the pendant or its value,
but the Abads set up the defense that the robbery extinguished their obligation.
The RTC ruled in favor of Austria, as the Abads failed to prove robbery; or, if
committed, that Maria Abad was guilty of negligence. The CA, however, reversed
the RTC decision holding that the fact of robbery was duly established and
declared the Abads not responsible for the loss of the jewelry on account of a
fortuitous event. We held that for the Abads to be relieved from the civil liability of
returning the pendant under Art. 1174 of the Civil Code, it would only be sufficient
that the unforeseen event, the robbery, took place without any concurrent fault on
the debtors part, and this can be done by preponderance of evidence; that to be
free from liability for reason of fortuitous event, the debtor must, in addition to the
casus itself, be free of any concurrent or contributory fault or negligence.38
We found in Austria that under the circumstances prevailing at the time the
Decision was promulgated in 1971, the City of Manila and its suburbs had a high
incidence of crimes against persons and property that rendered travel after
nightfall a matter to be sedulously avoided without suitable precaution and
protection; that the conduct of Maria Abad in returning alone to her house in the
evening carrying jewelry of considerable value would have been negligence per se
and would not exempt her from responsibility in the case of robbery. However we
did not hold Abad liable for negligence since, the robbery happened ten years
previously; i.e., 1961, when criminality had not reached the level of incidence
obtaining in 1971.
In contrast, the robbery in this case took place in 1987 when robbery was already
prevalent and petitioners in fact had already foreseen it as they wanted to deposit
the pawn with a nearby bank for safekeeping. Moreover, unlike in Austria, where
no negligence was committed, we found petitioners negligent in securing their
pawnshop as earlier discussed.
In Hernandez, Teodoro Hernandez was the OIC and special disbursing officer of
the Ternate Beach Project of the Philippine Tourism in Cavite. In the morning of
July 1, 1983, a Friday, he went to Manila to encash two checks covering the
wages of the employees and the operating expenses of the project. However for
some reason, the processing of the check was delayed and was completed at
about 3 p.m. Nevertheless, he decided to encash the check because the project
employees would be waiting for their pay the following day; otherwise, the workers
would have to wait until July 5, the earliest time, when the main office would open.
At that time, he had two choices: (1) return to Ternate, Cavite that same afternoon
and arrive early evening; or (2) take the money with him to his house in Marilao,
Bulacan, spend the night there, and leave for Ternate the following day. He chose
the second option, thinking it was the safer one. Thus, a little past 3 p.m., he took
a passenger jeep bound for Bulacan. While the jeep was on Epifanio de los
Santos Avenue, the jeep was held up and the money kept by Hernandez was
taken, and the robbers jumped out of the jeep and ran. Hernandez chased the
robbers and caught up with one robber who was subsequently charged with
robbery and pleaded guilty. The other robber who held the stolen money escaped.
The Commission on Audit found Hernandez negligent because he had not brought
the cash proceeds of the checks to his office in Ternate, Cavite for safekeeping,
which is the normal procedure in the handling of funds. We held that Hernandez
was not negligent in deciding to encash the check and bringing it home to Marilao,
Bulacan instead of Ternate, Cavite due to the lateness of the hour for the following
reasons: (1) he was moved by unselfish motive for his co-employees to collect
their wages and salaries the following day, a Saturday, a non-working, because to
encash the check on July 5, the next working day after July 1, would have caused
discomfort to laborers who were dependent on their wages for sustenance; and (2)
that choosing Marilao as a safer destination, being nearer, and in view of the
comparative hazards in the trips to the two places, said decision seemed logical at
that time. We further held that the fact that two robbers attacked him in broad
daylight in the jeep while it was on a busy highway and in the presence of other
passengers could not be said to be a result of his imprudence and negligence.
Unlike in Hernandez where the robbery happened in a public utility, the robbery in
this case took place in the pawnshop which is under the control of petitioners.
Petitioners had the means to screen the persons who were allowed entrance to
the premises and to protect itself from unlawful intrusion. Petitioners had failed to
exercise precautionary measures in ensuring that the robbers were prevented
from entering the pawnshop and for keeping the vault open for the day, which
paved the way for the robbers to easily cart away the pawned articles.
In Cruz, Dr. Filonila O. Cruz, Camanava District Director of Technological
Education and Skills Development Authority (TESDA), boarded the Light Rail
Transit (LRT) from Sen. Puyat Avenue to Monumento when her handbag was
slashed and the contents were stolen by an unidentified person. Among those
stolen were her wallet and the government-issued cellular phone. She then
reported the incident to the police authorities; however, the thief was not located,
and the cellphone was not recovered. She also reported the loss to the Regional
Director of TESDA, and she requested that she be freed from accountability for the
cellphone. The Resident Auditor denied her request on the ground that she lacked
the diligence required in the custody of government property and was ordered to
pay the purchase value in the total amount of P4,238.00. The COA found no
sufficient justification to grant the request for relief from accountability. We
reversed the ruling and found that riding the LRT cannot per se be denounced as
a negligent act more so because Cruzs mode of transit was influenced by time
and money considerations; that she boarded the LRT to be able to arrive in
Caloocan in time for her 3 pm meeting; that any prudent and rational person under
similar circumstance can reasonably be expected to do the same; that possession
of a cellphone should not hinder one from boarding the LRT coach as Cruz did
considering that whether she rode a jeep or bus, the risk of theft would have also
been present; that because of her relatively low position and pay, she was not
expected to have her own vehicle or to ride a taxicab; she did not have a
government assigned vehicle; that placing the cellphone in a bag away from
covetous eyes and holding on to that bag as she did is ordinarily sufficient care of
a cellphone while traveling on board the LRT; that the records did not show any
specific act of negligence on her part and negligence can never be presumed.
Unlike in the Cruz case, the robbery in this case happened in petitioners'
pawnshop and they were negligent in not exercising the precautions justly
demanded of a pawnshop.
WHEREFORE, except for the insurance aspect, the Decision of the Court of
Appeals dated March 31, 2003 and its Resolution dated August 8, 2003, are
AFFIRMED.
Costs against petitioners.
SO ORDERED.Ynares-Santiago, Chairperson, Chico-Nazario, Nachura, JJ.,
concur.
THIRD DIVISION
G.R. No. 158911 March 4, 2008
MANILA ELECTRIC COMPANY, Petitioner,
vs.
MATILDE MACABAGDAL RAMOY, BIENVENIDO RAMOY, ROMANA RAMOY-
RAMOS, ROSEMARIE RAMOY, OFELIA DURIAN and CYRENE PANADO,
Respondents.

Civil Law; Negligence; As a public utility, MERALCO has the obligation to

discharge its functions with utmost care and diligence.Article 1173 also provides
that the fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation and corresponds with the
circumstances of the persons, of the time and of the place. The Court emphasized
in Ridjo Tape & Chemical Corporation v. Court of Appeals, 286 SCRA 544 (1998),
that as a public utility, MERALCO has the obligation to discharge its functions with
utmost care and diligence.
Same; Same; Actions of MERALCO cannot be considered wanton, fraudulent,
reckless, oppressive or malevolent; Exemplary damages should not be
awarded.The Court finds that MERALCO fell short of exercising the due
diligence required, but its actions cannot be considered wanton, fraudulent,
reckless, oppressive or malevolent. Records show that MERALCO did take some
measures, i.e., coordinating with NPC officials and conducting a joint survey of the
subject area, to verify which electric meters should be disconnected although
these measures are not sufficient, considering the degree of diligence required of
it. Thus, in this case, exemplary damages should not be awarded.
Same; Same; Moral Damages; No other person could have proven such damages
except the respondent himself as they were extremely personal to him.Leoncio
Ramoy, the lone witness for respondents, was the only one who testified regarding
the effects on him of MERALCOs electric service disconnection. His co-
respondents Matilde Ramoy, Rosemarie Ramoy, Ofelia Durian and Cyrene
Panado did not present any evidence of damages they suffered. It is a hornbook
principle that damages may be awarded only if proven. In Mahinay v. Velasquez,
Jr., 419 SCRA 118 (2004), the
Court held thus: In order that moral damages may be awarded, there must be
pleading and proof of moral suffering, mental anguish, fright and the like. While
respondent alleged in his complaint that he suffered mental anguish, serious
anxiety, wounded feelings and moral shock, he failed to prove them during the
trial. Indeed, respondent should have taken the witness stand and should have
testified on the mental anguish, serious anxiety, wounded feelings and other
emotional and mental suffering he purportedly suffered to sustain his claim for
moral damages. Mere allegations do not suffice; they must be substantiated by
clear and convincing proof. No other person could have proven such damages
except the respondent himself as they were extremely personal to him. [Manila
Electric Company vs. Ramoy, 547 SCRA 559(2008)]
DECISION
AUSTRIA-MARTINEZ, J.:
This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of
Court, praying that the Decision1 of the Court of Appeals (CA) dated December 16,
2002, ordering petitioner Manila Electric Company (MERALCO) to pay Leoncio
Ramoy2 moral and exemplary damages and attorney's fees, and the CA
Resolution3 dated July 1, 2003, denying petitioner's motion for reconsideration, be
reversed and set aside.
The Regional Trial Court (RTC) of Quezon City, Branch 81, accurately
summarized the facts as culled from the records, thus:
The evidence on record has established that in the year 1987 the National Power
Corporation (NPC) filed with the MTC Quezon City a case for ejectment against
several persons allegedly illegally occupying its properties in Baesa, Quezon City.
Among the defendants in the ejectment case was Leoncio Ramoy, one of the
plaintiffs in the case at bar. On April 28, 1989 after the defendants failed to file an
answer in spite of summons duly served, the MTC Branch 36, Quezon City
rendered judgment for the plaintiff [MERALCO] and "ordering the defendants to
demolish or remove the building and structures they built on the land of the plaintiff
and to vacate the premises." In the case of Leoncio Ramoy, the Court found that
he was occupying a portion of Lot No. 72-B-2-B with the exact location of his
apartments indicated and encircled in the location map as No. 7. A copy of the
decision was furnished Leoncio Ramoy (Exhibits 2, 2-A, 2-B, 2-C, pp. 128-131,
Record; TSN, July 2, 1993, p. 5).
On June 20, 1990 NPC wrote Meralco requesting for the "immediate
disconnection of electric power supply to all residential and commercial
establishments beneath the NPC transmission lines along Baesa, Quezon City
(Exh. 7, p. 143, Record). Attached to the letter was a list of establishments
affected which included plaintiffs Leoncio and Matilde Ramoy (Exh. 9), as well as a
copy of the court decision (Exh. 2). After deliberating on NPC's letter, Meralco
decided to comply with NPC's request (Exhibits 6, 6-A, 6-A-1, 6-B) and thereupon
issued notices of disconnection to all establishments affected including plaintiffs
Leoncio Ramoy (Exhs. 3, 3-A to 3-C), Matilde Ramoy/Matilde Macabagdal
(Exhibits 3-D to 3-E), Rosemarie Ramoy (Exh. 3-F), Ofelia Durian (Exh. 3-G), Jose
Valiza (Exh. 3-H) and Cyrene S. Panado (Exh. 3-I).
In a letter dated August 17, 1990 Meralco requested NPC for a joint survey to
determine all the establishments which are considered under NPC property in view
of the fact that "the houses in the area are very close to each other" (Exh. 12).
Shortly thereafter, a joint survey was conducted and the NPC personnel pointed
out the electric meters to be disconnected (Exh. 13; TSN, October 8, 1993, p. 7;
TSN, July 1994, p. 8).
In due time, the electric service connection of the plaintiffs [herein respondents]
was disconnected (Exhibits D to G, with submarkings, pp. 86-87, Record).
Plaintiff Leoncio Ramoy testified that he and his wife are the registered owners of
a parcel of land covered by TCT No. 326346, a portion of which was occupied by
plaintiffs Rosemarie Ramoy, Ofelia Durian, Jose Valiza and Cyrene S. Panado as
lessees. When the Meralco employees were disconnecting plaintiffs' power
connection, plaintiff Leoncio Ramoy objected by informing the Meralco foreman
that his property was outside the NPC property and pointing out the monuments
showing the boundaries of his property. However, he was threatened and told not
to interfere by the armed men who accompanied the Meralco employees. After the
electric power in Ramoy's apartment was cut off, the plaintiffs-lessees left the
premises.
During the ocular inspection ordered by the Court and attended by the parties, it
was found out that the residence of plaintiffs-spouses Leoncio and Matilde Ramoy
was indeed outside the NPC property. This was confirmed by defendant's witness
R.P. Monsale III on cross-examination (TSN, October 13, 1993, pp. 10 and 11).
Monsale also admitted that he did not inform his supervisor about this fact nor did
he recommend re-connection of plaintiffs' power supply (Ibid., p. 14).
The record also shows that at the request of NPC, defendant Meralco re-
connected the electric service of four customers previously disconnected none of
whom was any of the plaintiffs (Exh. 14).4
The RTC decided in favor of MERALCO by dismissing herein respondents' claim
for moral damages, exemplary damages and attorney's fees. However, the RTC
ordered MERALCO to restore the electric power supply of respondents.
Respondents then appealed to the CA. In its Decision dated December 16, 2002,
the CA faulted MERALCO for not requiring from National Power Corporation
(NPC) a writ of execution or demolition and in not coordinating with the court
sheriff or other proper officer before complying with the NPC's request. Thus, the
CA held MERALCO liable for moral and exemplary damages and attorney's fees.
MERALCO's motion for reconsideration of the Decision was denied per Resolution
dated July 1, 2003.
Hence, herein petition for review on certiorari on the following grounds:
I
THE COURT OF APPEALS GRAVELY ERRED WHEN IT FOUND MERALCO
NEGLIGENT WHEN IT DISCONNECTED THE SUBJECT ELECTRIC SERVICE
OF RESPONDENTS.
II
THE COURT OF APPEALS GRAVELY ERRED WHEN IT AWARDED MORAL
AND EXEMPLARY DAMAGES AND ATTORNEY'S FEES AGAINST MERALCO
UNDER THE CIRCUMSTANCES THAT THE LATTER ACTED IN GOOD FAITH
IN THE DISCONNECTION OF THE ELECTRIC SERVICES OF THE
RESPONDENTS. 5
The petition is partly meritorious.
MERALCO admits6 that respondents are its customers under a Service Contract
whereby it is obliged to supply respondents with electricity. Nevertheless, upon
request of the NPC, MERALCO disconnected its power supply to respondents on
the ground that they were illegally occupying the NPC's right of way. Under the
Service Contract, "[a] customer of electric service must show his right or proper
interest over the property in order that he will be provided with and assured a
continuous electric service."7 MERALCO argues that since there is a Decision of
the Metropolitan Trial Court (MTC) of Quezon City ruling that herein respondents
were among the illegal occupants of the NPC's right of way, MERALCO was
justified in cutting off service to respondents.
Clearly, respondents' cause of action against MERALCO is anchored on culpa
contractual or breach of contract for the latter's discontinuance of its service to
respondents under Article 1170 of the Civil Code which provides:
Article 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof,
are liable for damages.
In Radio Communications of the Philippines, Inc. v. Verchez,8 the Court
expounded on the nature of culpa contractual, thus:
"In culpa contractual x x x the mere proof of the existence of the contract and
the failure of its compliance justify, prima facie, a corresponding right of
relief.The law, recognizing the obligatory force of contracts, will not permit a party
to be set free from liability for any kind of misperformance of the contractual
undertaking or a contravention of the tenor thereof. A breach upon the contract
confers upon the injured party a valid cause for recovering that which may have
been lost or suffered. The remedy serves to preserve the interests of the
promissee that may include his "expectation interest," which is his interest in
having the benefit of his bargain by being put in as good a position as he would
have been in had the contract been performed, or his "reliance interest," which is
his interest in being reimbursed for loss caused by reliance on the contract by
being put in as good a position as he would have been in had the contract not
been made; or his "restitution interest," which is his interest in having restored to
him any benefit that he has conferred on the other party. Indeed, agreements can
accomplish little, either for their makers or for society, unless they are made the
basis for action. The effect of every infraction is to create a new duty, that is, to
make recompense to the one who has been injured by the failure of another to
observe his contractual obligation unless he can show extenuating circumstances,
like proof of his exercise of due diligence x x x or of the attendance of fortuitous
event, to excuse him from his ensuing liability.9 (Emphasis supplied)
Article 1173 also provides that the fault or negligence of the obligor consists in the
omission of that diligence which is required by the nature of the obligation and
corresponds with the circumstances of the persons, of the time and of the place.
The Court emphasized in Ridjo Tape & Chemical Corporation v. Court of
Appeals10 that "as a public utility, MERALCO has the obligation to discharge its
functions with utmost care and diligence."11
The Court agrees with the CA that under the factual milieu of the present case,
MERALCO failed to exercise the utmost degree of care and diligence required of
it. To repeat, it was not enough for MERALCO to merely rely on the Decision of
the MTC without ascertaining whether it had become final and executory. Verily,
only upon finality of said Decision can it be said with conclusiveness that
respondents have no right or proper interest over the subject property, thus, are
not entitled to the services of MERALCO.
Although MERALCO insists that the MTC Decision is final and executory, it never
showed any documentary evidence to support this allegation. Moreover, if it were
true that the decision was final and executory, the most prudent thing for
MERALCO to have done was to coordinate with the proper court officials in
determining which structures are covered by said court order. Likewise, there is no
evidence on record to show that this was done by MERALCO.
The utmost care and diligence required of MERALCO necessitates such great
degree of prudence on its part, and failure to exercise the diligence required
means that MERALCO was at fault and negligent in the performance of its
obligation. In Ridjo Tape,12 the Court explained:
[B]eing a public utility vested with vital public interest, MERALCO is impressed
with certain obligations towards its customers and any omission on its part to
perform such duties would be prejudicial to its interest. For in the final analysis, the
bottom line is that those who do not exercise such prudence in the discharge of
their duties shall be made to bear the consequences of such oversight.13
This being so, MERALCO is liable for damages under Article 1170 of the Civil
Code.
The next question is: Are respondents entitled to moral and exemplary damages
and attorney's fees?
Article 2220 of the Civil Code provides:
Article 2220. Willful injury to property may be a legal ground for awarding moral
damages if the court should find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract where the defendant
acted fraudulently or in bad faith.
In the present case, MERALCO wilfully caused injury to Leoncio Ramoy by
withholding from him and his tenants the supply of electricity to which they were
entitled under the Service Contract. This is contrary to public policy because, as
discussed above, MERALCO, being a vital public utility, is expected to exercise
utmost care and diligence in the performance of its obligation. It was incumbent
upon MERALCO to do everything within its power to ensure that the improvements
built by respondents are within the NPCs right of way before disconnecting their
power supply. The Court emphasized in Samar II Electric Cooperative, Inc. v.
Quijano14 that:
Electricity is a basic necessity the generation and distribution of which is imbued
with public interest, and its provider is a public utility subject to strict
regulation by the State in the exercise of police power. Failure to comply with
these regulations will give rise to the presumption of bad faith or abuse of
right.15(Emphasis supplied)
Thus, by analogy, MERALCO's failure to exercise utmost care and diligence in the
performance of its obligation to Leoncio Ramoy, its customer, is tantamount to bad
faith. Leoncio Ramoy testified that he suffered wounded feelings because of
MERALCO's actions.16 Furthermore, due to the lack of power supply, the lessees
of his four apartments on subject lot left the premises.17 Clearly, therefore, Leoncio
Ramoy is entitled to moral damages in the amount awarded by the CA.
Leoncio Ramoy, the lone witness for respondents, was the only one who testified
regarding the effects on him of MERALCO's electric service disconnection. His co-
respondents Matilde Ramoy, Rosemarie Ramoy, Ofelia Durian and Cyrene
Panado did not present any evidence of damages they suffered.
It is a hornbook principle that damages may be awarded only if proven. In Mahinay
v. Velasquez, Jr.,18 the Court held thus:
In order that moral damages may be awarded, there must be pleading and
proof of moral suffering, mental anguish, fright and the like. While respondent
alleged in his complaint that he suffered mental anguish, serious anxiety, wounded
feelings and moral shock, he failed to prove them during the trial. Indeed,
respondent should have taken the witness stand and should have testified
on the mental anguish, serious anxiety, wounded feelings and other emotional and
mental suffering he purportedly suffered to sustain his claim for moral damages.
Mere allegations do not suffice; they must be substantiated by clear and
convincing proof. No other person could have proven such damages except
the respondent himself as they were extremely personal to him.
In Keirulf vs. Court of Appeals, we held:
"While no proof of pecuniary loss is necessary in order that moral damages may
be awarded, the amount of indemnity being left to the discretion of the court, it is
nevertheless essential that the claimant should satisfactorily show the existence of
the factual basis of damages and its causal connection to defendants acts. This is
so because moral damages, though incapable of pecuniary estimation, are in the
category of an award designed to compensate the claimant for actual injury
suffered and not to impose a penalty on the wrongdoer. In Francisco vs. GSIS, the
Court held that there must be clear testimony on the anguish and other forms
of mental suffering. Thus, if the plaintiff fails to take the witness stand and testify
as to his/her social humiliation, wounded feelings and anxiety, moral damages
cannot be awarded. In Cocoland Development Corporation vs. National Labor
Relations Commission, the Court held that "additional facts must be pleaded and
proven to warrant the grant of moral damages under the Civil Code, these being, x
x x social humiliation, wounded feelings, grave anxiety, etc. that resulted
therefrom."
x x x The award of moral damages must be anchored to a clear showing that
respondent actually experienced mental anguish, besmirched reputation,
sleepless nights, wounded feelings or similar injury. There was no better witness
to this experience than respondent himself. Since respondent failed to testify on
the witness stand, the trial court did not have any factual basis to award
moral damages to him.19 (Emphasis supplied)
Thus, only respondent Leoncio Ramoy, who testified as to his wounded feelings,
may be awarded moral damages.20
With regard to exemplary damages, Article 2232 of the Civil Code provides that in
contracts and quasi-contracts, the court may award exemplary damages if the
defendant, in this case MERALCO, acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner, while Article 2233 of the same Code provides
that such damages cannot be recovered as a matter of right and the
adjudication of the same is within the discretion of the court.1avvphi1
The Court finds that MERALCO fell short of exercising the due diligence required,
but its actions cannot be considered wanton, fraudulent, reckless, oppressive or
malevolent. Records show that MERALCO did take some measures, i.e.,
coordinating with NPC officials and conducting a joint survey of the subject area,
to verify which electric meters should be disconnected although these measures
are not sufficient, considering the degree of diligence required of it. Thus, in this
case, exemplary damages should not be awarded.
Since the Court does not deem it proper to award exemplary damages in this
case, then the CA's award for attorney's fees should likewise be deleted, as Article
2208 of the Civil Code states that in the absence of stipulation, attorney's fees
cannot be recovered except in cases provided for in said Article, to wit:
Article 2208. In the absence of stipulation, attorneys fees and expenses of
litigation, other than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
(2) When the defendants act or omission has compelled the plaintiff to
litigate with third persons or to incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the
plaintiff;
(5) Where the defendant acted in gross and evident bad faith in refusing to
satisfy the plaintiffs plainly valid, just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and
skilled workers;
(8) In actions for indemnity under workmens compensation and employers
liability laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable that
attorneys fees and expenses of litigation should be recovered.
In all cases, the attorneys fees and expenses of litigation must be reasonable.
None of the grounds for recovery of attorney's fees are present.
WHEREFORE, the petition is PARTLY GRANTED. The Decision of the Court of
Appeals is AFFIRMED with MODIFICATION. The award for exemplary damages
and attorney's fees is DELETED.
No costs.
SO ORDERED.
MA. ALICIA AUSTRIA-MARTINEZ
Associate Justice
SECOND DIVISION
G.R. No. 176868 July 26, 2010
SOLAR HARVEST, INC., Petitioner, vs.
DAVAO CORRUGATED CARTON CORPORATION, Respondent.

Civil Law; Contracts; Rescission; The right to rescind a contract arises once the
other party defaults in the performance of his obligation.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.
Same; Same; Same; In reciprocal obligation, as in a contract of sale, the general
rule is that the fulfillment of the parties respective 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 will
accrue.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, that is, the other party would incur in delay only from the moment
the other party demands fulfillment of the formers 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.
Same; Same; Same; Without a previous demand for the fulfilment of the
obligation, petitioners 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.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. Petitioners 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.
Remedial Law; Appeals; The existence of a breach of contract is a factual matter
not usually reviewed in a petition for review under Rule 45.The existence of a
breach of contract is a factual matter not usually reviewed in a petition for review
under Rule 45. 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. 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. [Solar Harvest, Inc. vs. Davao
Corrugated Carton Corporation, 625 SCRA 448(2010)]
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 petitioners
motion for reconsideration. The assailed Decision denied petitioners 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 petitioners
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 respondents 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 formers warehouse 30 days from completion, as agreed upon. Respondent
mentioned that petitioner even placed an additional order of 24,000 boxes, out of
which, 14,000 had been manufactured without any advanced payment from
petitioner. Respondent then demanded petitioner to remove the boxes from the
factory and to pay the balance of US$15,400.00 for the additional boxes and
P132,000.00 as storage fee.
On August 17, 2001, petitioner filed a Complaint for sum of money and damages
against respondent. The Complaint averred that the parties agreed that the boxes
will be delivered within 30 days from payment but respondent failed to
manufacture and deliver the boxes within such time. It further alleged
6. That repeated follow-up was made by the plaintiff for the immediate production
of the ordered boxes, but every time, defendant [would] only show samples of
boxes and ma[k]e repeated promises to deliver the said ordered boxes.
7. That because of the failure of the defendant to deliver the ordered boxes,
plaintiff ha[d] to cancel the same and demand payment and/or refund from the
defendant but the latter refused to pay and/or refund the US$40,150.00 payment
made by the former for the ordered boxes.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
petitioners 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 petitioners 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, petitioners 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 petitioners transaction to ship bananas to China did not
materialize. Respondent claimed that the boxes were occupying warehouse space
and that petitioner should be made to pay storage fee at P60.00 per square meter
for every month from April 1998. As counterclaim, respondent prayed that
judgment be rendered ordering petitioner to pay $15,400.00, plus interest, moral
and exemplary damages, attorneys fees, and costs of the suit.
In reply, petitioner denied that it made a second order of 24,000 boxes and that
respondent already completed the initial order of 36,500 boxes and 14,000 boxes
out of the second order. It maintained that
respondent only manufactured a sample of the ordered boxes and that respondent
could not have produced 14,000 boxes without the required pre-payments.6
During trial, petitioner presented Que as its sole witness. Que testified that he
ordered the boxes from respondent and deposited the money in respondents
account.7 He specifically stated that, when he visited respondents factory, he saw
that the boxes had no print of petitioners logo.8 A few months later, he followed-up
the order and was told that the company had full production, and thus, was
promised that production of the order would be rushed. He told respondent that it
should indeed rush production because the need for the boxes was urgent.
Thereafter, he asked his partner, Alfred Ong, to cancel the order because it was
already late for them to meet their commitment to ship the bananas to China.9 On
cross-examination, Que further testified that China Zero Food, the Chinese
company that ordered the bananas, was sending a ship to Davao to get the
bananas, but since there were no cartons, the ship could not proceed. He said
that, at that time, bananas from Tagum Agricultural Development Corporation
(TADECO) were already there. He denied that petitioner made an additional order
of 24,000 boxes. He explained that it took three years to refer the matter to
counsel because respondent promised to pay.10
For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que in
Davao in October 1998 to inspect the boxes and that the latter got samples of
them. In February 2000, they inspected the boxes again and Que got more
samples. Estanislao said that petitioner did not pick up the boxes because the ship
did not arrive.11 Jaime Tan (Tan), president of respondent, also testified that his
company finished production of the 36,500 boxes on April 3, 1998 and that
petitioner made a second order of 24,000 boxes. He said that the agreement was
for respondent to produce the boxes and for petitioner to pick them up from the
warehouse.12 He also said that the reason why petitioner did not pick up the boxes
was that the ship that was to carry the bananas did not arrive.13 According to him,
during the last visit of Que and Estanislao, he asked them to withdraw the boxes
immediately because they were occupying a big space in his plant, but they,
instead, told him to sell the cartons as rejects. He was able to sell 5,000 boxes at
P20.00 each for a total of P100,000.00. They then told him to apply the said
amount to the unpaid balance.
In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that
respondent did not commit any breach of faith that would justify rescission of the
contract and the consequent reimbursement of the amount paid by petitioner. The
RTC said that respondent was able to produce the ordered boxes but petitioner
failed to obtain possession thereof because its ship did not arrive. It thus
dismissed the complaint and respondents counterclaims, disposing as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of
defendant and against the plaintiff and, accordingly, plaintiffs complaint is hereby
ordered DISMISSED without pronouncement as to cost. Defendants
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.
Petitioners 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 formers 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. Petitioners 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, petitioners claim for reimbursement would still fail, as the circumstances
would show that respondent was not guilty of breach of contract.
The existence of a breach of contract is a factual matter not usually reviewed in a
petition for review under Rule 45.20 The Court, in petitions for review, limits its
inquiry only to questions of law. After all, it is not a trier of facts, and findings of fact
made by the trial court, especially when reiterated by the CA, must be given great
respect if not considered as final.21 In dealing with this petition, we will not veer
away from this doctrine and will thus sustain the factual findings of the CA, which
we find to be adequately supported by the evidence on record.
As correctly observed by the CA, aside from the pictures of the finished boxes and
the production report thereof, there is ample showing that the boxes had already
been manufactured by respondent. There is the testimony of Estanislao who
accompanied Que to the factory, attesting that, during their first visit to the
company, they saw the pile of petitioners boxes and Que took samples thereof.
Que, petitioners 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.
Ques absolute assertion that the boxes were not manufactured is, therefore,
implausible and suspicious.
In fact, we note that respondents 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
respondents premises.
We also believe that the agreement between the parties was for petitioner to pick
up the boxes from respondents warehouse, contrary to petitioners allegation.
Thus, it was due to petitioners 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. Thats 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, isnt it?
A. First time it was Mr. Alfred Ong.
Q. It was Mr. Ong who placed the order[,] not you?
A. Yes, sir.24
Q. Is it not a fact that the cartons were ordered through Mr. Bienvenido
Estanislao?
 A. Yes, sir.25
Moreover, assuming that respondent was obliged to deliver the boxes, it
could not have complied with such obligation. Que, insisting that the boxes
had not been manufactured, admitted that he did not give respondent the
authority to deliver the boxes to TADECO:
Q. Did you give authority to Mr. Tan to deliver these boxes to TADECO?
A. No, sir. As I have said, before the delivery, we must have to check the
carton, the quantity and quality. But I have not seen a single carton.
Q. Are you trying to impress upon the [c]ourt that it is only after the boxes are
completed, will you give authority to Mr. Tan to deliver the boxes to
TADECO[?]
A. Sir, because when I checked the plant, I have not seen any carton. I
asked Mr. Tan to rush the carton but not26
Q. Did you give any authority for Mr. Tan to deliver these boxes to TADECO?
A. Because I have not seen any of my carton.
Q. You dont have any authority yet given to Mr. Tan?
A. None, your Honor.27
Surely, without such authority, TADECO would not have allowed respondent to
deposit the boxes within its premises.
In sum, the Court finds that petitioner failed to establish a cause of action for
rescission, the evidence having shown that respondent did not commit any breach
of its contractual obligation. As previously stated, the subject boxes are still within
respondents premises. To put a rest to this dispute, we therefore relieve
respondent from the burden of having to keep the boxes within its premises and,
consequently, give it the right to dispose of them, after petitioner is given a period
of time within which to remove them from the premises.
WHEREFORE, premises considered, the petition is DENIED. The Court of
Appeals Decision dated September 21, 2006 and Resolution dated February 23,
2007 are AFFIRMED. In addition, petitioner is given a period of 30 days from
notice within which to cause the removal of the 36,500
boxes from respondents warehouse. After the lapse of said period and petitioner
fails to effect such removal, respondent shall have the right to dispose of the
boxes in any manner it may deem fit.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice
SECOND DIVISION
G.R. No. 162467 May 8, 2009
MINDANAO TERMINAL AND BROKERAGE SERVICE, INC. Petitioner,vs.
PHOENIX ASSURANCE COMPANY OF NEW YORK/MCGEE & CO., INC.,
Respondent.
Common Carriers; Contracts; Damages.As it is clear that Mindanao Terminal
had duly exercised the required degree of diligence in loading and stowing the
cargoes, which is the ordinary diligence of a good father of a family, the grant of
the petition is in order.
Attorneys Fees; The Court finds no basis for the award of attorneys fees in favor
of petitionernone of the circumstances enumerated in Article 2208 of the Civil
Code exists.The Court finds no basis for the award of attorneys fees in favor of
petitioner. None of the circumstances enumerated in Article 2208 of the Civil Code
exists. The present case is clearly not an unfounded civil action against the plaintiff
as there is no showing that it was instituted for the mere purpose of vexation or
injury. It is not sound public policy to set a premium to the right to litigate where
such right is exercised in good faith, even if erroneously. Likewise, the RTC erred
in awarding P83,945.80 actual damages to Mindanao Terminal. Although actual
expenses were incurred by Mindanao Terminal in relation to the trial of this case in
Davao City, the lawyer of Mindanao Terminal incurred expenses for plane fare,
hotel accommodations and food, as well as other miscellaneous expenses, as he
attended the trials coming all the way from Manila. But there is no showing that
Phoenix and McGee made a false claim against Mindanao Terminal resulting in
the protracted trial of the case necessitating the incurrence of expenditures.
[Mindanao Terminal and Brokerage Service, Inc. vs. Phoenix Assurance Company
of New York/McGee & Co., Inc., 587 SCRA 421(2009)]
DECISION
TINGA, J.:
Before us is a petition for review on certiorari1 under Rule 45 of the 1997 Rules of
Civil Procedure of the 29 October 20032 Decision of the Court of Appeals and the
26 February 2004 Resolution3 of the same court denying petitioners motion for
reconsideration.
The facts of the case are not disputed.
Del Monte Philippines, Inc. (Del Monte) contracted petitioner Mindanao Terminal
and Brokerage Service, Inc. (Mindanao Terminal), a stevedoring company, to load
and stow a shipment of 146,288 cartons of fresh green Philippine bananas and
15,202 cartons of fresh pineapples belonging to Del Monte Fresh Produce
International, Inc. (Del Monte Produce) into the cargo hold of the vessel M/V
Mistrau. The vessel was docked at the port of Davao City and the goods were to
be transported by it to the port of Inchon, Korea in favor of consignee Taegu
Industries, Inc. Del Monte Produce insured the shipment under an "open cargo
policy" with private respondent Phoenix Assurance Company of New York
(Phoenix), a non-life insurance company, and private respondent McGee & Co.
Inc. (McGee), the underwriting manager/agent of Phoenix.4
Mindanao Terminal loaded and stowed the cargoes aboard the M/V Mistrau. The
vessel set sail from the port of Davao City and arrived at the port of Inchon, Korea.
It was then discovered upon discharge that some of the cargo was in bad
condition. The Marine Cargo Damage Surveyor of Incok Loss and Average
Adjuster of Korea, through its representative Byeong Yong Ahn (Byeong),
surveyed the extent of the damage of the shipment. In a survey report, it was
stated that 16,069 cartons of the banana shipment and 2,185 cartons of the
pineapple shipment were so damaged that they no longer had commercial value.5
Del Monte Produce filed a claim under the open cargo policy for the damages to
its shipment. McGees Marine Claims Insurance Adjuster evaluated the claim and
recommended that payment in the amount of $210,266.43 be made. A check for
the recommended amount was sent to Del Monte Produce; the latter then issued a
subrogation receipt6 to Phoenix and McGee.
Phoenix and McGee instituted an action for damages7 against Mindanao Terminal
in the Regional Trial Court (RTC) of Davao City, Branch 12. After trial, the RTC,8 in
a decision dated 20 October 1999, held that the only participation of Mindanao
Terminal was to load the cargoes on board the M/V Mistrau under the direction
and supervision of the ships officers, who would not have accepted the cargoes
on board the vessel and signed the foremans report unless they were properly
arranged and tightly secured to withstand voyage across the open seas.
Accordingly, Mindanao Terminal cannot be held liable for whatever happened to
the cargoes after it had loaded and stowed them. Moreover, citing the survey
report, it was found by the RTC that the cargoes were damaged on account of a
typhoon which M/V Mistrau had encountered during the voyage. It was further held
that Phoenix and McGee had no cause of action against Mindanao Terminal
because the latter, whose services were contracted by Del Monte, a distinct
corporation from Del Monte Produce, had no contract with the assured Del Monte
Produce. The RTC dismissed the complaint and awarded the counterclaim of
Mindanao Terminal in the amount of P83,945.80 as actual damages and
P100,000.00 as attorneys fees.9 The actual damages were awarded as
reimbursement for the expenses incurred by Mindanao Terminals lawyer in
attending the hearings in the case wherein he had to travel all the way from Metro
Manila to Davao City.
Phoenix and McGee appealed to the Court of Appeals. The appellate court
reversed and set aside10 the decision of the RTC in its 29 October 2003 decision.
The same court ordered Mindanao Terminal to pay Phoenix and McGee "the total
amount of $210,265.45 plus legal interest from the filing of the complaint until fully
paid and attorneys fees of 20% of the claim."11 It sustained Phoenixs and
McGees argument that the damage in the cargoes was the result of improper
stowage by Mindanao Terminal. It imposed on Mindanao Terminal, as the
stevedore of the cargo, the duty to exercise extraordinary diligence in loading and
stowing the cargoes. It further held that even with the absence of a contractual
relationship between Mindanao Terminal and Del Monte Produce, the cause of
action of Phoenix and McGee could be based on quasi-delict under Article 2176 of
the Civil Code.12
Mindanao Terminal filed a motion for reconsideration,13 which the Court of Appeals
denied in its 26 February 200414 resolution. Hence, the present petition for review.
Mindanao Terminal raises two issues in the case at bar, namely: whether it was
careless and negligent in the loading and stowage of the cargoes onboard M/V
Mistrau making it liable for damages; and, whether Phoenix and McGee has a
cause of action against Mindanao Terminal under Article 2176 of the Civil Code on
quasi-delict. To resolve the petition, three questions have to be answered: first,
whether Phoenix and McGee have a cause of action against Mindanao Terminal;
second, whether Mindanao Terminal, as a stevedoring company, is under
obligation to observe the same extraordinary degree of diligence in the conduct of
its business as required by law for common carriers15 and warehousemen;16 and
third, whether Mindanao Terminal observed the degree of diligence required by
law of a stevedoring company.
We agree with the Court of Appeals that the complaint filed by Phoenix and
McGee against Mindanao Terminal, from which the present case has arisen,
states a cause of action. The present action is based on quasi-delict, arising from
the negligent and careless loading and stowing of the cargoes belonging to Del
Monte Produce. Even assuming that both Phoenix and McGee have only been
subrogated in the rights of Del Monte Produce, who is not a party to the contract of
service between Mindanao Terminal and Del Monte, still the insurance carriers
may have a cause of action in light of the Courts consistent ruling that the act that
breaks the contract may be also a tort.17 In fine, a liability for tort may arise even
under a contract, where tort is that which breaches the contract18 . In the present
case, Phoenix and McGee are not suing for damages for injuries arising from the
breach of the contract of service but from the alleged negligent manner by which
Mindanao Terminal handled the cargoes belonging to Del Monte Produce. Despite
the absence of contractual relationship between Del Monte Produce and
Mindanao Terminal, the allegation of negligence on the part of the defendant
should be sufficient to establish a cause of action arising from quasi-delict.19
The resolution of the two remaining issues is determinative of the ultimate result of
this case.
Article 1173 of the Civil Code is very clear that if the law or contract does not state
the degree of diligence which is to be observed in the performance of an obligation
then that which is expected of a good father of a family or ordinary diligence shall
be required. Mindanao Terminal, a stevedoring company which was charged with
the loading and stowing the cargoes of Del Monte Produce aboard M/V Mistrau,
had acted merely as a labor provider in the case at bar. There is no specific
provision of law that imposes a higher degree of diligence than ordinary diligence
for a stevedoring company or one who is charged only with the loading and
stowing of cargoes. It was neither alleged nor proven by Phoenix and McGee that
Mindanao Terminal was bound by contractual stipulation to observe a higher
degree of diligence than that required of a good father of a family. We therefore
conclude that following Article 1173, Mindanao Terminal was required to observe
ordinary diligence only in loading and stowing the cargoes of Del Monte Produce
aboard M/V Mistrau. imposing a higher degree of diligence,21 on Mindanao
Terminal in loading and stowing the cargoes. The case of Summa Insurance
Corporation v. CA, which involved the issue of whether an arrastre operator is
legally liable for the loss of a shipment in its custody and the extent of its liability, is
inapplicable to the factual circumstances of the case at bar. Therein, a vessel
owned by the National Galleon Shipping Corporation (NGSC) arrived at Pier 3,
South Harbor, Manila, carrying a shipment consigned to the order of Caterpillar
Far East Ltd. with Semirara Coal Corporation (Semirara) as "notify party." The
shipment, including a bundle of PC 8 U blades, was discharged from the vessel to
the custody of the private respondent, the exclusive arrastre operator at the South
Harbor. Accordingly, three good-order cargo receipts were issued by NGSC, duly
signed by the ship's checker and a representative of private respondent. When
Semirara inspected the shipment at house, it discovered that the bundle of PC8U
blades was missing. From those facts, the Court observed:
x x x The relationship therefore between the consignee and the arrastre
operator must be examined. This relationship is much akin to that existing
between the consignee or owner of shipped goods and the common carrier, or that
between a depositor and a warehouseman[22]. In the performance of its
obligations, an arrastre operator should observe the same degree of diligence
as that required of a common carrier and a warehouseman as enunciated
under Article 1733 of the Civil Code and Section 3(b) of the Warehouse Receipts
Law, respectively. Being the custodian of the goods discharged from a
vessel, an arrastre operator's duty is to take good care of the goods and to
turn them over to the party entitled to their possession. (Emphasis supplied)23
There is a distinction between an arrastre and a stevedore.24 Arrastre, a Spanish
word which refers to hauling of cargo, comprehends the handling of cargo on the
wharf or between the establishment of the consignee or shipper and the ship's
tackle. The responsibility of the arrastre operator lasts until the delivery of the
cargo to the consignee. The service is usually performed by longshoremen. On the
other hand, stevedoringrefers to the handling of the cargo in the holds of the
vessel or between the ship's tackle and the holds of the vessel. The responsibility
of the stevedore ends upon the loading and stowing of the cargo in the
vessel.1avvphi1
It is not disputed that Mindanao Terminal was performing purely stevedoring
function while the private respondent in the Summa case was performing arrastre
function. In the present case, Mindanao Terminal, as a stevedore, was only
charged with the loading and stowing of the cargoes from the pier to the ships
cargo hold; it was never the custodian of the shipment of Del Monte Produce. A
stevedore is not a common carrier for it does not transport goods or passengers; it
is not akin to a warehouseman for it does not store goods for profit. The loading
and stowing of cargoes would not have a far reaching public ramification as that of
a common carrier and a warehouseman; the public is adequately protected by our
laws on contract and on quasi-delict. The public policy considerations in legally
imposing upon a common carrier or a warehouseman a higher degree of diligence
is not present in a stevedoring outfit which mainly provides labor in loading and
stowing of cargoes for its clients.
In the third issue, Phoenix and McGee failed to prove by preponderance of
evidence25 that Mindanao Terminal had acted negligently. Where the evidence on
an issue of fact is in equipoise or there is any doubt on which side the evidence
preponderates the party having the burden of proof fails upon that issue. That is to
say, if the evidence touching a disputed fact is equally balanced, or if it does not
produce a just, rational belief of its existence, or if it leaves the mind in a state of
perplexity, the party holding the affirmative as to such fact must fail.
We adopt the findings27 of the RTC,28 which are not disputed by Phoenix and
McGee. The Court of Appeals did not make any new findings of fact when it
reversed the decision of the trial court. The only participation of Mindanao
Terminal was to load the cargoes on board M/V Mistrau.29 It was not disputed by
Phoenix and McGee that the materials, such as ropes, pallets, and cardboards,
used in lashing and rigging the cargoes were all provided by M/V Mistrau and
these materials meets industry standard.30
It was further established that Mindanao Terminal loaded and stowed the cargoes
of Del Monte Produce aboard the M/V Mistrau in accordance with the stowage
plan, a guide for the area assignments of the goods in the vessels hold, prepared
by Del Monte Produce and the officers of M/V Mistrau.31 The loading and stowing
was done under the direction and supervision of the ship officers. The vessels
officer would order the closing of the hatches only if the loading was done correctly
after a final inspection.32 The said ship officers would not have accepted the
cargoes on board the vessel if they were not properly arranged and tightly secured
to withstand the voyage in open seas. They would order the stevedore to rectify
any error in its loading and stowing. A foremans report, as proof of work done on
board the vessel, was prepared by the checkers of Mindanao Terminal and
concurred in by the Chief Officer of M/V Mistrau after they were satisfied that the
cargoes were properly loaded.33
Phoenix and McGee relied heavily on the deposition of Byeong Yong Ahn34 and on
the survey report35 of the damage to the cargoes. Byeong, whose testimony was
refreshed by the survey report,36 found that the cause of the damage was
improper stowage37 due to the manner the cargoes were arranged such that there
were no spaces between cartons, the use of cardboards as support system, and
the use of small rope to tie the cartons together but not by the negligent conduct of
Mindanao Terminal in loading and stowing the cargoes. As admitted by Phoenix
and McGee in their Comment38 before us, the latter is merely a stevedoring
company which was tasked by Del Monte to load and stow the shipments of fresh
banana and pineapple of Del Monte Produce aboard the M/V Mistrau. How and
where it should load and stow a shipment in a vessel is wholly dependent on the
shipper and the officers of the vessel. In other words, the work of the stevedore
was under the supervision of the shipper and officers of the vessel. Even the
materials used for stowage, such as ropes, pallets, and cardboards, are provided
for by the vessel. Even the survey report found that it was because of the
boisterous stormy weather due to the typhoon Seth, as encountered by M/V
Mistrau during its voyage, which caused the shipments in the cargo hold to
collapse, shift and bruise in extensive extent.39 Even the deposition of Byeong was
not supported by the conclusion in the survey report that:
CAUSE OF DAMAGE
xxx
From the above facts and our survey results, we are of the opinion that damage
occurred aboard the carrying vessel during sea transit, being caused by ships
heavy rolling and pitching under boisterous weather while proceeding from 1600
hrs on 7th October to 0700 hrs on 12th October, 1994 as described in the sea
protest.40
As it is clear that Mindanao Terminal had duly exercised the required degree of
diligence in loading and stowing the cargoes, which is the ordinary diligence of a
good father of a family, the grant of the petition is in order.
However, the Court finds no basis for the award of attorneys fees in favor of
petitioner.lawphil.net None of the circumstances enumerated in Article 2208 of the
Civil Code exists. The present case is clearly not an unfounded civil action against
the plaintiff as there is no showing that it was instituted for the mere purpose of
vexation or injury. It is not sound public policy to set a premium to the right to
litigate where such right is exercised in good faith, even if erroneously.41 Likewise,
the RTC erred in awarding P83,945.80 actual damages to Mindanao Terminal.
Although actual expenses were incurred by Mindanao Terminal in relation to the
trial of this case in Davao City, the lawyer of Mindanao Terminal incurred
expenses for plane fare, hotel accommodations and food, as well as other
miscellaneous expenses, as he attended the trials coming all the way from Manila.
But there is no showing that Phoenix and McGee made a false claim against
Mindanao Terminal resulting in the protracted trial of the case necessitating the
incurrence of expenditures.42
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals in
CA-G.R. CV No. 66121 is SET ASIDE and the decision of the Regional Trial Court
of Davao City, Branch 12 in Civil Case No. 25,311.97 is hereby REINSTATED
MINUS the awards of P100,000.00 as attorneys fees and P83,945.80 as actual
damages.
SO ORDERED.
DANTE O. TINGAAssociate Justice
 FIRST DIVISION
G.R. No. L-30056 August 30, 1988
MARCELO AGCAOILI, plaintiff-appellee vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.
Artemio L. Agcaoili for plaintiff-appellee.
Office of the Government Corporate Counsel for defendant-appellant.
Contracts; Sale; There being a perfected contract of sale, it was the duty of the
GSIS as seller to deliver the thing sold in a condition suitable for its enjoyment by
the buyer for the purpose contemplated.There was then a perfected contract of
sale between the parties; there had been a meeting of the minds upon the
purchase by Agcaoili of a determinate house and lot in the GSIS Housing Project
at Nangka, Marikina, Rizal at a definite price payable in amortizations at P31.56
per month, and from the moment the parties acquired the right to reciprocally
demand performance. It was, to be sure, the duty of the GSIS, as seller, to deliver
the thing sold in a condition suitable for its enjoyment by the buyer for the purpose
contemplated, in other words, to deliver the house subject of the contract in a
reasonably livable state. This it failed to do.
Same; Same; Same; There can hardly be any doubt that the house contemplated
was one that could be occupied for purposes of residence in reasonable comfort
and convenience.It sold a house to Agcaoili, and required him to immediately
occupy it under pain of cancellation of the sale. Under the circumstances there can
hardly be any doubt that the house contemplated was one that could be occupied
for purposes of residence in reasonable comfort and convenience. There would be
no sense to require the awardee to immediately occupy and live in a shell of a
house, a structure consisting only of four walls with openings, and a roof; and to
theorize, as the GSIS does, that this was what was intended by the parties, since
the contract did not clearly impose upon it the obligation to deliver a habitable
house, is to advocate an absurdity, the creation of an unfair situation. By any
objective interpretation of its terms, the contract can only be understood as
imposing on the GSIS an obligation to deliver to Agcaoili a reasonably habitable
dwelling in return for his undertaking to pay the stipulated price.
Same; Same; Same; Same; It is axiomatic that 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.Since GSIS did not fulfill that
obligation, and was not willing to put the house in habitable state, it cannot invoke
Agcaoilis suspension of payment of amortizations as cause to cancel the contract
between them. It is axiomatic that (i)n reciprocal obligations, neither party incurs
in delay if the other does not comply or is not ready to comply in a proper manner
with what is incumbent upon him.
Same; Same; Same; Same; Same; Argument that Agcaoili breached the
agreement by failing to occupy the house must be rejected as devoid of merit.
Nor may the GSIS succeed in justifying its cancellation of the award to Agcaoili by
the claim that the latter had not complied with the condition of occupying the house
within three (3) days. The record shows that Agcaoili did try to fulfill the condition;
he did try to occupy the house but found it to be so uninhabitable that he had to
leave it the following day. He did however leave a friend in the structure, who
being homeless and hence willing to accept shelter even of the most rudimentary
sort, agreed to stay therein and look after it. Thus the argument that Agcaoili
breached the agreement by failing to occupy the house, and by allowing another
person to stay in it without the consent of the GSIS, must be rejected as devoid of
merit. [Agcaoili vs. Government Service Insurance System, 165 SCRA 1(1988)]
NARVASA, J.:
The appellant Government Service Insurance System, (GSIS, for short) having
approved the application of the appellee Agcaoili for the purchase of a house and
lot in the GSIS Housing Project at Nangka Marikina, Rizal, subject to the condition
that the latter should forthwith occupy the house, a condition that Agacoili tried to
fulfill but could not for the reason that the house was absolutely uninhabitable;
Agcaoili, after paying the first installment and other fees, having thereafter refused
to make further payment of other stipulated installments until GSIS had made the
house habitable; and appellant having refused to do so, opting instead to cancel
the award and demand the vacation by Agcaoili of the premises; and Agcaoili
having sued the GSIS in the Court of First Instance of Manila for specific
performance with damages and having obtained a favorable judgment, the case
was appealled to this Court by the GSIS. Its appeal must fail.
The essential facts are not in dispute. Approval of Agcaoili's aforementioned
application for purchase 1 was contained in a letter 2 addressed to Agcaoili and
signed by GSIS Manager Archimedes Villanueva in behalf of the Chairman-
General Manager, reading as follows:
Please be informed that your application to purchase a house and lot in our
GSIS Housing Project at Nangka, Marikina, Rizal, has been approved by this
Office. Lot No. 26, Block No. (48) 2, together with the housing unit constructed
thereon, has been allocated to you.
You are, therefore, advised to occupy the said house immediately.
If you fail to occupy the same within three (3) days from receipt of this notice,
your application shall be considered automatically disapproved and the said
house and lot will be awarded to another applicant.
Agcaoili lost no time in occupying the house. He could not stay in it, however, and
had to leave the very next day, because the house was nothing more than a shell,
in such a state of incompleteness that civilized occupation was not possible:
ceiling, stairs, double walling, lighting facilities, water connection, bathroom, toilet
kitchen, drainage, were inexistent. Agcaoili did however ask a homeless friend, a
certain Villanueva, to stay in the premises as some sort of watchman, pending
completion of the construction of the house. Agcaoili thereafter complained to the
GSIS, to no avail.
The GSIS asked Agcaoili to pay the monthly amortizations and other fees. Agcaoili
paid the first monthly installment and the incidental fees, 3 but refused to make
further payments until and unless the GSIS completed the housing unit. What the
GSIS did was to cancel the award and require Agcaoili to vacate the premises. 4
Agcaoili reacted by instituting suit in the Court of First Instance of Manila for
specific performance and damages. 5 Pending the action, a written protest was
lodged by other awardees of housing units in the same subdivision, regarding the
failure of the System to complete construction of their own houses. 6 Judgment
was in due course rendered , 7 on the basis of the evidence adduced by Agcaoili
only, the GSIS having opted to dispense with presentation of its own proofs. The
judgment was in Agcaoili's favor and contained the following dispositions, 8 to wit:
1) Declaring the cancellation of the award (of a house and lot) in favor of
plaintiff (Mariano Agcaoili) illegal and void;
 2) Ordering the defendant (GSIS) to respect and enforce the aforesaid award
to the plaintiff relative to Lot No. 26, Block No. (48) 2 of the Government
Service Insurance System (GSIS) low cost housing project at Nangka
Marikina, Rizal;
3) Ordering the defendant to complete the house in question so as to make
the same habitable and authorizing it (defendant) to collect the monthly
amortization thereon only after said house shall have been completed under
the terms and conditions mentioned in Exhibit A ;and
4) Ordering the defendant to pay P100.00 as damages and P300.00 as and
for attorney's fees, and costs.
Appellant GSIS would have this Court reverse this judgment on the argument
that
1) Agcaoili had no right to suspend payment of amortizations on account of the
incompleteness of his housing unit, since said unit had been sold "in the condition
and state of completion then existing ... (and) he is deemed to have accepted the
same in the condition he found it when he accepted the award;" and assuming
indefiniteness of the contract in this regard, such circumstance precludes a
judgment for specific performance. 9
2) Perfection of the contract of sale between it and Agcaoili being conditioned
upon the latter's immediate occupancy of the house subject thereof, and the latter
having failed to comply with the condition, no contract ever came into existence
between them ; 10
3) Agcaoili's act of placing his homeless friend, Villanueva, in possession, "without
the prior or subsequent knowledge or consent of the defendant (GSIS)" operated
as a repudiation by Agcaoili of the award and a deprivation of the GSIS at the
same time of the reasonable rental value of the property. 11
Agcaoili's offer to buy from GSIS was contained in a printed form drawn up by the
latter, entitled "Application to Purchase a House and/or Lot." Agcaoili filled up the
form, signed it, and submitted it. 12 The acceptance of the application was also set
out in a form (mimeographed) also prepared by the GSIS. As already mentioned,
this form sent to Agcaoili, duly filled up, advised him of the approval of his
"application to purchase a house and lot in our GSIS Housing Project at NANGKA,
MARIKINA, RIZAL," and that "Lot No. 26, Block No. (48) 2, together with the
housing unit constructed thereon, has been allocated to you." Neither the
application form nor the acceptance or approval form of the GSIS nor the notice
to commence payment of a monthly amortizations, which again refers to "the
house and lot awarded" contained any hint that the house was incomplete, and
was being sold "as is," i.e., in whatever state of completion it might be at the time.
On the other hand, the condition explicitly imposed on Agcaoili "to occupy the
said house immediately," or in any case within three (3) days from notice,
otherwise his "application shall be considered automatically disapproved and the
said house and lot will be awarded to another applicant" would imply that
construction of the house was more or less complete, and it was by reasonable
standards, habitable, and that indeed, the awardee should stay and live in it; it
could not be interpreted as meaning that the awardee would occupy it in the sense
of a pioneer or settler in a rude wilderness, making do with whatever he found
available in the envirornment.
There was then a perfected contract of sale between the parties; there had been a
meeting of the minds upon the purchase by Agcaoili of a determinate house and
lot in the GSIS Housing Project at Nangka Marikina, Rizal at a definite price
payable in amortizations at P31.56 per month, and from that moment the parties
acquired the right to reciprocally demand performance. 13 It was, to be sure, the
duty of the GSIS, as seller, to deliver the thing sold in a condition suitable for its
enjoyment by the buyer for the purpose contemplated , 14 in other words, to deliver
the house subject of the contract in a reasonably livable state. This it failed to do.
It sold a house to Agcaoili, and required him to immediately occupy it under pain of
cancellation of the sale. Under the circumstances there can hardly be any doubt
that the house contemplated was one that could be occupied for purposes of
residence in reasonable comfort and convenience. There would be no sense to
require the awardee to immediately occupy and live in a shell of a house, a
structure consisting only of four walls with openings, and a roof, and to theorize, as
the GSIS does, that this was what was intended by the parties, since the contract
did not clearly impose upon it the obligation to deliver a habitable house, is to
advocate an absurdity, the creation of an unfair situation. By any objective
interpretation of its terms, the contract can only be understood as imposing on the
GSIS an obligation to deliver to Agcaoili a reasonably habitable dwelling in return
for his undertaking to pay the stipulated price. Since GSIS did not fulfill that
obligation, and was not willing to put the house in habitable state, it cannot invoke
Agcaoili's suspension of payment of amortizations as cause to cancel the contract
between them. It is axiomatic that "(i)n reciprocal obligations, neither party incurs
in delay if the other does not comply or is not ready to comply in a proper manner
with what is incumbent upon him." 15
Nor may the GSIS succeed in justifying its cancellation of the award to Agcaoili by
the claim that the latter had not complied with the condition of occupying the house
within three (3) days. The record shows that Agcaoili did try to fulfill the condition;
he did try to occupy the house but found it to be so uninhabitable that he had to
leave it the following day. He did however leave a friend in the structure, who
being homeless and hence willing to accept shelter even of the most rudimentary
sort, agreed to stay therein and look after it. Thus the argument that Agcaoili
breached the agreement by failing to occupy the house, and by allowing another
person to stay in it without the consent of the GSIS, must be rejected as devoid of
merit.
Finally, the GSIS should not be heard to say that the agreement between it and
Agcaoili is silent, or imprecise as to its exact prestation Blame for the imprecision
cannot be imputed to Agcaoili; it was after all the GSIS which caused the contract
to come into being by its written acceptance of Agcaoili's offer to purchase, that
offer being contained in a printed form supplied by the GSIS. Said appellant
having caused the ambiguity of which it would now make capital, the question of
interpretation arising therefrom, should be resolved against it.
It will not do, however, to dispose of the controversy by simply declaring that the
contract between the parties had not been validly cancelled and was therefore still
in force, and that Agcaoili could not be compelled by the GSIS to pay the
stipulated price of the house and lot subject of the contract until and unless it had
first completed construction of the house. This would leave the contract hanging or
in suspended animation, as it were, Agcaoili unwilling to pay unless the house
were first completed, and the GSIS averse to completing construction, which is
precisely what has been the state of affairs between the parties for more than
twenty (20) years now. On the other hand, assuming it to be feasible to still finish
the construction of the house at this time, to compel the GSIS to do so so that
Agcaoili's prestation to pay the price might in turn be demanded, without modifying
the price therefor, would not be quite fair. The cost to the GSIS of completion of
construction at present prices would make the stipulated price disproportionate,
unrealistic.
The situation calls for the exercise by this Court of its equity jurisdiction, to the end
that it may render complete justice to both parties.
As we . . reaffirmed in Air Manila, Inc. vs. Court of Industrial Relations (83
SCRA 579, 589 [1978]). "(E)quity as the complement of legal jurisdiction seeks
to reach and do complete justice where courts of law, through the inflexibility of
their rules and want of power to adapt their judgments to the special
circumstances of cases, are incompetent so to do. Equity regards the spirit of
and not the letter, the intent and not the form, the substance rather than the
circumstance, as it is variously expressed by different courts... " 16
In this case, the Court can not require specific performance of the contract in
question according to its literal terms, as this would result in inequity. The
prevailing rule is that in decreeing specific performance equity requires 17
... not only that the contract be just and equitable in its provisions, but that the
consequences of specific performance likewise be equitable and just. The
general rule is that this equitable relief will not be granted if, under the
circumstances of the case, the result of the specific enforcement of the contract
would be harsh, inequitable, oppressive, or result in an unconscionable
advantage to the plaintiff . .
In the exercise of its equity jurisdiction, the Court may adjust the rights of parties in
accordance with the circumstances obtaining at the time of rendition of judgment,
when these are significantly different from those existing at the time of generation
of those rights.
The Court is not restricted to an adjustment of the rights of the parties as they
existed when suit was brought, but will give relief appropriate to events occuring
ending the suit. 18
While equitable jurisdiction is generally to be determined with reference to the
situation existing at the time the suit is filed, the relief to be accorded by the
decree is governed by the conditions which are shown to exist at the time of
 making thereof, and not by the circumstances attending the inception of the
litigation. In making up the final decree in an equity suit the judge may rightly
consider matters arising after suit was brought. Therefore, as a general rule,
equity will administer such relief as the nature, rights, facts and exigencies of
the case demand at the close of the trial or at the time of the making of the
decree. 19
That adjustment is entirely consistent with the Civil Law principle that in the
exercise of rights a person must act with justice, give everyone his due, and
observe honesty and good faith. 20 Adjustment of rights has been held to be
particularly applicable when there has been a depreciation of currency.
Depreciation of the currency or other medium of payment contracted for has
frequently been held to justify the court in withholding specific performance or at
least conditioning it upon payment of the actual value of the property contracted
for. Thus, in an action for the specific performance of a real estate contract, it
has been held that where the currency in which the plaintiff had contracted to
pay had greatly depreciated before enforcement was sought, the relief would be
denied unless the complaint would undertake to pay the equitable value of the
land. (Willard & Tayloe [U.S.] 8 Wall 557,19 L. Ed 501; Doughdrill v. Edwards,
59 Ala 424) 21
In determining the precise relief to give, the Court will "balance the equities" or the
respective interests of the parties, and take account of the relative hardship that
one relief or another may occasion to them .22
The completion of the unfinished house so that it may be put into habitable
condition, as one form of relief to the plaintiff Agcaoili, no longer appears to be a
feasible option in view of the not inconsiderable time that has already elapsed.
That would require an adjustment of the price of the subject of the sale to conform
to present prices of construction materials and labor. It is more in keeping with the
realities of the situation, and with equitable norms, to simply require payment for
the land on which the house stands, and for the house itself, in its unfinished state,
as of the time of the contract. In fact, this is an alternative relief proposed by
Agcaoili himself, i.e., "that judgment issue . . (o)rdering the defendant (GSIS) to
execute a deed of sale that would embody and provide for a reasonable
amortization of payment on the basis of the present actual unfinished and
uncompleted condition, worth and value of the said house. 23
WHEREFORE, the judgment of the Court a quo insofar as it invalidates and sets
aside the cancellation by respondent GSIS of the award in favor of petitioner
Agcaoili of Lot No. 26, Block No. (48) 2 of the GSIS low cost housing project at
Nangka, Marikina, Rizal, and orders the former to respect the aforesaid award and
to pay damages in the amounts specified, is AFFIRMED as being in accord with
the facts and the law. Said judgments is however modified by deleting the
requirement for respondent GSIS "to complete the house in question so as to
make the same habitable," and instead it is hereby ORDERED that the contract
between the parties relative to the property above described be modified by
adding to the cost of the land, as of the time of perfection of the contract, the cost
of the house in its unfinished state also as of the time of perfection of the contract,
and correspondingly adjusting the amortizations to be paid by petitioner Agcaoili,
the modification to be effected after determination by the Court a quo of the value
of said house on the basis of the agreement of the parties, or if this is not possible
by such commissioner or commissioners as the Court may appoint. No
pronouncement as to costs.
SO ORDERED. Cruz, Gancayco, Aquino and Medialdea, JJ., concur.
 EN BANC
G.R. No. L-15645 January 31, 1964
PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees,
vs.
NATIONAL RICE AND CORN CORPORATION, defendant-appellant,
MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee.
Teehankee and Carreon for plaintiffs-appellees.
The Government Corporate Counsel for defendant-appellant.
Isidro A. Vera for defendant-appellee.
Obligations and contracts; Liability for non-performance; Failure to put up letter of
credit within agreed period.One who assumes a contractual obligation and fails
to perform the same on account of his inability to meet certain bank requirements
which inability he knew and was aware of when he entered into the contract,
should be held liable in damages for breach of contract.
Under Article 1170 of the Civil Code, not only debtors guilty of fraud, negligence
or default but also every debtor, in general, who fails in the performance of his
obligations is bound to indemnify for the losses and damages caused thereby.
Same; Same; Meaning of phrase "in any manner contravene the tenor" of the
obligation in Art. 1170, Civil Code.The phrase "in any manner contravene the
tenor" of the obligation in Art. 1170, Civil Code, includes any illicit task which
impairs the strict and faithful fulfillment of the obligation, or every kind of defective
performance.
Same; Same; Waiver of breach of contract not presumed.Waivers are not
presumed, but must be clearly and convincingly shown, either by express
stipulation or acts admitting no other reasonable explanation.
Same; Payment of award; Philippine currency.In view of Republic Act 527 which
specifically requires the discharge of obligations only "in any coin or currency
which at the time of payment is legal tender for public and private debt", the award
of "damages in U S. dollars made by the lower court in the case at bar is modified
by converting it into Philippine pesos at the rate of exchange prevailing at the time
the obligation was incurred, or when the contract in question was executed.
[Arrieta vs. National Rice and Corn Corporation, 10 SCRA 79(1964)]
REGALA, J.:
This is an appeal of the defendant-appellant NARIC from the decision of the trial
court dated February 20, 1958, awarding to the plaintiffs-appellees the amount of
$286,000.00 as damages for breach of contract and dismissing the counterclaim
and third party complaint of the defendant-appellant NARIC.
In accordance with Section 13 of Republic Act No. 3452, "the National Rice and
Corn Administration (NARIC) is hereby abolished and all its assets, liabilities,
functions, powers which are not inconsistent with the provisions of this Act, and all
personnel are transferred "to the Rice and Corn Administration (RCA).
All references, therefore, to the NARIC in this decision must accordingly be
adjusted and read as RCA pursuant to the aforementioned law.
On May 19, 1952, plaintiff-appellee participated in the public bidding called by the
NARIC for the supply of 20,000 metric tons of Burmese rice. As her bid of $203.00
per metric ton was the lowest, she was awarded the contract for the same.
Accordingly, on July 1, 1952, plaintiff-appellee Paz P. Arrieta and the appellant
corporation entered into a Contract of Sale of Rice, under the terms of which the
former obligated herself to deliver to the latter 20,000 metric tons of Burmess Rice
at $203.00 per metric ton, CIF Manila. In turn, the defendant corporation
committed itself to pay for the imported rice "by means of an irrevocable,
confirmed and assignable letter of credit in U.S. currency in favor of the plaintiff-
appellee and/or supplier in Burma, immediately." Despite the commitment to pay
immediately "by means of an irrevocable, confirmed and assignable Letter of
Credit," however, it was only on July 30, 1952, or a full month from the execution
of the contract, that the defendant corporation, thru its general manager, took the
first to open a letter of credit by forwarding to the Philippine National Bank its
Application for Commercial Letter Credit. The application was accompanied by a
transmittal letter, the relevant paragraphs of which read:
In view of the fact that we do not have sufficient deposit with your institution
with which to cover the amount required to be deposited as a condition for
the opening of letters of credit, we will appreciate it if this application could be
considered special case.
We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet
which is August 4, 1952, and in order to comply therewith, it is imperative
that the L/C be opened prior to that date. We would therefore request your
full cooperation on this matter.
On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the
appellant corporation of the extreme necessity for the immediate opening of the
letter credit since she had by then made a tender to her supplier in Rangoon,
Burma, "equivalent to 5% of the F.O.B. price of 20,000 tons at $180.70 and in
compliance with the regulations in Rangoon this 5% will be confiscated if the
required letter of credit is not received by them before August 4, 1952."
On August 4, 1952, the Philippine National Bank informed the appellant
corporation that its application, "for a letter of credit for $3,614,000.00 in favor of
Thiri Setkya has been approved by the Board of Directors with the condition that
marginal cash deposit be paid and that drafts are to be paid upon presentment."
(Exh. J-pl.; Exh. 10-def., p. 19, Folder of Exhibits). Furthermore, the Bank
represented that it "will hold your application in abeyance pending compliance with
the above stated requirement."
As it turned out, however, the appellant corporation not in any financial position to
meet the condition. As matter of fact, in a letter dated August 2, 1952, the NARIC
bluntly confessed to the appellee its dilemma: "In this connection, please be
advised that our application for opening of the letter of credit has been presented
to the bank since July 30th but the latter requires that we first deposit 50% of the
value of the letter amounting to aproximately $3,614,000.00 which we are not in a
position to meet." (Emphasis supplied. Exh. 9-Def.; Exh. 1-Pe., p. 18, Folder of
Exhibits)
Consequently, the credit instrument applied for was opened only on September 8,
1952 "in favor of Thiri Setkya, Rangoon, Burma, and/or assignee for
$3,614,000.00," (which is more than two months from the execution of the
contract) the party named by the appellee as beneficiary of the letter of
credit.1wph1.t
As a result of the delay, the allocation of appellee's supplier in Rangoon was
cancelled and the 5% deposit, amounting to 524,000 kyats or approximately
P200,000.00 was forfeited. In this connection, it must be made of record that
although the Burmese authorities had set August 4, 1952, as the deadline for the
remittance of the required letter of credit, the cancellation of the allocation and the
confiscation of the 5% deposit were not effected until August 20, 1952, or, a full
half month after the expiration of the deadline. And yet, even with the 15-day
grace, appellant corporation was unable to make good its commitment to open the
disputed letter of credit.
The appellee endeavored, but failed, to restore the cancelled Burmese rice
allocation. When the futility of reinstating the same became apparent, she offered
to substitute Thailand rice instead to the defendant NARIC, communicating at the
same time that the offer was "a solution which should be beneficial to the NARIC
and to us at the same time." (Exh. X-Pe., Exh. 25Def., p. 38, Folder of Exhibits).
This offer for substitution, however, was rejected by the appellant in a resolution
dated November 15, 1952.
On the foregoing, the appellee sent a letter to the appellant, demanding
compensation for the damages caused her in the sum of $286,000.00, U.S.
currency, representing unrealized profit. The demand having been rejected she
instituted this case now on appeal.
At the instance of the NARIC, a counterclaim was filed and the Manila
Underwriters Insurance Company was brought to the suit as a third party
defendant to hold it liable on the performance bond it executed in favor of the
plaintiff-appellee.
We find for the appellee.
It is clear upon the records that the sole and principal reason for the cancellation of
the allocation contracted by the appellee herein in Rangoon, Burma, was the
failure of the letter of credit to be opened with the contemplated period. This failure
must, therefore, be taken as the immediate cause for the consequent damage
which resulted. As it is then, the disposition of this case depends on a
determination of who was responsible for such failure. Stated differently, the issue
is whether appellant's failure to open immediately the letter of credit in dispute
amounted to a breach of the contract of July 1, 1952 for which it may be held liable
in damages.
Appellant corporation disclaims responsibility for the delay in the opening of the
letter of credit. On the contrary, it insists that the fault lies with the appellee.
Appellant contends that the disputed negotiable instrument was not promptly
secured because the appellee , failed to seasonably furnish data necessary and
required for opening the same, namely, "(1) the amount of the letter of credit, (2)
the person, company or corporation in whose favor it is to be opened, and (3) the
place and bank where it may be negotiated." Appellant would have this Court
believe, therefore, that had these informations been forthwith furnished it, there
would have been no delay in securing the instrument.
Appellant's explanation has neither force nor merit. In the first place, the
explanation reaches into an area of the proceedings into which We are not at
liberty to encroach. The explanation refers to a question of fact. Nothing in the
record suggests any arbitrary or abusive conduct on the part of the trial judge in
the formulation of the ruling. His conclusion on the matter is sufficiently borne out
by the evidence presented. We are denied, therefore, the prerogative to disturb
that finding, consonant to the time-honored tradition of this Tribunal to hold trial
judges better situated to make conclusions on questions of fact. For the record,
We quote hereunder the lower court's ruling on the point:
The defense that the delay, if any in opening the letter of credit was due to
the failure of plaintiff to name the supplier, the amount and the bank is not
tenable. Plaintiff stated in Court that these facts were known to defendant
even before the contract was executed because these facts were necessarily
revealed to the defendant before she could qualify as a bidder. She stated
too that she had given the necessary data immediately after the execution of
Exh. "A" (the contract of July 1, 1952) to Mr. GABRIEL BELMONTE, General
Manager of the NARIC, both orally and in writing and that she also pressed
for the opening of the letter of credit on these occasions. These statements
have not been controverted and defendant NARIC, notwithstanding its
previous intention to do so, failed to present Mr. Belmonte to testify or refute
this. ...
Secondly, from the correspondence and communications which form part of the
record of this case, it is clear that what singularly delayed the opening of the
stipulated letter of credit and which, in turn, caused the cancellation of the
allocation in Burma, was the inability of the appellant corporation to meet the
condition importation by the Bank for granting the same. We do not think the
appellant corporation can refute the fact that had it been able to put up the 50%
marginal cash deposit demanded by the bank, then the letter of credit would have
been approved, opened and released as early as August 4, 1952. The letter of the
Philippine National Bank to the NARIC was plain and explicit that as of the said
date, appellant's "application for a letter of credit ... has been approved by the
Board of Directors with the condition that 50% marginal cash deposit be paid and
that drafts are to be paid upon presentment." (Emphasis supplied)
The liability of the appellant, however, stems not alone from this failure or inability
to satisfy the requirements of the bank. Its culpability arises from its willful and
deliberate assumption of contractual obligations even as it was well aware of its
financial incapacity to undertake the prestation. We base this judgment upon the
letter which accompanied the application filed by the appellant with the bank, a
part of which letter was quoted earlier in this decision. In the said accompanying
correspondence, appellant admitted and owned that it did "not have sufficient
deposit with your institution (the PNB) with which to cover the amount required to
be deposited as a condition for the opening of letters of credit. ... .
A number of logical inferences may be drawn from the aforementioned admission.
First, that the appellant knew the bank requirements for opening letters of credit;
second, that appellant also knew it could not meet those requirement. When,
therefore, despite this awareness that was financially incompetent to open a letter
of credit immediately, appellant agreed in paragraph 8 of the contract to pay
immediately "by means of an irrevocable, confirm and assignable letter of credit," it
must be similarly held to have bound itself to answer for all and every
consequences that would result from the representation. aptly observed by the trial
court:
... Having called for bids for the importation of rice involving millions,
$4,260,000.00 to be exact, it should have a certained its ability and capacity
to comply with the inevitably requirements in cash to pay for such
importation. Having announced the bid, it must be deemed to have impliedly
assured suppliers of its capacity and facility to finance the importation within
the required period, especially since it had imposed the supplier the 90-day
period within which the shipment of the rice must be brought into the
Philippines. Having entered in the contract, it should have taken steps
immediately to arrange for the letter of credit for the large amount involved
and inquired into the possibility of its issuance.
In relation to the aforequoted observation of the trial court, We would like to make
reference also to Article 11 of the Civil Code which provides:
 Those who in the performance of their obligation are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor
thereof, are liable in damages.
Under this provision, not only debtors guilty of fraud, negligence or default in the
performance of obligations a decreed liable; in general, every debtor who fails in
performance of his obligations is bound to indemnify for the losses and damages
caused thereby (De la Cruz Seminary of Manila, 18 Phil. 330; Municipality of
Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz, 37 Phil. 982; Maluenda
& Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando v.
Gimenez, 54 Phil. 459; Acme Films v. Theaters Supply, 63 Phil. 657). The phrase
"any manner contravene the tenor" of the obligation includes any illicit act which
impairs the strict and faithful fulfillment of the obligation or every kind or defective
performance. (IV Tolentino, Civil Code of the Philippines, citing authorities, p. 103.)
The NARIC would also have this Court hold that the subsequent offer to substitute
Thailand rice for the originally contracted Burmese rice amounted to a waiver by
the appellee of whatever rights she might have derived from the breach of the
contract. We disagree. Waivers are not presumed, but must be clearly and
convincingly shown, either by express stipulation or acts admitting no other
reasonable explanation. (Ramirez v. Court of Appeals, 52 O.G. 779.) In the case
at bar, no such intent to waive has been established.
We have carefully examined and studied the oral and documentary evidence
presented in this case and upon which the lower court based its award. Under the
contract, the NARIC bound itself to buy 20,000 metric tons of Burmese rice at
"$203.00 U.S. Dollars per metric ton, all net shipped weight, and all in U.S.
currency, C.I.F. Manila ..." On the other hand, documentary and other evidence
establish with equal certainty that the plaintiff-appellee was able to secure the
contracted commodity at the cost price of $180.70 per metric ton from her supplier
in Burma. Considering freights, insurance and charges incident to its shipment
here and the forfeiture of the 5% deposit, the award granted by the lower court is
fair and equitable. For a clearer view of the equity of the damages awarded, We
reproduce below the testimony of the appellee, adequately supported by the
evidence and record:
Q. Will you please tell the court, how much is the damage you suffered?
 A. Because the selling price of my rice is $203.00 per metric ton, and the
cost price of my rice is $180.00 We had to pay also $6.25 for shipping and
about $164 for insurance. So adding the cost of the rice, the freight, the
insurance, the total would be about $187.99 that would be $15.01 gross
profit per metric ton, multiply by 20,000 equals $300,200, that is my
supposed profit if I went through the contract.
The above testimony of the plaintiff was a general approximation of the actual
figures involved in the transaction. A precise and more exact demonstration of the
equity of the award herein is provided by Exhibit HH of the plaintiff and Exhibit 34
of the defendant, hereunder quoted so far as germane.
It is equally of record now that as shown in her request dated July 29, 1959,
and other communications subsequent thereto for the opening by your
corporation of the required letter of credit, Mrs. Arrieta was supposed to pay
her supplier in Burma at the rate of One Hundred Eighty Dollars and Seventy
Cents ($180.70) in U.S. Currency, per ton plus Eight Dollars ($8.00) in the
same currency per ton for shipping and other handling expenses, so that she
is already assured of a net profit of Fourteen Dollars and Thirty Cents
($14.30), U.S., Currency, per ton or a total of Two Hundred and Eighty Six
Thousand Dollars ($286,000.00), U.S. Currency, in the aforesaid transaction.
...
Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise
by way of unrealized profit damages in the total sum of $406,000.00 from the
failure of the projected contract to materialize. This counterclaim was supported by
a cost study made and submitted by the appellant itself and wherein it was
illustrated how indeed had the importation pushed thru, NARIC would have
realized in profit the amount asserted in the counterclaim. And yet, the said
amount of P406,000.00 was realizable by appellant despite a number of expenses
which the appellee under the contract, did not have to incur. Thus, under the cost
study submitted by the appellant, banking and unloading charges were to be
shouldered by it, including an Import License Fee of 2% and superintendence fee
of $0.25 per metric ton. If the NARIC stood to profit over P400 000.00 from the
disputed transaction inspite of the extra expenditures from which the herein
appellee was exempt, we are convicted of the fairness of the judgment presently
under appeal.
In the premises, however, a minor modification must be effected in the dispositive
portion of the decision appeal from insofar as it expresses the amount of damages
in U.S. currency and not in Philippine Peso. Republic Act 529 specifically requires
the discharge of obligations only "in any coin or currency which at the time of
payment is legal tender for public and private debts." In view of that law, therefore,
the award should be converted into and expressed in Philippine Peso.
This brings us to a consideration of what rate of exchange should apply in the
conversion here decreed. Should it be at the time of the breach, at the time the
obligation was incurred or at the rate of exchange prevailing on the promulgation
of this decision.
In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for
recovery of damages for breach of contract, even if the obligation assumed by the
defendant was to pay the plaintiff a sum of money expressed in American
currency, the indemnity to be allowed should be expressed in Philippine currency
at the rate of exchange at the time of the judgment rather than at the rate of
exchange prevailing on the date of defendant's breach. This ruling, however, can
neither be applied nor extended to the case at bar for the same was laid down
when there was no law against stipulating foreign currencies in Philippine
contracts. But now we have Republic Act No. 529 which expressly declares such
stipulations as contrary to public policy, void and of no effect. And, as We already
pronounced in the case of Eastboard Navigation, Ltd. v. Juan Ysmael & Co., Inc.,
G.R. No. L-9090, September 10, 1957, if there is any agreement to pay an
obligation in a currency other than Philippine legal tender, the same is null and
void as contrary to public policy (Republic Act 529), and the most that could be
demanded is to pay said obligation in Philippine currency "to be measured in the
prevailing rate of exchange at the time the obligation was incurred (Sec. 1, idem)."
UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed,
with the sole modification that the award should be converted into the Philippine
peso at the rate of exchange prevailing at the time the obligation was incurred or
on July 1, 1952 when the contract was executed. The appellee insurance
company, in the light of this judgment, is relieved of any liability under this suit. No
pronouncement as to costs.
Bengzon, C.J., Padilla, Concepcion, Paredes, Dizon and Makalintal, JJ., concur.
Barrera, J., took no part.
Reyes, J.B.L., J., reserves his vote.
SECOND DIVISION
G.R. No. 73867 February 29, 1988
TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner, vs.
IGNACIO CASTRO, (etal), respondents.
PADILLA, J.:
Civil Law; Damages; Obligations; Telegrams; Failure of telegram company to send
the sender's telegram overseas despite payment of the required charges, makes it
guilty of contravening its obligation and is liable for damages.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.
Same; Same; Same; Same; Liability of telegram company is not limited to actual
or quantified 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.
Same; Same; Same; Same; Moral damages, concept of, under Art. 2217 of the
Civil Code; Moral damages, recoverable in case at bar.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."
Same; Same; Same; Same; Petitioners act or omission amounted to gross
negligence.Here, petitioner's act or omission, which amounted to gross
negligence, was precisely the cause of the suffering private respondents had to
undergo.
Same; Same; Same; Same; Compensatory damages, award of, proper, as
petitioner was remiss in performing its obligations.We also sustain the trial
court's award of P1 6,000.00 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.
Same; Same; Same; Same; Exemplary damages, award of, justified to serve as a
warning to all telegram companies to observe due diligence in transmitting their
customers' messages.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.
HERRERA, J., concurring;
Civil Law; Obligations; Damages; In addition to compensatory and exemplary
damages, moral damages are recoverable in actions for breach of contract where
the breach has been wanton and reckless.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. [Telefast Communications /Philippine Wireless, Inc. vs.
Castro, Sr., 158 SCRA 445(1988)]
Petition for review on certiorari of the decision * of the Intermediate Appellate
Court, dated 11 February 1986, in AC-G.R. No. CV-70245, entitled "Ignacio
Castro, Sr., et al., Plaintiffs-Appellees, versus Telefast Communication/Philippine
Wireless, Inc., Defendant-Appellant."
The facts of the case are as follows:
On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro,
Sr. and mother of the other plaintiffs, passed away in Lingayen, Pangasinan. On
the same day, her daughter Sofia C. Crouch, who was then vacationing in the
Philippines, addressed a telegram to plaintiff Ignacio Castro, Sr. at 685 Wanda,
Scottsburg, Indiana, U.S.A., 47170 announcing Consolacion's death. The telegram
was accepted by the defendant in its Dagupan office, for transmission, after
payment of the required fees or charges.
The telegram never reached its addressee. Consolacion was interred with only her
daughter Sofia in attendance. Neither the husband nor any of the other children of
the deceased, then all residing in the United States, returned for the burial.
When Sofia returned to the United States, she discovered that the wire she had
caused the defendant to send, had not been received. She and the other plaintiffs
thereupon brought action for damages arising from defendant's breach of contract.
The case was filed in the Court of First Instance of Pangasinan and docketed
therein as Civil Case No. 15356. The only defense of the defendant was that it
was unable to transmit the telegram because of "technical and atmospheric factors
beyond its control." 1 No evidence appears on record that defendant ever made
any attempt to advise the plaintiff Sofia C. Crouch as to why it could not transmit
the telegram.
The Court of First Instance of Pangasinan, after trial, ordered the defendant (now
petitioner) to pay the plaintiffs (now private respondents) damages, as follows, with
interest at 6% per annum:
1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and
P20,000.00 as moral damages.
2. Ignacio Castro Sr., P20,000.00 as moral damages.
3. Ignacio Castro Jr., P20,000.00 as moral damages.
4. Aurora Castro, P10,000.00 moral damages.
5. Salvador Castro, P10,000.00 moral damages.
6. Mario Castro, P10,000.00 moral damages.
7. Conrado Castro, P10,000 moral damages.
8. Esmeralda C. Floro, P20,000.00 moral damages.
9. Agerico Castro, P10,000.00 moral damages.
10. Rolando Castro, P10,000.00 moral damages.
11. Virgilio Castro, P10,000.00 moral damages.
12. Gloria Castro, P10,000.00 moral damages.
Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages
in the amount of P1,000.00 to each of the plaintiffs and costs. 2
On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's
decision but eliminated the award of P16,000.00 as compensatory damages to
Sofia C. Crouch and the award of P1,000.00 to each of the private respondents as
exemplary damages. The award of P20,000.00 as moral damages to each of Sofia
C. Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also reduced to
P120,000. 00 for each. 3
Petitioner appeals from the judgment of the appellate court, contending that the
award of moral damages should be eliminated as defendant's negligent act was
not motivated by "fraud, malice or recklessness."
In other words, under petitioner's theory, it can only be held liable for P 31.92, the
fee or charges paid by Sofia C. Crouch for the telegram that was never sent to the
addressee thereof.
Petitioner's contention is without merit.
Art. 1170 of the Civil Code provides that "those who in the performance of their
obligations are guilty of fraud, negligence or delay, and those who in any manner
contravene the tenor thereof, are liable for damages." Art. 2176 also provides that
"whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done."
In the case at bar, petitioner and private respondent Sofia C. Crouch entered into
a contract whereby, for a fee, petitioner undertook to send said private
respondent's message overseas by telegram. This, petitioner did not do, despite
performance by said private respondent of her obligation by paying the required
charges. Petitioner was therefore guilty of contravening its obligation to said
private respondent and is thus liable for damages.
This liability is not limited to actual or quantified damages. To sustain petitioner's
contrary position in this regard would result in an inequitous situation where
petitioner will only be held liable for the actual cost of a telegram fixed thirty (30)
years ago.
We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral
damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury. Though incapable of pecuniary computation, moral damages may be
recovered if they are the proximate results of the defendant's wrongful act or
omission." (Emphasis supplied).
Here, petitioner's act or omission, which amounted to gross negligence, was
precisely the cause of the suffering private respondents had to undergo.
As the appellate court properly observed:
 [Who] can seriously dispute the shock, the mental anguish and the sorrow that
the overseas children must have suffered upon learning of the death of their
mother after she had already been interred, without being given the opportunity
to even make a choice on whether they wanted to pay her their last respects?
There is no doubt that these emotional sufferings were proximately caused by
appellant's omission and substantive law provides for the justification for the
award of moral damages. 4
We also sustain the trial court's award of P16,000.00 as compensatory damages
to Sofia C. Crouch representing the expenses she incurred when she came to the
Philippines from the United States to testify before the trial court. Had petitioner
not been remiss in performing its obligation, there would have been no need for
this suit or for Mrs. Crouch's testimony.
The award of exemplary damages by the trial court is likewise justified and,
therefore, sustained in the amount of P1,000.00 for each of the private
respondents, as a warning to all telegram companies to observe due diligence in
transmitting the messages of their customers.
WHEREFORE, the petition is DENIED. The decision appealed from is modified so
that petitioner is held liable to private respondents in the following amounts:
(1) P10,000.00 as moral damages, to each of private respondents;
(2) P1,000.00 as exemplary damages, to each of private respondents;
(3) P16,000.00 as compensatory damages, to private respondent Sofia
C. Crouch;
(4) P5,000.00 as attorney's fees; and
(5) Costs of suit.
SO ORDERED. Yap (Chairman), Paras and Sarmiento, JJ., concur.
THIRD DIVISION
G.R. No. L-47379 May 16, 1988
NATIONAL POWER CORPORATION, petitioner,
vs.
HONORABLE COURT OF APPEALS
and ENGINEERING CONSTRUCTION, INC., respondents.
G.R. No. L-47481 May 16, 1988
ENGINEERING CONSTRUCTION, INC., petitioner,
vs.
COUTRT OF APPEALS and NATIONAL
POWER CORPORATION, respondents.
Raymundo A. Armovit for private respondent in L-47379.
The Solicitor General for petitioner.
Civil Law; Torts and Damages; Negligence; NPC cannot escape liability because
its negligence was the proximate cause of the loss and damage even though the
typhoon was an act of God.It is clear from the appellate courts decision that
based on its findings of fact and that of the trial courts, petitioner NPC was
undoubtedly negligent because it opened the spillway gates of the Angat Dam
only at the height of typhoon Welming when it knew very well that it was safer to
have opened the same gradually and earlier, as it was also undeniable that NPC
knew of the coming typhoon at least four days before it actually struck. And even
though the typhoon was an act of God or what we may call force majeure, NPC
cannot escape liability because its negligence was the proximate cause of the loss
and damage. As we have ruled in Juan F. Nakpil & Sons v. Court of Appeals (144
SCRA 596, 606607): 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 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 was,
and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp.
11741175). Thus, it has been held that when the negligence of a person concur s
with an act of God in producing a loss, such person is not exempt from liability by
showing that the immediate cause of the damage was the act of God. To be
exempt from liability for loss because of an act of God, he must be free from any
previous negligence or misconduct by which the 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)."
Same; Same; Same; Same; The question of whether or not there was negligence
on the part of NPC is a question of fact which falls within the jurisdiction of the
CA.Furthermore, the question of whether or not there was negligence on the
part of NPC is a question of fact which properly falls within the jurisdiction of the
Court of Appeals and will not be disturbed by this Court unless the same is clearly
unfounded, Thus, in Tolentino v. Court of Appeals, (150 SCRA 26, 36) we ruled:
Moreover, the findings of fact of the Court of Appeals are generally final and
conclusive upon the Supreme Court (Leonardo v. Court of Appeals, 120 SCRA
890 [1983]. In fact it is settled that the Supreme Court is not supposed to weigh
evidence but only to determine its substantially (Nunez v. Sandiganbayan, 100
SCRA 433 [1982] and will generally not disturb said findings of fact when
supported by substantial evidence (Aytona v. Court of appeals, 113 SCRA 575
[1985]; Collector of Customs of Manila v. Intermediate Appellate Court, 137 SCRA
3 [1985]. On the other hand substantial evidence is defined as such relevant
evidence as a reasonable mind might accept as adequate to support a conclusion
(Philippine Metal Products, Inc. v. Court of Industrial Relations, 90 SCRA 135
[1979]; Police Commission v. Lood, 127 SCRA 757 [1984]; Canete v. WCC, 136
SCRA 302 [1985])."
Same; Same; Same; Same; Consequential damages; Court of Ap-peals did not err
in reducing the consequential damages from P333,200.00 to P19,000.00;
Reasons.Likewise, it did not err in re-ducing the consequential damages from
P333,200.00 to P19,000.00. As shown by the records, while there was no
categorical statement or admission on the part of ECI that it bought a new crane to
replace the damaged one, a sales contract was presented to the effect that the
new crane would be delivered to it by Asian Enterprises within 60 days from the
opening of the letter of credit at the cost of P1 06,336.75. The offer was made by
Asian Enterprises a few days after the flood. As compared to the amount of
P106,336.75 for a brand new crane and paying the alleged amount of P4,000.00 a
day as rental for the use of a temporary crane, which use petitioner ECI alleged to
have lasted for a period of one year, thus, totalling P1 20,000.00, plus the fact that
there was already a sales contract between it and Asian Enterprises, there is no
reason why ECI should opt to rent a temporary crane for a period of one year. The
appellate court also found that the damaged crane was subsequently repaired and
re-activated and the cost of repair was P77,000.00. Therefore, it included the said
amount in the award of compensatory damages, but not the value of the new
crane. We do not find anything erroneous in the decision of the appellate court
that the consequential damages should represent only the service of the
temporary crane for one month. A contrary ruling would result in the unjust
enrichment of ECI.
Same; Same; Same; Same; Exemplary Damages; Appellate court is correct in
eliminating exemplary damages since there was no bad faith and gross negligence
on the part of NPC.As to the question of exemplary damages, we sustain the
appellate court in eliminating the same since it found that there was no bad faith
on the part of NPC and that neither can the latters negligence be considered
gross. In Dee Hua Liong Electrical Equipment Corp. v. Reyes, (145 SCRA 713,
719) we ruled: Neither may private respondent recover exemplary damages since
he is not entitled to moral or compensatory damages, and again because the
petitioner is not shown to have acted in a wanton, fraudulent, reckless or
oppressive manner (Art. 2234, Civil Code; Yutuk v. Manila Electric Co., 2 SCRA
377; Francisco v. Government Service Insurance System, 7 SCRA 577; Gutierrez
v. Villegas, 8 SCRA 527; Air France v. Carrascoso, 18 SCRA 155; Pan Pacific
(Phil.) v. Phil. Advertising Corp., 23 SCRA 977; Marchan v. Mendoza, 24 SCRA
888)." [National Power Corporation vs. Court of Appeals, 161 SCRA 334(1988)]
GUTIERREZ, JR., J.:
These consolidated petitions seek to set aside the decision of the respondent
Court of Appeals which adjudged the National Power Corporation liable for
damages against Engineering Construction, Inc. The appellate court, however,
reduced the amount of damages awarded by the trial court. Hence, both parties
filed their respective petitions: the National Power Corporation (NPC) in G.R. No.
47379, questioning the decision of the Court of Appeals for holding it liable for
damages and the Engineering Construction, Inc. (ECI) in G.R. No. 47481,
questioning the same decision for reducing the consequential damages and
attorney's fees and for eliminating the exemplary damages.
The facts are succinctly summarized by the respondent Court of Appeals, as
follows:
 On August 4, 1964, plaintiff Engineering Construction, Inc., being a successful
bidder, executed a contract in Manila with the National Waterworks and
Sewerage Authority (NAWASA), whereby the former undertook to furnish all
tools, labor, equipment, and materials (not furnished by Owner), and to
construct the proposed 2nd lpo-Bicti Tunnel, Intake and Outlet Structures, and
Appurtenant Structures, and Appurtenant Features, at Norzagaray, Bulacan,
and to complete said works within eight hundred (800) calendar days from the
date the Contractor receives the formal notice to proceed (Exh. A).
The project involved two (2) major phases: the first phase comprising, the
tunnel work covering a distance of seven (7) kilometers, passing through the
mountain, from the Ipo river, a part of Norzagaray, Bulacan, where the Ipo Dam
of the defendant National Power Corporation is located, to Bicti; the other phase
consisting of the outworks at both ends of the tunnel.
By September 1967, the plaintiff corporation already had completed the first
major phase of the work, namely, the tunnel excavation work. Some portions of
the outworks at the Bicti site were still under construction. As soon as the
plaintiff corporation had finished the tunnel excavation work at the Bicti site, all
the equipment no longer needed there were transferred to the Ipo site where
some projects were yet to be completed.
The record shows that on November 4,1967, typhoon 'Welming' hit Central
Luzon, passing through defendant's Angat Hydro-electric Project and Dam at
lpo, Norzagaray, Bulacan. Strong winds struck the project area, and heavy rains
intermittently fell. Due to the heavy downpour, the water in the reservoir of the
Angat Dam was rising perilously at the rate of sixty (60) centimeters per hour.
To prevent an overflow of water from the dam, since the water level had
reached the danger height of 212 meters above sea level, the defendant
corporation caused the opening of the spillway gates." (pp. 45-46, L-47379,
Rollo)
The appellate court sustained the findings of the trial court that the evidence
preponlderantly established the fact that due to the negligent manner with which
the spillway gates of the Angat Dam were opened, an extraordinary large volume
of water rushed out of the gates, and hit the installations and construction works of
ECI at the lpo site with terrific impact, as a result of which the latter's stockpile of
materials and supplies, camp facilities and permanent structures and accessories
either washed away, lost or destroyed.
The appellate court further found that:
It cannot be pretended that there was no negligence or that the appellant
exercised extraordinary care in the opening of the spillway gates of the Angat
Dam. Maintainers of the dam knew very well that it was far more safe to open
them gradually. But the spillway gates were opened only when typhoon
Welming was already at its height, in a vain effort to race against time and
prevent the overflow of water from the dam as it 'was rising dangerously at the
rate of sixty centimeters per hour. 'Action could have been taken as early as
November 3, 1967, when the water in the reservoir was still low. At that time,
the gates of the dam could have been opened in a regulated manner. Let it be
stressed that the appellant knew of the coming of the typhoon four days before
it actually hit the project area. (p. 53, L-47379, Rollo)
As to the award of damages, the appellate court held:
We come now to the award of damages. The appellee submitted a list of
estimated losses and damages to the tunnel project (Ipo side) caused by the
instant flooding of the Angat River (Exh. J-1). The damages were itemized in
four categories, to wit: Camp Facilities P55,700.00; Equipment, Parts and Plant
P375,659.51; Materials P107,175.80; and Permanent Structures and
accessories P137,250.00, with an aggregate total amount of P675,785.31.
The list is supported by several vouchers which were all submitted as Exhibits K
to M-38 a, N to O, P to U-2 and V to X- 60-a (Vide: Folders Nos. 1 to 4). The
appellant did not submit proofs to traverse the aforementioned documentary
evidence. We hold that the lower court did not commit any error in awarding P
675,785.31 as actual or compensatory damages.
However, We cannot sustain the award of P333,200.00 as consequential
damages. This amount is broken down as follows: P213,200.00 as and for the
rentals of a crane to temporarily replace the one "destroyed beyond repair," and
P120,000.00 as one month bonus which the appellee failed to realize in
accordance with the contract which the appellee had with NAWASA. Said rental
of the crane allegedly covered the period of one year at the rate of P40.00 an
hour for 16 hours a day. The evidence, however, shows that the appellee
 bought a crane also a crawler type, on November 10, 1967, six (6) days after
the incident in question (Exh N) And according to the lower court, which finding
was never assailed, the appellee resumed its normal construction work on the
Ipo- Bicti Project after a stoppage of only one month. There is no evidence
when the appellee received the crane from the seller, Asian Enterprise Limited.
But there was an agreement that the shipment of the goods would be effected
within 60 days from the opening of the letter of credit (Exh. N).<re||an1w>It
appearing that the contract of sale was consummated, We must conclude or at
least assume that the crane was delivered to the appellee within 60 days as
stipulated. The appellee then could have availed of the services of another
crane for a period of only one month (after a work stoppage of one month) at
the rate of P 40.00 an hour for 16 hours a day or a total of P 19,200.00 as
rental.
But the value of the new crane cannot be included as part of actual damages
because the old was reactivated after it was repaired. The cost of the repair
was P 77,000.00 as shown in item No. 1 under the Equipment, Parts and Plants
category (Exh. J-1), which amount of repair was already included in the actual
or compensatory damages. (pp. 54-56, L-47379, Rollo)
The appellate court likewise rejected the award of unrealized bonus from
NAWASA in the amount of P120,000.00 (computed at P4,000.00 a day in case
construction is finished before the specified time, i.e., within 800 calendar days),
considering that the incident occurred after more than three (3) years or one
thousand one hundred seventy (1,170) days. The court also eliminated the award
of exemplary damages as there was no gross negligence on the part of NPC and
reduced the amount of attorney's fees from P50,000.00 to P30,000.00.
In these consolidated petitions, NPC assails the appellate court's decision as
being erroneous on the ground that the destruction and loss of the ECI's
equipment and facilities were due to force majeure. It argues that the rapid rise of
the water level in the reservoir of its Angat Dam due to heavy rains brought about
by the typhoon was an extraordinary occurrence that could not have been
foreseen, and thus, the subsequent release of water through the spillway gates
and its resultant effect, if any, on ECI's equipment and facilities may rightly be
attributed to force majeure.
On the other hand, ECI assails the reduction of the consequential damages from
P333,200.00 to P19,000.00 on the grounds that the appellate court had no basis
in concluding that ECI acquired a new Crawler-type crane and therefore, it only
can claim rentals for the temporary use of the leased crane for a period of one
month; and that the award of P4,000.00 a day or P120,000.00 a month bonus is
justified since the period limitation on ECI's contract with NAWASA had dual
effects, i.e., bonus for earlier completion and liquidated damages for delayed
performance; and in either case at the rate of P4,000.00 daily. Thus, since NPC's
negligence compelled work stoppage for a period of one month, the said award of
P120,000.00 is justified. ECI further assailes the reduction of attorney's fees and
the total elimination of exemplary damages.
Both petitions are without merit.
It is clear from the appellate court's decision that based on its findings of fact and
that of the trial court's, petitioner NPC was undoubtedly negligent because it
opened the spillway gates of the Angat Dam only at the height of typhoon
"Welming" when it knew very well that it was safer to have opened the same
gradually and earlier, as it was also undeniable that NPC knew of the coming
typhoon at least four days before it actually struck. And even though the typhoon
was an act of God or what we may call force majeure, NPC cannot escape liability
because its negligence was the proximate cause of the loss and damage. As we
have ruled in Juan F. Nakpil & Sons v. Court of Appeals, (144 SCRA 596, 606-
607):
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 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 was, and removed from the rules applicable to the acts of God.
(1 Corpus Juris, pp. 1174-1175).
Thus, it has been held that when the negligence of a person concurs with an act
of God in producing a loss, such person is not exempt from liability by showing
that the immediate cause of the damage was the act of God. To be exempt
from liability for loss because of an act of God, he must be free from any
previous negligence or misconduct by which the 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).
Furthermore, the question of whether or not there was negligence on the part of
NPC is a question of fact which properly falls within the jurisdiction of the Court of
Appeals and will not be disturbed by this Court unless the same is clearly
unfounded. Thus, in Tolentino v. Court of appeals, (150 SCRA 26, 36) we ruled:
Moreover, the findings of fact of the Court of Appeals are generally final and
conclusive upon the Supreme Court (Leonardo v. Court of Appeals, 120 SCRA
890 [1983]. In fact it is settled that the Supreme Court is not supposed to weigh
evidence but only to determine its substantially (Nuez v. Sandiganbayan, 100
SCRA 433 [1982] and will generally not disturb said findings of fact when
supported by substantial evidence (Aytona v. Court of Appeals, 113 SCRA 575
[1985]; Collector of Customs of Manila v. Intermediate Appellate Court, 137
SCRA 3 [1985]. On the other hand substantial evidence is defined as such
relevant evidence as a reasonable mind might accept as adequate to support a
conclusion (Philippine Metal Products, Inc. v. Court of Industrial Relations, 90
SCRA 135 [1979]; Police Commission v. Lood, 127 SCRA 757 [1984]; Canete
v. WCC, 136 SCRA 302 [1985])
Therefore, the respondent Court of Appeals did not err in holding the NPC liable
for damages.
Likewise, it did not err in reducing the consequential damages from P333,200.00
to P19,000.00. As shown by the records, while there was no categorical statement
or admission on the part of ECI that it bought a new crane to replace the damaged
one, a sales contract was presented to the effect that the new crane would be
delivered to it by Asian Enterprises within 60 days from the opening of the letter of
credit at the cost of P106,336.75. The offer was made by Asian Enterprises a few
days after the flood. As compared to the amount of P106,336.75 for a brand new
crane and paying the alleged amount of P4,000.00 a day as rental for the use of a
temporary crane, which use petitioner ECI alleged to have lasted for a period of
one year, thus, totalling P120,000.00, plus the fact that there was already a sales
contract between it and Asian Enterprises, there is no reason why ECI should opt
to rent a temporary crane for a period of one year. The appellate court also found
that the damaged crane was subsequently repaired and reactivated and the cost
of repair was P77,000.00. Therefore, it included the said amount in the award of of
compensatory damages, but not the value of the new crane. We do not find
anything erroneous in the decision of the appellate court that the consequential
damages should represent only the service of the temporary crane for one month.
A contrary ruling would result in the unjust enrichment of ECI.
The P120,000.00 bonus was also properly eliminated as the same was granted by
the trial court on the premise that it represented ECI's lost opportunity "to earn the
one month bonus from NAWASA ... ." As stated earlier, the loss or damage to
ECI's equipment and facilities occurred long after the stipulated deadline to finish
the construction. No bonus, therefore, could have been possibly earned by ECI at
that point in time. The supposed liquidated damages for failure to finish the project
within the stipulated period or the opposite of the claim for bonus is not clearly
presented in the records of these petitions. It is not shown that NAWASA imposed
them.
As to the question of exemplary damages, we sustain the appellate court in
eliminating the same since it found that there was no bad faith on the part of NPC
and that neither can the latter's negligence be considered gross. In Dee Hua Liong
ElectricalEquipment Corp. v. Reyes, (145 SCRA 713, 719) we ruled:
Neither may private respondent recover exemplary damages since he is not
entitled to moral or compensatory damages, and again because the petitioner is
not shown to have acted in a wanton, fraudulent, reckless or oppressive
manner (Art. 2234, Civil Code; Yutuk v. Manila Electric Co., 2 SCRA 377;
Francisco v. Government Service Insurance System, 7 SCRA 577; Gutierrez v.
Villegas, 8 SCRA 527; Air France v. Carrascoso, 18 SCRA 155; Pan Pacific
 (Phil.) v. Phil. Advertising Corp., 23 SCRA 977; Marchan v. Mendoza, 24 SCRA
888).
We also affirm the reduction of attorney's fees from P50,000.00 to P30,000.00.
There are no compelling reasons why we should set aside the appellate court's
finding that the latter amount suffices for the services rendered by ECI's counsel.
WHEREFORE, the petitions in G.R. No. 47379 and G.R. No. 47481 are both
DISMISSED for LACK OF MERIT. The decision appealed from is AFFIRMED.
SO ORDERED.
Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur.
 SECOND DIVISION
G.R. No. 71049 May 29, 1987
BERNARDINO JIMENEZ, petitioner,
vs.
CITY OF MANILA and INTERMEDIATE APPELLATE COURT, respondents.

Civil Law; Civil liability of Provinces, Cities and Municipalities for quasi-delict;
Article 1, Sec. 4, RA No. 409 (Revised Charter of Manila) refers to liability arising
from negligence, in general, regardless of the object, while Article 2189 of the Civil
Code governs liability due to "defective streets, public buildings and other public
works" in particular.This issue has been laid to rest in the case of City of Manila
v. Teotico (22 SCRA 269-272 [1968]) where the Supreme Court squarely ruled
that Republic Act No. 409 establishes a general rule regulating the liability of the
City of Manila for "damages or injury to persons or property arising from the failure
of city officers" to enforce the provisions of said Act, "or any other law or ordinance
or from negligence" of the City "Mayor, Municipal Board, or other officers while
enforcing or attempting to enforce said provisions." Upon the other hand, Article
2189 of the Civil Code of the Philippines constitutes a particular prescription
making "provinces, cities and municipalities x x x liable for damages for the death
of, or injury suffered by any person by reason"specifically"of the defective
condition of roads, streets, bridges, public buildings, and other public works under
their control or supervision." In other words, Art. 1, sec. 4, R.A. No. 409 refers to
liability arising from negligence, in general, regardless of the object, thereof, while
Article 2189 of the Civil Code governs liability due to "defective streets, public
buildings and other public works" in particular and is therefore decisive on this
specific case.
Same; Same; Same; For liability under Article 2189 of the Civil Code to attach,
control or supervision by the province, city or municipality over the public building
in question is enough; Case at bar.In the same suit, the Supreme Court clarified
further that under Article 2189 of the Civil Code, it is not necessary for the liability
therein established to attach, that the defective public works belong to the
province, city or municipality from which responsibility is exacted. What said article
requires is that the province, city or municipality has either "control or supervision"
over the public building in question. In the case at bar, there is no question that the
Sta. Ana Public Market, despite the Management and Operating Contract between
respondent City and Asiatic Integrated Corporation remained under the control of
the former. The fact of supervision and control of the City over subject public
market was admitted by Mayor Ramon Bagatsing in his letter to Secretary of
Finance Cesar Virata. In fact, the City of Manila employed a market master for the
Sta. Ana Public Market whose primary duty is-to take direct supervision and
control of that particular market, more specifically, to check the safety of the place
for the public.
Same; Same; Same; Same; Respondent City of Manila failed to exercise the
diligence of a good father of a family which is a defense in quasi-delict.As a
defense against liability on the basis of a quasidelict, one must have exercised the
diligence of a good father of a family. (Art. 1173 of the Civil Code). There is no
argument that it is the duty of the City of Manila to exercise reasonable care to
keep the public market reasonably safe for people frequenting the place for their
marketing needs. While it may be conceded that the fulfillment of such duties is
extremely difficult during storms and floods, it must however, be admitted that
ordinary precautions could have been taken during good weather to minimize the
dangers to life and limb under those difficult circumstances. For instance,. the
drainage hole could have been placed under the stalls instead of on the passage
ways. Even more important is the fact, that the City should have seen to it that the
openings were covered. Sadly, the evidence indicates that long before petitioner
fell into the opening, it was already uncovered, and five (5) months after the
incident happened, the opening was still uncovered. (Rollo, pp. 57; 69). Moreover,
while there are findings that during floods the vendors remove the iron grills to
hasten the flow of water (Decision, AC-G.R. CV No. 01387, Rollo, p. 17), there is
no showing that such practice has ever been prohibited, much less penalized by
the City of Manila. Neither was it shown that any sign had been placed
thereabouts to warn passers-by of the impending danger. [Jimenez vs. City of
Manila, 150 SCRA 510(1987)]
PARAS, J.:
This is a petition for review on certiorari of: (1) the decision * of the Intermediate
Appellate Court in AC-G.R. No. 013887-CV Bernardino Jimenez v. Asiatic
Integrated Corporation and City of Manila, reversing the decision ** of the Court of
First Instance of Manila, Branch XXII in Civil Case No. 96390 between the same
parties, but only insofar as holding Asiatic Integrated Corporation solely liable for
damages and attorney's fees instead of making the City of Manila jointly and
solidarily liable with it as prayed for by the petitioner and (2) the resolution of the
same Appellate Court denying his Partial Motion for Reconsideration (Rollo, p. 2).
The dispositive portion of the Intermediate Appellate Court's decision is as follows:
WHEREFORE, the decision appealed from is hereby REVERSED. A new one
is hereby entered ordering the defendant Asiatic Integrated Corporation to pay
the plaintiff P221.90 actual medical expenses, P900.00 for the amount paid for
 the operation and management of a school bus, P20,000.00 as moral damages
due to pains, sufferings and sleepless nights and P l0,000.00 as attorney's fees.
SO ORDERED. (p. 20, Rollo)
The findings of respondent Appellate Court are as follows:
The evidence of the plaintiff (petitioner herein) shows that in the morning of August
15, 1974 he, together with his neighbors, went to Sta. Ana public market to buy
"bagoong" at the time when the public market was flooded with ankle deep
rainwater. After purchasing the "bagoong" he turned around to return home but he
stepped on an uncovered opening which could not be seen because of the dirty
rainwater, causing a dirty and rusty four- inch nail, stuck inside the uncovered
opening, to pierce the left leg of plaintiff-petitioner penetrating to a depth of about
one and a half inches. After administering first aid treatment at a nearby drugstore,
his companions helped him hobble home. He felt ill and developed fever and he
had to be carried to Dr. Juanita Mascardo. Despite the medicine administered to
him by the latter, his left leg swelled with great pain. He was then rushed to the
Veterans Memorial Hospital where he had to be confined for twenty (20) days due
to high fever and severe pain.
Upon his discharge from the hospital, he had to walk around with crutches for
fifteen (15) days. His injury prevented him from attending to the school buses he is
operating. As a result, he had to engage the services of one Bienvenido Valdez to
supervise his business for an aggregate compensation of nine hundred pesos
(P900.00). (Decision, AC-G.R. CV No. 01387, Rollo, pp. 13-20).
Petitioner sued for damages the City of Manila and the Asiatic Integrated
Corporation under whose administration the Sta. Ana Public Market had been
placed by virtue of a Management and Operating Contract (Rollo, p. 47).
The lower court decided in favor of respondents, the dispositive portion of the
decision reading:
WHEREFORE, judgment is hereby rendered in favor of the defendants and
against the plaintiff dismissing the complaint with costs against the plaintiff. For
lack of sufficient evidence, the counterclaims of the defendants are likewise
dismissed. (Decision, Civil Case No. 96390, Rollo, p. 42).
As above stated, on appeal, the Intermediate Appellate Court held the Asiatic
Integrated Corporation liable for damages but absolved respondent City of Manila.
Hence this petition.
The lone assignment of error raised in this petition is on whether or not the
Intermediate Appellate Court erred in not ruling that respondent City of Manila
should be jointly and severally liable with Asiatic Integrated Corporation for the
injuries petitioner suffered.
In compliance with the resolution of July 1, 1985 of the First Division of this Court
(Rollo, p. 29) respondent City of Manila filed its comment on August 13, 1985
(Rollo, p. 34) while petitioner filed its reply on August 21, 1985 (Reno, p. 51).
Thereafter, the Court in the resolution of September 11, 1985 (Rollo, p. 62) gave
due course to the petition and required both parties to submit simultaneous
memoranda
Petitioner filed his memorandum on October 1, 1985 (Rollo, p. 65) while
respondent filed its memorandum on October 24, 1985 (Rollo, p. 82).
In the resolution of October 13, 1986, this case was transferred to the Second
Division of this Court, the same having been assigned to a member of said
Division (Rollo, p. 92).
The petition is impressed with merit.
As correctly found by the Intermediate Appellate Court, there is no doubt that the
plaintiff suffered injuries when he fell into a drainage opening without any cover in
the Sta. Ana Public Market. Defendants do not deny that plaintiff was in fact
injured although the Asiatic Integrated Corporation tries to minimize the extent of
the injuries, claiming that it was only a small puncture and that as a war veteran,
plaintiff's hospitalization at the War Veteran's Hospital was free. (Decision, AC-
G.R. CV No. 01387, Rollo, p. 6).
Respondent City of Manila maintains that it cannot be held liable for the injuries
sustained by the petitioner because under the Management and Operating
Contract, Asiatic Integrated Corporation assumed all responsibility for damages
which may be suffered by third persons for any cause attributable to it.
It has also been argued that the City of Manila cannot be held liable under Article
1, Section 4 of Republic Act No. 409 as amended (Revised Charter of Manila)
which provides:
The City shall not be liable or held for damages or injuries to persons or
property arising from the failure of the Mayor, the Municipal Board, or any other
City Officer, to enforce the provisions of this chapter, or any other law or
ordinance, or from negligence of said Mayor, Municipal Board, or any other
officers while enforcing or attempting to enforce said provisions.
This issue has been laid to rest in the case of City of Manila v. Teotico (22 SCRA
269-272 [1968]) where the Supreme Court squarely ruled that Republic Act No.
409 establishes a general rule regulating the liability of the City of Manila for
"damages or injury to persons or property arising from the failure of city officers" to
enforce the provisions of said Act, "or any other law or ordinance or from
negligence" of the City "Mayor, Municipal Board, or other officers while enforcing
or attempting to enforce said provisions."
Upon the other hand, Article 2189 of the Civil Code of the Philippines which
provides that:
Provinces, cities and municipalities shall be liable for damages for the death of,
or injuries suffered by any person by reason of defective conditions of roads,
streets, bridges, public buildings and other public works under their control or
supervision.
constitutes a particular prescription making "provinces, cities and municipalities ...
liable for damages for the death of, or injury suffered by any person by reason"
specifically "of the defective condition of roads, streets, bridges, public
buildings, and other public works under their control or supervision." In other
words, Art. 1, sec. 4, R.A. No. 409 refers to liability arising from negligence, in
general, regardless of the object, thereof, while Article 2189 of the Civil Code
governs liability due to "defective streets, public buildings and other public works"
in particular and is therefore decisive on this specific case.
In the same suit, the Supreme Court clarified further that under Article 2189 of the
Civil Code, it is not necessary for the liability therein established to attach, that the
defective public works belong to the province, city or municipality from which
responsibility is exacted. What said article requires is that the province, city or
municipality has either "control or supervision" over the public building in question.
In the case at bar, there is no question that the Sta. Ana Public Market, despite the
Management and Operating Contract between respondent City and Asiatic
Integrated Corporation remained under the control of the former.
For one thing, said contract is explicit in this regard, when it provides:
II
That immediately after the execution of this contract, the SECOND PARTY shall
start the painting, cleaning, sanitizing and repair of the public markets and
talipapas and within ninety (90) days thereof, the SECOND PARTY shall submit
a program of improvement, development, rehabilitation and reconstruction of
the city public markets and talipapas subject to prior approval of the FIRST
PARTY. (Rollo, p. 44)
xxx xxx xxx
VI
That all present personnel of the City public markets and talipapas shall be
retained by the SECOND PARTY as long as their services remain satisfactory
and they shall be extended the same rights and privileges as heretofore
enjoyed by them. Provided, however, that the SECOND PARTY shall have the
right, subject to prior approval of the FIRST PARTY to discharge any of the
present employees for cause. (Rollo, p. 45).
VII
That the SECOND PARTY may from time to time be required by the FIRST
PARTY, or his duly authorized representative or representatives, to report, on
the activities and operation of the City public markets and talipapas and the
facilities and conveniences installed therein, particularly as to their cost of
construction, operation and maintenance in connection with the stipulations
contained in this Contract. (lbid)
The fact of supervision and control of the City over subject public market was
admitted by Mayor Ramon Bagatsing in his letter to Secretary of Finance Cesar
Virata which reads:
 These cases arose from the controversy over the Management and
Operating Contract entered into on December 28, 1972 by and
between the City of Manila and the Asiatic Integrated Corporation,
whereby in consideration of a fixed service fee, the City hired the
services of the said corporation to undertake the physical management,
maintenance, rehabilitation and development of the City's public
markets and' Talipapas' subject to the control and supervision of the
City.
xxx xxx xxx
It is believed that there is nothing incongruous in the exercise of these
powers vis-a-vis the existence of the contract, inasmuch as the City
retains the power of supervision and control over its public markets
andtalipapas under the terms of the contract. (Exhibit "7-A") (Emphasis
supplied.) (Rollo, p. 75).
In fact, the City of Manila employed a market master for the Sta. Ana Public
Market whose primary duty is to take direct supervision and control of that
particular market, more specifically, to check the safety of the place for the public.
Thus the Asst. Chief of the Market Division and Deputy Market Administrator of the
City of Manila testified as follows:
Court This market master is an employee of the City of Manila?
Mr. Ymson Yes, Your Honor.
Q What are his functions?
A Direct supervision and control over the market area assigned to
him."(T.s.n.,pp. 41-42, Hearing of May 20, 1977.)
xxx xxx xxx
Court As far as you know there is or is there any specific employee assigned
with the task of seeing to it that the Sta. Ana Market is safe for the public?
Mr. Ymson Actually, as I stated, Your Honor, that the Sta. Ana has its own
market master. The primary duty of that market master is to make the direct
supervision and control of that particular market, the check or verifying whether
 the place is safe for public safety is vested in the market master. (T.s.n., pp.
2425, Hearing of July 27, 1977.) (Emphasis supplied.) (Rollo, p. 76).
Finally, Section 30 (g) of the Local Tax Code as amended, provides:
The treasurer shall exercise direct and immediate supervision administration
and control over public markets and the personnel thereof, including those
whose duties concern the maintenance and upkeep of the market and
ordinances and other pertinent rules and regulations. (Emphasis supplied.)
(Rollo, p. 76)
The contention of respondent City of Manila that petitioner should not have
ventured to go to Sta. Ana Public Market during a stormy weather is indeed
untenable. As observed by respondent Court of Appeals, it is an error for the trial
court to attribute the negligence to herein petitioner. More specifically stated, the
findings of appellate court are as follows:
... The trial court even chastised the plaintiff for going to market on a rainy day
just to buy bagoong. A customer in a store has the right to assume that the
owner will comply with his duty to keep the premises safe for customers. If he
ventures to the store on the basis of such assumption and is injured because
the owner did not comply with his duty, no negligence can be imputed to the
customer. (Decision, AC-G. R. CV No. 01387, Rollo, p. 19).
As a defense against liability on the basis of a quasi-delict, one must have
exercised the diligence of a good father of a family. (Art. 1173 of the Civil Code).
There is no argument that it is the duty of the City of Manila to exercise reasonable
care to keep the public market reasonably safe for people frequenting the place for
their marketing needs.
While it may be conceded that the fulfillment of such duties is extremely difficult
during storms and floods, it must however, be admitted that ordinary precautions
could have been taken during good weather to minimize the dangers to life and
limb under those difficult circumstances.
For instance, the drainage hole could have been placed under the stalls instead of
on the passage ways. Even more important is the fact, that the City should have
seen to it that the openings were covered. Sadly, the evidence indicates that long
before petitioner fell into the opening, it was already uncovered, and five (5)
months after the incident happened, the opening was still uncovered. (Rollo, pp.
57; 59). Moreover, while there are findings that during floods the vendors remove
the iron grills to hasten the flow of water (Decision, AC-G.R. CV No. 0 1387; Rollo,
p. 17), there is no showing that such practice has ever been prohibited, much less
penalized by the City of Manila. Neither was it shown that any sign had been
placed thereabouts to warn passersby of the impending danger.
To recapitulate, it appears evident that the City of Manila is likewise liable for
damages under Article 2189 of the Civil Code, respondent City having retained
control and supervision over the Sta. Ana Public Market and as tort-feasor under
Article 2176 of the Civil Code on quasi-delicts
Petitioner had the right to assume that there were no openings in the middle of the
passageways and if any, that they were adequately covered. Had the opening
been covered, petitioner could not have fallen into it. Thus the negligence of the
City of Manila is the proximate cause of the injury suffered, the City is therefore
liable for the injury suffered by the peti- 4 petitioner.
Respondent City of Manila and Asiatic Integrated Corporation being joint tort-
feasors are solidarily liable under Article 2194 of the Civil Code.
PREMISES CONSIDERED, the decision of the Court of Appeals is hereby
MODIFIED, making the City of Manila and the Asiatic Integrated Corporation
solidarily liable to pay the plaintiff P221.90 actual medical expenses, P900.00 for
the amount paid for the operation and management of the school bus, P20,000.00
as moral damages due to pain, sufferings and sleepless nights and P10,000.00 as
attorney's fees.
SO ORDERED.
Fernan (Chairman), Gutierrez, Jr., Padilla, Bidin and Cortes JJ., concur.
 THIRD DIVISION
G.R. No. 149338 July 28, 2008
UNLAD RESOURCES DEVELOPMENT CORPORATION, UNLAD RURAL
BANK OF NOVELETA, INC., UNLAD COMMODITIES, INC., HELENA Z.
BENITEZ, and CONRADO L. BENITEZ II, Petitioners,
vs.
RENATO P. DRAGON, TARCISIUS R. RODRIGUEZ, VICENTE D. CASAS,
ROMULO M. VIRATA, FLAVIANO PERDITO, TEOTIMO BENITEZ, ELENA
BENITEZ, and ROLANDO SUAREZ, Respondents.

Civil Law; Contracts; Rescission; Jurisdictions; The rescission of the Memorandum

of Agreement is a cause of action within the jurisdiction of the trial courts,
notwithstanding the fact that the parties involved are all directors of the same
corporation.The main issue in this case is the rescission of the Memorandum of
Agreement. This is to be distinguished from respondents allegation of the alleged
mismanagement and dissipation of corporate assets by the petitioners which is
based on the prayer for receivership over the bank. The two issues, albeit related,
are obviously separate, as they pertain to different acts of the parties involved. The
issue of receivership does not arise from the parties obligations under the
Memorandum of Agreement, but rather from specific acts attributed to petitioners
as members of the Board of Directors of the Bank. Clearly, the rescission of the
Memorandum of Agreement is a cause of action within the jurisdiction of the trial
courts, notwithstanding the fact that the parties involved are all directors of the
same corporation.
Same; Same; Same; Same; The Securities Regulation Code which took effect in
2000 has transferred jurisdiction over such disputes to the Regional Trial Court.
This point has been rendered moot by Republic Act (R.A.) No. 8799, also known
as the Securities Regulation Code. This law, which took effect in 2000, has
transferred jurisdiction over such disputes to the RTC. x x x Consequently,
whether the cause of action stems from a contractual dispute or one that involves
intra-corporate matters, the RTC already has jurisdiction over this case. In this
light, the question of whether the doctrine of estoppel by laches applies, as
enunciated by this Court in Tijam v. Sibonghanoy, 23 SCRA 29 (1968), no longer
finds relevance.
Same; Same; Same; Prescription; The prescriptive period that should apply to this
case is that provided for in Article 1144.Article 1381 sets out what are
rescissible contracts, x x x The Memorandum of Agreement subject of this
controversy does not fall under the above enumeration. Accordingly, the
prescriptive period that should apply to this case is that provided for in Article
1144, to wit: Article 1144. The following actions must be brought within ten years
from the time the right of action accrues: (1) Upon a written contract; x x x x
Same; Same; Same; Same; The right of action accrues from the moment the
breach of right or duty occurs.Based on the records of this case, the action was
commenced on July 3, 1987, while the Memorandum of Agreement was entered
into on December 29, 1981. Article 1144 specifically provides that the 10-year
period is counted from the time the right of action accrues. The right of action
accrues from the moment the breach of right or duty occurs. Thus, the original
Complaint was filed well within the prescriptive period.
Same; Same; Same; Mutual restitution is required in cases involving rescission
under Article 1191.Mutual restitution is required in cases involving rescission
under Article 1191. This means bringing the parties back to their original status
prior to the inception of the contract.
Same; Same; Same; Rescission has the effect of unmaking a contract, or its
undoing from the beginning, and not merely its termination; To rescind is to
declare a contract void at its inception and to put an end to it as though it never
was.Rescission has the effect of unmaking a contract, or its undoing from the
beginning, and not merely its termination. Hence, rescission creates the obligation
to return the object of the contract. It can be carried out only when the one who
demands rescission can return whatever he may be obliged to restore. To rescind
is to declare a contract void at its inception and to put an end to it as though it
never was. It is not merely to terminate it and release the parties from further
obligations to each other, but to abrogate it from the beginning and restore the
parties to their relative positions as if no contract has been made.
Same; Same; Same; Rescission has the effect of abrogating the contract in all
parts.When a decree for rescission is handed down, it is the duty of the court to
require both parties to surrender that which they have respectively received and to
place each other as far as practicable in his original situation. The rescission has
the effect of abrogating the contract in all parts.
Same; Damages; Though incapable of precise pecuniary computation, moral
damages may be recovered if they are the proximate result of the defendants
wrongful act or omission; Requisites to award moral damages.Moral damages
include physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury.
Though incapable of precise pecuniary computation, moral damages may be
recovered if they are the proximate result of the defendants wrongful act or
omission. Article 2220 of the Civil Code further provides that moral damages may
be recovered in case of a breach of contract where the defendant acted in bad
faith. To award moral damages, a court must be satisfied with proof of the
following requisites: (1) an injurywhether physical, mental, or psychological
clearly sustained by the claimant; (2) a culpable act or omission factually
established; (3) a wrongful act or omission of the defendant as the proximate
cause of the injury sustained by the claimant; and (4) the award of damages
predicated on any of the cases stated in Article 2219.
Same; Same; Exemplary Damages; Exemplary damages cannot be recovered as
a matter of right.Exemplary damages cannot be recovered as a matter of right.
While these need not be proved, respondents must show that they are entitled to
moral, temperate or compensatory damages before the court may consider the
question of awarding exemplary damages. We find that respondents are indeed
entitled to moral damages; thus, the award for exemplary damages is in order.
[Unlad Resources Development Corporation vs. Dragon, 560 SCRA 63(2008)]
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules
of Civil Procedure seeking the reversal of the November 29, 2000 Decision1 and
August 2, 2001 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No.
54226.
The facts, as found by the CA, are as follows:
On December 29, 1981, the Plaintiffs (herein respondents) and defendant (herein
petitioner) Unlad Resources, through its Chairman[,] Helena Z. Benitez[,] entered
into a Memorandum of Agreement wherein it is provided that [respondents], as
controlling stockholders of the Rural Bank [of Noveleta] shall allow Unlad
Resources to invest four million eight hundred thousand pesos (P4,800,000.00) in
the Rural Bank in the form of additional equity. On the other hand, [petitioner]
Unlad Resources bound itself to invest the said amount of 4.8 million pesos in the
Rural Bank; upon signing, it was, likewise, agreed that [petitioner] Unlad
Resources shall subscribe to a minimum of four hundred eighty thousand pesos
(P480,000.00) (sic) common or preferred non-voting shares of stock with a total
par value of four million eight hundred thousand pesos (P4,800,000.00) and pay
up immediately one million two hundred thousand pesos (P1,200,000.00) for said
subscription; that the [respondents], upon the signing of the said agreement shall
transfer control and management over the Rural Bank to Unlad Resources.
According to the [respondents], immediately after the signing of the agreement,
they complied with their obligation and transferred control of the Rural Bank to
Unlad Resources and its nominees and the Bank was renamed the Unlad Rural
Bank of Noveleta, Inc. However, [respondents] claim that despite repeated
demands, Unlad Resources has failed and refused to comply with their obligation
under the said Memorandum of Agreement when it did not invest four million eight
hundred thousand pesos (P4,800,000.00) in the Rural Bank in the form of
additional equity and, likewise, it failed to immediately infuse one million two
hundred thousand pesos (P1,200,000.00) as paid in capital upon signing of the
Memorandum of Agreement.
On August 10, 1984, the Board of Directors of [petitioner] Unlad Resources
passed Resolution No. 84-041 authorizing the President and the General Manager
to lease a mango plantation situated in Naic, Cavite. Pursuant to this Resolution,
the Bank as [lessee] entered into a Contract of Lease with the [petitioner] Helena
Z. Benitez as [lessor]. The management of the mango plantation was undertaken
by Unlad Commodities, Inc., a subsidiary of Unlad Resources[,] under a
Management Contract Agreement. The Management Contract provides that Unlad
Commodities, Inc. would receive eighty percent (80%) of the net profits generated
by the operation of the mango plantation while the Banks share is twenty percent
(20%). It was further agreed that at the end of the lease period, the Rural Bank
shall turn over to the lessor all permanent improvements introduced by it on the
plantation.
xxxx
On May 20, 1987, [petitioner] Unlad Rural Bank wrote [respondents] regarding
[the] Central Banks approval to retire its [Development Bank of the Philippines]
preferred shares in the amount of P219,000.00 and giving notice for subscription
to proportionate shares. The [respondents] objected on the grounds that there is
already a sinking fund for the retirement of the said DBP-held preferred shares
provided for annually and that it could deprive the Rural Bank of a cheap source of
fund. (sic)
[Respondents] alleged compliance with all of their obligations under the
Memorandum of Agreement in that they have transferred control and management
over the Rural bank to the [petitioners] and are ready, willing and able to allow
[petitioners] to subscribe to a minimum of four hundred eighty thousand
(P480,000.00) (sic) common or preferred non-voting shares of stocks with a total
par value of four million eight hundred thousand pesos (P4,800,000.00) in the
Rural Bank. However, [petitioners] have failed and refused to subscribe to the said
shares of stock and to pay the initial amount of one million two hundred thousand
pesos (P1,200,000.00) for said subscription.3
On July 3, 1987, herein respondents filed before the Regional Trial Court (RTC) of
Makati City, Branch 61 a Complaint4 for rescission of the agreement and the return
of control and management of the Rural Bank from petitioners to respondents,
plus damages. After trial, the RTC rendered a Decision,5 the dispositive portion of
which provides:
WHEREFORE, Premises Considered, judgment is hereby rendered, as follows:
1. The Memorandum of Agreement dated 29 December 1991 (sic) is hereby
declared rescinded and:
(a) Defendant Unlad Resources Development Corporation is hereby ordered
to immediately return control and management over the Rural Bank of
Noveleta, Inc. to Plaintiffs; and
(b) Unlad Rural Bank of Noveleta, Inc. is hereby ordered to return to
Defendants the sum of One Million Three Thousand Seventy Pesos
(P1,003,070.00)
2. The Director for Rural Banks of the Bangko Sentral ng Pilipinas is hereby
appointed as Receiver of the Rural Bank;
3. Unlad Rural Bank of Noveleta, Inc. is hereby enjoined from placing the retired
DBP-held preferred shares available for subscription and the same is hereby
ordered to be placed under a sinking fund;
4. Defendant Unlad Resources Development Corporation is hereby ordered to
pay plaintiffs the following:
 (a) actual compensatory damages amounting to Four Million Six Hundred
One Thousand Seven Hundred Sixty- Five and 38/100 Pesos
(P4,601,765.38);
(b) moral damages in the amount of Five Hundred Thousand Pesos
(P500,000.00);
(c) exemplary and corrective damages in the amount of One Hundred
Thousand Pesos (P100,000.00); and
(d) attorneys fees in the sum of (P100,000.00), plus cost of suit.
SO ORDERED.6
Herein petitioners appealed the ruling to the CA. Respondents filed a Motion to
Dismiss and, subsequently, a Supplemental Motion to Dismiss, which were both
denied. Later, however, the CA, in a Decision dated November 29, 2000,
dismissed the appeal for lack of merit and affirmed the RTC Decision in all
respects. Petitioners motion for reconsideration was denied in CA Resolution
dated August 2, 2001.
Petitioners are now before this Court alleging that the CA committed a grave and
serious reversible error in issuing the assailed Decision. Petitioners question the
jurisdiction of the trial court, something they have done from the beginning of the
controversy, contending that the issues that respondents raised before the trial
court are intra-corporate in nature and are, therefore, beyond the jurisdiction of the
trial court. They point out that respondents complaint charged them with
mismanagement and alleged dissipation of the assets of the Rural Bank. Since the
complaint challenges corporate actions and decisions of the Board of Directors
and prays for the recovery of the control and management of the Rural Bank,
these matters fall outside the jurisdiction of the trial court. Thus, they posit that the
judgment of the trial court, as affirmed by the CA, is null and void and may be
impugned at any time.
Petitioners further argue that the action instituted by respondents had already
prescribed, because Article 1389 of the Civil Code provides that an action for
rescission must be commenced within four years. They claim that the trial court
and the CA mistakenly applied Article 1144 of the Civil Code which treats of
prescription of actions in general. They submit that Article 1389, which deals
specifically with actions for rescission, is the applicable law.
Moreover, petitioners assert that they have fully complied with their undertaking
under the subject Memorandum of Agreement, but that the undertaking has
become a "legal and factual impossibility" because the authorized capital stock of
the Rural Bank was increased from P1.7 million to only P5 million, and could not
accommodate the subscription by petitioners of P4.8 million worth of shares. Such
deficiency, petitioners contend, is with the knowledge and approval of respondent
Renato P. Dragon and his nominees to the Board of Directors.
Petitioners, without conceding the propriety of the judgment of rescission, also
argue that the subject Memorandum of Agreement could not just be ordered
rescinded without the corresponding order for the restitution of the parties total
contributions and/or investments in the Rural Bank. Finally, they assail the award
for moral and exemplary damages, as well as the award for attorneys fees, as
bereft of factual and legal bases given that, in the body of the Decision, it was
merely stated that respondents suffered moral damages without any discussion or
explanation of, nor any justification for such award. Likewise, the matter of
attorneys fees was not at all discussed in the body of the Decision. Petitioners
claim that pursuant to the prevailing rule, attorneys fees cannot be recovered in
the absence of stipulation.
On the other hand, respondents declare that immediately after the signing of the
Memorandum of Agreement, they complied with their obligation and transferred
control of the Rural Bank to petitioner Unlad Resources and its nominees, but that,
despite repeated demands, petitioners have failed and refused to comply with their
concomitant obligations under the Agreement.
Respondents narrate that shortly after taking over the Rural Bank, petitioners
Conrado L. Benitez II and Jorge C. Cerbo, as President and General Manager,
respectively, entered into a Contract of Lease over the Naic, Cavite mango
plantation, and that, as a consequence of this venture, the bank incurred
expenses amounting to P475,371.57, equivalent to 25.76% of its capital and
surplus. The respondents further assert that the Central Bank found this
undertaking not inherently connected with bona fide rural banking operations, nor
does it fall within the allied undertakings permitted under Section 26 of Central
Bank Circular No. 741 and Section 3379 of the Manual of Regulations of the
Central Bank. Thus, respondents contend that this circumstance, coupled with the
fact that petitioners Helena Z. Benitez and Conrado L. Benitez II were also
stockholders and members of the Board of Directors of Unlad Resources, Unlad
Rural Bank, and Unlad Commodities at that time, is adequate proof that the Rural
Banks management had every intention of diverting, dissipating, and/or wasting
the banks assets for petitioners own gain.
They likewise allege that because of the failure of petitioners to comply with their
obligations under the Memorandum of Agreement, respondents, with the
exception of Tarcisius Rodriguez, lodged a complaint with the Securities and
Exchange Commission (SEC), seeking rescission of the Agreement, damages,
and the appointment of a management committee, but the SEC dismissed the
complaint for lack of jurisdiction.
Furthermore, when the Rural Bank informed respondents of the Central Banks
approval of its plan to retire its DBP-held preferred shares, giving notices for
subscription to proportionate shares, respondents objected on the ground that
there was already a sinking fund for the retirement of said shares provided for
annually, and that the retirement would deprive the petitioner Rural Bank of a
cheap source of fund. It was at that point, respondents claim, that they instituted
the aforementioned Complaint against petitioners before the RTC of Makati.
The respondents also seek the outright dismissal of this Petition for lack of
verification as to petitioners Helena Z. Benitez and Conrado L. Benitez II; lack of
proper verification as to petitioners Unlad Resources Development Corporation,
Unlad Rural Bank of Noveleta, Inc., and Unlad Commodities, Inc.; lack of proper
verified statement of material dates; and lack of proper sworn certification of non-
forum shopping.
They support the proposition that Tijam v. Sibonghanoy7 applies, and that
petitioners are indeed estopped from questioning the jurisdiction of the trial court.
They also share the lower courts view that it is Article 1144 of the Civil Code, and
not Article 1389, that is applicable to this case. Finally, respondents allege that the
failure of petitioner Unlad Resources to comply with its undertaking under the
Agreement, as uniformly found by the trial court and the CA, may no longer be
assailed in the instant Petition, and that the award of moral and exemplary
damages and attorneys fees is justified.
The Petition is bereft of merit. We uphold the Decision of the CA affirming that of
the RTC.
First, the subject of jurisdiction. The main issue in this case is the rescission of the
Memorandum of Agreement. This is to be distinguished from respondents
allegation of the alleged mismanagement and dissipation of corporate assets by
the petitioners which is based on the prayer for receivership over the bank. The
two issues, albeit related, are obviously separate, as they pertain to different acts
of the parties involved. The issue of receivership does not arise from the parties
obligations under the Memorandum of Agreement, but rather from specific acts
attributed to petitioners as members of the Board of Directors of the Bank. Clearly,
the rescission of the Memorandum of Agreement is a cause of action within the
jurisdiction of the trial courts, notwithstanding the fact that the parties involved are
all directors of the same corporation.
Still, the petitioners insist that the trial court had no jurisdiction over the complaint
because the issues involved are intra-corporate in nature.
This argument miserably fails to persuade. The law in force at the time of the filing
of the case was Presidential Decree (P.D.) 902-A, Section 5(b) of which vested the
Securities and Exchange Commission with original and exclusive jurisdiction to
hear and decide cases involving controversies arising out of intra-corporate
relations.8 Interpreting this statutorily conferred jurisdiction on the SEC, this Court
had occasion to state:
Nowhere in said decree do we find even so much as an [intimation] that absolute
jurisdiction and control is vested in the Securities and Exchange Commission in all
matters affecting corporations. To uphold the respondents arguments would
remove without legal imprimatur from the regular courts all conflicts over matters
involving or affecting corporations, regardless of the nature of the transactions
which give rise to such disputes. The courts would then be divested of jurisdiction
not by reason of the nature of the dispute submitted to them for adjudication, but
solely for the reason that the dispute involves a corporation. This cannot be done.9
It is well to remember that the respondents had actually filed with the SEC a case
against the petitioners which, however, was dismissed for lack of jurisdiction due
to the pendency of the case before the RTC.10 The SECs Order dismissing the
respondents complaint is instructive:
From the foregoing allegations, it is apparent that the present action involves two
separate causes of action which are interrelated, and the resolution of which
hinges on the very document sought to be rescinded. The assertion that the
defendants failed to comply with their contractual undertaking and the claim for
rescission of the contract by the plaintiffs has, in effect, put in issue the very status
of the herein defendants as stockholders of the Rural Bank. The issue as to
whether or not the defendants are stockholders of the Rural Bank is a pivotal issue
to be determined on the basis of the Memorandum of Agreement. It is a prejudicial
question and a logical antecedent to confer jurisdiction to this Commission.
It is to be noted, however, that determination of the contractual undertaking of the
parties under a contract lies with the Regional Trial Courts and not with this
Commission. x x x11
Be that as it may, this point has been rendered moot by Republic Act (R.A.) No.
8799, also known as the Securities Regulation Code. This law, which took effect in
2000, has transferred jurisdiction over such disputes to the RTC. Specifically, R.A.
8799 provides:
Sec. 5. Powers and Functions of the Commission
xxxx
5.2. The Commissions jurisdiction over all cases enumerated under Section 5 of
Presidential Decree No. 902-A is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme
Court in the exercise of its authority may designate the Regional Trial Court
branches that shall exercise jurisdiction over these cases. The Commission shall
retain jurisdiction over pending cases involving intra-corporate disputes submitted
for final resolution which should be resolved within one (1) year from the
enactment of this Code. The Commission shall retain jurisdiction over pending
suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally
disposed.
Section 5 of P.D. No. 902-A reads, thus:
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities
and Exchange Commission over corporations, partnerships and other forms of
associations registered with it as expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving:
a) Devices and schemes employed by or any acts of the board of directors,
business associates, its officers or partnership, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public
and/or of the stockholder, partners, members of associations or
organizations registered with the Commission;
b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members, or associates; between any or
all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns
their individual franchise or right to exist as such entity;
c) Controversies in the election or appointment of directors, trustees, officers
or managers of such corporations, partnerships or associations.
Consequently, whether the cause of action stems from a contractual dispute or
one that involves intra-corporate matters, the RTC already has jurisdiction over
this case. In this light, the question of whether the doctrine of estoppel by laches
applies, as enunciated by this Court in Tijam v. Sibonghanoy, no longer finds
relevance.
Second, the issue of prescription. Petitioners further contend that the action for
rescission has prescribed under Article 1398 of the Civil Code, which provides:
Article 1389. The action to claim rescission must be commenced within four years
x x x.
This is an erroneous proposition. Article 1389 specifically refers to rescissible
contracts as, clearly, this provision is under the chapter entitled "Rescissible
Contracts."
In a previous case,12 this Court has held that Article 1389:
applies to rescissible contracts, as enumerated and defined in Articles 1380 and
1381. We must stress however, that the "rescission" in Article 1381 is not akin to
the term "rescission" in Article 1191 and Article 1592. In Articles 1191 and 1592,
the rescission is a principal action which seeks the resolution or cancellation of the
contract while in Article 1381, the action is a subsidiary one limited to cases of
rescission for lesion as enumerated in said article.
The prescriptive period applicable to rescission under Articles 1191 and 1592, is
found in Article 1144, which provides that the action upon a written contract should
be brought within ten years from the time the right of action accrues.
Article 1381 sets out what are rescissible contracts, to wit:
Article 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom
they represent suffer lesion by more than one-fourth of the value of the
things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other
manner collect the claims due them;
(4) Those which refer to things under litigation if they have been entered into
by the defendant without the knowledge and approval of the litigants or of
competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
The Memorandum of Agreement subject of this controversy does not fall under the
above enumeration. Accordingly, the prescriptive period that should apply to this
case is that provided for in Article 1144, to wit:
Article 1144. The following actions must be brought within ten years from the time
the right of action accrues:
(1) Upon a written contract;
xxxx
Based on the records of this case, the action was commenced on July 3, 1987,
while the Memorandum of Agreement was entered into on December 29, 1981.
Article 1144 specifically provides that the 10-year period is counted from "the time
the right of action accrues." The right of action accrues from the moment the
breach of right or duty occurs.13 Thus, the original Complaint was filed well within
the prescriptive period.
We now proceed to determine if the trial court, as affirmed by the CA, correctly
ruled for the rescission of the subject Agreement.
Petitioners contend that they have fully complied with their obligation under the
Memorandum of Agreement. They allege that due to respondents failure to
increase the capital stock of the corporation to an amount that will accommodate
their undertaking, it had become impossible for them to perform their end of the
Agreement.
Again, petitioners contention is untenable. There is no question that petitioners
herein failed to fulfill their obligation under the Memorandum of Agreement. Even
they admit the same, albeit laying the blame on respondents.
It is true that respondents increased the Rural Banks authorized capital stock to
only P5 million, which was not enough to accommodate the P4.8 million worth of
stocks that petitioners were to subscribe to and pay for. However, respondents
failure to fulfill their undertaking in the agreement would have given rise to the
scenario contemplated by Article 1191 of the Civil Code, which reads:
Article 1191. The power to rescind reciprocal obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage
Law.
Thus, petitioners should have exacted fulfillment from the respondents or asked
for the rescission of the contract instead of simply not performing their part of the
Agreement. But in the course of things, it was the respondents who availed of the
remedy under Article 1191, opting for the rescission of the Agreement in order to
regain control of the Rural Bank.
Having determined that the rescission of the subject Memorandum of Agreement
was in order, the trial court ordered petitioner Unlad Resources to return to
respondents the management and control of the Rural Bank and for the latter to
return the sum of P1,003,070.00 to petitioners.
Mutual restitution is required in cases involving rescission under Article 1191. This
means bringing the parties back to their original status prior to the inception of the
contract.14 Article 1385 of the Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can
return whatever he may be obligated to restore.
Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing
the loss.
This Court has consistently ruled that this provision applies to rescission under
Article 1191:
[S]ince Article 1385 of the Civil Code expressly and clearly states that "rescission
creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest," the Court finds no
justification to sustain petitioners position that said Article 1385 does not apply to
rescission under Article 1191.15
Rescission has the effect of "unmaking a contract, or its undoing from the
beginning, and not merely its termination."16 Hence, rescission creates the
obligation to return the object of the contract. It can be carried out only when the
one who demands rescission can return whatever he may be obliged to restore.
To rescind is to declare a contract void at its inception and to put an end to it as
though it never was. It is not merely to terminate it and release the parties from
further obligations to each other, but to abrogate it from the beginning and restore
the parties to their relative positions as if no contract has been made.17
Accordingly, when a decree for rescission is handed down, it is the duty of the
court to require both parties to surrender that which they have respectively
received and to place each other as far as practicable in his original situation. The
rescission has the effect of abrogating the contract in all parts.18
Clearly, the petitioners failed to fulfill their end of the agreement, and thus, there
was just cause for rescission. With the contract thus rescinded, the parties must
be restored to the status quo ante, that is, before they entered into the
Memorandum of Agreement.
Finally, we must resolve the question of the propriety of the award for damages
and attorneys fees.
The trial courts Decision mentioned that the "evidence is clear and convincing that
Plaintiffs (herein respondents) suffered actual compensatory damages amounting
to Four Million Six Hundred One Thousand Seven Hundred Sixty-Five and 38/100
Pesos (P4,601,765.38) moral damages and attorneys fees."
Though not discussed in the body of the Decision, the records show that the
amount of P4,601,765.38 pertains to actual losses incurred by respondents as a
result of petitioners non-compliance with their undertaking under the
Memorandum of Agreement. On this point, respondent Dragon presented
testimonial and documentary evidence to prove the actual amount of damages,
thus:
Atty. Cruz
Q: Was there any consequence to you Mr. Dragon due to any breach of the
agreement marked as Exhibit A?
A: Yes sir I could have earned thru the shares of stock that I have, or we have or
we had by this time amounting to several millions pesos (sic). They have only put
in the whole amount that we have agreed upon (sic).
Q: In this connection did you cause computation of these losses that you incured
(sic)?
A: Yes sir.
xxxx
Q: Will you please kindly go through this computation and explain the same to the
Honorable Court?
A: Number 1 is an Organ (sic) income from the sale of 60% (sic) at only Three
Hundred Ninety Nine Thousand Two hundred for Nineteen Thousand Nine
Hundred Sixty shares which should have been sold if it were sold to others for
P50.00 each for a total of Nine Hundred Ninety Eight Thousand but sold to them
for Three Hundred Ninety nine (sic) Thousand two (sic) Hundred only and of which
only Three Hundred Twenty Four Thousand Six Hundred was paid to me.
Therefore, there was a difference of Six Hundred Seven Three (sic) Thousand
Four Hundred (P673,400.00). On the basis of the commulative (sic) lost income
every year from March 1982 from the amount of Seven Six Hundred (sic) Seventy
Three Thousand four (sic) Hundred (P673,400.) (sic) there would be a
discommulative (sic) lost (sic) of One Million Ninety Three Thousand Nine
Hundred Fifty Two Pesos and forty two (sic) centavos (P1,093,952.42). Please
note that the interest imputed is only at 12% per annum but it should had (sic)
been much higher. In 1984 to 1986 (sic) alone rates went as higher (sic) as 40%
per annum from the so called (sic) Jobo Bills and yet we only computed the
imputed income or lost income at 12% per annum and then there is a 40%
participation on the unrealized earnings due to their failure to put in an stabilized
(sic) earnings. You will note that if they put in 4.8 million Pesos and it would be
earning money, 40% of that will go to us because 40% of the bank would be ours
and 60% would be there (sic). But because they did put in the 4.8 million our 40%
did not earn up to that extent and computed again on the basis of 12% the amount
(sic) on the commulative (sic) basis up to September 1990 is 2 million three
hundred fifty two thousand sixty five pesos and four centavos (sic).
(P2,352,065.04). You will note again that the average return of investment of any
Cavite based (sic) Rural Bank has been no less than 20% or about 30% per
annum. And we computed only the earnings at 12%.
xxxx
There were loans granted fraudulently to members of the board and some
borrowers which were not all charged interest for several years and on this basis
we computed a 40% shares (sic) on the foregone income interest income (sic) on
all these fraudulently granted loans, without interest being collected and none a
project (sic) among a plantation project (sic), which was funded by the bank but
nothing was given back to the bank for several hundred thousand of pesos (sic).
And we arrived an (sic) estimate of the foregone interest income a total of One
Million Two Hundred Five Thousand Eight Hundred Sixty None Pesos and eighty
one (sic) centavos and 40 percent share of this (sic) would be Four Hundred
Eighty Two Thousand Three Hundred Forty Seven Pesos and Ninety Two
Centavos. All in all our estimate of the damages we have suffered is Four Million
Six Hundred one (sic) Thousand Seven Hundred Sixty Five Pesos and thirty eight
(sic) centavos (P4,601,765.38).19
More importantly, petitioners never raised in issue before the CA this award of
actual compensatory damages. They did not raise the matter of damages in their
Appellants Brief, while in their Motion for Reconsideration, they questioned only
the award of moral and exemplary damages, not the award of actual damages.
Even in the present Petition for Review, what petitioners raised was the propriety
of the award of moral and exemplary damages and attorneys fees.
On the grant of moral and exemplary damages and attorneys fees, we note that
the trial courts Decision did not discuss the basis for the award. No mention of
these damages awarded or their factual basis is made in the body of the
Decision, only in the dispositive portion. Be that as it may, we have examined the
records of the case and found that the award must be sustained.
It should be remembered that there are two separate causes of action in this case:
one for rescission of the Memorandum of Agreement and the other for
receivership based on alleged mismanagement of the company by the plaintiffs.
While the award of actual compensatory damages was based on the breach of
duty under the Memorandum of Agreement, the award of moral damages appears
to be based on petitioners mismanagement of the company when they became
members of the Board of Directors of the Rural Bank.
Thus, the trial court said:
Under the Rural Banks management, a systematic diversion of the banks assets
was conceived whereby: (a) The Rural Banks funds would be funneled in the
development and improvements of the Benitez Mango Plantation in the guise of an
investment in said plantation; (b) Of the net profits earned from the plantations
operations, the Rural Banks share therein, although it shoulders all of the financial
risks, would be a measly twenty percent (20%) thereof while UCI, without investing
a single centavo, would earn eighty percent (80%) of the said profits. Thus, the
bulk of the profits of the mango plantation was also sought to be diverted to an
entity wherein Helena Z. Benitez and Conrado L. Benitez II are not only principal
stockholders but also the Chairman of the Board of Directors and President,
respectively. Moreover, Defendant Helena Z. Benitez would be entitled to receive,
under the lease contract, rentals in the total amount of Three Hundred Thousand
Pesos (P300,000.00) or ten percent (10%) of gross profits, whichever is higher. (c)
Finally, at the end of the lease period, the Rural Bank was obliged to turn over to
the lessor (Helena Z. Benitez) all permanent improvements introduced by it on the
plantation at no cost to Ms. Benitez.
Further, in its report dated March 13, 1985, the [Central Bank] after conducting its
general examination upon the Rural Bank ordered the latter to "explain
satisfactorily why the bank engage (sic) in an undertaking not inherently connected
with [bona fide] rural banking operations nor within the allowed allied
undertakings," contrary to the provisions of Section 3379 of the CB Manual of
Regulations and Section 26 of CB Circular No. 741, otherwise known as the
"Circular on Rural Banks[.]"
The aforestated CB report states that "total exposure to this project now amounts
to P475,371.57 or 25.76% of its capital and surplus[.]" Notwithstanding a finding
by the CB of the undertakings illegality, the defendants nevertheless persisted in
pursuing the Mango Plantation Project and never acceded to the call of [the] CB
for it to desist from further implementing the said project. It was only after another
letter from the CB was received when defendant finally shelved the mango
plantation project.
The result of the aforestated report, as well as the actuations of the Defendants in
not yielding to the order of the CB, adequately establishes not only a violation of
CB Rules (specifically Section 26, Circular 741 and Section 3379 of the CB
Manual of Regulations, but also, that it has caused undue damage both to the
Rural bank as well as its stockholders.
The initial CB report should have sufficiently apprised Defendants of the illegality
of the undertaking. Defendants, therefore have the duty to terminate the Mango
Plantation Project. They, however, [chose] to continue it, apparently to further their
[own] interest in the scheme for their own personal benefit and gain, an act which
is clearly contrary to the fiduciary nature of their relationship with the corporation in
which they are officers. Such persistence proves evident bad faith, or a breach of
a known duty through some motive or ill-will, which resulted in the further
dissipation and wastage of the Rural Banks assets, unjustly depriving Plaintiffs of
their fair share in the assets of the bank.
All the foregoing satisfactorily affirms the allegations of Plaintiffs to the effect that
these contracts were but part of a device employed by Defendants to siphon [off]
the Rural bank for their personal gain.20
Moral damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury. Though incapable of precise pecuniary computation, moral damages
may be recovered if they are the proximate result of the defendants wrongful act
or omission.21 Article 2220 of the Civil Code further provides that moral damages
may be recovered in case of a breach of contract where the defendant acted in
bad faith.22
To award moral damages, a court must be satisfied with proof of the following
requisites: (1) an injury whether physical, mental, or psychological clearly
sustained by the claimant; (2) a culpable act or omission factually established; (3)
a wrongful act or omission of the defendant as the proximate cause of the injury
sustained by the claimant; and (4) the award of damages predicated on any of the
cases stated in Article 2219.231avvphi1
Accordingly, based upon the findings of the trial court, it is clear that respondents
are entitled to moral damages. The acts attributed to the petitioners as directors of
the Rural Bank manifestly prejudiced the respondents causing detriment to their
standing as directors and stockholders of the Rural Bank.
Exemplary damages cannot be recovered as a matter of right.24 While these need
not be proved, respondents must show that they are entitled to moral, temperate
or compensatory damages before the court may consider the question of awarding
exemplary damages.25 We find that respondents are indeed entitled to moral
damages; thus, the award for exemplary damages is in order.
Anent the award for attorneys fees, Article 2208 of the Civil Code states:
In the absence of stipulation, attorneys fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded.
Hence, the award of exemplary damages is in itself sufficient justification for the
award of attorneys fees.26
WHEREFORE, the foregoing premises considered, the petition is hereby DENIED.
The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No.
54226 are AFFIRMED.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice
EN BANC
G.R. No. L-29155 May 13, 1970
UNIVERSAL FOOD CORPORATION, petitioner, vs.
THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR.,
and VICTORIANO N. FRANCISCO, respondents.
Contracts; Interpretation; Where bill of assignment of trademark and formula
interpreted to have been intended by the parties to refer only to assignment of use
of trademark and formula.While the literal reading of the Bill of Assignment
seem to support the view that the formula itself was ceded by the patentee, yet the
language employed in the entire instrument would lead one to the conclusion that
what was actually ceded and transferred was only the use of the formula as the
precise intention of the parties,
Same; Same; Same; Meaning of "royalty".Royalty, when used in connection
with a license under a patent, means the compensation paid by the licensee to the
licensor for the use of the licensor's patented invention.
Civil actions; Pleadings; Effect of pleadings; Admissions in pleadings do not
require proof.Where a fact is admitted without equivocation by a party in his
pleading, it does "not require proof and cannot be contradicted."
Contracts; Interpretation: Least transmission of rights favored.The Civil Code
lays down the rule that a conveyance should be interpreted to effect "the least
transmission of rights."
Contracts; Rescissible contracts; When contract may be rescinded.The general
rule is that rescission of a contract will not be permitted for a slight or casual
breach, but only for such substantial and fundamental breach as would defeat the
very object of the parties in making the agreement. The question of whether a
breach of a contract is substantial depends upon' the attendant circumstances.
[Universal Food Corp. vs. Court of Appeals, 33 SCRA 1(1970)]
CASTRO, J.:
Petition for certiorari by the Universal Food Corporation against the decision of the
Court of Appeals of February 13, 1968 in CA-G.R. 31430-R (Magdalo V.
Francisco, Sr. and Victoriano V. Francisco, plaintiffs-appellants vs. Universal Food
Corporation, defendant-appellee), the dispositive portion of which reads as follows:
"WHEREFORE the appealed decision is hereby reversed; the BILL OF
ASSIGNMENT marked Exhibit A is hereby rescinded, and defendant is hereby
ordered to return to plaintiff Magdalo V. Francisco, Sr., his Mafran sauce
trademark and formula subject-matter of Exhibit A, and to pay him his monthly
salary of P300.00 from December 1, 1960, until the return to him of said trademark
and formula, plus attorney's fees in the amount of P500.00, with costs against
defendant." 1
On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed
with the Court of First Instance of Manila, against, the Universal Food Corporation,
an action for rescission of a contract entitled "Bill of Assignment." The plaintiffs
prayed the court to adjudge the defendant as without any right to the use of the
Mafran trademark and formula, and order the latter to restore to them the said right
of user; to order the defendant to pay Magdalo V. Francisco, Sr. his unpaid salary
from December 1, 1960, as well as damages in the sum of P40,000, and to pay
the costs of suit. 1
On February 28, the defendant filed its answer containing admissions and denials.
Paragraph 3 thereof "admits the allegations contained in paragraph 3 of plaintiffs'
complaint." The answer further alleged that the defendant had complied with all
the terms and conditions of the Bill of Assignment and, consequently, the plaintiffs
are not entitled to rescission thereof; that the plaintiff Magdalo V. Francisco, Sr.
was not dismissed from the service as permanent chief chemist of the corporation
as he is still its chief chemist; and, by way of special defenses, that the aforesaid
plaintiff is estopped from questioning 1) the contents and due execution of the Bill
of Assignment, 2) the corporate acts of the petitioner, particularly the resolution
adopted by its board of directors at the special meeting held on October 14, 1960,
to suspend operations to avoid further losses due to increase in the prices of raw
materials, since the same plaintiff was present when that resolution was adopted
and even took part in the consideration thereof, 3) the actuations of its president
and general manager in enforcing and implementing the said resolution, 4) the fact
that the same plaintiff was negligent in the performance of his duties as chief
chemist of the corporation, and 5) the further fact that the said plaintiff was
delinquent in the payment of his subscribed shares of stock with the corporation.
The defendant corporation prayed for the dismissal of the complaint, and asked for
P750 as attorney's fees and P5,000 in exemplary or corrective damages.
On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well as the
defendant's claim for damages and attorney's fees, with costs against the former,
who promptly appealed to the Court of Appeals. On February 13, 1969 the
appellate court rendered the judgment now the subject of the present recourse.
The Court of Appeals arrived at the following "uncontroverted" findings of fact:
That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or
invented a formula for the manufacture of a food seasoning (sauce) derived
from banana fruits popularly known as MAFRAN sauce; that the manufacture of
this product was used in commercial scale in 1942, and in the same year
plaintiff registered his trademark in his name as owner and inventor with the
Bureau of Patents; that due to lack of sufficient capital to finance the expansion
of the business, in 1960, said plaintiff secured the financial assistance of Tirso
T. Reyes who, after a series of negotiations, formed with others defendant
Universal Food Corporation eventually leading to the execution on May 11,
1960 of the aforequoted "Bill of Assignment" (Exhibit A or 1).
Conformably with the terms and conditions of Exh. A, plaintiff Magdalo V.
Francisco, Sr. was appointed Chief Chemist with a salary of P300.00 a month,
and plaintiff Victoriano V. Francisco was appointed auditor and superintendent
with a salary of P250.00 a month. Since the start of the operation of defendant
corporation, plaintiff Magdalo V. Francisco, Sr., when preparing the secret
materials inside the laboratory, never allowed anyone, not even his own son, or
the President and General Manager Tirso T. Reyes, of defendant, to enter the
laboratory in order to keep the formula secret to himself. However, said plaintiff
expressed a willingness to give the formula to defendant provided that the same
should be placed or kept inside a safe to be opened only when he is already
incapacitated to perform his duties as Chief Chemist, but defendant never
acquired a safe for that purpose. On July 26, 1960, President and General
Manager Tirso T. Reyes wrote plaintiff requesting him to permit one or two
members of his family to observe the preparation of the 'Mafran Sauce' (Exhibit
C), but said request was denied by plaintiff. In spite of such denial, Tirso T.
Reyes did not compel or force plaintiff to accede to said request. Thereafter,
however, due to the alleged scarcity and high prices of raw materials, on
November 28, 1960, Secretary-Treasurer Ciriaco L. de Guzman of defendant
issued a Memorandum (Exhibit B), duly approved by the President and General
Manager Tirso T. Reyes that only Supervisor Ricardo Francisco should be
retained in the factory and that the salary of plaintiff Magdalo V. Francisco, Sr.,
should be stopped for the time being until the corporation should resume its
operation. Some five (5) days later, that is, on December 3, 1960, President
and General Manager Tirso T. Reyes, issued a memorandom to Victoriano
Francisco ordering him to report to the factory and produce "Mafran Sauce" at
the rate of not less than 100 cases a day so as to cope with the orders of the
corporation's various distributors and dealers, and with instructions to take only
the necessary daily employees without employing permanent employees
(Exhibit B). Again, on December 6, 1961, another memorandum was issued by
the same President and General Manager instructing the Assistant Chief
Chemist Ricardo Francisco, to recall all daily employees who are connected in
the production of Mafran Sauce and also some additional daily employees for
the production of Porky Pops (Exhibit B-1). On December 29, 1960, another
memorandum was issued by the President and General Manager instructing
Ricardo Francisco, as Chief Chemist, and Porfirio Zarraga, as Acting
Superintendent, to produce Mafran Sauce and Porky Pops in full swing starting
January 2, 1961 with further instructions to hire daily laborers in order to cope
with the full blast protection (Exhibit S-2). Plaintiff Magdalo V. Francisco, Sr.
received his salary as Chief Chemist in the amount of P300.00 a month only
until his services were terminated on November 30, 1960. On January 9 and
16, 1961, defendant, acting thru its President and General Manager, authorized
Porfirio Zarraga and Paula de Bacula to look for a buyer of the corporation
including its trademarks, formula and assets at a price of not less than
P300,000.00 (Exhibits D and D-1). Due to these successive memoranda,
without plaintiff Magdalo V. Francisco, Sr. being recalled back to work, the latter
filed the present action on February 14, 1961. About a month afterwards, in a
letter dated March 20, 1961, defendant, thru its President and General
Manager, requested said plaintiff to report for duty (Exhibit 3), but the latter
declined the request because the present action was already filed in court
(Exhibit J).
1. The petitioner's first contention is that the respondents are not entitled to
rescission. It is argued that under article 1191 of the new Civil Code, the right to
rescind a reciprocal obligation is not absolute and can be demanded only if one is
ready, willing and able to comply with his own obligation and the other is not; that
under article 1169 of the same Code, in reciprocal obligations, neither party incurs
in delay if the other does not comply or is not ready to comply in a proper manner
with what is incumbent upon him; that in this case the trial court found that the
respondents not only have failed to show that the petitioner has been guilty of
default in performing its contractual obligations, "but the record sufficiently reveals
the fact that it was the plaintiff Magdalo V. Francisco who had been remiss in the
compliance of his contractual obligation to cede and transfer to the defendant the
formula for Mafran sauce;" that even the respondent Court of Appeals found that
as "observed by the lower court, 'the record is replete with the various attempt
made by the defendant (herein petitioner) to secure the said formula from Magdalo
V. Francisco to no avail; and that upon the foregoing findings, the respondent
Court of Appeals unjustly concluded that the private respondents are entitled to
rescind the Bill of Assignment.
The threshold question is whether by virtue of the terms of the Bill of Assignment
the respondent Magdalo V. Francisco, Sr. ceded and transferred to the petitioner
corporation the formula for Mafran sauce. 2
The Bill of Assignment sets forth the following terms and conditions:
THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the sole and
exclusive owner of the MAFRAN trade-mark and the formula for MAFRAN
SAUCE;
THAT for and in consideration of the royalty of TWO (2%) PER CENTUM of the
net annual profit which the PARTY OF THE Second Part [Universal Food
Corporation] may realize by and/or out of its production of MAFRAN SAUCE
and other food products and from other business which the Party of the Second
Part may engage in as defined in its Articles of Incorporation, and which its
Board of Directors shall determine and declare, said Party of the First Part
hereby assign, transfer, and convey all its property rights and interest over said
Mafran trademark and formula for MAFRAN SAUCE unto the Party of the
Second Part;
THAT the payment for the royalty of TWO (2%) PER CENTUM of the annual
net profit which the Party of the Second Part obligates itself to pay unto the
Party of the First Part as founder and as owner of the MAFRAN trademark and
formula for MAFRAN SAUCE, shall be paid at every end of the Fiscal Year after
the proper accounting and inventories has been undertaken by the Party of the
Second Part and after a competent auditor designated by the Board of Directors
shall have duly examined and audited its books of accounts and shall have
certified as to the correctness of its Financial Statement;
THAT it is hereby understood that the Party of the First Part, to improve the
quality of the products of the Party of the First Part and to increase its
production, shall endeavor or undertake such research, study, experiments and
testing, to invent or cause to invent additional formula or formulas, the property
rights and interest thereon shall likewise be assigned, transferred, and
conveyed unto the Party of the Second Part in consideration of the foregoing
premises, covenants and stipulations:
THAT in the operation and management of the Party of the First Part, the Party
of the First Part shall be entitled to the following Participation:
(a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed Second Vice-
President and Chief Chemist of the Party of the Second Part, which
appointments are permanent in character and Mr. VICTORIANO V.
FRANCISCO shall be appointed Auditor thereof and in the event that the
Treasurer or any officer who may have the custody of the funds, assets and
other properties of the Party of the Second Part comes from the Party of the
First Part, then the Auditor shall not be appointed from the latter; furthermore
should the Auditor be appointed from the Party representing the majority shares
of the Party of the Second Part, then the Treasurer shall be appointed from the
Party of the First Part;
(b) THAT in case of death or other disabilities they should become
incapacitated to discharge the duties of their respective position, then, their
shares or assigns and who may have necessary qualifications shall be
preferred to succeed them;
(c) That the Party of the First Part shall always be entitled to at least two (2)
membership in the Board of Directors of the Party of the Second Part;
 (d) THAT in the manufacture of MAFRAN SAUCE and other food products by
the Party of the Second Part, the Chief Chemist shall have and shall exercise
absolute control and supervision over the laboratory assistants and personnel
and in the purchase and safekeeping of the Chemicals and other mixtures used
in the preparation of said products;
THAT this assignment, transfer and conveyance is absolute and irrevocable in
no case shall the PARTY OF THE First Part ask, demand or sue for the
surrender of its rights and interest over said MAFRAN trademark and mafran
formula, except when a dissolution of the Party of the Second Part, voluntary or
otherwise, eventually arises, in which case then the property rights and
interests over said trademark and formula shall automatically revert the Party of
the First Part.
Certain provisions of the Bill of Assignment would seem to support the petitioner's
position that the respondent patentee, Magdalo V. Francisco, Sr. ceded and
transferred to the petitioner corporation the formula for Mafran sauce. Thus, the
last part of the second paragraph recites that the respondent patentee "assign,
transfer and convey all its property rights and interest over said Mafran trademark
and formula for MAFRAN SAUCE unto the Party of the Second Part," and the last
paragraph states that such "assignment, transfer and conveyance is absolute and
irrevocable (and) in no case shall the PARTY OF THE First Part ask, demand or
sue for the surrender of its rights and interest over said MAFRAN trademark and
mafran formula."
However, a perceptive analysis of the entire instrument and the language
employed therein 3would lead one to the conclusion that what was actually ceded
and transferred was only the use of the Mafran sauce formula. This was the
precise intention of the parties, 4as we shall presently show.
Firstly, one of the principal considerations of the Bill of Assignment is the payment
of "royalty of TWO (2%) PER CENTUM of the net annual profit" which the
petitioner corporation may realize by and/or out of its production of Mafran sauce
and other food products, etc. The word "royalty," when employed in connection
with a license under a patent, means the compensation paid for the use of a
patented invention.
 'Royalty,' when used in connection with a license under a patent, means the
compensation paid by the licensee to the licensor for the use of the licensor's
patented invention." (Hazeltine Corporation vs. Zenith Radio Corporation, 100
F. 2d 10, 16.) 5
Secondly, in order to preserve the secrecy of the Mafran formula and to prevent its
unauthorized proliferation, it is provided in paragraph 5-(a) of the Bill that the
respondent patentee was to be appointed "chief chemist ... permanent in
character," and that in case of his "death or other disabilities," then his "heirs or
assigns who may have necessary qualifications shall be preferred to succeed" him
as such chief chemist. It is further provided in paragraph 5-(d) that the same
respondent shall have and shall exercise absolute control and supervision over the
laboratory assistants and personnel and over the purchase and safekeeping of the
chemicals and other mixtures used in the preparation of the said product. All these
provisions of the Bill of Assignment clearly show that the intention of the
respondent patentee at the time of its execution was to part, not with the formula
for Mafran sauce, but only its use, to preserve the monopoly and to effectively
prohibit anyone from availing of the invention. 6
Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the
Petitioner corporation eventually take place, "the property rights and interests over
said trademark and formula shall automatically revert to the respondent patentee.
This must be so, because there could be no reversion of the trademark and
formula in this case, if, as contended by the petitioner, the respondent patentee
assigned, ceded and transferred the trademark and formula and not merely the
right to use it for then such assignment passes the property in such patent right
to the petitioner corporation to which it is ceded, which, on the corporation
becoming insolvent, will become part of the property in the hands of the receiver
thereof. 7
Fourthly, it is alleged in paragraph 3 of the respondents' complaint that what was
ceded and transferred by virtue of the Bill of Assignment is the "use of the formula"
(and not the formula itself). This incontrovertible fact is admitted without
equivocation in paragraph 3 of the petitioner's answer. Hence, it does "not require
proof and cannot be contradicted." 8The last part of paragraph 3 of the complaint
and paragraph 3 of the answer are reproduced below for ready reference:
 3. ... and due to these privileges, the plaintiff in return assigned to said
corporation his interest and rights over the said trademark and formula so that
the defendant corporation could use the formula in the preparation and
manufacture of the mafran sauce, and the trade name for the marketing of said
project, as appearing in said contract ....
3. Defendant admits the allegations contained in paragraph 3 of plaintiff's
complaint.
Fifthly, the facts of the case compellingly demonstrate continued possession of the
Mafran sauce formula by the respondent patentee.
Finally, our conclusion is fortified by the admonition of the Civil Code that a
conveyance should be interpreted to effect "the least transmission of right," 9and is
there a better example of least transmission of rights than allowing or permitting
only the use, without transfer of ownership, of the formula for Mafran sauce.
The foregoing reasons support the conclusion of the Court of Appeals 10that what
was actually ceded and transferred by the respondent patentee Magdalo V.
Francisco, Sr. in favor of the petitioner corporation was only the use of the formula.
Properly speaking, the Bill of Assignment vested in the petitioner corporation no
title to the formula. Without basis, therefore, is the observation of the lower court
that the respondent patentee "had been remiss in the compliance of his
contractual obligation to cede and transfer to the defendant the formula for Mafran
sauce."
2. The next fundamental question for resolution is whether the respondent
Magdalo V. Francisco, Sr. was dismissed from his position as chief chemist of the
corporation without justifiable cause, and in violation of paragraph 5-(a) of the Bill
of Assignment which in part provides that his appointment is "permanent in
character."
The petitioner submits that there is nothing in the successive memoranda issued
by the corporate officers of the petitioner, marked exhibits B, B-1 and B-2, from
which can be implied that the respondent patentee was being dismissed from his
position as chief chemist of the corporation. The fact, continues the petitioner, is
that at a special meeting of the board of directors of the corporation held on
October 14, 1960, when the board decided to suspend operations of the factory
for two to four months and to retain only a skeletal force to avoid further losses,
the two private respondents were present, and the respondent patentee was even
designated as the acting superintendent, and assigned the mission of explaining
to the personnel of the factory why the corporation was stopping operations
temporarily and laying off personnel. The petitioner further submits that exhibit B
indicates that the salary of the respondent patentee would not be paid only during
the time that the petitioner corporation was idle, and that he could draw his salary
as soon as the corporation resumed operations. The clear import of this exhibit
was allegedly entirely disregarded by the respondent Court of Appeals, which
concluded that since the petitioner resumed partial production of Mafran sauce
without notifying the said respondent formally, the latter had been dismissed as
chief chemist, without considering that the petitioner had to resume partial
operations only to fill its pending orders, and that the respondents were duly
notified of that decision, that is, that exhibit B-1 was addressed to Ricardo
Francisco, and this was made known to the respondent Victoriano V. Francisco.
Besides, the records will show that the respondent patentee had knowledge of the
resumption of production by the corporation, but in spite of such knowledge he did
not report for work.
The petitioner further submits that if the respondent patentee really had unqualified
interest in propagating the product he claimed he so dearly loved, certainly he
would not have waited for a formal notification but would have immediately
reported for work, considering that he was then and still is a member of the
corporation's board of directors, and insofar as the petitioner is concerned, he is
still its chief chemist; and because Ricardo Francisco is a son of the respondent
patentee to whom had been entrusted the performance of the duties of chief
chemist, while the respondent Victoriano V. Francisco is his brother, the
respondent patentee could not feign ignorance of the resumption of operations.
The petitioner finally submits that although exhibit B-2 is addressed to Ricardo
Francisco, and is dated December 29, 1960, the records will show that the
petitioner was set to resume full capacity production only sometime in March or
April, 1961, and the respondent patentee cannot deny that in the very same month
when the petitioner was set to resume full production, he received a copy of the
resolution of its board of directors, directing him to report immediately for duty; that
exhibit H, of a later vintage as it is dated February 1, 1961, clearly shows that
Ricardo Francisco was merely the acting chemist, and this was the situation on
February 1, 1961, thirteen days before the filing of the present action for
rescission. The designation of Ricardo Francisco as the chief chemist carried no
weight because the president and general manager of the corporation had no
power to make the designation without the consent of the corporation's board of
directors. The fact of the matter is that although the respondent Magdalo V.
Francisco, Sr. was not mentioned in exhibit H as chief chemist, this same exhibit
clearly indicates that Ricardo Francisco was merely the acting chemist as he was
the one assisting his father.
In our view, the foregoing submissions cannot outweigh the uncontroverted facts.
On November 28, 1960 the secretary-treasurer of the corporation issued a
memorandum (exh. B), duly approved by its president and general manager,
directing that only Ricardo Francisco be retained in the factory and that the salary
of respondent patentee, as chief chemist, be stopped for the time being until the
corporation resumed operations. This measure was taken allegedly because of the
scarcity and high prices of raw materials. Five days later, however, or on
December 3, the president and general manager issued a memorandum (exh. B-
1) ordering the respondent Victoria V. Francisco to report to the factory and to
produce Mafran sauce at the rate of no less than 100 cases a day to cope with the
orders of the various distributors and dealers of the corporation, and instructing
him to take only the necessary daily employees without employing permanent
ones. Then on December 6, the same president and general manager issued yet
another memorandum (exh. B-2), instructing Ricardo Francisco, as assistant chief
chemist, to recall all daily employees connected with the production of Mafran
sauce and to hire additional daily employees for the production of Porky Pops.
Twenty-three days afterwards, or on December 29, the same president and
general manager issued still another memorandum (exh. S-2), directing "Ricardo
Francisco, as Chief Chemist" and Porfirio Zarraga, as acting superintendent, to
produce Mafran sauce and, Porky Pops in full swing, starting January 2, 1961,
with the further instruction to hire daily laborers in order to cope with the full blast
production. And finally, at the hearing held on October 24, 1961, the same
president and general manager admitted that "I consider that the two months we
paid him (referring to respondent Magdalo V. Francisco, Sr.) is the separation
pay."
The facts narrated in the preceding paragraph were the prevailing milieu on
February 14, 1961 when the complaint for rescission of the Bill of Assignment was
filed. They clearly prove that the petitioner, acting through its corporate officers, 11
schemed and maneuvered to ease out, separate and dismiss the said respondent
from the service as permanent chief chemist, in flagrant violation of paragraph 5-
(a) and (b) of the Bill of Assignment. The fact that a month after the institution of
the action for rescission, the petitioner corporation, thru its president and general
manager, requested the respondent patentee to report for duty (exh. 3), is of no
consequence. As the Court of Appeals correctly observed, such request was a
"recall to placate said plaintiff."
3. We now come to the question of rescission of the Bill of Assignment. In this
connection, we quote for ready reference the following articles of the new Civil
Code governing rescission of contracts:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who
have acquired the thing, in accordance with articles 1385 and 1388 of the
Mortgage Law.
ART. 1383. The action for rescission is subsidiary; it cannot be instituted except
when the party suffering damage has no other legal means to obtain reparation
for the same.
ART. 1384. Rescission shall be only to the extent necessary to cover the
damages caused.
At the moment, we shall concern ourselves with the first two paragraphs of article
1191. The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him. The injured party
may choose between fulfillment and rescission of the obligation, with payment of
damages in either case.
In this case before us, there is no controversy that the provisions of the Bill of
Assignment are reciprocal in nature. The petitioner corporation violated the Bill of
Assignment, specifically paragraph 5-(a) and (b), by terminating the services of the
respondent patentee Magdalo V. Francisco, Sr., without lawful and justifiable
cause.
Upon the factual milieu, is rescission of the Bill of Assignment proper?
The general rule is that rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental breach as would
defeat the very object of the parties in making the agreement. 12The question of
whether a breach of a contract is substantial depends upon the attendant
circumstances. 13The petitioner contends that rescission of the Bill of Assignment
should be denied, because under article 1383, rescission is a subsidiary remedy
which cannot be instituted except when the party suffering damage has no other
legal means to obtain reparation for the same. However, in this case the dismissal
of the respondent patentee Magdalo V. Francisco, Sr. as the permanent chief
chemist of the corporation is a fundamental and substantial breach of the Bill of
Assignment. He was dismissed without any fault or negligence on his part. Thus,
apart from the legal principle that the option to demand performance or ask for
rescission of a contract belongs to the injured party, 14the fact remains that the
respondents-appellees had no alternative but to file the present action for
rescission and damages. It is to be emphasized that the respondent patentee
would not have agreed to the other terms of the Bill of Assignment were it not for
the basic commitment of the petitioner corporation to appoint him as its Second
Vice-President and Chief Chemist on a permanent basis; that in the manufacture
of Mafran sauce and other food products he would have "absolute control and
supervision over the laboratory assistants and personnel and in the purchase and
safeguarding of said products;" and that only by all these measures could the
respondent patentee preserve effectively the secrecy of the formula, prevent its
proliferation, enjoy its monopoly, and, in the process afford and secure for himself
a lifetime job and steady income. The salient provisions of the Bill of Assignment,
namely, the transfer to the corporation of only the use of the formula; the
appointment of the respondent patentee as Second Vice-President and chief
chemist on a permanent status; the obligation of the said respondent patentee to
continue research on the patent to improve the quality of the products of the
corporation; the need of absolute control and supervision over the laboratory
assistants and personnel and in the purchase and safekeeping of the chemicals
and other mixtures used in the preparation of said product all these provisions
of the Bill of Assignment are so interdependent that violation of one would result in
virtual nullification of the rest.
4. The petitioner further contends that it was error for the Court of Appeals to hold
that the respondent patentee is entitled to payment of his monthly salary of P300
from December 1, 1960, until the return to him of the Mafran trademark and
formula, arguing that under articles 1191, the right to specific performance is not
conjunctive with the right to rescind a reciprocal contract; that a plaintiff cannot ask
for both remedies; that the appellate court awarded the respondents both
remedies as it held that the respondents are entitled to rescind the Bill of
Assignment and also that the respondent patentee is entitled to his salary
aforesaid; that this is a gross error of law, when it is considered that such holding
would make the petitioner liable to pay respondent patentee's salary from
December 1, 1960 to "kingdom come," as the said holding requires the petitioner
to make payment until it returns the formula which, the appellate court itself found,
the corporation never had; that, moreover, the fact is that the said respondent
patentee refused to go back to work, notwithstanding the call for him to return
which negates his right to be paid his back salaries for services which he had not
rendered; and that if the said respondent is entitled to be paid any back salary, the
same should be computed only from December 1, 1960 to March 31, 1961, for on
March 20, 1961 the petitioner had already formally called him back to work.
The above contention is without merit. Reading once more the Bill of Assignment
in its entirety and the particular provisions in their proper setting, we hold that the
contract placed the use of the formula for Mafran sauce with the petitioner, subject
to defined limitations. One of the considerations for the transfer of the use thereof
was the undertaking on the part of the petitioner corporation to employ the
respondent patentee as the Second Vice-President and Chief Chemist on a
permanent status, at a monthly salary of P300, unless "death or other disabilities
supervened. Under these circumstances, the petitioner corporation could not
escape liability to pay the private respondent patentee his agreed monthly salary,
as long as the use, as well as the right to use, the formula for Mafran sauce
remained with the corporation.
5. The petitioner finally contends that the Court of Appeals erred in ordering the
corporation to return to the respondents the trademark and formula for Mafran
sauce, when both the decision of the appellate court and that of the lower court
state that the corporation is not aware nor is in possession of the formula for
Mafran sauce, and the respondent patentee admittedly never gave the same to
the corporation. According to the petitioner these findings would render it
impossible to carry out the order to return the formula to the respondent patentee.
The petitioner's predicament is understandable. Article 1385 of the new Civil Code
provides that rescission creates the obligation to return the things which were the
object of the contract. But that as it may, it is a logical inference from the appellate
court's decision that what was meant to be returned to the respondent patentee is
not the formula itself, but only its use and the right to such use. Thus, the
respondents in their complaint for rescission specifically and particularly pray,
among others, that the petitioner corporation be adjudged as "without any right to
use said trademark and formula."
ACCORDINGLY, conformably with the observations we have above made, the
judgment of the Court of Appeals is modified to read as follows: "Wherefore the
appealed decision is reversed. The Bill of Assignment (Exhibit A) is hereby
rescinded, and the defendant corporation is ordered to return and restore to the
plaintiff Magdalo V. Francisco, Sr. the right to the use of his Mafran sauce
trademark and formula, subject-matter of the Bill of Assignment, and to this end
the defendant corporation and all its assigns and successors are hereby
permanently enjoined, effective immediately, from using in any manner the said
Mafran sauce trademark and formula. The defendant corporation shall also pay to
Magdalo V. Francisco, Sr. his monthly salary of P300 from December 1, 1960,
until the date of finality of this judgment, inclusive, the total amount due to him to
earn legal interest from the date of the finality of this judgment until it shall have
been fully paid, plus attorney's fees in the amount of P500, with costs against the
defendant corporation." As thus modified, the said judgment is affirmed, with costs
against the petitioner corporation.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Barredo and Villamor,
JJ., concur.