Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-4811 July 31, 1953

CHARLES F. WOODHOUSE, plaintiff-appellant,

vs.
FORTUNATO F. HALILI, defendant-appellant.

Tañada, Pelaez & Teehankee for defendant and appellant.

Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.

LABRADOR, J.:

On November 29, 1947, the plaintiff entered on a written agreement, Exhibit A, with the
defendant, the most important provisions of which are (1) that they shall organize a partnership
for the bottling and distribution of Mision soft drinks, plaintiff to act as industrial partner or
manager, and the defendant as a capitalist, furnishing the capital necessary therefor; (2) that
the defendant was to decide matters of general policy regarding the business, while the plaintiff
was to attend to the operation and development of the bottling plant; (3) that the plaintiff was to
secure the Mission Soft Drinks franchise for and in behalf of the proposed partnership; and (4)
that the plaintiff was to receive 30 per cent of the net profits of the business. The above
agreement was arrived at after various conferences and consultations by and between them,
with the assistance of their respective attorneys. Prior to entering into this agreement, plaintiff
had informed the Mission Dry Corporation of Los Angeles, California, U.S.A., manufacturers of
the bases and ingridients of the beverages bearing its name, that he had interested a prominent
financier (defendant herein) in the business, who was willing to invest half a million dollars in the
bottling and distribution of the said beverages, and requested, in order that he may close the
deal with him, that the right to bottle and distribute be granted him for a limited time under the
condition that it will finally be transferred to the corporation (Exhibit H). Pursuant for this request,
plaintiff was given "a thirty-days" option on exclusive bottling and distribution rights for the
Philippines" (Exhibit J). Formal negotiations between plaintiff and defendant began at a meeting
on November 27, 1947, at the Manila Hotel, with their lawyers attending. Before this meeting
plaintiff's lawyer had prepared the draft of the agreement, Exhibit II or OO, but this was not
satisfactory because a partnership, instead of a corporation, was desired. Defendant's lawyer
prepared after the meeting his own draft, Exhibit HH. This last draft appears to be the main
basis of the agreement, Exhibit A.

The contract was finally signed by plaintiff on December 3, 1947. Plaintiff did not like to go to the
United States without the agreement being not first signed. On that day plaintiff and defendant
went to the United States, and on December 10, 1947, a franchise agreement (Exhibit V) was
entered into the Mission Dry Corporation and Fortunato F. Halili and/or Charles F. Woodhouse,
granted defendant the exclusive right, license, and authority to produce, bottle, distribute, and
sell Mision beverages in the Philippines. The plaintiff and the defendant thereafter returned to
the Philippines. Plaintiff reported for duty in January, 1948, but operations were not begun until
the first week of February, 1948. In January plaintiff was given as advance, on account of
profits, the sum of P2,000, besides the use of a car; in February, 1948, also P2,000, and in
March only P1,000. The car was withdrawn from plaintiff on March 9, 1948.

When the bottling plant was already on operation, plaintiff demanded of defendant that the
partnership papers be executed. At first defendant executed himself, saying there was no hurry.
Then he promised to do so after the sales of the product had been increased to P50,000. As
nothing definite was forthcoming, after this condition was attained, and as defendant refused to
give further allowances to plaintiff, the latter caused his attorneys to take up the matter with the
defendant with a view to a possible settlement. as none could be arrived at, the present action
was instituted.

In his complaint plaintiff asks for the execution of the contract of partnership, an accounting of
the profits, and a share thereof of 30 per cent, as well as damages in the amount of P200,000.
In his answer defendant alleges by way of defense (1) that defendant's consent to the
agreement, Exhibit A, was secured by the representation of plaintiff that he was the owner, or
was about to become owner of an exclusive bottling franchise, which representation was false,
and plaintiff did not secure the franchise, but was given to defendant himself; (2) that defendant
did not fail to carry out his undertakings, but that it was plaintiff who failed; (3) that plaintiff
agreed to contribute the exclusive franchise to the partnership, but plaintiff failed to do so. He
also presented a counter-claim for P200,000 as damages. On these issues the parties went to
trial, and thereafter the Court of First Instance rendered judgment ordering defendant to render
an accounting of the profits of the bottling and distribution business, subject of the action, and to
pay plaintiff 15 percent thereof. it held that the execution of the contract of partnership could not
be enforced upon the parties, but it also held that the defense of fraud was not proved. Against
this judgment both parties have appealed.

The most important question of fact to be determined is whether defendant had falsely
represented that he had an exclusive franchise to bottle Mission beverages, and whether this
false representation or fraud, if it existed, annuls the agreement to form the partnership. The trial
court found that it is improbable that defendant was never shown the letter, Exhibit J, granting
plaintiff had; that the drafts of the contract prior to the final one can not be considered for the
purpose of determining the issue, as they are presumed to have been already integrated into
the final agreement; that fraud is never presumed and must be proved; that the parties were
represented by attorneys, and that if any party thereto got the worse part of the bargain, this fact
alone would not invalidate the agreement. On this appeal the defendant, as appellant, insists
that plaintiff did represent to the defendant that he had an exclusive franchise, when as a matter
of fact, at the time of its execution, he no longer had it as the same had expired, and that,
therefore, the consent of the defendant to the contract was vitiated by fraud and it is,
consequently, null and void.
Our study of the record and a consideration of all the surrounding circumstances lead us to
believe that defendant's contention is not without merit. Plaintiff's attorney, Mr. Laurea, testified
that Woodhouse presented himself as being the exclusive grantee of a franchise, thus:

A. I don't recall any discussion about that matter. I took along with me the file of the office with
regards to this matter. I notice from the first draft of the document which I prepared which calls
for the organization of a corporation, that the manager, that is, Mr. Woodhouse, is represented
as being the exclusive grantee of a franchise from the Mission Dry Corporation. . . . (t.s.n.,
p.518)

As a matter of fact, the first draft that Mr. Laurea prepared, which was made before the Manila
Hotel conference on November 27th, expressly states that plaintiff had the exclusive franchise.
Thus, the first paragraph states:

Whereas, the manager is the exclusive grantee of a franchise from the Mission Dry Corporation
San Francisco, California, for the bottling of Mission products and their sale to the public
throughout the Philippines; . . . .

3. The manager, upon the organization of the said corporation, shall forthwith transfer to the
said corporation his exclusive right to bottle Mission products and to sell them throughout the
Philippines. . . . .

(Exhibit II; emphasis ours)

The trial court did not consider this draft on the principle of integration of jural acts. We find that
the principle invoked is inapplicable, since the purpose of considering the prior draft is not to
vary, alter, or modify the agreement, but to discover the intent of the parties thereto and the
circumstances surrounding the execution of the contract. The issue of fact is: Did plaintiff
represent to defendant that he had an exclusive franchise? Certainly, his acts or statements
prior to the agreement are essential and relevant to the determination of said issue. The act or
statement of the plaintiff was not sought to be introduced to change or alter the terms of the
agreement, but to prove how he induced the defendant to enter into it — to prove the
representations or inducements, or fraud, with which or by which he secured the other party's
consent thereto. These are expressly excluded from the parol evidence rule. (Bough and Bough
vs. Cantiveros and Hanopol, 40 Phil., 209; port Banga Lumber Co. vs. Export & Import Lumber
Co., 26 Phil., 602; III Moran 221,1952 rev. ed.) Fraud and false representation are an incident to
the creation of a jural act, not to its integration, and are not governed by the rules on integration.
Were parties prohibited from proving said representations or inducements, on the ground that
the agreement had already been entered into, it would be impossible to prove misrepresentation
or fraud. Furthermore, the parol evidence rule expressly allows the evidence to be introduced
when the validity of an instrument is put in issue by the pleadings (section 22, par. (a), Rule 123,
Rules of Court),as in this case.
That plaintiff did make the representation can also be easily gleaned from his own letters and
his own testimony. In his letter to Mission Dry Corporation, Exhibit H, he said:.

. . . He told me to come back to him when I was able to speak with authority so that we could
come to terms as far as he and I were concerned. That is the reason why the cable was sent.
Without this authority, I am in a poor bargaining position. . .

I would propose that you grant me the exclusive bottling and distributing rights for a limited
period of time, during which I may consummate my plants. . . .

By virtue of this letter the option on exclusive bottling was given to the plaintiff on October 14,
1947. (See Exhibit J.) If this option for an exclusive franchise was intended by plaintiff as an
instrument with which to bargain with defendant and close the deal with him, he must have used
his said option for the above-indicated purpose, especially as it appears that he was able to
secure, through its use, what he wanted.

Plaintiff's own version of the preliminary conversation he had with defendant is to the effect that
when plaintiff called on the latter, the latter answered, "Well, come back to me when you have
the authority to operate. I am definitely interested in the bottling business." (t. s. n., pp. 60-61.)
When after the elections of 1949 plaintiff went to see the defendant (and at that time he had
already the option), he must have exultantly told defendant that he had the authority already. It
is improbable and incredible for him to have disclosed the fact that he had only an option to the
exclusive franchise, which was to last thirty days only, and still more improbable for him to have
disclosed that, at the time of the signing of the formal agreement, his option had already
expired. Had he done so, he would have destroyed all his bargaining power and authority, and
in all probability lost the deal itself.

The trial court reasoned, and the plaintiff on this appeal argues, that plaintiff only undertook in
the agreement "to secure the Mission Dry franchise for and in behalf of the proposed
partnership." The existence of this provision in the final agreement does not militate against
plaintiff having represented that he had the exclusive franchise; it rather strengthens belief that
he did actually make the representation. How could plaintiff assure defendant that he would get
the franchise for the latter if he had not actually obtained it for himself? Defendant would not
have gone into the business unless the franchise was raised in his name, or at least in the name
of the partnership. Plaintiff assured defendant he could get the franchise. Thus, in the draft
prepared by defendant's attorney, Exhibit HH, the above provision is inserted, with the
difference that instead of securing the franchise for the defendant, plaintiff was to secure it for
the partnership. To show that the insertion of the above provision does not eliminate the
probability of plaintiff representing himself as the exclusive grantee of the franchise, the final
agreement contains in its third paragraph the following:

. . . and the manager is ready and willing to allow the capitalists to use the exclusive franchise . .
.
and in paragraph 11 it also expressly states:

1. In the event of the dissolution or termination of the partnership, . . . the franchise from Mission
Dry Corporation shall be reassigned to the manager.

These statements confirm the conclusion that defendant believed, or was made to believe, that
plaintiff was the grantee of an exclusive franchise. Thus it is that it was also agreed upon that
the franchise was to be transferred to the name of the partnership, and that, upon its dissolution
or termination, the same shall be reassigned to the plaintiff.

Again, the immediate reaction of defendant, when in California he learned that plaintiff did not
have the exclusive franchise, was to reduce, as he himself testified, plaintiff's participation in the
net profits to one half of that agreed upon. He could not have had such a feeling had not plaintiff
actually made him believe that he (plaintiff) was the exclusive grantee of the franchise.

The learned trial judge reasons in his decision that the assistance of counsel in the making of
the contract made fraud improbable. Not necessarily, because the alleged representation took
place before the conferences were had, in other words, plaintiff had already represented to
defendant, and the latter had already believed in, the existence of plaintiff's exclusive franchise
before the formal negotiations, and they were assisted by their lawyers only when said formal
negotiations actually took place. Furthermore, plaintiff's attorney testified that plaintiff had said
that he had the exclusive franchise; and defendant's lawyer testified that plaintiff explained to
him, upon being asked for the franchise, that he had left the papers evidencing it.(t.s.n., p. 266.)

We conclude from all the foregoing that plaintiff did actually represent to defendant that he was
the holder of the exclusive franchise. The defendant was made to believe, and he actually
believed, that plaintiff had the exclusive franchise. Defendant would not perhaps have gone to
California and incurred expenses for the trip, unless he believed that plaintiff did have that
exclusive privilege, and that the latter would be able to get the same from the Mission Dry
Corporation itself. Plaintiff knew what defendant believed about his (plaintiff's) exclusive
franchise, as he induced him to that belief, and he may not be allowed to deny that defendant
was induced by that belief. (IX Wigmore, sec. 2423; Sec. 65, Rule 123, Rules of Court.)

We now come to the legal aspect of the false representation. Does it amount to a fraud that
would vitiate the contract? It must be noted that fraud is manifested in illimitable number of
degrees or gradations, from the innocent praises of a salesman about the excellence of his
wares to those malicious machinations and representations that the law punishes as a crime. In
consequence, article 1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the
causal fraud, which may be a ground for the annulment of a contract, and the incidental deceit,
which only renders the party who employs it liable for damages. This Court had held that in
order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the
incidental (dolo causante), inducement to the making of the contract. (Article 1270, Spanish Civil
Code; Hill vs. Veloso, 31 Phil. 160.) The record abounds with circumstances indicative that the
fact that the principal consideration, the main cause that induced defendant to enter into the
partnership agreement with plaintiff, was the ability of plaintiff to get the exclusive franchise to
bottle and distribute for the defendant or for the partnership. The original draft prepared by
defendant's counsel was to the effect that plaintiff obligated himself to secure a franchise for the
defendant. Correction appears in this same original draft, but the change is made not as to the
said obligation but as to the grantee. In the corrected draft the word "capitalist"(grantee) is
changed to "partnership." The contract in its final form retains the substituted term "partnership."
The defendant was, therefore, led to the belief that plaintiff had the exclusive franchise, but that
the same was to be secured for or transferred to the partnership. The plaintiff no longer had the
exclusive franchise, or the option thereto, at the time the contract was perfected. But while he
had already lost his option thereto (when the contract was entered into), the principal obligation
that he assumed or undertook was to secure said franchise for the partnership, as the bottler
and distributor for the Mission Dry Corporation. We declare, therefore, that if he was guilty of a
false representation, this was not the causal consideration, or the principal inducement, that led
plaintiff to enter into the partnership agreement.

But, on the other hand, this supposed ownership of an exclusive franchise was actually the
consideration or price plaintiff gave in exchange for the share of 30 percent granted him in the
net profits of the partnership business. Defendant agreed to give plaintiff 30 per cent share in
the net profits because he was transferring his exclusive franchise to the partnership. Thus, in
the draft prepared by plaintiff's lawyer, Exhibit II, the following provision exists:

3. That the MANAGER, upon the organization of the said corporation, shall forthwith transfer to
the said corporation his exclusive right to bottle Mission products and to sell them throughout
the Philippines. As a consideration for such transfer, the CAPITALIST shall transfer to the
Manager fully paid non assessable shares of the said corporation . . . twenty-five per centum of
the capital stock of the said corporation. (Par. 3, Exhibit II; emphasis ours.)

Plaintiff had never been a bottler or a chemist; he never had experience in the production or
distribution of beverages. As a matter of fact, when the bottling plant being built, all that he
suggested was about the toilet facilities for the laborers.

We conclude from the above that while the representation that plaintiff had the exclusive
franchise did not vitiate defendant's consent to the contract, it was used by plaintiff to get from
defendant a share of 30 per cent of the net profits; in other words, by pretending that he had the
exclusive franchise and promising to transfer it to defendant, he obtained the consent of the
latter to give him (plaintiff) a big slice in the net profits. This is the dolo incidente defined in
article 1270 of the Spanish Civil Code, because it was used to get the other party's consent to a
big share in the profits, an incidental matter in the agreement.

El dolo incidental no es el que puede producirse en el cumplimiento del contrato sino que
significa aqui, el que concurriendoen el consentimiento, o precediendolo, no influyo para
arrancar porsi solo el consentimiento ni en la totalidad de la obligacion, sinoen algun extremo o
accidente de esta, dando lugar tan solo a una accion para reclamar indemnizacion de
perjuicios. (8 Manresa 602.)
Having arrived at the conclusion that the agreement may not be declared null and void, the
question that next comes before us is, May the agreement be carried out or executed? We find
no merit in the claim of plaintiff that the partnership was already a fait accompli from the time of
the operation of the plant, as it is evident from the very language of the agreement that the
parties intended that the execution of the agreement to form a partnership was to be carried out
at a later date. They expressly agreed that they shall form a partnership. (Par. No. 1, Exhibit A.)
As a matter of fact, from the time that the franchise from the Mission Dry Corporation was
obtained in California, plaintiff himself had been demanding that defendant comply with the
agreement. And plaintiff's present action seeks the enforcement of this agreement. Plaintiff's
claim, therefore, is both inconsistent with their intention and incompatible with his own conduct
and suit.

As the trial court correctly concluded, the defendant may not be compelled against his will to
carry out the agreement nor execute the partnership papers. Under the Spanish Civil Code, the
defendant has an obligation to do, not to give. The law recognizes the individual's freedom or
liberty to do an act he has promised to do, or not to do it, as he pleases. It falls within what
Spanish commentators call a very personal act (acto personalismo), of which courts may not
compel compliance, as it is considered an act of violence to do so.

Efectos de las obligaciones consistentes en hechos personalismo.—Tratamos de la ejecucion

de las obligaciones de hacer en el solocaso de su incumplimiento por parte del deudor, ya sean
los hechos personalisimos, ya se hallen en la facultad de un tercero; porque el complimiento
espontaneo de las mismas esta regido por los preceptos relativos al pago, y en nada les
afectan las disposiciones del art. 1.098.

Esto supuesto, la primera dificultad del asunto consiste en resolver si el deudor puede ser
precisado a realizar el hecho y porque medios.

Se tiene por corriente entre los autores, y se traslada generalmente sin observacion el principio
romano nemo potest precise cogi ad factum. Nadie puede ser obligado violentamente a
haceruna cosa. Los que perciben la posibilidad de la destruccion deeste principio, añaden que,
aun cuando se pudiera obligar al deudor, no deberia hacerse, porque esto constituiria una
violencia, y noes la violenciamodo propio de cumplir las obligaciones (Bigot, Rolland, etc.). El
maestro Antonio Gomez opinaba lo mismo cuandodecia que obligar por la violencia seria infrigir
la libertad eimponer una especie de esclavitud.

xxx xxx xxx

En efecto; las obligaciones contractuales no se acomodan biencon el empleo de la fuerza fisica,

no ya precisamente porque seconstituya de este modo una especie de esclavitud, segun el
dichode Antonio Gomez, sino porque se supone que el acreedor tuvo encuenta el caracter
personalisimo del hecho ofrecido, y calculo sobre laposibilidad de que por alguna razon no se
realizase. Repugna,ademas, a la conciencia social el empleo de la fuerza publica, mediante
coaccion sobre las personas, en las relaciones puramente particulares; porque la evolucion de
las ideas ha ido poniendo masde relieve cada dia el respeto a la personalidad humana, y nose
admite bien la violencia sobre el individuo la cual tiene caracter visiblemente penal, sino por
motivos que interesen a la colectividad de ciudadanos. Es, pues, posible y licita esta violencia
cuando setrata de las obligaciones que hemos llamado ex lege, que afectanal orden social y a
la entidad de Estado, y aparecen impuestas sinconsideracion a las conveniencias particulares,
y sin que por estemotivo puedan tampoco ser modificadas; pero no debe serlo cuandola
obligacion reviste un interes puramente particular, como sucedeen las contractuales, y cuando,
por consecuencia, paraceria salirseel Estado de su esfera propia, entrado a dirimir, con apoyo
dela fuerza colectiva, las diferencias producidas entre los ciudadanos. (19 Scaevola 428, 431-
432.)

The last question for us to decide is that of damages,damages that plaintiff is entitled to receive
because of defendant's refusal to form the partnership, and damages that defendant is also
entitled to collect because of the falsity of plaintiff's representation. (Article 1101, Spanish Civil
Code.) Under article 1106 of the Spanish Civil Code the measure of damages is the actual loss
suffered and the profits reasonably expected to be received, embraced in the terms daño
emergente and lucro cesante. Plaintiff is entitled under the terms of the agreement to 30 per
cent of the net profits of the business. Against this amount of damages, we must set off the
damage defendant suffered by plaintiff's misrepresentation that he had obtained a very high
percentage of share in the profits. We can do no better than follow the appraisal that the parties
themselves had adopted.

When defendant learned in Los Angeles that plaintiff did not have the exclusive franchise which
he pretended he had and which he had agreed to transfer to the partnership, his spontaneous
reaction was to reduce plaintiff's share form 30 per cent to 15 per cent only, to which reduction
defendant appears to have readily given his assent. It was under this understanding, which
amounts to a virtual modification of the contract, that the bottling plant was established and
plaintiff worked as Manager for the first three months. If the contract may not be considered
modified as to plaintiff's share in the profits, by the decision of defendant to reduce the same to
one-half and the assent thereto of plaintiff, then we may consider the said amount as a fair
estimate of the damages plaintiff is entitled to under the principle enunciated in the case of
Varadero de Manila vs. Insular Lumber Co., 46 Phil. 176. Defendant's decision to reduce
plaintiff's share and plaintiff's consent thereto amount to an admission on the part of each of the
reasonableness of this amount as plaintiff's share. This same amount was fixed by the trial
court. The agreement contains the stipulation that upon the termination of the partnership,
defendant was to convey the franchise back to plaintiff (Par. 11, Exhibit A). The judgment of the
trial court does not fix the period within which these damages shall be paid to plaintiff. In view of
paragraph 11 of Exhibit A, we declare that plaintiff's share of 15 per cent of the net profits shall
continue to be paid while defendant uses the franchise from the Mission Dry Corporation.

With the modification above indicated, the judgment appealed from is hereby affirmed. Without
costs.
Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo and Bautista Angelo, JJ.,
concur.

------------------------------

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-14335 January 28, 1920

MANUEL DE GUIA, plaintiff-appellant,

vs.
THE MANILA ELECTRIC RAILROAD & LIGHT COMPANY, defendant-appellant.

Sumulong and Estrada, Crossfield and O'Brien and Francisco A. Delgado for
plaintiff-appellant.
Lawrence and Ross for defendant-appellant.

STREET, J.:

This is an appeal prosecuted both by the plaintiff and the defendant from a judgment of the
Court of First Instance of the City of Manila, whereby the plaintiff was awarded the sum of
P6,100, with interest and costs, as damages incurred by him in consequence of physical injuries
sustained while riding on one of the defendant's car.

The accident which gave rise to the litigation occurred on September 4, 1915, near the end of
the street-car line in Caloocan, Rizal, a northern suburb of the city of Manila. It appears that, at
about 8 o'clock p.m., of the date mentioned, the plaintiff Manuel de Guia, a physician residing in
Caloocan, boarded a car at the end of the line with the intention of coming to the city. At about
30 meters from the starting point the car entered a switch, the plaintiff remaining on the back
platform holding the handle of the right-hand door. Upon coming out of the switch, the small
wheels of the rear truck left the track, ran for a short distance along the macadam filling, which
was flush with the rails, and struck a concrete post at the left of the tract. The post was
shattered; and as the car stopped the plaintiff was thrown against the door with some violence,
receiving bruises and possibly certain internal injuries, the extent of which is a subject of
dispute.

The trial court found that the motorman of the derailed car was negligent in having maintained
too rapid a speed. This inference appears to be based chiefly upon the results of the shock,
involving the shattering of the post and the bending of the kingpost of the car. It is insisted for
the defendant company that the derailment was due to the presence of a stone, somewhat
larger than a goose egg, which had become accidentally lodged between the rails at the
juncture of the switch and which was unobserved by the motorman. In this view the derailment
of the car is supposed to be due to casus fortuitos and not chargeable to the negligence of the
motorman.

Even supposing that the derailment of the car was due to the accidental presence of such a
stone as suggested, we do not think that the existence of negligence is disproved. The
motorman says that upon approaching the switch he reduced the electrical energy to the point
that the car barely entered the switch under its own momentum, and this operation was
repeated as he passed out. Upon getting again on the straight tract he put the control
successively at points one, two, three and lastly at point four. At the moment when the control
was placed at point four he perceived that the rear wheels were derailed and applied the brake;
but at the same instant the car struck the post, some 40 meters distant from the exit of the
switch. One of the defendant's witnesses stated in court that the rate of a car propelled by
electricity with the control at point "four" should be about five or 6 miles per hour. There was
some other evidence to the effect that the car was behind schedule time and that it was being
driven after leaving the switch, at a higher rate than would ordinarily be indicated by the control
at point four. This inference is rendered more tenable by the circumstance that the car was
practically empty. On the whole, we are of the opinion that the finding of negligence in the
operation of the car must be sustained, as not being clearly contrary to the evidence; not so
much because of excessive speed as because of the distance which the car was allowed to run
with the front wheels of the rear truck derailed. It seems to us than an experienced and attentive
motorman should have discovered that something was wrong and would have stopped before
he had driven the car over the entire distance from the point where the wheels left the track to
the place where the post was struck.

The conclusion being accepted that there was negligence on the part of the motorman in driving
the car, it results that the company is liable for the damage resulting to the plaintiff as a
consequence of that negligence. The plaintiff had boarded the car as a passenger for the city of
Manila and the company undertook to convey him for hire. The relation between the parties
was, therefore, of a contractual nature, and the duty of the carrier is to be determined with
reference to the principles of contract law, that is, the company was bound to convey and
deliver the plaintiff safely and securely with reference to the degree of care which, under the
circumstances, is required by law and custom applicable to the case (art. 1258, Civil Code).
Upon failure to comply with that obligation the company incurred the liability defined in articles
1103-1107 of the Civil Code. (Cangco vs. Manila Railroad Company, 38 Phil. Rep., 768; Manila
Railroad Company vs. Compañia Transatlantica, and Atlantic, Gulf & Pacific Co., 38 Phil. Rep.,
875.)

From the nature of the liability thus incurred, it is clear that the defendant company can not avail
itself of the last paragraph of article 1903 of the Civil Code, since that provision has reference to
liability incurred by negligence in the absence of contractual relation, that is, to the culpa
aquiliana of the civil law. It was therefore irrelevant for the defendant company to prove, as it
did, that the company had exercised due care in the selection and instruction of the motorman
who was in charge of its car and that he was in fact an experienced and reliable servant.

At this point, however, it should be observed that although in case like this the defendant must
answer for the consequences of the negligence of its employee, the court has the power to
moderate liability according to the circumstances of the case (art. 1103, Civ. Code):
Furthermore, we think it obvious that an employer who has in fact displayed due diligence in
choosing and instructing his servants is entitled to be considered a debtor in good faith, within
the meaning of article 1107 of the same Code. Construing these two provisions together,
applying them to the facts of this case, it results that the defendant's liability is limited to such
damages as might, at the time of the accident, have been reasonably foreseen as a probable
consequence of the physical injuries inflicted upon the plaintiff and which were in fact a
necessary result of those injuries. There is nothing novel in this proposition, since both the civil
and the common law are agreed upon the point that the damages ordinarily recoverable for the
breach of a contractual obligation, against a person who has acted in good faith, are such as
can reasonably be foreseen at the time the obligation is contracted. In Daywalt vs. Corporacion
de PP. Agustinos Recoletos (39 Phil., 587), we said: "The extent of the liability for the breach of
a contract must be determined in the light of the situation in existence at the time the contract is
made; and the damages ordinarily recoverable are in all events limited to such as might be
reasonably foreseen in the light of the facts then known to the contracting parties."

This brings us to consider the amount which may be awarded to the plaintiff as damages. Upon
this point the trial judge found that, as a result of the physical and nervous derangement
resulting from the accident, Dr. De Guia was unable properly to attend to his professional labors
for three months and suspended his practice for that period. It was also proved by the testimony
of the plaintiff that his customary income, as a physician, was about P300 per month. The trial
judge accordingly allowed P900, as damages for loss of professional earnings. This allowance
is attacked upon appeal by the defendant as excessive both as to the period and rate of
allowance. Upon examining the evidence we fell disinclined to disturb this part of the judgment,
though it must be conceded that the estimate of the trial judge on this point was liberal enough
to the plaintiff.

Another item allowed by the trial judge consists of P3,900, which the plaintiff is supposed to
have lost by reason of his inability to accept a position as district health officer in Occidental
Negros. It appears in this connection that Mr. Alunan, representative from Occidental Negros,
had asked Dr. Montinola, who supposedly had the authority to make the appointment, to
nominate the plaintiff to such position. The job was supposed to be good for two years, with a
salary of P1,600 per annum, and possibility of outside practice worth P350. Accepting these
suggestions as true, it is evident that the damages thus incurred are too speculative to be the
basis of recovery in a civil action. This element of damages must therefore be eliminated. It
goes without saying that damage of this character could not, at the time of the accident, have
been foreseen by the delinquent party as a probable consequence of the injury inflicted — a
circumstance which makes applicable article 1107 of the Civil Code, as already expounded.
The last element of damages to be considered is the item of the plaintiff's doctor's bills, a
subject which we momentarily pass for discussion further on, since the controversy on this point
can be more readily understood in connection with the question raised by the plaintiff's appeal.

The plaintiff alleges in the complaint that the damages incurred by him as a result of the injuries
in question ascend to the amount of P40,000. Of this amount the sum of P10,000 is supposed
to represent the cost of medical treatment and other expenses incident to the plaintiff's cure,
while the remainder (P30,000) represents the damage resulting from the character of his
injuries, which are supposedly such as to incapacitate him for the exercise of the medical
profession in the future. In support of these claims the plaintiff introduced evidence, consisting
of his own testimony and that of numerous medical experts, tending to show that as a result of
the injuries in question he had developed infarct of the liver and traumatic neurosis,
accompanied by nervousness, vertigo, and other disturbing symptoms of a serious and
permanent character, it being claimed that these manifestations of disorder rendered him liable
to a host of other dangerous diseases, such as pleuresy, tuberculosis, pneumonia, and
pulmonary gangrene, and that restoration to health could only be accomplished, if at all, after
long years of complete repose. The trial judge did not take these pretensions very seriously,
and, as already stated, limited the damages to the three items of professional earnings,
expenses of medical treatment, and the loss of the appointment as medical treatment, and the
loss of the appointment as medical inspector in Occidental Negros. As the appeal of the plaintiff
opens the whole case upon the question of damages, it is desirable to present a somewhat
fuller statement than that already given with respect to extent and character of the injuries in
question.

The plaintiff testified that, at the time the car struck against the concrete post, he was standing
on the rear platform, grasping the handle of the right-hand door. The shock of the impact threw
him forward, and the left part of his chest struck against the door causing him to fall. In falling,
the plaintiff says, his head struck one of the seats and he became unconscious. He was
presently taken to his home which was only a short distance away, where he was seen at about
10 o'clock p. m., by a physician in the employment of the defendant company. This physician
says that the plaintiff was then walking about and apparently suffering somewhat from bruises
on his chest. He said nothing about his head being injured and refused to go to a hospital. Later,
during the same night Dr. Carmelo Basa was called in to see the plaintiff. This physician says
that he found Doctor De Guia lying in bed and complaining of a severe pain in the side. During
the visit of Doctor Basa the plaintiff several times spit up blood, a manifestation no doubt due to
the effects of the bruises received in his side. The next day Doctor De Guia went into Manila to
consult another physician, Doctor Miciano, and during the course of a few weeks he called into
consultation other doctors who were introduced as witnesses in his behalf at the trial of this
case. According to the testimony of these witnesses, as well as that of the plaintiff himself, the
symptoms of physical and nervous derangement in the plaintiff speedily developed in
portentous degree.
Other experts were introduced by the defendant whose testimony tended to show that the
plaintiff's injuries, considered in their physical effects, were trivial and that the attendant nervous
derangement, with its complicated train of ailments, was merely simulated.

Upon this question the opposing medical experts ventilated a considerable mass of professional
learning with reference to the nature and effects of the baffling disease known as traumatic
neurosis, or traumatic hysteria — a topic which has been the occasion of much controversy in
actions of this character in the tribunals of Europe and America. The subject is one of
considerable interest from a medico-legal point of view, but we deem it unnecessary in this
opinion to enter upon a discussion of its voluminous literature. It is enough to say that in our
opinion the plaintiff's case for large damages in respect to his supposed incapacitation for future
professional practice is not made out. Of course in this jurisdiction damages can not be
assessed in favor of the plaintiff as compensation for the physical or mental pain which he may
have endured (Marcelo vs. Velasco, 11 Phil. Rep. 287); and the evidence relating to the injuries,
both external and internal, received by him must be examined chiefly in its bearing upon his
material welfare, that is, in its results upon his earning capacity and the expenses incurred in
restoration to the usual condition of health.

The evidence before us shows that immediately after the accident in question Doctor De Guia,
sensing in the situation a possibility of profit, devoted himself with great assiduity to the
promotion of this litigation; and with the aid of his own professional knowledge, supplemented
by suggestions obtained from his professional friends and associates, he enveloped himself
more or less unconsciously in an atmosphere of delusion which rendered him incapable of
appreciating at their true value the symptoms of disorder which he developed. The trial court
was in our opinion fully justified in rejecting the exaggerated estimate of damages thus created.

We now pass to the consideration of the amount allowed to the plaintiff by the trial judge as the
expense incurred for medical service. In this connection Doctor Montes testified that he was first
called to see the plaintiff upon September 14, 1915, when he found him suffering from traumatic
neurosis. Three months later he was called upon to treat the same patient for an acute catarrhal
condition, involving disturbance in the pulmonary region. The treatment for this malady was
successful after two months, but at the end of six months the same trouble recurred and
required further treatment. In October of the year 1916, or more than a year after the accident in
question occurred, Doctor Montes was called in consultation with Doctor Guerrero to make an
examination of the plaintiff. Doctor Montes says that his charges altogether for services
rendered to the plaintiff amount to P350, of which the sum of P200 had been paid by the plaintiff
upon bills rendered from time to time. This physician speaks in the most general terms with
respect to the times and extent of the services rendered; and it is by no means clear that those
services which were rendered many months, or year, after the accident had in fact any
necessary or legitimate relation to the injuries received by the plaintiff. In view of the vagueness
and uncertainty of the testimony relating to Doctor Montes' services, we are of the opinion that
the sum of P200, or the amount actually paid to him by the plaintiff, represents the extent of the
plaintiff's obligation with respect to treatment for said injuries.
With regard to the obligation supposedly incurred by the plaintiff to three other physicians, we
are of the opinion that they are not a proper subject of recovery in this action; and this for more
than one reason. In the first place, it does not appear that said physicians have in fact made
charges for those services with the intention of imposing obligations on the plaintiff to pay for
them. On the contrary it would seem that said services were gratuitously rendered out of
courtesy to the plaintiff as a member of the medical profession. The suggestions made on the
stand by these physicians to the effect that their services were worth the amounts stated by
them are not sufficient to proved that the plaintiff had incurred the obligation to pay those
amounts. In the second place, we are convinced that in employing so many physicians the
plaintiff must have had in view of the successful promotion of the issue of this lawsuit rather
than the bona fide purpose of effecting the cure of his injuries. In order to constitute a proper
element of recovery in an action of this character, the medical service for which reimbursement
is claimed should not only be such as to have created a legal obligation upon the plaintiff but
such as was reasonably necessary in view of his actual condition. It can not be permitted that a
litigant should retain an unusual and unnecessary number of professional experts with a view to
the successful promotion of a lawsuit and expect to recover against his adversary the entire
expense thus incurred. His claim for medical services must be limited to such expenditures as
were reasonably suited to the case.

The second error assigned in the brief of the defendant company presents a question of
practice which, though not vital to the solution of this case, is of sufficient general importance to
merit notice. It appears that four of the physicians examined as witnesses for the plaintiff had
made written statements at various dates certifying the results of their respective examinations
into the condition of the plaintiff. When these witnesses were examined in court the identified
their respective signatures to these certificates and the trial judge, over the defendant's
objection, admitted the documents as primary evidence in the case. This was undoubtedly
erroneous. A document of this character is not primary evidence in any sense, since it is
fundamentally of a hearsay nature; and the only legitimate use to which one of these certificates
could be put, as evidence for the plaintiff, was to allow the physician who issued it to refer
thereto to refresh his memory upon details which he might have forgotten. In Zwangizer vs.
Newman (83 N. Y. Supp., 1071) which was also an action to recover damages for personal
injury, it appeared that a physician, who had been sent by one of the parties to examine the
plaintiff, had made at the time a written memorandum of the results of the examination; and it
was proposed to introduce this document in evidence at the trial. It was excluded by the trial
judge, and it was held upon appeal that this was proper. Said the court: "There was no failure or
exhaustion of the memory, and no impeachment of the memorandum on cross-examination;
and the document was clearly incompetent as evidence in chief."

It results from the foregoing that the judgment appealed from must be modified by reducing the
amount of the recovery to eleven hundred pesos (1,100), with legal interest from November 8,
1916. As thus modified the judgment is affirmed, without any special pronouncement as to costs
of this instance. So ordered.

Arellano, C.J., Torres, Araullo, Malcolm and Avanceña, JJ., concur.

---------------------------------------------

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-48930 February 23, 1944

ANTONIO VAZQUEZ, petitioner,

vs.
FRANCISCO DE BORJA, respondent.

x---------------------------------------------------------x

G.R. No. L-48931 February 23, 1944

FRANCISCO DE BORJA, petitioner,

vs.
ANTONIO VAZQUEZ, respondent.

OZAETA, J.:

This action was commenced in the Court of First Instance of Manila by Francisco de Borja
against Antonio Vazquez and Fernando Busuego to recover from them jointly and severally the
total sum of P4,702.70 upon three alleged causes of action, to wit: First, that in or about the
month of January, 1932, the defendants jointly and severally obligated themselves to sell to the
plaintiff 4,000 cavans of palay at P2.10 per cavan, to be delivered during the month of February,
1932, the said defendants having subsequently received from the plaintiff in virtue of said
agreement the sum of P8,400; that the defendants delivered to the plaintiff during the months of
February, March, and April, 1932, only 2,488 cavans of palay of the value of P5,224.80 and
refused to deliver the balance of 1,512 cavans of the value of P3,175.20 notwithstanding
repeated demands. Second, that because of defendants' refusal to deliver to the plaintiff the
said 1,512 cavans of palay within the period above mentioned, the plaintiff suffered damages in
the sum of P1,000. And, third, that on account of the agreement above mentioned the plaintiff
delivered to the defendants 4,000 empty sacks, of which they returned to the plaintiff only 2,490
and refused to deliver to the plaintiff the balance of 1,510 sacks or to pay their value amounting
to P377.50; and that on account of such refusal the plaintiff suffered damages in the sum of
P150.

The defendant Antonio Vazquez answered the complaint, denying having entered into the
contract mentioned in the first cause of action in his own individual and personal capacity, either
solely or together with his codefendant Fernando Busuego, and alleging that the agreement for
the purchase of 4,000 cavans of palay and the payment of the price of P8,400 were made by
the plaintiff with and to the Natividad-Vasquez Sabani Development Co., Inc., a corporation
organized and existing under the laws of the Philippines, of which the defendant Antonio
Vazquez was the acting manager at the time the transaction took place. By way of counterclaim,
the said defendant alleged that he suffered damages in the sum of P1,000 on account of the
filing of this action against him by the plaintiff with full knowledge that the said defendant had
nothing to do whatever with any and all of the transactions mentioned in the complaint in his
own individual and personal capacity.

The trial court rendered judgment ordering the defendant Antonio Vazquez to pay to the plaintiff
the sum of P3,175.20 plus the sum of P377.50, with legal interest on both sums, and absolving
the defendant Fernando Busuego (treasurer of the corporation) from the complaint and the
plaintiff from the defendant Antonio Vazquez' counterclaim. Upon appeal to the Court of
Appeals, the latter modified that judgment by reducing it to the total sum of P3,314.78, with legal
interest thereon and the costs. But by a subsequent resolution upon the defendant's motion for
reconsideration, the Court of Appeals set aside its judgment and ordered that the case be
remanded to the court of origin for further proceedings. The defendant Vazquez, not being
agreeable to that result, filed the present petition for certiorari (G.R. No. 48930) to review and
reverse the judgment of the Court of Appeals; and the plaintiff Francisco de Borja, excepting to
the resolution of the Court of Appeals whereby its original judgment was set aside and the case
was ordered remanded to the court of origin for further proceedings, filed a cross-petition for
certiorari (G.R. No. 48931) to maintain the original judgment of the Court of Appeals.

The original decision of the Court of Appeals and its subsequent resolutions on reconsideration
read as follows:

Es hecho no controvertido que el 25 de Febrero de 1932, el demandado-apelante vendio al

demandante 4,000 cavanes de palay al precio de P2.10 el cavan, de los cuales, dicho
demandante solamente recibio 2,583 cavanes; y que asimismo recibio para su envase 4,000
sacos vacios. Esta provbado que de dichos 4,000 sacos vacios solamente se entregaron, 2,583
quedando en poder del demandado el resto, y cuyo valor es el de P0.24 cada uno. Presentada
la demanda contra los demandados Antonio Vazquez y Fernando Busuego para el pago de la
cantidad de P4,702.70, con sus intereses legales desde el 1.o de marzo de 1932 hasta su
completo pago y las costas, el Juzgado de Primera Instancia de Manila el asunto condenando a
Antonio Vazquez a pagar al demandante la cantidad de P3,175.20, mas la cantidad de
P377.50, con sus intereses legales, absolviendo al demandado Fernando Busuego de la
demanda y al demandante de la reconvencion de los demandados, sin especial
pronunciamiento en cuanto a las costas. De dicha decision apelo el demandado Antonio
Vazquez, apuntado como principal error el de que el habia sido condenado personalmente, y
no la corporacion por el representada.

Segun la preponderancia de las pruebas, la venta hecha por Antonio Vazquez a favor de
Francisco de Borja de los 4,000 cavanes de palay fue en su capacidad de Presidente interino y
Manager de la corporacion Natividad-Vazquez Sabani Development Co., Inc. Asi resulta del
Exh. 1, que es la copia al carbon del recibo otorgado por el demandado Vazquez, y cuyo
original lo habia perdido el demandante, segun el. Asi tambien consta en los libros de la
corporacion arriba mencionada, puesto que en los mismos se ha asentado tanto la entrada de
los P8,400, precio del palay, como su envio al gobierno en pago de los alquileres de la
Hacienda Sabani. Asi mismo lo admitio Francisco de Borja al abogado Sr. Jacinto Tomacruz,
posterior presidente de la corporacion sucesora en el arrendamiento de la Sabani Estate,
cuando el solicito sus buenos oficios para el cobro del precio del palay no entregado. Asi
igualmente lo declaro el que hizo entrega de parte del palay a Borja, Felipe Veneracion, cuyo
testimonio no ha sido refutado. Y asi se deduce de la misma demanda, cuando se incluyo en
ella a Fernando Busuego, tesorero de la Natividad-Vazquez Sabani Development Co., Inc.

Siendo esto asi, la principal responsable debe ser la Natividad-Vazquez Sabani Development
Co., Inc., que quedo insolvente y dejo de existir. El Juez sentenciador declaro, sin embargo, al
demandado Vazquez responsable del pago de la cantidad reclamada por su negligencia al
vender los referidos 4,000 cavanes de palay sin averiguar antes si o no dicha cantidad existia
en las bodegas de la corporacion.

Resulta del Exh. 8 que despues de la venta de los 4,000 cavanes de palay a Francisco de
Borja, el mismo demandado vendio a Kwong Ah Phoy 1,500 cavanes al precio de P2.00 el
cavan, y decimos 'despues' porque esta ultima venta aparece asentada despues de la primera.
Segun esto, el apelante no solamente obro con negligencia, sino interviniendo culpa de su
parte, por lo que de acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser
responsable subsidiariamente del pago de la cantidad objecto de la demanda.

En meritos de todo lo expuesto, se confirma la decision apelada con la modificacion de que el

apelante debe pagar al apelado la suma de P2,295.70 como valor de los 1,417 cavanes de
palay que dejo de entregar al demandante, mas la suma de P339.08 como importe de los 1,417
sacos vacios, que dejo de devolver, a razon de P0.24 el saco, total P3,314.78, con sus
intereses legales desde la interposicion de la demanda y las costas de ambas instancias.

Vista la mocion de reconsideracion de nuestra decision de fecha 13 de Octubre de 1942, y

alegandose en la misma que cuando el apelante vendio los 1,500 cavanes de palay a Ah Phoy,
la corporacion todavia tenia bastante existencia de dicho grano, y no estando dicho extremo
suficientemente discutido y probado, y pudiendo variar el resultado del asunto, dejamos sin
efecto nuestra citada decision, y ordenamos la devolucion de la causa al Juzgado de origen
para que reciba pruebas al efecto y dicte despues la decision correspondiente.

Upon consideration of the motion of the attorney for the plaintiff-appellee in case CA-G.R. No.
8676, Francisco de Borja vs. Antonio Vasquez et al., praying, for the reasons therein given, that
the resolution of December 22, 1942, be reconsidered: Considering that said resolution
remanding the case to the lower court is for the benefit of the plaintiff-appellee to afford him
opportunity to refute the contention of the defendant-appellant Antonio Vazquez, motion denied.
The action is on a contract, and the only issue pleaded and tried is whether the plaintiff entered
into the contract with the defendant Antonio Vazquez in his personal capacity or as manager of
the Natividad-Vazquez Sabani Development Co., Inc. The Court of Appeals found that
according to the preponderance of the evidence "the sale made by Antonio Vazquez in favor of
Francisco de Borja of 4,000 cavans of palay was in his capacity as acting president and
manager of the corporation Natividad-Vazquez Sabani Development Co., Inc." That finding of
fact is final and, it resolving the only issue involved, should be determinative of the result.

The Court of Appeals doubly erred in ordering that the cause be remanded to the court of origin
for further trial to determine whether the corporation had sufficient stock of palay at the time
appellant sold, 1500 cavans of palay to Kwong Ah Phoy. First, if that point was material to the
issue, it should have been proven during the trial; and the statement of the court that it had not
been sufficiently discussed and proven was no justification for ordering a new trial, which, by the
way, neither party had solicited but against which, on the contrary, both parties now vehemently
protest. Second, the point is, in any event, beside the issue, and this we shall now discuss in
connection with the original judgment of the Court of Appeals which the plaintiff cross-petitioner
seeks to maintain.

The action being on a contract, and it appearing from the preponderance of the evidence that
the party liable on the contract is the Natividad-Vazquez Sabani Development Co., Inc. which is
not a party herein, the complaint should have been dismissed. Counsel for the plaintiff, in his
brief as respondent, argues that altho by the preponderance of the evidence the trial court and
the Court of Appeals found that Vazquez celebrated the contract in his capacity as acting
president of the corporation and altho it was the latter, thru Vazquez, with which the plaintiff had
contracted and which, thru Vazquez, had received the sum of P8,400 from Borja, and altho that
was true from the point of view of a legal fiction, "ello no impede que tambien sea verdad lo
alegado en la demanda de que la misma persona de Vasquez fue la que contrato con Borja y
que la misma persona de Vasquez fue quien recibio la suma de P8,400." But such argument is
invalid and insufficient to show that the president of the corporation is personally liable on the
contract duly and lawfully entered into by him in its behalf.

It is well known that a corporation is an artificial being invested by law with a personality of its
own, separate and distinct from that of its stockholders and from that of its officers who manage
and run its affairs. The mere fact that its personality is owing to a legal fiction and that it
necessarily has to act thru its agents, does not make the latter personally liable on a contract
duly entered into, or for an act lawfully performed, by them for an in its behalf. The legal fiction
by which the personality of a corporation is created is a practical reality and necessity. Without it
no corporate entities may exists and no corporate business may be transacted. Such legal
fiction may be disregarded only when an attempt is made to use it as a cloak to hide an unlawful
or fraudulent purpose. No such thing has been alleged or proven in this case. It has not been
alleged nor even intimated that Vazquez personally benefited by the contract of sale in question
and that he is merely invoking the legal fiction to avoid personal liability. Neither is it contended
that he entered into said contract for the corporation in bad faith and with intent to defraud the
plaintiff. We find no legal and factual basis upon which to hold him liable on the contract either
principally or subsidiarily.

The trial court found him guilty of negligence in the performance of the contract and held him
personally liable on that account. On the other hand, the Court of Appeals found that he "no
solamente obro con negligencia, sino interveniendo culpa de su parte, por lo que de acuerdo
con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable subsidiariamente del
pago de la cantidad objeto de la demanda." We think both the trial court and the Court of
Appeals erred in law in so holding. They have manifestly failed to distinguish a contractual from
an extracontractual obligation, or an obligation arising from contract from an obligation arising
from culpa aquiliana. The fault and negligence referred to in articles 1101-1104 of the Civil Code
are those incidental to the fulfillment or nonfullfillment of a contractual obligation; while the fault
or negligence referred to in article 1902 is the culpa aquiliana of the civil law, homologous but
not identical to tort of the common law, which gives rise to an obligation independently of any
contract. (Cf. Manila R.R. Co. vs. Cia. Trasatlantica, 38 Phil., 875, 887-890; Cangco vs. Manila
R.R. Co., 38 Phil. 768.) The fact that the corporation, acting thru Vazquez as its manager, was
guilty of negligence in the fulfillment of the contract, did not make Vazquez principally or even
subsidiarily liable for such negligence. Since it was the corporation's contract, its nonfulfillment,
whether due to negligence or fault or to any other cause, made the corporation and not its agent
liable.

On the other hand if independently of the contract Vazquez by his fault or negligence cause
damaged to the plaintiff, he would be liable to the latter under article 1902 of the Civil Code. But
then the plaintiff's cause of action should be based on culpa aquiliana and not on the contract
alleged in his complaint herein; and Vazquez' liability would be principal and not merely
subsidiary, as the Court of Appeals has erroneously held. No such cause of action was alleged
in the complaint or tried by express or implied consent of the parties by virtue of section 4 of
Rule 17. Hence the trial court had no jurisdiction over the issue and could not adjudicate upon it
(Reyes vs. Diaz, G.R. No. 48754.) Consequently it was error for the Court of Appeals to remand
the case to the trial court to try and decide such issue.

It only remains for us to consider petitioner's second assignment of error referring to the lower
courts' refusal to entertain his counterclaim for damages against the respondent Borja arising
from the bringing of this action. The lower courts having sustained plaintiff's action. The finding
of the Court of Appeals that according to the preponderance of the evidence the defendant
Vazquez celebrated the contract not in his personal capacity but as acting president and
manager of the corporation, does not warrant his contention that the suit against him is
malicious and tortious; and since we have to decide defendant's counterclaim upon the facts
found by the Court of Appeals, we find no sufficient basis upon which to sustain said
counterclaim. Indeed, we feel that a a matter of moral justice we ought to state here that the
indignant attitude adopted by the defendant towards the plaintiff for having brought this action
against him is in our estimation not wholly right. Altho from the legal point of view he was not
personally liable for the fulfillment of the contract entered into by him on behalf of the
corporation of which he was the acting president and manager, we think it was his moral duty
towards the party with whom he contracted in said capacity to see to it that the corporation
represented by him fulfilled the contract by delivering the palay it had sold, the price of which it
had already received. Recreant to such duty as a moral person, he has no legitimate cause for
indignation. We feel that under the circumstances he not only has no cause of action against the
plaintiff for damages but is not even entitled to costs.

The judgment of the Court of Appeals is reversed, and the complaint is hereby dismissed,
without any finding as to costs.

Yulo, C.J., Moran, Horrilleno and Bocobo, JJ., concur.

Separate Opinions

PARAS, J., dissenting:

Upon the facts of this case as expressly or impliedly admitted in the majority opinion, the plaintiff
is entitled to a judgment against the defendant. The latter, as acting president and manager of
Natividad-Vazquez Sabani Development Co., Inc., and with full knowledge of the then insolvent
status of his company, agreed to sell to the plaintiff 4,000 cavans of palay. Notwithstanding the
receipt from the plaintiff of the full purchase price, the defendant delivered only 2,488 cavans
and failed and refused to deliver the remaining 1,512 cavans and failed and refused to deliver
the remaining 1,512 cavans and a quantity of empty sacks, or their value. Such failure resulted,
according to the Court of First Instance of Manila and the Court of Appeals, from his fault or
negligence.

It is true that the cause of action made out by the complaint is technically based on a contract
between the plaintiff and Natividad-Vazquez Sabani Development Co., Inc. which is not a party
to this case. Nevertheless, inasmuch as it was proven at the trial that the defendant was guilty
of fault in that he prevented the performance of the plaintiff's contract and also of negligence
bordering on fraud which cause damage to the plaintiff, the error of procedure should not be a
hindrance to the rendition of a decision in accordance with the evidence actually introduced by
the parties, especially when in such a situation we may order the necessary amendment of the
pleadings, or even consider them correspondingly amended.

As already stated, the corporation of which the defendant was acting president and manager
was, at the time he made the sale of the plaintiff, known to him to be insolvent. As a matter of
fact, said corporation was soon thereafter dissolved. There is admitted damage on the part of
the plaintiff, proven to have been inflicted by reason of the fault or negligence of the defendant.
In the interest of simple justice and to avoid multiplicity of suits I am therefore impelled to
consider the present action as one based on fault or negligence and to sentence the defendant
accordingly. Otherwise, he would be allowed to profit by his own wrong under the protective
cover of the corporate existence of the company he represented. It cannot be pretended that
any advantage under the sale inured to the benefit of Natividad-Vazquez Sabani Development
Co., Inc. and not of the defendant personally, since the latter undoubtedly owned a considerable
part of its capital.

-----------------------------------------------

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 34840 September 23, 1931

NARCISO GUTIERREZ, plaintiff-appellee,

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

L.D. Lockwood for appellants Velasco and Cortez.

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

MALCOLM, J.:

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

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

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

In amplification of so much of the above pronouncement as concerns the Gutierrez family, it

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

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

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

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

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

Avanceña, C.J., Johnson, Street, Villamor, Ostrand, Romualdez, and Imperial, JJ., concur.

--------------------------------------

[G.R. No. 138334. August 25, 2003]

ESTELA L. CRISOSTOMO, petitioner, vs. THE COURT OF APPEALS and CARAVAN TRAVEL
& TOURS INTERNATIONAL, INC., respondents.

DECISION

YNARES-SANTIAGO, J.:

In May 1991, petitioner Estela L. Crisostomo contracted the services of respondent Caravan
Travel and Tours International, Inc. to arrange and facilitate her booking, ticketing and
accommodation in a tour dubbed Jewels of Europe. The package tour included the countries of
England, Holland, Germany, Austria, Liechstenstein, Switzerland and France at a total cost of
P74,322.70. Petitioner was given a 5% discount on the amount, which included airfare, and the
booking fee was also waived because petitioners niece, Meriam Menor, was respondent
companys ticketing manager.

Pursuant to said contract, Menor went to her aunts residence on June 12, 1991 a Wednesday to
deliver petitioners travel documents and plane tickets. Petitioner, in turn, gave Menor the full
payment for the package tour. Menor then told her to be at the Ninoy Aquino International
Airport (NAIA) on Saturday, two hours before her flight on board British Airways.

Without checking her travel documents, petitioner went to NAIA on Saturday, June 15, 1991, to
take the flight for the first leg of her journey from Manila to Hongkong. To petitioners dismay,
she discovered that the flight she was supposed to take had already departed the previous day.
She learned that her plane ticket was for the flight scheduled on June 14, 1991. She thus called
up Menor to complain.

Subsequently, Menor prevailed upon petitioner to take another tour the British Pageant which
included England, Scotland and Wales in its itinerary. For this tour package, petitioner was
asked anew to pay US$785.00 or P20,881.00 (at the then prevailing exchange rate of P26.60).
She gave respondent US$300 or P7,980.00 as partial payment and commenced the trip in July
1991.

Upon petitioners return from Europe, she demanded from respondent the reimbursement of
P61,421.70, representing the difference between the sum she paid for Jewels of Europe and the
amount she owed respondent for the British Pageant tour. Despite several demands,
respondent company refused to reimburse the amount, contending that the same was non-
refundable.[1] Petitioner was thus constrained to file a complaint against respondent for breach
of contract of carriage and damages, which was docketed as Civil Case No. 92-133 and raffled
to Branch 59 of the Regional Trial Court of Makati City.

In her complaint,[2] petitioner alleged that her failure to join Jewels of Europe was due to
respondents fault since it did not clearly indicate the departure date on the plane ticket.
Respondent was also negligent in informing her of the wrong flight schedule through its
employee Menor. She insisted that the British Pageant was merely a substitute for the Jewels of
Europe tour, such that the cost of the former should be properly set-off against the sum paid for
the latter.

For its part, respondent company, through its Operations Manager, Concepcion Chipeco,
denied responsibility for petitioners failure to join the first tour. Chipeco insisted that petitioner
was informed of the correct departure date, which was clearly and legibly printed on the plane
ticket. The travel documents were given to petitioner two days ahead of the scheduled trip.
Petitioner had only herself to blame for missing the flight, as she did not bother to read or
confirm her flight schedule as printed on the ticket.

Respondent explained that it can no longer reimburse the amount paid for Jewels of Europe,
considering that the same had already been remitted to its principal in Singapore, Lotus Travel
Ltd., which had already billed the same even if petitioner did not join the tour. Lotus European
tour organizer, Insight International Tours Ltd., determines the cost of a package tour based on
a minimum number of projected participants. For this reason, it is accepted industry practice to
disallow refund for individuals who failed to take a booked tour.[3]

Lastly, respondent maintained that the British Pageant was not a substitute for the package tour
that petitioner missed. This tour was independently procured by petitioner after realizing that
she made a mistake in missing her flight for Jewels of Europe. Petitioner was allowed to make a
partial payment of only US$300.00 for the second tour because her niece was then an
employee of the travel agency. Consequently, respondent prayed that petitioner be ordered to
pay the balance of P12,901.00 for the British Pageant package tour.
After due proceedings, the trial court rendered a decision,[4] the dispositive part of which reads:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Ordering the defendant to return and/or refund to the plaintiff the amount of Fifty Three
Thousand Nine Hundred Eighty Nine Pesos and Forty Three Centavos (P53,989.43) with legal
interest thereon at the rate of twelve percent (12%) per annum starting January 16, 1992, the
date when the complaint was filed;

2. Ordering the defendant to pay the plaintiff the amount of Five Thousand (P5,000.00) Pesos
as and for reasonable attorneys fees;

3. Dismissing the defendants counterclaim, for lack of merit; and

4. With costs against the defendant.

SO ORDERED.[5]

The trial court held that respondent was negligent in erroneously advising petitioner of her
departure date through its employee, Menor, who was not presented as witness to rebut
petitioners testimony. However, petitioner should have verified the exact date and time of
departure by looking at her ticket and should have simply not relied on Menors verbal
representation. The trial court thus declared that petitioner was guilty of contributory negligence
and accordingly, deducted 10% from the amount being claimed as refund.

Respondent appealed to the Court of Appeals, which likewise found both parties to be at fault.
However, the appellate court held that petitioner is more negligent than respondent because as
a lawyer and well-traveled person, she should have known better than to simply rely on what
was told to her. This being so, she is not entitled to any form of damages. Petitioner also
forfeited her right to the Jewels of Europe tour and must therefore pay respondent the balance
of the price for the British Pageant tour. The dispositive portion of the judgment appealed from
reads as follows:

WHEREFORE, premises considered, the decision of the Regional Trial Court dated October 26,
1995 is hereby REVERSED and SET ASIDE. A new judgment is hereby ENTERED requiring
the plaintiff-appellee to pay to the defendant-appellant the amount of P12,901.00, representing
the balance of the price of the British Pageant Package Tour, the same to earn legal interest at
the rate of SIX PERCENT (6%) per annum, to be computed from the time the counterclaim was
filed until the finality of this decision. After this decision becomes final and executory, the rate of
TWELVE PERCENT (12%) interest per annum shall be additionally imposed on the total
obligation until payment thereof is satisfied. The award of attorneys fees is DELETED. Costs
against the plaintiff-appellee.
SO ORDERED.[6]

Upon denial of her motion for reconsideration,[7] petitioner filed the instant petition under Rule
45 on the following grounds:

It is respectfully submitted that the Honorable Court of Appeals committed a reversible error in
reversing and setting aside the decision of the trial court by ruling that the petitioner is not
entitled to a refund of the cost of unavailed Jewels of Europe tour she being equally, if not more,
negligent than the private respondent, for in the contract of carriage the common carrier is
obliged to observe utmost care and extra-ordinary diligence which is higher in degree than the
ordinary diligence required of the passenger. Thus, even if the petitioner and private respondent
were both negligent, the petitioner cannot be considered to be equally, or worse, more guilty
than the private respondent. At best, petitioners negligence is only contributory while the private
respondent [is guilty] of gross negligence making the principle of pari delicto inapplicable in the
case;

II

The Honorable Court of Appeals also erred in not ruling that the Jewels of Europe tour was not
indivisible and the amount paid therefor refundable;

III

The Honorable Court erred in not granting to the petitioner the consequential damages due her
as a result of breach of contract of carriage.[8]

Petitioner contends that respondent did not observe the standard of care required of a common
carrier when it informed her wrongly of the flight schedule. She could not be deemed more
negligent than respondent since the latter is required by law to exercise extraordinary diligence
in the fulfillment of its obligation. If she were negligent at all, the same is merely contributory and
not the proximate cause of the damage she suffered. Her loss could only be attributed to
respondent as it was the direct consequence of its employees gross negligence.

Petitioners contention has no merit.

By definition, a contract of carriage or transportation is one whereby a certain person or

association of persons obligate themselves to transport persons, things, or news from one place
to another for a fixed price.[9] Such person or association of persons are regarded as carriers
and are classified as private or special carriers and common or public carriers.[10] A common
carrier is defined under Article 1732 of the Civil Code as persons, corporations, firms or
associations engaged in the business of carrying or transporting passengers or goods or both,
by land, water or air, for compensation, offering their services to the public.
It is obvious from the above definition that respondent is not an entity engaged in the business
of transporting either passengers or goods and is therefore, neither a private nor a common
carrier. Respondent did not undertake to transport petitioner from one place to another since its
covenant with its customers is simply to make travel arrangements in their behalf. Respondents
services as a travel agency include procuring tickets and facilitating travel permits or visas as
well as booking customers for tours.

While petitioner concededly bought her plane ticket through the efforts of respondent company,
this does not mean that the latter ipso facto is a common carrier. At most, respondent acted
merely as an agent of the airline, with whom petitioner ultimately contracted for her carriage to
Europe. Respondents obligation to petitioner in this regard was simply to see to it that petitioner
was properly booked with the airline for the appointed date and time. Her transport to the place
of destination, meanwhile, pertained directly to the airline.

The object of petitioners contractual relation with respondent is the latters service of arranging
and facilitating petitioners booking, ticketing and accommodation in the package tour. In
contrast, the object of a contract of carriage is the transportation of passengers or goods. It is in
this sense that the contract between the parties in this case was an ordinary one for services
and not one of carriage. Petitioners submission is premised on a wrong assumption.

The nature of the contractual relation between petitioner and respondent is determinative of the
degree of care required in the performance of the latters obligation under the contract. For
reasons of public policy, a common carrier in a contract of carriage is bound by law to carry
passengers as far as human care and foresight can provide using the utmost diligence of very
cautious persons and with due regard for all the circumstances.[11] As earlier stated, however,
respondent is not a common carrier but a travel agency. It is thus not bound under the law to
observe extraordinary diligence in the performance of its obligation, as petitioner claims.

Since the contract between the parties is an ordinary one for services, the standard of care
required of respondent is that of a good father of a family under Article 1173 of the Civil
Code.[12] This connotes reasonable care consistent with that which an ordinarily prudent
person would have observed when confronted with a similar situation. The test to determine
whether negligence attended the performance of an obligation is: did the defendant in doing the
alleged negligent act use that reasonable care and caution which an ordinarily prudent person
would have used in the same situation? If not, then he is guilty of negligence.[13]

In the case at bar, the lower court found Menor negligent when she allegedly informed petitioner
of the wrong day of departure. Petitioners testimony was accepted as indubitable evidence of
Menors alleged negligent act since respondent did not call Menor to the witness stand to refute
the allegation. The lower court applied the presumption under Rule 131, Section 3 (e)[14] of the
Rules of Court that evidence willfully suppressed would be adverse if produced and thus
considered petitioners uncontradicted testimony to be sufficient proof of her claim.
On the other hand, respondent has consistently denied that Menor was negligent and maintains
that petitioners assertion is belied by the evidence on record. The date and time of departure
was legibly written on the plane ticket and the travel papers were delivered two days in advance
precisely so that petitioner could prepare for the trip. It performed all its obligations to enable
petitioner to join the tour and exercised due diligence in its dealings with the latter.

We agree with respondent.

Respondents failure to present Menor as witness to rebut petitioners testimony could not give
rise to an inference unfavorable to the former. Menor was already working in France at the time
of the filing of the complaint,[15] thereby making it physically impossible for respondent to
present her as a witness. Then too, even if it were possible for respondent to secure Menors
testimony, the presumption under Rule 131, Section 3(e) would still not apply. The opportunity
and possibility for obtaining Menors testimony belonged to both parties, considering that Menor
was not just respondents employee, but also petitioners niece. It was thus error for the lower
court to invoke the presumption that respondent willfully suppressed evidence under Rule 131,
Section 3(e). Said presumption would logically be inoperative if the evidence is not intentionally
omitted but is simply unavailable, or when the same could have been obtained by both
parties.[16]

In sum, we do not agree with the finding of the lower court that Menors negligence concurred
with the negligence of petitioner and resultantly caused damage to the latter. Menors negligence
was not sufficiently proved, considering that the only evidence presented on this score was
petitioners uncorroborated narration of the events. It is well-settled that the party alleging a fact
has the burden of proving it and a mere allegation cannot take the place of evidence.[17] If the
plaintiff, upon whom rests the burden of proving his cause of action, fails to show in a
satisfactory manner facts upon which he bases his claim, the defendant is under no obligation to
prove his exception or defense.[18]

Contrary to petitioners claim, the evidence on record shows that respondent exercised due
diligence in performing its obligations under the contract and followed standard procedure in
rendering its services to petitioner. As correctly observed by the lower court, the plane ticket[19]
issued to petitioner clearly reflected the departure date and time, contrary to petitioners
contention. The travel documents, consisting of the tour itinerary, vouchers and instructions,
were likewise delivered to petitioner two days prior to the trip. Respondent also properly booked
petitioner for the tour, prepared the necessary documents and procured the plane tickets. It
arranged petitioners hotel accommodation as well as food, land transfers and sightseeing
excursions, in accordance with its avowed undertaking.

Therefore, it is clear that respondent performed its prestation under the contract as well as
everything else that was essential to book petitioner for the tour. Had petitioner exercised due
diligence in the conduct of her affairs, there would have been no reason for her to miss the
flight. Needless to say, after the travel papers were delivered to petitioner, it became incumbent
upon her to take ordinary care of her concerns. This undoubtedly would require that she at least
read the documents in order to assure herself of the important details regarding the trip.

The negligence of the obligor in the performance of the obligation renders him liable for
damages for the resulting loss suffered by the obligee. Fault or negligence of the obligor
consists in his failure to exercise due care and prudence in the performance of the obligation as
the nature of the obligation so demands.[20] There is no fixed standard of diligence applicable
to each and every contractual obligation and each case must be determined upon its particular
facts. The degree of diligence required depends on the circumstances of the specific obligation
and whether one has been negligent is a question of fact that is to be determined after taking
into account the particulars of each case.[21]

The lower court declared that respondents employee was negligent. This factual finding,
however, is not supported by the evidence on record. While factual findings below are generally
conclusive upon this court, the rule is subject to certain exceptions, as when the trial court
overlooked, misunderstood, or misapplied some facts or circumstances of weight and substance
which will affect the result of the case.[22]

In the case at bar, the evidence on record shows that respondent company performed its duty
diligently and did not commit any contractual breach. Hence, petitioner cannot recover and must
bear her own damage.

WHEREFORE, the instant petition is DENIED for lack of merit. The decision of the Court of
Appeals in CA-G.R. CV No. 51932 is AFFIRMED. Accordingly, petitioner is ordered to pay
respondent the amount of P12,901.00 representing the balance of the price of the British
Pageant Package Tour, with legal interest thereon at the rate of 6% per annum, to be computed
from the time the counterclaim was filed until the finality of this Decision. After this Decision
becomes final and executory, the rate of 12% per annum shall be imposed until the obligation is
fully settled, this interim period being deemed to be by then an equivalent to a forbearance of
credit.[23]

SO ORDERED.

Davide, Jr., C.J., (Chairman), Vitug, Carpio, and Azcuna, JJ., concur.

--------------------------------

TOMASA SARMIENTO, petitioner, vs. SPS. LUIS & ROSE SUN-CABRIDO and MARIA
LOURDES SUN, respondents.

DECISION

CORONA, J.:
This appeal by certiorari stems from the Decision[1] of respondent Court of Appeals
promulgated on November 26, 1999 in CA-G.R. SP No. 47431 declaring the private
respondents not liable for damages.

Petitioner, Tomasa Sarmiento, states that sometime in April 1994, a friend, Dra. Virginia Lao,
requested her to find somebody to reset a pair of diamond earrings into two gold rings.[2]
Accordingly, petitioner sent a certain Tita Payag with the pair of earrings to Dingdings Jewelry
Shop, owned and managed by respondent spouses Luis and Rose Cabrido,[3] which accepted
the job order for P400.[4]

Petitioner provided 12 grams of gold to be used in crafting the pair of ring settings.[5] After 3
days, Tita Payag delivered to the jewelry shop one of Dra. Laos diamond earrings which was
earlier appraised as worth .33 carat and almost perfect in cut and clarity.[6] Respondent Ma.
Lourdes (Marilou) Sun went on to dismount the diamond from its original setting. Unsuccessful,
she asked their goldsmith, Zenon Santos, to do it. Santos removed the diamond by twisting the
setting with a pair of pliers, breaking the gem in the process.[7]

Petitioner required the respondents to replace the diamond with the same size and quality.
When they refused, the petitioner was forced to buy a replacement in the amount of P30,000.[8]

Respondent Rose Cabrido, manager of Dingdings Jewelry Shop, denied having entered into
any transaction with Tita Payag whom she met only after the latter came to the jewelry shop to
seek compensation from Santos for the broken piece of jewelry.[9] However, it was possible that
Payag may have availed of their services as she could not have known every customer who
came to their shop. Rose disclosed that she usually arrived at 11:00 a.m. When she was not
around, her mother and sister tended the shop.[10]

Marilou admitted knowing Payag who came to Dingdings Jewelry Shop to avail of their services
regarding a certain piece of jewelry. After a short conversation, Payag went inside the shop to
see Santos. When the precious stone was broken by Santos, Payag demanded P15,000 from
him. As the latter had no money, she turned to Marilou for reimbursement apparently thinking
that Marilou was the owner of the shop.[11]

For his part, Santos recalled that Payag requested him to dismount what appeared to him was a
sapphire. While clipping the setting with the use of a small pair of pliers, the stone accidentally
broke. Santos denied being an employee of Dingdings Jewelry Shop.[12]

Attempts to settle the controversy before the barangay lupon proved futile.[13] Consequently,
petitioner filed a complaint for damages on June 28, 1994 with the Municipal Trial Court in Cities
(MTCC) of Tagbilaran City docketed as Civil Case No. 2339 which rendered a decision[14] in
favor of the petitioner, the dispositive portion of which reads:

WHEREFORE, Decision is hereby rendered in favor of plaintiff Tomasa Sarmiento and against
defendants Spouses Luis and Rose Sun-Cabrido, ordering defendants to pay jointly and
severally the amount of Thirty Thousand Pesos (P30,000.00) as actual or compensatory
damages; Three Thousand Pesos (P3,000.00) as moral damages; Five Thousand Pesos
(P5,000.00) as attorneys fees; Two Thousand Pesos (P2,000.00) as litigation expenses, with
legal interest of 6% per annum from the date of this decision and 12% per annum from the date
when this decision becomes final until the amounts shall have been fully paid and to pay the
costs.

This case as against defendant Maria Lourdes Sun as well as defendants counterclaim are
dismissed for lack of merit.

SO ORDERED.

On appeal, the Regional Trial Court (RTC) of Tagbilaran City, Branch 3, reversed the decision
of the MTCC, thus absolving the respondents of any responsibility arising from breach of
contract.[15] Finding no reversible error, the Court of Appeals (CA) affirmed the judgment of the
RTC in its Decision promulgated on November 26, 1999.[16]

Unable to accept the decision, the petitioner filed the instant petition for review with the following
assigned errors:

THE COURT OF APPEALS ERRED IN MAINTAINING AND SO HOLDING THAT ZENON

SANTOS IS NOT AN EMPLOYEE OF DEFENDANT (herein respondent) ROSE SUN-
CABRIDO, AND IS THEREFORE ANSWERABLE FOR HIS OWN ACTS OR OMISSIONS

II

THE HONORABLE COURT OF APPEALS ERRED IN SUSTAINING THE REGIONAL TRIAL

COURTS PRONOUNCEMENTS THAT THERE EXISTS NO AGREEMENT BETWEEN THE
PETITIONER AND RESPONDENTS THAT THE LATTER WOULD ANSWER FOR ANY
LIABILITY SHOULD THE DIAMOND BE DAMAGED IN THE PROCESS OF DISMOUNTING
THEM FROM THE EARRINGS.

Essentially, petitioner claims that the dismounting of the diamond from its original setting was
part of the obligation assumed by the private respondents under the contract of service. Thus,
they should be held liable for damages arising from its breakage. On the other hand, the version
of the private respondents, upheld by the RTC and the CA, is that their agreement with the
petitioner was for crafting two gold rings mounted with diamonds only and did not include the
dismounting of the said diamonds from their original setting.[17] Consequently, the crux of the
instant controversy is the scope of the obligation assumed by the private respondents under the
verbal contract of service with the petitioner.
The Court notes that, during the trial, private respondents vigorously denied any transaction
between Dingdings Jewelry Shop and the petitioner, through Tita Payag. Rose Cabrido, for
instance, denied having ever met Payag before the latter came to seek reimbursement for the
value of the broken diamond. Likewise, while Marilou acknowledged acquaintance with Payag,
she nevertheless denied accepting any job order from her. Debunking their protestations,
however, the MTCC of Tagbilaran City rendered its decision on November 26, 1999 in favor of
herein petitioner.

Apparently realizing the weakness and futility of their position, private respondents conceded,
on appeal, the existence of an agreement with the petitioner for crafting a pair of gold rings
mounted with diamonds. This apparent concession by the private respondents, however, was
really nothing but an ingenious maneuver, designed to preclude, just the same, any recovery for
damages by the petitioner. Thus, while ostensibly admitting the existence of the said
agreement, private respondents, nonetheless denied assuming any obligation to dismount the
diamonds from their original settings.[18]

The inconsistent position of the private respondents impugns their credibility. They cannot be
permitted to adopt a certain stance, only to vacillate later to suit their interest. We are therefore
inclined to agree with the MTCC in giving credence to the version of the petitioner. The MTCC
had the unique opportunity to actually observe the behavior and demeanor of the witnesses as
they testified during the trial.[19]

At any rate, the contemporaneous and subsequent acts of the parties[20] support the version of
the petitioner. Thus, when Tita Payag asked Marilou of Dingdings Jewelry Shop to reset a pair
of diamond earrings, she brought with her the said pieces of jewelry so that the diamonds which
were still mounted could be measured and the new ring settings crafted accordingly. On the
said occasion, Marilou expressed no reservation regarding the dismounting of the diamonds
which, after all, was an integral part of petitioners job order. She should have instructed Payag
to have them dismounted first if Marilou had actually intended to spare the jewelry shop of the
task but she did not. Instead, petitioner was charged P400 for the job order which was readily
accepted. Thus, a perfected contract to reset the pair of diamond earrings arose between the
petitioner, through Payag, and Dingdings Jewelry Shop, through Marilou.

Marilous subsequent actuations were even more revealing as regards the scope of obligation
assumed by the jewelry shop. After the new settings were completed in 3 days, she called up
the petitioner to bring the diamond earrings to be reset.[21] Having initially examined one of
them, Marilou went on to dismount the diamond from its original setting. Unsuccessful, she then
delegated the task to their goldsmith, Zenon Santos. Having acted the way she did, Marilou
cannot now deny the shops obligation to reset the pair of earrings.

Obligations arising from contracts have the force of law between the contracting parties.[22]
Corollarily, those who in the performance of their obligations are guilty of fraud, negligence or
delay and those who in any manner contravene the tenor thereof, are liable for damages.[23]
The fault or negligence of the obligor consists in the omission of that diligence which is required
by the nature of the obligation and corresponds with the circumstances of the persons, of the
time and of the place.[24]

In the case at bar, it is beyond doubt that Santos acted negligently in dismounting the diamond
from its original setting. It appears to be the practice of the trade to use a miniature wire saw in
dismounting precious gems, such as diamonds, from their original settings.[25] However,
Santos employed a pair of pliers in clipping the original setting, thus resulting in breakage of the
diamond. The jewelry shop failed to perform its obligation with the ordinary diligence required by
the circumstances. It should be pointed out that Marilou examined the diamond before
dismounting it from the original setting and found the same to be in order. Its subsequent
breakage in the hands of Santos could only have been caused by his negligence in using the
wrong equipment. Res ipsa loquitur.

Private respondents seek to avoid liability by passing the buck to Santos who claimed to be an
independent worker. They also claim, rather lamely, that Marilou simply happened to drop by at
Dingdings Jewelry Shop when Payag arrived to place her job order.[26]

We do not think so.

The facts show that Santos had been working at Dingdings Jewelry Shop as goldsmith for about
6 months accepting job orders through referrals from private respondents.[27] On the other
hand, Payag stated that she had transacted with Dingdings Jewelry Shop on at least 10
previews occasions, always through Marilou.[28] The preponderance of evidence supports the
view that Marilou and Zenon Santos were employed at Dingdings Jewelry Shop in order to
perform activities which were usually necessary or desirable in its business.[29]

We therefore hold that an obligation to pay actual damages arose in favor of the petitioner
against the respondents spouses who admittedly owned and managed Dingdings Jewelry Shop.
It was proven that petitioner replaced the damaged jewelry in the amount of P30,000.[30]

The facts of the case also justify the award of moral damages. As a general rule, moral
damages are not recoverable in actions for damages predicated on a breach of contract for it is
not one of the items enumerated under Article 2219 of the Civil Code.[31] Moral damages may
be awarded in a breach of contract only when there is proof that defendant acted in bad faith, or
was guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual
obligation.[32] Santos was a goldsmith for more than 40 years.[33] Given his long experience in
the trade, he should have known that using a pair of pliers instead of a miniature wire saw in
dismounting a precious stone like a diamond would have entailed an unnecessary risk of
breakage. He went on with it anyway. Hence, respondent spouses are liable for P10,000 as
moral damages due to the gross negligence of their employee.

However, private respondents refusal to pay the value of the damaged jewelry emanated from
an honest belief that they were not responsible therefor, hence, negating any basis for the
award of attorneys fees.[34]
WHEREFORE, the instant petition is GRANTED and the assailed decision of the Court of
Appeals dated November 26, 1999 is hereby reversed and set aside. Private respondents Luis
Cabrido and Rose Sun-Cabrido are hereby ordered to pay, jointly and severally, the amount of
P30,000 as actual damages and P10,000 as moral damages in favor of the petitioner.

No costs.

SO ORDERED.

Puno, (Chairman), Panganiban, Sandoval-Gutierrez, and Carpio-Morales, JJ., concur.

----------------

Republic of the Philippines

SUPREME COURT
Manila

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.

REGALA, J.:

This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated
February 20, 1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages
for breach of contract and dismissing the counterclaim and third party complaint of the
defendant-appellant NARIC.

In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn
Administration (NARIC) is hereby abolished and all its assets, liabilities, functions, powers which
are not inconsistent with the provisions of this Act, and all personnel are transferred "to the Rice
and Corn Administration (RCA).
All references, therefore, to the NARIC in this decision must accordingly be adjusted and read
as RCA pursuant to the aforementioned law.

On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the
supply of 20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the
lowest, she was awarded the contract for the same. Accordingly, on July 1, 1952, plaintiff-
appellee Paz P. Arrieta and the appellant corporation entered into a Contract of Sale of Rice,
under the terms of which the former obligated herself to deliver to the latter 20,000 metric tons
of Burmess Rice at $203.00 per metric ton, CIF Manila. In turn, the defendant corporation
committed itself to pay for the imported rice "by means of an irrevocable, confirmed and
assignable letter of credit in U.S. currency in favor of the plaintiff-appellee and/or supplier in
Burma, immediately." Despite the commitment to pay immediately "by means of an irrevocable,
confirmed and assignable Letter of Credit," however, it was only on July 30, 1952, or a full
month from the execution of the contract, that the defendant corporation, thru its general
manager, took the first to open a letter of credit by forwarding to the Philippine National Bank its
Application for Commercial Letter Credit. The application was accompanied by a transmittal
letter, the relevant paragraphs of which read:

In view of the fact that we do not have sufficient deposit with your institution with which to cover
the amount required to be deposited as a condition for the opening of letters of credit, we will
appreciate it if this application could be considered special case.

We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August 4,
1952, and in order to comply therewith, it is imperative that the L/C be opened prior to that date.
We would therefore request your full cooperation on this matter.

On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the appellant
corporation of the extreme necessity for the immediate opening of the letter credit since she had
by then made a tender to her supplier in Rangoon, Burma, "equivalent to 5% of the F.O.B. price
of 20,000 tons at $180.70 and in compliance with the regulations in Rangoon this 5% will be
confiscated if the required letter of credit is not received by them before August 4, 1952."

On August 4, 1952, the Philippine National Bank informed the appellant corporation that its
application, "for a letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved
by the Board of Directors with the condition that marginal cash deposit be paid and that drafts
are to be paid upon presentment." (Exh. J-pl.; Exh. 10-def., p. 19, Folder of Exhibits).
Furthermore, the Bank represented that it "will hold your application in abeyance pending
compliance with the above stated requirement."

As it turned out, however, the appellant corporation not in any financial position to meet the
condition. As matter of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the
appellee its dilemma: "In this connection, please be advised that our application for opening of
the letter of credit has been presented to the bank since July 30th but the latter requires that we
first deposit 50% of the value of the letter amounting to aproximately $3,614,000.00 which we
are not in a position to meet." (Emphasis supplied. Exh. 9-Def.; Exh. 1-Pe., p. 18, Folder of
Exhibits)

Consequently, the credit instrument applied for was opened only on September 8, 1952 "in
favor of Thiri Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than
two months from the execution of the contract) the party named by the appellee as beneficiary
of the letter of credit.1äwphï1.ñët

As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the
5% deposit, amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this
connection, it must be made of record that although the Burmese authorities had set August 4,
1952, as the deadline for the remittance of the required letter of credit, the cancellation of the
allocation and the confiscation of the 5% deposit were not effected until August 20, 1952, or, a
full half month after the expiration of the deadline. And yet, even with the 15-day grace,
appellant corporation was unable to make good its commitment to open the disputed letter of
credit.

The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the
futility of reinstating the same became apparent, she offered to substitute Thailand rice instead
to the defendant NARIC, communicating at the same time that the offer was "a solution which
should be beneficial to the NARIC and to us at the same time." (Exh. X-Pe., Exh. 25—Def., p.
38, Folder of Exhibits). This offer for substitution, however, was rejected by the appellant in a
resolution dated November 15, 1952.

On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the
damages caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit.
The demand having been rejected she instituted this case now on appeal.

At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance
Company was brought to the suit as a third party defendant to hold it liable on the performance
bond it executed in favor of the plaintiff-appellee.

We find for the appellee.

It is clear upon the records that the sole and principal reason for the cancellation of the
allocation contracted by the appellee herein in Rangoon, Burma, was the failure of the letter of
credit to be opened with the contemplated period. This failure must, therefore, be taken as the
immediate cause for the consequent damage which resulted. As it is then, the disposition of this
case depends on a determination of who was responsible for such failure. Stated differently, the
issue is whether appellant's failure to open immediately the letter of credit in dispute amounted
to a breach of the contract of July 1, 1952 for which it may be held liable in damages.

Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit.
On the contrary, it insists that the fault lies with the appellee. Appellant contends that the
disputed negotiable instrument was not promptly secured because the appellee , failed to
seasonably furnish data necessary and required for opening the same, namely, "(1) the amount
of the letter of credit, (2) the person, company or corporation in whose favor it is to be opened,
and (3) the place and bank where it may be negotiated." Appellant would have this Court
believe, therefore, that had these informations been forthwith furnished it, there would have
been no delay in securing the instrument.

Appellant's explanation has neither force nor merit. In the first place, the explanation reaches
into an area of the proceedings into which We are not at liberty to encroach. The explanation
refers to a question of fact. Nothing in the record suggests any arbitrary or abusive conduct on
the part of the trial judge in the formulation of the ruling. His conclusion on the matter is
sufficiently borne out by the evidence presented. We are denied, therefore, the prerogative to
disturb that finding, consonant to the time-honored tradition of this Tribunal to hold trial judges
better situated to make conclusions on questions of fact. For the record, We quote hereunder
the lower court's ruling on the point:

The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff
to name the supplier, the amount and the bank is not tenable. Plaintiff stated in Court that these
facts were known to defendant even before the contract was executed because these facts
were necessarily revealed to the defendant before she could qualify as a bidder. She stated too
that she had given the necessary data immediately after the execution of Exh. "A" (the contract
of July 1, 1952) to Mr. GABRIEL BELMONTE, General Manager of the NARIC, both orally and
in writing and that she also pressed for the opening of the letter of credit on these occasions.
These statements have not been controverted and defendant NARIC, notwithstanding its
previous intention to do so, failed to present Mr. Belmonte to testify or refute this. ...

Secondly, from the correspondence and communications which form part of the record of this
case, it is clear that what singularly delayed the opening of the stipulated letter of credit and
which, in turn, caused the cancellation of the allocation in Burma, was the inability of the
appellant corporation to meet the condition importation by the Bank for granting the same. We
do not think the appellant corporation can refute the fact that had it been able to put up the 50%
marginal cash deposit demanded by the bank, then the letter of credit would have been
approved, opened and released as early as August 4, 1952. The letter of the Philippine National
Bank to the NARIC was plain and explicit that as of the said date, appellant's "application for a
letter of credit ... has been approved by the Board of Directors with the condition that 50%
marginal cash deposit be paid and that drafts are to be paid upon presentment." (Emphasis
supplied)

The liability of the appellant, however, stems not alone from this failure or inability to satisfy the
requirements of the bank. Its culpability arises from its willful and deliberate assumption of
contractual obligations even as it was well aware of its financial incapacity to undertake the
prestation. We base this judgment upon the letter which accompanied the application filed by
the appellant with the bank, a part of which letter was quoted earlier in this decision. In the said
accompanying correspondence, appellant admitted and owned that it did "not have sufficient
deposit with your institution (the PNB) with which to cover the amount required to be deposited
as a condition for the opening of letters of credit. ... .

A number of logical inferences may be drawn from the aforementioned admission. First, that the
appellant knew the bank requirements for opening letters of credit; second, that appellant also
knew it could not meet those requirement. When, therefore, despite this awareness that was
financially incompetent to open a letter of credit immediately, appellant agreed in paragraph 8 of
the contract to pay immediately "by means of an irrevocable, confirm and assignable letter of
credit," it must be similarly held to have bound itself to answer for all and every consequences
that would result from the representation. aptly observed by the trial court:

... Having called for bids for the importation of rice involving millions, $4,260,000.00 to be exact,
it should have a certained its ability and capacity to comply with the inevitably requirements in
cash to pay for such importation. Having announced the bid, it must be deemed to have
impliedly assured suppliers of its capacity and facility to finance the importation within the
required period, especially since it had imposed the supplier the 90-day period within which the
shipment of the rice must be brought into the Philippines. Having entered in the contract, it
should have taken steps immediately to arrange for the letter of credit for the large amount
involved and inquired into the possibility of its issuance.

In relation to the aforequoted observation of the trial court, We would like to make reference
also to Article 11 of the Civil Code which provides:

Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof, are liable in damages.

Under this provision, not only debtors guilty of fraud, negligence or default in the performance of
obligations a decreed liable; in general, every debtor who fails in performance of his obligations
is bound to indemnify for the losses and damages caused thereby (De la Cruz Seminary of
Manila, 18 Phil. 330; Municipality of Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz,
37 Phil. 982; Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando
v. Gimenez, 54 Phil. 459; Acme Films v. Theaters Supply, 63 Phil. 657). The phrase "any
manner contravene the tenor" of the obligation includes any illicit act which impairs the strict and
faithful fulfillment of the obligation or every kind or defective performance. (IV Tolentino, Civil
Code of the Philippines, citing authorities, p. 103.)

The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice
for the originally contracted Burmese rice amounted to a waiver by the appellee of whatever
rights she might have derived from the breach of the contract. We disagree. Waivers are not
presumed, but must be clearly and convincingly shown, either by express stipulation or acts
admitting no other reasonable explanation. (Ramirez v. Court of Appeals, 52 O.G. 779.) In the
case at bar, no such intent to waive has been established.
We have carefully examined and studied the oral and documentary evidence presented in this
case and upon which the lower court based its award. Under the contract, the NARIC bound
itself to buy 20,000 metric tons of Burmese rice at "$203.00 U.S. Dollars per metric ton, all net
shipped weight, and all in U.S. currency, C.I.F. Manila ..." On the other hand, documentary and
other evidence establish with equal certainty that the plaintiff-appellee was able to secure the
contracted commodity at the cost price of $180.70 per metric ton from her supplier in Burma.
Considering freights, insurance and charges incident to its shipment here and the forfeiture of
the 5% deposit, the award granted by the lower court is fair and equitable. For a clearer view of
the equity of the damages awarded, We reproduce below the testimony of the appellee,
adequately supported by the evidence and record:

Q. Will you please tell the court, how much is the damage you suffered?

A. Because the selling price of my rice is $203.00 per metric ton, and the cost price of my rice is
$180.00 We had to pay also $6.25 for shipping and about $164 for insurance. So adding the
cost of the rice, the freight, the insurance, the total would be about $187.99 that would be
$15.01 gross profit per metric ton, multiply by 20,000 equals $300,200, that is my supposed
profit if I went through the contract.

The above testimony of the plaintiff was a general approximation of the actual figures involved
in the transaction. A precise and more exact demonstration of the equity of the award herein is
provided by Exhibit HH of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far
as germane.

It is equally of record now that as shown in her request dated July 29, 1959, and other
communications subsequent thereto for the opening by your corporation of the required letter of
credit, Mrs. Arrieta was supposed to pay her supplier in Burma at the rate of One Hundred
Eighty Dollars and Seventy Cents ($180.70) in U.S. Currency, per ton plus Eight Dollars ($8.00)
in the same currency per ton for shipping and other handling expenses, so that she is already
assured of a net profit of Fourteen Dollars and Thirty Cents ($14.30), U.S., Currency, per ton or
a total of Two Hundred and Eighty Six Thousand Dollars ($286,000.00), U.S. Currency, in the
aforesaid transaction. ...

Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of
unrealized profit damages in the total sum of $406,000.00 from the failure of the projected
contract to materialize. This counterclaim was supported by a cost study made and submitted
by the appellant itself and wherein it was illustrated how indeed had the importation pushed
thru, NARIC would have realized in profit the amount asserted in the counterclaim. And yet, the
said amount of P406,000.00 was realizable by appellant despite a number of expenses which
the appellee under the contract, did not have to incur. Thus, under the cost study submitted by
the appellant, banking and unloading charges were to be shouldered by it, including an Import
License Fee of 2% and superintendence fee of $0.25 per metric ton. If the NARIC stood to profit
over P400 000.00 from the disputed transaction inspite of the extra expenditures from which the
herein appellee was exempt, we are convicted of the fairness of the judgment presently under
appeal.

In the premises, however, a minor modification must be effected in the dispositive portion of the
decision appeal from insofar as it expresses the amount of damages in U.S. currency and not in
Philippine Peso. Republic Act 529 specifically requires the discharge of obligations only "in any
coin or currency which at the time of payment is legal tender for public and private debts." In
view of that law, therefore, the award should be converted into and expressed in Philippine
Peso.

This brings us to a consideration of what rate of exchange should apply in the conversion here
decreed. Should it be at the time of the breach, at the time the obligation was incurred or at the
rate of exchange prevailing on the promulgation of this decision.

In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of
damages for breach of contract, even if the obligation assumed by the defendant was to pay the
plaintiff a sum of money expressed in American currency, the indemnity to be allowed should be
expressed in Philippine currency at the rate of exchange at the time of the judgment rather than
at the rate of exchange prevailing on the date of defendant's breach. This ruling, however, can
neither be applied nor extended to the case at bar for the same was laid down when there was
no law against stipulating foreign currencies in Philippine contracts. But now we have Republic
Act No. 529 which expressly declares such stipulations as contrary to public policy, void and of
no effect. And, as We already pronounced in the case of Eastboard Navigation, Ltd. v. Juan
Ysmael & Co., Inc., G.R. No. L-9090, September 10, 1957, if there is any agreement to pay an
obligation in a currency other than Philippine legal tender, the same is null and void as contrary
to public policy (Republic Act 529), and the most that could be demanded is to pay said
obligation in Philippine currency "to be measured in the prevailing rate of exchange at the time
the obligation was incurred (Sec. 1, idem)."

UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole
modification that the award should be converted into the Philippine peso at the rate of exchange
prevailing at the time the obligation was incurred or on July 1, 1952 when the contract was
executed. The appellee insurance company, in the light of this judgment, is relieved of any
liability under this suit. No pronouncement as to costs.

Bengzon, C.J., Padilla, Concepcion, Paredes, Dizon and Makalintal, JJ., concur.
Barrera, J., took no part.
Reyes, J.B.L., J., reserves his vote.

------------------------------------

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR.
OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory
receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

This is a petition for review on certiorari to set aside as null and void the decision of the Court of
Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated
February 15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of
respondent Sulpicio M. Tolentino for injunction, specific performance or rescission, and
damages with preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal
department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a
security for the loan, executed on the same day a real estate mortgage over his 100-hectare
land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage
was annotated on the said title the next day. The approved loan application called for a lump
sum P80,000.00 loan, repayable in semi-annual installments for a period of 3 years, with 12%
annual interest. It was required that Sulpicio M. Tolentino shall use the loan proceeds solely as
an additional capital to develop his other property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the
Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for
P17,000.00 at 12% annual interest, payable within 3 years from the date of execution of the
contract at semi-annual installments of P3,459.00 (p. 64, rec.). An advance interest for the
P80,000.00 loan covering a 6-month period amounting to P4,800.00 was deducted from the
partial release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M.
Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet
available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-
president and treasurer, promised repeatedly the release of the P63,000.00 balance (p. 113,
rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank
was suffering liquidity problems, issued Resolution No. 1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit
liabilities, the Board, by unanimous vote, decided as follows:

1) To prohibit the bank from making new loans and investments [except investments in
government securities] excluding extensions or renewals of already approved loans, provided
that such extensions or renewals shall be subject to review by the Superintendent of Banks,
who may impose such limitations as may be necessary to insure correction of the bank's
deficiency as soon as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up
the required capital to restore its solvency, issued Resolution No. 967 which prohibited Island
Savings Bank from doing business in the Philippines and instructed the Acting Superintendent
of Banks to take charge of the assets of Island Savings Bank (pp. 48-49, rec).

On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by
the promissory note, filed an application for the extra-judicial foreclosure of the real estate
mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the
auction for January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of
Agusan for injunction, specific performance or rescission and damages with preliminary
injunction, alleging that since Island Savings Bank failed to deliver the P63,000.00 balance of
the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to
deliver the P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance
cannot be delivered, to rescind the real estate mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a
temporary restraining order enjoining the Island Savings Bank from continuing with the
foreclosure of the mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal
of the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the
Central Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the
amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the
restraining order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the
Court of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for
specific performance, but it ruled that Island Savings Bank can neither foreclose the real estate
mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory
note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate
mortgage be foreclosed to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan
agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the
obligation or promise of each party is the consideration for that of the other (Penaco vs. Ruaya,
110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has
performed or is ready and willing to perform his part of the contract, the other party who has not
performed or is not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The
promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island
Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real
estate mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From
such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus,
the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of
3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14,
1968, which prohibited Island Savings Bank from doing further business. Such prohibition made
it legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the
P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the
protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June
15, 1948, the validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans and investments, and nowhere
did it prohibit island Savings Bank from releasing the balance of loan agreements previously
contracted. Besides, the mere pecuniary inability to fulfill an engagement does not discharge the
obligation of the contract, nor does it constitute any defense to a decree of specific performance
(Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of
insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is
taken as a breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted
interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period
cannot be taken as a waiver of his right to collect the P63,000.00 balance. The act of Island
Savings Bank, in asking the advance interest for 6 months on the supposed P80,000.00 loan,
was improper considering that only P17,000.00 out of the P80,000.00 loan was released. A
person cannot be legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio
M. 'Tolentino of the pre-deducted interest was an exercise of his right to it, which right exist
independently of his right to demand the completion of the P80,000.00 loan. The exercise of
one right does not affect, much less neutralize, the exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot
exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan.
'This Court previously ruled that bank officials and employees are expected to exercise caution
and prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104
SCRA 151 [1981]). It is the obligation of the bank's officials and employees that before they
approve the loan application of their customers, they must investigate the existence and
evaluation of the properties being offered as a loan security. The recent rush of events where
collaterals for bank loans turn out to be non-existent or grossly over-valued underscore the
importance of this responsibility. The mere reliance by bank officials and employees on their
customer's representation regarding the loan collateral being offered as loan security is a patent
non-performance of this responsibility. If ever bank officials and employees totally reIy on the
representation of their customers as to the valuation of the loan collateral, the bank shall bear
the risk in case the collateral turn out to be over-valued. The representation made by the
customer is immaterial to the bank's responsibility to conduct its own investigation. Furthermore,
the lower court, on objections of' Sulpicio M. Tolentino, had enjoined petitioners from presenting
proof on the alleged over-valuation because of their failure to raise the same in their pleadings
(pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by the Rules of
Court, Section 2, Rule 9, which states that "defenses and objections not pleaded either in a
motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the
same issue before the Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between
specific performance or rescission with damages in either case. But since Island Savings Bank
is now prohibited from doing further business by Monetary Board Resolution No. 967, WE
cannot grant specific performance in favor of Sulpicio M, Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as
the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a
promissory note to cover it, the bank was deemed to have complied with its reciprocal obligation
to furnish a P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal
obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue
amortizations under the promissory note made him a party in default, hence not entitled to
rescission (Article 1191 of the Civil Code). If there is a right to rescind the promissory note, it
shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a
promissory note setting the date for payment of P17,000.00 within 3 years, he would be entitled
to ask for rescission of the entire loan because he cannot possibly be in default as there was no
date for him to perform his reciprocal obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations,
that is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and
Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3
years as stipulated, they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of
their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the
courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire
loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and
surcharges, for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for
interest on his PI 7,000.00 debt shall not be included in offsetting the liabilities of both parties.
Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just that he
should account for the interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P 17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the
principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the
consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract
of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the
existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the
Civil Code).

The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration
was then in existence, as there was no debt yet because Island Savings Bank had not made
any release on the loan, does not make the real estate mortgage void for lack of consideration.
It is not necessary that any consideration should pass at the time of the execution of the
contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or
subsequent matter. But when the consideration is subsequent to the mortgage, the mortgage
can take effect only when the debt secured by it is created as a binding contract to pay (Parks
vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6).
And, when there is partial failure of consideration, the mortgage becomes unenforceable to the
extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS,
p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than the
sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum
due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on
Mortgage, Vol. 1, P. 180).

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the
real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00
is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is
unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25
hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient
to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be divided among the successors
in interest of the debtor or creditor.

Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditor's heir who have received his share of the debt return the pledge or
cancel the mortgage, to the prejudice of other heirs who have not been paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes
several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of
indivisibility of a mortgage cannot apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977
IS HEREBY MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN

PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12%
INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22,
1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985
UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE

COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL
INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY
DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF
SULPICIO M. TOLENTINO.

NO COSTS. SO ORDERED.

Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.

Aquino (Chairman) and Abad Santos, JJ., took no part.

---------------------------------

CETUS DEVELOPMENT INC VS. CA

TUESDAY, NOVEMBER 19, 2013 Labels: Article 1169 of the Civil Code, Obligations and
Contracts

Article 1169 of the Civil Code

FACTS:
Private respondents were the lessees of the premises originally owned by Susana
Realty. The payments of the rentals were paid by them to a collector of the Susana Realty who
went the premises monthly. Susana Realty, however, sold the property to petitioner Cetus
Development, Inc. The private respondents then continued to pay their monthly rentals to a
collector sent by the petitioner. In succeeding months, for three months, the private
respondents failed to pay their rentals because no collector came. They then contacted the
petitioner over the telephone as to where they should pay their rentals. The petitioner then told
them that they would send a collector to collect the rentals. Private respondents waited but no
collector came. Petitioner then sent a letter to each of the private respondents demanding that
they vacate the subject premises and to pay their arrearages within 15 days from the receipt
thereof. With this, private respondents immediately upon the receipt of such demand, tendered
their payments which were accepted by the petitioner with the condition that the acceptance
was without prejudice to the filing of ejectment suit. For failure of the private respondents to
vacate the premises as demanded, petitioner filed an ejectment suit against them.

ISSUE:
Whether or not there was a delay of payment by the private respondents to the
petitioner considering that upon receipt of the demand letter, they immediately tendered their
payments.
HELD:
No. There was no failure yet on the part of the private respondents to pay rents for
three consecutive months. It has been duly established that it has been customary for private
respondents to pay their rentals through a collector sent by the lessor.
 Article 1169 of the Civil Code provides that those obliged to deliver or to do something
incur in delay from the time the oblige judicially or extrajudicially demands from them the
fulfillment of their obligation.
The moment the petitioner extrajudicially demand the payment of the rentals, private
respondents immediately answered their obligation by paying their arrearages of rentals to the
petitioner.
-------------------------------------

[G.R. No. 153004. November 5, 2004]

SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner, vs. ERNESTO V. SANTOS

and RIVERLAND, INC., respondents

DECISION

QUISUMBING, J.:

Subject of the present petition for review on certiorari is the Decision,[1] dated January 30,
2002, as well as the April 12, 2002, Resolution[2] of the Court of Appeals in CA-G.R. CV No.
55122. The appellate court reversed the Decision,[3] dated October 4, 1996, of the Regional
Trial Court of Makati City, Branch 148, in Civil Case No. 95-811, and likewise denied petitioners
Motion for Reconsideration.

The facts of this case are undisputed.

Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were the plaintiff and
defendant, respectively, in several civil cases filed in different courts in the Philippines. On
October 26, 1990, the parties executed a Compromise Agreement[4] which amicably ended all
their pending litigations. The pertinent portions of the Agreement read as follows:

1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million in the following manner:

a. P1.5 Million immediately upon the execution of this agreement;

b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the
discretion of the Foundation, within a period of not more than two (2) years from the execution
of this agreement; provided, however, that in the event that the Foundation does not pay the
whole or any part of such balance, the same shall be paid with the corresponding portion of the
land or real properties subject of the aforesaid cases and previously covered by the notices of
lis pendens, under such terms and conditions as to area, valuation, and location mutually
acceptable to both parties; but in no case shall the payment of such balance be later than two
(2) years from the date of this agreement; otherwise, payment of any unpaid portion shall only
be in the form of land aforesaid;
2. Immediately upon the execution of this agreement (and [the] receipt of the P1.5 Million),
plaintiff Santos shall cause the dismissal with prejudice of Civil Cases Nos. 88-743, 1413OR,
TC-1024, 45366 and 18166 and voluntarily withdraw the appeals in Civil Cases Nos. 4968
(C.A.-G.R. No. 26598) and 88-45366 (C.A.-G.R. No. 24304) respectively and for the immediate
lifting of the aforesaid various notices of lis pendens on the real properties aforementioned (by
signing herein attached corresponding documents, for such lifting); provided, however, that in
the event that defendant Foundation shall sell or dispose of any of the lands previously subject
of lis pendens, the proceeds of any such sale, or any part thereof as may be required, shall be
partially devoted to the payment of the Foundations obligations under this agreement as may
still be subsisting and payable at the time of any such sale or sales;

...

5. Failure of compliance of any of the foregoing terms and conditions by either or both parties to
this agreement shall ipso facto and ipso jure automatically entitle the aggrieved party to a writ of
execution for the enforcement of this agreement. [Emphasis supplied][5]

In compliance with the Compromise Agreement, respondent Santos moved for the dismissal of
the aforesaid civil cases. He also caused the lifting of the notices of lis pendens on the real
properties involved. For its part, petitioner SVHFI, paid P1.5 million to respondent Santos,
leaving a balance of P13 million.

Subsequently, petitioner SVHFI sold to Development Exchange Livelihood Corporation two real
properties, which were previously subjects of lis pendens. Discovering the disposition made by
the petitioner, respondent Santos sent a letter to the petitioner demanding the payment of the
remaining P13 million, which was ignored by the latter. Meanwhile, on September 30, 1991, the
Regional Trial Court of Makati City, Branch 62, issued a Decision[6] approving the compromise
agreement.

On October 28, 1992, respondent Santos sent another letter to petitioner inquiring when it would
pay the balance of P13 million. There was no response from petitioner. Consequently,
respondent Santos applied with the Regional Trial Court of Makati City, Branch 62, for the
issuance of a writ of execution of its compromise judgment dated September 30, 1991. The
RTC granted the writ. Thus, on March 10, 1993, the Sheriff levied on the real properties of
petitioner, which were formerly subjects of the lis pendens. Petitioner, however, filed numerous
motions to block the enforcement of the said writ. The challenge of the execution of the
aforesaid compromise judgment even reached the Supreme Court. All these efforts, however,
were futile.

On November 22, 1994, petitioners real properties located in Mabalacat, Pampanga were
auctioned. In the said auction, Riverland, Inc. was the highest bidder for P12 million and it was
issued a Certificate of Sale covering the real properties subject of the auction sale.
Subsequently, another auction sale was held on February 8, 1995, for the sale of real properties
of petitioner in Bacolod City. Again, Riverland, Inc. was the highest bidder. The Certificates of
Sale issued for both properties provided for the right of redemption within one year from the
date of registration of the said properties.

On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief and
Damages[7] alleging that there was delay on the part of petitioner in paying the balance of P13
million. They further alleged that under the Compromise Agreement, the obligation became due
on October 26, 1992, but payment of the remaining P12 million was effected only on November
22, 1994. Thus, respondents prayed that petitioner be ordered to pay legal interest on the
obligation, penalty, attorneys fees and costs of litigation. Furthermore, they prayed that the
aforesaid sales be declared final and not subject to legal redemption.

In its Answer,[8] petitioner countered that respondents have no cause of action against it since it
had fully paid its obligation to the latter. It further claimed that the alleged delay in the payment
of the balance was due to its valid exercise of its rights to protect its interests as provided under
the Rules. Petitioner counterclaimed for attorneys fees and exemplary damages.

On October 4, 1996, the trial court rendered a Decision[9] dismissing herein respondents
complaint and ordering them to pay attorneys fees and exemplary damages to petitioner.
Respondents then appealed to the Court of Appeals. The appellate court reversed the ruling of
the trial court:

WHEREFORE, finding merit in the appeal, the appealed Decision is hereby REVERSED and
judgment is hereby rendered ordering appellee SVHFI to pay appellants Santos and Riverland,
Inc.: (1) legal interest on the principal amount of P13 million at the rate of 12% per annum from
the date of demand on October 28, 1992 up to the date of actual payment of the whole
obligation; and (2) P20,000 as attorneys fees and costs of suit.

SO ORDERED.

Hence this petition for review on certiorari where petitioner assigns the following issues:

WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN

IT AWARDED LEGAL INTEREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND
RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT NEITHER IN THE COMPROMISE
AGREEMENT NOR IN THE COMPROMISE JUDGEMENT OF HON. JUDGE DIOKNO
PROVIDES FOR PAYMENT OF INTEREST TO THE RESPONDENT

II

WHETHER OF NOT THE COURT OF APPEALS ERRED IN AWARDING LEGAL IN[T]EREST

IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND, INC.,
NOTWITHSTANDING THE FACT THAT THE OBLIGATION OF THE PETITIONER TO
RESPONDENT SANTOS TO PAY A SUM OF MONEY HAD BEEN CONVERTED TO AN
OBLIGATION TO PAY IN KIND DELIVERY OF REAL PROPERTIES OWNED BY THE
PETITIONER WHICH HAD BEEN FULLY PERFORMED

III

WHETHER OR NOT RESPONDENTS ARE BARRED FROM DEMANDING PAYMENT OF

INTEREST BY REASON OF THE WAIVER PROVISION IN THE COMPROMISE
AGREEMENT, WHICH BECAME THE LAW AMONG THE PARTIES[10]

The only issue to be resolved is whether the respondents are entitled to legal interest.

Petitioner SVHFI alleges that where a compromise agreement or compromise judgment does
not provide for the payment of interest, the legal interest by way of penalty on account of fault or
delay shall not be due and payable, considering that the obligation or loan, on which the
payment of legal interest could be based, has been superseded by the compromise
agreement.[11] Furthermore, the petitioner argues that the respondents are barred by res
judicata from seeking legal interest on account of the waiver clause in the duly approved
compromise agreement.[12] Article 4 of the compromise agreement provides:

Plaintiff Santos waives and renounces any and all other claims that he and his family may have
on the defendant Foundation arising from and in connection with the aforesaid civil cases, and
defendant Foundation, on the other hand, also waives and renounces any and all claims that it
may have against plaintiff Santos in connection with such cases.[13] [Emphasis supplied.]

Lastly, petitioner alleges that since the compromise agreement did not provide for a period
within which the obligation will become due and demandable, it is incumbent upon respondent
Santos to ask for judicial intervention for purposes of fixing the period. It is only when a fixed
period exists that the legal interests can be computed.

Respondents profer that their right to damages is based on delay in the payment of the
obligation provided in the Compromise Agreement. The Compromise Agreement provides that
payment must be made within the two-year period from its execution. This was approved by the
trial court and became the law governing their contract. Respondents posit that petitioners
failure to comply entitles them to damages, by way of interest.[14]

The petition lacks merit.

A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a

litigation or put an end to one already commenced.[15] It is an agreement between two or more
persons, who, for preventing or putting an end to a lawsuit, adjust their difficulties by mutual
consent in the manner which they agree on, and which everyone of them prefers in the hope of
gaining, balanced by the danger of losing.[16]
The general rule is that a compromise has upon the parties the effect and authority of res
judicata, with respect to the matter definitely stated therein, or which by implication from its
terms should be deemed to have been included therein.[17] This holds true even if the
agreement has not been judicially approved.[18]

In the case at bar, the Compromise Agreement was entered into by the parties on October 26,
1990.[19] It was judicially approved on September 30, 1991.[20] Applying existing
jurisprudence, the compromise agreement as a consensual contract became binding between
the parties upon its execution and not upon its court approval. From the time a compromise is
validly entered into, it becomes the source of the rights and obligations of the parties thereto.
The purpose of the compromise is precisely to replace and terminate controverted claims.[21]

In accordance with the compromise agreement, the respondents asked for the dismissal of the
pending civil cases. The petitioner, on the other hand, paid the initial P1.5 million upon the
execution of the agreement. This act of the petitioner showed that it acknowledges that the
agreement was immediately executory and enforceable upon its execution.

As to the remaining P13 million, the terms and conditions of the compromise agreement are
clear and unambiguous. It provides:

...

b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the
discretion of the Foundation, within a period of not more than two (2) years from the execution
of this agreement[22] [Emphasis supplied.]

...

The two-year period must be counted from October 26, 1990, the date of execution of the
compromise agreement, and not on the judicial approval of the compromise agreement on
September 30, 1991. When respondents wrote a demand letter to petitioner on October 28,
1992, the obligation was already due and demandable. When the petitioner failed to pay its due
obligation after the demand was made, it incurred delay.

Article 1169 of the New Civil Code provides:

Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation. [Emphasis supplied]

Delay as used in this article is synonymous to default or mora which means delay in the
fulfillment of obligations. It is the non-fulfillment of the obligation with respect to time.[23]
In order for the debtor to be in default, it is necessary that the following requisites be present: (1)
that the obligation be demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance judicially or extrajudicially.[24]

In the case at bar, the obligation was already due and demandable after the lapse of the two-
year period from the execution of the contract. The two-year period ended on October 26, 1992.
When the respondents gave a demand letter on October 28, 1992, to the petitioner, the
obligation was already due and demandable. Furthermore, the obligation is liquidated because
the debtor knows precisely how much he is to pay and when he is to pay it.

The second requisite is also present. Petitioner delayed in the performance. It was able to fully
settle its outstanding balance only on February 8, 1995, which is more than two years after the
extra-judicial demand. Moreover, it filed several motions and elevated adverse resolutions to the
appellate court to hinder the execution of a final and executory judgment, and further delay the
fulfillment of its obligation.

Third, the demand letter sent to the petitioner on October 28, 1992, was in accordance with an
extra-judicial demand contemplated by law.

Verily, the petitioner is liable for damages for the delay in the performance of its obligation. This
is provided for in Article 1170[25] of the New Civil Code.

When the debtor knows the amount and period when he is to pay, interest as damages is
generally allowed as a matter of right.[26] The complaining party has been deprived of funds to
which he is entitled by virtue of their compromise agreement. The goal of compensation
requires that the complainant be compensated for the loss of use of those funds. This
compensation is in the form of interest.[27] In the absence of agreement, the legal rate of
interest shall prevail.[28] The legal interest for loan as forbearance of money is 12% per
annum[29] to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.[30]

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 30, 2002 of
the Court of Appeals and its April 12, 2002 Resolution in CA-G.R. CV No. 55122 are
AFFIRMED. Costs against petitioner.

SO ORDERED.

Davide, Jr. C.J. (Chairman), Ynares-Santiago and Carpio, JJ., concur.

Azcuna, J., on leave.

-----------------------------------------------------------------

SECOND DIVISION
[G.R. No. 149734. November 19, 2004]

DR. DANIEL VAZQUEZ and MA. LUIZA M. VAZQUEZ, petitioners vs. AYALA CORPORATION,
respondent.

DECISION

TINGA, J.:

The rise in value of four lots in one of the countrys prime residential developments, Ayala
Alabang Village in Muntinlupa City, over a period of six (6) years only, represents big money.
The huge price difference lies at the heart of the present controversy. Petitioners insist that the
lots should be sold to them at 1984 prices while respondent maintains that the prevailing market
price in 1990 should be the selling price.

Dr. Daniel Vazquez and Ma. Luisa Vazquez[1] filed this Petition for Review on Certiorari[2]
dated October 11, 2001 assailing the Decision[3] of the Court of Appeals dated September 6,
2001 which reversed the Decision[4] of the Regional Trial Court (RTC) and dismissed their
complaint for specific performance and damages against Ayala Corporation.

Despite their disparate rulings, the RTC and the appellate court agree on the following
antecedents:[5]

On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M. Vasquez (hereafter, Vasquez
spouses) entered into a Memorandum of Agreement (MOA) with Ayala Corporation (hereafter,
AYALA) with AYALA buying from the Vazquez spouses, all of the latters shares of stock in
Conduit Development, Inc. (hereafter, Conduit). The main asset of Conduit was a 49.9 hectare
property in Ayala Alabang, Muntinlupa, which was then being developed by Conduit under a
development plan where the land was divided into Villages 1, 2 and 3 of the Don Vicente
Village. The development was then being undertaken for Conduit by G.P. Construction and
Development Corp. (hereafter, GP Construction).

Under the MOA, Ayala was to develop the entire property, less what was defined as the
Retained Area consisting of 18,736 square meters. This Retained Area was to be retained by
the Vazquez spouses. The area to be developed by Ayala was called the Remaining Area. In
this Remaining Area were 4 lots adjacent to the Retained Area and Ayala agreed to offer these
lots for sale to the Vazquez spouses at the prevailing price at the time of purchase. The relevant
provisions of the MOA on this point are:

5.7. The BUYER hereby commits that it will develop the Remaining Property into a first class
residential subdivision of the same class as its New Alabang Subdivision, and that it intends to
complete the first phase under its amended development plan within three (3) years from the
date of this Agreement. x x x
5.15. The BUYER agrees to give the SELLERS a first option to purchase four developed lots
next to the Retained Area at the prevailing market price at the time of the purchase.

The parties are agreed that the development plan referred to in paragraph 5.7 is not Conduits
development plan, but Ayalas amended development plan which was still to be formulated as of
the time of the MOA. While in the Conduit plan, the 4 lots to be offered for sale to the Vasquez
Spouses were in the first phase thereof or Village 1, in the Ayala plan which was formulated a
year later, it was in the third phase, or Phase II-c.

Under the MOA, the Vasquez spouses made several express warranties, as follows:

3.1. The SELLERS shall deliver to the BUYER:

xxx

3.1.2. The true and complete list, certified by the Secretary and Treasurer of the Company
showing:

xxx

D. A list of all persons and/or entities with whom the Company has pending contracts, if any.

xxx

3.1.5. Audited financial statements of the Company as at Closing date.

4. Conditions Precedent

All obligations of the BUYER under this Agreement are subject to fulfillment prior to or at the
Closing, of the following conditions:

4.1. The representations and warranties by the SELLERS contained in this Agreement shall be
true and correct at the time of Closing as though such representations and warranties were
made at such time; and

xxx

6. Representation and Warranties by the SELLERS

The SELLERS jointly and severally represent and warrant to the BUYER that at the time of the
execution of this Agreement and at the Closing:

xxx
6.2.3. There are no actions, suits or proceedings pending, or to the knowledge of the SELLERS,
threatened against or affecting the SELLERS with respect to the Shares or the Property; and

7. Additional Warranties by the SELLERS

7.1. With respect to the Audited Financial Statements required to be submitted at Closing in
accordance with Par. 3.1.5 above, the SELLER jointly and severally warrant to the BUYER that:

7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the
Company shall own the Remaining Property, free from all liens and encumbrances and that the
Company shall have no obligation to any party except for billings payable to GP Construction &
Development Corporation and advances made by Daniel Vazquez for which BUYER shall be
responsible in accordance with Par. 2 of this Agreement.

7.1.2 Except to the extent reflected or reserved in the Audited Financial Statements of the
Company as of Closing, and those disclosed to BUYER, the Company as of the date thereof,
has no liabilities of any nature whether accrued, absolute, contingent or otherwise, including,
without limitation, tax liabilities due or to become due and whether incurred in respect of or
measured in respect of the Companys income prior to Closing or arising out of transactions or
state of facts existing prior thereto.

7.2 SELLERS do not know or have no reasonable ground to know of any basis for any assertion
against the Company as at closing or any liability of any nature and in any amount not fully
reflected or reserved against such Audited Financial Statements referred to above, and those
disclosed to BUYER.

xxx xxx xxx

7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the Closing, the
Company is not engaged in or a party to, or to the best of the knowledge of the SELLERS,
threatened with, any legal action or other proceedings before any court or administrative body,
nor do the SELLERS know or have reasonable grounds to know of any basis for any such
action or proceeding or of any governmental investigation relative to the Company.

7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due performance
and observance by the Company of any term, covenant or condition of any instrument or
agreement to which the company is a party or by which it is bound, and no condition exists
which, with notice or lapse of time or both, will constitute such default or breach.

After the execution of the MOA, Ayala caused the suspension of work on Village 1 of the Don
Vicente Project. Ayala then received a letter from one Maximo Del Rosario of Lancer General
Builder Corporation informing Ayala that he was claiming the amount of P1,509,558.80 as the
subcontractor of G.P. Construction...
G.P. Construction not being able to reach an amicable settlement with Lancer, on March 22,
1982, Lancer sued G.P. Construction, Conduit and Ayala in the then Court of First Instance of
Manila in Civil Case No. 82-8598. G.P. Construction in turn filed a cross-claim against Ayala.
G.P. Construction and Lancer both tried to enjoin Ayala from undertaking the development of
the property. The suit was terminated only on February 19, 1987, when it was dismissed with
prejudice after Ayala paid both Lancer and GP Construction the total of P4,686,113.39.

Taking the position that Ayala was obligated to sell the 4 lots adjacent to the Retained Area
within 3 years from the date of the MOA, the Vasquez spouses sent several reminder letters of
the approaching so-called deadline. However, no demand after April 23, 1984, was ever made
by the Vasquez spouses for Ayala to sell the 4 lots. On the contrary, one of the letters signed by
their authorized agent, Engr. Eduardo Turla, categorically stated that they expected
development of Phase 1 to be completed by February 19, 1990, three years from the settlement
of the legal problems with the previous contractor.

By early 1990 Ayala finished the development of the vicinity of the 4 lots to be offered for sale.
The four lots were then offered to be sold to the Vasquez spouses at the prevailing price in
1990. This was rejected by the Vasquez spouses who wanted to pay at 1984 prices, thereby
leading to the suit below.

After trial, the court a quo rendered its decision, the dispositive portion of which states:

THEREFORE, judgment is hereby rendered in favor of plaintiffs and against defendant, ordering
defendant to sell to plaintiffs the relevant lots described in the Complaint in the Ayala Alabang
Village at the price of P460.00 per square meter amounting to P1,349,540.00; ordering
defendant to reimburse to plaintiffs attorneys fees in the sum of P200,000.00 and to pay the
cost of the suit.

In its decision, the court a quo concluded that the Vasquez spouses were not obligated to
disclose the potential claims of GP Construction, Lancer and Del Rosario; Ayalas accountants
should have opened the records of Conduit to find out all claims; the warranty against suit is
with respect to the shares of the Property and the Lancer suit does not affect the shares of stock
sold to Ayala; Ayala was obligated to develop within 3 years; to say that Ayala was under no
obligation to follow a time frame was to put the Vasquezes at Ayalas mercy; Ayala did not
develop because of a slump in the real estate market; the MOA was drafted and prepared by
the AYALA who should suffer its ambiguities; the option to purchase the 4 lots is valid because
it was supported by consideration as the option is incorporated in the MOA where the parties
had prestations to each other. [Emphasis supplied]

Ayala Corporation filed an appeal, alleging that the trial court erred in holding that petitioners did
not breach their warranties under the MOA[6] dated April 23, 1981; that it was obliged to
develop the land where the four (4) lots subject of the option to purchase are located within
three (3) years from the date of the MOA; that it was in delay; and that the option to purchase
was valid because it was incorporated in the MOA and the consideration therefor was the
commitment by Ayala Corporation to petitioners embodied in the MOA.

As previously mentioned, the Court of Appeals reversed the RTC Decision. According to the
appellate court, Ayala Corporation was never informed beforehand of the existence of the
Lancer claim. In fact, Ayala Corporation got a copy of the Lancer subcontract only on May 29,
1981 from G.P. Constructions lawyers. The Court of Appeals thus held that petitioners violated
their warranties under the MOA when they failed to disclose Lancers claims. Hence, even
conceding that Ayala Corporation was obliged to develop and sell the four (4) lots in question
within three (3) years from the date of the MOA, the obligation was suspended during the
pendency of the case filed by Lancer.

Interpreting the MOAs paragraph 5.7 above-quoted, the appellate court held that Ayala
Corporation committed to develop the first phase of its own amended development plan and not
Conduits development plan. Nowhere does the MOA provide that Ayala Corporation shall follow
Conduits development plan nor is Ayala Corporation prohibited from changing the sequence of
the phases of the property it will develop.

Anent the question of delay, the Court of Appeals ruled that there was no delay as petitioners
never made a demand for Ayala Corporation to sell the subject lots to them. According to the
appellate court, what petitioners sent were mere reminder letters the last of which was dated
prior to April 23, 1984 when the obligation was not yet demandable. At any rate, the Court of
Appeals found that petitioners in fact waived the three (3)-year period when they sent a letter
through their agent, Engr. Eduardo Turla, stating that they expect that the development of
Phase I will be completed by 19 February 1990, three years from the settlement of the legal
problems with the previous contractor.[7]

The appellate court likewise ruled that paragraph 5.15 above-quoted is not an option contract
but a right of first refusal there being no separate consideration therefor. Since petitioners
refused Ayala Corporations offer to sell the subject lots at the reduced 1990 price of P5,000.00
per square meter, they have effectively waived their right to buy the same.

In the instant Petition, petitioners allege that the appellate court erred in ruling that they violated
their warranties under the MOA; that Ayala Corporation was not obliged to develop the
Remaining Property within three (3) years from the execution of the MOA; that Ayala was not in
delay; and that paragraph 5.15 of the MOA is a mere right of first refusal. Additionally,
petitioners insist that the Court should review the factual findings of the Court of Appeals as they
are in conflict with those of the trial court.

Ayala Corporation filed a Comment on the Petition[8] dated March 26, 2002, contending that the
petition raises questions of fact and seeks a review of evidence which is within the domain of
the Court of Appeals. Ayala Corporation maintains that the subcontract between GP
Construction, with whom Conduit contracted for the development of the property under a
Construction Contract dated October 10, 1980, and Lancer was not disclosed by petitioners
during the negotiations. Neither was the liability for Lancers claim included in the Audited
Financial Statements submitted by petitioners after the signing of the MOA. These justify the
conclusion that petitioners breached their warranties under the afore-quoted paragraphs of the
MOA. Since the Lancer suit ended only in February 1989, the three (3)-year period within which
Ayala Corporation committed to develop the property should only be counted thence. Thus,
when it offered the subject lots to petitioners in 1990, Ayala Corporation was not yet in delay.

In response to petitioners contention that there was no action or proceeding against them at the
time of the execution of the MOA on April 23, 1981, Ayala Corporation avers that the facts and
circumstances which gave rise to the Lancer claim were already extant then. Petitioners
warranted that their representations under the MOA shall be true and correct at the time of
Closing which shall take place within four (4) weeks from the signing of the MOA.[9] Since the
MOA was signed on April 23, 1981, Closing was approximately the third week of May 1981.
Hence, Lancers claims, articulated in a letter which Ayala Corporation received on May 4, 1981,
are among the liabilities warranted against under paragraph 7.1.2 of the MOA.

Moreover, Ayala Corporation asserts that the warranties under the MOA are not just against
suits but against all kinds of liabilities not reflected in the Audited Financial Statements. It cannot
be faulted for relying on the express warranty that except for billings payable to GP Construction
and advances made by petitioner Daniel Vazquez in the amount of P38,766.04, Conduit has no
other liabilities. Hence, petitioners cannot claim that Ayala Corporation should have examined
and investigated the Audited Financial Statements of Conduit and should now assume all its
obligations and liabilities including the Lancer suit and the cross-claim of GP Construction.

Furthermore, Ayala Corporation did not make a commitment to complete the development of the
first phase of the property within three (3) years from the execution of the MOA. The provision
refers to a mere declaration of intent to develop the first phase of its (Ayala Corporations) own
development plan and not Conduits. True to its intention, Ayala Corporation did complete the
development of the first phase (Phase II-A) of its amended development plan within three (3)
years from the execution of the MOA. However, it is not obliged to develop the third phase
(Phase II-C) where the subject lots are located within the same time frame because there is no
contractual stipulation in the MOA therefor. It is free to decide on its own the period for the
development of Phase II-C. If petitioners wanted to impose the same three (3)-year timetable
upon the third phase of the amended development plan, they should have filed a suit to fix the
time table in accordance with Article 1197[10] of the Civil Code. Having failed to do so, Ayala
Corporation cannot be declared to have been in delay.

Ayala Corporation further contends that no demand was made on it for the performance of its
alleged obligation. The letter dated October 4, 1983 sent when petitioners were already aware
of the Lancer suit did not demand the delivery of the subject lots by April 23, 1984. Instead, it
requested Ayala Corporation to keep petitioners posted on the status of the case. Likewise, the
letter dated March 4, 1984 was merely an inquiry as to the date when the development of Phase
1 will be completed. More importantly, their letter dated June 27, 1988 through Engr. Eduardo
Turla expressed petitioners expectation that Phase 1 will be completed by February 19, 1990.
Lastly, Ayala Corporation maintains that paragraph 5.15 of the MOA is a right of first refusal and
not an option contract.

Petitioners filed their Reply[11] dated August 15, 2002 reiterating the arguments in their Petition
and contending further that they did not violate their warranties under the MOA because the
case was filed by Lancer only on April 1, 1982, eleven (11) months and eight (8) days after the
signing of the MOA on April 23, 1981. Ayala Corporation admitted that it received Lancers claim
before the Closing date. It therefore had all the time to rescind the MOA. Not having done so, it
can be concluded that Ayala Corporation itself did not consider the matter a violation of
petitioners warranty.

Moreover, petitioners submitted the Audited Financial Statements of Conduit and allowed an
acquisition audit to be conducted by Ayala Corporation. Thus, the latter bought Conduit with
open eyes.

Petitioners also maintain that they had no knowledge of the impending case against Conduit at
the time of the execution of the MOA. Further, the MOA makes Ayala Corporation liable for the
payment of all billings of GP Construction. Since Lancers claim was actually a claim against GP
Construction being its sub-contractor, it is Ayala Corporation and not petitioners which is liable.

Likewise, petitioners aver that although Ayala Corporation may change the sequence of its
development plan, it is obliged under the MOA to develop the entire area where the subject lots
are located in three (3) years.

They also assert that demand was made on Ayala Corporation to comply with their obligation
under the MOA. Apart from their reminder letters dated January 24, February 18 and March 5,
1984, they also sent a letter dated March 4, 1984 which they claim is a categorical demand for
Ayala Corporation to comply with the provisions of the MOA.

The parties were required to submit their respective memoranda in the Resolution[12] dated
November 18, 2002. In compliance with this directive, petitioners submitted their
Memorandum[13] dated February 14, 2003 on even date, while Ayala Corporation filed its
Memorandum[14] dated February 14, 2003 on February 17, 2003.

We shall first dispose of the procedural question raised by the instant petition.

It is well-settled that the jurisdiction of this Court in cases brought to it from the Court of Appeals
by way of petition for review under Rule 45 is limited to reviewing or revising errors of law
imputed to it, its findings of fact being conclusive on this Court as a matter of general principle.
However, since in the instant case there is a conflict between the factual findings of the trial
court and the appellate court, particularly as regards the issues of breach of warranty, obligation
to develop and incurrence of delay, we have to consider the evidence on record and resolve
such factual issues as an exception to the general rule.[15] In any event, the submitted issue
relating to the categorization of the right to purchase granted to petitioners under the MOA is
legal in character.

The next issue that presents itself is whether petitioners breached their warranties under the
MOA when they failed to disclose the Lancer claim. The trial court declared they did not; the
appellate court found otherwise.

Ayala Corporation summarizes the clauses of the MOA which petitioners allegedly breached
when they failed to disclose the Lancer claim:

a) Clause 7.1.1. that Conduit shall not be obligated to anyone except to GP Construction for
P38,766.04, and for advances made by Daniel Vazquez;

b) Clause 7.1.2. that except as reflected in the audited financial statements Conduit had no
other liabilities whether accrued, absolute, contingent or otherwise;

c) Clause 7.2. that there is no basis for any assertion against Conduit of any liability of any value
not reflected or reserved in the financial statements, and those disclosed to Ayala;

d) Clause 7.6.3. that Conduit is not threatened with any legal action or other proceedings; and

e) Clause 7.6.4. that Conduit had not breached any term, condition, or covenant of any
instrument or agreement to which it is a party or by which it is bound.[16]

The Court is convinced that petitioners did not violate the foregoing warranties.

The exchanges of communication between the parties indicate that petitioners substantially
apprised Ayala Corporation of the Lancer claim or the possibility thereof during the period of
negotiations for the sale of Conduit.

In a letter[17] dated March 5, 1984, petitioner Daniel Vazquez reminded Ayala Corporations Mr.
Adolfo Duarte (Mr. Duarte) that prior to the completion of the sale of Conduit, Ayala Corporation
asked for and was given information that GP Construction sub-contracted, presumably to
Lancer, a greater percentage of the project than it was allowed. Petitioners gave this information
to Ayala Corporation because the latter intimated a desire to break the contract of Conduit with
GP. Ayala Corporation did not deny this. In fact, Mr. Duartes letter[18] dated March 6, 1984
indicates that Ayala Corporation had knowledge of the Lancer subcontract prior to its acquisition
of Conduit. Ayala Corporation even admitted that it tried to explorelegal basis to discontinue the
contract of Conduit with GP but found this not feasible when information surfaced about the tacit
consent of Conduit to the sub-contracts of GP with Lancer.

At the latest, Ayala Corporation came to know of the Lancer claim before the date of Closing of
the MOA. Lancers letter[19] dated April 30, 1981 informing Ayala Corporation of its unsettled
claim with GP Construction was received by Ayala Corporation on May 4, 1981, well before the
Closing[20] which occurred four (4) weeks after the date of signing of the MOA on April 23,
1981, or on May 23, 1981.

The full text of the pertinent clauses of the MOA quoted hereunder likewise indicate that certain
matters pertaining to the liabilities of Conduit were disclosed by petitioners to Ayala Corporation
although the specifics thereof were no longer included in the MOA:

7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the
Company shall own the Remaining Property, free from all liens and encumbrances and that the
Company shall have no obligation to any party except for billings payable to GP Construction &
Development Corporation and advances made by Daniel Vazquez for which BUYER shall be
responsible in accordance with Paragraph 2 of this Agreement.

7.1.2 Except to the extent reflected or reserved in the Audited Financial Statements of the
Company as of Closing, and those disclosed to BUYER, the Company as of the date hereof,
has no liabilities of any nature whether accrued, absolute, contingent or otherwise, including,
without limitation, tax liabilities due or to become due and whether incurred in respect of or
measured in respect of the Companys income prior to Closing or arising out of transactions or
state of facts existing prior thereto.

7.2 SELLERS do not know or have no reasonable ground to know of any basis for any assertion
against the Company as at Closing of any liability of any nature and in any amount not fully
reflected or reserved against such Audited Financial Statements referred to above, and those
disclosed to BUYER.

xxx xxx xxx

7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the Closing, the
Company is not engaged in or a party to, or to the best of the knowledge of the SELLERS,
threatened with, any legal action or other proceedings before any court or administrative body,
nor do the SELLERS know or have reasonable grounds to know of any basis for any such
action or proceeding or of any governmental investigation relative to the Company.

7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due performance
and observance by the Company of any term, covenant or condition of any instrument or
agreement to which the Company is a party or by which it is bound, and no condition exists
which, with notice or lapse of time or both, will constitute such default or breach.[21] [Emphasis
supplied]

Hence, petitioners warranty that Conduit is not engaged in, a party to, or threatened with any
legal action or proceeding is qualified by Ayala Corporations actual knowledge of the Lancer
claim which was disclosed to Ayala Corporation before the Closing.
At any rate, Ayala Corporation bound itself to pay all billings payable to GP Construction and the
advances made by petitioner Daniel Vazquez. Specifically, under paragraph 2 of the MOA
referred to in paragraph 7.1.1, Ayala Corporation undertook responsibility for the payment of all
billings of the contractor GP Construction & Development Corporation after the first billing and
any payments made by the company and/or SELLERS shall be reimbursed by BUYER on
closing which advances to date is P1,159,012.87.[22]

The billings knowingly assumed by Ayala Corporation necessarily include the Lancer claim for
which GP Construction is liable. Proof of this is Ayala Corporations letter[23] to GP Construction
dated before Closing on May 4, 1981, informing the latter of Ayala Corporations receipt of the
Lancer claim embodied in the letter dated April 30, 1981, acknowledging that it is taking over the
contractual responsibilities of Conduit, and requesting copies of all sub-contracts affecting the
Conduit property. The pertinent excerpts of the letter read:

In this connection, we wish to inform you that this morning we received a letter from Mr. Maximo
D. Del Rosario, President of Lancer General Builders Corporation apprising us of the existence
of subcontracts that they have with your corporation. They have also furnished us with a copy of
their letter to you dated 30 April 1981.

Since we are taking over the contractual responsibilities of Conduit Development, Inc., we
believe that it is necessary, at this point in time, that you furnish us with copies of all your
subcontracts affecting the property of Conduit, not only with Lancer General Builders
Corporation, but all subcontracts with other parties as well[24]

Quite tellingly, Ayala Corporation even attached to its Pre-Trial Brief[25] dated July 9, 1992 a
copy of the letter[26] dated May 28, 1981 of GP Constructions counsel addressed to Conduit
furnishing the latter with copies of all sub-contract agreements entered into by GP Construction.
Since it was addressed to Conduit, it can be presumed that it was the latter which gave Ayala
Corporation a copy of the letter thereby disclosing to the latter the existence of the Lancer sub-
contract.

The ineluctable conclusion is that petitioners did not violate their warranties under the MOA. The
Lancer sub-contract and claim were substantially disclosed to Ayala Corporation before the
Closing date of the MOA. Ayala Corporation cannot disavow knowledge of the claim.

Moreover, while in its correspondence with petitioners, Ayala Corporation did mention the filing
of the Lancer suit as an obstacle to its development of the property, it never actually brought up
nor sought redress for petitioners alleged breach of warranty for failure to disclose the Lancer
claim until it filed its Answer[27] dated February 17, 1992.

We now come to the correct interpretation of paragraph 5.7 of the MOA. Does this paragraph
express a commitment or a mere intent on the part of Ayala Corporation to develop the property
within three (3) years from date thereof? Paragraph 5.7 provides:
5.7. The BUYER hereby commits that it will develop the Remaining Property into a first class
residential subdivision of the same class as its New Alabang Subdivision, and that it intends to
complete the first phase under its amended development plan within three (3) years from the
date of this Agreement.[28]

Notably, while the first phrase of the paragraph uses the word commits in reference to the
development of the Remaining Property into a first class residential subdivision, the second
phrase uses the word intends in relation to the development of the first phase of the property
within three (3) years from the date of the MOA. The variance in wording is significant. While
commit[29] connotes a pledge to do something, intend[30] merely signifies a design or
proposition.

Atty. Leopoldo Francisco, former Vice President of Ayala Corporations legal division who
assisted in drafting the MOA, testified:

COURT

You only ask what do you mean by that intent. Just answer on that point.

ATTY. BLANCO

Dont talk about standard.

WITNESS

A Well, the word intent here, your Honor, was used to emphasize the tentative character of the
period of development because it will be noted that the sentence refers to and I quote to
complete the first phase under its amended development plan within three (3) years from the
date of this agreement, at the time of the execution of this agreement, your Honor. That
amended development plan was not yet in existence because the buyer had manifested to the
seller that the buyer could amend the subdivision plan originally belonging to the seller to
conform with its own standard of development and second, your Honor, (interrupted)[31]

It is thus unmistakable that this paragraph merely expresses an intention on Ayala Corporations
part to complete the first phase under its amended development plan within three (3) years from
the execution of the MOA. Indeed, this paragraph is so plainly worded that to misunderstand its
import is deplorable.

More focal to the resolution of the instant case is paragraph 5.7s clear reference to the first
phase of Ayala Corporations amended development plan as the subject of the three (3)-year
intended timeframe for development. Even petitioner Daniel Vazquez admitted on cross-
examination that the paragraph refers not to Conduits but to Ayala Corporations development
plan which was yet to be formulated when the MOA was executed:
Q: Now, turning to Section 5.7 of this Memorandum of Agreement, it is stated as follows: The
Buyer hereby commits that to develop the remaining property into a first class residential
subdivision of the same class as New Alabang Subdivision, and that they intend to complete the
first phase under its amended development plan within three years from the date of this
agreement.

Now, my question to you, Dr. Vasquez is that there is no dispute that the amended development
plan here is the amended development plan of Ayala?

A: Yes, sir.

Q: In other words, it is not Exhibit D-5 which is the original plan of Conduit?

A: No, it is not.

Q: This Exhibit D-5 was the plan that was being followed by GP Construction in 1981?

A: Yes, sir.

Q: And point of fact during your direct examination as of the date of the agreement, this
amended development plan was still to be formulated by Ayala?

A: Yes, sir.[32]

As correctly held by the appellate court, this admission is crucial because while the subject lots
to be sold to petitioners were in the first phase of the Conduit development plan, they were in
the third or last phase of the Ayala Corporation development plan. Hence, even assuming that
paragraph 5.7 expresses a commitment on the part of Ayala Corporation to develop the first
phase of its amended development plan within three (3) years from the execution of the MOA,
there was no parallel commitment made as to the timeframe for the development of the third
phase where the subject lots are located.

Lest it be forgotten, the point of this petition is the alleged failure of Ayala Corporation to offer
the subject lots for sale to petitioners within three (3) years from the execution of the MOA. It is
not that Ayala Corporation committed or intended to develop the first phase of its amended
development plan within three (3) years. Whether it did or did not is actually beside the point
since the subject lots are not located in the first phase anyway.

We now come to the issue of default or delay in the fulfillment of the obligation.

Article 1169 of the Civil Code provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declares; or

(2) When from the nature and the circumstances of the obligation it appears that the designation
of the time when the thing is to be delivered or the service is to be rendered was a controlling
motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to
perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready
to comply in a proper manner with what is incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other begins.

In order that the debtor may be in default it is necessary that the following requisites be present:
(1) that the obligation be demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance judicially or extrajudicially.[33]

Under Article 1193 of the Civil Code, obligations for whose fulfillment a day certain has been
fixed shall be demandable only when that day comes. However, no such day certain was fixed
in the MOA. Petitioners, therefore, cannot demand performance after the three (3) year period
fixed by the MOA for the development of the first phase of the property since this is not the
same period contemplated for the development of the subject lots. Since the MOA does not
specify a period for the development of the subject lots, petitioners should have petitioned the
court to fix the period in accordance with Article 1197[34] of the Civil Code. As no such action
was filed by petitioners, their complaint for specific performance was premature, the obligation
not being demandable at that point. Accordingly, Ayala Corporation cannot likewise be said to
have delayed performance of the obligation.

Even assuming that the MOA imposes an obligation on Ayala Corporation to develop the
subject lots within three (3) years from date thereof, Ayala Corporation could still not be held to
have been in delay since no demand was made by petitioners for the performance of its
obligation.

As found by the appellate court, petitioners letters which dealt with the three (3)-year timetable
were all dated prior to April 23, 1984, the date when the period was supposed to expire. In other
words, the letters were sent before the obligation could become legally demandable. Moreover,
the letters were mere reminders and not categorical demands to perform. More importantly,
petitioners waived the three (3)-year period as evidenced by their agent, Engr. Eduardo Turlas
letter to the effect that petitioners agreed that the three (3)-year period should be counted from
the termination of the case filed by Lancer. The letter reads in part:
I. Completion of Phase I

As per the memorandum of Agreement also dated April 23, 1981, it was undertaken by your
goodselves to complete the development of Phase I within three (3) years. Dr. & Mrs. Vazquez
were made to understand that you were unable to accomplish this because of legal problems
with the previous contractor. These legal problems were resolved as of February 19, 1987, and
Dr. & Mrs. Vazquez therefore expect that the development of Phase I will be completed by
February 19, 1990, three years from the settlement of the legal problems with the previous
contractor. The reason for this is, as you know, that security-wise, Dr. & Mrs. Vazquez have
been advised not to construct their residence till the surrounding area (which is Phase I) is
developed and occupied. They have been anxious to build their residence for quite some time
now, and would like to receive assurance from your goodselves regarding this, in compliance
with the agreement.

II. Option on the adjoining lots

We have already written your goodselves regarding the intention of Dr. & Mrs. Vazquez to
exercise their option to purchase the two lots on each side (a total of 4 lots) adjacent to their
Retained Area. They are concerned that although over a year has elapsed since the settlement
of the legal problems, you have not presented them with the size, configuration, etc. of these
lots. They would appreciate being provided with these at your earliest convenience.[35]

Manifestly, this letter expresses not only petitioners acknowledgement that the delay in the
development of Phase I was due to the legal problems with GP Construction, but also their
acquiescence to the completion of the development of Phase I at the much later date of
February 19, 1990. More importantly, by no stretch of semantic interpretation can it be
construed as a categorical demand on Ayala Corporation to offer the subject lots for sale to
petitioners as the letter merely articulates petitioners desire to exercise their option to purchase
the subject lots and concern over the fact that they have not been provided with the
specifications of these lots.

The letters of petitioners children, Juan Miguel and Victoria Vazquez, dated January 23,
1984[36] and February 18, 1984[37] can also not be considered categorical demands on Ayala
Corporation to develop the first phase of the property within the three (3)-year period much less
to offer the subject lots for sale to petitioners. The letter dated January 23, 1984 reads in part:

You will understand our interest in the completion of the roads to our property, since we cannot
develop it till you have constructed the same. Allow us to remind you of our Memorandum of
Agreement, as per which you committed to develop the roads to our property as per the original
plans of the company, and that

1. The back portion should have been developed before the front portion which has not been
the case.
2. The whole project front and back portions be completed by 1984.[38]

The letter dated February 18, 1984 is similarly worded. It states:

In this regard, we would like to remind you of Articles 5.7 and 5.9 of our Memorandum of
Agreement which states respectively:[39]

Even petitioner Daniel Vazquez letter[40] dated March 5, 1984 does not make out a categorical
demand for Ayala Corporation to offer the subject lots for sale on or before April 23, 1984. The
letter reads in part:

and that we expect from your goodselves compliance with our Memorandum of Agreement, and
a definite date as to when the road to our property and the development of Phase I will be
completed.[41]

At best, petitioners letters can only be construed as mere reminders which cannot be
considered demands for performance because it must appear that the tolerance or benevolence
of the creditor must have ended.[42]

The petition finally asks us to determine whether paragraph 5.15 of the MOA can properly be
construed as an option contract or a right of first refusal. Paragraph 5.15 states:

5.15 The BUYER agrees to give the SELLERS first option to purchase four developed lots next
to the Retained Area at the prevailing market price at the time of the purchase.[43]

The Court has clearly distinguished between an option contract and a right of first refusal. An
option is a preparatory contract in which one party grants to another, for a fixed period and at a
determined price, the privilege to buy or sell, or to decide whether or not to enter into a principal
contract. It binds the party who has given the option not to enter into the principal contract with
any other person during the period designated, and within that period, to enter into such
contract with the one to whom the option was granted, if the latter should decide to use the
option. It is a separate and distinct contract from that which the parties may enter into upon the
consummation of the option. It must be supported by consideration.[44]

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

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

Further, paragraph 5.15 was inserted into the MOA to give petitioners the first crack to buy the
subject lots at the price which Ayala Corporation would be willing to accept when it offers the
subject lots for sale. It is not supported by an independent consideration. As such it is not
governed by Articles 1324 and 1479 of the Civil Code, viz:

Art. 1324. When the offeror has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except when the
option is founded upon a consideration, as something paid or promised.

Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding
upon the promissor if the promise is supported by a consideration distinct from the price.

Consequently, the offer may be withdrawn anytime by communicating the withdrawal to the
other party.[47]

In this case, Ayala Corporation offered the subject lots for sale to petitioners at the price of
P6,500.00/square meter, the prevailing market price for the property when the offer was made
on June 18, 1990.[48] Insisting on paying for the lots at the prevailing market price in 1984 of
P460.00/square meter, petitioners rejected the offer. Ayala Corporation reduced the price to
P5,000.00/square meter but again, petitioners rejected the offer and instead made a counter-
offer in the amount of P2,000.00/square meter.[49] Ayala Corporation rejected petitioners
counter-offer. With this rejection, petitioners lost their right to purchase the subject lots.

It cannot, therefore, be said that Ayala Corporation breached petitioners right of first refusal and
should be compelled by an action for specific performance to sell the subject lots to petitioners
at the prevailing market price in 1984.

WHEREFORE, the instant petition is DENIED. No pronouncement as to costs.

SO ORDERED.

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

--------------------------

SECOND DIVISION
[G.R. No. 32336. December 20, 1930.]

JULIO C. ABELLA, Plaintiff-Appellant, v. GUILLERMO B. FRANCISCO, Defendant-Appellee.

Antonio T. Carrascoso jr., for Appellant.

Camus & Delgado for Mooney.

SYLLABUS

1. CONTRACT OF SALE; PERIOD FOR PAYMENT OF SELLING PRICE; RESOLUTION OF

CONTRACT. — Having agreed that the selling price (even supposing it was a contract of sale)
would be paid not later than December, 1928, and in view of the fact that the vendor executed
said contract in order to pay off with the proceeds thereof certain obligations which fell due in
the same month of December, it is held that the time fixed for the payment of the selling price
was essential in the transaction, and, therefore, the vendor, under article 1124 of the Civil Code,
is entitled to resolve the contract for failure to pay the price within the time specified.

DECISION

AVANCEÑA, C.J. :

Defendant Guillermo B. Francisco purchased from the Government on installments, lots 937 to
945 of the Tala Estate in Novaliches, Caloocan, Rizal. He was in arrears for some of these
installments. On the 31st of October, 1928, he signed the following
document:jgc:chanrobles.com.ph

"MANILA, October 31, 1928

"Received from Mr. Julio C. Abella the amount of five hundred pesos (500), payment on account
of lots Nos. 937, 938, 939, 940, 941, 942, 943, 944, and 945 of the Tala Estate, barrio of
Novaliches, Caloocan, Rizal, containing an area of about 221 hectares, at the rate of one
hundred pesos (P100) per hectare, the balance being due on or before the fifteenth day of
December, 1928, extendible fifteen days thereafter. (Sgd.) G. B. FRANCISCO — P500 —
Phone 67125."cralaw virtua1aw library

After having made this agreement, the plaintiff proposed the sale of these lots at a higher price
to George C. Sellner, collecting P10,000 on account thereof on December 29, 1928.
Besides the P500 which, according to the instrument quoted above, the plaintiff paid, he made
another payment of P415.31 on November 13, 1928, upon demand made by the defendant. On
December 27th of the same year, the defendant, being in the Province of Cebu, wrote to Roman
Mabanta of this City of Manila, attaching a power of attorney authorizing him to sign in behalf of
the defendant all the documents required by the Bureau of Lands for the transfer of the lots to
the plaintiff. In that letter the defendant instructed Roman Mabanta, in the event that the plaintiff
failed to pay the remainder of the selling price, to inform him that the option would be
considered cancelled, and to return to him the amount of P915.31 already delivered. On
January 3, 1929, Mabanta notified the plaintiff that he had received the power of attorney to sign
the deed of conveyance of the lots to him, and that he was willing go execute the proper deed of
sale upon payment of the balance due. The plaintiff asked for a few days’ time, but Mabanta,
following the instructions he had received from the defendant, only gave him until the 5th of that
month. The plaintiff did not pay the rest of the price on the 5th of January, but on the 9th of the
month attempted to do so; Mabanta, however, refused to accept it, and gave him to understand
that he regarded the contract as rescinded. On the same day, Mabanta returned by check the
sum of P915.31 which the plaintiff had paid.

The plaintiff brought this action to compel the defendant to execute the deed of sale of the lots
in question, upon receipt of the balance of the price, and asks that he be judicially declared the
owner of said lots and that the defendant be ordered to deliver them to him.

The court below absolved the defendant from the complaint, and the plaintiff appealed.

In rendering that judgment, the court relied on the fact that the plaintiff had failed to pay the
price of the lots within the stipulated time; and that since the contract between plaintiff and
defendant was an option for the purchase of the lots, time was an essential element in it.

It is to be noted that in the document signed by the defendant, the 15th of December was fixed
as the date, extendible for fifteen days, for the payment by the plaintiff of the balance of the
selling price. It has been admitted that the plaintiff did not offer to complete the payment until
January 9, 1929. He contends that Mabanta, as attorney-in-fact for the defendant in this
transaction, granted him an extension of time until the 9th of January. But Mabanta has stated
that he only extended the time until the 5th of that month. Mabanta’s testimony on this point is
corroborated by that of Paz Vicente and by the plaintiff’s own admission to Narciso Javier that
his option to purchase those lots expired on January 5, 1929.

In holding that the period was an essential element of the transaction between plaintiff and
defendant, the trial court considered that the contract in question was an option for the purchase
that the contract in question was an option for the purchase of the lots, and that in an agreement
of this nature the period is deemed essential. The opinion of the court is divided upon the
question of whether the agreement was an option or a sale, but even supposing it was a sale,
the court holds that time was an essential element in the transaction. The defendant wanted to
sell those lots to the plaintiff in order to pay off certain obligation which fell due in the month of
December, 1928. The time fixed for the payment of the price was therefore essential for the
defendant, and this view in borne out by his letter to his representative Mabanta instructing him
to consider the contract rescinded if the price was not completed in time. In accordance with
article 1124 of the Civil Code, the defendant is entitled to resolve the contract for failure to pay
the price within the time specified.

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

Johnson, Street, Malcolm, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

------------------------

EN BANC

FRANCISCO CHAVEZ,

Petitioner,

- versus -
RAUL M. GONZALES,

in his capacity as the

Secretary of the

Department of Justice;

and NATIONAL TELECOMMUNICATIONS COMMISSION (NTC),

Respondents.

G.R. No. 168338

Present:

PUNO, C.J.,

QUISUMBING,

YNARES-SANTIAGO,

SANDOVAL-GUTIERREZ,

CARPIO,

AUSTRIA-MARTINEZ,

CORONA,

CARPIO MORALES,

AZCUNA,
TINGA,

CHICO-NAZARIO,

VELASCO, JR.,

NACHURA,

REYES, and

LEONARDO-DE CASTRO, JJ.

Promulgated:

February 15, 2008

x-------------------------------------------------------------------------------------x

DECISION

PUNO, C.J.:
A. Precis

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

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

B. The Facts

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

2. On June 7, 2005, former counsel of deposed President Joseph Estrada, Atty. Alan Paguia,
subsequently released an alleged authentic tape recording of the wiretap. Included in the tapes
were purported conversations of the President, the First Gentleman Jose Miguel Arroyo,
COMELEC Commissioner Garcillano, and the late Senator Barbers.[8]
3. On June 8, 2005, respondent Department of Justice (DOJ) Secretary Raul Gonzales
warned reporters that those who had copies of the compact disc (CD) and those broadcasting
or publishing its contents could be held liable under the Anti-Wiretapping Act. These persons
included Secretary Bunye and Atty. Paguia. He also stated that persons possessing or airing
said tapes were committing a continuing offense, subject to arrest by anybody who had
personal knowledge if the crime was committed or was being committed in their presence.[9]

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

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

NTC GIVES FAIR WARNING TO RADIO AND TELEVISION OWNERS/OPERATORS TO

OBSERVE ANTI-WIRETAPPING LAW AND PERTINENT CIRCULARS ON PROGRAM
STANDARDS

xxx xxx xxx

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

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

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

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

6. On June 14, 2005, NTC held a dialogue with the Board of Directors of the Kapisanan ng
mga Brodkaster sa Pilipinas (KBP). NTC allegedly assured the KBP that the press release did
not violate the constitutional freedom of speech, of expression, and of the press, and the right to
information. Accordingly, NTC and KBP issued a Joint Press Statement which states, among
others, that: [12]
NTC respects and will not hinder freedom of the press and the right to information on matters of
public concern. KBP & its members have always been committed to the exercise of press
freedom with high sense of responsibility and discerning judgment of fairness and honesty.

NTC did not issue any MC [Memorandum Circular] or Order constituting a restraint of press
freedom or censorship. The NTC further denies and does not intend to limit or restrict the
interview of members of the opposition or free expression of views.

What is being asked by NTC is that the exercise of press freedom [be] done responsibly.

KBP has program standards that KBP members will observe in the treatment of news and public
affairs programs. These include verification of sources, non-airing of materials that would
constitute inciting to sedition and/or rebellion.

The KBP Codes also require that no false statement or willful misrepresentation is made in the
treatment of news or commentaries.

The supposed wiretapped tapes should be treated with sensitivity and handled responsibly
giving due consideration to the process being undertaken to verify and validate the authenticity
and actual content of the same.

C. The Petition

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

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

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

Respondents[16] denied that the acts transgress the Constitution, and questioned petitioners
legal standing to file the petition. Among the arguments they raised as to the validity of the fair
warning issued by respondent NTC, is that broadcast media enjoy lesser constitutional
guarantees compared to print media, and the warning was issued pursuant to the NTCs
mandate to regulate the telecommunications industry. [17] It was also stressed that most of the
[television] and radio stations continue, even to this date, to air the tapes, but of late within the
parameters agreed upon between the NTC and KBP. [18]

D. THE PROCEDURAL THRESHOLD: LEGAL STANDING

To be sure, the circumstances of this case make the constitutional challenge peculiar.
Petitioner, who is not a member of the broadcast media, prays that we strike down the acts and
statements made by respondents as violations of the right to free speech, free expression and a
free press. For another, the recipients of the press statements have not come forwardneither
intervening nor joining petitioner in this action. Indeed, as a group, they issued a joint statement
with respondent NTC that does not complain about restraints on freedom of the press.
It would seem, then, that petitioner has not met the requisite legal standing, having failed to
allege such a personal stake in the outcome of the controversy as to assure that concrete
adverseness which sharpens the presentation of issues upon which the Court so largely
depends for illumination of difficult constitutional questions. [19]

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

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

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

E. RE-EXAMINING THE LAW ON FREEDOM OF SPEECH,

OF EXPRESSION AND OF THE PRESS

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

Freedom of expression has gained recognition as a fundamental principle of every democratic

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

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

E.1. ABSTRACTION OF FREE SPEECH

Surrounding the freedom of speech clause are various concepts that we have adopted as part
and parcel of our own Bill of Rights provision on this basic freedom.[31] What is embraced
under this provision was discussed exhaustively by the Court in Gonzales v. Commission on
Elections, [32] in which it was held:
At the very least, free speech and free press may be identified with the liberty to discuss publicly
and truthfully any matter of public interest without censorship and punishment. There is to be no
previous restraint on the communication of views or subsequent liability whether in libel suits,
prosecution for sedition, or action for damages, or contempt proceedings unless there be a clear
and present danger of substantive evil that Congress has a right to prevent. [33]

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

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

The scope of freedom of expression is so broad that it extends protection to nearly all forms of
communication. It protects speech, print and assembly regarding secular as well as political
causes, and is not confined to any particular field of human interest. The protection covers
myriad matters of public interest or concern embracing all issues, about which information is
needed or appropriate, so as to enable members of society to cope with the exigencies of their
period. The constitutional protection assures the broadest possible exercise of free speech and
free press for religious, political, economic, scientific, news, or informational ends, inasmuch as
the Constitution's basic guarantee of freedom to advocate ideas is not confined to the
expression of ideas that are conventional or shared by a majority.
The constitutional protection is not limited to the exposition of ideas. The protection afforded
free speech extends to speech or publications that are entertaining as well as instructive or
informative. Specifically, in Eastern Broadcasting Corporation (DYRE) v. Dans,[41] this Court
stated that all forms of media, whether print or broadcast, are entitled to the broad protection of
the clause on freedom of speech and of expression.

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

E.2. DIFFERENTIATION: THE LIMITS & RESTRAINTS OF FREE SPEECH

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

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

Moreover, the techniques of reviewing alleged restrictions on speech (overbreadth, vagueness,

and so on) have been applied differently to each category, either consciously or unconsciously.
[46] A study of free speech jurisprudencewhether here or abroadwill reveal that courts have
developed different tests as to specific types or categories of speech in concrete situations; i.e.,
subversive speech; obscene speech; the speech of the broadcast media and of the traditional
print media; libelous speech; speech affecting associational rights; speech before hostile
audiences; symbolic speech; speech that affects the right to a fair trial; and speech associated
with rights of assembly and petition. [47]

Generally, restraints on freedom of speech and expression are evaluated by either or a

combination of three tests, i.e., (a) the dangerous tendency doctrine which permits limitations on
speech once a rational connection has been established between the speech restrained and the
danger contemplated; [48] (b) the balancing of interests tests, used as a standard when courts
need to balance conflicting social values and individual interests, and requires a conscious and
detailed consideration of the interplay of interests observable in a given situation of type of
situation; [49] and (c) the clear and present danger rule which rests on the premise that speech
may be restrained because there is substantial danger that the speech will likely lead to an evil
the government has a right to prevent. This rule requires that the evil consequences sought to
be prevented must be substantive, extremely serious and the degree of imminence extremely
high. [50]

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

E.3. IN FOCUS: FREEDOM OF THE PRESS

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

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

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

E.4. ANATOMY OF RESTRICTIONS: PRIOR RESTRAINT, CONTENT-NEUTRAL AND

CONTENT-BASED REGULATIONS

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

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

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

Be that as it may, the determination in every case of whether there is an impermissible restraint
on the freedom of speech has always been based on the circumstances of each case, including
the nature of the restraint. And in its application in our jurisdiction, the parameters of this
principle have been etched on a case-to-case basis, always tested by scrutinizing the
governmental issuance or act against the circumstances in which they operate, and then
determining the appropriate test with which to evaluate.
Prior restraint refers to official governmental restrictions on the press or other forms of
expression in advance of actual publication or dissemination.[56] Freedom from prior restraint is
largely freedom from government censorship of publications, whatever the form of censorship,
and regardless of whether it is wielded by the executive, legislative or judicial branch of the
government. Thus, it precludes governmental acts that required approval of a proposal to
publish; licensing or permits as prerequisites to publication including the payment of license
taxes for the privilege to publish; and even injunctions against publication. Even the closure of
the business and printing offices of certain newspapers, resulting in the discontinuation of their
printing and publication, are deemed as previous restraint or censorship. [57] Any law or official
that requires some form of permission to be had before publication can be made, commits an
infringement of the constitutional right, and remedy can be had at the courts.

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

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

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

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

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

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

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

Also, the incidental restriction on speech must be no greater than what is essential to the
furtherance of that interest. [70] A restriction that is so broad that it encompasses more than
what is required to satisfy the governmental interest will be invalidated. [71] The regulation,
therefore, must be reasonable and narrowly drawn to fit the regulatory purpose, with the least
restrictive means undertaken. [72]
Thus, when the prior restraint partakes of a content-neutral regulation, it is subjected to an
intermediate review. A content-based regulation,[73] however, bears a heavy presumption of
invalidity and is measured against the clear and present danger rule. The latter will pass
constitutional muster only if justified by a compelling reason, and the restrictions imposed are
neither overbroad nor vague. [74]

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

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

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

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

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

As pointed out by respondents, Philippine jurisprudence has also echoed a differentiation in

treatment between broadcast and print media. Nevertheless, a review of Philippine case law on
broadcast media will show thatas we have deviated with the American conception of the Bill of
Rights[81] we likewise did not adopt en masse the U.S. conception of free speech as it relates
to broadcast media, particularly as to which test would govern content-based prior restraints.

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

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

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

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

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

Broadcasting has to be licensed. Airwave frequencies have to be allocated among qualified

users. A broadcast corporation cannot simply appropriate a certain frequency without regard for
government regulation or for the rights of others.

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

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

Similar considerations apply in the area of national security.

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

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

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

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

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

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

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

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

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

All that remains to be said is that the ruling is to be limited to the concept of obscenity applicable
to motion pictures. It is the consensus of this Court that where television is concerned, a less
liberal approach calls for observance. This is so because unlike motion pictures where the
patrons have to pay their way, television reaches every home where there is a set. Children
then will likely be among the avid viewers of the programs therein shown..It cannot be denied
though that the State as parens patriae is called upon to manifest an attitude of caring for the
welfare of the young.

More recently, in resolving a case involving the conduct of exit polls and dissemination of the
results by a broadcast company, we reiterated that the clear and present danger rule is the test
we unquestionably adhere to issues that involve freedoms of speech and of the press.[89]

This is not to suggest, however, that the clear and present danger rule has been applied to all
cases that involve the broadcast media. The rule applies to all media, including broadcast, but
only when the challenged act is a content-based regulation that infringes on free speech,
expression and the press. Indeed, in Osmena v. COMELEC,[90] which also involved broadcast
media, the Court refused to apply the clear and present danger rule to a COMELEC regulation
of time and manner of advertising of political advertisements because the challenged restriction
was content-neutral.[91] And in a case involving due process and equal protection issues, the
Court in Telecommunications and Broadcast Attorneys of the Philippines v. COMELEC[92]
treated a restriction imposed on a broadcast media as a reasonable condition for the grant of
the medias franchise, without going into which test would apply.
That broadcast media is subject to a regulatory regime absent in print media is observed also in
other jurisdictions, where the statutory regimes in place over broadcast media include elements
of licensing, regulation by administrative bodies, and censorship. As explained by a British
author:

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

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

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

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

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

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

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

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

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

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

SO ORDERED.

REYNATO S. PUNO

Chief Justice

WE CONCUR:

LEONARDO A. QUISUMBING
Associate Justice
CONSUELO YNARES-SANTIAGO

Associate Justice

ANGELINA SANDOVAL-GUTIERREZ

Associate Justice

ANTONIO T. CARPIO

Associate Justice

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

RENATO C. CORONA
Associate Justice

CONCHITA CARPIO MORALES

Associate Justice

ADOLFO S. AZCUNA

Associate Justice

DANTE O. TINGA

Associate Justice

MINITA V. CHICO-NAZARIO

Associate Justice
PRESBITERO J. VELASCO, JR.

Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

RUBEN T. REYES TERESITA LEONARDO-DE CASTRO

Associate Justice Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above
decision had been reached in consultation before the case was assigned to the writer of the
opinion of the Court.
REYNATO S. PUNO

Chief Justice

[1] G.R. No. 103956, March 31, 1992, 207 SCRA 712.

[2] 218 Phil. 754 (1984).

[3] G.R. No. 147571, May 5, 2001, 357 SCRA 496.

[4] G.R. No. 169838, April 25, 2006, 488 SCRA 226.

[5] Rollo, pp. 6-7 (citing the Philippine Daily Inquirer (PDI), June 7, 2005, pp. A1, A18; PDI, June
14, 2005, p. A1); and p. 58.

[6] Id. at 7-8 (citing the Manila Standard, June 10, 2005, p. A2); and 58.

[7] Id. at 7-8 and 59.

[8] Id.

[9] Id. at 8-9 and 59.

[10] Id. at 9.

[11] Id. at 10-12, 43-44, 60-62.

[12] Id. at 62-63, 86-87.

[13] Id. at 6.

[14] Respondents have committed blatant violations of the freedom of expression and of the
press and the right of the people to information on matters of public concern enshrined in Article
III, Sections 4 and 7 of the 1987 Constitution. Id. at 18. Petitioner also argued that respondent
NTC acted beyond its powers when it issued the press release of June 11, 2005. Id.
[15] Id. at 6.

[16] Through the Comment filed by the Solicitor-General. Id. at 56-83.

[17] Id. at 71-73.

[18] Id. at 74-75.

[19] The Court will exercise its power of judicial review only if the case is brought before it by a
party who has the legal standing to raise the constitutional or legal question. Legal standing
means a personal and substantial interest in the case such that the party has sustained or will
sustain direct injury as a result of the government act that is being challenged. The term interest
is material interest, an interest in issue and to be affected by the decree, as distinguished from
mere interest in the question involved, or a mere incidental interest. Pimentel v. Executive
Secretary, G.R. No. 158088, July 6, 2005, 462 SCRA 622, citing Joya vs. Presidential
Commission on Good Government, G.R. No. 96541, August 24, 1993, 225 SCRA 568. See
Kilosbayan, Inc. v. Morato, G.R. No. 118910, July 17, 1995, 246 SCRA 540, 562563; and Agan
v. PIATCO (Decision), 450 Phil. 744 (2003).

[20] Araneta v. Dinglasan, 84 Phil. 368, 373 (1949), cited in Osmea v. COMELEC, G.R. No.
100318, July 30, 1991, 199 SCRA 750.

[21] See Agan v. PIATCO (Decision), 450 Phil. 744 (2003).

[22] Philconsa v. Jimenez, 122 Phil. 894 (1965); Civil Liberties Union v. Executive Secretary,
G.R. No. 83896, February 22, 1991, 194 SCRA 317; Guingona v. Carague, G.R. No. 94571,
April 22, 1991, 196 SCRA 221; Osmea v. COMELEC, G.R. No. 100318, July 30, 1991, 199
SCRA 750; Basco v. PAGCOR, 274 Phil. 323 (1991); Carpio v. Executive Secretary, G.R. No.
96409, February 14, 1992, 206 SCRA 290; Del Mar v. PAGCOR, 400 Phil. 307 (2000).

[23] Basco v. PAGCOR, 274 Phil. 323 (1991), citing Kapatiran ng mga Naglilingkod sa
Pamahalaan ng Pilipinas Inc. v. Tan, G.R. No. L-81311, June 30, 1988, 163 SCRA 371.

[24] 1987 PHIL. CONST. Art. III, 4.

[25] U.S. Bill of Rights, First Amendment. (Congress shall make no lawabridging the freedom of
speech, or of the press, or the right of the people peaceably to assemble, and to petition the
Government for a redress of grievances.)

[26] The First Amendment was so crafted because the founders of the American government
believed -- as a matter of history and experience -- that the freedom to express personal
opinions was essential to a free government. See LARRY KRAMER, THE PEOPLE
THEMSELVES: POPULAR CONSTITUTION AND JUDICIAL REVIEW (2004).
[27] Article 19 of the 1948 Universal Declaration on Human Rights (UDHR) states: Everyone
has the right to freedom of opinion and expression; this right includes the right to hold opinions
without interference and to seek, receive and impart information and ideas through any media
and regardless of frontiers. Although the UDHR is not binding as a treaty, many of its provisions
have acquired binding status on States and are now part of customary international law. Article
19 forms part of the UDHR principles that have been transformed into binding norms. Moreover,
many of the rights in the UDHR were included in and elaborated on in the International
Covenant on Civil and Political Rights (ICCPR), a treaty ratified by over 150 States, including
the Philippines. The recognition of freedom of expression is also found in regional human rights
instruments, namely, the European Convention on Human Rights (Article 10), the American
Convention on Human Rights (Article 10), and the African Charter on Human and Peoples
Rights (Article 9).

[28] Gonzales v. COMELEC, 137 Phil. 471, 492 (1969).

[29] Salonga v. Cruz-Pano, G.R. 59524, February 18, 1985, 134 SCRA 458-459; Gonzales v.
COMELEC, 137 Phil. 489, 492-3 (1969); Philippine Blooming Mills Employees Organization v.
Philippine Blooming Mills Co., 151-A Phil. 676-677 (1973); National Press Club v. COMELEC,
G.R. No. 102653, March 5, 1992, 207 SCRA 1, 9; Adiong v. COMELEC, G.R. No. 103956,
March 31, 1992, 207 SCRA 712, 715.

[30] Indeed, the struggle that attended the recognition of the value of free expression was
discussed by Justice Malcolm in the early case United States v. Bustos, 37 Phil. 731, 739
(1918). Justice Malcolm generalized that the freedom of speech as cherished in democratic
countries was unknown in the Philippine Islands before 1900. Despite the presence of
pamphlets and books early in the history of the Philippine Islands, the freedom of speech was
alien to those who were used to obeying the words of barangay lords and, ultimately, the
colonial monarchy. But ours was a history of struggle for that specific right: to be able to express
ourselves especially in the governance of this country. Id.

[31] Id.

[32] 137 Phil. 471, 492 (1969).

[33] Id.

[34] Id. at 493, citing Thomas I. Emerson, Toward a General Theory of the First Amendment, 72
Yale Law Journal 877 (1963).

[35] Id. citing New York Times Co. v. Sullivan, 376 US 254, 270 (1964).

[36] Id.

[37] Id.
[38] Id.

[39] Id. citing Terminiello v. City of Chicago, 337 US 1, 4 (1949).

[40] Id. citing U.S. v. Schwimmer, 279 US 644, 655 (1929).

[41] G.R. No. L-59329, July 19, 1985, 137 SCRA 628.

[42] Gonzales v. COMELEC, 137 Phil. 471, 494(1969).

[43] HECTOR S. DE LEON, I PHILIPPINE CONSTITUTIONAL LAW: PRINCIPLES AND

CASES 485 (2003) [Hereinafter DE LEON, CONSTITUTIONAL LAW].

[44] See JOHN E. NOWAK & RONALD D. ROTUNDA, CONSTITUTIONAL LAW 16.1, 1131
(7th ed.2000 [Hereinafter NOWAK & ROTUNDA, CONSTITUTIONAL LAW].

[45] DE LEON, CONSTITUTIONAL LAW at 485. Laws have also limited the freedom of speech
and of the press, or otherwise affected the media and freedom of expression. The Constitution
itself imposes certain limits (such as Article IX on the Commission on Elections, and Article XVI
prohibiting foreign media ownership); as do the Revised Penal Code (with provisions on national
security, libel and obscenity), the Civil Code (which contains two articles on privacy), the Rules
of Court (on the fair administration of justice and contempt) and certain presidential decrees.
There is also a shield law, or Republic Act No. 53, as amended by Republic Act No. 1477.
Section 1 of this law provides protection for non-disclosure of sources of information, without
prejudice to ones liability under civil and criminal laws. The publisher, editor, columnist or duly
accredited reporter of a newspaper, magazine or periodical of general circulation cannot be
compelled to reveal the source of any information or news report appearing in said publication, if
the information was released in confidence to such publisher, editor or reporter unless the court
or a Committee of Congress finds that such revelation is demanded by the security of the state.

[46] See NOWAK & ROTUNDA, CONSTITUTIONAL LAW 16.1, 1131 (7th ed.2000).

[47] Id.

[48] Cabansag v. Fernandez, 102 Phil. 151 (1957); Gonzales v. COMELEC, 137 Phil. 471
(1969). See People v. Perez, 4 Phil. 599 (1905); People v. Nabong, 57 Phil. 455 (1933); People
v. Feleo, 57 Phil. 451 (1933).

[49] This test was used by J. Ruiz-Castro in his Separate Opinion in Gonzales v. COMELEC,
137 Phil. 471, 532-537 (1969).

[50] Cabansag v. Fernandez, 102 Phil. 151 (1957).

[51] ABS-CBN Broadcasting Corp. v. COMELEC, 380 Phil. 780, 794 (2000).

[52] See U.S. v. Bustos, 37 Phil. 731 (1918).

[53] The aspect of freedom from liability subsequent to publication precludes liability for
completed publications of views traditionally held innocent. Otherwise, the prohibition on prior
restraint would be meaningless, as the unrestrained threat of subsequent punishment, by itself,
would be an effective prior restraint. Thus, opinions on public issues cannot be punished when
published, merely because the opinions are novel or controversial, or because they clash with
current doctrines. This fact does not imply that publishers and editors are never liable for what
they print. Such freedom gives no immunity from laws punishing scandalous or obscene matter,
seditious or disloyal writings, and libelous or insulting words. As classically expressed, the
freedom of the press embraces at the very least the freedom to discuss truthfully and publicly
matters of public concern, without previous restraint or fear of subsequent punishment. For
discussion to be innocent, it must be truthful, must concern something in which people in
general take a healthy interest, and must not endanger some important social end that the
government by law protects. See JOAQUIN G. BERNAS, S.J., THE 1987 CONSTITUTION OF
THE REPUBLIC OF THE PHILIPPINES: A COMMENTARY, 225 (2003 ed.).

[54] Freedom of access to information regarding matters of public interest is kept real in several
ways. Official papers, reports and documents, unless held confidential and secret by competent
authority in the public interest, are public records. As such, they are open and subject to
reasonable regulation, to the scrutiny of the inquiring reporter or editor. Information obtained
confidentially may be printed without specification of the source; and that source is closed to
official inquiry, unless the revelation is deemed by the courts, or by a House or committee of
Congress, to be vital to the security of the State. Id.

[55] Freedom of circulation refers to the unhampered distribution of newspapers and other
media among customers and among the general public. It may be interfered with in several
ways. The most important of these is censorship. Other ways include requiring a permit or
license for the distribution of media and penalizing dissemination of copies made without it;[55]
and requiring the payment of a fee or tax, imposed either on the publisher or on the distributor,
with the intent to limit or restrict circulation. These modes of interfering with the freedom to
circulate have been constantly stricken down as unreasonable limitations on press freedom.
Thus, imposing a license tax measured by gross receipts for the privilege of engaging in the
business of advertising in any newspaper, or charging license fees for the privilege of selling
religious books are impermissible restraints on the freedom of expression. Id. citing Grosjean v.
American Press Co., 297 U.S. 233 (1936); Murdock v. Pennsylvania, 319 U.S. 105 (1943), and
American Bible Society v. City of Manila, 101 Phil. 386 (1957). It has been held, however, even
in the Philippines, that publishers and distributors of newspapers and allied media cannot
complain when required to pay ordinary taxes such as the sales tax. The exaction is valid only
when the obvious and immediate effect is to restrict oppressively the distribution of printed
matter.
[56] Id at 225.

[57] Burgos v. Chief of Staff, 218 Phil. 754 (1984).

[58] Gonzales v. COMELEC, 137 Phil. 471 (1969); ABS-CBN Broadcasting Corp. v. COMELEC,
380 Phil. 780, 795 (2000) (Doctrinally, the Court has always ruled in favor of the freedom of
expression, and any restriction is treated an exemption.); Social Weather Stations v.
COMELEC, G.R. No. 147571, May 5, 2001, 357 SCRA 496 ([A]ny system of prior restraint
comes to court bearing a heavy burden against its constitutionality. It is the government which
must show justification for enforcement of the restraint.). See also Iglesia ni Cristo v. Court of
Appeals, 328 Phil. 893 (1996) (religious speech falls within the protection of free speech).

[59] Iglesia ni Cristo v. CA, 328 Phil. 893, 928 (1996), citing Near v. Minnesota, 283 US 697
(1931); Bantam Books Inc. v. Sullivan, 372 US 58 (1963); New York Times v. United States,
403 US 713 (1971).

[60] See J.B.L. Reyes v. Bagatsing, 210 Phil. 457 (1983), Navarro v. Villegas, G.R. No. L-
31687, February 18, 1970, 31 SCRA 730; Ignacio v. Ela, 99 Phil. 346 (1956); Primicias v.
Fugosa, 80 Phil. 71 (1948).

[61] Determining if a restriction is content-based is not always obvious. A regulation may be

content-neutral on its face but partakes of a content-based restriction in its application, as when
it can be shown that the government only enforces the restraint as to prohibit one type of
content or viewpoint. In this case, the restriction will be treated as a content-based regulation.
The most important part of the time, place, or manner standard is the requirement that the
regulation be content-neutral both as written and applied. See NOWAK & ROTUNDA,
CONSTITUTIONAL LAW 16.1, 1133 (7th ed.2000).

[62] See Osmea v. COMELEC, 351 Phil. 692, 718 (1998). The Court looked to Adiong v.
COMELEC, G.R. No. 103456, March 31, 1992, 207 SCRA 712, which had cited a U.S. doctrine,
viz. A governmental regulation is sufficiently justified if it is within the constitutional power of the
Government, if it furthers an important or substantial governmental interest; if the governmental
interest is unrelated to the suppression of free expression; and if the incident restriction on
alleged [freedom of speech & expression] is no greater than is essential to the furtherance of
that interest.

[63] NOWAK & ROTUNDA, CONSTITUTIONAL LAW 16.1, 1133 (7th ed.2000). This was also
called a deferential standard of review in Osmea v. COMELEC, 351 Phil. 692, 718 (1998). It
was explained that the clear and present danger rule is not a sovereign remedy for all free
speech problems, and its application to content-neutral regulations would be tantamount to
using a sledgehammer to drive a nail when a regular hammer is all that is needed. Id. at 478.

[64] Osmea v. COMELEC, 351 Phil. 692, 717, citing Adiong v. COMELEC, G.R. No. 103956,
March 31, 1992, 207 SCRA 712. It was noted that the test was actually formulated in United
States v. OBrien, 391 U.S. 367 (1968), which was deemed appropriate for restrictions on
speech which are content-neutral.

[65] Iglesia ni Cristo v. Court of Appeals, 328 Phil. 893 (1996). In this case, it was found that the
act of respondent Board of Review for Motion Pictures and Television of rating a TV program
with X on the ground that it offend[s] and constitute[s] an attack against other religions which is
expressly prohibited by law was a form of prior restraint and required the application of the clear
and present danger rule.

[66] Iglesia ni Cristo v. Court of Appeals, 328 Phil. 893 (1996); Gonzales v. COMELEC, 137
Phil. 471 (1969); ABS-CBN Broadcasting Corp. v. COMELEC, 380 Phil. 780 (2000); Social
Weather Stations v. COMELEC, G.R. No. 147571, May 5, 2001, 357 SCRA 496.

[67] Iglesia ni Cristo v. Court of Appeals, 328 Phil. 893 (1996).

[68] Schenke v. United States, 249 U.S. 47, 52 (19191), cited in Cabansag v. Fernandez, 102
Phil. 151 (1957); and ABS-CBN Broadcasting Corp. v. COMELEC, 380 Phil. 780, 794 (2000).

[69] Adiong v. COMELEC, G.R. No. 103956, March 31, 1992, 207 SCRA 712, cited in ABS-
CBN Broadcasting Corp. v. COMELEC, 380 Phil. 780, 795 (2000).

[70] See Adiong v. COMELEC, G.R. No. 103956, March 31, 1992, 207 SCRA 712, and
Gonzales v. COMELEC, 137 Phil. 471 (1969), cited in ABS-CBN Broadcasting Corp. v.
COMELEC, 380 Phil. 780, 795 (2000).

[71] See Adiong v. COMELEC, G.R. No. 103956, March 31, 1992, 207 SCRA 712.

[72] See Osmea v. COMELEC, 351 Phil. 692 (1998).

[73] Parenthetically, there are two types of content-based restrictions. First, the government
may be totally banning some type of speech for content (total ban). Second, the government
may be requiring individuals who wish to put forth certain types of speech to certain times or
places so that the type of speech does not adversely affect its environment. See NOWAK &
ROTUNDA, CONSTITUTIONAL LAW 16.1, 1131 (7th ed.2000). Both types of conten-based
regulations are subject to strict scrutiny and the clear and present danger rule.

[74] Iglesia ni Cristo v. Court of Appeals, 328 Phil. 893 (1996); Gonzales v. COMELEC, 137
Phil. 471 (1969); ABS-CBN Broadcasting Corp. v. COMELEC, 380 Phil. 780 (2000); Social
Weather Stations v. COMELEC, G.R. No. 147571, May 5, 2001, 357 SCRA 496.

[75] This is based on a finding that broadcast regulation involves unique considerations, and
that differences in the characteristics of new media justify differences in the First Amendment
standards applied to them. Red Lion Broad. Co. v. Federal Communications Commission [FCC],
395 U.S. 367, 386 (1969). See generally National Broadcasting Co. v. United States, 319 U.S.
190, 219 (1943) (noting that the public interest standard denoted to the FCC is an expansive
power).

[76] See Federal Communications Commission [FCC] v. Pacifica Foundation, 438 U.S. 726
(1978); Sable Communications v. FCC, 492 U.S. 115 (1989); and Reno v. American Civil
Liberties Union [ACLU], 521 U.S. 844, 874 (1997). In these cases, U.S. courts disregarded the
argument that the offended listener or viewer could simply turn the dial and avoid the unwanted
broadcast [thereby putting print and broadcast media in the same footing], reasoning that
because the broadcast audience is constantly tuning in and out, prior warnings cannot protect
the listener from unexpected program content.

[77] Red Lion Broad. Co. v. FCC, 395 U.S. 367, 386 (1969). Red Lion involved the application of
the fairness doctrine and whether someone personally attacked had the right to respond on the
broadcast medium within the purview of FCC regulation. The court sustained the regulation. The
Court in Red Lion reasoned that because there are substantially more individuals who want to
broadcast than there are frequencies available, this scarcity of the spectrum necessitates a
stricter standard for broadcast media, as opposed to newspapers and magazines. See generally
National Broadcasting v. United States, 319 U.S. 190, 219 (1943) (noting that the public interest
standard denoted to the FCC is an expansive power).

[78] See Federal Communications Commission v. Pacifica Foundation, 438 U.S. 726 (1978);
Sable Communications v. FCC, 492 U.S. 115 (1989); and Reno v. American Civil Liberties
Union [ACLU], 521 U.S. 844, 874 (1997). In FCC v. Pacifica Foundation, involving an FCC
decision to require broadcasters to channel indecent programming away from times of the day
when there is a reasonable risk that children may be in the audience, the U.S. Court found that
the broadcast medium was an intrusive and pervasive one. In reaffirming that this medium
should receive the most limited of First Amendment protections, the U.S. Court held that the
rights of the public to avoid indecent speech trump those of the broadcaster to disseminate such
speech. The justifications for this ruling were two-fold. First, the regulations were necessary
because of the pervasive presence of broadcast media in American life, capable of injecting
offensive material into the privacy of the home, where the right "to be left alone plainly
outweighs the First Amendment rights of an intruder." Second, the U.S. Court found that
broadcasting "is uniquely accessible to children, even those too young to read." The Court
dismissed the argument that the offended listener or viewer could simply turn the dial and avoid
the unwanted broadcast, reasoning that because the broadcast audience is constantly tuning in
and out, prior warnings cannot protect the listener from unexpected program content.

[79] FCC v. League of Women Voters, 468 U.S. 364, 376 (1984).

[80] Id. at 380.

[81] See Estrada v. Escritor (Resolution), A.M. No. P-02-1651, June 22, 2006 (free exercise of
religion); and Osmea v. COMELEC, 351 Phil. 692, 718 (1998) (speech restrictions to promote
voting rights). The Court in Osmea v. COMELEC, for example, noted that it is a foreign notion to
the American Constitution that the government may restrict the speech of some in order to
enhance the relative voice of others [the idea being that voting is a form of speech]. But this
Court then declared that the same does not hold true of the Philippine Constitution, the notion
being in fact an animating principle of that document. 351 Phil. 692, 718 (1998).

[82] G.R. No. L-59329, July 19, 1985, 137 SCRA 628.

[83] Id.

[84] Id. at 634-637.

[85] There is another case wherein the Court had occasion to refer to the differentiation between
traditional print media and broadcast media, but of limited application to the case at bar
inasmuch as the issues did not invoke a free-speech challenge, but due process and equal
protection. See Telecommunications and Broadcast Attorneys of the Philippines, Inc. v.
COMELEC, 352 Phil. 153 (1998) (challenge to legislation requiring broadcast stations to provide
COMELEC Time free of charge).

[86] G.R. No. L-69500, July 22, 1985, 137 SCRA 717. In this case, the classification of a movie
as For Adults Only was challenged, with the issue focused on obscenity as basis for the alleged
invasion of the right to freedom on artistic and literary expression embraced in the free speech
guarantees of the Constitution. The Court held that the test to determine free expression was
the clear and present danger rule. The Court found there was an abuse of discretion, but did not
get enough votes to rule it was grave. The decision specifically stated that the ruling in the case
was limited to concept of obscenity applicable to motion pictures. Id. at 723-729.

[87] Id. at 725.

[88] Id.

[89] ABS-CBN Broadcasting Corp. v. COMELEC, 380 Phil. 780, 794 (COMELEC Resolution
restraining ABS-CBN, a corporation engaged in broadcast media of television and radio, from
conducting exit surveys after the 1998 elections). Although the decision was rendered after the
1998 elections, the Court proceeded to rule on the case to rule on the issue of the
constitutionality of holding exit polls and the dissemination of data derived therefrom. The Court
ruled that restriction on exit polls must be tested against the clear and present danger rule, the
rule we unquestionably adhere to. The framing of the guidelines issued by the Court clearly
showed that the issue involved not only the conduct of the exit polls but also its dissemination
by broadcast media. And yet, the Court did not distinguish, and still applied the clear and
present danger rule.

[90] 351 Phil. 692 (1998) (challenge to legislation which sought to equalize media access
through regulation).
[91] Id. at 718.

[92] Telecommunications and Broadcast Attorneys of the Philippines, Inc. v. COMELEC, 352
Phil. 153 (1998) (challenge to legislation requiring broadcast stations to provide COMELEC
Time free of charge).

[93] HELEN FENWICK, CIVIL LIBERTIES AND HUMAN RIGHTS 296 (3rd ed. 2002).

[94] Id.

[95] Stephen J. Shapiro, How Internet Non-Regulation Undermines The Rationales Used To
Support Broadcast Regulation, 8-FALL MEDIA L. & POL'Y 1, 2 (1999).

[96] Technological advances, such as software that facilitates the delivery of live, or real-time,
audio and video over the Internet, have enabled Internet content providers to offer the same
services as broadcasters. Indeed, these advancements blur the distinction between a computer
and a television. Id. at 13.

[97] Id.

[98] The current rationales used to support regulation of the broadcast media become
unpersuasive in light of the fact that the unregulated Internet and the regulated broadcast media
share many of the same features. Id. In other words, as the Internet and broadcast media
become identical, for all intents and purposes, it makes little sense to regulate one but not the
other in an effort to further First Amendment principles. Indeed, as Internet technologies
advance, broadcasters will have little incentive to continue developing broadcast programming
under the threat of regulation when they can disseminate the same content in the same format
through the unregulated Internet. In conclusion, "the theory of partial regulation, whatever its
merits for the circumstances of the last fifty years, will be unworkable in the media landscape of
the future." Id. at 23.

-----------------------------------------

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 73867 February 29, 1988

TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner,

vs.
IGNACIO CASTRO, SR., SOFIA C. CROUCH, IGNACIO CASTRO JR., AURORA CASTRO,
SALVADOR CASTRO, MARIO CASTRO, CONRADO CASTRO, ESMERALDA C. FLORO,
AGERICO CASTRO, ROLANDO CASTRO, VIRGILIO CASTRO AND GLORIA CASTRO, and
HONORABLE INTERMEDIATE APPELLATE COURT, respondents.

PADILLA, J.:

Petition for review on certiorari of the decision * of the Intermediate Appellate Court, dated 11
February 1986, in AC-G.R. No. CV-70245, entitled "Ignacio Castro, Sr., et al., Plaintiffs-
Appellees, versus Telefast Communication/Philippine Wireless, Inc., Defendant-Appellant."

The facts of the case are as follows:

On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr. and mother
of the other plaintiffs, passed away in Lingayen, Pangasinan. On the same day, her daughter
Sofia C. Crouch, who was then vacationing in the Philippines, addressed a telegram to plaintiff
Ignacio Castro, Sr. at 685 Wanda, Scottsburg, Indiana, U.S.A., 47170 announcing
Consolacion's death. The telegram was accepted by the defendant in its Dagupan office, for
transmission, after payment of the required fees or charges.

The telegram never reached its addressee. Consolacion was interred with only her daughter
Sofia in attendance. Neither the husband nor any of the other children of the deceased, then all
residing in the United States, returned for the burial.

When Sofia returned to the United States, she discovered that the wire she had caused the
defendant to send, had not been received. She and the other plaintiffs thereupon brought action
for damages arising from defendant's breach of contract. The case was filed in the Court of First
Instance of Pangasinan and docketed therein as Civil Case No. 15356. The only defense of the
defendant was that it was unable to transmit the telegram because of "technical and
atmospheric factors beyond its control." 1 No evidence appears on record that defendant ever
made any attempt to advise the plaintiff Sofia C. Crouch as to why it could not transmit the
telegram.

The Court of First Instance of Pangasinan, after trial, ordered the defendant (now petitioner) to
pay the plaintiffs (now private respondents) damages, as follows, with interest at 6% per annum:

1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and P20,000.00 as

moral damages.

2. Ignacio Castro Sr., P20,000.00 as moral damages.

3. Ignacio Castro Jr., P20,000.00 as moral damages.

4. Aurora Castro, P10,000.00 moral damages.

5. Salvador Castro, P10,000.00 moral damages.

6. Mario Castro, P10,000.00 moral damages.

7. Conrado Castro, P10,000 moral damages.

8. Esmeralda C. Floro, P20,000.00 moral damages.

9. Agerico Castro, P10,000.00 moral damages.

10. Rolando Castro, P10,000.00 moral damages.

11. Virgilio Castro, P10,000.00 moral damages.

12. Gloria Castro, P10,000.00 moral damages.

Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in the amount
of P1,000.00 to each of the plaintiffs and costs. 2

On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's decision but
eliminated the award of P16,000.00 as compensatory damages to Sofia C. Crouch and the
award of P1,000.00 to each of the private respondents as exemplary damages. The award of
P20,000.00 as moral damages to each of Sofia C. Crouch, Ignacio Castro, Jr. and Esmeralda
C. Floro was also reduced to P120,000. 00 for each. 3

Petitioner appeals from the judgment of the appellate court, contending that the award of moral
damages should be eliminated as defendant's negligent act was not motivated by "fraud, malice
or recklessness."

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.

Separate Opinions

MELENCIO-HERRERA, J., concurring.

[I] concur.In addition to compensatory and exemplary damages, moral damages are
recoverable in actions for breach of contract, as in this case, where the breach has been wanton
and reckless, tantamount to bad faith.

Separate Opinions

MELENCIO-HERRERA, J., concurring.

[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.

Footnotes

* Penned by Justice Serafin E. Camilon, with the concurrence of Justices Crisolito

Pascual, Jose C. Campos, Jr. and Desiderio P. Jurado.

1 Rollo at 8.

2 Rollo at 9-10.

3 Rollo at 14,
4 Rollo at 13.

-------------------------------------------------

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-10394 December 13, 1958

CLAUDINA VDA. DE VILLARUEL, ET AL., plaintiffs-appellees,

vs.
MANILA MOTOR CO., INC. and ARTURO COLMENARES, defendants-appellants.

Hilado and Hilado for appellees.

Ozaeta, Gibbs and Ozaeta for appellant company.
Jose L. Gamboa and Napoleon Garcia for appellant Arturo Colmenares.

REYES, J. B. L., J.:

Manila Motor Co., Inc., and Arturo Colmenares interpose this appeal against the decision of the
Court of First Instance of Negros Occidental, in its Civil Case No. 648, ordering the defendant
Manila Motor Co., Inc. to pay to the plaintiffs Villaruel the sum of (a) P11,900 with legal rest from
May 18, 1953, on which date, the court below declared invalid the continued operation of the
Debt Moratorium, under the first cause of action; (b) P38,395 with legal interest from the date of
filing of the original complaint on April 26, 1947, on the second cause of action; and against both
the Manila Motor Co., Inc. and its co-defendant, Arturo Colmenares, the sum of P30,000 to be
paid, jointly and severally, with respect to the third cause of action.

On May 31, 1940, the plaintiffs Villaruel and the defendant Manila Motor Co., Inc. entered into a
contract (Exhibit "A") whereby, the former agreed to convey by way of lease to the latter the
following described premises;

(a) Five hundred (500) square meters of floor space of a building of strong materials for
automobile showroom, offices, and store room for automobile spare parts;

(b) Another building of strong materials for automobile repair shop; and

(c) A 5-bedroom house of strong materials for residence of the Bacolod Branch Manager of
the defendant company.
The term of the lease was five (5) years, to commence from the time that the building were
delivered and placed at the disposal of the lessee company, ready for immediate occupancy.
The contract was renewable for an additional period of five (5) years. The Manila Motor
Company, in consideration of the above covenants, agreed to pay to the lessors, or their duly
authorized representative, a monthly rental of Three Hundred (P300) pesos payable in advance
before the fifth day of each month, and for the residential house of its branch manager, a
monthly rental not to exceed Fifty (P50) pesos "payable separately by the Manager".

The leased premises were placed in the possession of the lessee on the 31st day of October,
1940, from which date, the period of the lease started to run under their agreement.

This situation, the Manila Motor Co., Inc. and its branch manager enjoying the premises, and
the lessors receiving the corresponding rentals as stipulated, continued until the invasion of
1941; and shortly after the Japanese military occupation of the Provincial Capital of Bacolod the
enemy forces held and used the properties leased as part of their quarters from June 1, 1942 to
March 29, 1945, ousting the lessee therefrom. No payment of rentals were made at any time
during the said period.

Immediately upon the liberation of the said city in 1945, the American Forces occupied the
same buildings that were vacated by the Japanese, including those leased by the plaintiffs, until
October 31, 1945. Monthly rentals were paid by the said occupants to the owners during the
time that they were in possession, as the same rate that the defendant company used to pay.

Thereafter, when the United States Army finally gave up the occupancy the premises, the
Manila Motor Co., Inc., through their branch manager, Rafael B. Grey, decided to exercise their
option to renew the contract for the additional period of five (5) years, and the parties, agreed
that the seven months occupancy by the U. S. Army would not be counted as part of the new 5-
year term. Simultaneously with such renewal, the company sublet the same buildings, except
that used for the residence of the branch manager, to the other defendant, Arturo Colmenares.

However, before resuming the collection of rentals, Dr. Alfredo Villaruel, who was entrusted with
the same, consulted Atty. Luis Hilado on whether they (the lessors) had the right to collect, from
the defendant company, rentals corresponding to the time during which the Japanese military
forces had control over the leased premises. Upon being advised that they had such a right, Dr.
Villaruel demanded payment thereof, but the defendant company refused to pay. As a result, Dr.
Villaruel gave notice seeking the rescission of the contract of lease and the payment of rentals
from June 1, 1942 to March 31, 1945 totalling P11,900. This was also rejected by the defendant
company in its letter to Villaruel, dated July 27, 1946.

Sometime on that same month of July, Rafael B. Grey offered to pay to Dr. Villaruel the sum of
P350, for which, tenderer requested a receipt that would state that it was in full payment for the
said month. The latter expressed willingness to accept the tendered amount provided, however,
that his acceptance should be understood to be without prejudice to their demand for the
rescission of the contract, and for increased rentals until their buildings were returned to them.
Later, Dr. Villaruel indicated his willingness to limit the condition of his acceptance to be that
"neither the lessee nor the lessors admit the contention of the other by the mere fact of
payment". As no accord could still be reached between the parties as to the context of the
receipt, no payment was thereafter tendered until the end of November, 1946. On December 4,
1946 (the day after the defendant company notified Dr. Villaruel by telegram, that it cancelled
the power of attorney given to Grey, and that it now authorized Arturo Colmenares, instead, to
pay the rent of P350 each month), the Manila Motor Co., Inc. remitted to Dr. Villaruel by letter,
the sum of P350.00. For this payment, the latter issued a receipt stating that it was "without
prejudice" to their demand for rents in arrears and for the rescission of the contract of lease.

After it had become evident that the parties could not settle their case amicably, the lessors
commenced this action on April 26, 1947 with the Court of First Instance of Negros Occidental
against the appellants herein. During the pendency of the case, a fire originating from the
projection room of the City Theatre, into which Arturo Colmenares, (the sublessee) had
converted the former repair shop of the Manila Motor Co. Inc., completely razed the building,
engulfing also the main building where Colmenares had opened a soda fountain and
refreshment parlor, and made partitions for store spaces which he rented to other persons.

Because of the aforesaid occurrence, plaintiffs demanded reimbursement from the defendants,
but having been refused, they filed a supplemental complaint to include as their third cause of
action, the recovery of the value of the burned buildings.

Defendants filed their amended answer and also moved for the dismissal of the plaintiffs' first
and second causes of action invoking the Debt Moratorium that was then in force. The dismissal
was granted by the trial court on February 5, 1951, but hearing was set as regards the third
cause of action.

On August 11, 1952, the defendant company filed a motion for summary judgment dismissing
the plaintiffs, third cause of action, to which plaintiffs registered objection coupled with a petition
for reconsideration of the order of the court dismissing the first and second causes of action.
Pending the resolution of this incident, plaintiffs, on October 2, 1953, called the court's attention
to the decision in the case of Rutter vs. Esteban (93 Phil., 68; 49 Off. Gaz. [5] 1807) invalidating
the continued effectivity of the Moratorium Law (R. A. 342). On November 25, 1953, the trial
court denied the defendant company's motion for summary judgment and set aside its previous
order dismissing the first and second causes of action. The case was accordingly heard and
thereafter, judgment was rendered in plaintiffs' favor in the terms set in the opening paragraph
of this decision. Thereafter, the defendants regularly appealed to this Court.

The defendants-appellants raise a number of procedural points. The first of these relates to their
contention that the supplemental complaint which included a third cause of action, should not
have been admitted, as it brought about a change in the original theory of the case and that it
raised new issues not theretofore considered. This argument cannot be sustained under the
circumstances. This action was inceptionally instituted for the rescission of the contract of lease
and for the recovery of unpaid rentals before and after liberation. When the leased buildings
were destroyed, the plaintiffs-lessors demanded from the defendants-lessees, instead, the value
of the burned premises, basing their right to do so on defendants' alleged default in the payment
of post-liberation rentals (which was also their basis in formerly seeking for rescission). This
cannot be considered as already altering the theory of the case which is merely a change in the
relief prayed for, brought about by circumstances occurring during the pendency of the action,
and is not improper. (Southern Pacific Co. vs. Conway, 115 F. 2d 746; Suburban Improvement
Company vs. Scott Lumber Co., 87 A.L.R. 555, 59 F. 2d 711). The filing of the supplements
complaint can well be justified also under section 2, Rule 17 of the Rules of Court (on
amendments) "to the end that the real matter in dispute and all matters in the action in dispute
between the parties may, as far as possible be completely determined in a single proceedings".
It is to be noted furthermore, that the admission or rejection of this kind of pleadings is within the
sound discretion of the court that will not be disturbed on appeal in the absence of abuse
thereof (see Sec. 5, Rule 17, Rules of Court), especially so, as in this case, where no
substantial procedural prejudice is caused to the adverse party.

It is urged that the dismissal of the first and second causes of action on February 5, 1951 had
the effect of a dismissal "with prejudice" as the court did not make any qualification in its
dismissal order. Appellants, apparently, lost sight of the fact that the dismissal was premised on
the existence of the "Debt Moratorium" which suspended the enforcement of the obligation up to
a certain time. The reference thereto by the lower court amounted to a dismissal "without
prejudice", since in effect it ruled that the plaintiffs could not, at the time they sought it, enforce
their right of action against the defendants, but plaintiffs must wait until the moratorium was
lifted. In this way, the court qualified its dismissal.

Taking up the case on its merits, it is readily seen that the key to the entire dispute is the
question whether the defendant-appellant Manila Motor Co., Inc. should be held liable for the
rentals of the premises leased corresponding to the lapse of time that they were occupied as
quarters or barracks by the invading Japanese army, and whether said appellant was placed in
default by its refusal to comply with the demand to pay such rents. For if the Motor Company
was not so liable, then it never was in default nor was it chargeable for the accidental lose of the
buildings, nor for any damages except the rental at the contract rate from its reoccupation of the
premises leased until the same were accidentally destroyed by fire on March 2, 1948.

The appellees contended, and the court below has held, that the ouster of the least company by
the Japanese occupation forces from 1942 until liberation, while operating to deprive the lessee
of the enjoyment of the thing leased, was, nevertheless, a mere act of trespass ("perturbacion
de mero hecho") that, under the Spanish Civil Code of 1889 (in force here until 1950), did not
exempt the lessee from the duty to pay rent. We find that contention and ruling erroneous and
untenable.

The pertinent articles of the Civil Code of Spain of 1889 provide:

ART. 1554. It shall be the duty of the lessor;

1. To deliver to the lessee the thing which is the subject matter of the contract;

2. To make thereon, during the lease, all repairs necessary in order to keep it in
serviceable condition for the purpose for which it was intended;

3. To maintain the lessee in the peaceful enjoyment of the lease during the entire term of
the contract.

ART. 1560. The lessor shall not be liable for any act of mere disturbance of a third person of
the use of the leased property; but the lessee shall have a direct action against the trespasser.

It the third person, be it the Government or a private individual, has acted in reliance upon a
right, such action shall not be deemed a mere act of disturbance. (Emphasis supplied)

Under the first paragraph of article 1560 the lessor does not answer for a mere act of trespass (
perturbacion de mero hecho) as distinguished from trespass under color of title ( perturbacion
de derecho). As to what would constitute a mere act of trespass, this Court in the case of
Goldstein vs. Roces (34 Phil. 562), made this pronouncement:

Si el hecho perturbador no va acompañado ni precedido de nada que revele una intencion

propiamente juridica en el que lo realiza, de tal suerte que el arrendatario solo pueda apreciar el
hecho material desnudo de toda forma o motivacion de derecho, entendemos que se trata de
una perturbacion de mero hecho.

Upon the basis of the distinction thus established between the perturbacion de hecho and the
perturbacion de derecho, it is demonstrable that the ouster of the appellant by the Japanese
occupying forces belongs to the second class of disturbances, de derecho. For under the
generally accepted principles of international law (and it must be remembered that those
principles are made by our Constitution a part of the law of our nation 1) a belligerent occupant
(like the Japanese in 1942-1945) may legitimately billet or quarter its troops in privately owned
land and buildings for the duration of its military operations, or as military necessity should
demand. The well known writer Oppenheim, discoursing on the laws of war on land, says upon
this topic;

Immovable private enemy property may under no circumstances or conditions be appropriated

by an invading belligerent. Should he confiscate and sell private land or buildings, the buyer
would acquire no right whatever to the property. Article 46 of the Hague Regulations expressly
enacts that "private property may not be confiscated." But confiscation differs from the
temporary use of private land and building for all kinds of purposes demanded by the
necessities of war. What has been said above with regard to utilization of public buildings
applied equally to private buildings. If necessary, they maybe converted into hospital barracks,
and stables without compensation for the proprietors, and they may also be converted into
fortifications. A humane belligerent will not drive the wretched inhabitants into the street if he
can help it. But under the pressure of necessity he may be obliged to do this, and he is certainly
not prohibited from doing it. (Emphasis supplied) (Oppenheim & Lauterpach, International Law,
Vol. II, p. 312, 1944 Ed.)

The view thus expressed is concurred in by other writers. Hyde (International Law, Vol. 3, p.
1893, 2nd Rev. Ed.) quotes the U. S. War Department 1940 Rules of Land Warfare (Rule No.
324) to the effect that —

The measure of permissible devastation is found in the strict necessities of war. As an end in
itself, as a separate measure of war, devastation is not sanctioned by the law of war. There
must be some reasonably close connection between the destruction of property and the
overcoming of the enemy's army. Thus the rule requiring respect for private property is not
violated through damage resulting from operations, movements, or combats of the army; that is,
real estate may be utilized for marches, camp sites, construction of trenches, etc. Buildings may
be used for shelter for troops, the sick and wounded, for animals, for reconnaissance, cover
defense, etc. Fence, woods, crops, buildings, etc., may be demolished, cut down, and removed
to clear a field of fire, to construct bridges, to furnish fuel if imperatively needed for the army.
(Emphasis supplied)

Reference may also be made to Rule 336:

What may be requisitioned. — Practically everything may be requisitioned under this article (art.
LII of the regulations above quoted) that is necessary for the maintenance of the army and not
of direct military use, such as fuel, food, forage, clothing, tobacco, printing presses, type,
leather, cloth, etc. Billeting of troops for quarters and subsistence is also authorized. (Emphasis
supplied)

And Forest and Tucker state:

The billegerent occupant may destroy or appropriate public property which may have a hostile
purpose, as forts, arms, armories, etc. The occupying force may enjoy the income from the
public sources. Strictly private property should be inviolable, except so far as the necessity of
war requires contrary action. (Forest and Tucker, International Law, 9th Ed., p. 277) (Emphasis
supplied)

The distinction between confiscation and temporary sequestration of private property by a

belligerent occupant was also passed upon by this Court in Haw Pia vs. China Banking
Corporation, 80 Phil. 604, wherein the right of Japan to sequester or take temporary control over
enemy private property in the interest of its military effort was expressly recognized.

We are thus forced to conclude that in evicting the lessee, Manila Motor Co., Inc. from the
leased buildings and occupying the same as quarters for troops, the Japanese authorities acted
pursuant to a right recognized by international and domestic law. Its act of dispossession,
therefore, did not constitute perturbacion de hecho but a perturbacion de derecho for which the
lessors Villaruel (and not the appellants lessees) were liable (Art. 1560, supra) and for the
consequences of which said lessors must respond, since the result of the disturbance was the
deprivation of the lessee of the peaceful use and enjoyment of the property leased. Wherefore,
the latter's corresponding obligation to pay rentals ceased during such deprivation.

The Supreme Court of Spain, in its Sentencia of 6 December 1944, squarely declared the
resolutory effect of the military sequestration of properties under lease upon the lessee's
obligation to pay rent (Jurisprudencia Civil, Segunda Serie, Tomo 8, pp. 583, 608):.

Considerando que para resolver acerca de la procedencia del presente recurso es preciso partir
de las bases de hecho sentadas en la sentencia recurrida, y no impugnadas al amparo del
numero 7. del articulo 1.692 de la Ley de Enjuiciamiento civil, es decir, de que hallandose
vigente el contrato de arrendamiento celebrado entre actor y demandada, en fecha que no se
precisa, entre los dias del 18 al 31 de julio de 1936, los locales objeto de dicho contrato de
arrendamiento, y en los que no funcionaba de tiempo anterior la industria para cuyo ejercicio se
arrendaron, fueron requisados por el Ejercito Nacional, con motivo de la guerra civil, para que
se instalara en los mismos la Junta de Donativos al Ejercito del Sur, aun cundo en dicha
incautacion, que se hizo a la propiedad de la finca, no se observaron las formalidades legales,
a causa de las circunstancias extraordinarias por que a la sazon atravesaba Sevilla, hecho que
no consta se hiciera saber por los arrendatarios demandados al actor, pero que fue notorio en
aquella capital, donde residia el actor, que de el debio tener conocimiento. Se estima
igualmente por la Sala que el hecho de que la industria no funcionara en el local no tuvo
influencia alguna sobre su incautacion por el Ejercito.

Considerando que sobre tales bases de hecho es de desestimar el primer motivo del recurso:
violacion de los articulos 1.254, 1.278 y 1.091 del Codigo civil, que sancionan, en terminos
generales, la eficacia de los contratos, puesto que en el presente caso de los que se trata en
definitiva es de determinar si por virtud de fuerza mayor, la requisa a que se hace referencia,
ajena, por lo tanto, a culpa, asi del arrendatario como del arrendador, se vio aquel privado del
posible disfrute de la finca arrendada, y de si por virtud de esta circunstancia esta o no exento
de la obligacion de abonar la renta pactada durante el tiempo que subsistio la incautacion; y es
indudable la afirmativa en cuanto al primer extremo, puesto que la sentencia recurrida
establece que el hecho de que no funcionase la industria y estuvieran los locales cerrados no
actuo como causa de la requisa de estos por el Ejercito.

Considerando que la sentencia recurrida, en cuanto no da lugar al pago de las rentas

correspondientes al tiempo que duro la incautacion, lejos de infringir, por aplicacion indebida, el
art. 1.568 del Codigo civil, se ajusta la orientacion marcada en el mismo, puesto que este
precepto legal dispone que el arrendatario tiene accion contra el tercero perturbador de mero
hecho en la posesion de la finca arrendada, pero no contra la Administracion o contra los que
obran en virtud de un derecho que les corresponde; y aqui la perturbacion que experimento el
arrendador en su posesion, como consecuencia de la requisa, no puede calificarse como de
mero hecho, conforme al citado articulo, puesto que la finca fue requisada por la autoridad
militar para fines de guerra, de donde se sigue que el arrendatario tenia que soportar la
privacion de su tenencia material a traves del arrendador, con quien ha de entenderse la
requisa de la cosa arrendada.

In addition, the text of Art. 1560, in its first paragraph ( jam quot.) assumes that in case of mere
disturbance ( perturbacion de mero hecho) "the lessee shall have a direct action against the
trespasser." This assumption evidently does not contemplate the case of dispossession of the
lessee by a military occupant, as pointed out by Mr. Chief Justice Paras in his dissenting opinion
in Reyes vs. Caltex (Phil.) Inc., 84 Phil. 669; for the reason that the lessee could not have a
direct action against the military occupant. It would be most unrealistic to expect that the
occupation courts, place under the authority of the occupying belligerent, should entertain at the
time a suit for forcible entry against the Japanese army. The plaintiffs, their lawyers, and in all
probability, the Judge and court personnel, would face "severest penalties" for such defiance of
the invader.

The present case is distinguishable from Lo Ching vs. Archbishop of Manila (81 Phil., 601) in
that the act of the Japanese military involved in the latter case clearly went beyond the limits set
by the Hague Conventions, in seizing the property and delivering it to another private party; and
from Reyes vs. Caltex (Phil.) Inc., 84 Phil. 654, in that the rights of the military occupant under
international law were not raised or put in issue in said case; and moreover, the lessee there, by
failing to rescind the lease upon seizure of the premises by the Japanese military, despite the
stipulated power to do so, resumed business and decided to hold unto the long term lease for
the balance of its 20-year period, starting from December 23, 1940. In the case before us, the
occupation of the leased property by the Japanese army covered the major portion of the five-
year contractual period, without any option to rescind by the lessee.

The lessor's position is not improved by regarding the military seizure of the property under
lease as a case of force majeure or fortuitous event. Ordinarily, a party may not be held
responsible therefor, despite the fact that it prevented compliance of its obligations. But lease
being a contract that calls for prestations that are both reciprocal and repetitive (tractum
successivum), the obligations of either party are not discharged at any given moment, but must
be fulfilled all throughout the term of the contract. As a result, any substantial failure by one
party to fulfill its commitments at any time during the contract period gives rise to a failure of
consideration (causa) for the obligations of the other party and excuses the latter from the
correlative performance, because the causa in lease must exist not only at the perfection but
throughout the term of the contract. No lessee would agree to pay rent for premises he could
not enjoy. As expressed by Marcel Planiol (quoted in 4 Castan, Derecho Civil, 7th Edition, p.
264) —

Como la obligacion del arrendador es sucesiva y se renueva todos los dias, la subsistencia del
arrendamiento se hace imposible cuando, por cualquier razon, el arrendador no puede ya
procurar al arrendatario el disfrute de la cosa.

This effect of the failure of reciprocity appears whether the failure is due to fault or to fortuitous
event; the only difference being that in case of fault, the other party is entitled to rescind the
contract in toto, and collect damages, while in casual non-performance it becomes entitled only
to a suspension pro tanto of its own commitments. This rule is recognized in par. 2 of Art. 1558,
authorizing the lessee to demand reduction of the rent in case of repairs depriving him of the
possession of part of the property; and in Art. 1575, enabling the lessee of rural property to
demand reduction of the rent if more than one-half of the fruits are lost by extraordinary
fortuitous event. Of course, where it becomes immediately apparent that the loss of possession
or enjoyment will be permanent, as in the case of accidental destruction of a leased building, the
lease contract terminates.

Applying these principles, the Sentencia of December 1944, already adverted to, ruled as
follows:

Considerando que privado el arrendador, por tal hecho, del disfrute de esta, es manifiesta la
imposibilidad en que se vio de cumplir la tercera de las obligaciones que el impone el articulo
1.554 del Codigo Civil, obligacion (la de mantener al arrendatario en el disfrute de la cosa
arrendada) que ha de entenderse reciproca de la de pago de renta pactada, que impone al
arrendatario el numero primero del art. 1.555 de dicho Cuerpo legal, y por ello no puede ser
exigida.

Considerando que, aunque no sean estrictamente aplicables al caso los articulos 1.124, 1.556 y
1.568, que se citan como infringidos por el recurrente, suponiendo que a ellos ha entendido
referirse la Audiencia (lo que impediria, en todo caso, la estimacion del recurso por este motivo,
ya que dichos articulos no se citan en la sentencia de instancia), es evidente que ellos
proclaman la reciprocidad de las obligaciones entre arrendatario y arrendador, y en este
sentido, tratandose de un incumplimiento inculpable decontrato, pueden servir, como tambien el
1.558, en cuanto preven la reduccion de rentas o posible restriccion del contrato cuando el
arrendatario se ve privado, por obras realizadas en la finca arrendada, del disfrute de este, de
fundamento, con los demas preceptos invocados, a una extencion de renta mientras subsiste la
imposibilidad de utilizar la cosa arrendada, sobre todo cuando los articulos 157 y 158 del
Reglamento de Requisas de 13 de enero de 1921 estatuyen claramente que las requisas de
edificio se hacen a la propiedad, y es el propietario el que puede pedir indemnization, uno de
cuyos elementos es el precio del alquiler que le sea satisfecho por el inmueble incautado.

We are aware that the rule in the common law is otherwise, due to its regarding a lease as a
conveyance to the lessee of a temporary estate or title to the leased property so that loss of
possession due to war or other fortuitous event leaves the tenant liable for the rent in the
absence of stipulation. The fundamental difference between the common law and the civil law
concepts has been outlined by the United States in Viterbo vs. Friedlander, 30 L. Ed. (U.S.) pp.
776, 778, in this wise:

But as to the nature and effect of a lease for years, at a certain rent which the lessee agrees to
pay, and containing no express covenant on the part of the lessor, the two systems differ
materially. The common law regards such a lease as the grant of an estate for years, which the
lessee takes a title in, and is bound to pay the stipulated rent for, notwithstanding any injury by
flood, fire or external violence, at least unless the injury is such a destruction of the land as to
amount to an eviction; and by that law the lessor is under no implied covenant to repair, or even
that the premises shall be fit for the purpose for which they are leased. Fowler vs. Bott, 6 Mass.
63; 3 Kent, Com. 465, 466; Broom, Legal Maxims, 3d ed. 213, 214; Doupe vs. Genin, 45 N. Y.
119; Kingbury vs. Westfall, 61 N. Y. 356. Naumberg vs. Young, 15 Vroom, 331; Bowe vs.
Hunking, 135 Mass. 380; Manchester Warehouse Co. vs. Carr, L.R. 5 C.P.D. 507.

The civil law, on the other hand, regards a lease for years as a mere transfer of the use and
enjoyment of the property; and holds the landlord bound, without any express covenant, to keep
it in repair and otherwise fit for use and enjoyment for the purpose for which it is leased, even
when the need of repair or the unfitness is caused by an inevitable accident, and if he does not
do so, the tenant may have the lease annulled, or the rent abated. Dig. 19, 2, 9, 2; 19, 2, 15, 1,
2; 19, 2, 25, 2; 19, 2, 39; 2 Gomez, Variae Resolutiones c. 3, secs. 1-3, 18, 19: Gregorio Lopez
in 5 Partidas, tit. 8, 11. 8, 22; Domat, Droit Civil, pt. 1, lib. 1, tit. 4, sec. 1, no. 1; sec. 3 nos. 1, 3,
6, Pothier, Contract de Louage, nos. 3, 6, 11, 22, 53, 103, 106, 139-155.

It is accordingly laid down in the Pandects, on the authority of Julian, "If anyone has let an
estate, that, even if anything happens by vis major, he must make it good, he must stand by his
contract," si quis fundum locaverit, ut, etiamsi quid vi majore accidisset, hoc ei praestaretur,
pacto standum esse; Dig. 19, 2, 9, 2; and on the authority of Ulpian, that "A lease does not
change the ownership," non solet locatio dominiun mutare; Dig. 19, 2, 39; and that the lessee
has a right of action, if he cannot enjoy the thing which he has hired, si re quam conduxit frui
non liceat, whether because his possession, either of the whole or of part of the field, is not
made good, or a house, or stable or sheepfold, is not repaired; and the landlord ought to
warrant the tenant, dominum colono praestare debere, against every irresistible force, omnim
vim cui resisti non potest, such as floods, flocks of birds, or any like cause, or invasion of
enemies; and if the whole crop should be destroyed by a heavy rainfall, or the olives should be
spoiled by blight, or by extraordinary heat of the sun, solis fervore non assueto, it would be the
loss of the landlord, damnum domini futurum; and so if the field falls in by an earthquake, for
there must be made good to the tenant a field that he can enjoy, oportere enim agrum praestari
conductori, ut frui possit; but if any loss arises from defects in the thing itself, si qua tamen vitia
ex ipsa re oriantur, as if wine turns sour, or standing corn is spoiled by worms or weeds, or if
nothing extraordinary happens, si vero nihil extra consuetudinem acciderit, it is the loss of the
tenant, damnum coloni esse. Dig. 19, 2; 15, 1, 2. (Emphasis supplied)

In short, the law applies to leases the rule enunciated by the Canonists and the Bartolist School
of Post glossatorse, that "contractus qui tractum successivum habent et dependentiam de
futuro, sub conditione rebus sic stantibus intelliguntur," they are understood entered subject to
the condition that things will remain as they are, without material change.

It is also worthy of note that the lessors, through Dr. Javier Villaruel, agreed after liberation to a
renewal of the contract of lease for another five years (from June 1, 1946 to May 31 of 1951)
without making any reservation regarding the alleged liability of the lessee company for the
rentals corresponding to the period of occupancy of the premises by the Japanese army, and
without insisting that the non-payment of such rental was a breach of the contract of lease. This
passivity of the lessors strongly supports the claim of the lessees that the rentals in question
were verbally waived. The proffered explanation is that the lessors could not refuse to renew the
lease, because the privilege of renewal had been granted to the lessees in the original contract.
Such excuse is untenable: if the lessors deemed that the contract had been breached by the
lessee's non-payment of the occupation rents how could they admit the lessee's right to renew a
contract that the lessee itself had violated?

But this is not all. The lessors accepted payment of current rentals from October 1945 to June
1946. It was only in July 1946 that they insisted upon collecting also the 1942-1945 rents, and
refused to accept further payments tendered by the lessee unless their right to collect the
occupation rental was recognized or reserved. After refusing the rents from July to November
1946, unless the lessee recognized their right to occupation rentals, the appellees (lessors)
demanded rescission of the contract and a rental of P1,740 monthly in lieu of the stipulated
P350 per month. (Exhibit "C").

This attitude of the lessors was doubly wrongful: first, because as already shown, the
dispossession by the Japanese army exempted the lessee from his obligation to pay rent for the
period of its ouster; and second, because even if the lessee had been liable for that rent, its
collection in 1946 was barred by the moratorium order, Executive Order No. 32, that remained
in force until replaced by Rep. Act 342 in 1948. To apply the current rentals to the occupation
obligations would amount to enforcing them contrary to the moratorium decreed by the
government.

Clearly, then, the lessor' insistence upon collecting the occupation rentals for 1942-1945 was
unwarranted in law. Hence, their refusal to accept the current rentals without qualification placed
them in default (mora creditoris or accipiendi) with the result that thereafter, they had to bear all
supervening risks of accidental injury or destruction of the leased premises. While not expressly
declared by the Code of 1889, this result is clearly inferable from the nature and effects of mora,
and from Articles 1185, 1452 [par. 3] and 1589).

ART. 1185. When the obligation to deliver a certain and determinate thing arises from the
commission of a crime or misdemeanor the obligor shall not be exempted from the payment of
its value, whatever the cause of its loss may have been, unless, having offered the thing to the
person entitled to receive it, the latter should have refused without reason to accept it.

Art. 1452. ....

If fungible things should be sold for a price fixed with relation to weight, number, or measure,
they shall not be at the purchaser's risk until they have been weighed, counted, or measured,
unless the purchaser should be in default.
ART. 1589. If the person who contracted to do the work bound himself to furnish the
materials, he shall bear the loss in case of the destruction of the work before it is delivered,
unless its acceptance has been delayed by the default of the other party.

While there is a presumption that the loss of the thing leased is due to the fault of the lessee
(Civil Code of 1889, Art. 1563), it is noteworthy that the lessor have not invoked that
presumption either here or in the court below. On the contrary, the parties and the trial court
have all proceeded and discussed the issues taking for granted that the destruction of the
leased buildings was purely fortuitous. We see no reason for departing from that assumption
and further prolonging this litigation..

That the lessee and sublessee did not consign or deposit in court the rentals tendered to and
improperly rejected by the lessors, did not render the debtor liable for default (mora solvendi)
nor answerable for fortuitous events because, as explained by the Supreme Court of Spain in its
Sentencia of 5 June 1944 —

Al exigir el art. 1176 del Codigo Civil la consignacion para liberar al deudor no quiere decir que
necesariamente haya de practicarse, y no baste el ofrecimiento de pago que de aquella no
fuere seguido, a efectos de exclusion de las consecuencias de la mora solvendi. (8 Manresa,
Comentarios, 5th Ed., Vol. 1, p. 136).

In other words, the only effect of the failure to consign the rentals in court was that the obligation
to pay them subsisted (P.N.B. vs. Relativo, 92 Phil., 203) and the lessee remained liable for the
amount of the unpaid contract rent, corresponding to the period from July to November, 1946; it
being undisputed that, from December 1946 up to March 2, 1948, when the commercial
buildings were burned, the defendants-appellants have paid the contract rentals at the rate of
P350 per month. But the failure to consign did not eradicate the default (mora) of the lessors nor
the risk of loss that lay upon them. (3 Castan, Der. Civ., 8th Ed., p. 145; 4 Puig Peña, Der. Civ.,
part. 1, p. 234; Diaz Pairo, Teoria Gen. de las Obligaciones [3rd Ed.], Vol. 1, pp. 192-193).

In view of the foregoing, we hold:lawphil.net

(a) That the dispossession of the lessee from the premises by the Japanese army of
occupation was not an act of mere trespass ( perturbacion de mero hecho) but one de derecho
chargeable to the lessors;

(b) That such dispossession, though not due to fault of lessors or lessee, nevertheless
resulted in the exemption of the lessee from its obligation to pay rent during the period that it
was deprived of the possession and enjoyment of the premises leased;

(c) That the insistence of the lessors to collect such rentals was unwarranted;
(d) That the lessors were not justified in refusing to accept the tender of current rentals
unless the lessee should recognize their right to the rents corresponding to the period that the
lessee was not in possession;

(e) That by their improper refusal to accept the current rents tendered by the lessee, the
lessors incurred in default (mora) and they must shoulder the subsequent accidental loss of the
premises leased;

(f) That the mora of the lessors was not cured by the failure of the lessee to make the
consignation of the rejected payments, but the lessee remained obligated to pay the amounts
tendered and not consigned by it in court.

Consequently, it was reversible error to sentence the appellants to pay P2,165 a month as
reasonable value of the occupation of the premises from July 1946, and the value of the
destroyed buildings amounting to P30,000.

Wherefore, the decision appealed from is modified in the sense that the appellant Manila Motor
Company should pay to the appellees Villaruel only the rents for the leased premises
corresponding to the period from July up to November 1946, at the rate of P350 a month, or a
total of P1,750. Costs against appellees in both instances. So ordered.

Paras, C. J., Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion and
Endencia, JJ., concur.

Footnotes

1 "Art. 2. Sec. 3. — The Philippines renounces war as an instrument of national policy, and
adopts the generally accepted principles of international law as part of the law of the nation."
(Constitution of the Philippines)--Applied in Go Kim Chan vs. Valdez, 75 Phil. 113; Tubb vs.
Griess, 78 Phil. 249; Dizon vs. Commanding General, 81 Phil. 286.

------------------------------------------------Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-49852 October 19, 1989

EMILIA TENGCO, petitioner,

vs.
COURT OF APPEALS and BENJAMIN CIFRA JR., respondents.
De Santos, Balgos & Perez for petitioner.

Teofilo F. Manalo for respondents.

PADILLA, J.:

Review on certiorari of the decision* rendered by the Court of Appeals in CA-G.R. NO. SP-
08182, entitled: "Emilia Tengco, petitioner, versus Court of First Instance of Rizal, etc., et al,
respondents," which dismissed herein petitioner's "Appeal by Way of Certiorari" from the
judgment of the Court of First Instance of Rizal in Civil Case No. C-6625 which affirmed the
decision of the Municipal Court of Navotas, Metro Manila, in Civil Case No. 2092, entitled:
"Benjamin Cifra, plaintiff, versus Emilia Tengco defendant," ordering the herein petitioner (as
defendant) to vacate the premises at No. 164 Int Gov. Pascual St., Navotas, Metro Manila, and
to pay the herein private respondent (as plaintiff) the arrears in rentals and attorney's fees; and
the Resolution denying the herein petitioner's motion for reconsideration of the said Court of
Appeals decision.

The record of the case shows that on 16 September 1976, the herein private respondent,
Benjamin Cifra, Jr., claiming to be the owner of the premises at No. 164 Int Gov. Pascual St.,
Navotas, Metro Manila, which he had leased to the herein petitioner, Emilia Tengco, filed an
action for unlawful detainer with the Municipal Court of Navotas, Metro Manila, docketed therein
as Civil Case No. 2092, to evict the petitioner, Emilia Tengco, from the said premises for her
alleged failure to comply with the terms and conditions of the lease contract by failing and
refusing to pay the stipulated rentals despite repeated demands. After trial judgment was
rendered against the petitioner. The decretal portion of the decision reads, as follows:

WHEREFORE, Judgment is hereby rendered in favor of the plaintiff and against the defendant,
ordering the defendant and any and all persons claiming rights under her to vacate the premises
occupied by her at No. 164 Int Gov. Pascual Street, this town and to surrender possession
thereof to the plaintiff, condemning the defendant to pay the plaintiff the amount of THREE
HUNDRED SEVENTY SIX (P376.00) PESOS, as rentals in arrears and the sum of TWELVE
PESOS (P12.00), a month from October, 1976 until the premises is fully vacated. To pay the
plaintiff the sum of TWO HUNDRED (P200.00) PESOS as and for attorney's fees and costs of
suit.

From this judgment, the herein petitioner appealed to the Court of First Instance of Rizal where
the appeal was docketed as Civil Case No. C-6625. On 18 May 1978, the Court of First
Instance of Rizal rendered judgment affirming the decision of the municipal court, the dispositive
part of which reads as follows:

WHEREFORE, premises considered, judgment is hereby rendered affirming in toto the

judgment of the lower court dated September 20, 1 977 without pronouncement as to costs.
Not satisfied, the herein petitioner filed with the respondent Court of Appeals an "Appeal by Way
of Certiorari" which was docketed as CA-G.R. NO. SP-08182. On 29 August 1978, the
respondent Court of Appeals promulgated a decision, with the following disposition:

WHEREFORE, finding that the Decision of the lower Court is supported by substantial evidence
and that its conclusions are not clearly against the law and jurisprudence, the instant petition is
hereby denied due course and is dismissed outright.

The petitioner filed a motion for reconsideration of the decision but her motion was denied on 16
January 1979.

Hence, the present recourse.

The petitioner contends that the respondent Court of Appeals erred in sustaining the decisions
of the appellate and trial courts which are allegedly contrary to the evidence and applicable
jurisprudence. The petitioner more particularly claims that (1) the private respondent Benjamin
Cifra, Jr. is not the owner of the leased premises; (2) the lessor was guilty of mora accipiendi;
(3) the petitioner's version of the facts is more credible than private respondent's; (4) laches had
deprived the lessor of the right to eject her; and (5) the private respondent failed to establish a
cause of action against the petitioner.

We find no merit in the petition. The reasons advanced by the petitioner to support her petition
are the same reasons given by her to the Court of Appeals in support of her "Appeal by Way of
Certiorari" and we find no ground to adopt a different course from that of the respondent
appellate court. In disposing of the petitioner's contentions, the Court of Appeals said:

Petitioner claims that private respondent had failed to establish his ownership of the lot in
question for while the Certificate of Title presented by him refers to a parcel of land situated at
Bo. Almacen, Navotas, the premises in question, on the other hand, is situated in Bo. Sipak
Navotas; that it was not with private respondent that she entered into the lease agreement but
with his mother; that her failure to pay the rentals on the premises was due to the refusal of the
collector to accept her tender of payment; and that laches had deprived private respondent of
whatever right he had against her considering that the Complaint was filed only in September,
1976 whereas his cause of action arose sometime in February, 1974 when she defaulted in the
payment of rentals.

We find this appeal which We consider as a Petition for Review, to be without merit.

It should be noted that petitioner admits that she is a lessee on the premises in question and
that she had been in default in the payment of the rentals thereon since February, 1974
allegedly because of the refusal of the collector to accept her tender of payment. However, she
claims that the lease agreement was not with private respondent, but with his mother. The
question as to who is the real lessor of the premises is one of fact and the findings of the lower
court that it was private respondent is entitled to the highest respect by appellate Courts barring
any material evidence to the contrary. Neither can petitioner question private respondent's claim
of ownership of the leased premises. The tenant is not permitted to deny the title of his landlord
at the time of the commencement of the relation of landlord and tenant between them.

Petitioner's excuse for her non-payment of the rentals on the premises deserves scant
consideration. If, indeed, her offer to settle her obligation was refused by private respondent,
she should have resorted to the judicial deposit of the amount due in order to release her from
responsibility.

Petitioner's claim that private respondent's cause of' action is barred by laches is untenable.
While it is true that petitioner's arrearages date back to February, 1974, however, a tenant's
mere failure to pay rent does not ipso facto make unlawful his possession of the leased
premises. As held by respondent Court of First Instance, it is the failure to pay rents after a
demand therefor is made that entitles the lessor to bring an action of Unlawful Detainer.
Moreover, the lessor has the privilege to waive his right to bring an action against his tenant and
give the latter credit for the payment of the rents and allow him to continue indefinitely in the
possession of the premises. During such period, the tenant would not be in illegal possession of
the premises and the landlord can not maintain an action until after he has taken steps to
convert the legal possession into an illegal possession. Thus, in the case at bar, the demand on
petitioner to vacate the premises for failure to pay the rentals thereon was made by private
respondent only on August 23, 1976 and the Complaint against petitioner was filed on
September 16,1976.

Consequently, petitioner's non-payment of the rentals on the premises, notwithstanding demand

made by private respondent, and her failure to avail of the remedy provided for in Article 1256 of
the Civil Code, entitles private respondent to eject her from the premises.

Indeed, the question of whether or not private respondent is the owner of the leased premises is
one of fact which is within the cognizance of the trial court whose findings thereon will not be
disturbed on appeal unless there is a showing that the trial court had overlooked,
misunderstood, or misapplied some fact or circumstance of weight and substance that would
have affected the result of the case. And since the petitioner has not presented sufficient proof
that the leased premises is not the same lot registered in the name of the private respondent,
the findings of the lower courts on the fact of ownership of the leased premises will not be
disturbed.

The maps attached by the petitioner to her Reply to the Comment of the private respondent
which would tend to show that Almacen and Sipac are two (2) different barangays or sitios,
cannot offset the findings of the trial court for lack of proper Identifications; in fact, these maps
do not even indicate where the property at No. 164 Int Gov. Pascual Street is located.
The petitioner's contention that the provisions of Section 1, Commonwealth Act No. 53, should
be applied in this case in determining the credibility of witnesses, is untenable. The said law
provides:

Sec. 1. Where a covenant or contract made between the owner of land and a lessee or tenant
on share thereof has not been reduced to writing or has not been set forth in a document written
in a language known to the lessee or tenant, the testimony of such lessee or tenant shall be
accepted as prima facie evidence on the terms of a covenant or contract.

As can be seen, the cited law can be invoked only when there is a dispute between the owner of
the land and the lessee or tenant on share tenancy as to the terms of an unwritten contract or
where the contract is written in a language not known to the lessee or tenant. In the instant
case, there is no dispute as to the terms of the contract of lease. Hence, the cited law cannot be
invoked to support the petitioner's claim that the private respondent is not the owner of the
leased premises or that the petitioner's version of the facts of the case is more credible than that
of the private respondent.

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

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

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

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

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

Sometime later, or in August 1977, petitioner received another letter, this time from the private
respondent, demanding the surrender of the possession of the premises in question, also
claiming to be the owner of the property.
Upon receipt of this letter, petitioner forthwith went to the residence of the collector, another
sister of the private respondent to whom she had been paying her rentals, and there tendered
payment but this was refused without any justification (t.s.n. July 26, 1 977, p. 7). 2

Under the circumstances, the refusal to accept the proffered rentals is not without justification.
The ownership of the property had been transferred to the private respondent and the person to
whom payment was offered had no authority to accept payment. It should be noted that the
contract of lease between the petitioner and Lutgarda Cifra, the former owner of the land, was
not in writing and, hence, unrecorded. The Court has held that a contract of lease executed by
the vendor, unless recorded, ceases to have effect when the property is sold, in the absence of
a contrary agreement. 3 The petitioner cannot claim ignorance of the transfer of ownerhip of the
property because, by her own account, Aurora Recto and the private respondent, at various
times, had informed her of their respective claims to ownership of the property occupied by the
petitioner. The petitioner should have tendered payment of the rentals to the private respondent
and if that was not possible, she should have consigned such rentals in court.

Finally, we find no merit in the petitioner's contention that the private respondent is guilty of
laches. As the Court of Appeals had stated, the demand for the petitioner to vacate the
premises and to pay arrears in rentals was made on 23 August 1976 and the complaint seeking
her ejectment was filed a few days thereafter, or on 16 September 1976.

For reasons aforestated, the judgment of the Court of Appeals appears to be in accord with the
evidence and the law.

WHEREFORE, the petition is hereby DENIED. Without pronouncement as to costs. This

decision is immediately executory.

SO ORDERED.

Paras, Sarmiento and Regalado, JJ., concur.

Melencio-Herrera, J. (Chairperson), took no part.

Footnotes

* Penned by Justice Ameurfina A. Melencio-Herrera and concurred in by Justices Lorenzo

Relova and Simeon M. Gopengco.

1 Brief for the Respondent, p. 5.

2 Brief for the Petitioner, pp. 1-2.

3 Saul vs. Hawkins, 1 Phil. 275.