Statutory Construction; Statutory construction has it that if a statute is
clear and unequivocal, it must be given its literal meaning and applied
without any attempt at interpretation.—Statutory construction has it that
if a statute is clear and unequivocal, it must be given its literal meaning
and applied without any attempt at interpretation. Since Section 803 of
the National Building Code and Rule XIX of its IRR do not mention
parking fees, then simply, said provisions do not regulate the collection of
the same. The RTC and the Court of Appeals correctly applied Article
1158 of the New Civil Code, which states: Art. 1158. Obligations derived
from law are not presumed. Only those expressly determined in this
Code or in special laws are demandable, and shall be regulated by the
precepts of the law which establishes them; and as to what has not been
foreseen, by the provisions of this Book.
National Building Code; The Office of the Solicitor General (OSG)
cannot rely on Section 102 of the National Building Code to expand the
coverage of Section 803 of the same Code and Rule XIX of the
Implementing Rules and Regulations (IRR), so as to include the
regulation of parking fees.—The OSG cannot rely on Section 102 of the
National Building Code to expand the coverage of Section 803 of the
same Code and Rule XIX of the IRR, so as to include the regulation of
parking fees. The OSG limits its citation to the first part of Section 102 of
the National Building Code declaring the policy of the State “to
safeguard life, health, property, and public welfare, consistent with the
principles of sound environmental management and control”; but totally
ignores the second part of said provision, which reads, “and to this end,
make it the purpose of this Code to provide for all buildings and
structures, a framework of minimum standards and
requirements to regulate and control their location, site, design, quality
of materials, construction, use, occupancy, and maintenance.” While the
first part of Section 102 of the National Building Code lays down the
State policy, it is the second part thereof that explains how said policy
shall be carried out in the Code. Section 102 of the National Building
Code is not an all-encompassing grant of regulatory power to the DPWH
Secretary and local building officials in the name of life, health, property,
and public welfare. On the contrary, it limits the regulatory power of said
officials to ensuring that the minimum standards and requirements for
all buildings and structures, as set forth in the National Building Code,
are complied with.
Administrative Agencies; The rule-making power of administrative
agencies must be confined to details for regulating the mode or
proceedings to carry into effect the law as it has been enacted and it
cannot be extended to amend or expand the statutory requirements or to
embrace matters not covered by the statute.—The OSG cannot claim that
in addition to fixing the minimum requirements for parking spaces for
buildings, Rule XIX of the IRR also mandates that such parking spaces
be provided by building owners free of charge. If Rule XIX is not covered
by the enabling law, then it cannot be added to or included in the
implementing rules. The rule-making power of administrative agencies
must be confined to details for regulating the mode or proceedings to
carry into effect the law as it has been enacted, and it cannot be extended
to amend or expand the statutory requirements or to embrace matters
not covered by the statute. Administrative regulations must always be in
harmony with the provisions of the law because any resulting
discrepancy between the two will always be resolved in favor of the basic
law.
National Building Code; Whether allowing or prohibiting the
collection of such parking fees, the action of the Department of Public
Works and Highways (DPWH) Secretary and local building officials must
pass the test of classic reasonableness and propriety of the measures or
means in the promotion of the ends sought to be accomplished.—It is not
sufficient for the OSG to claim that “the power to regulate and control
the use, occupancy, and maintenance of buildings and structures carries
with it the power to impose fees and, conversely, to control, partially or,
as in this case, absolutely, the imposition of such fees.” Firstly, the fees
within the power of regulatory agencies to impose are regulatory fees.
It has been settled law in this jurisdiction that this broad and all-
compassing governmental competence to restrict rights of liberty and
property carries with it the undeniable power to collect a regulatory fee.
It looks to the enactment of specific measures that govern the relations
not only as between individuals but also as between private parties and
the political society. True, if the regulatory agencies have the power to
impose regulatory fees, then conversely, they also have the power to
remove the same. Even so, it is worthy to note that the present case does
not involve the imposition by the DPWH Secretary and local building
officials of regulatory fees upon respondents; but the collection by
respondents of parking fees from persons who use the mall parking
facilities. Secondly, assuming arguendo that the DPWH Secretary and
local building officials do have regulatory powers over the collection of
parking fees for the use of privately owned parking facilities, they cannot
allow or prohibit such collection arbitrarily or whimsically. Whether
allowing or prohibiting the collection of such parking fees, the action of
the DPWH Secretary and local building officials must pass the test of
classic reasonableness and propriety of the measures or means in the
promotion of the ends sought to be accomplished.
Same; The National Building Code regulates buildings, by setting the
minimum specifications and requirements for the same.—The Court is
unconvinced. The National Building Code regulates buildings, by
setting the minimum specifications and requirements for the same. It
does not concern itself with traffic congestion in areas surrounding the
building. It is already a stretch to say that the National Building Code
and its IRR also intend to solve the problem of traffic congestion around
the buildings so as to ensure that the said buildings shall have adequate
lighting and ventilation. Moreover, the Court cannot simply assume, as
the OSG has apparently done, that the traffic congestion in areas around
the malls is due to the fact that respondents charge for their parking
facilities, thus, forcing vehicle owners to just park in the streets. The
Court notes that despite the fees charged by respondents, vehicle owners
still use the mall parking facilities, which are even fully occupied on
some days. Vehicle owners may be parking in the streets only because
there are not enough parking spaces in the malls, and not because they
are deterred by the parking fees charged by respondents. Free parking
spaces at the malls may even have the opposite effect from what the OSG
envisioned: more people may be encouraged by the free parking to bring
their own vehicles, instead of taking public transport, to the malls; as a
result, the parking facilities would become full sooner, leaving more
vehicles without parking spaces in the malls and parked in the streets
instead, causing even more traffic congestion.
Police Power; The Court finds, however, that in totally prohibiting
respondents from collecting parking fees from the public for the use of the
mall parking facilities, the State would be acting beyond the bounds of
police power.—Without using the term outright, the OSG is actually
invoking police power to justify the regulation by the State, through the
DPWH Secretary and local building officials, of privately owned parking
facilities, including the collection by the owners/operators of such
facilities of parking fees from the public for the use thereof. The Court
finds, however, that in totally prohibiting respondents from collecting
parking fees from the public for the use of the mall parking facilities, the
State would be acting beyond the bounds of police power.
Same; Police power does not involve the taking or confiscation of property,
with the exception of a few cases where there is a necessity to confiscate
private property in order to destroy it for the purpose of protecting peace
and order and of promoting the general welfare; for instance, the
confiscation of an illegally possessed article, such as opium and
firearms.—Police power is the power of promoting the public welfare by
restraining and regulating the use of liberty and property. It is usually
exerted in order to merely regulate the use and enjoyment of the
property of the owner. The power to regulate, however, does not include
the power to prohibit. A fortiori, the power to regulate does not include
the power to confiscate. Police power does not involve the taking or
confiscation of property, with the exception of a few cases where there is
a necessity to confiscate private property in order to destroy it for the
purpose of protecting peace and order and of promoting the general
welfare; for instance, the confiscation of an illegally possessed article,
such as opium and firearms.
Taking; A police regulation that unreasonably restricts the right to
use business property for business purposes amounts to taking of private
property, and the owner may recover therefor.—The power of eminent
domain results in the taking or appropriation of title to, and possession
of, the expropriated property; but no cogent reason appears why the said
power may not be availed of only to impose a burden upon the owner of
condemned property, without loss of title and possession. It is a settled
rule that neither acquisition of title nor total destruction of value is
essential to taking. It is usually in cases where title remains with the
private owner that inquiry should be made to determine whether the
impairment of a property is merely regulated or amounts to a
compensable taking. A regulation that deprives any person of the
profitable use of his property constitutes a taking and entitles him to
compensation, unless the invasion of rights is so slight as to permit the
regulation to be justified under the police power. Similarly, a police
regulation that unreasonably restricts the right to use business property
for business purposes amounts to a taking of private property, and the
owner may recover therefor.
Same; Although in the present case, title to and/or possession of the
parking facilities remain/s with respondents, the prohibition against their
collection of parking fees from the public, for the use of said facilities, is
already tantamount to a taking or confiscation of their properties.—
Although in the present case, title to and/or possession of the parking
facilities remain/s with respondents, the prohibition against their
collection of parking fees from the public, for the use of said facilities, is
already tantamount to a taking or confiscation of their properties. The
State is not only requiring that respondents devote a portion of the
latter’s properties for use as parking spaces, but is also mandating that
they give the public access to said parking spaces for free. Such is
already an excessive intrusion into the property rights of respondents. DECISION
Not only are they being deprived of the right to use a portion of their
properties as they wish, they are further prohibited from profiting from
its use or even just recovering therefrom the expenses for the CHICO-NAZARIO, J.:
maintenance and operation of the required parking facilities.

Same; Expropriation; The total prohibition against the collection by Before this Court is a Petition for Review
respondents of parking fees from persons who use the mall parking on Certiorari,[1] under Rule 45 of the Revised Rules of Court, filed by
facilities has no basis in the National Building Code or its Implementing petitioner Office of the Solicitor General (OSG), seeking the reversal
Rules and Regulations (IRR).—The total prohibition against the and setting aside of the Decision[2] dated 25 January 2007 of the
collection by respondents of parking fees from persons who use the mall Court of Appeals in CA-G.R. CV No. 76298, which affirmed in toto the
parking facilities has no basis in the National Building Code or its IRR. Joint Decision[3] dated 29 May 2002 of the Regional Trial Court (RTC)
The State also cannot impose the same prohibition by generally invoking of Makati City, Branch 138, in Civil Cases No. 00-1208 and No. 00-
police power, since said prohibition amounts to a taking of respondents’ 1210; and (2) the Resolution[4] dated 14 March 2007 of the appellate
property without payment of just compensation. court in the same case which denied the Motion for Reconsideration
of the OSG. The RTC adjudged that respondents Ayala Land
Incorporated (Ayala Land), Robinsons Land Corporation (Robinsons),
Shangri-la Plaza Corporation (Shangri-la), and SM Prime Holdings,
Inc. (SM Prime) could not be obliged to provide free parking spaces in
their malls to their patrons and the general public.
THIRD DIVISION
Respondents Ayala Land, Robinsons, and Shangri-la
maintain and operate shopping malls in various locations in Metro
Manila. Respondent SM Prime constructs, operates, and leases out
THE OFFICE OF THE G.R. No. 177056
commercial buildings and other structures, among which, are SM
SOLICITOR GENERAL,
City, Manila; SM Centerpoint, Sta. Mesa, Manila; SM City, North
Petitioner, Present:
Avenue, Quezon City; and SM Southmall, Las Pias.
YNARES-SANTIAGO, J.,
The shopping malls operated or leased out by respondents
- versus - Chairperson,
have parking facilities for all kinds of motor vehicles, either by way of
CHICO-NAZARIO,
parking spaces inside the mall buildings or in separate buildings
VELASCO, JR.,
and/or adjacent lots that are solely devoted for use as parking
AYALA LAND INCORPORATED, NACHURA, and
spaces. Respondents Ayala Land, Robinsons, and SM Prime spent for
ROBINSONS LAND PERALTA, JJ.
the construction of their own parking facilities. Respondent Shangri-
CORPORATION, SHANGRI-LA
la is renting its parking facilities, consisting of land and building
PLAZA CORPORATION and SM
specifically used as parking spaces, which were constructed for the
PRIME HOLDINGS, INC., Promulgated:
lessors account.
Respondents.
Respondents expend for the maintenance and
September 18, 2009
administration of their respective parking facilities. They provide
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
security personnel to protect the vehicles parked in their parking
- - - - -x
facilities and maintain order within the area. In turn, they collect the
following parking fees from the persons making use of their parking
facilities, regardless of whether said persons are mall patrons or not:

Respondent Parking Fees
Ayala Land On weekdays, P25.00 for the first four hours
and P10.00 for every succeeding hour; on weekends,
flat rate of P25.00 per day
Robinsons P20.00 for the first three hours and P10.00 for every
succeeding hour
Shangri-la Flat rate of P30.00 per day
SM Prime P10.00 to P20.00 (depending on whether the parking
space is outdoors or indoors) for the first three hours
and 59 minutes, and P10.00 for every succeeding
hour or fraction thereof
The parking tickets or cards issued by respondents to vehicle owners
contain the stipulation that respondents shall not be responsible for
any loss or damage to the vehicles parked in respondents parking
facilities.
In 1999, the Senate Committees on Trade and Commerce
and on Justice and Human Rights conducted a joint investigation for
the following purposes: (1) to inquire into the legality of the prevalent
practice of shopping malls of charging parking fees; (2)
assuming arguendo that the collection of parking fees was legally
authorized, to find out the basis and reasonableness of the parking
rates charged by shopping malls; and (3) to determine the legality of
the policy of shopping malls of denying liability in cases of theft,
robbery, or carnapping, by invoking the waiver clause at the back of
the parking tickets. Said Senate Committees invited the top
executives of respondents, who operate the major malls in the
country; the officials from the Department of Trade and Industry
(DTI), Department of Public Works and Highways (DPWH), Metro
Manila Development Authority (MMDA), and other local government
officials; and the Philippine Motorists Association (PMA) as
representative of the consumers group.
After three public hearings held on 30 September, 3
November, and 1 December 1999, the afore-mentioned Senate
Committees jointly issued Senate Committee Report No. 225 [5] on 2
May 2000, in which they concluded:
In view of the foregoing, the Committees find
that the collection of parking fees by shopping malls
is contrary to the National Building Code and is
therefor [sic] illegal. While it is true that the Code
merely requires malls to provide parking spaces,
without specifying whether it is free or not, both
Committees believe that the reasonable and logical
interpretation of the Code is that the parking spaces
are for free. This interpretation is not only
reasonable and logical but finds support in the
actual practice in other countries like the United
States of America where parking spaces owned and
operated by mall owners are free of charge.
Figuratively speaking, the Code has
expropriated the land for parking something similar
to the subdivision law which require developers to
devote so much of the land area for parks.
Moreover, Article II of R.A. No. 9734
(Consumer Act of the Philippines) provides that it is
the policy of the State to protect the interest of the
consumers, promote the general welfare and establish
standards of conduct for business and
industry. Obviously, a contrary interpretation (i.e.,
justifying the collection of parking fees) would be
going against the declared policy of R.A. 7394.
Section 201 of the National Building Code
gives the responsibility for the administration and
enforcement of the provisions of the Code, including
the imposition of penalties for administrative
violations thereof to the Secretary of Public
Works. This set up, however, is not being carried out
in reality.
In the position paper submitted by the
Metropolitan Manila Development Authority
(MMDA), its chairman, Jejomar C. Binay, accurately
pointed out that the Secretary of the DPWH is
responsible for the implementation/enforcement of
the National Building Code. After the enactment of
the Local Government Code of 1991, the local
government units (LGUs) were tasked to discharge
 the regulatory powers of the DPWH.Hence, in the
local level, the Building Officials enforce all rules/
regulations formulated by the DPWH relative to all
building plans, specifications and designs including
parking space requirements. There is, however, no
single national department or agency directly tasked
to supervise the enforcement of the provisions of the
Code on parking, notwithstanding the national
character of the law.[6]
Senate Committee Report No. 225, thus, contained the
following recommendations:
In light of the foregoing, the Committees on
Trade and Commerce and Justice and Human
Rights hereby recommend the following:
1. The Office of the Solicitor General should institute
the necessary action to enjoin the collection
of parking fees as well as to enforce the
penal sanction provisions of the National
Building Code. The Office of the Solicitor
General should likewise study how refund
can be exacted from mall owners who
continue to collect parking fees.
2. The Department of Trade and Industry pursuant
to the provisions of R.A. No. 7394, otherwise
known as the Consumer Act of
the Philippines should enforce the
provisions of the Code relative to
parking. Towards this end, the DTI should
formulate the necessary implementing rules
and regulations on parking in shopping
malls, with prior consultations with the local
government units where these are
located. Furthermore, the DTI, in
coordination with the DPWH, should be
empowered to regulate and supervise the
construction and maintenance of parking
establishments.
3. Finally, Congress should amend and update the
National Building Code to expressly prohibit
shopping malls from collecting parking fees
by at the same time, prohibit them from
invoking the waiver of liability.[7]
Respondent SM Prime thereafter received information that,
pursuant to Senate Committee Report No. 225, the DPWH Secretary
and the local building officials of Manila, Quezon City, and Las Pias
intended to institute, through the OSG, an action to enjoin
respondent SM Prime and similar establishments from collecting
parking fees, and to impose upon said establishments penal
sanctions under Presidential Decree No. 1096, otherwise known as
the National Building Code of the Philippines (National Building
Code), and its Implementing Rules and Regulations (IRR). With the
threatened action against it, respondent SM Prime filed, on 3 October
2000, a Petition for Declaratory Relief[8] under Rule 63 of the Revised
Rules of Court, against the DPWH Secretary and local building
officials of Manila, Quezon City, and Las Pias. Said Petition was
docketed as Civil Case No. 00-1208 and assigned to the RTC of
Makati City, Branch 138, presided over by Judge Sixto Marella, Jr.
(Judge Marella). In its Petition, respondent SM Prime prayed for
judgment:
a) Declaring Rule XIX of the Implementing
Rules and Regulations of the National Building Code
as ultra vires, hence, unconstitutional and void;
b) Declaring [herein respondent SM Prime]s
clear legal right to lease parking spaces appurtenant
to its department stores, malls, shopping centers
and other commercial establishments; and
c) Declaring the National Building Code of
the Philippines Implementing Rules and Regulations
as ineffective, not having been published once a
week for three (3) consecutive weeks in a newspaper
of general circulation, as prescribed by Section 211
of Presidential Decree No. 1096.
[Respondent SM Prime] further prays for
such other reliefs as may be deemed just and
equitable under the premises.[9]

The very next day, 4 October 2000, the OSG filed a Petition
for Declaratory Relief and Injunction (with Prayer for Temporary
Restraining Order and Writ of Preliminary Injunction)[10] against
respondents. This Petition was docketed as Civil Case No. 00-1210
and raffled to the RTC of Makati, Branch 135, presided over by
Judge Francisco B. Ibay (Judge Ibay). Petitioner prayed that the RTC:
1. After summary hearing, a temporary
restraining order and a writ of preliminary injunction
be issued restraining respondents from collecting
parking fees from their customers; and
2. After hearing, judgment be rendered
declaring that the practice of respondents in charging
parking fees is violative of the National Building Code
and its Implementing Rules and Regulations and is
therefore invalid, and making permanent any
injunctive writ issued in this case.
Other reliefs just and equitable under the
premises are likewise prayed for.[11]
On 23 October 2000, Judge Ibay of the RTC of Makati City,
Branch 135, issued an Order consolidating Civil Case No. 00-1210
with Civil Case No. 00-1208 pending before Judge Marella of RTC of
Makati, Branch 138.
As a result of the pre-trial conference held on the morning
of 8 August 2001, the RTC issued a Pre-Trial Order[12] of even date
which limited the issues to be resolved in Civil Cases No. 00-1208
and No. 00-1210 to the following:
1. Capacity of the plaintiff [OSG] in Civil
Case No. 00-1210 to institute the present
proceedings and relative thereto whether the
controversy in the collection of parking fees by mall
owners is a matter of public welfare.
2. Whether declaratory relief is
proper.
3. Whether
respondent Ayala Land, Robinsons, Shangri-La and
SM Prime are obligated to provide parking spaces in
their malls for the use of their patrons or the public
in general, free of charge.
4. Entitlement of the parties of
[sic] award of damages.[13]
On 29 May 2002, the RTC rendered its Joint Decision in
Civil Cases No. 00-1208 and No. 00-1210.
The RTC resolved the first two issues affirmatively. It ruled
that the OSG can initiate Civil Case No. 00-1210 under Presidential
Decree No. 478 and the Administrative Code of 1987.[14] It also found
that all the requisites for an action for declaratory relief were
present, to wit:
The requisites for an action for declaratory
relief are: (a) there is a justiciable controversy; (b)
the controversy is between persons whose interests
are adverse; (c) the party seeking the relief has a
legal interest in the controversy; and (d) the issue
involved is ripe for judicial determination.
SM, the petitioner in Civil Case No. 001-
1208 [sic] is a mall operator who stands to be
affected directly by the position taken by the
government officials sued namely the Secretary of
Public Highways and the Building Officials of the
local government units where it operates shopping
malls. The OSG on the other hand acts on a matter
of public interest and has taken a position adverse
to that of the mall owners whom it sued. The
construction of new and bigger malls has been
announced, a matter which the Court can take
judicial notice and the unsettled issue of whether
mall operators should provide parking facilities, free
of charge needs to be resolved.[15]
As to the third and most contentious issue, the RTC
pronounced that:

The Building Code, which is the enabling
law and the Implementing Rules and Regulations do
not impose that parking spaces shall be provided by
the mall owners free of charge. Absent such
directive[,] AyalaLand, Robinsons, Shangri-la and
SM [Prime] are under no obligation to provide them
for free. Article 1158 of the Civil Code is clear:
Obligations derived from
law are not presumed. Only those
expressly determined in this Code or
in special laws are demandable and
shall be regulated by the precepts of
the law which establishes them; and
as to what has not been foreseen, by
the provisions of this Book (1090).[]
xxxx
The provision on ratios of parking slots to
several variables, like shopping floor area or
customer area found in Rule XIX of the
Implementing Rules and Regulations cannot be
construed as a directive to provide free parking
spaces, because the enabling law, the Building Code
does not so provide. x x x.
To compel Ayala Land, Robinsons, Shangri-
La and SM [Prime] to provide parking spaces for free
can be considered as an unlawful taking of property
right without just compensation.
Parking spaces in shopping malls are
privately owned and for their use, the mall operators
collect fees. The legal relationship could be either
lease or deposit. In either case[,] the mall owners
have the right to collect money which translates into
income. Should parking spaces be made free, this
right of mall owners shall be gone. This, without just
compensation. Further, loss of effective control over
their property will ensue which is frowned upon by
law.
The presence of parking spaces can be
viewed in another light. They can be looked at as
necessary facilities to entice the public to increase
patronage of their malls because without parking
spaces, going to their malls will be
inconvenient. These are[,] however[,] business
considerations which mall operators will have to
decide for themselves. They are not sufficient to
justify a legal conclusion, as the OSG would like the
Court to adopt that it is the obligation of the mall
owners to provide parking spaces for free.[16]
The RTC then held that there was no sufficient evidence to
justify any award for damages.
The RTC finally decreed in its 29 May 2002 Joint Decision in Civil
Cases No. 00-1208 and No. 00-1210 that:
FOR THE REASONS GIVEN, the Court
declares that Ayala Land[,] Inc., Robinsons Land
Corporation, Shangri-la Plaza Corporation and SM
Prime Holdings[,] Inc. are not obligated to provide
parking spaces in their malls for the use of their
patrons or public in general, free of charge.
All counterclaims in Civil Case No. 00-1210
are dismissed.
No pronouncement as to costs.[17]
CA-G.R. CV No. 76298 involved the separate appeals of the
OSG[18] and respondent SM Prime[19] filed with the Court of
Appeals. The sole assignment of error of the OSG in its Appellants
Brief was:
THE TRIAL COURT ERRED IN HOLDING THAT THE
NATIONAL BUILDING CODE DID NOT INTEND
MALL PARKING SPACES TO BE FREE OF
CHARGE[;][20]
while the four errors assigned by respondent SM Prime in its
Appellants Brief were:
I merits of the case.
THE TRIAL COURT ERRED IN FAILING TO
DECLARE RULE XIX OF THE IMPLEMENTING
RULES AS HAVING BEEN ENACTED ULTRA VIRES,
HENCE, UNCONSTITUTIONAL AND VOID.
II
THE TRIAL COURT ERRED IN FAILING TO
DECLARE THE IMPLEMENTING RULES
INEFFECTIVE FOR NOT HAVING BEEN PUBLISHED
AS REQUIRED BY LAW.
III
THE TRIAL COURT ERRED IN FAILING TO DISMISS
THE OSGS PETITION FOR DECLARATORY RELIEF
AND INJUNCTION FOR FAILURE TO EXHAUST
ADMINISTRATIVE REMEDIES.
IV
THE TRIAL COURT ERRED IN FAILING TO
DECLARE THAT THE OSG HAS NO LEGAL
CAPACITY TO SUE AND/OR THAT IT IS NOT A
REAL PARTY-IN-INTEREST IN THE INSTANT
CASE.[21]
Respondent Robinsons filed a Motion to Dismiss Appeal of the OSG
on the ground that the lone issue raised therein involved a pure
question of law, not reviewable by the Court of Appeals.
The Court of Appeals promulgated its Decision in CA-G.R. CV No.
76298 on 25 January 2007. The appellate court agreed with
respondent Robinsons that the appeal of the OSG should suffer the
fate of dismissal, since the issue on whether or not the National
Building Code and its implementing rules require shopping mall
operators to provide parking facilities to the public for free was
evidently a question of law. Even so, since CA-G.R. CV No. 76298
also included the appeal of respondent SM Prime, which raised
issues worthy of consideration, and in order to satisfy the demands
of substantial justice, the Court of Appeals proceeded to rule on the
In its Decision, the Court of Appeals affirmed the capacity of the OSG
to initiate Civil Case No. 00-1210 before the RTC as the legal
representative of the government,[22] and as the one deputized by the
Senate of the Republic of the Philippines through Senate Committee
Report No. 225.
The Court of Appeals rejected the contention of respondent
SM Prime that the OSG failed to exhaust administrative
remedies. The appellate court explained that an administrative
review is not a condition precedent to judicial relief where the
question in dispute is purely a legal one, and nothing of an
administrative nature is to be or can be done.
The Court of Appeals likewise refused to rule on the validity
of the IRR of the National Building Code, as such issue was not
among those the parties had agreed to be resolved by the RTC during
the pre-trial conference for Civil Cases No. 00-1208 and No. 00-
1210. Issues cannot be raised for the first time on
appeal. Furthermore, the appellate court found that the controversy
could be settled on other grounds, without touching on the issue of
the validity of the IRR. It referred to the settled rule that courts
should refrain from passing upon the constitutionality of a law or
implementing rules, because of the principle that bars judicial
inquiry into a constitutional question, unless the resolution thereof
is indispensable to the determination of the case.
Lastly, the Court of Appeals declared that Section 803 of the
National Building Code and Rule XIX of the IRR were clear and
needed no further construction. Said provisions were only intended
to control the occupancy or congestion of areas and structures. In
the absence of any express and clear provision of law, respondents
could not be obliged and expected to provide parking slots free of
charge.
The fallo of the 25 January 2007 Decision of the Court of
Appeals reads:
 WHEREFORE, premises considered, the
instant appeals are DENIED. Accordingly, appealed Pursuant to Section 803 of the National
Decision is hereby AFFIRMED in toto.[23] Building Code (PD 1096) providing for maximum site
occupancy, the following provisions on parking and
loading space requirements shall be observed:
In its Resolution issued on 14 March 2007, the Court of Appeals
denied the Motion for Reconsideration of the OSG, finding that the 1. The parking space ratings listed below are
grounds relied upon by the latter had already been carefully minimum off-street requirements for
considered, evaluated, and passed upon by the appellate court, and specific uses/occupancies for
there was no strong and cogent reason to modify much less reverse buildings/structures:
the assailed judgment. 1.1 The size of an average
automobile parking slot shall
The OSG now comes before this Court, via the instant be computed as 2.4 meters
Petition for Review, with a single assignment of error: by 5.00 meters for
THE COURT OF APPEALS SERIOUSLY ERRED IN perpendicular or diagonal
AFFIRMING THE RULING OF THE LOWER parking, 2.00 meters by 6.00
COURT THAT RESPONDENTS ARE NOT OBLIGED meters for parallel parking. A
TO PROVIDE FREE PARKING SPACES TO THEIR truck or bus
CUSTOMERS OR THE PUBLIC.[24] parking/loading slot shall be
computed at a minimum of
3.60 meters by 12.00
The OSG argues that respondents are mandated to provide meters. The parking slot
free parking by Section 803 of the National Building Code and Rule shall be drawn to scale and
XIX of the IRR. the total number of which
shall be indicated on the
According to Section 803 of the National Building Code: plans and specified whether
or not parking
SECTION 803. Percentage of Site accommodations, are
Occupancy attendant-managed. (See
Section 2 for computation of
(a) Maximum site occupancy shall be parking requirements).
governed by the use, type of construction, and
height of the building and the use, area, nature, and xxxx
location of the site; and subject to the provisions of
the local zoning requirements and in accordance 1.7 Neighborhood shopping center 1
with the rules and regulations promulgated by the slot/100 sq. m. of shopping
Secretary. floor area

In connection therewith, Rule XIX of the old The OSG avers that the aforequoted provisions should be
IRR,[25] provides: read together with Section 102 of the National Building Code, which
declares:
RULE XIX PARKING AND LOADING SPACE
REQUIREMENTS SECTION 102. Declaration of Policy

It is hereby declared to be the policy of the
State to safeguard life, health, property, and public
welfare, consistent with the principles of sound
environmental management and control; and to this
end, make it the purpose of this Code to provide for
all buildings and structures, a framework of
minimum standards and requirements to regulate
and control their location, site, design, quality of
materials, construction, use, occupancy, and
maintenance.
The requirement of free-of-charge parking, the OSG argues, greatly
contributes to the aim of safeguarding life, health, property, and
public welfare, consistent with the principles of sound environmental
management and control. Adequate parking spaces would contribute
greatly to alleviating traffic congestion when complemented by quick
and easy access thereto because of free-charge parking. Moreover,
the power to regulate and control the use, occupancy, and
maintenance of buildings and structures carries with it the power to
impose fees and, conversely, to control -- partially or, as in this case,
absolutely -- the imposition of such fees.
The Court finds no merit in the present Petition.
The explicit directive of the afore-quoted statutory and
regulatory provisions, garnered from a plain reading thereof, is that
respondents, as operators/lessors of neighborhood shopping centers,
should provide parking and loading spaces, in accordance with the
minimum ratio of one slot per 100 square meters of shopping floor
area. There is nothing therein pertaining to the collection (or non-
collection) of parking fees by respondents. In fact, the term parking
fees cannot even be found at all in the entire National Building Code
and its IRR.
Statutory construction has it that if a statute is clear and
unequivocal, it must be given its literal meaning and applied without
any attempt at interpretation.[26] Since Section 803 of the National
Building Code and Rule XIX of its IRR do not mention parking fees,
then simply, said provisions do not regulate the collection of the
same. The RTC and the Court of Appeals correctly applied Article
1158 of the New Civil Code, which states:
Art. 1158. Obligations derived from law are
not presumed. Only those expressly determined in
this Code or in special laws are demandable, and
shall be regulated by the precepts of the law which
establishes them; and as to what has not been
foreseen, by the provisions of this Book. (Emphasis
ours.)
Hence, in order to bring the matter of parking fees within
the ambit of the National Building Code and its IRR, the OSG had to
resort to specious and feeble argumentation, in which the Court
cannot concur.
The OSG cannot rely on Section 102 of the National Building
Code to expand the coverage of Section 803 of the same Code and
Rule XIX of the IRR, so as to include the regulation of parking
fees. The OSG limits its citation to the first part of Section 102 of the
National Building Code declaring the policy of the State to safeguard
life, health, property, and public welfare, consistent with the
principles of sound environmental management and control; but
totally ignores the second part of said provision, which reads, and to
this end, make it the purpose of this Code to provide for all buildings
and structures, a framework of minimum standards and
requirements to regulate and control their location, site, design,
quality of materials, construction, use, occupancy, and
maintenance. While the first part of Section 102 of the National
Building Code lays down the State policy, it is the second part
thereof that explains how said policy shall be carried out in the
Code.Section 102 of the National Building Code is not an all-
encompassing grant of regulatory power to the DPWH Secretary and
local building officials in the name of life, health, property, and
public welfare. On the contrary, it limits the regulatory power of said
officials to ensuring that the minimum standards and requirements
for all buildings and structures, as set forth in the National Building
Code, are complied with.
Consequently, the OSG cannot claim that in addition to
fixing the minimum requirements for parking spaces for buildings,
Rule XIX of the IRR also mandates that such parking spaces be
provided by building owners free of charge. If Rule XIX is not covered
by the enabling law, then it cannot be added to or included in the
implementing rules. The rule-making power of administrative
agencies must be confined to details for regulating the mode or
proceedings to carry into effect the law as it has been enacted, and it
cannot be extended to amend or expand the statutory requirements
or to embrace matters not covered by the statute. Administrative
regulations must always be in harmony with the provisions of the
law because any resulting discrepancy between the two will always
be resolved in favor of the basic law.[27]
From the RTC all the way to this Court, the OSG repeatedly
referred to Republic v. Gonzales[28] and City of Ozamis v.
Lumapas[29] to support its position that the State has the power to
regulate parking spaces to promote the health, safety, and welfare of
the public; and it is by virtue of said power that respondents may be
required to provide free parking facilities. The OSG, though, failed to
consider the substantial differences in the factual and legal
backgrounds of these two cases from those of the Petition at bar.
In Republic, the Municipality of Malabon sought to eject the
occupants of two parcels of land of the public domain to give way to
a road-widening project. It was in this context that the Court
pronounced:
Indiscriminate parking along F. Sevilla
Boulevard and other main thoroughfares was
prevalent; this, of course, caused the build up of
traffic in the surrounding area to the great
discomfort and inconvenience of the public who use
the streets. Traffic congestion constitutes a threat to
the health, welfare, safety and convenience of the
people and it can only be substantially relieved by
widening streets and providing adequate parking
areas.
The Court, in City of Ozamis, declared that the City had
been clothed with full power to control and regulate its streets for the
purpose of promoting public health, safety and welfare. The City can
regulate the time, place, and manner of parking in the streets and
public places; and charge minimal fees for the street parking to cover
the expenses for supervision, inspection and control, to ensure the
smooth flow of traffic in the environs of the public market, and for
the safety and convenience of the public.
Republic and City of Ozamis involved parking in the local
streets; in contrast, the present case deals with privately owned
parking facilities available for use by the general
public. In Republicand City of Ozamis, the concerned local
governments regulated parking pursuant to their power to control
and regulate their streets; in the instant case, the DPWH Secretary
and local building officials regulate parking pursuant to their
authority to ensure compliance with the minimum standards and
requirements under the National Building Code and its IRR. With the
difference in subject matters and the bases for the regulatory powers
being invoked, Republic and City of Ozamis do not constitute
precedents for this case.
Indeed, Republic and City of Ozamis both contain
pronouncements that weaken the position of the OSG in the case at
bar. In Republic, the Court, instead of placing the burden on private
persons to provide parking facilities to the general public, mentioned
the trend in other jurisdictions wherein the municipal governments
themselves took the initiative to make more parking spaces available
so as to alleviate the traffic problems, thus:
Under the Land Transportation and Traffic
Code, parking in designated areas along public
streets or highways is allowed which clearly
indicates that provision for parking spaces serves a
useful purpose. In other jurisdictions where traffic is
at least as voluminous as here, the provision by
municipal governments of parking space is not
limited to parking along public streets or highways.
There has been a marked trend to build off-street
parking facilities with the view to removing parked
cars from the streets. While the provision of off-
street parking facilities or carparks has been
commonly undertaken by private enterprise,
municipal governments have been constrained to
put up carparks in response to public necessity
where private enterprise had failed to keep up with
the growing public demand. American courts have
upheld the right of municipal governments to
construct off-street parking facilities as clearly
redounding to the public benefit.[30]
In City of Ozamis, the Court authorized the collection by the
City of minimal fees for the parking of vehicles along the streets: so
why then should the Court now preclude respondents from collecting
from the public a fee for the use of the mall parking
facilities? Undoubtedly, respondents also incur expenses in the
maintenance and operation of the mall parking facilities, such as
electric consumption, compensation for parking attendants and
security, and upkeep of the physical structures.
It is not sufficient for the OSG to claim that the power to
regulate and control the use, occupancy, and maintenance of
buildings and structures carries with it the power to impose fees
and, conversely, to control, partially or, as in this case, absolutely,
the imposition of such fees. Firstly, the fees within the power of
regulatory agencies to impose are regulatory fees. It has been
settled law in this jurisdiction that this broad and all-compassing
governmental competence to restrict rights of liberty and property
carries with it the undeniable power to collect a regulatory fee. It
looks to the enactment of specific measures that govern the relations
not only as between individuals but also as between private parties
and the political society.[31] True, if the regulatory agencies have the
power to impose regulatory fees, then conversely, they also have the
power to remove the same. Even so, it is worthy to note that the
present case does not involve the imposition by the DPWH Secretary
and local building officials of regulatory fees upon respondents; but
the collection by respondents of parking fees from persons who use
the mall parking facilities. Secondly, assuming arguendo that the
DPWH Secretary and local building officials do have regulatory
powers over the collection of parking fees for the use of privately
owned parking facilities, they cannot allow or prohibit such collection
arbitrarily or whimsically. Whether allowing or prohibiting the
collection of such parking fees, the action of the DPWH Secretary and
local building officials must pass the test of classic reasonableness
and propriety of the measures or means in the promotion of the ends
sought to be accomplished.[32]
Keeping in mind the aforementioned test of reasonableness
and propriety of measures or means, the Court notes that Section
803 of the National Building Code falls under Chapter 8 on Light
and Ventilation. Evidently, the Code deems it necessary to regulate
site occupancy to ensure that there is proper lighting and ventilation
in every building. Pursuant thereto, Rule XIX of the IRR requires that
a building, depending on its specific use and/or floor area, should
provide a minimum number of parking spaces. The Court, however,
fails to see the connection between regulating site occupancy to
ensure proper light and ventilation in every building vis--
vis regulating the collection by building owners of fees for the use of
their parking spaces. Contrary to the averment of the OSG, the
former does not necessarily include or imply the latter. It totally
escapes this Court how lighting and ventilation conditions at the
malls could be affected by the fact that parking facilities thereat are
free or paid for.
The OSG attempts to provide the missing link by arguing
that:
Under Section 803 of the National Building
Code, complimentary parking spaces are required to
enhance light and ventilation, that is, to avoid traffic
congestion in areas surrounding the building, which
certainly affects the ventilation within the building
itself, which otherwise, the annexed parking spaces
would have served. Free-of-charge parking avoids
traffic congestion by ensuring quick and easy access
of legitimate shoppers to off-street parking spaces
annexed to the malls, and thereby removing the
vehicles of these legitimate shoppers off the busy
streets near the commercial establishments.[33]
The Court is unconvinced. The National Building Code
regulates buildings, by setting the minimum specifications and
requirements for the same. It does not concern itself with traffic
congestion in areas surrounding the building. It is already a stretch
to say that the National Building Code and its IRR also intend to
solve the problem of traffic congestion around the buildings so as to
ensure that the said buildings shall have adequate lighting and
ventilation. Moreover, the Court cannot simply assume, as the OSG
has apparently done, that the traffic congestion in areas around the
malls is due to the fact that respondents charge for their parking
facilities, thus, forcing vehicle owners to just park in the streets. The
Court notes that despite the fees charged by respondents, vehicle
owners still use the mall parking facilities, which are even fully
occupied on some days. Vehicle owners may be parking in the streets
only because there are not enough parking spaces in the malls, and
not because they are deterred by the parking fees charged by
respondents. Free parking spaces at the malls may even have the
opposite effect from what the OSG envisioned: more people may be
encouraged by the free parking to bring their own vehicles, instead of
taking public transport, to the malls; as a result, the parking
facilities would become full sooner, leaving more vehicles without
parking spaces in the malls and parked in the streets instead,
causing even more traffic congestion.
Without using the term outright, the OSG is actually
invoking police power to justify the regulation by the State, through
the DPWH Secretary and local building officials, of privately owned
parking facilities, including the collection by the owners/operators of
such facilities of parking fees from the public for the use thereof. The
Court finds, however, that in totally prohibiting respondents from
collecting parking fees from the public for the use of the mall parking
facilities, the State would be acting beyond the bounds of police
power.
Police power is the power of promoting the public welfare by
restraining and regulating the use of liberty and property. It is
usually exerted in order to merely regulate the use and enjoyment of
the property of the owner. The power to regulate, however, does not
include the power to prohibit. A fortiori, the power to regulate does
not include the power to confiscate. Police power does not involve the
taking or confiscation of property, with the exception of a few cases
where there is a necessity to confiscate private property in order to
destroy it for the purpose of protecting peace and order and of
promoting the general welfare; for instance, the confiscation of an
illegally possessed article, such as opium and firearms. [34]
When there is a taking or confiscation of private property for
public use, the State is no longer exercising police power, but
another of its inherent powers, namely, eminent domain. Eminent
domain enables the State to forcibly acquire private lands intended
for public use upon payment of just compensation to the owner.[35]
Normally, of course, the power of eminent domain results in
the taking or appropriation of title to, and possession of, the
expropriated property; but no cogent reason appears why the said
power may not be availed of only to impose a burden upon the owner
of condemned property, without loss of title and possession.[36] It is a
settled rule that neither acquisition of title nor total destruction of
value is essential to taking. It is usually in cases where title remains
with the private owner that inquiry should be made to determine
whether the impairment of a property is merely regulated or amounts
to a compensable taking. A regulation that deprives any person of
the profitable use of his property constitutes a taking and entitles
him to compensation, unless the invasion of rights is so slight as to
permit the regulation to be justified under the police power.
Similarly, a police regulation that unreasonably restricts the right to
use business property for business purposes amounts to a taking of
private property, and the owner may recover therefor.[37]
Although in the present case, title to and/or possession of
the parking facilities remain/s with respondents, the prohibition
against their collection of parking fees from the public, for the use of
said facilities, is already tantamount to a taking or confiscation of
their properties. The State is not only requiring that respondents
devote a portion of the latters properties for use as parking spaces,
but is also mandating that they give the public access to said
parking spaces for free. Such is already an excessive intrusion into
the property rights of respondents. Not only are they being deprived
of the right to use a portion of their properties as they wish, they are
further prohibited from profiting from its use or even just recovering
therefrom the expenses for the maintenance and operation of the
required parking facilities.
The ruling of this Court in City Government of Quezon City v.
Judge Ericta[38] is edifying. Therein, the City Government of Quezon
City passed an ordinance obliging private cemeteries within its
jurisdiction to set aside at least six percent of their total area for
charity, that is, for burial grounds of deceased paupers. According to
the Court, the ordinance in question was null and void, for it
authorized the taking of private property without just compensation:
There is no reasonable relation between the
setting aside of at least six (6) percent of the total
area of all private cemeteries for charity burial
grounds of deceased paupers and the promotion of'
health, morals, good order, safety, or the general
welfare of the people. The ordinance is actually a
taking without compensation of a certain area from
a private cemetery to benefit paupers who are
charges of the municipal corporation. Instead of'
building or maintaining a public cemetery for this
purpose, the city passes the burden to private
cemeteries.
'The expropriation without compensation of a
portion of private cemeteries is not covered by
Section 12(t) of Republic Act 537, the Revised
Charter of Quezon City which empowers the city
council to prohibit the burial of the dead within the
center of population of the city and to provide for
 their burial in a proper place subject to the 2007 and Resolution dated 14 March 2007 of the Court of Appeals in
provisions of general law regulating burial grounds CA-G.R. CV No. 76298, affirming in toto the Joint Decision dated 29
and cemeteries. When the Local Government Code, May 2002 of the Regional Trial Court of Makati City, Branch 138, in
Batas Pambansa Blg. 337 provides in Section 177(q) Civil Cases No. 00-1208 and No. 00-1210 are hereby AFFIRMED.No
that a sangguniang panlungsod may "provide for the costs.
burial of the dead in such place and in such manner
as prescribed by law or ordinance" it simply SO ORDERED.
authorizes the city to provide its own city owned
land or to buy or expropriate private properties to
construct public cemeteries. This has been the law,
and practise in the past. It continues to the present.
Expropriation, however, requires payment of just
compensation. The questioned ordinance is different
from laws and regulations requiring owners of
subdivisions to set aside certain areas for streets,
parks, playgrounds, and other public facilities from
the land they sell to buyers of subdivision lots. The
necessities of public safety, health, and convenience
are very clear from said requirements which are
intended to insure the development of communities
with salubrious and wholesome environments. The
beneficiaries of the regulation, in turn, are made to
pay by the subdivision developer when individual
lots are sold to homeowners.

In conclusion, the total prohibition against the collection by

respondents of parking fees from persons who use the mall parking
facilities has no basis in the National Building Code or its IRR. The
State also cannot impose the same prohibition by generally invoking
police power, since said prohibition amounts to a taking of
respondents property without payment of just compensation.
Given the foregoing, the Court finds no more need to address the
issue persistently raised by respondent SM Prime concerning the
unconstitutionality of Rule XIX of the IRR. In addition, the said issue
was not among those that the parties, during the pre-trial conference
for Civil Cases No. 12-08 and No. 00-1210, agreed to submit for
resolution of the RTC. It is likewise axiomatic that the
constitutionality of a law, a regulation, an ordinance or an act will
not be resolved by courts if the controversy can be, as in this case it
has been, settled on other grounds.[39]

WHEREFORE, the instant Petition for Review

on Certiorari is hereby DENIED. The Decision dated 25 January
 Contracts; Restraint of Trade; Non-Involvement Clause; A
noninvolvement clause is not necessarily void for being in restraint of
trade as long as there are reasonable limitations as to time, trade, and
place.—A non-involvement clause is not necessarily void for being in
restraint of trade as long as there are reasonable limitations as to time,
trade, and place. In this case, the non-involvement clause has a time
limit: two years from the time petitioner’s employment with respondent
ends. It is also limited as to trade, since it only prohibits petitioner from
engaging in any pre-need business akin to respondent’s. More
significantly, since petitioner was the Senior Assistant Vice-President
and Territorial Operations Head in charge of respondent’s Hongkong and
Asean operations, she had been privy to confidential and highly sensitive
marketing strategies of respondent’s business. To allow her to engage in
a rival business soon after she leaves would make respondent’s trade
secrets vulnerable especially in a highly competitive marketing
environment. In sum, we find the non-involvement clause not contrary to
public welfare and not greater than is necessary to afford a fair and
reasonable protection to respondent.
Same; Same; Same; Courts cannot stipulate for the parties nor
amend their agreement where the same does not contravene law, morals,
good customs, public order or public policy, for to do so would be to alter
the real intent of the parties, and would run contrary to the function of the
courts to give force and effect thereto.—Article 1306 of the Civil Code
provides that parties to a contract may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order, or
public policy. Article 1159 of the same Code also provides that obligations
arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. Courts cannot
stipulate for the parties nor amend their agreement where the same does
not contravene law, morals, good customs, public order or public policy,
for to do so would be to alter the real intent of the parties, and would run
contrary to the function of the courts to give force and effect thereto. Not
being contrary to public policy, the non-involvement clause, which
petitioner and respondent freely agreed upon, has the force of law
between them, and thus, should be complied with in good faith.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 163512 February 28, 2007
DAISY B. TIU, Petitioner
vs.
PLATINUM PLANS PHIL., INC., Respondent.
DECISION
QUISUMBING, J.:
For review on certiorari are the Decision1 dated January 20, 2004 of
the Court of Appeals in CA-G.R. CV No. 74972, and its
Resolution2 dated May 4, 2004 denying reconsideration. The Court of
Appeals had affirmed the decision3 dated February 28, 2002 of the
Regional Trial Court (RTC) of Pasig City, Branch 261, in an action for
damages, ordering petitioner to pay respondent ₱100,000 as
liquidated damages.
The relevant facts are as follows:
Respondent Platinum Plans Philippines, Inc. is a domestic
corporation engaged in the pre-need industry. From 1987 to 1989,
petitioner Daisy B. Tiu was its Division Marketing Director.
On January 1, 1993, respondent re-hired petitioner as Senior
Assistant Vice-President and Territorial Operations Head in charge of
its Hongkong and Asean operations. The parties executed a contract
of employment valid for five years.4
On September 16, 1995, petitioner stopped reporting for work. In
November 1995, she became the Vice-President for Sales of
Professional Pension Plans, Inc., a corporation engaged also in the
pre-need industry.
Consequently, respondent sued petitioner for damages before the
RTC of Pasig City, Branch 261. Respondent alleged, among others,
that petitioner’s employment with Professional Pension Plans, Inc.
violated the non-involvement clause in her contract of employment,
to wit:
8. NON INVOLVEMENT PROVISION – The EMPLOYEE further
undertakes that during his/her engagement with EMPLOYER and in
case of separation from the Company, whether voluntary or for
cause, he/she shall not, for the next TWO (2) years thereafter,
engage in or be involved with any corporation, association or entity,
whether directly or indirectly, engaged in the same business or
belonging to the same pre-need industry as the EMPLOYER. Any
breach of the foregoing provision shall render the EMPLOYEE liable
to the EMPLOYER in the amount of One Hundred Thousand Pesos
(P100,000.00) for and as liquidated damages.5
Respondent thus prayed for ₱100,000 as compensatory damages;
₱200,000 as moral damages; ₱100,000 as exemplary damages; and
25% of the total amount due plus ₱1,000 per counsel’s court
appearance, as attorney’s fees.
Petitioner countered that the non-involvement clause was
unenforceable for being against public order or public policy: First,
the restraint imposed was much greater than what was necessary to
afford respondent a fair and reasonable protection. Petitioner
contended that the transfer to a rival company was an accepted
practice in the pre-need industry. Since the products sold by the
companies were more or less the same, there was nothing peculiar or
unique to protect. Second, respondent did not invest in petitioner’s
training or improvement. At the time petitioner was recruited, she
already possessed the knowledge and expertise required in the pre-
need industry and respondent benefited tremendously from it. Third,
a strict application of the non-involvement clause would amount to a
deprivation of petitioner’s right to engage in the only work she knew.
In upholding the validity of the non-involvement clause, the trial
court ruled that a contract in restraint of trade is valid provided that
there is a limitation upon either time or place. In the case of the pre-
need industry, the trial court found the two-year restriction to be
valid and reasonable. The dispositive portion of the decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff
and against the defendant, ordering the latter to pay the following:
1. the amount of One Hundred Thousand Pesos
(P100,000.00) for and as damages, for the breach of the non-
involvement provision (Item No. 8) of the contract of
employment;
2. costs of suit.
There being no sufficient evidence presented to sustain the grant of
attorney’s fees, the Court deems it proper not to award any.
SO ORDERED.6
On appeal, the Court of Appeals affirmed the trial court’s ruling. It
reasoned that petitioner entered into the contract on her own will
and volition. Thus, she bound herself to fulfill not only what was
expressly stipulated in the contract, but also all its consequences
that were not against good faith, usage, and law. The appellate court
also ruled that the stipulation prohibiting non-employment for two
years was valid and enforceable considering the nature of
respondent’s business.
Petitioner moved for reconsideration but was denied. Hence, this
appeal by certiorari where petitioner alleges that the Court of
Appeals erred when:
A.
… [IT SUSTAINED] THE VALIDITY OF THE NON-INVOLVEMENT
CLAUSE IN PETITIONER’S CONTRACT CONSIDERING THAT THE
PERIOD FIXED THEREIN IS VOID FOR BEING OFFENSIVE TO
PUBLIC POLICY
B.
… [IT SUSTAINED] THE AWARD OF LIQUIDATED DAMAGES
CONSIDERING THAT IT BEING IN THE NATURE OF A PENALTY THE
SAME IS EXCESSIVE, INIQUITOUS OR UNCONSCIONABLE7
Plainly stated, the core issue is whether the non-involvement clause
is valid.
Petitioner avers that the non-involvement clause is offensive to
public policy since the restraint imposed is much greater than what
is necessary to afford respondent a fair and reasonable protection.
She adds that since the products sold in the pre-need industry are
more or less the same, the transfer to a rival company is acceptable.
Petitioner also points out that respondent did not invest in her
training or improvement. At the time she joined respondent, she
already had the knowledge and expertise required in the pre-need
industry. Finally, petitioner argues that a strict application of the
non-involvement clause would deprive her of the right to engage in
the only work she knows.
Respondent counters that the validity of a non-involvement clause
has been sustained by the Supreme Court in a long line of cases. It
contends that the inclusion of the two-year non-involvement clause
in petitioner’s contract of employment was reasonable and needed
since her job gave her access to the company’s confidential
marketing strategies. Respondent adds that the non-involvement
clause merely enjoined her from engaging in pre-need business akin
to respondent’s within two years from petitioner’s separation from
respondent. She had not been prohibited from marketing other
service plans.
As early as 1916, we already had the occasion to discuss the validity
of a non-involvement clause. In Ferrazzini v. Gsell,8 we said that
such clause was unreasonable restraint of trade and therefore
against public policy. In Ferrazzini, the employee was prohibited from
engaging in any business or occupation in the Philippines for a
period of five years after the termination of his employment contract
and must first get the written permission of his employer if he were
to do so. The Court ruled that while the stipulation was indeed
limited as to time and space, it was not limited as to trade. Such
prohibition, in effect, forces an employee to leave the Philippines to
work should his employer refuse to give a written permission.
In G. Martini, Ltd. v. Glaiserman,9 we also declared a similar
stipulation as void for being an unreasonable restraint of trade.
There, the employee was prohibited from engaging in any business
similar to that of his employer for a period of one year. Since the
employee was employed only in connection with the purchase and
export of abaca, among the many businesses of the employer, the
Court considered the restraint too broad since it effectively prevented
the employee from working in any other business similar to his
employer even if his employment was limited only to one of its
multifarious business activities.
However, in Del Castillo v. Richmond,10 we upheld a similar
stipulation as legal, reasonable, and not contrary to public policy. In
the said case, the employee was restricted from opening, owning or
having any connection with any other drugstore within a radius of
four miles from the employer’s place of business during the time the
employer was operating his drugstore. We said that a contract in
restraint of trade is valid provided there is a limitation upon either
time or place and the restraint upon one party is not greater than the
protection the other party requires.
Finally, in Consulta v. Court of Appeals,11 we considered a non-
involvement clause in accordance with Article 130612 of the Civil
Code. While the complainant in that case was an independent agent
and not an employee, she was prohibited for one year from engaging
directly or indirectly in activities of other companies that compete
with the business of her principal. We noted therein that the
restriction did not prohibit the agent from engaging in any other
business, or from being connected with any other company, for as
long as the business or company did not compete with the principal’s
business. Further, the prohibition applied only for one year after the
termination of the agent’s contract and was therefore a reasonable
restriction designed to prevent acts prejudicial to the employer.
Conformably then with the aforementioned pronouncements, a non-
involvement clause is not necessarily void for being in restraint of
trade as long as there are reasonable limitations as to time, trade,
and place.
In this case, the non-involvement clause has a time limit: two years
from the time petitioner’s employment with respondent ends. It is
also limited as to trade, since it only prohibits petitioner from
engaging in any pre-need business akin to respondent’s.1awphi1.net
More significantly, since petitioner was the Senior Assistant Vice-
President and Territorial Operations Head in charge of respondent’s
Hongkong and Asean operations, she had been privy to confidential
and highly sensitive marketing strategies of respondent’s business.
To allow her to engage in a rival business soon after she leaves would
make respondent’s trade secrets vulnerable especially in a highly
competitive marketing environment. In sum, we find the non-
involvement clause not contrary to public welfare and not greater
than is necessary to afford a fair and reasonable protection to
respondent.13
In any event, Article 1306 of the Civil Code provides that parties to a
contract may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy.
Notes.—A contract of adhesion is one in which one of the contracting
parties imposes a ready-made form of contract which the other party may
accept or reject, but cannot modify. The terms of a contract of adhesion
are construed strictly against the party who drafted them. (Ouano vs.
Court of Appeals, 398 SCRA 525 [2003]
The exclusivity clause is more often the subject of critical scrutiny when
it is perceived to collide with the Constitutional proscription against
unreasonable restraint of trade or occupation. Restraint of trade or
occupation embraces acts, contracts, agreements or combinations which
restrict competition or obstruct due course of trade. (Avon Cosmetics,
Incorporated vs. Luna, 511 SCRA 376[2006])

Article 115914 of the same Code also provides that obligations arising
from contracts have the force of law between the contracting parties
and should be complied with in good faith. Courts cannot stipulate
for the parties nor amend their agreement where the same does not
contravene law, morals, good customs, public order or public policy,
for to do so would be to alter the real intent of the parties, and would
run contrary to the function of the courts to give force and effect
thereto.15 Not being contrary to public policy, the non-involvement
clause, which petitioner and respondent freely agreed upon, has the
force of law between them, and thus, should be complied with in
good faith.16

Thus, as held by the trial court and the Court of Appeals, petitioner
is bound to pay respondent ₱100,000 as liquidated damages. While
we have equitably reduced liquidated damages in certain cases, 17 we
cannot do so in this case, since it appears that even from the start,
petitioner had not shown the least intention to fulfill the non-
involvement clause in good faith.

WHEREFORE, the petition is DENIED for lack of merit. The Decision

dated January 20, 2004, and the Resolution dated May 4, 2004, of
the Court of Appeals in CA-G.R. CV No. 74972, are AFFIRMED.
Costs against petitioner.

SO ORDERED.

LEONARDO A. QUISUMBING
Associate Justice
 Obligations and Contracts; Interests; Words and Phrases; Interest is
a compensation fixed by the parties for the use or forbearance of money,
and this is referred to as monetary interest; Interest may also be imposed
by law or by courts as penalty or indemnity for damages, and this is
called compensatory interest; Article 1956 of the Civil Code refers to
monetary interest; Monetary interest shall be due only if it has been
expressly stipulated in writing.—Interest is a compensation fixed by the
parties for the use or forbearance of money. This is referred to as
monetary interest. Interest may also be imposed by law or by courts as
penalty or indemnity for damages. This is called compensatory interest.
The right to interest arises only by virtue of a contract or by virtue of
damages for delay or failure to pay the principal loan on which interest is
demanded. Article 1956 of the Civil Code, which refers to monetary
interest, specifically mandates that no interest shall be due unless it has
been expressly stipulated in writing. As can be gleaned from the
foregoing provision, payment of monetary interest is allowed only if: (1)
there was an express stipulation for the payment of interest; and (2) the
agreement for the payment of interest was reduced in writing. The
concurrence of the two conditions is required for the payment of
monetary interest. Thus, we have held that collection of interest without any
stipulation therefor in writing is prohibited by law.
Same; Same; The interest under Arts. 2209 and 2212 of the Civil
Code may be imposed only as a penalty or damages for breach of
contractual obligations—it cannot be charged as a compensation for the
use or forbearance of money.—There are instances in which an interest
may be imposed even in the absence of express stipulation, verbal or
written, regarding payment of interest. Article 2209 of the Civil Code
states that if the obligation consists in the payment of a sum of money,
and the debtor incurs delay, a legal interest of 12% per annum may be
imposed as indemnity for damages if no stipulation on the payment of
interest was agreed upon. Likewise, Article 2212 of the Civil Code
provides that interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent on this point.
All the same, the interest under these two instances may be imposed
only as a penalty or damages for breach of contractual obligations. It
cannot be charged as a compensation for the use or forbearance of money.
In other words, the two instances apply only to compensatory interest
and not to monetary interest. The case at bar involves petitioner’s claim
for monetary interest.
Same; Same; Solutio Indebiti; The principle of solutio indebiti applies in
case of erroneous payment of undue interest.—Under Article 1960 of the
Civil Code, if the borrower of loan pays interest when there has been no
stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied. Article 2154 of the Civil Code
explains the principle of solutio indebiti. Said provision provides that if
something is received when there is no right to demand it, and it was
unduly delivered through mistake, the obligation to return it arises. In
such a case, a creditor-debtor relationship is created under a quasi-
contract whereby the payor becomes the creditor who then has the right
to demand the return of payment made by mistake, and the person who
has no right to receive such payment becomes obligated to return the
same. The quasi-contract of solutio indebiti harks back to the ancient
principle that no one shall enrich himself unjustly at the expense of
another. The principle of solutio indebiti applies where (1) a payment is
made when there exists no binding relation between the payor, who has
no duty to pay, and the person who received the payment; and (2) the
payment is made through mistake, and not through liberality or some
other cause. We have held that the principle of solutio indebiti applies in
case of erroneous payment of undue interest.
Damages; Article 2216 of the Civil Code instructs that assessment of
damages is left to the discretion of the court according to the
circumstances of each case, which discretion is limited by the principle
that the amount awarded should not be palpably excessive as to indicate
that it was the result of prejudice or corruption on the part of the trial
court.—Article 2217 of the Civil Code provides that moral damages may
be recovered if the party underwent physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral
shock, social humiliation and similar injury. Respondent testified that
she experienced sleepless nights and wounded feelings when petitioner
refused to return the amount paid as interest despite her repeated
demands. Hence, the award of moral damages is justified. However, its
corresponding amount of P300,000.00, as fixed by the RTC and the Court
of Appeals, is exorbitant and should be equitably reduced. Article 2216 of
the Civil Code instructs that assessment of damages is left to the
discretion of the court according to the circumstances of each case. This
discretion is limited by the principle that the amount awarded should not
be palpably excessive as to indicate that it was the result of prejudice or
corruption on the part of the trial court. To our mind, the amount of
P150,000.00 as moral damages is fair, reasonable, and proportionate to
the injury suffered by respondent.
Same; In a quasi-contract, such as solutio indebiti, exemplary
damages may be imposed if the defendant acted in an oppressive manner,
such as when the creditor defendant acted oppressively by pestering imposed on the amount to be refunded as well as on the damages
debtor to pay interest and threatening to block the latter’s transactions awarded and on the attorney’s fees, to be computed from the time of the
with a government office if she would not pay interest.—Article 2232 of extrajudicial demand on 3 March 1998, up to the finality of this Decision.
the Civil Code states that in a quasi-contract, such as solutio indebiti, In addition, the interest shall become 12% per annum from the finality of
exemplary damages may be imposed if the defendant acted in an this Decision up to its satisfaction.
oppressive manner. Petitioner acted oppressively when he pestered
respondent to pay interest and threatened to block her transactions with
the PNO if she would not pay interest. This forced respondent to pay THIRD DIVISION
interest despite lack of agreement thereto. Thus, the award of exemplary
damages is appropriate. The amount of P50,000.00 imposed as
exemplary damages by the RTC and the Court is fitting so as to deter SEBASTIAN SIGA-AN, G.R. No. 173227
petitioner and other lenders from committing similar and other serious Petitioner,
wrongdoings. Present:
Same; Attorney’s Fees; In awarding attorney’s fees, the trial court must
state the factual, legal or equitable justification for awarding the same.— YNARES-SANTIAGO,
Jurisprudence instructs that in awarding attorney’s fees, the trial court Chairperson,
must state the factual, legal or equitable justification for awarding the AUSTRIA-MARTINEZ,
same. In the case under consideration, the RTC stated in its Decision -versus CHICO-NAZARIO,
that the award of attorney’s fees equivalent to 25% of the amount paid as NACHURA, and
interest by respondent to petitioner is reasonable and moderate LEONARDO-DE CASTRO,* JJ.
considering the extent of work rendered by respondent’s lawyer in the
instant case and the fact that it dragged on for several years. Further,
Promulgated:
respondent testified that she agreed to compensate her lawyer handling
ALICIA VILLANUEVA,
the instant case such amount. The award, therefore, of attorney’s fees
Respondent. January 20, 2009
and its amount equivalent to 25% of the amount paid as interest by
x----------------------------------------------
respondent to petitioner is proper.
- - - -x
Interests; Where the obligation arose from a quasi-contract of solutio
indebiti and not from a loan or forbearance of money, the interest of 6% DECISION
per annum should be imposed on the amount to be refunded as well as on
the damages awarded and on the attorney’s fees, to be computed from the CHICO-NAZARIO, J.:
time of the extrajudicial demand up to the finality of the Decision.—
In Eastern Shipping Lines, Inc. v. Court of Appeals, 234 SCRA 78 (1994), Before Us is a Petition[1] for Review on Certiorari under Rule
that when an obligation, not constituting a loan or forbearance of money 45 of the Rules of Court seeking to set aside the Decision,[2] dated 16
is breached, an interest on the amount of damages awarded may be December 2005, and Resolution,[3] dated 19 June 2006 of the Court
imposed at the rate of 6% per annum. We further declared that when the of Appeals in CA-G.R. CV No. 71814, which affirmed in toto the
judgment of the court awarding a sum of money becomes final and Decision,[4] dated 26 January 2001, of the Las Pinas City Regional
executory, the rate of legal interest, whether it is a loan/forbearance of Trial Court, Branch 255, in Civil Case No. LP-98-0068.
money or not, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed equivalent to a The facts gathered from the records are as follows:
forbearance of credit. In the present case, petitioner’s obligation arose
from a quasi-contract of solutio indebiti and not from a loan or On 30 March 1998, respondent Alicia Villanueva filed a
forbearance of money. Thus, an interest of 6% per annum should be complaint[5] for sum of money against petitioner Sebastian Siga-an
before the Las Pinas City Regional Trial Court (RTC), Branch 255,
docketed as Civil Case No. LP-98-0068. Respondent alleged that she
was a businesswoman engaged in supplying office materials and
equipments to the Philippine Navy Office (PNO) located at Fort
Bonifacio, Taguig City, while petitioner was a military officer and
comptroller of the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner
approached her inside the PNO and offered to loan her the amount
of P540,000.00. Since she needed capital for her business
transactions with the PNO, she accepted petitioners proposal. The
loan agreement was not reduced in writing. Also, there was no
stipulation as to the payment of interest for the loan.[6]
On 31 August 1993, respondent issued a check
worth P500,000.00 to petitioner as partial payment of the loan. On
31 October 1993, she issued another check in the amount
of P200,000.00 to petitioner as payment of the remaining balance of
the loan. Petitioner told her that since she paid a total amount
of P700,000.00 for the P540,000.00 worth of loan, the excess
amount of P160,000.00 would be applied as interest for the loan. Not
satisfied with the amount applied as interest, petitioner pestered her
to pay additional interest. Petitioner threatened to block or
disapprove her transactions with the PNO if she would not comply
with his demand. As all her transactions with the PNO were subject
to the approval of petitioner as comptroller of the PNO, and fearing
that petitioner might block or unduly influence the payment of her
vouchers in the PNO, she conceded. Thus, she paid additional
amounts in cash and checks as interests for the loan. She asked
petitioner for receipt for the payments but petitioner told her that it
was not necessary as there was mutual trust and confidence
between them. According to her computation, the total amount she
paid to petitioner for the loan and interest accumulated
to P1,200,000.00.[7]
Thereafter, respondent consulted a lawyer regarding the
propriety of paying interest on the loan despite absence of agreement
to that effect. Her lawyer told her that petitioner could not validly
collect interest on the loan because there was no agreement between
her and petitioner regarding payment of interest. Since she paid
petitioner a total amount of P1,200,000.00 for the P540,000.00
worth of loan, and upon being advised by her lawyer that she made
overpayment to petitioner, she sent a demand letter to petitioner
asking for the return of the excess amount of P660,000.00.
Petitioner, despite receipt of the demand letter, ignored her claim for
reimbursement.[8]
Respondent prayed that the RTC render judgment ordering
petitioner to pay respondent (1) P660,000.00 plus legal interest from
the time of demand; (2) P300,000.00 as moral damages;
(3) P50,000.00 as exemplary damages; and (4) an amount equivalent
to 25% of P660,000.00 as attorneys fees.[9]
In his answer[10] to the complaint, petitioner denied that he
offered a loan to respondent. He averred that in 1992, respondent
approached and asked him if he could grant her a loan, as she
needed money to finance her business venture with the PNO. At first,
he was reluctant to deal with respondent, because the latter had a
spotty record as a supplier of the PNO. However, since respondent
was an acquaintance of his officemate, he agreed to grant her a
loan. Respondent paid the loan in full.[11]
Subsequently, respondent again asked him to give her a
loan. As respondent had been able to pay the previous loan in full,
he agreed to grant her another loan. Later, respondent requested him
to restructure the payment of the loan because she could not give
full payment on the due date. He acceded to her request. Thereafter,
respondent pleaded for another restructuring of the payment of the
loan. This time he rejected her plea. Thus, respondent proposed to
execute a promissory note wherein she would acknowledge her
obligation to him, inclusive of interest, and that she would issue
several postdated checks to guarantee the payment of her obligation.
Upon his approval of respondents request for restructuring of the
loan, respondent executed a promissory note dated 12 September
1994 wherein she admitted having borrowed an amount
of P1,240,000.00, inclusive of interest, from petitioner and that she
would pay said amount in March 1995. Respondent also issued to
him six postdated checks amounting to P1,240,000.00 as guarantee
of compliance with her obligation. Subsequently, he presented the
six checks for encashment but only one check was honored. He
demanded that respondent settle her obligation, but the latter failed
to do so. Hence, he filed criminal cases for Violation of the Bouncing
Checks Law (Batas Pambansa Blg. 22) against respondent. The cases
were assigned to the Metropolitan Trial Court of Makati City, Branch
65 (MeTC).[12]
Petitioner insisted that there was no overpayment because
respondent admitted in the latters promissory note that her
monetary obligation as of 12 September 1994 amounted
to P1,240,000.00 inclusive of interests. He argued that respondent
was already estopped from complaining that she should not have
paid any interest, because she was given several times to settle her
obligation but failed to do so. He maintained that to rule in favor of
respondent is tantamount to concluding that the loan was given
interest-free. Based on the foregoing averments, he asked the RTC to
dismiss respondents complaint.
After trial, the RTC rendered a Decision on 26 January 2001
holding that respondent made an overpayment of her loan obligation
to petitioner and that the latter should refund the excess amount to
the former. It ratiocinated that respondents obligation was only to
pay the loaned amount of P540,000.00, and that the alleged interests
due should not be included in the computation of respondents total
monetary debt because there was no agreement between them
regarding payment of interest. It concluded that since respondent
made an excess payment to petitioner in the amount of P660,000.00
through mistake, petitioner should return the said amount to
respondent pursuant to the principle of solutio indebiti.[13]
The RTC also ruled that petitioner should pay moral
damages for the sleepless nights and wounded feelings experienced
by respondent. Further, petitioner should pay exemplary damages by
way of example or correction for the public good, plus attorneys fees
and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing
evidence and in the light of the provisions of law and
jurisprudence on the matter, judgment is hereby
rendered in favor of the plaintiff and against the
defendant as follows:
(1) Ordering defendant to pay
plaintiff the amount of P660,000.00 plus legal
interest of 12% per annum computed from 3 March
1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the
amount of P300,000.00 as moral damages;
(3) Ordering defendant to pay plaintiff the
amount of P50,000.00 as exemplary damages;
(4) Ordering defendant to pay plaintiff the
amount equivalent to 25% of P660,000.00 as
attorneys fees; and
(5) Ordering defendant to pay the costs of
suit.[14]
Petitioner appealed to the Court of Appeals. On 16 December
2005, the appellate court promulgated its Decision affirming in
toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the
instant appeal is hereby DENIED and the assailed
decision [is] AFFIRMED in toto.[15]
Petitioner filed a motion for reconsideration of the appellate
courts decision but this was denied.[16] Hence, petitioner lodged the
instant petition before us assigning the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN
RULING THAT NO INTEREST WAS DUE TO
PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN
APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.[17]
Interest is a compensation fixed by the parties for the use or
forbearance of money. This is referred to as monetary interest.
Interest may also be imposed by law or by courts as penalty or
indemnity for damages. This is called compensatory interest.[18] The
right to interest arises only by virtue of a contract or by virtue of
damages for delay or failure to pay the principal loan on which
interest is demanded.[19]
Article 1956 of the Civil Code, which refers to monetary
interest,[20] specifically mandates that no interest shall be due unless
it has been expressly stipulated in writing. As can be gleaned from
the foregoing provision, payment of monetary interest is allowed only
if: (1) there was an express stipulation for the payment of interest;
and (2) the agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required for the
payment of monetary interest. Thus, we have held that collection of
interest without any stipulation therefor in writing is prohibited by
law.[21]
It appears that petitioner and respondent did not agree on
the payment of interest for the loan. Neither was there convincing
proof of written agreement between the two regarding the payment of
interest. Respondent testified that although she accepted petitioners
offer of loan amounting to P540,000.00, there was, nonetheless, no
verbal or written agreement for her to pay interest on the loan.[22]
Petitioner presented a handwritten promissory note dated 12
September 1994[23] wherein respondent purportedly admitted owing
petitioner capital and interest. Respondent, however, explained that
it was petitioner who made a promissory note and she was told to
copy it in her own handwriting; that all her transactions with the
PNO were subject to the approval of petitioner as comptroller of the
PNO; that petitioner threatened to disapprove her transactions with
the PNO if she would not pay interest; that being unaware of the law
on interest and fearing that petitioner would make good of his
threats if she would not obey his instruction to copy the promissory
note, she copied the promissory note in her own handwriting; and
that such was the same promissory note presented by petitioner as
alleged proof of their written agreement on interest.[24] Petitioner did
not rebut the foregoing testimony. It is evident that respondent did
not really consent to the payment of interest for the loan and that
she was merely tricked and coerced by petitioner to pay
interest. Hence, it cannot be gainfully said that such promissory note
pertains to an express stipulation of interest or written agreement of
interest on the loan between petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and the
Court of Appeals found that he and respondent agreed on the
payment of 7% rate of interest on the loan; that the agreed 7% rate of
interest was duly admitted by respondent in her testimony in the
Batas Pambansa Blg. 22 cases he filed against respondent; that
despite such judicial admission by respondent, the RTC and the
Court of Appeals, citing Article 1956 of the Civil Code, still held that
no interest was due him since the agreement on interest was not
reduced in writing; that the application of Article 1956 of the Civil
Code should not be absolute, and an exception to the application of
such provision should be made when the borrower admits that a
specific rate of interest was agreed upon as in the present case; and
that it would be unfair to allow respondent to pay only the loan when
the latter very well knew and even admitted in the Batas Pambansa
Blg. 22 cases that there was an agreed 7% rate of interest on the
loan.[25]
We have carefully examined the RTC Decision and found
that the RTC did not make a ruling therein that petitioner and
respondent agreed on the payment of interest at the rate of 7% for
the loan. The RTC clearly stated that although petitioner and
respondent entered into a valid oral contract of loan amounting
to P540,000.00, they, nonetheless, never intended the payment of
interest thereon.[26] While the Court of Appeals mentioned in its
Decision that it concurred in the RTCs ruling that petitioner and
respondent agreed on a certain rate of interest as regards the loan,
we consider this as merely an inadvertence because, as earlier
elucidated, both the RTC and the Court of Appeals ruled that
petitioner is not entitled to the payment of interest on the loan. The
rule is that factual findings of the trial court deserve great weight
and respect especially when affirmed by the appellate court.[27] We
found no compelling reason to disturb the ruling of both courts.
Petitioners reliance on respondents alleged admission in the
Batas Pambansa Blg. 22 cases that they had agreed on the payment
of interest at the rate of 7% deserves scant consideration. In the said
case, respondent merely testified that after paying the total amount
of loan, petitioner ordered her to pay interest.[28] Respondent did not
categorically declare in the same case that she and respondent made
an express stipulation in writing as regards payment of interest at
the rate of 7%. As earlier discussed, monetary interest is due only if
there was an express stipulation in writing for the payment of
interest.
There are instances in which an interest may be imposed
even in the absence of express stipulation, verbal or written,
regarding payment of interest. Article 2209 of the Civil Code states
that if the obligation consists in the payment of a sum of money, and
the debtor incurs delay, a legal interest of 12% per annum may be
imposed as indemnity for damages if no stipulation on the payment
of interest was agreed upon. Likewise, Article 2212 of the Civil Code
provides that interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent on this
point.
All the same, the interest under these two instances may be
imposed only as a penalty or damages for breach of contractual
obligations. It cannot be charged as a compensation for the use or
forbearance of money. In other words, the two instances apply only
to compensatory interest and not to monetary interest.[29] The case at
bar involves petitioners claim for monetary interest.
Further, said compensatory interest is not chargeable in the
instant case because it was not duly proven that respondent
defaulted in paying the loan. Also, as earlier found, no interest was
due on the loan because there was no written agreement as regards
payment of interest.
Apropos the second assigned error, petitioner argues that the
principle of solutio indebiti does not apply to the instant case. Thus,
he cannot be compelled to return the alleged excess amount paid by
respondent as interest.[30]
Under Article 1960 of the Civil Code, if the borrower of loan
pays interest when there has been no stipulation therefor, the
provisions of the Civil Code concerning solutio indebiti shall be
applied. Article 2154 of the Civil Code explains the principle of solutio
indebiti. Said provision provides that if something is received when
there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises. In such a case, a creditor-
debtor relationship is created under a quasi-contract whereby the
payor becomes the creditor who then has the right to demand the
return of payment made by mistake, and the person who has no
right to receive such payment becomes obligated to return the
same. The quasi-contract of solutio indebiti harks back to the ancient
principle that no one shall enrich himself unjustly at the expense of
another.[31] The principle of solutio indebiti applies where (1) a
payment is made when there exists no binding relation between the
payor, who has no duty to pay, and the person who received the
payment; and (2) the payment is made through mistake, and not
through liberality or some other cause.[32] We have held that the
principle of solutio indebiti applies in case of erroneous payment of
undue interest.[33]
It was duly established that respondent paid interest to
petitioner. Respondent was under no duty to make such payment
because there was no express stipulation in writing to that
effect. There was no binding relation between petitioner and
respondent as regards the payment of interest. The payment was
clearly a mistake. Since petitioner received something when there
was no right to demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award
and damages imposed by the RTC and the Court of Appeals.
Records show that respondent received a loan amounting
to P540,000.00 from petitioner.[34] Respondent issued two checks
with a total worth of P700,000.00 in favor of petitioner as payment of
the loan.[35] These checks were subsequently encashed by
petitioner.[36] Obviously, there was an excess of P160,000.00 in the
payment for the loan. Petitioner claims that the excess
of P160,000.00 serves as interest on the loan to which he was
entitled. Aside from issuing the said two checks, respondent also
paid cash in the total amount of P175,000.00 to petitioner as
interest.[37]Although no receipts reflecting the same were presented
because petitioner refused to issue such to respondent, petitioner,
nonetheless, admitted in his Reply-Affidavit[38] in the Batas
Pambansa Blg. 22 cases that respondent paid him a total amount
of P175,000.00 cash in addition to the two checks. Section 26 Rule
130 of the Rules of Evidence provides that the declaration of a party
as to a relevant fact may be given in evidence against him. Aside
from the amounts of P160,000.00 and P175,000.00 paid as interest,
no other proof of additional payment as interest was presented by
respondent. Since we have previously found that petitioner is not
entitled to payment of interest and that the principle of solutio
indebiti applies to the instant case, petitioner should return to
respondent the excess amount of P160,000.00 and P175,000.00 or
the total amount of P335,000.00. Accordingly, the reimbursable
amount to respondent fixed by the RTC and the Court of Appeals
should be reduced from P660,000.00 to P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for
violation of Batas Pambansa Blg. 22 against respondent. In the said
cases, the MeTC found respondent guilty of violating Batas
Pambansa Blg. 22 for issuing five dishonored checks to petitioner.
Nonetheless, respondents conviction therein does not affect our
ruling in the instant case. The two checks, subject matter of this
case, totaling P700,000.00 which respondent claimed as payment of
the P540,000.00 worth of loan, were not among the five checks found
to be dishonored or bounced in the five criminal cases. Further, the
MeTC found that respondent made an overpayment of the loan by
reason of the interest which the latter paid to petitioner.[39]
Article 2217 of the Civil Code provides that moral damages
may be recovered if the party underwent physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation and similar injury.
Respondent testified that she experienced sleepless nights and
wounded feelings when petitioner refused to return the amount paid
as interest despite her repeated demands. Hence, the award of moral
damages is justified. However, its corresponding amount
of P300,000.00, as fixed by the RTC and the Court of Appeals, is
exorbitant and should be equitably reduced. Article 2216 of the Civil
Code instructs that assessment of damages is left to the discretion of
the court according to the circumstances of each case. This
discretion is limited by the principle that the amount awarded
should not be palpably excessive as to indicate that it was the result
of prejudice or corruption on the part of the trial court. [40] To our
mind, the amount of P150,000.00 as moral damages is fair,
reasonable, and proportionate to the injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-contract,
such as solutio indebiti, exemplary damages may be imposed if the
defendant acted in an oppressive manner. Petitioner acted
oppressively when he pestered respondent to pay interest and
threatened to block her transactions with the PNO if she would not
pay interest. This forced respondent to pay interest despite lack of
agreement thereto. Thus, the award of exemplary damages is
appropriate. The amount of P50,000.00 imposed as exemplary
damages by the RTC and the Court is fitting so as to deter petitioner
and other lenders from committing similar and other serious
wrongdoings.[41]
Jurisprudence instructs that in awarding attorneys fees, the
trial court must state the factual, legal or equitable justification for
awarding the same.[42] In the case under consideration, the RTC
stated in its Decision that the award of attorneys fees equivalent to
25% of the amount paid as interest by respondent to petitioner is
reasonable and moderate considering the extent of work rendered by
respondents lawyer in the instant case and the fact that it dragged
on for several years.[43] Further, respondent testified that she agreed
to compensate her lawyer handling the instant case such
amount.[44] The award, therefore, of attorneys fees and its amount
equivalent to 25% of the amount paid as interest by respondent to
petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12%
rate of legal interest on the amount refundable to respondent
computed from 3 March 1998 until its full payment. This is
erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of
Appeals,[45] that when an obligation, not constituting a loan or
forbearance of money is breached, an interest on the amount of
damages awarded may be imposed at the rate of 6% per annum. We
further declared that when the judgment of the court awarding a
sum of money becomes final and executory, the rate of legal interest,
whether it is a loan/forbearance of money or not, shall be 12% per
annum from such finality until its satisfaction, this interim period
being deemed equivalent to a forbearance of credit.
In the present case, petitioners obligation arose from a
quasi-contract of solutio indebiti and not from a loan or forbearance
of money. Thus, an interest of 6% per annum should be imposed on
the amount to be refunded as well as on the damages awarded and
on the attorneys fees, to be computed from the time of the extra-
judicial demand on 3 March 1998,[46] up to the finality of this
Decision. In addition, the interest shall become 12% per annum from
the finality of this Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-
G.R. CV No. 71814, dated 16 December 2005, is
hereby AFFIRMED with the following MODIFICATIONS: (1) the
amount of P660,000.00 as refundable amount of interest is reduced
to THREE HUNDRED THIRTY FIVE THOUSAND PESOS
(P335,000.00); (2) the amount of P300,000.00 imposed as moral
damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS
(P150,000.00); (3) an interest of 6% per annum is imposed on
the P335,000.00, on the damages awarded and on the attorneys fees
to be computed from the time of the extra-judicial demand on 3
March 1998 up to the finality of this Decision; and (4) an interest of
12% per annum is also imposed from the finality of this Decision up
to its satisfaction. Costs against petitioner.
SO ORDERED.
 Banks and Banking; Bank Deposits; Loans; The contractual
relationship between banks and their depositors is governed by the Civil
Code provisions on simple loan.—The contractual relationship between
banks and their depositors is governed by the Civil Code provisions on
simple loan. Once a person makes a deposit of his or her money to the
bank, he or she is considered to have lent the bank that money. The bank
becomes his or her debtor, and he or she becomes the creditor of the
bank, which is obligated to pay him or her on demand. The default
standard of diligence in the performance of obligations is “diligence of a
good father of a family.”
Same; Same; Fiduciary Relationship; The Supreme Court (SC) has
recognized the fiduciary nature of the banks’ functions, and attached a
special standard of diligence for the exercise of their functions.—Other
industries, because of their nature, are bound by law to observe higher
standards of diligence. Common carriers, for example, must observe
“extraordinary diligence in the vigilance over the goods and for the safety
of [their] passengers” because it is considered a business affected with
public interest. “Extraordinary diligence” with respect to passenger
safety is further qualified as “carry[ing] the passengers safely as far as
human care and foresight can provide, using the utmost diligence of very
cautious persons, with a due regard for all the circumstances.” Similar to
common carriers, banking is a business that is impressed with public
interest. It affects economies and plays a significant role in businesses
and commerce. The public reposes its faith and confidence upon banks,
such that “even the humble wage-earner has not hesitated to entrust his
life’s savings to the bank of his choice, knowing that they will be safe in
its custody and will even earn some interest for him.” This is why we
have recognized the fiduciary nature of the banks’ functions, and
attached a special standard of diligence for the exercise of their
functions.
Same; Same; Same; This fiduciary relationship means that the
bank’s obligation to observe “high standards of integrity and
performance” is deemed written into every deposit agreement between a
bank and its depositor. The fiduciary nature of banking requires banks to
assume a degree of diligence higher than that of a good father of a
family.—In The Consolidated Bank and Trust Corporation v. Court of
Appeals, 410 SCRA 562 (2003), this court explained the meaning of
fiduciary relationship and the standard of diligence assumed by
banks: This fiduciary relationship means that the banks obligation to
observe “high standards of integrity and performance” is deemed written
into every deposit agreement between a bank and its depositor. The
fiduciary nature of banking requires banks to assume a degree of
diligence higher than that of a good father of a family. Article 1172 of the
Civil Code states that the degree of diligence required of an obligor is
that prescribed by law or contract, and absent such stipulation then the
diligence a good father of a family.
Taxation; Estate Tax; Bank Deposits; Estate tax may also serve as
guard against the release of deposits to persons who have no sufficient
and valid claim over the deposits.—Taxes are created primarily to
generate revenues for the maintenance of the government. However, this
particular tax may also serve as guard against the release of deposits to
persons who have no sufficient and valid claim over the deposits. Based
on the assumption that only those with sufficient and valid claim to the
deposit will pay the taxes for it, requiring the certificate from the BIR
increases the chance that the deposit will be released only to them.
Banks and Banking; Diligence Required of Banks; Petitioner
Philippine National Bank (PNB) is a bank from which a degree of
diligence higher than that of a good father of a family is expected.—
Petitioner PNB is a bank from which a degree of diligence higher than
that of a good father of a family is expected. Petitioner PNB and its
manager, petitioner Aguilar, failed to meet even the standard of diligence
of a good father of a family. Their actions and inactions constitute gross
negligence. It is for this reason that we sustain the trial court’s and the
Court of Appeals’ rulings that petitioners PNB and Aguilar are solidarily
liable with each other.
Same; Damages; Moral Damages; The Supreme Court (SC) sustains
the award of moral damages; The bank’s negligence was the result of lack
of due care and caution required of managers and employees of a firm
engaged in so sensitive and demanding business as banking.—For the
same reason, we sustain the award for moral damages. Petitioners PNB
and Aguilar’s gross negligence deprived Angel C. Santos’ heirs what is
rightfully theirs. Respondents also testified that they experienced anger
and embarrassment when petitioners PNB and Aguilar refused to
release Angel C. Santos’ deposit. “The bank’s negligence was the result of
lack of due care and caution required of managers and employees of a
firm engaged in so sensitive and demanding business as banking.”
Same; Same; Exemplary Damages; The law allows the grant of
exemplary damages by way of example for the public good.—Exemplary
damages should also be awarded. “The law allows the grant of exemplary
damages by way of example for the public good. The public relies on the
banks’ sworn profession of diligence and meticulousness in giving
irreproachable service. The level of meticulousness must be maintained
at all times by the banking sector.”
Same; Same; Attorney’s Fees; Since exemplary damages are
awarded and since respondents were compelled to litigate to protect their
interests, the award of attorney’s fees is also proper.—Since exemplary
damages are awarded and since respondents were compelled to litigate to
protect their interests, the award of attorney’s fees is also proper.
Same; Same; Interest Rates; The Court of Appeals’ (CA’s) award of
interest should be modified to twelve percent (12%) from demand on April
25, 1998 until June 30, 2013, and six percent (6%) from July 1, 2013 until
fully paid.—The Court of Appeals’ award of interest should be modified
to 12% from demand on April 26, 1998 until June 30, 2013, and 6% from
July 1, 2013 until fully paid. In Nacar v. Gallery Frames, 703 SCRA 439
(2013): Thus, from the foregoing, in the absence of an express stipulation
as to the rate of interest that would govern the parties, the rate of legal
interest for loans or forbearance of any money . . . shall no longer be
twelve percent (12%) per annum . . . but will now be six percent (6%) per
annum effective July 1, 2013. It should be noted, nonetheless, that . . .
the twelve percent (12%) per annum legal interest shall apply only until
June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per
annum shall be the prevailing rate of interest when applicable. . . . . 1.
When the obligation is breached, and it consists in the payment of a sum
of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be
6% per annum to be computed from default, i.e., from judicial or
extrajudicial demand. . . . . . . 3. When the judgment of the court
awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 6% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance
of credit.
G.R. No. 208293
PHILIPPINE NATIONAL BANK, Petitioner
vs.
CARMELITA S. SANTOS, REYME L. SANTOS, ANGEL L. SANTOS,
NONENG S. DIANCO, ET AL., Respondent
x-----------------------x
G.R. No. 208295
LINA B. AGUILAR, Petitioner
vs.
CARMELITA S. SANTOS, REYME L. SANTOS, ANGEL L. SANTOS,
BUENVENIDO L. SANTOS, ET AL.,Respondents.
DECISION
LEONEN, J.:
The standard of diligence required of banks is higher than the degree
of diligence of a good father of a family. Respondents are children of
Angel C. Santos who died on March 21, 1991.1
Sometime in May 1996, respondents discovered that their father
maintained a premium savings account with Philippine National
Bank (PNB), Sta. Elena-Marikina City Branch.2 As of July 14, 1996,
the deposit amounted to 1,759,082.63.3 Later, respondents would
discover that their father also had a time deposit of 1,000,000.00
with PNB.4
Respondents went to PNB to withdraw their father’s deposit.5
Lina B. Aguilar, the Branch Manager of PNB-Sta. Elena-Marikina
City Branch, required them to submit the following: "(1) original or
certified true copy of the Death Certificate of Angel C. Santos; (2)
certificate of payment of, or exemption from, estate tax issued by the
Bureau of Internal Revenue (BIR); (3) Deed of Extrajudicial
Settlement; (4) Publisher’s Affidavit of publication of the Deed of
Extrajudicial Settlement; and (5) Surety bond effective for two (2)
years and in an amount equal to the balance of the deposit to be
withdrawn."6
By April 26, 1998, respondents had already obtained the necessary
documents.7 They tried to withdraw the deposit.8 However, Aguilar
informed them that the deposit had already "been released to a
certain Bernardito Manimbo (Manimbo) on April 1, 1997."9 An
amount of 1,882,002.05 was released upon presentation of: (a) an
affidavit of selfadjudication purportedly executed by one of the
respondents, Reyme L. Santos; (b) a certificate of time deposit dated
December 14, 1989 amounting to 1,000,000.00; and (c) the death
certificate of Angel C. Santos, among others.10 A special power of
attorney was purportedly executed by Reyme L. Santos in favor of
Manimbo and a certain Angel P. Santos for purposes of withdrawing
and receiving the proceeds of the certificate of time deposit.11
On May 20, 1998, respondents filed before the Regional Trial Court
of Marikina City a complaint for sum of money and damages against
PNB, Lina B. Aguilar, and a John Doe.12 Respondents questioned the
release of the deposit amount to Manimbo who had no authority
from them to withdraw their father’s deposit and who failed to
present to PNB all the requirements for such
withdrawal.13 Respondents prayed that they be paid: (a) the premium
deposit amount; (b) the certificate of time deposit amount; and (c)
moral and exemplary damages, attorney’s fees, and costs of suit.14
PNB and Aguilar denied that Angel C. Santos had two separate
accounts (premium deposit account and time deposit account) with
PNB.15 They alleged that Angel C. Santos’ deposit account was
originally a time deposit account that was subsequently converted
into a premium savings account.16 They also alleged that Aguilar did
not know about Angel C. Santos’ death in 1991 because she only
assumed office in 1996.17 Manimbo was able to submit an affidavit of
self-adjudication and the required surety bond.18 He also submitted
a certificate of payment of estate tax dated March 31, 1997. 19 All
documents he submitted appeared to be regular.20
PNB and Aguilar filed a third-party complaint against Manimbo,
Angel P. Santos, and Capital Insurance and Surety Co., Inc.21
Angel P. Santos denied having anything to do with the special power
of attorney and affidavit of self-adjudication presented by
Manimbo.22 He also alleged that Manimbo presented the certificate of
time deposit without his knowledge and consent.23
Capital Insurance and Surety Co., Inc. alleged that its undertaking
was to pay claims only when persons who were unduly deprived of
their lawful participation in the estate filed an action in court for
their claims.24 It did not undertake to pay claims resulting from
PNB’s negligence.25
In the decision26 dated February 22, 2011, the trial court held that
PNB and Aguilar were jointly and severally liable to pay respondents
the amount of 1,882,002.05 with an interest rate of 6% starting May
20, 1998.27 PNB and Aguilar were also declared jointly and severally
liable for moral and exemplary damages, attorney’s fees, and costs of
suit.28Manimbo, Angel P. Santos, and Capital Insurance and Surety
Co., Inc. were held jointly and severally liable to pay PNB
1,877,438.83 pursuant to the heir’s bond and 50,000.00 as
attorney’s fees and the costs of suit.29 The dispositive portion of the
trial court’s decision reads:
WHEREFORE, foregoing premises considered, judgment is hereby
rendered as follows:
1. ordering the defendants PNB and LINA B. AGUILAR jointly and
severally liable to pay the plaintiffs the amount of P1,882,002.05,
representing the face value of PNB Manager’s Check No. AF-974686B
as balance of the total deposits of decedent Angel C. Santos at the
time of its issue, with interest thereon at the rate of 6% starting on
May 20, 1998, the date when the complaint was filed, until fully
paid;
2. ordering both defendants jointly and severally liable to pay
plaintiffs the amount of Php 100,000.00 as moral damages, another
Php100,000.00 as exemplary damages and Php 50,000.00 as
attorney’s fees and the costs of suit;
On the Third party complaint:
3. Ordering the third party defendants Bernardito P. Manimbo, Angel
P. Santos and Capital Insurance & Surety Co., Inc., jointly and
severally liable to pay third party plaintiff PNB, the amount of Php
1,877,438.83 pursuant to the Heir’s Bond and the amount of Php
50,000.00 as attorney’s fees and the costs of suit.
SO ORDERED.30
The trial court found that Angel C. Santos had only one account with
PNB.31 The account was originally a time deposit, which was
converted into a premium savings account when it was not renewed
on maturity.32 The trial court took judicial notice that in 1989,
automatic rollover of time deposit was not yet prevailing.33
On the liability of PNB and Aguilar, the trial court held that they
were both negligent in releasing the deposit to Manimbo.34 The trial
court noted PNB’s failure to notify the depositor about the maturity
of the time deposit and the conversion of the time deposit into a
premium savings account.35 The trial court also noted PNB’s failure
to cancel the certificate of time deposit despite conversion.36 PNB and
Aguilar also failed to require the production of birth certificates to
prove claimants’ relationship to the depositor.37 Further, they relied
on the affidavit of self-adjudication when several persons claiming to
be heirs had already approached them previously.38
Aguilar filed a motion for reconsideration39 of the February 22, 2011
Regional Trial Court decision. This was denied in the June 21, 2011
Regional Trial Court order.40
PNB and Aguilar appealed before the Court of Appeals.41
Aguilar contended that she was not negligent and should not have
been made jointly and severally liable with PNB. 42 She merely
implemented PNB’s Legal Department’s directive to release the
deposit to Manimbo.43
PNB argued that it was not negligent.44 The release of the deposit to
Manimbo was pursuant to an existing policy.45Moreover, the
documents submitted by Manimbo were more substantial than those
submitted by respondents.46Respondents could have avoided the
incident "had they accomplished the required documents
immediately."47
In the decision48 promulgated on July 25, 2013, the Court of Appeals
sustained the trial court’s finding that there was only one
account.49 Angel C. Santos could not have possibly opened the
premium savings account in 1994 since he already died in
1991.50 The Court of Appeals also held that PNB and Aguilar were
negligent in handling the deposit.51 The deposit amount was released
to Manimbo who did not present all the requirements, particularly
the Bureau of Internal Revenue (BIR) certification that estate taxes
had already been paid.52 They should also not have honored the
affidavit of self-adjudication.53
The Court of Appeals ruled that Aguilar could not escape liability by
pointing her finger at PNB’s Legal Department.54As the Bank
Manager, she should have given the Legal Department all the
necessary information that must be known in order to protect both
the depositors’ and the bank’s interests.55
The Court of Appeals removed the award of exemplary damages,
upon finding that there was no malice or bad faith.56
The Court of Appeals considered the deposit as an ordinary loan by
the bank from Angel C. Santos or his heirs.57Therefore, the deposit
was a forbearance which should earn an interest of 12% per
annum.58 The dispositive portion of the Court of Appeals’ decision
reads:
WHEREFORE, premises considered, the assailed decision of the
court a quo dated February 22, 2011 is AFFIRMED with
the MODIFICATIONS in that the rate of interest shall be twelve
percent (12%) per annum computed from the filing of the case until
fully satisfied. The interest due shall further earn an interest of
12% per annum to be computed from the date of the filing of the
complaint until fully paid. Meanwhile, the award of exemplary
damages is DELETED.
SO ORDERED.59
PNB and Aguilar filed their separate petitions for review of the Court
of Appeals’ July 25, 2013 decision.60
We resolve the following issues:
I. Whether Philippine National Bank was negligent in releasing the
deposit to Bernardito Manimbo;
II. Whether Lina B. Aguilar is jointly and severally liable with
Philippine National Bank for the release of the deposit to Bernardito
Manimbo; and
III. Whether respondents were properly awarded damages.
Petitioner Aguilar argued that the Court of Appeals had already
found no malice or bad faith on her part.61 Moreover, as a mere
officer of the bank, she cannot be made personally liable for acts that
she was authorized to do.62 These acts were mere directives to her by
her superiors.63 Hence, she should not be held solidarily liable with
PNB.64
Petitioner PNB argued that it was the presumptuousness and
cavalier attitude of respondents that gave rise to the controversy and
not its judgment call.65 Respondents were lacking in sufficient
documentation.66 Petitioner PNB also argued that respondents failed
to show any justification for the award of moral damages.67 No bad
faith can be attributed to Aguilar.68
In their separate comments to the petitions, respondents argued that
the trial court and the Court of Appeals did not err in finding that
petitioners PNB and Aguilar were negligent in handling their father’s
deposit.69 The acceptance of invalid and incomplete documents to
support the deposit’s release to Manimbo was a violation of the
bank’s fiduciary duty to its clients.70 These acts constituted gross
negligence on the part of petitioners PNB and Aguilar.71
However, according to respondents, the Court of Appeals erred in
deleting the award for exemplary damages because the acts in
violation of the bank’s fiduciary were done in bad faith.72
We rule for the respondents.
The trial court and the Court of Appeals correctly found that
petitioners PNB and Aguilar were negligent in handling the deposit of
Angel C. Santos.
The contractual relationship between banks and their depositors is
governed by the Civil Code provisions on simple loan.73 Once a
person makes a deposit of his or her money to the bank, he or she is
considered to have lent the bank that money.74 The bank becomes
his or her debtor, and he or she becomes the creditor of the bank,
which is obligated to pay him or her on demand.75
The default standard of diligence in the performance of obligations is
"diligence of a good father of a family." Thus, the Civil Code provides:
ART. 1163. Every person obliged to give something is also obliged to
take care of it with the proper diligence of a good father of a family,
unless the law or the stipulation of the parties requires another
standard of care.
....
ART. 1173. The fault or negligence of the obligor consists in the
omission of that diligence which is required by the nature of the
obligation and corresponds with the circumstances of the persons, of
the time and of the place. When negligence shows bad faith, the
provisions of articles 1171 and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be
observed in the performance, that which is expected of a good father of
a family shall be required. (Emphasis supplied)
"Diligence of a good father of a family" is the standard of diligence
expected of, among others,
usufructuaries,76 passengers of common
carriers,77 agents,78 depositaries,79 pledgees,80 officious
managers,81 and persons deemed by law as responsible for the acts
of others.82 "The diligence of a good father of a family requires only
that diligence which an ordinary prudent man would exercise with
regard to his own property.83
Other industries, because of their nature, are bound by law to
observe higher standards of diligence. Common carriers, for example,
must observe "extraordinary diligence in the vigilance over the goods
and for the safety of [their] passengers"84 because it is considered a
business affected with public interest. "Extraordinary diligence" with
respect to passenger safety is further qualified as "carry[ing] the
passengers safely as far as human care and foresight can provide,
using the utmost diligence of very cautious persons, with a due
regard for all the circumstances."85
Similar to common carriers, banking is a business that is impressed
with public interest. It affects economies and plays a significant role
in businesses and commerce.86 The public reposes its faith and
confidence upon banks, such that "even the humble wage-earner has
not hesitated to entrust his life’s savings to the bank of his choice,
knowing that they will be safe in its custody and will even earn some
interest for him."87 This is why we have recognized the fiduciary
nature of the banks’ functions, and attached a special standard of
diligence for the exercise of their functions.
In Simex International (Manila), Inc. v. Court of Appeals,88 this court
described the nature of banks’ functions and the attitude expected of
banks in handling their depositors’ accounts, thus:
In every case, the depositor expects the bank to treat his account
with the utmost fidelity, whether such account consists only of a few
hundred pesos or of millions. . . .
The point is that as a business affected with public interest and
because of the nature of its functions, the bank is under obligation
to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship.89 (Emphasis
supplied)
The fiduciary nature of banking is affirmed in Republic Act No. 8791
or The General Banking Law, thus:
SEC. 2. Declaration of Policy.—The State recognizes the vital role of
banks in providing an environment conducive to the sustained
development of the national economy and the fiduciary nature of
banking that requires high standards of integrity and performance. In
furtherance thereof, the State shall promote and maintain a stable
and efficient banking and financial system that is globally
competitive, dynamic and responsive to the demands of a developing
economy. (Emphasis supplied)
In The Consolidated Bank and Trust Corporation v. Court of
Appeals,90 this court explained the meaning of fiduciary relationship
and the standard of diligence assumed by banks:
This fiduciary relationship means that the bank’s obligation to observe
"high standards of integrity and performance" is deemed written into
every deposit agreement between a bank and its depositor. The
fiduciary nature of banking requires banks to assume a degree of
diligence higher than that of a good father of a family. Article 1172 of
the Civil Code states that the degree of diligence required of an
obligor is that prescribed by law or contract, and absent such
stipulation then the diligence of a good father of a
family.91 (Emphasis supplied, citation omitted)
Petitioners PNB and Aguilar’s treatment of Angel C. Santos’ account
is inconsistent with the high standard of diligence required of banks.
They accepted Manimbo’s representations despite knowledge of the
existence of circumstances that should have raised doubts on such
representations. As a result, Angel C. Santos’ deposit was given to a
person stranger to him.
Petitioner PNB pointed out that since petitioner Aguilar assumed
office as PNB-Sta. Elena-Marikina City Branch Manager only five (5)
years from Angel C. Santos’ death, she was not in the position to
know that respondents were the heirs of Angel C. Santos.92 She
could not have accepted the unsigned and unnotarized extrajudicial
settlement deed that respondents had first showed her.93 She was
not competent to make a conclusion whether that deed was
genuine.94 Neither could petitioners PNB and Aguilar pass judgment
on a letter from respondents’ lawyer stating that respondents were
the nine heirs of Angel C. Santos.95 Petitioners PNB and Aguilar’s
negligence is not based on their failure to accept respondents’
documents as evidence of their right to claim Angel C. Santos’
deposit. Rather, it is based on their failure to exercise the diligence
required of banks when they accepted the fraudulent representations
of Manimbo. Petitioners PNB and Aguilar disregarded their own
requirements for the release of the deposit to persons claiming to be
heirs of a deceased depositor. When respondents asked for the
release of Angel C. Santos’ deposit, they were required to present the
following: "(1) original or certified true copy of the Death Certificate of
Angel C. Santos; (2) certificate of payment of, or exemption from,
estate tax issued by the Bureau of Internal Revenue (BIR); (3) Deed of
Extrajudicial Settlement; (4) Publisher’s Affidavit of publication of the
Deed of Extrajudicial Settlement; and (5) Surety bond effective for
two (2) years and in an amount equal to the balance of the deposit to
be withdrawn."96
Petitioners PNB and Aguilar, however, accepted Manimbo’s
representations, and they released Angel C. Santos’ deposit based on
only the following documents:
1. Death certificate of Angel C. Santos;
2. Birth certificate of Reyme L. Santos;
3. Affidavit of self-adjudication of Reyme L. Santos;
4. Affidavit of publication;
5. Special power of attorney that Reyme L. Santos executed in favor
of Bernardito Manimbo and Angel P. Santos;
6. Personal items of Angel C. Santos, such as photocopies or
originals of passport, residence certificate for year 1990, SSS I.D.,
etc.;
7. Surety good for two (2) years; and
8. Certificate of Time Deposit No. 341306.97
Based on these enumerations, petitioners PNB and Aguilar either
have no fixed standards for the release of their deceased clients’
deposits or they have standards that they disregard for convenience,
favor, or upon exercise of discretion. Both are inconsistent with the
required diligence of banks. These threaten the safety of the
depositors’ accounts as they provide avenues for fraudulent practices
by third persons or by bank officers themselves.
In this case, petitioners PNB and Aguilar released Angel C. Santos’
deposit to Manimbo without having been presented the BIR-issued
certificate of payment of, or exception from, estate tax. This is a legal
requirement before the deposit of a decedent is released. Presidential
Decree No. 1158,98 the tax code applicable when Angel C. Santos
died in 1991, provides:
SEC. 118. Payment of tax antecedent to the transfer of shares, bonds,
or rights. — There shall not be transferred to any new owner in the
books of any corporation, sociedad anonima, partnership, business,
or industry organized or established in the Philippines, any shares,
obligations, bonds or rights by way of gift inter vivos or mortis causa,
legacy, or inheritance unless a certification from the Commissioner
that the taxes fixed in this Title and due thereon have been paid is
shown.
If a bank has knowledge of the death of a person who maintained a
bank deposit account alone, or jointly with another, it shall not allow
any withdrawal from the said deposit account, unless the
Commissioner has certified that the taxes imposed thereon by this
Title have been paid; Provided, however, That the administrator of the
estate or any one of the heirs of the decedent may upon
authorization by the Commissioner of Internal Revenue, withdraw an
amount not exceeding 10,000 without the said certification. For this
purpose, all withdrawal slips shall contain a statement to the effect
that all of the joint depositors are still living at the time of withdrawal
by any one of the joint depositors and such statement shall be under
oath by the said depositors.99 (Emphasis supplied)
This provision was reproduced in Section 97 of the 1997 National
Internal Revenue Code, thus:
SEC. 97. Payment of Tax Antecedent to the Transfer of Shares,
Bonds or Rights. - There shall not be transferred to any new owner
in the books of any corporation, sociedad anonima, partnership,
business, or industry organized or established in the Philippines any
share, obligation, bond or right by way of gift inter vivos or mortis
causa, legacy or inheritance, unless a certification from the
Commissioner that the taxes fixed in this Title and due thereon have
been paid is shown.
If a bank has knowledge of the death of a person, who maintained a
bank deposit account alone, or jointly with another, it shall not allow
any withdrawal from the said deposit account, unless the
Commissioner has certified that the taxes imposed thereon by this
Title have been paid: Provided, however, That the administrator of
the estate or any one (1) of the heirs of the decedent may, upon
authorization by the Commissioner, withdraw an amount not
exceeding Twenty thousand pesos (20,000) without the said
certification. For this purpose, all withdrawal slips shall contain a
statement to the effect that all of the joint depositors are still living at
the time of withdrawal by any one of the joint depositors and such
statement shall be under oath by the said depositors. (Emphasis
supplied)
Taxes are created primarily to generate revenues for the maintenance
of the government. However, this particular tax may also serve as
guard against the release of deposits to persons who have no
sufficient and valid claim over the deposits. Based on the
assumption that only those with sufficient and valid claim to the
deposit will pay the taxes for it, requiring the certificate from the BIR
increases the chance that the deposit will be released only to them.
In their compulsory counterclaim,100 petitioners PNB and Aguilar
claimed that Manimbo presented a certificate of payment of estate
tax.101 During trial, however, it turned out that this certificate was
instead an authority to accept payment, which is not the certificate
required for the release of bank deposits.102 It appears that Manimbo
was not even required to submit the BIR certificate.103 He, thus,
failed to present such certificate. Petitioners PNB and Aguilar
provided no satisfactory explanation why Angel C. Santos’ deposit
was released without it.
Petitioners PNB and Aguilar’s negligence is also clear when they
accepted as bases for the release of the deposit to Manimbo: (a) a
mere photocopy of Angel C. Santos’ death certificate;104 (b) the
falsified affidavit of self-adjudication and special power of attorney
purportedly executed by Reyme L. Santos;105 and (c) the certificate of
time deposit.106
Petitioner Aguilar was aware that there were other claimants to Angel
C. Santos’ deposit. Respondents had already communicated with
petitioner Aguilar regarding Angel C. Santos’ account before
Manimbo appeared. Petitioner Aguilar even gave respondents the
updated passbook of Angel C. Santos’ account.107 Yet, petitioners
PNB and Aguilar did not think twice before they released the deposit
to Manimbo. They did not doubt why no original death certificate
could be submitted. They did not doubt why Reyme L. Santos would
execute an affidavit of self-adjudication when he, together with
others, had previously asked for the release of Angel C. Santos’
deposit. They also relied on the certificate of time deposit and on
Manimbo’s representation that the passbook was lost when the
passbook had just been previously presented to Aguilar for
updating.108
During the trial, petitioner PNB’s counsel only reasoned that the
photocopy of the death certificate was also submitted with other
documents, which led him to no other conclusion than that Angel C.
Santos was already dead.109 On petitioners PNB and Aguilar’s
reliance special power of attorney allegedly executed by Reyme L.
Santos, Aguilar admitted that she did not contact Reyme L. Santos
for verification. Her reason was that Reyme L. Santos was their
client. Therefore, they had no obligation to do so.110
Given the circumstances, "diligence of a good father of a family"
would have required petitioners PNB and Aguilar to verify. A prudent
man would have inquired why Reyme L. Santos would issue an
affidavit of selfadjudication when others had also claimed to be heirs
of Angel C. Santos. Contrary to petitioner Aguilar’s reasoning, the
fact that Reyme L. Santos was not petitioner PNB’s client should
have moved her to take measures to ensure the veracity of
Manimbo’s documents and representations. This is because she had
no previous knowledge of Reyme L. Santos his representatives, and
his signature.
Petitioner PNB is a bank from which a degree of diligence higher than
that of a good father of a family is expected. Petitioner PNB and its
manager, petitioner Aguilar, failed to meet even the standard of
diligence of a good father of a family. Their actions and inactions
constitute gross negligence. It is for this reason that we sustain the
trial court’s and the Court of Appeals’ rulings that petitioners PNB
and Aguilar are solidarily liable with each other.111
For the same reason, we sustain the award for moral damages.
Petitioners PNB and Aguilar’s gross negligence deprived Angel C.
Santos’ heirs what is rightfully theirs. Respondents also testified that
they experienced anger and embarrassment when petitioners PNB
and Aguilar refused to release Angel C. Santos’ deposit.112 "The
bank’s negligence was the result of lack of due care and caution
required of managers and employees of a firm engaged in so sensitive
and demanding business as banking."113
Exemplary damages should also be awarded. "The law allows the
grant of exemplary damages by way of example for the public good.
The public relies on the banks’ sworn profession of diligence and
meticulousness in giving irreproachable service. The level of
meticulousness must be maintained at all times by the banking
sector."114
Since exemplary damages are awarded and since respondents were
compelled to litigate to protect their interests,115 the award of
attorney’s fees is also proper.
The Court of Appeals' award of interest should be modified to 12%
from demand on April 26, 1998 until June 30, 2013, and 6% from
July I, 2013 until fully paid. In Nacar v. Gallery Frames:116
....
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annumfrom such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of
credit.117
WHEREFORE, the Court of Appeals' decision dated July 25, 2013
is AFFIRMED with the MODIFICATIONS in that petitioners
Philippine National Bank and Lina B. Aguilar are ordered solidarily
liable to pay respondents Pl 00,000.00 as exemplary damages.
Further, the interest rate for the amount of Pl,882,002.05,
representing the face value of PNB Manager's Check No. AF-974686B
is modified to 12% from April 26, 1998 until June 30, 2013, and 6%
from July 1, 2013 until satisfaction. All monetary awards shall then
earn interest at the rate of 6% per annum from finality of the decision
until full satisfaction.
SO ORDERED.

Thus, from the foregoing, in the absence of an express stipulation as MARVIC M.V.F. LEONEN
to the rate of interest that would govern the parties, the rate of legal Associate Justice
interest for loans or forbearance of any money. . . s.hall no longer be
twelve percent (12%) per annum ... but will now be six percent
(6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that. .. the twelve percent (12%) per annum legal
interest shall apply only until June 30, 2013. Come July 1, 2013 the
new rate of six percent (6%) per annum shall be the prevailing rate of
interest when applicable.

....

1. When the obligation is breached, and it consists in the payment of

a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate
of interest shall be 6% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand ...
 Civil Law; Obligations; Reciprocal obligations are to be performed THIRD DIVISION
simultaneously such that the performance of one is conditioned upon the
simultaneous fulfillment of the other.—Reciprocal obligations are those HEIRS OF RAMON C. GAITE, G.R. No. 177685
which arise from the same cause, and in which each party is a debtor and CYNTHIA GOROSTIZA GAITE and
a creditor of the other, such that the obligation of one is dependent upon RHOGEN BUILDERS, Present:
the obligation of the other. They are to be performed simultaneously such Petitioners,
that the performance of one is conditioned upon the simultaneous CARPIO MORALES, J.,
fulfillment of the other. Chairperson,
- versus - NACHURA,*
Same; Same; Contracts; Unjust Enrichment; Quantum Meruit; BRION,
Words and Phrases; Quantum meruit means that in an action for work VILLARAMA, JR., and
and labor, payment shall be made in such amount as the plaintiff SERENO, JJ.
reasonably deserves.—Under the principle of quantum meruntractor is
allowed to recover the reasonable value of the thing or services
rendereit, a cod despite the lack of a written contract, in order to avoid
unjust enrichment. Quantum meruit means that in an action for work
and labor, payment shall be made in such amount as the plaintiff
reasonably deserves. To deny payment for a building almost completed THE PLAZA, INC. and FGU Promulgated:
and already occupied would be to permit unjust enrichment at the INSURANCE CORPORATION,
expense of the contractor. Respondents. January 26, 2011
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Same; Same; Same; Temperate Damages; The rationale behind - - -x
temperate damages is precisely that from the nature of the case, definite
proof of pecuniary loss cannot be offered.—As to temperate damages, DECISION
Article 2224 of the Civil Code provides that temperate or moderate
damages, which are more than nominal but less than compensatory VILLARAMA, JR., J.:
damages, may be recovered when the court finds that some pecuniary
loss has been suffered but its amount cannot, from the nature of the case,
be proved with certainty. The rationale behind temperate damages is This is a petition for review under Rule 45 of the 1997 Rules
precisely that from the nature of the case, definite proof of pecuniary loss of Civil Procedure, as amended, which seeks to reverse and set aside
cannot be offered. the Decision[1] dated June 27, 2006 and Resolution[2] dated April 20,
2007 of the Court of Appeals (CA) in CA-G.R. CV No. 58790. The CA
affirmed with modification the Decision[3] dated July 3, 1997 of the
Regional Trial Court (RTC) of Makati City, Branch 63, in Civil Case
Nos. 1328 (43083) and 40755.

The facts are as follows:

On July 16, 1980, The Plaza, Inc. (The Plaza), a corporation
engaged in the restaurant business, through its President, Jose C.
Reyes, entered into a contract[4] with Rhogen Builders (Rhogen),
represented by Ramon C. Gaite, for the construction of a restaurant
building in Greenbelt, Makati, Metro Manila for the price
of P7,600,000.00. On July 18, 1980, to secure Rhogens compliance
with its obligation under the contract, Gaite and FGU Insurance
Corporation (FGU) executed a surety bond in the amount
of P1,155,000.00 in favor of The Plaza. On July 28, 1980, The Plaza
paid P1,155,000.00 less withholding taxes as down payment to
Gaite. Thereafter, Rhogen commenced construction of the restaurant
building.
In a letter dated September 10, 1980, Engineer Angelito Z.
Gonzales, the Acting Building Official of the Municipality of Makati,
ordered Gaite to cease and desist from continuing with the
construction of the building for violation of Sections 301 and 302 of
the National Building Code (P.D. 1096) and its implementing rules
and regulations.[5] The letter was referred to The Plazas Project
Manager, Architect Roberto L. Tayzon.
On September 15, 1980, Engr. Gonzales informed Gaite that
the building permit for the construction of the restaurant was
revoked for non-compliance with the provisions of the National
Building Code and for the additional temporary construction without
permit.[6] The Memorandum Report of Building Inspector Victor
Gregory enumerated the following violations of Rhogen in the
construction of the building:
1) No permit for Temporary Structure.
2) No notice of concrete pouring.
3) Some workers have no safety devices.
4) The Secretary and Construction Foreman refused
to [receive] the Letter of Stoppage
dated September 10, 1980.
5) Mr. Ramon Gaite [is] questioning the authority of
the Building Officials Inspector.
6) Construction plans use[d] on the job site is not in
accordance to the approved plan.[7]
On September 19, 1980, the Project Manager (Tayzon) in his
Construction Memo #23 reported on his evaluation of Progress
Billing #1 submitted by Rhogen. Tayzon stated that actual jobsite
assessment showed that the finished works fall short of Rhogens
claimed percentage of accomplishment and Rhogen was entitled to
only P32,684.16 and not P260,649.91 being demanded by
Rhogen.Further, he recommended that said amount payable to
Rhogen be withheld pending compliance with Construction Memo
#18, resolution of cases regarding unauthorized withdrawal of
materials from jobsite and stoppage of work by the Municipal
Engineers Office of Makati.[8]
On October 7, 1980, Gaite wrote Mr. Jose C. Reyes,
President of The Plaza regarding his actions/observations on the
stoppage order issued. On the permit for temporary structure, Gaite
said the plans were being readied for submission to the Engineering
Department of the Municipality of Makati and the application was
being resent to Reyes for his appropriate action. As to the notice for
concrete pouring, Gaite said that their construction set-up provides
for a Project Manager to whom the Pouring Request is first submitted
and whose job is to clear to whoever parties are involved (this could
still be worked out with the Building Inspector). Regarding the safety
devices for workers, Gaite averred that he had given strict rules on
this but in the course of construction some workers have personal
preferences. On the refusal of the secretary and construction
foreman to receive the stoppage order dated September 10, 1980,
Gaite took responsibility but insisted it was not a violation of
the National Building Code. Likewise, questioning the authority of
the Building Inspector is not a violation of the Code although Gaite
denied he ever did so. Lastly, on the construction plans used in the
jobsite not being in accordance with the approved plan, Gaite said he
had sent Engr. Cristino V. Laurel on October 3, 1980 to Reyes office
and make a copy of the only approved plan which was in the care of
Reyes, but the latter did not give it to Engr. Laurel. Gaite thus
thought that Reyes would handle the matter by himself.[9]
On the same day, Gaite notified Reyes that he is suspending
all construction works until Reyes and the Project Manager cooperate
to resolve the issue he had raised to address the problem.[10]This was
followed by another letter dated November 18, 1980 in which Gaite
expressed his sentiments on their aborted project and reiterated that
they can still resolve the matter with cooperation from the side of The
Plaza.[11] In his reply-letter dated November 24, 1980, Reyes asserted
that The Plaza is not the one to initiate a solution to the situation,
especially after The Plaza already paid the agreed down payment
of P1,155,000.00, which compensation so far exceeds the work
completed by Rhogen before the municipal authorities stopped the
construction for several violations. Reyes made it clear they have no
obligation to help Rhogen get out of the situation arising from non-
performance of its own contractual undertakings, and that The Plaza
has its rights and remedies to protect its interest.[12]
Subsequently, the correspondence between Gaite and Reyes
involved the custody of remaining bags of cement in the jobsite, in
the course of which Gaite was charged with estafa for ordering the
removal of said items. Gaite complained that Reyes continued to be
uncooperative in refusing to meet with him to resolve the delay. Gaite
further answered the estafa charge by saying that he only acted to
protect the interest of the owner (prevent spoilage/hardening of
cement) and that Reyes did not reply to his request for exchange.[13]
On January 9, 1981, Gaite informed The Plaza that he is
terminating their contract based on the Contractors Right to Stop
Work or Terminate Contracts as provided for in the General
Conditions of the Contract. In his letter, Gaite accused Reyes of not
cooperating with Rhogen in solving the problem concerning the
revocation of the building permits, which he described as a minor
problem.Additionally, Gaite demanded the payment of P63,058.50
from The Plaza representing the work that has already been
completed by Rhogen.[14]
On January 13, 1981, The Plaza, through Reyes, countered
that it will hold Gaite and Rhogen fully responsible for failure to
comply with the terms of the contract and to deliver the finished
structure on the stipulated date. Reyes argued that the down
payment made by The Plaza was more than enough to cover Rhogens
expenses.[15]
In a subsequent letter dated January 20, 1981, Reyes
adverted to Rhogens undertaking to complete the construction within
180 calendar days from July 16, 1980 or up to January 12, 1981,
and to pay the agreed payment of liquidated damages for every
month of delay, chargeable against the performance bond posted by
FGU. Reyes invoked Section 121 of the Articles of General Conditions
granting the owner the right to terminate the contract if the
contractor fails to execute the work properly and to make good such
deficiencies and deducting the cost from the payment due to the
contractor. Reyes also informed Gaite that The Plaza will continue
the completion of the structure utilizing the services of a competent
contractor but will charge Rhogen for liquidated damages as
stipulated in Article VIII of the Contract. After proper evaluation of
the works completed by Rhogen, The Plaza shall then resume the
construction and charge Rhogen for all the costs and expenses
incurred in excess of the contract price. In the meantime that The
Plaza is still evaluating the extent and condition of the works
performed by Rhogen to determine whether these are done in
accordance with the approved plans, Reyes demanded from Gaite the
reimbursement of the balance of their initial payment
of P1,155,000.00 from the value of the works correctly completed by
Rhogen, or if none, to reimburse the entire down payment plus
expenses of removal and replacement. Rhogen was also asked to
turn over the jobsite premises as soon as possible.[16] The Plaza sent
copy of said letter to FGU but the latter replied that it has no liability
under the circumstances and hence it could not act favorably on its
claim against the bond.[17]
On March 3, 1981, The Plaza notified Gaite that it could no
longer credit any payment to Rhogen for the work it had completed
because the evaluation of the extent, condition, and cost of work
done revealed that in addition to the violations committed during the
construction of the building, the structure was not in accordance
with plans approved by the government and accepted by
Ayala.Hence, The Plaza demanded the reimbursement of the down
payment, the cost of uprooting or removal of the defective structures,
the value of owner-furnished materials, and payment of liquidated
damages.[18]
On March 26, 1981, The Plaza filed Civil Case No. 40755 for
breach of contract, sum of money and damages against Gaite and
FGU in the Court of First Instance (CFI) of Rizal.[19] The Plaza later
amended its complaint to include Cynthia G. Gaite and
Rhogen.[20] The Plaza likewise filed Civil Case No. 1328
(43083) against Ramon C. Gaite, Cynthia G. Gaite and/or Rhogen
Builders also in the CFI of Rizal for nullification of the project
development contract executed prior to the General Construction
Contract subject of Civil Case No. 40755, which was allegedly in time of filing of the complaint until full
violation of the provisions of R.A. No. 545 (Architectural Law of payment;
the Philippines).[21] After the reorganization of the Judiciary in 1983,
the cases were transferred to the RTC of Makati and eventually 2. the amount of P14,504.66 as actual
consolidated. damages representing expenses for
uprooting with interest from the time of
On July 3, 1997, Branch 63 of the RTC Makati rendered its filing the complaint until full payment;
decision granting the claims of The Plaza against Rhogen, the Gaites
and FGU, and the cross-claim of FGU against Rhogen and the 3. the amount of P1,155,000.00 as actual
Gaites. The trial court ruled that the Project Manager was justified in damages representing the downpayment
recommending that The Plaza withhold payment on the progress with legal interest from the time of filing
billings submitted by Rhogen based on his evaluation that The Plaza the complaint until full payment;
is liable to pay only P32,684.16 and not P260,649.91. The other valid
grounds for the withholding of payment were the pending estafa case 4. the amount of P150,000.00 for moral
against Gaite, non-compliance by Rhogen with Construction damages;
Memorandum No. 18 and the non-lifting of the stoppage order.[22]
5. the amount of P100,000.00 for
exemplary damages;
Regarding the non-lifting of the stoppage order, which the
trial court said was based on simple infractions, the same was held 6. the amount of P500,000.00 as
to be solely attributable to Rhogens willful inaction. Instead of readily liquidated damages;
rectifying the violations, Rhogen continued with the construction
works thereby causing more damage. The trial court pointed out that 7. the amount of P100,000.00 as
Rhogen is not only expected to be aware of standard requirements reasonable attorneys fees; and,
and pertinent regulations on construction work, but also expressly
bound itself under the General Construction Contract to comply with 8. the cost of suit.
all the laws, city and municipal ordinances and all government
regulations. Having failed to complete the project within the Under the surety bond, defendants Rhogen and FGU
stipulated period and comply with its obligations, Rhogen was thus are jointly and severally ordered to pay plaintiff the
declared guilty of breaching the Construction Contract and is liable amount of P1,155,000.00 with legal interest from the
for damages under Articles 1170 and 1167 of the Civil Code.[23] time of filing the complaint until full payment. In the
event [that] FGU pays the said amount, third-party
defendants are jointly and severally ordered to pay
The dispositive portion of the trial courts decision reads: the same amount to FGU plus P50,000.00 as
reasonable attorneys fees, the latter having been
WHEREFORE, in Civil Case No. 40755, defendants forced to litigate, and the cost of suit.
Ramon Gaite, Cynthia Gaite and Rhogen Builders
are jointly and severally ordered to pay plaintiff: Civil Case No. 1328 is hereby ordered dismissed with
no pronouncement as to cost.
1. the amount of P525,422.73 as actual
SO ORDERED.[24]
damages representing owner-furnished
materials with legal interest from the
 Dissatisfied, Ramon and Cynthia Gaite, Rhogen and FGU For its part, FGU interposed the following assignment of
appealed to the CA.[25] In view of the death of Ramon C. Gaite errors:
on April 21, 1999, the CA issued a Resolution dated July 12,
2000granting the substitution of the former by his heirs Cynthia G. I. THE REGIONAL TRIAL COURT ERRED IN
Gaite, Rhoel Santiago G. Gaite, Genevieve G. Gaite and Roman Juan NOT RULING THAT DEFENDANT-APPELLANT
G. Gaite.[26] RAMON GAITE VALIDLY TERMINATED THE
CONTRACT BETWEEN HIM AND PLAINTIFF-
APPELLEE.
In their appeal, the heirs of Ramon C. Gaite, Cynthia G.
Gaite and Rhogen assigned the following errors, to wit:
II. THE REGIONAL TRIAL COURT ERRED IN
HOLDING DEFENDANT-APPELLANT RAMON
I. THE TRIAL COURT ERRED IN
GAITE RESPONSIBLE FOR THE STOPPAGE
DECLARING THAT THE GROUNDS RELIED
OF THE CONSTRUCTION.
UPON BY DEFENDANT-APPELLANT RHOGEN
BUILDERS IN TERMINATING THE CONTRACT
III. THE REGIONAL TRIAL COURT ERRED IN
ARE UNTENABLE;
ORDERING DEFENDANT-APPELLANT
RAMON GAITE TO PAY THE AMOUNT OF
II. THE TRIAL COURT ERRED IN DECLARING
P525,422.73 FOR THE OWNER FURNISHED
THAT THE NON-LIFTING OF THE STOPPAGE
MATERIALS.
ORDER OF THE THEN MUNICIPAL
GOVERNMENT OF MAKATI WAS SOLELY
IV. THE REGIONAL TRIAL COURT ERRED IN
ATTRIBUTABLE TO DEFENDANT-APPELLANT
ORDERING DEFENDANT-APPELLANT
RHOGENS WILLFUL INACTION;
RAMON GAITE TO PAY PLAINTIFF-APPELLEE
THE AMOUNT OF P14,504.66 AS ALLEGED
III. THE TRIAL COURT ERRED IN FAILING TO
EXPENSES FOR UPROOTING THE WORK HE
CONSIDER THAT IT WAS THE WILLFUL
PERFORMED.
INACTION OF PLAINTIFF-APPELLEE WHICH
MADE IT IMPOSSIBLE FOR
V. THE REGIONAL TRIAL COURT ERRED IN
DEFENDANTAPPELLANT RHOGEN TO
ORDERING DEFENDANT-APPELLANT
PERFORM ITS OBLIGATIONS UNDER THE
RAMON GAITE TO REFUND THE DOWN
CONTRACT;
PAYMENT OF P1,155,000.00 PLAINTIFF-
APPELLEE PAID HIM.
IV. THE TRIAL COURT ERRED IN AWARDING
ACTUAL DAMAGES AS WELL AS MORAL,
VI. THE REGIONAL TRIAL COURT ERRED IN
EXEMPLARY, AND LIQUIDATED DAMAGES
AWARDING MORAL DAMAGES TO
AND ATTORNEYS FEES SINCE THERE WERE
PLAINTIFF-APPELLEE.
NO FACTUAL AND LEGAL BASES
THEREFOR; AND
VII. THE REGIONAL TRIAL COURT ERRED IN
AWARDING EXEMPLARY DAMAGES TO
V. THE TRIAL COURT ERRED IN FAILING TO
PLAINTIFF-APPELLEE.
AWARD ACTUAL, MORAL AND EXEMPLARY
DAMAGES AND ATTORNEYS FEES IN FAVOR
OF DEFENDANTS-APPELLANTS.[27]
 VIII. THE REGIONAL TRIAL [COURT] ERRED IN
AWARDING LIQUIDATED DAMAGES TO
PLAINTIFF-APPELLEE.
IX. THE REGIONAL TRIAL COURT ERRED IN
AWARDING ATTORNEYS FEES TO
PLAINTIFF-APPELLEE.
X. THE REGIONAL TRIAL COURT ERRED IN
HOLDING DEFENDANT-APPELLANT FGU
INSURANCE CORPORATION LIABLE TO
PLAINTIFF-APPELLEE.[28]
On June 27, 2006, the CA affirmed the Decision of the trial
court but modified the award of damages as follows:
WHEREFORE, the Decision dated July 3,
1997 rendered by the Regional Trial Court of Makati
City, Branch 63 in Civil Case Nos. 40755 and 1328
is AFFIRMED with the modification that: (a) the
award for actual damages representing the owner-
furnished materials and the expenses for uprooting
are deleted, and in lieu thereof, the amount of
P300,000.00 as temperate damages is awarded; and
(b) the awards for moral, exemplary, liquidated and
attorneys fees are likewise deleted.
SO ORDERED.[29]
According to the CA, The Plaza cannot now be demanded to
comply with its obligation under the contract since Rhogen has
already failed to comply with its own contractual obligation. Thus,
The Plaza had every reason not to pay the progress billing as a result
of Rhogens inability to perform its obligations under the
contract. Further, the stoppage and revocation orders were issued on
account of Rhogens own violations involving the construction as
found by the local building official. Clearly, Rhogen cannot blame
The Plaza for its own failure to comply with its contractual
obligations. The CA stressed that Rhogen obliged itself to comply
with all the laws, city and municipal ordinances and all government
regulations insofar as they are binding upon or affect the parties [to
the contract] , the work or those engaged thereon.[30] As such, it was
responsible for the lifting of the stoppage and revocation orders. As
to Rhogens act of challenging the validity of the stoppage and
revocation orders, the CA held that it cannot be done in the present
case because under Section 307 of the National Building Code,
appeal to the Secretary of the Department of Public Works and
Highways (DPWH) whose decision is subject to review by the Office of
the President -- is available as remedy for Rhogen.[31]
However, the CA modified the award of damages holding that
the claim for actual damages of P525,422.73 representing the
damaged owner-furnished materials was not supported by any
evidence. Instead, the CA granted temperate damages in the amount
of P300,000.00. As to moral damages, no specific finding for the
factual basis of said award was made by the trial court, and hence it
should be deleted. Likewise, liquidated damages is not proper
considering that this is not a case of delay but non-completion of the
project. The Plaza similarly failed to establish that Rhogen and Gaite
acted with malice or bad faith; consequently, the award of exemplary
damages must be deleted. Finally, there being no bad faith on the
part of the defendants, the award of attorneys fees cannot be
sustained.[32]
The motion for reconsideration of the aforesaid Decision was
denied in the Resolution dated April 20, 2007 for lack of
merit. Hence, this appeal.
Before us, petitioners submit the following issues:
I.
Whether or not the Court of Appeals acted without
or in excess of jurisdiction, or with grave abuse of
discretion amounting to lack of or excess of
jurisdiction, when it found that Petitioner Rhogen
had no factual or legal basis to terminate the
General Construction Contract.
II.
Whether or not the Court of Appeals acted without
or in excess of jurisdiction, or with grave abuse of
 discretion amounting to lack of or excess of
jurisdiction, when, as a consequence of its finding
that Petitioners did not have valid grounds to
terminate the Construction Contract, it directed
Petitioners to return the downpayment paid by The
Plaza, with legal interest.
III.
Whether or not the Court of Appeals acted without
or in excess of jurisdiction, or with grave abuse of
discretion amounting to lack of or excess of
jurisdiction, when, in addition thereto, it awarded
temperate damages to The Plaza.
IV.
Whether or not the Court of Appeals acted without
or in excess of jurisdiction, or with grave abuse of
discretion amounting to lack of or excess of
jurisdiction, when it failed to award damages in
favor of Petitioners.[33]
Petitioners contend that the CA gravely erred in not holding that
there were valid and legal grounds for Rhogen to terminate the
contract pursuant to Article 1191 of the Civil Code and Article 123 of
the General Conditions of the Construction Contract. Petitioners
claim that Rhogen sent Progress Billing No. 1 dated September 10,
1980 and demanded payment from The Plaza in the net amount
of P473,554.06 for the work it had accomplished from July 28,
1980 until September 7, 1980. The Plaza, however, failed to pay the
said amount. According to petitioners, Article 123 of the General
Conditions of the Construction Contract gives The Plaza seven days
from notice within which to pay the Progress Billing; otherwise,
Rhogen may terminate the contract. Petitioners also invoke Article
1191 of the Civil Code, which states that the power to rescind
obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
We deny the petition.
Reciprocal obligations are those which arise from the same cause,
and in which each party is a debtor and a creditor of the other, such
that the obligation of one is dependent upon the obligation of the
other. They are to be performed simultaneously such that the
performance of one is conditioned upon the simultaneous fulfillment
of the other. Respondent The Plaza predicated its action on Article
1191[34] of the Civil Code, which provides for the remedy of rescission
or more properly resolution, a principal action based on breach of
faith by the other party who violates the reciprocity between
them. The breach contemplated in the provision is the obligors
failure to comply with an existing obligation. Thus, the power to
rescind is given only to the injured party. The injured party is the
party who has faithfully fulfilled his obligation or is ready and willing
to perform his obligation.[35]
The construction contract between Rhogen and The Plaza provides
for reciprocal obligations whereby the latters obligation to pay the
contract price or progress billing is conditioned on the formers
performance of its undertaking to complete the works within the
stipulated period and in accordance with approved plans and other
specifications by the owner. Pursuant to its contractual obligation,
The Plaza furnished materials and paid the agreed down payment. It
also exercised the option of furnishing and delivering construction
materials at the jobsite pursuant to Article III of the Construction
Contract. However, just two months after commencement of the
project, construction works were ordered stopped by the local
building official and the building permit subsequently revoked on
account of several violations of the National Building Code and other
regulations of the municipal authorities.
Petitioners reiterate their position that the stoppage order
was unlawful, citing the fact that when the new contractor (ACK
Construction, Inc.) took over the project, the local government
of Makati allowed the construction of the building using the old
building permit; moreover, the basement depth of only two meters
was retained, with no further excavation made. They cite the
testimony of the late Ramon Gaite before the trial court that at the
time, he had incurred the ire of then Mayor of Makati because his
(Gaite) brother was the Mayors political opponent; hence, they
sought to file whatever charge they could against him in order to call
the attention of his brother. This political harassment defense was
raised by petitioners in their Amended Answer. Gaites testimony was
intended to explain the circumstances leading to his decision to
terminate the construction contract and not to question the
revocation of the building permit. As the available remedy was
already foreclosed, it was thus error for the CA to suggest that
Rhogen should have appealed the stoppage and revocations orders
issued by the municipal authorities to the DPWH and then to the
OP.[36]
Article 123 of the Articles of General Conditions states the grounds
for the termination of the work or contract by the Contractor:
123. CONTRACTORS RIGHT TO STOP WORK OR
TERMINATE
CONTRACT
If work should be stopped under order of any court,
or other public authority, for period of three
(3) months through no act or fault of
Contractor or of anyone employed by him, or
if Owners Representative should fail to issue
any certificate of payment within seven (7)
days after its maturity and presentation of any
sum certified by Owners Representative or
awarded arbitrator, then contractor, may, stop
work or terminate Contract, recover from
Owner payment for work executed, loss
sustained upon any plant or materials,
reasonable profit, damages.[37] (Emphasis
supplied.)
Petitioners may not justify Rhogens termination of the
contract upon grounds of non-payment of progress billing and
uncooperative attitude of respondent The Plaza and its employees in
rectifying the violations which were the basis for issuance of the
stoppage order. Having breached the contractual obligation it had
expressly assumed, i.e., to comply with all laws, rules and
regulations of the local authorities, Rhogen was already at
fault. Respondent The Plaza, on the other hand, was justified in
withholding payment on Rhogens first progress billing, on account of
the stoppage order and additionally due to disappearance of owner-
furnished materials at the jobsite. In failing to have the stoppage and
revocation orders lifted or recalled, Rhogen should take full
responsibility in accordance with its contractual undertaking, thus:
In the performance of the works, services, and
obligations subject of this Contract, the
CONTRACTOR binds itself to observe all pertinent
and applicable laws, rules and regulations
promulgated by duly constituted authorities and to
be personally, fully and solely liable for any and
all violations of the same.[38] (Emphasis supplied.)
Significantly, Rhogen did not mention in its communications
to Reyes that Gaite was merely a victim of abuse by a local official
and this was the primary reason for the problems besetting the
project. On the contrary, the site appraisal inspection conducted on
February 12 and 13, 1981 in the presence of representatives from
The Plaza, Rhogen, FGU and Municipal Engineer Victor Gregory,
disclosed that in addition to the violations committed by Rhogen
which resulted in the issuance of the stoppage order, Rhogen built
the structure not in accordance with government approved plans
and/or without securing the approval of the Municipal Engineer
before making the changes thereon.[39]
Such non-observance of laws and regulations of the local
authorities affecting the construction project constitutes a
substantial violation of the Construction Contract which entitles The
Plaza to terminate the same, without obligation to make further
payment to Rhogen until the work is finished or subject to refund of
payment exceeding the expenses of completing the works. This is
evident from a reading of Article 122 which states:
122. OWNERS RIGHT TO TERMINATE CONTRACT
A. If Contractor should be adjudged bankrupt,
or if he should make general assignment
for benefit of his creditors, or if receiver
should be appointed on account of his
insolvency, or if he should persistently or
repeatedly refuse or should fail, except in
cases for which extension of time is
provided, to supply enough properly
skilled workmen or proper materials, or if
he should fail to make prompt payment
 to Sub-Contractors or for materials of
labor, or persistently disregard laws,
ordinances, or instructions of Owners
Representative or otherwise be guilty of
substantial violation of any provision
of [the] Contract,then Owner, upon
certification by Owners Representative
that sufficient cause exists to justify such
action, may, without prejudice to any
right or remedy, after giving Contractor
seven days written notice, terminate
contract with Contractor, take
possession of premises, materials,
tools, appliances, thereon, finish work
by whatever method he may deem
expedient. In such cases, Contractor
shall not be entitled to receive any
further payment until work is finished.
B. If unpaid balance of Contract sum shall
exceed expense of finishing work
including compensation for additional
managerial and administrative services,
such excess, paid to Contractor. Refund
the difference to Owner if such
expense shall exceed unpaid
balance.[40] (Emphasis supplied.)
Upon the facts duly established, the CA therefore did not err
in holding that Rhogen committed a serious breach of its contract with
The Plaza, which justified the latter in terminating the contract.
Petitioners are thus liable for damages for having breached their
contract with respondent The Plaza. Article 1170 of the Civil
Code provides that those who in the performance of their obligations
are guilty of fraud, negligence or delay and those who in any manner
contravene the tenor thereof are liable for damages.
Petitioners assail the order for the return of down payment,
asserting that the principle of quantum meruit demands that Rhogen
as contractor be paid for the work already accomplished.
We disagree.
Under the principle of quantum meruit, a contractor is
allowed to recover the reasonable value of the thing or services
rendered despite the lack of a written contract, in order to avoid
unjust enrichment. Quantum meruit means that in an action for work
and labor, payment shall be made in such amount as the plaintiff
reasonably deserves. To deny payment for a building almost
completed and already occupied would be to permit unjust
enrichment at the expense of the contractor.[41]
Rhogen failed to finish even a substantial portion of the
works due to the stoppage order issued just two months from the
start of construction. Despite the down payment received from The
Plaza, Rhogen, upon evaluation of the Project Manager, was able to
complete a meager percentage much lower than that claimed by it
under the first progress billing between July and September
1980.Moreover, after it relinquished the project in January 1981, the
site inspection appraisal jointly conducted by the Project Manager,
Building Inspector Engr. Gregory and representatives from FGU and
Rhogen, Rhogen was found to have executed the works not in
accordance with the approved plans or failed to seek prior approval
of the Municipal Engineer. Article 1167 of the Civil Code is explicit
on this point that if a person obliged to do something fails to do it,
the same shall be executed at his cost.
Art. 1167. If a person obliged to do
something fails to do it, the same shall be executed
at his cost.
This same rule shall be observed if he does it
in contravention of the tenor of the obligation.
Furthermore, it may be decreed that what has been
poorly done be undone.
In addition, Article 122 of the Articles of General Conditions provides
that the contractor shall not be entitled to receive further payment
until the work is finished. As the works completed by Rhogen were
not in accordance with approved plans, it should have been executed
at its cost had it not relinquished the project in January 1981. The
CA thus did not err in sustaining the trial courts order for the return
of the down payment given by The Plaza to Rhogen.

As to temperate damages, Article 2224 of the Civil

Code provides that temperate or moderate damages, which are more
than nominal but less than compensatory damages, may be
recovered when the court finds that some pecuniary loss has been
suffered but its amount cannot, from the nature of the case, be
proved with certainty. The rationale behind temperate damages is
precisely that from the nature of the case, definite proof of pecuniary
loss cannot be offered. When the court is convinced that there has
been such loss, the judge is empowered to calculate moderate
damages, rather than let the complainant suffer without redress
from the defendants wrongful act.[42] Petitioners contention that such
award is improper because The Plaza could have presented receipts
to support the claim for actual damages, must fail considering that
Rhogen never denied the delivery of the owner-furnished materials
which were under its custody at the jobsite during the work stoppage
and before it terminated the contract. Since Rhogen failed to account
either for those items which it had caused to be withdrawn from the
premises, or those considered damaged or lost due spoilage, or
disappeared for whatever reason there was no way of determining the
exact quantity and cost of those materials. Hence, The Plaza was
correctly allowed to recover temperate damages.

Upon the foregoing, we find petitioners claim for actual, moral and
exemplary damages and attorneys fees lacking in legal basis and
undeserving of further discussion.

WHEREFORE, the petition is DENIED. The Decision

dated June 27, 2006 and the Resolution dated April 20, 2007 of the
Court of Appeals in CA-G.R. CV No. 58790 are AFFIRMED.

With costs against petitioners.

SO ORDERED.
 Banks and Banking; Fiduciary Nature of Banking; The bank is under SECOND DIVISION
obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship; The CENTRAL BANK OF THE PHILIPPINES, G.R. No. 141835
fiduciary nature of banking requires banks to assume a degree of Petitioner,
diligence higher than that of a good father of a family.—The law Present:
imposes on banks high standards in view of the fiduciary nature of
banking. Section 2 of Republic Act No. 8791 (“RA 8791”), which took CARPIO MORALES,* J., Acting
effect on 13 June 2000, declares that the State recognizes the - versus - Chairperson,
“fiduciary nature of banking that requires high standards of integrity TINGA,
and performance.” This new provision in the general banking law, NAZARIO,
introduced in 2000, is a statutory affirmation of Supreme Court NACHURA,** and
decisions, starting with the 1990 case of Simex International v. Court CITYTRUST BANKING CORPORATION, BRION, JJ.
of Appeals, holding that “the bank is under obligation to treat the Respondent.
accounts of its depositors with meticulous care, always having in
mind the fiduciary nature of their relationship.” This fiduciary Promulgated:
relationship means that the bank’s obligation to observe “high February 4, 2009
standards of integrity and performance” is deemed written into x----------------------------------------------
every deposit agreement between a bank and its depositor. The - - - -x
fiduciary nature of banking requires banks to assume a degree of
diligence higher than that of a good father of a family. DECISION

Same; Same; Petitioner’s liability to Citytrust mitigated on a 60-
40-ratio.—Citytrust’s failure to timely examine its account, cancel the
checks and notify petitioner of their alleged loss/theft should
mitigate petitioner’s liability, in accordance with Article 2179 of the
Civil Code which provides that if the plaintiff’s negligence was only
contributory, the immediate and proximate cause of the injury being
the defendant’s lack of due care, the plaintiff may recover damages,
but the courts shall mitigate the damages to be awarded. For had
Citytrust timely discovered the loss/theft and/or subsequent
encashment, their proceeds or part thereof could have been
recovered. In line with the ruling in Consolidated Bank and Trust
Corporation v. Court of Appeals, 410 SCRA 562 (2003), the Court
deems it proper to allocate the loss between petitioner and Citytrust
on a 60-40 ratio.
CARPIO MORALES, J.:
Pursuant to Republic Act No. 625, the old Central Bank Law,
respondent Citytrust Banking Corporation (Citytrust), formerly Feati
Bank, maintained a demand deposit account with petitioner Central
Bank of the Philippines, now Bangko Sentral ng Pilipinas.
As required, Citytrust furnished petitioner with the names
and corresponding signatures of five of its officers authorized to sign
checks and serve as drawers and indorsers for its account. And it
provided petitioner with the list and corresponding signatures of its
roving tellers authorized to withdraw, sign receipts and perform other
transactions on its behalf. Petitioner later issued security
identification cards to the roving tellers one of whom was Rounceval
Flores (Flores).

On July 15, 1977, Flores presented for payment to

petitioners Senior Teller Iluminada dela Cruz (Iluminada) two
Citytrust checks of even date, payable to Citytrust, one in the
amount ofP850,000 and the other in the amount of P900,000, both
of which were signed and indorsed by Citytrusts authorized
signatory-drawers.
 After the checks were certified by petitioners Accounting
Department, Iluminada verified them, prepared the cash transfer slip
on which she affixed her signature, stamped the checks with the
notation Received Payment and asked Flores to, as he did, sign on
the space above such notation. Instead of signing his name,
however, Flores signed as Rosauro C. Cayabyab a fact Iluminada
failed to notice.
Iluminada thereupon sent the cash transfer slip and checks
to petitioners Cash Department where an officer verified and
compared the drawers signatures on the checks against their
specimen signatures provided by Citytrust, and finding the same in
order, approved the cash transfer slip and paid the corresponding
amounts to Flores. Petitioner then debited the amount of the checks
totaling P1,750,000 from Citytrusts demand deposit account.
More than a year and nine months later, Citytrust, by letter
dated April 23, 1979, alleging that the checks were already cancelled
because they were stolen, demanded petitioner to restore the
amounts covered thereby to its demand deposit account. Petitioner
did not heed the demand, however.
Citytrust later filed a complaint for estafa, with reservation
on the filing of a separate civil action, against Flores. Flores was
convicted.
Citytrust thereafter filed before the Regional Trial Court
(RTC) of Manila a complaint for recovery of sum of money with
damages against petitioner which it alleged erred in encashing the
checks and in charging the proceeds thereof to its account, despite
the lack of authority of Rosauro C. Cayabyab.
By Decision[1] of November 13, 1991, Branch 32 of the RTC
of Manila found both Citytrust and petitioner negligent and
accordingly held them equally liable for the loss. Both parties
appealed to the Court of Appeals which, by Decision [2] dated July 16,
1999, affirmed the trial courts decision, it holding that both parties
contributed equally to the fraudulent encashment of the checks,
hence, they should equally share the loss in consonance with Article
2179[3] vis a vis Article 1172[4] of the Civil Code.
In arriving at its Decision, the appellate court noted that
while Citytrust failed to take adequate precautionary measures to
prevent the fraudulent encashment of its checks, petitioner was not
entirely blame-free in light of its failure to verify the signature of
Citytrusts agent authorized to receive payment.
Brushing aside petitioners contention that it cannot be sued,
the appellate court held that petitioners Charter specifically clothes it
with the power to sue and be sued.
Also brushing aside petitioners assertion that Citytrusts
reservation of the filing of a separate civil action against Flores
precluded Citytrust from filing the civil action against it, the
appellate court held that the action for the recovery of sum of money
is separate and distinct and is grounded on a separate cause of
action from that of the criminal case for estafa.
Hence, the present appeal, petitioner maintaining that Flores
having been an authorized roving teller, Citytrust is bound by his
acts. Also maintaining that it was not negligent in releasing the
proceeds of the checks to Flores, the failure of its teller to properly
verify his signature notwithstanding, petitioner contends that
verification could be dispensed with, Flores having been known to be
an authorized roving teller of Citytrust who had had numerous
transactions with it (petitioner) on its (Citytrusts) behalf for five years
prior to the questioned transaction.
Attributing negligence solely to Citytrust, petitioner harps on
Citytrusts allowing Flores to steal the checks and failing to timely
cancel them; allowing Flores to wear the issued identification card
issued by it (petitioner); failing to report Flores absence from work on
the day of the incident; and failing to explain the circumstances
surrounding the supposed theft and cancellation of the checks.
Drawing attention to Citytrusts considerable delay in
demanding the restoration of the proceeds of the checks, petitioners
argue that, assuming arguendo that its teller was negligent,
Citytrusts negligence, which preceded that committed by the teller,
was the proximate cause of the loss or fraud.
The petition is bereft of merit.
Petitioners teller Iluminada did not verify Flores signature on
the flimsy excuse that Flores had had previous transactions with it
for a number of years. That circumstance did not excuse the teller
from focusing attention to or at least glancing at Flores as he was
signing, and to satisfy herself that the signature he had just affixed
matched that of his specimen signature. Had she done that, she
would have readily been put on notice that Flores was affixing, not
his but a fictitious signature.
Given that petitioner is the government body mandated to
supervise and regulate banking and other financial institutions, this
Courts ruling in Consolidated Bank and Trust Corporation v. Court of
Appeals[5] illumines:
The contract between the bank and its
depositor is governed by the provisions of the Civil
Code on simple loan. Article 1980 of the Civil Code
expressly provides that x x x savings x x x deposits
of money in banks and similar institutions shall be
governed by the provisions concerning simple
loan. There is a debtor-creditor relationship between
the bank and its depositor. The bank is the debtor
and the depositor is the creditor. The depositor lends
the bank money and the bank agrees to pay the
depositor on demand. The savings deposit agreement
between the bank and the depositor is the contract
that determines the rights and obligations of the
parties.
The law imposes on banks high standards in
view of the fiduciary nature of banking. Section 2 of
Republic Act No. 8791 (RA 8791), which took effect
on 13 June 2000, declares that the State recognizes
the fiduciary nature of banking that requires high
standards of integrity and performance. This new
provision in the general banking law, introduced in
2000, is a statutory affirmation of Supreme Court
decisions, starting with the 1990 case of Simex
International v. Court of Appeals, holding that
the bank is under obligation to treat the accounts of
its depositors with meticulous care, always having in
mind the fiduciary nature of their relationship.
This fiduciary relationship means that
the banks obligation to observe high standards of
integrity and performance is deemed written into
every deposit agreement between a bank and its
depositor. The fiduciary nature of banking
requires banks to assume a degree of diligence
higher than that of a good father of a
family. Article 1172 of the Civil Code states that the
degree of diligence required of an obligor is that
prescribed by law or contract, and absent such
stipulation then the diligence of a good father of a
family. Section 2 of RA 8791 prescribes the statutory
diligence required from banks that banks must
observe high standards of integrity and performance
in servicing their depositors. Although RA 8791
took effect almost nine years after the
unauthorized withdrawal of the P300,000 from
L.C. Diazs savings account, jurisprudence at the
time of the withdrawal already imposed on banks
the same high standard of diligence required
under RA No. 8791. (Emphasis supplied)
Citytrusts failure to timely examine its account, cancel the
checks and notify petitioner of their alleged loss/theft should
mitigate petitioners liability, in accordance with Article 2179 of the
Civil Code which provides that if the plaintiffs negligence was only
contributory, the immediate and proximate cause of the injury being
the defendants lack of due care, the plaintiff may recover damages,
but the courts shall mitigate the damages to be awarded. For had
Citytrust timely discovered the loss/theft and/or subsequent
encashment, their proceeds or part thereof could have been
recovered.
In line with the ruling in Consolidated Bank, the Court
deems it proper to allocate the loss between petitioner and Citytrust
on a 60-40 ratio.
WHEREFORE, the assailed Court of Appeals Decision of
July 16, 1999 is hereby AFFIRMED with MODIFICATION, in that
petitioner and Citytrust should bear the loss on a 60-40 ratio.
SO ORDERED.
CONCHITA CARPIO MORALES
Associate Justice
 Courts; Judgments; The discretion to decide a case one way or
another is broad enough to justify the adoption of the arguments put forth
by one of the parties, as long as these are legally tenable and supported by
law and the facts on records.—To begin with, although it is true that
indeed the CA findings were exact reproductions of the arguments raised
in respondents’ (appellants’) brief filed with the CA, we find the same to
be not fatally infirmed. Upon examination of the Decision, we find that it
expressed clearly and distinctly the facts and the law on which it is based
as required by Section 8, Article VIII of the Constitution. The discretion
to decide a case one way or another is broad enough to justify the
adoption of the arguments put forth by one of the parties, as long as
these are legally tenable and supported by law and the facts on records.
Corporation Law; Piercing the Veil of Corporate Fiction; The rule is
that the veil of corporate fiction may be pierced when made as a shield to
perpetrate fraud and/or confuse legitimate issues—the theory of corporate
entity was not meant to promote unfair objectives or otherwise to shield
them.—The CA correctly pierced the veil of the corporate fiction and
adjudged petitioner Sicam liable together with petitioner corporation.
The rule is that the veil of corporate fiction may be pierced when made as
a shield to perpetrate fraud and/or confuse legitimate issues. The theory
of corporate entity was not meant to promote unfair objectives or
otherwise to shield them. Notably, the evidence on record shows that at
the time respondent Lulu pawned her jewelry, the pawnshop was owned
by petitioner Sicam himself. As correctly observed by the CA, in all the
pawnshop receipts issued to respondent Lulu in September 1987, all bear
the words “Agencia de R.C. Sicam,” notwithstanding that the pawnshop
was allegedly incorporated in April 1987. The receipts issued after such
alleged incorporation were still in the name of “Agencia de R.C. Sicam,”
thus inevitably misleading, or at the very least, creating the wrong
impression to respondents and the public as well, that the pawnshop was
owned solely by petitioner Sicam and not by a corporation.
Actions; Judicial Admissions; The general rule that a judicial
admission is conclusive upon the party making it and does not require
proof, admits of two exceptions, to wit—(1) when it is shown that such
admission was made through palpable mistake, and (2) when it is shown
that no such admission was in fact made; If a party invokes an
“admission” by an adverse party, but cites the admission “out of context,”
then the one making the “admission” may show that he made no “such”
admission, or that his admission was taken out of context.—The general
rule that a judicial admission is conclusive upon the party making it and
does not require proof, admits of two exceptions, to wit: (1) when it is
shown that such admission was made through palpable mistake, and (2)
when it is shown that no such admission was in fact made. The latter
exception allows one to contradict an admission by denying that he made
such an admission. The Committee on the Revision of the Rules of Court
explained the second exception in this wise: x x x if a party invokes an
“admission” by an adverse party, but cites the admission “out of context,”
then the one making the “admission” may show that he made no “such”
admission, or that his admission was taken out of context. x x x that the
party can also show that he made no “such admission”, i.e., not in the
sense in which the admission is made to appear. That is the reason for
the modifier “such” because if the rule simply states that the admission
may be contradicted by showing that “no admission was made,” the rule
would not really be providing for a contradiction of the admission but
just a denial. (Emphasis supplied).
Obligations and Contracts; Fortuitous Events; Elements; Words and
Phrases; Fortuitous events by definition are extraordinary events not
foreseeable or avoidable—it is therefore, not enough that the event should
not have been foreseen or anticipated, as is commonly believed but it must
be one impossible to foresee or to avoid.—Fortuitous events by definition
are extraordinary events not foreseeable or avoidable. It is therefore, not
enough that the event should not have been foreseen or anticipated, as is
commonly believed but it must be one impossible to foresee or to avoid.
The mere difficulty to foresee the happening is not impossibility to
foresee the same. To constitute a fortuitous event, the following elements
must concur: (a) the cause of the unforeseen and unexpected occurrence
or of the failure of the debtor to comply with obligations must be
independent of human will; (b) it must be impossible to foresee the event
that constitutes the caso fortuito or, if it can be foreseen, it must be
impossible to avoid; (c) the occurrence must be such as to render it
impossible for the debtor to fulfill obligations in a normal manner; and,
(d) the obligor must be free from any participation in the aggravation of
the injury or loss.
Same; Same; In order for a fortuitous event to exempt one from
liability, it is necessary that one has committed no negligence or
misconduct that may have occasioned the loss; When the effect is found to
be partly the result of a person’s participation—whether by active
intervention, neglect or failure to act—the whole occurrence is humanized
and removed from the rules applicable to acts of God.—The burden of
proving that the loss was due to a fortuitous event rests on him who
invokes it. And, in order for a fortuitous event to exempt one from
liability, it is necessary that one has committed no negligence or
misconduct that may have occasioned the loss. It has been held that an
act of God cannot be invoked to protect a person who has failed to take
steps to forestall the possible adverse consequences of such a loss. One’s
negligence may have concurred with an act of God in producing damage
and injury to another; nonetheless, showing that the immediate or
proximate cause of the damage or injury was a fortuitous event would
not exempt one from liability. When the effect is found to be partly the
result of a person’s participation—whether by active intervention,
neglect or failure to act—the whole occurrence is humanized and
removed from the rules applicable to acts of God.
Same; Same; Pawnshops; Robbery; Robbery per se, just like
carnapping, is not a fortuitous event; Merely presenting the police report
on the robbery committed based on the report of the employees of the
pawnshop owner is not sufficient to establish robbery.—Robbery per se,
just like carnapping, is not a fortuitous event. It does not foreclose the
possibility of negligence on the part of herein petitioners. In Co v. Court
of Appeals, 291 SCRA 111 (1998), the Court held: It is not a defense for a
repair shop of motor vehicles to escape liability simply because the
damage or loss of a thing lawfully placed in its possession was due to
carnapping. Carnapping per se cannot be considered as a fortuitous
event. The fact that a thing was unlawfully and forcefully taken from
another’s rightful possession, as in cases of carnapping, does not
automatically give rise to a fortuitous event. To be considered as such,
carnapping entails more than the mere forceful taking of another’s
property. It must be proved and established that the event was an act of
God or was done solely by third parties and that neither the claimant nor
the person alleged to be negligent has any participation. In accordance
with the Rules of Evidence, the burden of proving that the loss was due to
a fortuitous event rests on him who invokes it—which in this case is the
private respondent. However, other than the police report of the alleged
carnapping incident, no other evidence was presented by private
respondent to the effect that the incident was not due to its fault. A
police report of an alleged crime, to which only private respondent is
privy, does not suffice to establish the carnapping. Neither does it prove
that there was no fault on the part of private respondent
notwithstanding the parties’ agreement at the pre-trial that the car was
carnapped. Carnapping does not foreclose the possibility of fault or
negligence on the part of private respondent. Just like in Co, petitioners
merely presented the police report of the Parañaque Police Station on the
robbery committed based on the report of petitioners’ employees which is
not sufficient to establish robbery. Such report also does not prove that
petitioners were not at fault.
Same; Same; Same; Article 2123 of the Civil Code provides that
with regard to pawnshops and other establishments which are engaged in
making loans secured by pledges, the special laws and regulations
concerning them shall be observed, and subsidiarily, the provisions on
pledge, mortgage and antichresis.—Article 2123 of the Civil Code
provides that with regard to pawnshops and other establishments which
are engaged in making loans secured by pledges, the special laws and
regulations concerning them shall be observed, and subsidiarily, the
provisions on pledge, mortgage and antichresis. The provision on pledge,
particularly Article 2099 of the Civil Code, provides that the creditor
shall take care of the thing pledged with the diligence of a good father of
a family. This means that petitioners must take care of the pawns the
way a prudent person would as to his own property.
Same; Same; Same; Negligence; Words and Phrases; Negligence is
the omission to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human affairs,
would do, or the doing of something which a prudent and reasonable man
would not do.—We expounded in Cruz v. Gangan, 211 SCRA 517 (1992),
that negligence is the omission to do something which a reasonable man,
guided by those considerations which ordinarily regulate the conduct of
human affairs, would do; or the doing of something which a prudent and
reasonable man would not do. It is want of care required by the
circumstances. A review of the records clearly shows that petitioners
failed to exercise reasonable care and caution that an ordinarily prudent
person would have used in the same situation. Petitioners were guilty of
negligence in the operation of their pawnshop business.
Same; Same; Same; Same; The Central Bank considered it not
feasible to require insurance of pawned articles against burglary—there
was no statutory duty imposed on the pawnshop owner to insure the
pawned jewelry.—Under Section 17 of Central Bank Circular No. 374,
Rules and Regulations for Pawnshops, which took effect on July 13, 1973,
and which was issued pursuant to Presidential Decree No. 114,
Pawnshop Regulation Act, it is provided that pawns pledged must be
insured, to wit: Sec. 17. Insurance of Office Building and Pawns.—The
place of business of a pawnshop and the pawns pledged to it must be
insured against fire and against burglary as well as for the
latter(sic), by an insurance company accredited by the Insurance
Commissioner. However, this Section was subsequently amended by CB
Circular No. 764 which took effect on October 1, 1980, to wit: Sec.
17. Insurance of Office Building and Pawns.—The office
building/premises and pawns of a pawnshop must be insured against
fire. (emphasis supplied). where the requirement that insurance against
burglary was deleted. Obviously, the Central Bank considered it not ROBERTO C. SICAM and AGENCIA G.R. NO. 159617
feasible to require insurance of pawned articles against burglary. The de R.C. SICAM, INC.,
robbery in the pawnshop happened in 1987, and considering the above- Petitioners,
quoted amendment, there is no statutory duty imposed on petitioners to Present:
insure the pawned jewelry in which case it was error for the CA to
consider it as a factor in concluding that petitioners were negligent. YNARES-SANTIAGO, J.,
Chairperson,
Same; Same; Same; Same; The diligence with which the law - versus - AUSTRIA-MARTINEZ,
requires the individual at all times to govern his conduct varies with the CHICO-NAZARIO, and
nature of the situation in which he is placed and the importance of the act NACHURA, JJ.
which he is to perform.—The preponderance of evidence shows that
petitioners failed to exercise the diligence required of them under the LULU V. JORGE and CESAR
Civil Code. The diligence with which the law requires the individual at JORGE, Promulgated:
all times to govern his conduct varies with the nature of the situation in Respondents. August 8, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
which he is placed and the importance of the act which he is to perform.
-----x
Thus, the cases of Austria v. Court of Appeals, 39 SCRA 527
(1971), Hernandez v. Chairman, Commission on Audit, 179 SCRA 39
(1989), and Cruz v. Gangan, 211 SCRA 517 (1992), cited by petitioners in
DECISION
their pleadings, where the victims of robbery were exonerated from
liability, find no application to the present case.
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Roberto
C. Sicam, Jr. (petitioner Sicam) and Agencia de R.C. Sicam, Inc.
(petitioner corporation) seeking to annul the Decision[1] of the Court
of Appeals dated March 31, 2003, and its Resolution[2] dated August
8, 2003, in CA G.R. CV No. 56633.

It appears that on different dates from September to October

1987, Lulu V. Jorge (respondent Lulu) pawned several pieces of
jewelry with Agencia de R. C. Sicam located at No. 17 Aguirre Ave.,
BF Homes Paraaque, Metro Manila, to secure a loan in the total
amount of P59,500.00.

On October 19, 1987, two armed men entered the pawnshop and
took away whatever cash and jewelry were found inside the
pawnshop vault. The incident was entered in the police blotter of the
Southern Police District, Paraaque Police Station as follows:

Investigation shows that at above TDPO, while victims

were inside the office, two (2) male unidentified
THIRD DIVISION
persons entered into the said office with guns
 drawn. Suspects(sic) (1) went straight inside and Respondents opposed the same. The RTC denied the motion in an
poked his gun toward Romeo Sicam and thereby tied Order dated November 8, 1989.[5]
him with an electric wire while suspects (sic) (2) After trial on the merits, the RTC rendered its
poked his gun toward Divina Mata Decision[6] dated January 12, 1993, dismissing respondents
and Isabelita Rodriguez and ordered them to lay (sic) complaint as well as petitioners counterclaim. The RTC held that
face flat on the floor. Suspects asked forcibly the case petitioner Sicam could not be made personally liable for a claim
and assorted pawned jewelries items mentioned arising out of a corporate transaction; that in the Amended
above. Complaint of respondents, they asserted that plaintiff pawned
assorted jewelries in defendants' pawnshop; and that as a
Suspects after taking the money and jewelries fled on consequence of the separate juridical personality of a corporation,
board a Marson Toyota unidentified plate number.[3] the corporate debt or credit is not the debt or credit of a stockholder.

Petitioner Sicam sent respondent Lulu a letter dated October 19,
1987 informing her of the loss of her jewelry due to the robbery
incident in the pawnshop. On November 2, 1987, respondent Lulu
then wrote a letter[4] to petitioner Sicam expressing disbelief stating
that when the robbery happened, all jewelry pawned were deposited
with Far East Bank near the pawnshop since it had been the practice
that before they could withdraw, advance notice must be given to the
pawnshop so it could withdraw the jewelry from the bank.
Respondent Lulu then requested petitioner Sicam to prepare the
pawned jewelry for withdrawal on November
6, 1987 but petitioner Sicam failed to return the jewelry.
On September 28, 1988, respondent Lulu joined by her husband,
Cesar Jorge, filed a complaint against petitioner Sicam with the
Regional Trial Court of Makati seeking indemnification for the loss of
pawned jewelry and payment of actual, moral and exemplary
damages as well as attorney's fees. The case was docketed as Civil
Case No. 88-2035.
Petitioner Sicam filed his Answer contending that he is not the real
party-in-interest as the pawnshop was incorporated on April 20,
1987 and known as Agencia de R.C. Sicam, Inc; that petitioner
corporation had exercised due care and diligence in the safekeeping
of the articles pledged with it and could not be made liable for an
event that is fortuitous.
Respondents subsequently filed an Amended Complaint to
include petitioner corporation.
Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is
concerned considering that he is not the real party-in-interest.
The RTC further ruled that petitioner corporation could not be held
liable for the loss of the pawned jewelry since it had not been
rebutted by respondents that the loss of the pledged pieces of jewelry
in the possession of the corporation was occasioned by armed
robbery; that robbery is a fortuitous event which exempts the victim
from liability for the loss, citing the case of Austria v. Court of
Appeals;[7] and that the parties transaction was that
of a pledgor and pledgee and under Art. 1174 of the Civil Code, the
pawnshop as a pledgee is not responsible for those events which
could not be foreseen.
Respondents appealed the RTC Decision to the CA. In a Decision
dated March 31, 2003, the CA reversed the RTC,
the dispositive portion of which reads as follows:
WHEREFORE, premises considered, the instant
Appeal is GRANTED, and the Decision dated January
12, 1993,of the Regional Trial Court of Makati,
Branch 62, is hereby REVERSED and SET ASIDE,
ordering the appellees to pay appellants the actual
value of the lost jewelry amounting to P272,000.00,
and attorney' fees of P27,200.00.[8]
In finding petitioner Sicam liable together with petitioner corporation,
the CA applied the doctrine of piercing the veil of corporate entity
reasoning that respondents were misled into thinking that they were
dealing with the pawnshop owned by petitioner Sicam as all the
pawnshop tickets issued to them bear the
words Agencia de R.C. Sicam; and that there was no indication on
the pawnshop tickets that it was the petitioner corporation that
owned the pawnshop which explained why respondents had to
amend their complaint impleading petitioner corporation.
The CA further held that the corresponding diligence required of a
pawnshop is that it should take steps to secure and protect the
pledged items and should take steps to insure itself against the loss
ofarticles which are entrusted to its custody as it derives earnings
from the pawnshop trade which petitioners failed to do;
that Austria is not applicable to this case since the robbery incident
happened in 1961 when the criminality had not as yet reached the
levels attained in the present day; that they are at least guilty of
contributory negligence and should be held liable for the loss of
jewelries; and that robberies and hold-ups are foreseeable risks in
that those engaged in the pawnshop business are expected to
foresee.
The CA concluded that both petitioners should be jointly and
severally held liable to respondents for the loss of the pawned
jewelry.
Petitioners motion for reconsideration was denied in a
Resolution dated August 8, 2003.
Hence, the instant petition for review with the following assignment
of errors:
THE COURT OF APPEALS ERRED AND WHEN IT
DID, IT OPENED ITSELF TO REVERSAL, WHEN IT
ADOPTED UNCRITICALLY (IN FACT IT
REPRODUCED AS ITS OWN WITHOUT IN THE
MEANTIME ACKNOWLEDGING IT) WHAT THE
RESPONDENTS ARGUED IN THEIR BRIEF, WHICH
ARGUMENT WAS PALPABLY UNSUSTAINABLE.
THE COURT OF APPEALS ERRED, AND WHEN IT
DID, IT OPENED ITSELF TO REVERSAL BY THIS
HONORABLE COURT, WHEN IT AGAIN ADOPTED
UNCRITICALLY (BUT WITHOUT ACKNOWLEDGING
IT) THE SUBMISSIONS OF THE RESPONDENTS IN
THEIR BRIEF WITHOUT ADDING ANYTHING MORE
THERETO DESPITE THE FACT THAT THE SAID
ARGUMENT OF THE RESPONDENTS COULD NOT
HAVE BEEN SUSTAINED IN VIEW OF UNREBUTTED
EVIDENCE ON RECORD.[9]
Anent the first assigned error, petitioners point out that the CAs
finding that petitioner Sicam is personally liable for the loss of the
pawned jewelries is a virtual and uncritical reproduction of the
arguments set out on pp. 5-6 of the Appellants brief.[10]
Petitioners argue that the reproduced arguments of respondents in
their Appellants Brief suffer from infirmities, as follows:
(1) Respondents conclusively asserted in paragraph
2 of their Amended Complaint that Agencia de
R.C. Sicam, Inc. is the present owner of Agencia de
R.C. Sicam Pawnshop, and therefore, the CA cannot
rule against said conclusive assertion of
respondents;
(2) The issue resolved against petitioner Sicam was
not among those raised and litigated in the trial
court; and
(3) By reason of the above infirmities, it was error for
the CA to have pierced the corporate veil since a
corporation has a personality distinct and separate
from its individual stockholders or members.
Anent the second error, petitioners point out that the CA finding on
their negligence is likewise an unedited reproduction of respondents
brief which had the following defects:
(1) There were unrebutted evidence on record that
petitioners had observed the diligence
required of them, i.e, they wanted to open a vault
with a nearby bank for purposes of safekeeping the
pawned articles but was discouraged by the Central
Bank (CB) since CB rules provide that they can only
store the pawned articles in a vault inside the
pawnshop premises and no other place;
(2) Petitioners were adjudged negligent as they did
not take insurance against the loss of the
pledged jelweries, but it is judicial notice that due to
high incidence of crimes, insurance companies
 refused to cover pawnshops and banks because of
high probability of losses due to robberies;
(3) In Hernandez v. Chairman, Commission on
Audit (179 SCRA 39, 45-46), the victim of robbery
was exonerated from liability for the sum of money
belonging to others and lost by him to robbers.
Respondents filed their Comment and petitioners filed their Reply
thereto. The parties subsequently submitted their respective
Memoranda.
We find no merit in the petition.
To begin with, although it is true that indeed the CA findings were
exact reproductions of the arguments raised in respondents
(appellants) brief filed with the CA, we find the same to be not fatally
infirmed. Upon examination of the Decision, we find that it expressed
clearly and distinctly the facts and the law on which it is based as
required by Section 8, Article VIII of the Constitution. The discretion
to decide a case one way or another is broad enough to justify the
adoption of the arguments put forth by one of the parties, as long as
these are legally tenable and supported by law and the facts on
records.[11]
Our jurisdiction under Rule 45 of the Rules of Court is limited to the
review of errors of law committed by the appellate court. Generally,
the findings of fact of the appellate court are deemed conclusive and
we are not duty-bound to analyze and calibrate all over again the
evidence adduced by the parties in the court a quo.[12] This rule,
however, is not without exceptions, such as where the factual
findings of the Court of Appeals and the trial court are conflicting or
contradictory[13] as is obtaining in the instant case.
However, after a careful examination of the records, we find no
justification to absolve petitioner Sicam from liability.
The CA correctly pierced the veil of the corporate fiction and
adjudged petitioner Sicam liable together with petitioner
corporation. The rule is that the veil of corporate fiction may be
pierced when made as a shield to perpetrate fraud and/or confuse
legitimate issues. [14] The theory of corporate entity was not meant to
promote unfair objectives or otherwise to shield them.[15]
Notably, the evidence on record shows that at the time respondent
Lulu pawned her jewelry, the pawnshop was owned by
petitioner Sicam himself. As correctly observed by the CA, in all the
pawnshop receipts issued to respondent Lulu in September 1987, all
bear the words Agencia de R. C. Sicam, notwithstanding that the
pawnshop was allegedly incorporated in April 1987. The receipts
issued after such alleged incorporation were still in the name
of Agencia de R. C. Sicam, thus inevitably misleading, or at the very
least, creating the wrong impression to respondents and the public
as well, that the pawnshop was owned solely by petitioner Sicam and
not by a corporation.
Even petitioners counsel, Atty. Marcial T. Balgos, in his
letter[16] dated October 15, 1987 addressed to the Central Bank,
expressly referred to petitioner Sicam as the proprietor of the
pawnshop notwithstanding the alleged incorporation in April 1987.
We also find no merit in petitioners' argument that since respondents
had alleged in their Amended Complaint that petitioner
corporation is the present owner of the pawnshop, the CA is bound
to decide the case on that basis.
Section 4 Rule 129 of the Rules of Court provides that an admission,
verbal or written, made by a party in the course of the proceedings in
the same case, does not require proof. The admission may be
contradicted only by showing that it was made through palpable
mistake or that no such admission was made.
Thus, the general rule that a judicial admission is conclusive upon
the party making it and does not require proof, admits of two
exceptions, to wit: (1) when it is shown that such admission was
made through palpable mistake, and (2) when it is shown that no
such admission was in fact made. The latter exception allows one
to contradict an admission by denying that he made such an
admission.[17]
The Committee on the Revision of the Rules of Court explained the
second exception in this wise:
x x x if a party invokes an admission by an adverse
party, but cites the admission out of context, then
the one making the admission may show that he
made no such admission, or that his admission
was taken out of context.
 x x x that the party can also show that he made
no such admission, i.e., not in the sense in which
the admission is made to appear.
That is the reason for the modifier such because if
the rule simply states that the admission may be
contradicted by showing that no admission was
made, the rule would not really be providing for a
contradiction of the admission but just a
denial.[18] (Emphasis supplied).
While it is true that respondents alleged in their Amended Complaint
that petitioner corporation is the present owner of the pawnshop,
they did so only because petitioner Sicam alleged in his Answer to
the original complaint filed against him that he was not the real
party-in-interest as the pawnshop was incorporated in April 1987.
Moreover, a reading of the Amended Complaint in its entirety shows
that respondents referred to both petitioner Sicam and petitioner
corporation where they (respondents) pawned their assorted pieces of
jewelry and ascribed to both the failure to observe due diligence
commensurate with the business which resulted in the loss of their
pawned jewelry.
Markedly, respondents, in their Opposition to petitioners Motion to
Dismiss Amended Complaint, insofar as petitioner Sicam is
concerned, averred as follows:
Roberto C. Sicam was named the defendant in the
original complaint because the pawnshop tickets
involved in this case did not show that the
R.C. Sicam Pawnshop was a corporation. In
paragraph 1 of his Answer, he admitted the
allegations in paragraph 1 and 2 of the Complaint.
He merely added that defendant is not now the real
party in interest in this case.
It was defendant Sicam's omission to correct the
pawnshop tickets used in the subject transactions in
this case which was the cause of the instant action.
He cannot now ask for the dismissal of the
complaint against himsimply on the mere allegation
that his pawnshop business is now incorporated. It
is a matter of defense, the merit of which can only be
reached after consideration of the evidence to be
presented in due course.[19]
Unmistakably, the alleged admission made in respondents'
Amended Complaint was taken out of context by petitioner Sicam to
suit his own purpose. Ineluctably, the fact that
petitioner Sicamcontinued to issue pawnshop receipts under his
name and not under the corporation's name militates for the piercing
of the corporate veil.
We likewise find no merit in petitioners' contention that the CA erred
in piercing the veil of corporate fiction of petitioner corporation, as it
was not an issue raised and litigated before the RTC.
Petitioner Sicam had alleged in his Answer filed with the trial
court that he was not the real party-in-interest because since April
20, 1987, the pawnshop business initiated by him was incorporated
and known as Agencia de R.C. Sicam. In the pre-trial brief filed by
petitioner Sicam, he submitted that as far as he was concerned, the
basic issue was whether he is the real party in interest against whom
the complaint should be directed.[20] In fact, he subsequently moved
for the dismissal of the complaint as to him but was not favorably
acted upon by the trial court. Moreover, the issue was squarely
passed upon, although erroneously, by the trial court in its Decision
in this manner:
x x x The defendant Roberto Sicam, Jr likewise
denies liability as far as he is concerned for the
reason that he cannot be made personally liable for
a claim arising from a corporate transaction.
This Court sustains the contention of the defendant
Roberto C. Sicam, Jr. The amended complaint itself
asserts that plaintiff pawned assorted jewelries in
defendant's pawnshop. It has been held that as a
consequence of the separate juridical personality of
a corporation, the corporate debt or credit is not the
debt or credit of the stockholder, nor is the
stockholder's debt or credit that of a corporation.[21]
Clearly, in view of the alleged incorporation of the pawnshop, the
issue of whether petitioner Sicam is personally liable is inextricably
connected with the determination of the question whether the
doctrine of piercing the corporate veil should or should not apply to
the case.
The next question is whether petitioners are liable for the
loss of the pawned articles in their possession.
Petitioners insist that they are not liable since robbery is a fortuitous
event and they are not negligent at all.
We are not persuaded.
Article 1174 of the Civil Code provides:
Art. 1174. Except in cases expressly specified by the
law, or when it is otherwise declared by stipulation,
or when the nature of the obligation requires the
assumption of risk, no person shall be responsible
for those events which could not be foreseen or
which, though foreseen, were inevitable.
Fortuitous events by definition are extraordinary events not
foreseeable or avoidable. It is therefore, not enough that the event
should not have been foreseen or anticipated, as is commonly
believed but it must be one impossible to foresee or to avoid. The
mere difficulty to foresee the happening is not impossibility to foresee
the same. [22]
To constitute a fortuitous event, the following elements must concur:
(a) the cause of the unforeseen and unexpected occurrence or of the
failure of the debtor to comply with obligations must be independent
of human will; (b) it must be impossible to foresee the event that
constitutes the caso fortuito or, if it can be foreseen, it must be
impossible to avoid; (c) the occurrence must be such as to render it
impossible for the debtor to fulfill obligations in a normal manner;
and, (d) the obligor must be free from any participation in the
aggravation of the injury or loss. [23]
The burden of proving that the loss was due to a fortuitous event
rests on him who invokes it.[24] And, in order for a fortuitous event to
exempt one from liability, it is necessary that one has committed no
negligence or misconduct that may have occasioned the loss. [25]
It has been held that an act of God cannot be invoked to protect a
person who has failed to take steps to forestall the possible adverse
consequences of such a loss. One's negligence may have concurred
with an act of God in producing damage and injury to another;
nonetheless, showing that the immediate or proximate cause of the
damage or injury was a fortuitous event would not exempt one from
liability. When the effect is found to be partly the result of a person's
participation -- whether by active intervention, neglect or failure to
act -- the whole occurrence is humanized and removed from the
rules applicable to acts of God. [26]
Petitioner Sicam had testified that there was a security guard in their
pawnshop at the time of the robbery. He likewise testified that when
he started the pawnshop business in 1983, he thought of opening a
vault with the nearby bank for the purpose of safekeeping the
valuables but was discouraged by the Central Bank since pawned
articles should only be stored in a vault inside the pawnshop.The
very measures which petitioners had allegedly adopted show that to
them the possibility of robbery was not only foreseeable, but actually
foreseen and anticipated. Petitioner Sicams testimony, in effect,
contradicts petitioners defense of fortuitous event.
Moreover, petitioners failed to show that they were free from any
negligence by which the loss of the pawned jewelry may have been
occasioned.
Robbery per se, just like carnapping, is not a fortuitous event. It does
not foreclose the possibility of negligence on the part of herein
petitioners. In Co v. Court of Appeals,[27] the Court held:
It is not a defense for a repair shop of
motor vehicles to escape liability simply because
the damage or loss of a thing lawfully placed in its
possession was due to carnapping. Carnapping per
se cannot be considered as a fortuitous event. The
fact that a thing was unlawfully and forcefully
taken from another's rightful possession, as in
cases of carnapping, does not automatically give
rise to a fortuitous event. To be considered as
such, carnapping entails more than the mere
forceful taking of another's property. It must be
proved and established that the event was an
act of God or was done solely by third parties
and that neither the claimant nor the person
alleged to be negligent has any participation. In
accordance with the Rules of Evidence, the
burden of proving that the loss was due to a
fortuitous event rests on him who invokes it
which in this case is the private
 respondent. However, other than the police report
of the alleged carnapping incident, no other
evidence was presented by private respondent to
the effect that the incident was not due to its fault.
A police report of an alleged crime, to which only
private respondent is privy, does not suffice to
establish the carnapping. Neither does it prove that
there was no fault on the part of private respondent
notwithstanding the parties' agreement at the pre-
trial that the car was carnapped. Carnapping does
not foreclose the possibility of fault or negligence on
the part of private respondent.[28]
Just like in Co, petitioners merely presented the police
report of the Paraaque Police Station on the robbery committed
based on the report of petitioners' employees which is not sufficient
to establish robbery. Such report also does not prove that petitioners
were not at fault.
On the contrary, by the very evidence of petitioners, the CA did not
err in finding that petitioners are guilty of concurrent or contributory
negligence as provided in Article 1170 of the Civil Code, to wit:
Art. 1170. Those who in the performance of their
obligations are guilty of fraud, negligence, or delay,
and those who in any manner contravene the tenor
thereof, are liable for damages.[29]
Article 2123 of the Civil Code provides that with regard to pawnshops
and other establishments which are engaged in making loans
secured by pledges, the special laws and regulations concerning
them shall be observed, and subsidiarily, the provisions on pledge,
mortgage and antichresis.
The provision on pledge, particularly Article 2099 of the Civil
Code, provides that the creditor shall take care of the thing pledged
with the diligence of a good father of a family. This means that
petitioners must take care of the pawns the way a prudent person
would as to his own property.
In this connection, Article 1173 of the Civil Code further provides:
Art. 1173. The fault or negligence of the obligor
consists in the omission of that diligence which is
required by the nature of the obligation and
corresponds with the circumstances of the persons,
of time and of the place. When negligence shows bad
faith, the provisions of Articles 1171 and 2201,
paragraph 2 shall apply.
If the law or contract does not state the
diligence which is to be observed in the performance,
that which is expected of a good father of a family
shall be required.
We expounded in Cruz v. Gangan[30] that negligence is the
omission to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human
affairs, would do; or the doing of something which a prudent and
reasonable man would not do.[31] It is want of care required by the
circumstances.
A review of the records clearly shows that petitioners failed to
exercise reasonable care and caution that an ordinarily prudent
person would have used in the same situation. Petitioners were
guilty of negligence in the operation of their pawnshop business.
Petitioner Sicam testified, thus:
Court:
Q. Do you have security guards in your pawnshop?
A. Yes, your honor.
Q. Then how come that the robbers were able to enter
the premises when according to you there was a
security guard?
A. Sir, if these robbers can rob a bank, how much
more a pawnshop.
Q. I am asking you how were the robbers able to enter
despite the fact that there was a security guard?
A. At the time of the incident which happened about
1:00 and 2:00 o'clock in the afternoon and it
happened on a Saturday and everything was
quiet in the area BF Homes Paraaque they
pretended to pawn an article in the pawnshop, so
one of my employees allowed him to come in and
it was only when it was announced that it was a
hold up.
 Q. Did you come to know how the vault was opened?
A. When the pawnshop is official (sic) open your
honor the pawnshop is partly open. The
combination is off.
Q. No one open (sic) the vault for the robbers?
A. No one your honor it was open at the time of the
robbery.
Q. It is clear now that at the time of the robbery the
vault was open the reason why the robbers were
able to get all the items pawned to you inside the
vault.
A. Yes sir.[32]
revealing that there were no security measures adopted by
petitioners in the operation of the pawnshop. Evidently, no sufficient
precaution and vigilance were adopted by petitioners to protect the
pawnshop from unlawful intrusion. There was no clear showing that
there was any security guard at all. Or if there was one, that he had
sufficient training in securing a pawnshop. Further, there is no
showing that the alleged security guard exercised all that was
necessary to prevent any untoward incident or to ensure that no
suspicious individuals were allowed to enter the premises. In fact, it
is even doubtful that there was a security guard, since it is quite
impossible that he would not have noticed that the robbers were
armed with caliber .45 pistols each, which were allegedly poked at
the employees.[33] Significantly, the alleged security guard was not
presented at all to corroborate petitioner Sicam's claim; not
one of petitioners' employees who were present during the robbery
incident testified in court.
Furthermore, petitioner Sicam's admission that the vault was open
at the time of robbery is clearly a proof of petitioners' failure to
observe the care, precaution and vigilance that the circumstances
justly demanded. Petitioner Sicam testified that once the pawnshop
was open, the combination was already off. Considering
petitioner Sicam's testimony that the robbery took place on a
Saturday afternoon and the area in BF Homes Paraaque at that time
was quiet, there was more reason for petitioners to have exercised
reasonable foresight and diligence in protecting the pawned jewelries.
Instead of taking the precaution to protect them, they let open the
vault, providing no difficulty for the robbers to cart away the pawned
articles.
We, however, do not agree with the CA when it
found petitioners negligent for not taking steps to insure themselves
against loss of the pawned jewelries.
Under Section 17 of Central Bank Circular No. 374, Rules and
Regulations for Pawnshops, which took effect on July 13, 1973, and
which was issued pursuant to Presidential Decree No. 114,
Pawnshop Regulation Act, it is provided that pawns pledged must be
insured, to wit:
Sec. 17. Insurance of Office Building and Pawns- The
place of business of a pawnshop and the pawns
pledged to it must be insured against fire and
against burglary as well as for the latter(sic), by an
insurance company accredited by the Insurance
Commissioner.
However, this Section was subsequently amended by CB Circular No.
764 which took effect on October 1, 1980, to wit:
Sec. 17 Insurance of Office Building and Pawns The
office building/premises and pawns of a pawnshop
must be insured against fire. (emphasis supplied).
where the requirement that insurance against burglary was
deleted. Obviously, the Central Bank considered it not feasible
to require insurance of pawned articles against burglary.
The robbery in the pawnshop happened in 1987, and considering the
above-quoted amendment, there is no statutory duty imposed on
petitioners to insure the pawned jewelry in which case it was error
for the CA to consider it as a factor in concluding that petitioners
were negligent.
Nevertheless, the preponderance of evidence shows that petitioners
failed to exercise the diligence required of them under the Civil Code.
The diligence with which the law requires the individual at all times
to govern his conduct varies with the nature of the situation in which
he is placed and the importance of the act which he is to
perform.[34] Thus, the cases of Austria v. Court of
Appeals,[35] Hernandez v. Chairman, Commission on Audit[36] and Cruz
v. Gangan[37] cited by petitioners in their pleadings, where the victims
of robbery were exonerated from liability, find no application to the
present case.
In Austria, Maria Abad received from Guillermo Austria a pendant
with diamonds to be sold on commission basis, but
which Abad failed to subsequently return because of a robbery
committed upon her in 1961. The incident became the subject of a
criminal case filed against several persons. Austria filed an action
against Abad and her husband (Abads) for recovery of the pendant or
its value, but the Abads set up the defense that the robbery
extinguished their obligation. The RTC ruled in favor of Austria, as
the Abads failed to prove robbery; or, if committed, that
Maria Abad was guilty of negligence. The CA, however, reversed the
RTC decision holding that the fact of robbery was duly established
and declared the Abads not responsible for the loss of the jewelry on
account of a fortuitous event. We held that for the Abads to be
relieved from the civil liability of returning the pendant under Art.
1174 of the Civil Code, it would only be sufficient that the unforeseen
event, the robbery, took place without any concurrent fault on the
debtors part, and this can be done by preponderance of evidence;
that to be free from liability for reason of fortuitous event, the debtor
must, in addition to the casus itself, be free of any concurrent or
contributory fault or negligence.[38]
We found in Austria that under the circumstances prevailing at the
time the Decision was promulgated in 1971, the City of Manila and
its suburbs had a high incidence of crimes against persons and
property that rendered travel after nightfall a matter to be sedulously
avoided without suitable precaution and protection; that the conduct
of Maria Abad in returning alone to her house in the evening carrying
jewelry of considerable value would have been negligence per se and
would not exempt her from responsibility in the case of robbery.
However we did not hold Abad liable for negligence since, the robbery
happened ten years previously; i.e., 1961, when criminality had not
reached the level of incidence obtaining in 1971.
In contrast, the robbery in this case took place in 1987 when robbery
was already prevalent and petitioners in fact had already foreseen it
as they wanted to deposit the pawn with a nearby bank for
safekeeping. Moreover, unlike in Austria, where no negligence was
committed, we found petitioners negligent in securing their
pawnshop as earlier discussed.
In Hernandez, Teodoro Hernandez was the OIC and special
disbursing officer of the Ternate Beach Project of the Philippine
Tourism in Cavite. In the morning of July 1, 1983, a Friday, he went
to Manila to encash two checks covering the wages of the employees
and the operating expenses of the project. However for some reason,
the processing of the check was delayed and was completed at
about 3 p.m. Nevertheless, he decided to encash the check because
the project employees would be waiting for their pay the following
day; otherwise, the workers would have to wait until July 5, the
earliest time, when the main office would open. At that time, he had
two choices: (1) return to Ternate, Cavite that same afternoon and
arrive early evening; or (2) take the money with him to his house
in Marilao, Bulacan, spend the night there, and leave for Ternate the
following day. He chose the second option, thinking it was the safer
one. Thus, a little past 3 p.m., he took a passenger jeep bound
for Bulacan. While the jeep was on Epifanio de los Santos Avenue,
the jeep was held up and the money kept by Hernandez was taken,
and the robbers jumped out of the jeep and ran. Hernandez chased
the robbers and caught up with one robber who was subsequently
charged with robbery and pleaded guilty. The other robber who held
the stolen money escaped. The Commission on Audit found
Hernandez negligent because he had not brought the cash proceeds
of the checks to his office in Ternate, Cavite for safekeeping, which is
the normal procedure in the handling of funds. We held that
Hernandez was not negligent in deciding to encash the check and
bringing it home to Marilao, Bulacan instead of Ternate, Cavite due
to the lateness of the hour for the following reasons: (1) he was
moved by unselfish motive for his co-employees to collect their wages
and salaries the following day, a Saturday, a non-working, because
to encash the check on July 5, the next working day after July 1,
would have caused discomfort to laborers who were dependent on
their wages for sustenance; and (2) that choosing Marilao as a safer
destination, being nearer, and in view of the comparative hazards in
the trips to the two places, said decision seemed logical at that time.
We further held that the fact that two robbers attacked him in broad
daylight in the jeep while it was on a busy highway and in the
presence of other passengers could not be said to be a result of his
imprudence and negligence.
Unlike in Hernandez where the robbery happened in a public
utility, the robbery in this case took place in the pawnshop which is
under the control of petitioners. Petitioners had the means to screen
the persons who were allowed entrance to the premises and to
protect itself from unlawful intrusion. Petitioners had failed to
exercise precautionary measures in ensuring that the robbers were
prevented from entering the pawnshop and for keeping the vault
open for the day, which paved the way for the robbers to easily cart Costs against petitioners.
away the pawned articles.
SO ORDERED.
In Cruz, Dr. Filonila O. Cruz, Camanava District Director of
Technological Education and Skills Development Authority (TESDA),
boarded the Light Rail Transit (LRT) MA. ALICIA AUSTRIA-MARTINEZ
from Sen. Puyat Avenue to Monumento when her handbag was Associate Justice
slashed and the contents were stolen by an unidentified person.
Among those stolen were her wallet and the government-issued
cellular phone. She then reported the incident to the police
authorities; however, the thief was not located, and
the cellphone was not recovered. She also reported the loss to the
Regional Director of TESDA, and she requested that she be freed
from accountability for the cellphone. The Resident Auditor denied
her request on the ground that she lacked the diligence required in
the custody of government property and was ordered to pay the
purchase value in the total amount of P4,238.00. The COA found no
sufficient justification to grant the request for relief from
accountability. We reversed the ruling and found that riding the LRT
cannot per se be denounced as a negligent act more so because
Cruzs mode of transit was influenced by time and money
considerations; that she boarded the LRT to be able to arrive
in Caloocan in time for her 3 pm meeting; that any prudent and
rational person under similar circumstance can reasonably be
expected to do the same; that possession of a cellphone should not
hinder one from boarding the LRT coach as Cruz did considering that
whether she rode a jeep or bus, the risk of theft would have also
been present; that because of her relatively low position and pay, she
was not expected to have her own vehicle or to ride a taxicab; she did
not have a government assigned vehicle; that placing
the cellphone in a bag away from covetous eyes and holding on to
that bag as she did is ordinarily sufficient care of a cellphone while
traveling on board the LRT; that the records did not show any
specific act of negligence on her part and negligence can never be
presumed.

Unlike in the Cruz case, the robbery in this case

happened in petitioners' pawnshop and they were negligent in
not exercising the precautions justly demanded of a pawnshop.

WHEREFORE, except for the insurance aspect, the

Decision of the Court of Appeals dated March 31, 2003 and its
Resolution dated August 8, 2003, are AFFIRMED.
 Appeals; Pleadings and Practice; Procedural Rules and
Technicalities; The rule is explicit in its mandate that the legible
duplicate originals or true copies of the judgment or final orders of both
lower courts must be certified correct by the Clerk of Court, unless the
petitioner could show that the Clerk of Court was officially on leave
and the Administrative Officer was officially designated as officer-in-
charge.—In the present case, petitioner’s submission of copies of the
RTC Decision and Order certified as correct by the Administrative
Officer IV of the RTC is insufficient compliance with the requirements
of the rule. Petitioner failed to show that the Clerk of Court was
officially on leave and the Administrative Officer was officially
designated as officer-in-charge. The rule is explicit in its mandate
that the legible duplicate originals or true copies of the judgments or
final orders of both lower courts must be certified correct by the
Clerk of Court.
Same; Same; There is ample jurisprudence holding that the
subsequent and substantial compliance of a party may call for the
relaxation of the rules of procedure; When the Court of Appeals
dismisses a petition outright and the petitioner files a motion for the
reconsideration of such dismissal, appending thereto the requisite
pleadings, documents or order/resolution, this would constitute
substantial compliance with the Revised Rules of Court.—Nonetheless,
a strict application of the rule in this case is not called for. This
Court has ruled against the dismissal of appeals based solely on
technicalities in several cases, especially when the appellant had
substantially complied with the formal requirements. There is ample
jurisprudence holding that the subsequent and substantial
compliance of a party may call for the relaxation of the rules of
procedure. When the CA dismisses a petition outright and the
petitioner files a motion for the reconsideration of such dismissal,
appending thereto the requisite pleadings, documents or
order/resolution, this would constitute substantial compliance with
the Revised Rules of Court.
Same; Same; There is no compelling need to attach the position
papers of the parties where the Decisions of the MeTC and RTC
already stated their respective arguments.—On the necessity of
attaching position papers and affidavits of witnesses, Section 2 of
Rule 42 of the Revised Rules of Court requires attachments if these
would support the allegations of the petition. In the present case,
there was no compelling need to attach the position papers of the
parties since the Decisions of the MeTC and RTC already stated their
respective arguments. As to the affidavits, the Court notes that they
were presented by the respondent as part of the testimony of his
witness Fire Investigator Pinca and therefore would not support the
allegations of the petitioner.
Same; Same; What should guide judicial action is that a party
litigant is given the fullest opportunity to establish the merits of his
action or defense rather than for him to lose life, honor or property on
mere technicalities.—Truly, in dismissing the petition for review, the
CA had committed grave abuse of discretion amounting to lack of
jurisdiction in putting a premium on technicalities at the expense of
a just resolution of the case. The Court’s pronouncement in Republic
of the Philippines v. Court of Appeals, 292 SCRA 243 (1998), is worth
echoing: “cases should be determined on the merits, after full
opportunity to all parties for ventilation of their causes and
defenses, rather than on technicality or some procedural
imperfections. In that way, the ends of justice would be better
served.” Thus, what should guide judicial action is that a party
litigant is given the fullest opportunity to establish the merits of his
action or defense rather than for him to lose life, honor or property
on mere technicalities.
Torts; Quasi-Delicts; Negligence; Fortuitous Events; Elements;A
party’s theory of fortuitous event is unavailing where the
circumstances show that the fire originated from leaking fumes from
the LPG stove and tank installed at a party’s fastfood stall and her
employees failed to prevent the fire from spreading and destroying the
other fastfood stalls.—Jurisprudence defines the elements of a
“fortuitous event” as follows: (a) the cause of the unforeseen and
unexpected occurrence must be independent of human will; (b) it
must be impossible to foresee the event which constitutes the caso
fortuito, or if it can be foreseen, it must be impossible to avoid; (c) the
occurrence must be such as to render it impossible for the debtor to
fulfill his obligation in a normal manner; and (d) the obligor must be
free from any participation in the aggravation of the injury resulting
to the creditor. Article 1174 of the Civil Code provides that no person
shall be responsible for a fortuitous event which could not be
foreseen, or which, though foreseen, was inevitable. In other words,
there must be an entire exclusion of human agency from the cause of
injury or loss. It is established by evidence that the fire originated
from leaking fumes from the LPG stove and tank installed at
petitioner’s fastfood stall and her employees failed to prevent the fire
from spreading and destroying the other fastfood stalls, including
respondent’s fastfood stall. Such circumstances do not support
petitioner’s theory of fortuitous event.
 Same; Same; Same; Same; Evidence; Bare allegations,
unsubstantiated by evidence, are not equivalent to proof.—Petitioner’s
bare allegation is far from sufficient proof for the Court to rule in her
favor. It is basic in the rule of evidence that bare allegations,
unsubstantiated by evidence, are not equivalent to proof. In short,
mere allegations are not evidence.
Same; Same; Same; Whenever an employee’s negligence causes
damage or injury to another, there instantly arises a presumption juris
tantum that the employer failed to exercise diligentissimi patris
families in the selection (culpa in eligiendo) or supervision (culpa in
vigilando) of its employees.—Whenever an employee’s negligence
causes damage or injury to another, there instantly arises a
presumption juris tantum that the employer failed to
exercise diligentissimi patris families in the selection (culpa in
eligiendo) or supervision (culpa in vigilando) of its employees. To
avoid liability for a quasi-delict committed by his employee, an
employer must overcome the presumption by presenting convincing
proof that he exercised the care and diligence of a good father of a
family in the selection and supervision of his employee.
Appeals; Pleadings and Practice; It is well-settled that a party
who does not appeal from the decision may not obtain any affirmative
relief from the appellate court other than what he has obtained from
the lower court, if any, whose decision is brought up on appeal;
Exceptions.—As to the award of temperate damages, the increase in
the amount thereof by the RTC is improper. The RTC could no longer
examine the amounts awarded by the MeTC since respondent did not
appeal from the Decision of the MeTC. It is well-settled that a party
who does not appeal from the decision may not obtain any
affirmative relief from the appellate court other than what he has
obtained from the lower court, if any, whose decision is brought up
on appeal. While there are exceptions to this rule, such as if they
involve (1) errors affecting the lower court’s jurisdiction over the
subject matter, (2) plain errors not specified, and (3) clerical errors,
none apply here.
THIRD DIVISION
G.R. NO. 146224 January 26, 2007
VIRGINIA REAL, Petitioner,
vs.
SISENANDO H. BELO, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari under Rule 45 of
the Revised Rules of Court assailing the Resolution1 dated June 16, 2000
of the Court of Appeals (CA) which dismissed outright the petition for
review of Virginia Real (petitioner) in CA-G.R. SP No. 58799, and the CA
Resolution2 dated November 27, 2000 which denied her Motion for
Reconsideration.
The facts of the case:
Petitioner owned and operated the Wasabe Fastfood stall located at the
Food Center of the Philippine Women's University (PWU) along Taft
Avenue, Malate, Manila. Sisenando H. Belo (respondent) owned and
operated the BS Masters fastfood stall, also located at the Food Center of
PWU.
Around 7:00 o'clock in the morning of January 25, 1996, a fire broke out
at petitioner's Wasabe Fastfood stall. The fire spread and gutted other
fastfood stalls in the area, including respondent's stall. An investigation
on the cause of the fire by Fire Investigator SFO1 Arnel C. Pinca (Pinca)
revealed that the fire broke out due to the leaking fumes coming from the
Liquefied Petroleum Gas (LPG) stove and tank installed at petitioner's
stall. For the loss of his fastfood stall due to the fire, respondent
demanded compensation from petitioner. However, petitioner refused to
accede to respondent's demand.
Hence, respondent filed a complaint for damages against petitioner
before the Metropolitan Trial Court, Branch 24, Manila (MeTC),
docketed as Civil Case No. 152822.3 Respondent alleged that petitioner
failed to exercise due diligence in the upkeep and maintenance of her
cooking equipments, as well as the selection and supervision of her
employees; that petitioner's negligence was the proximate cause of the
fire that gutted the fastfood stalls.4
In her Answer dated September 23, 1996, petitioner denied liability on
the grounds that the fire was a fortuitous event and that she exercised
due diligence in the selection and supervision of her employees. 5
After trial, the MeTC rendered its Decision6 dated April 5, 1999 in favor
of the respondent, the dispositive portion of which reads:
WHEREFORE, in light of the foregoing, judgment is hereby rendered in
favor of the plaintiff and against the defendant ordering the latter:
1) To pay the plaintiff the sum of P50,000.00 representing
temperate or moderate damages; and
2) To pay the plaintiff the sum of P25,000.00 as and for
attorney's fees and litigation expenses.
The counterclaim filed by the defendant is hereby DENIED FOR LACK
OF MERIT.
SO ORDERED.7
The MeTC held that the investigation conducted by the appropriate
authority revealed that the fire broke out due to the leaking fumes
coming from the LPG stove and tank installed at petitioner's fastfood
stall; that factual circumstances did not show any sign of interference by
any force of nature to infer that the fire occurred due to fortuitous event;
that the petitioner failed to exercise due diligence, precaution, and
vigilance in the conduct of her business, particularly, in maintaining the
safety of her cooking equipment as well as in the selection and
supervision of her employees; that even if petitioner passes the fault to
her employees, Article 2180 of the Civil Code finds application; that in
the absence of supporting evidence, the amount of actual damages and
unrealized profits prayed for by respondent cannot be granted; that,
nonetheless, respondent is entitled to temperate damages since
respondent sustained pecuniary loss, though its true value cannot, from
the very nature of the case, be proved with certainty.
Dissatisfied, petitioner filed an appeal with the Regional Trial Court,
Branch 43, Manila (RTC), docketed as Civil Case No. 99-94606, insisting
that the fire was a fortuitous event. On November 26, 1999, the RTC
affirmed the Decision of the MeTC but increased the amount of
temperate damages awarded to the respondent from P50,000.00
to P80,000.00.8
Petitioner filed a Motion for Reconsideration contending that the
increase in the award of temperate damages is unreasonable since she
also incurred losses from the fire.
In its Order dated April 12, 2000, the RTC denied petitioner's Motion for
Reconsideration holding that it cannot disregard evidence showing that
the fire originated from petitioner's fastfood stall; that the increased
amount of temperate damages awarded to respondent is not a full
compensation but only a fair approximate of what he lost due to the
negligence of petitioner's workers.9
Petitioner then filed a Petition for Review with the CA, docketed as CA-
G.R. SP No. 58799.10 On June 16, 2000, the CA issued a Resolution
dismissing the petition for being "procedurally flawed/deficient." 11 The
CA held that the attached RTC Decision was not certified as a true copy
by the Clerk of Court; that a certified true copy of the MeTC Decision
was not attached; that material portions of the record, such as the
position papers of the parties and affidavits of witnesses, as would
support the material allegations of the petition were also not attached.12
On July 14, 2000, petitioner filed her Motion for
Reconsideration,13 attaching photocopies of the Decisions of the RTC and
MeTC as certified correct by the Clerk of Court.14
On November 27, 2000, the CA issued its Resolution denying petitioner's
Motion for Reconsideration.15
Hence, the present petition raising the following issues:
 1. Whether the submitted certified true copy of the appealed
decision of the Regional Trial Court as authenticated by a court
employee other than the Clerk of Court who was not around at
that time said copy was secured constitutes compliance with the
Rules?
2. Whether the submission of a certified true copy of the
Metropolitan Trial Court's judgment is still an indispensable
requirement in filing a petition for review before the Court of
Appeals despite the fact that said judgment was already
modified by the above decision of the Regional Trial Court and it
is the latter decision that is the proper subject of the petition for
review?
3. Whether the submission of copies of the respective position
papers of the contending parties is still an indispensable
requirement in filing a petition for review before the Court of
Appeals despite the fact that the contents thereof are already
quoted in the body of the verified petition and in the subject
judgment of the Metropolitan Trial Court?
4. Whether the herein petitioner could be held liable for
damages as a result of the fire that razed not only her own food
kiosk but also the adjacent foodstalls at the Food Center
premises of the Philippine Women's University, including that of
the respondent?
5. Whether the Regional Trial Court could increase the amount
of damages awarded by the Metropolitan Trial Court in favor of
the respondent who has not even filed an appeal therefrom?16
Petitioner submits that rules of procedure should not be applied in a very
harsh, inflexible and technically unreasonable sense.
While admitting that the RTC Decision and Order were not certified by
the Clerk of Court himself, petitioner insists that they were certified as
authentic copies by Administrative Officer IV Gregorio B. Paraon of the
RTC.
As to the MeTC Decision, petitioner contends that the submission of a
certified true copy thereof is not an indispensable requirement because
that judgment is not the subject of the petition for review.
In any case, petitioner submits that she had substantially complied with
the requirements of the rule when she attached with her Motion for
Reconsideration the copies of the Decisions of the RTC and MeTC as
certified correct by the Clerk of Court.
Anent the non-submission of the position papers of the parties, petitioner
maintains that the contents of said position papers were lengthily quoted
verbatim in the petition and in the attached copy of the MeTC Decision.
On the submission of affidavits of witnesses, petitioner contends that it
was not necessary because the case before the MeTC was not covered by
summary proceedings.
On the merits of her petition before the CA, petitioner avers that she
should not be held liable for a fire which was a fortuitous event since the
fire could not be foreseen and the spread of the fire to the adjacent
fastfood stalls was inevitable.
Lastly, she argues that the RTC cannot increase the amount of
temperate damages since the respondent did not appeal from the
judgment of the MeTC.
Respondent opted not to file a Comment, manifesting that the petition
contains no new arguments which would require a comment since the
arguments are but a rehash of those raised and decided by the lower
courts.17
The Court gave due course to the petition and required both parties to
submit their respective memoranda.18 In compliance therewith,
petitioner submitted her Memorandum.19 On the other hand, respondent
filed a Manifestation stating that since no new issues have been raised
by the petitioner in her petition and in order not to be redundant, he
adopts as his memorandum the memoranda he filed in the MeTC and the
RTC.20
In his Memoranda before the MeTC and RTC, respondent emphasized
the evidence he presented to establish his cause of action against
petitioner, principally the testimony of Fire Investigator SFO1 Arnel G.
Pinca stating that the fire originated from the LPG stove and tank in
petitioner's fastfood stall.
The requirements as to form and content of a petition for review of a
decision of the RTC are laid down in Section 2 of Rule 42 of the Revised
Rules of Court, thus:
Sec. 2. Form and contents. - The petition shall be filed in seven (7) legible
copies, with the original copy intended for the court being indicated as
such by the petitioner, and shall (a) state the full names of the parties to
the case, without impleading the lower courts or judges thereof either as
petitioners or respondents; (b) indicate the specific material dates
showing that it was filed on time; (c) set forth concisely a statement of
the matters involved, the issues raised, the specification of errors of fact
or law, or both, allegedly committed by the Regional Trial Court, and the
reasons or arguments relied upon for the allowance of the appeal; (d) be
accompanied by clearly legible duplicate originals or true copies of the
judgments or final orders of both lower courts, certified correct by the
clerk of court of the Regional Trial Court, the requisite number of plain
copies thereof and of the pleadings and other material portions of the
record as would support the allegations of the petition. (Emphasis
supplied)
xxxx
Under Section 3 of the same Rule, failure to comply with the above
requirements "shall be sufficient ground for the dismissal thereof."
However, Section 6, Rule 1 of the Revised Rules of Court also provides
that rules shall be liberally construed in order to promote their objective
of securing a just, speedy and inexpensive disposition of every action and
proceeding. Indeed, rules of procedure should be used to promote, not
frustrate justice.21
In the present case, petitioner's submission of copies of the RTC Decision
and Order certified as correct by the Administrative Officer IV of the
RTC is insufficient compliance with the requirements of the rule.
Petitioner failed to show that the Clerk of Court was officially on leave
and the Administrative Officer was officially designated as officer-in-
charge. The rule is explicit in its mandate that the legible duplicate
originals or true copies of the judgments or final orders of both lower
courts must be certified correct by the Clerk of Court.
Nonetheless, a strict application of the rule in this case is not called for.
This Court has ruled against the dismissal of appeals based solely on
technicalities in several cases, especially when the appellant had
substantially complied with the formal requirements.22 There is ample
jurisprudence holding that the subsequent and substantial compliance of
a party may call for the relaxation of the rules of procedure. 23 When the
CA dismisses a petition outright and the petitioner files a motion for the
reconsideration of such dismissal, appending thereto the requisite
pleadings, documents or order/resolution, this would constitute
substantial compliance with the Revised Rules of Court.24
Thus, in the present case, there was substantial compliance when
petitioner attached in her Motion for Reconsideration a photocopy of the
Decision of the RTC as certified correct by the Clerk of Court of the RTC.
In like manner, there was substantial compliance when petitioner
attached, in her Motion for Reconsideration, a photocopy of the Decision
of the MeTC as certified correct by the Clerk of Court of the RTC.
On the necessity of attaching position papers and affidavits of witnesses,
Section 2 of Rule 42 of the Revised Rules of Court requires attachments if
these would support the allegations of the petition.25 In the present case,
there was no compelling need to attach the position papers of the parties
since the Decisions of the MeTC and RTC already stated their respective
arguments. As to the affidavits, the Court notes that they were presented
by the respondent as part of the testimony of his witness Fire
Investigator Pinca and therefore would not support the allegations of the
petitioner.
Truly, in dismissing the petition for review, the CA had committed grave
abuse of discretion amounting to lack of jurisdiction in putting a
premium on technicalities at the expense of a just resolution of the case.
The Court's pronouncement in Republic of the Philippines v. Court of
Appeals26 is worth echoing: "cases should be determined on the merits,
after full opportunity to all parties for ventilation of their causes and
defenses, rather than on technicality or some procedural imperfections.
In that way, the ends of justice would be better served." 27 Thus, what
should guide judicial action is that a party litigant is given the fullest
opportunity to establish the merits of his action or defense rather than
for him to lose life, honor or property on mere technicalities. 28
The next most logical step would then be for the Court to simply set aside
the challenged resolutions, remand the case to the CA and direct the
latter to resolve on the merits of the petition in CA-G.R. SP No. 58799.
But, that would further delay the case. Considering the issues raised
which can be resolved on the basis of the pleadings and documents filed,
and the fact that petitioner herself has asked the Court to decide her
petition on the merits, the Court deems it more practical and in the
greater interest of justice not to remand the case to the CA but, instead,
to resolve the controversy once and for all.29
The Court shall now address the issue of whether the fire was a
fortuitous event.
Jurisprudence defines the elements of a "fortuitous event" as follows: (a)
the cause of the unforeseen and unexpected occurrence must be
independent of human will; (b) it must be impossible to foresee the event
which constitutes the caso fortuito, or if it can be foreseen, it must be
impossible to avoid; (c) the occurrence must be such as to render it
impossible for the debtor to fulfill his obligation in a normal manner; and
(d) the obligor must be free from any participation in the aggravation of
the injury resulting to the creditor. 30
Article 1174 of the Civil Code provides that no person shall be
responsible for a fortuitous event which could not be foreseen, or which,
though foreseen, was inevitable. In other words, there must be an entire
exclusion of human agency from the cause of injury or loss.31
It is established by evidence that the fire originated from leaking fumes
from the LPG stove and tank installed at petitioner's fastfood stall and
her employees failed to prevent the fire from spreading and destroying
the other fastfood stalls, including respondent's fastfood stall. Such
circumstances do not support petitioner's theory of fortuitous event.
Petitioner's bare allegation is far from sufficient proof for the Court to
rule in her favor. It is basic in the rule of evidence that bare allegations,
unsubstantiated by evidence, are not equivalent to proof.32 In short, mere
allegations are not evidence.33
The Civil Code provides:
Art. 2176. Whoever by act or omission causes damage to another, there
being fault or negligence, is obliged to pay for the damage done. x x x
Art. 2180. The obligation imposed by Article 2176 is demandable not only
for one's own acts or omissions, but also for those of persons for whom
one is responsible.
xxxx
The owners and managers of an establishment or enterprise are likewise
responsible for damages caused by their employees in the service of the
branches in which the latter are employed or on the occasion of their
functions.
Employers shall be liable for the damages caused by their employees and
household helpers acting within the scope of their assigned tasks, even
though the former are not engaged in any business or industry.
xxxx
The responsibility treated of in this article shall cease when the persons
herein mentioned prove that they observed all the diligence of a good
father of a family to prevent damage.
Whenever an employee's negligence causes damage or injury to another,
there instantly arises a presumption juris tantum that the employer
failed to exercise diligentissimi patris families in the selection (culpa in
eligiendo) or supervision (culpa in vigilando) of its employees.34 To avoid
liability for a quasi-delict committed by his employee, an employer must
overcome the presumption by presenting convincing proof that he
exercised the care and diligence of a good father of a family in the
selection and supervision of his employee.35
In this case, petitioner not only failed to show that she submitted proof
that the LPG stove and tank in her fastfood stall were maintained in
good condition and periodically checked for defects but she also failed to
submit proof that she exercised the diligence of a good father of a family
in the selection and supervision of her employees. For failing to prove
care and diligence in the maintenance of her cooking equipment and in
the selection and supervision of her employees, the necessary inference
was that petitioner had been negligent.36

As to the award of temperate damages, the increase in the amount

thereof by the RTC is improper. The RTC could no longer examine the
amounts awarded by the MeTC since respondent did not appeal from the
Decision of the MeTC.37 It is well-settled that a party who does not
appeal from the decision may not obtain any affirmative relief from the
appellate court other than what he has obtained from the lower court, if
any, whose decision is brought up on appeal.38 While there are exceptions
to this rule, such as if they involve (1) errors affecting the lower court's
jurisdiction over the subject matter, (2) plain errors not specified, and (3)
clerical errors,39 none apply here.

WHEREFORE, the petition is GRANTED. The assailed Resolutions

dated June 16, 2000 and November 27, 2000 of the Court of Appeals
are REVERSED and SET ASIDE. The Decision dated November 26,
1999 of the Regional Trial Court, Branch 43, Manila
is AFFIRMED with MODIFICATION that the temperate damages
awarded is reduced from P80,000.00 to P50,000.00 as awarded by the
Metropolitan Trial Court, Branch 24, Manila in its Decision dated April
5, 1999.

No costs.

SO ORDERED.

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice
Actions; Compromise Agreements.—The Compromise Agreement dated On February 28, 1994, Mondragon International Philippines, Inc. (MIPI),
June 28, 1999 executed by Mondragon and CDC, not being contrary to Mondragon Securities Corporation (MSC) and herein petitioner entered
law, morals, good customs, and public order and public policy is hereby into a lease agreement with the Clark Development Corporation (CDC)
NOTED. for the development of what is now known as the Mimosa Leisure Estate.

To help finance the project, petitioner, on June 30, 1997, entered into an
FIRST DIVISION Omnibus Loan and Security Agreement[3] (hereafter Omnibus
Agreement) with respondent banks for a syndicated term loan in the
MONDRAGON LEISURE AND G.R. No. 154188 aggregate principal amount of US$20M. Under the agreement, as
RESORTS CORPORATION, amended on January 19, 1999,[4] the proceeds of the loan were to be
Petitioner, Present: released through advances evidenced by promissory notes to be executed
Davide, Jr., C.J., by petitioner in favor of each lender-bank, and to be paid within a six-
(Chairman), year period from the date of initial advance inclusive of a one year and
Quisumbing, two quarters grace period.
- versus - Ynares-Santiago,
Carpio, and To secure the repayment of the loan, petitioner pledged in favor of
Azcuna, JJ. respondents US$20M worth of MIPI shares of stocks; assigned,
transferred and delivered all rights, title to and interest in the pledged
shares; and assigned by way of security its leasehold rights over the
COURT OF APPEALS, ASIAN project and all the rights, title, interests and benefits in, to and under
BANK CORPORATION, FAR any and all agreements in connection with the project.
EAST BANK AND TRUST Promulgated:
COMPANY, and UNITED On July 3, 1997, petitioner fully availed of and received the full amount
COCONUT PLANTERS BANK, June 15, 2005 of the syndicated loan agreement. Petitioner, which had regularly paid
Respondents. the monthly interests due on the promissory notes until October 1998,
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x thereafter failed to make payments. Consequently, on January 6
and February 5, 1999, written notices of default, acceleration of payment
DECISION and demand letters were sent by the lenders to the petitioner. Then
on August 27, 1999, respondents filed a complaint, docketed as Civil
Case No. 9527, for the foreclosure of leasehold rights against petitioner.
QUISUMBING, J.:
Petitioner moved for the dismissal of the complaint on the following
grounds: (1) a condition precedent for the filing of the complaint has not
been complied with and/or the instant complaint failed to state a cause of
In its Decision[1] dated March 12, 2002, the Court of Appeals in CA-G.R.
action, or otherwise the filing was premature; (2) the certification of non-
SP No. 61047 dismissed the petition for certiorari filed by Mondragon
forum shopping appended to the complaint was fatally defective since
Leisure and Resorts Corporation against the Order[2]dated March 9,
one of the plaintiffs, UCPB, deliberately failed to mention that it had
2000, of the Regional Trial Court of Angeles City, Branch 61, in Civil
previously filed another complaint; and (3) plaintiffs had engaged in
Case No. 9527. Likewise, in its Resolution dated July 3, 2002, the CA
forum shopping in filing the instant complaint.
denied the motion for reconsideration.
The trial court denied the motion and ruled as follows:
The facts of the case are undisputed.
...
 After a careful study of the arguments of the parties, THE RESPONDENT-APPELLEE COURT OF
this court finds that the motion to dismiss is without APPEALS COMMITTED A SERIOUS ERROR OF
merit. As correctly pointed out by the plaintiffs under LAW AND ACTED WITH GRAVE ABUSE OF
par. 6.01, the borrower defaults when interests due at DISCRETION AMOUNTING TO LACK OR EXCESS
stated maturity are not paid and the lenders are OF JURISDICTION IN RULING THAT THE
authorized to accelerate any amount payable under the COMPLAINT IN CIVIL CASE NO. 9527 COMPLIED
loan agreements. One of the consequences of such WITH THE MANDATORY REQUIREMENTS OF
default is the foreclosure of collaterals. This is the CERTIFICATION OF NON-FORUM SHOPPING.
action taken by the herein plaintiffs-lenders.
II
This court also finds the alleged force majeure baseless.
THE RESPONDENT-APPELLEE COURT OF
The same are not those provided for under Sec. 1,
APPEALS COMMITTED A SERIOUS ERROR OF
Article 41 of the loan agreement.
LAW AND ACTED WITH GRAVE ABUSE OF
As to the allegation of forum shopping, the herein DISCRETION AMOUNTING TO LACK OR EXCESS
parties Asian Bank Corporation and Far East Bank and OF JURISDICTION IN NOT RULING THAT A
Trust Company are not parties to this case in 9510 (sic). CONDITION PRECEDENT FOR THE FILING OF
The subject matter of Civil Case No. 9527 is not the THE COMPLAINT IN CIVIL CASE NO. 9527 HAS
same with the subject matter in Civil Case No. 9510. NOT BEEN COMPLIED WITH, OR THAT IT IS
OTHERWISE PREMATURE, AND/OR THAT IT FAILS
Wherefore, premises considered, the motion to dismiss TO STATE A CAUSE OF ACTION AGAINST
is denied. The defendant is given 15 days from receipt PETITIONER-APPELLANT.
hereof within which to file its answer and/or responsive
pleading.

SO ORDERED.[5] III
THE RESPONDENT-APPELLEE COURT OF
APPEALS COMMITTED A SERIOUS ERROR OF
Petitioner moved for the reconsideration of the order and argued that the LAW AND ACTED WITH GRAVE ABUSE OF
complaint is premature, since it had not been validly declared in DISCRETION AMOUNTING TO LACK OR EXCESS
default.[6] The trial court denied the motion for reconsideration. OF JURISDICTION IN NOT RULING THAT
Seasonably, petitioner filed a special civil action for certiorari with the RESPONDENT-APPELLEE BANKS, IN FILING THE
Court of Appeals. COMPLAINT IN CIVIL CASE NO. 9527,
DELIBERATELY ENGAGED IN FORUM
Before the appellate court, petitioner reiterated its arguments in its SHOPPING.[9]
motion to dismiss before the trial court, including the failure of the
respondents to attach the board resolutions authorizing them to file the
complaint.[7] In brief, three issues are presented for resolution, namely, (1) Was the
certificate of non-forum shopping defective? (2) Did respondents engage
The Court of Appeals dismissed the petition and denied the subsequent in forum shopping? and (3) Do respondents have a cause of action against
motion for reconsideration. Hence, this appeal by certiorari [8] imputing the petitioner?
the following errors:
I
On the first issue, petitioner asserts that the verification and certificate
of forum shopping were defective because there was no proof as to the
authority of the signatories to file the complaint. Petitioner avers that
UCPB Resolution 48-87, which was only presented in the Court of
Appeals, merely authorized the signatory to appear, act for, or otherwise
represent the bank in all judicial, quasi-judicial or administrative
hearings or incidents, including pre-trial conference, and in connection
therewith, to do any and all of the following acts and deeds and clearly
pertains to a pending proceeding.
Respondents, on the other hand, contend that the lack of authority of the
persons who verified and certified the complaint was neither raised in
the motion to dismiss nor in the motion for reconsideration of the
petitioner. They aver that the verification and certification of non-forum
shopping contained a statement by the persons who signed it that they
had been so authorized by the board of directors of their respective
corporations.
Considering the submissions of the parties, we are constrained to agree
with the respondents contention. The trial court did not err in denying
the motion to dismiss. The issue concerning the signatories authorization
was never raised before it. Likewise, the appellate court did not err in
refusing to take cognizance of the issue, since the parties did not raise it
beforehand. Issues not raised in the trial court cannot be raised for the
first time on appeal.[10]
On the second issue, petitioner claims that respondent UCPB engaged in
forum shopping since it earlier instituted an action for foreclosure of
mortgage and/or collection, docketed as Civil Case No. 9510. [11] This
claim, in our view, is untenable. A comparison of the two complaints
would show its utter lack of merit.
Civil Case No. 9510 pertains to an Omnibus Credit and Security
Agreement executed by and between the petitioner and respondent
UCPB on November 23, 1995. This is separate and distinct from the
Omnibus Agreement involved in Civil Case No. 9527. Moreover,
respondents Asian Bank and Far East Bank are not among the parties to
Civil Case No. 9510.
As pointed out by the Court of Appeals, forum shopping exists when both
actions involve the same transactions, with the same essential facts and
circumstances; and where identical causes of actions, subject matter and
issues are raised. The test to determine the existence of forum shopping
is whether the elements of litis pendentia are present, or whether a final
judgment in one case will amount to res judicata in another.[12] The
requisites in order that an action may be dismissed on the ground of litis
pendentia are (a) the identity of parties, or at least such as representing
the same interest in both actions; (b) the identity of rights asserted and
relief prayed for, the relief being founded on the same facts; and (c) the
identity of the two cases such that judgment in one, regardless of which
party is successful, would amount to res judicata in the other.[13] Such
requisites are not present in this controversy.
Apropos the third issue, petitioner contends the subject obligation of the
instant case is not yet due and demandable because the Omnibus
Agreement allows a full six-year term of payment. Even if it failed to pay
some installments, petitioner insists it is not in default because
respondents merely sent collection and demand letters, but failed to give
the written notice of default required under their agreement. Moreover,
petitioner avers that the provisions on default in the Omnibus
Agreement have been rendered inapplicable and unenforceable by
fortuitous events, namely the Asian economic crisis and the closure of the
Mimosa Regency Casino, which was petitioners primary source of
revenues.
Respondents counter that the Omnibus Agreement defines, as an event
of default, the failure of petitioner to pay when due at stated maturity,
by acceleration or otherwise, any amount payable under the loan
documents. Since petitioner is also required to pay interest, respondents
posit that non-payment thereof constituted a clear and unmistakable
case of default. Respondents add that they had properly advised the
petitioner that it had been declared in default, referring to the January 6
and February 5, 1999 letters as their compliance with the notice
requirement.
On this issue, we are unable to agree with the petitioner.
Section 2.06 (a) of Part B of the Omnibus Agreement provides that the
borrower shall pay interest on the advances outstanding from time to
time on each interest payment date, while Section 6 of Part A reads
6.01 Events of Default
Each of the following events shall constitute an Event of
Default under this Omnibus Agreement:
(a) Payment Default The BORROWER defaults in the
payment when due at stated maturity, by
acceleration or otherwise, of any amount
payable under the Loan Documents.[14]
 ...
Clearly, under the foregoing provisions of the Agreement, petitioner may
be validly declared in default for failure to pay the interest. As a
consequence of default, the unpaid amount shall earn default
interest,[15] and the respondent-banks have four alternative remedies
without prejudice to the application of the provisions on collaterals and
any other steps or action which may be adopted by the majority
lender.[16]
The four remedies are alternative, with the right of choice given to the
lenders, in this case the respondents. Under Article 1201 of the Civil
Code, the choice shall produce no effect except from the time it has been
communicated. This is the reason why a written notice is required under
Section 6.02 of the Omnibus Agreement.
In the present case, we find that written notices were sent to the
petitioner by the respondents. The notices clearly indicate respondents
choice of remedy: to accelerate all payments payable under the loan
agreement. On January 6, 1999, respondents notified petitioner that it
was in default, and demanded payment of the stated amount within five
days from receipt of the letter, otherwise all outstanding availments of
the US$20M term loan together with interests and other sum payable
shall be declared due and demandable.[17] The letter clearly indicated the
choice of remedy by the respondents, pursuant to the Omnibus
Agreement.
Even though subsequent demand is waived by the petitioner in Section
6.02 of Part B of the Omnibus Agreement, on February 5, 1999, the
respondents nevertheless actually made their demand in writing for the
payment of the principal plus interest and penalty charges due on or
before February 28, 1999, with express notice that they would take all
legal remedies available to protect the interests of their
clients.[18] Clearly, respondents have more than complied with the
requirement concerning notice to the petitioner.
It should be noted that the agreement also provides that the choice of
remedy is without prejudice to the action on the collaterals. Thus,
respondents could properly file an action for foreclosure of the leasehold
rights to obtain payment for the amount demanded.
Petitioners claim, that the respondents could not be held in default
because of a fortuitous event, is untenable. Said event, the Asian
financial crisis of 1997, is not among the fortuitous events contemplated
under Article 1174[19] of the Civil Code. To exempt the obligor from
liability for a breach of an obligation by reason of a fortuitous event, the
following requisites must concur: (a) the cause of the breach of the
obligation must be independent of the will of the debtor; (b) the event
must be either unforeseeable or unavoidable; (c) the event must be such
as to render it impossible for the debtor to fulfill his obligation in a
normal manner; and (d) the debtor must be free from any participation
in, or aggravation of the injury to the creditor.[20]
As pointed out by the respondents, the loan agreement was entered into
on June 30, 1997, or when the Asian economic crisis had already started.
Petitioner, as a long established corporation, should have been well
aware of the economic environment at that time, yet it still took the risk
to expand operations. Likewise, the closure of the Mimosa Regency
Casino was not an unforeseeable or unavoidable event, in the context of
the contract of lease between petitioner and CDC. Every business
venture involves risks. Risks are not unforeseeable; they are inherent in
business.
Worthy of note, risk is an exception to the general rule on fortuitous
events. Under the law, these exceptions are: (1) when the law expressly
so specifies; (2) when it is otherwise declared by the parties; and (3) when
the nature of the obligation requires the assumption of risks.[21] We find
that in the Omnibus Agreement, the parties expressly agreed that any
enactment, official action, act of war, act of nature or other force
majeure or other similar circumstances shall in no way affect the
obligation of the borrowers to make payments.[22]
In sum, the appellate court did not err in dismissing petitioners action
for certiorari and in denying the motion for reconsideration. It committed
no reversible error, much less any grave abuse of discretion amounting to
lack or excess of jurisdiction, contrary to petitioners contentions.
WHEREFORE, the appeal is DENIED for lack of merit. The Decision
dated March 12, 2002 and the Resolution dated July 3, 2002 of the Court
of Appeals in CA-G.R. SP No. 61047 are hereby AFFIRMED.
Costs against petitioner.
SO ORDERED.
 Common Carriers; Obligations; Presumption of Fault; When the
goods shipped either are lost or arrive in damaged condition, a
presumption arises against the carrier of its failure to observe that
requisite diligence, and there need not be an express finding of
negligence to hold it liable.—The common carrier’s duty to observe
the requisite diligence in the shipment of goods lasts from the time
the articles are surrendered to or unconditionally placed in the
possession of, and received by, the carrier for transportation until
delivered to, or until the lapse of a reasonable time for their
acceptance by, the person entitled to receive them (Arts. 1736-1738,
Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs.
Dollar Steamship Lines, 52 Phil. 863). When the goods shipped
either are lost or arrive in damaged condition, a presumption arises
against the carrier of its failure to observe that diligence, and there
need not be an express finding of negligence to hold it liable (Art.
1735, Civil Code; Philippine National Railways vs. Court of Appeals,
139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA
365). There are, of course, exceptional cases when such presumption
of fault is not observed but these cases, enumerated in Article 1734
of the Civil Code, are exclusive, not one of which can be applied to
this case.
Same; Same; Arrastre Operator; Carrier and arrastre operator
liable in solidum for the proper delivery of the goods to the
consignee.—The question of charging both the carrier and the
arrastre operator with the obligation of properly delivering the goods
to the consignee has, too, been passed upon by the Court. In
Fireman’s Fund Insurance Co. vs. Metro Port Service, Inc. (182 SCRA
455), we have explained, in holding the carrier and the arrastre
operator liable in solidum, thus: “The legal relationship between the
consignee and the arrastre operator is akin to that of a depositor and
warehouseman (Lua Kian v. Manila Railroad Co., et al., 19 SCRA 5
[1967]. The relationship between the consignee and the common
carrier is similar to that of the consignee and the arrastre operator
(Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]).
Since it is the duty of the ARRASTRE to take good care of the goods
that are in its custody and to deliver them in good condition to the
consignee, such responsibility also devolves upon the CARRIER.
Both the ARRASTRE and the CARRIER are therefore charged with
the obligation to deliver the goods in good condition to the
consignee.”
Same; Same; Same; The Supreme Court is not implying, however,
that the arrastre operator and the customs broker are themselves
always and necessarily liable solidarily with the carrier, or vice-versa,
nor that attendant facts in a given case may not vary the rule.—We do
not, of course, imply by the above pronouncement that the arrastre
operator and the customs broker are themselves always and
necessarily liable solidarily with the carrier, or vice-versa, nor that
attendant facts in a given case may not vary the rule. The instant
petition has been brought solely by Eastern Shipping Lines which,
being the carrier and not having been able to rebut the presumption
of fault, is, in any event, to be held liable in this particular case. A
factual finding of both the court a quo and the appellate court, we
take note, is that “there is sufficient evidence that the shipment
sustained damage while in the successive possession of appellants”
(the herein petitioner among them). Accordingly, the liability imposed
on Eastern Shipping Lines, Inc., the sole petitioner in this case, is
inevitable regardless of whether there are others solidarily liable with
it.
Damages; Interest Rates; Rules of thumb for future guidance in
the award of damages and interest rates.—The ostensible discord is
not difficult to explain. The factual circumstances may have called
for different applications, guided by the rule that the courts are
vested with discretion, depending on the equities of each case, on the
award of interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of
thumb for future guidance.
Same; Same; Same; When an obligation is breached, the
contravenor can be held liable for damages.—When an obligation,
regardless of its source, i.e., law, contracts, quasi-contracts, delicts
or quasi-delicts is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on “Damages” of the Civil
Code govern in determining the measure of recoverable damages.
Same; Same; Same; Interests in the Concept of Actual and
Compensatory Damages; In a loan or forbearance of money, the
interest due should be that stipulated in writing, and in the absence
thereof, the rate shall be 12% per annum.—With regard particularly to
an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows: 1. When the obligation is breached, and it
consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due shall Republic of the Philippines
itself earn legal interest from the time it is judicially demanded. In SUPREME COURT
the absence of stipulation, the rate of interest shall be 12% per Manila
annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article
EN BANC
1169 of the Civil Code.

Same; Same; Same; Same; In case of other obligations, the

interest on the amount of damages may be imposed at the discretion
of the court at the rate of 6% per annum.—When an obligation, not G.R. No. 97412 July 12, 1994
constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion
EASTERN SHIPPING LINES, INC., petitioner,
of the court at the rate of 6% per annum. No interest, however, shall
vs.
be adjudged on unliquidated claims or damages except when or until
HON. COURT OF APPEALS AND MERCANTILE INSURANCE
the demand can be established with reasonable certainty.
COMPANY, INC., respondents.
Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is
made judicially or extrajudicially (Art. 1169, Civil Code) but when Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date Zapa Law Office for private respondent.
the judgment of the court is made (at which time the quantification
of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
VITUG, J.:
Same; Same; Same; Same; When the judgment of the court
awarding a sum of money becomes final and executory, the rate of The issues, albeit not completely novel, are: (a) whether or not a claim for
legal interest shall be 12% per annum from such finality until its damage sustained on a shipment of goods can be a solidary, or joint and
satisfaction, this interim period being deemed to be by then an several, liability of the common carrier, the arrastre operator and the
equivalent to a forbearance of credit.—When the judgment of the customs broker; (b) whether the payment of legal interest on an award
court awarding a sum of money becomes final and executory, the for loss or damage is to be computed from the time the complaint is filed
rate of legal interest, whether the case falls under paragraph 1 or
or from the date the decision appealed from is rendered; and (c) whether
paragraph 2, above, shall be 12% per annum from such finality until
the applicable rate of interest, referred to above, is twelve percent (12%)
its satisfaction, this interim period being deemed to be by then an
or six percent (6%).
equivalent to a forbearance of credit.

The findings of the court a quo, adopted by the Court of Appeals, on the
antecedent and undisputed facts that have led to the controversy are
hereunder reproduced:

This is an action against defendants shipping company,

arrastre operator and broker-forwarder for damages
sustained by a shipment while in defendants' custody,
filed by the insurer-subrogee who paid the consignee
the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin
were shipped from Yokohama, Japan for delivery vessel
"SS EASTERN COMET" owned by defendant Eastern
Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under
plaintiff's Marine Insurance Policy No. 81/01177 for
P36,382,466.38.
Upon arrival of the shipment in Manila on December
12, 1981, it was discharged unto the custody of
defendant Metro Port Service, Inc. The latter excepted
to one drum, said to be in bad order, which damage was
unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage
Corporation received the shipment from defendant
Metro Port Service, Inc., one drum opened and without
seal (per "Request for Bad Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage
Corporation made deliveries of the shipment to the
consignee's warehouse. The latter excepted to one drum
which contained spillages, while the rest of the contents
was adulterated/fake (per "Bad Order Waybill" No.
10649, Exh. E).
Plaintiff contended that due to the losses/damage
sustained by said drum, the consignee suffered losses
totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against defendants
who failed and refused to pay the same (Exhs. H, I, J,
K, L).
As a consequence of the losses sustained, plaintiff was
compelled to pay the consignee P19,032.95 under the
aforestated marine insurance policy, so that it became
subrogated to all the rights of action of said consignee
against defendants (per "Form of Subrogation",
"Release" and Philbanking check, Exhs. M, N, and O).
(pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts.
Here, the appellate court said:
Defendants filed their respective answers, traversing
the material allegations of the complaint contending
that: As for defendant Eastern Shipping it alleged that
the shipment was discharged in good order from the
vessel unto the custody of Metro Port Service so that
any damage/losses incurred after the shipment was
incurred after the shipment was turned over to the
latter, is no longer its liability (p. 17, Record);
Metroport averred that although subject shipment was
discharged unto its custody, portion of the same was
already in bad order (p. 11, Record); Allied Brokerage
alleged that plaintiff has no cause of action against it,
not having negligent or at fault for the shipment was
already in damage and bad order condition when
received by it, but nonetheless, it still exercised extra
ordinary care and diligence in the handling/delivery of
the cargo to consignee in the same condition shipment
was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment
sustained losses/damages;
2. Whether or not these
losses/damages were sustained while
in the custody of defendants (in whose
respective custody, if determinable);
3. Whether or not defendant(s) should
be held liable for the losses/damages
(see plaintiff's pre-Trial Brief, Records,
p. 34; Allied's pre-Trial Brief, adopting
plaintiff's Records, p. 38).
As to the first issue, there can be no
doubt that the shipment sustained
losses/damages. The two drums were
shipped in good order and condition,
as clearly shown by the Bill of Lading
and Commercial Invoice which do not
indicate any damages drum that was
shipped (Exhs. B and C). But when on
December 12, 1981 the shipment was
delivered to defendant Metro Port
Service, Inc., it excepted to one drum
in bad order.
Correspondingly, as to the second
issue, it follows that the
losses/damages were sustained while
in the respective and/or successive
custody and possession of defendants
carrier (Eastern), arrastre operator
(Metro Port) and broker (Allied
Brokerage). This becomes evident
when the Marine Cargo Survey Report
(Exh. G), with its "Additional Survey
Notes", are considered. In the latter
notes, it is stated that when the
shipment was "landed on vessel" to
dock of Pier # 15, South Harbor,
Manila on December 12, 1981, it was
observed that "one (1) fiber drum (was)
in damaged condition, covered by the
vessel's Agent's Bad Order Tally Sheet
No. 86427." The report further states
that when defendant Allied Brokerage
withdrew the shipment from
defendant arrastre operator's custody
on January 7, 1982, one drum was
found opened without seal, cello bag
partly torn but contents intact. Net
unrecovered spillages was
15 kgs. The report went on to state
that when the drums reached the
consignee, one drum was found with
adulterated/faked contents. It is
obvious, therefore, that these
losses/damages occurred before the
shipment reached the consignee while
under the successive custodies of
defendants. Under Art. 1737 of the
New Civil Code, the common carrier's
duty to observe extraordinary
diligence in the vigilance of goods
remains in full force and effect even if
the goods are temporarily unloaded
and stored in transit in the warehouse
of the carrier at the place of
destination, until the consignee has
been advised and has had reasonable
opportunity to remove or dispose of
the goods (Art. 1738, NCC). Defendant
Eastern Shipping's own exhibit, the
"Turn-Over Survey of Bad Order
Cargoes" (Exhs. 3-Eastern) states that
on December 12, 1981 one drum was
found "open".
and thus held:
WHEREFORE, PREMISES
CONSIDERED, judgment is hereby
rendered:
A. Ordering defendants to pay plaintiff, jointly and
severally:
1. The amount of P19,032.95, with the
present legal interest of 12% per
annum from October 1, 1982, the date
of filing of this complaints, until fully
paid (the liability of defendant
Eastern Shipping, Inc. shall not
exceed US$500 per case or the CIF
 value of the loss, whichever is lesser,
while the liability of defendant Metro
Port Service, Inc. shall be to the extent
of the actual invoice value of each
package, crate box or container in no
case to exceed P5,000.00 each,
pursuant to Section 6.01 of the
Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the
counterclaims and
crossclaim of
defendant/cross-
claimant Allied
Brokerage
Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We
find that the conclusion drawn therefrom is correct. As
there is sufficient evidence that the shipment sustained
damage while in the successive possession of
appellants, and therefore they are liable to the appellee,
as subrogee for the amount it paid to the consignee. (pp.
87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier,
attributes error and grave abuse of discretion on the part of the appellate
court when —
I. IT HELD PETITIONER CARRIER JOINTLY AND
SEVERALLY LIABLE WITH THE ARRASTRE
OPERATOR AND CUSTOMS BROKER FOR THE
CLAIM OF PRIVATE RESPONDENT AS GRANTED
IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON
THE CLAIM OF PRIVATE RESPONDENT SHOULD
COMMENCE FROM THE DATE OF THE FILING OF
THE COMPLAINT AT THE RATE OF TWELVE
PERCENT PER ANNUM INSTEAD OF FROM THE
DATE OF THE DECISION OF THE TRIAL COURT
AND ONLY AT THE RATE OF SIX PERCENT PER
ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by
petitioner carrier are not all that novel. Indeed, we do have a fairly good
number of previous decisions this Court can merely tack to.
The common carrier's duty to observe the requisite diligence in the
shipment of goods lasts from the time the articles are surrendered to or
unconditionally placed in the possession of, and received by, the carrier
for transportation until delivered to, or until the lapse of a reasonable
time for their acceptance by, the person entitled to receive them (Arts.
1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui
Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped
either are lost or arrive in damaged condition, a presumption arises
against the carrier of its failure to observe that diligence, and there need
not be an express finding of negligence to hold it liable (Art. 1735, Civil
Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87;
Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of
course, exceptional cases when such presumption of fault is not observed
but these cases, enumerated in Article 17341 of the Civil Code, are
exclusive, not one of which can be applied to this case.
The question of charging both the carrier and the arrastre operator with
the obligation of properly delivering the goods to the consignee has, too,
been passed upon by the Court. In Fireman's Fund Insurance vs. Metro
Port Services (182 SCRA 455), we have explained, in holding the carrier
and the arrastre operator liable in solidum, thus:
The legal relationship between the consignee and the
arrastre operator is akin to that of a depositor and
warehouseman (Lua Kian v. Manila Railroad Co., 19
SCRA 5 [1967]. The relationship between the consignee
and the common carrier is similar to that of the
consignee and the arrastre operator (Northern Motors,
Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it
is the duty of the ARRASTRE to take good care of the
goods that are in its custody and to deliver them in good
condition to the consignee, such responsibility also
devolves upon the CARRIER. Both the ARRASTRE and
the CARRIER are therefore charged with the obligation
to deliver the goods in good condition to the consignee.
We do not, of course, imply by the above pronouncement that the
arrastre operator and the customs broker are themselves always and
necessarily liable solidarily with the carrier, or vice-versa, nor that
attendant facts in a given case may not vary the rule. The instant
petition has been brought solely by Eastern Shipping Lines, which, being
the carrier and not having been able to rebut the presumption of fault, is,
in any event, to be held liable in this particular case. A factual finding of
both the court a quo and the appellate court, we take note, is that "there
is sufficient evidence that the shipment sustained damage while in the
successive possession of appellants" (the herein petitioner among them).
Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the
sole petitioner in this case, is inevitable regardless of whether there are
others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that
deserves more than just a passing remark.
Let us first see a chronological recitation of the major rulings of this
Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service,2 decided3 on 15 May 1969, involved a suit for recovery of money
arising out of short deliveries and pilferage of goods. In this case, appellee
Malayan Insurance (the plaintiff in the lower court) averred in its
complaint that the total amount of its claim for the value of the
undelivered goods amounted to P3,947.20. This demand, however, was
neither established in its totality nor definitely ascertained. In the
stipulation of facts later entered into by the parties, in lieu of proof, the
amount of P1,447.51 was agreed upon. The trial court rendered judgment
ordering the appellants (defendants) Manila Port Service and Manila
Railroad Company to pay appellee Malayan Insurance the sum of
P1,447.51 with legal interest thereon from the date the complaint was
filed on 28 December 1962 until full payment thereof. The appellants then
assailed, inter alia, the award of legal interest. In sustaining the
appellants, this Court ruled:
Interest upon an obligation which calls for the payment
of money, absent a stipulation, is the legal rate. Such
interest normally is allowable from the date of demand,
judicial or extrajudicial. The trial court opted for
judicial demand as the starting point.
But then upon the provisions of Article 2213 of the Civil
Code, interest "cannot be recovered upon unliquidated
claims or damages, except when the demand can be
established with reasonable certainty." And as was held
by this Court in Rivera vs. Perez,4 L-6998, February 29,
1956, if the suit were for damages, "unliquidated and
not known until definitely ascertained, assessed and
determined by the courts after proof (Montilla
c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco
v. Guzman,
38 Phil. 302)," then, interest "should be from the date of
the decision." (Emphasis supplied)
The case of Reformina vs. Tomol,5 rendered on 11 October 1985, was for
"Recovery of Damages for Injury to Person and Loss of Property." After
trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of
the plaintiffs and third party defendants and against
the defendants and third party plaintiffs as follows:
 Ordering defendants and third party plaintiffs Shell
and Michael, Incorporated to pay jointly and severally
the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco
Reformina the sum of P131,084.00 which is the value of
the boat F B Pacita III together with its accessories,
fishing gear and equipment minus P80,000.00 which is
the value of the insurance recovered and the amount of
P10,000.00 a month as the estimated monthly loss
suffered by them as a result of the fire of May 6, 1969
up to the time they are actually paid or already the total
sum of P370,000.00 as of June 4, 1972 with legal
interest from the filing of the complaint until paid and
to pay attorney's fees of P5,000.00 with costs against
defendants and third party plaintiffs. (Emphasis
supplied.)
On appeal to the Court of Appeals, the latter modified the
amount of damages awarded but sustained the trial court in
adjudging legal interest from the filing of the complaint until
fully paid. When the appellate court's decision became final, the
case was remanded to the lower court for execution, and this
was when the trial court issued its assailed resolution which
applied the 6% interest per annum prescribed in Article 2209 of
the Civil Code. In their petition for review on certiorari, the
petitioners contended that Central Bank Circular
No. 416, providing thus —
By virtue of the authority granted to it under Section 1
of Act 2655, as amended, Monetary Board in its
Resolution No. 1622 dated July 29, 1974, has prescribed
that the rate of interest for the loan, or forbearance of
any money, goods, or credits and the rate allowed in
judgments, in the absence of express contract as to such
rate of interest, shall be twelve (12%) percent per
annum. This Circular shall take effect immediately.
(Emphasis found in the text) —
should have, instead, been applied. This Court6 ruled:
The judgments spoken of and referred to are judgments
in litigations involving loans or forbearance of any
money, goods or credits. Any other kind of monetary
judgment which has nothing to do with, nor involving
loans or forbearance of any money, goods or credits does
not fall within the coverage of the said law for it is not
within the ambit of the authority granted to the Central
Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to
be executed is one rendered in an Action for Damages
for injury to persons and loss of property and does not
involve any loan, much less forbearances of any money,
goods or credits. As correctly argued by the private
respondents, the law applicable to the said case is
Article 2209 of the New Civil Code which reads —
Art. 2209. — If the obligation consists
in the payment of a sum of money, and
the debtor incurs in delay, the
indemnity for damages, there being no
stipulation to the contrary, shall be
the payment of interest agreed upon,
and in the absence of stipulation, the
legal interest which is six percent per
annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc.,
v. Cruz,7 promulgated on 28 July 1986. The case was for damages
occasioned by an injury to person and loss of property. The trial court
awarded private respondent Pedro Manabat actual and compensatory
damages in the amount of P72,500.00 with legal interest thereon from the
filing of the complaint until fully paid. Relying on the Reformina
v. Tomol case, this Court8 modified the interest award from 12% to 6%
interest per annum but sustained the time computation thereof, i.e., from
the filing of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for
the recovery of damages arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the
petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the
legal rate from November 29, 1968, the date of the filing of the complaint
until full payment . . . ." Save from the modification of the amount
granted by the lower court, the Court of Appeals sustained the trial
court's decision. When taken to this Court for review, the case, on 03
October 1986, was decided, thus:
WHEREFORE, the decision appealed from is hereby
MODIFIED and considering the special and
environmental circumstances of this case, we deem it
reasonable to render a decision imposing, as We do
hereby impose, upon the defendant and the third-party
defendants (with the exception of Roman Ozaeta) a
solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar
Association of FIVE MILLION (P5,000,000.00) Pesos to
cover all damages (with the exception to attorney's fees)
occasioned by the loss of the building (including interest
charges and lost rentals) and an additional ONE
HUNDRED THOUSAND (P100,000.00) Pesos as and
for attorney's fees, the total sum being payable upon the
finality of this decision. Upon failure to pay on such
finality, twelve (12%) per cent interest per annum shall
be imposed upon aforementioned amounts from finality
until paid. Solidary costs against the defendant and
third-party defendants (Except Roman Ozaeta).
(Emphasis supplied)
A motion for reconsideration was filed by United Construction,
contending that "the interest of twelve (12%) per cent per
annum imposed on the total amount of the monetary award was
in contravention of law." The Court10 ruled out the applicability
of the Reformina and Philippine Rabbit Bus Lines cases and, in
its resolution of 15 April 1988, it explained:
There should be no dispute that the imposition of 12%
interest pursuant to Central Bank Circular No. 416 . . .
is applicable only in the following: (1) loans; (2)
forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of
refer to judgments involving loans or forbearance of any
money, goods or credits. (Philippine Rabbit Bus Lines
Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v.
Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the
instant case, there is neither a loan or a forbearance, but
then no interest is actually imposed provided the sums
referred to in the judgment are paid upon the finality of
the judgment. It is delay in the payment of such final
judgment, that will cause the imposition of the interest.
It will be noted that in the cases already adverted to,
the rate of interest is imposed on the total sum, from
the filing of the complaint until paid; in other words,
as part of the judgment for damages. Clearly, they are
not applicable to the instant case. (Emphasis supplied.)
The subsequent case of American Express International, Inc.,
vs. Intermediate Appellate Court11 was a petition for review
on certiorari from the decision, dated 27 February 1985, of the then
Intermediate Appellate Court reducing the amount of moral and
exemplary damages awarded by the trial court, to P240,000.00 and
P100,000.00, respectively, and its resolution, dated 29 April 1985,
restoring the amount of damages awarded by the trial court, i.e.,
P2,000,000.00 as moral damages and P400,000.00 as exemplary damages
with interest thereon at 12% per annum from notice of judgment, plus
costs of suit. In a decision of 09 November 1988, this Court, while
recognizing the right of the private respondent to recover damages, held
the award, however, for moral damages by the trial court, later sustained
by the IAC, to be inconceivably large. The Court12 thus set aside the
decision of the appellate court and rendered a new one, "ordering the
petitioner to pay private respondent the sum of One Hundred Thousand
(P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this
decision until paid. (Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo
v. Ruiz13 which arose from a breach of employment contract. For having
been illegally dismissed, the petitioner was awarded by the trial court
moral and exemplary damages without, however, providing any legal
interest thereon. When the decision was appealed to the Court of
Appeals, the latter held:
WHEREFORE, except as modified hereinabove the
decision of the CFI of Negros Oriental dated October 31,
1972 is affirmed in all respects, with the modification
that defendants-appellants, except defendant-appellant
Merton Munn, are ordered to pay, jointly and severally,
the amounts stated in the dispositive portion of the
decision, including the sum of P1,400.00 in concept of
compensatory damages, with interest at the legal rate
from the date of the filing of the complaint until fully
paid(Emphasis supplied.)
The petition for review to this Court was denied. The records
were thereupon transmitted to the trial court, and an entry of
judgment was made. The writ of execution issued by the trial
court directed that only compensatory damages should earn
interest at 6% per annum from the date of the filing of the
complaint. Ascribing grave abuse of discretion on the part of the
trial judge, a petition for certiorari assailed the said order. This
Court said:
. . . , it is to be noted that the Court of Appeals ordered
the payment of interest "at the legal rate" from the time
of the filing of the complaint. . . Said circular [Central
Bank Circular No. 416] does not apply to actions based
on a breach of employment contract like the case at bar.
(Emphasis supplied)
The Court reiterated that the 6% interest per annum on the
damages should be computed from the time the complaint was
filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the
matter. National Power Corporation vs. Angas,14decided on 08 May 1992,
involved the expropriation of certain parcels of land. After conducting a
hearing on the complaints for eminent domain, the trial court ordered the
petitioner to pay the private respondents certain sums of money as just
compensation for their lands so expropriated "with legal interest thereon .
. . until fully paid." Again, in applying the 6% legal interest per
annum under the Civil Code, the Court15 declared:
. . . , (T)he transaction involved is clearly not a loan or
forbearance of money, goods or credits but expropriation
of certain parcels of land for a public purpose, the
payment of which is without stipulation regarding
interest, and the interest adjudged by the trial court is
in the nature of indemnity for damages. The legal
interest required to be paid on the amount of just
compensation for the properties expropriated is
manifestly in the form of indemnity for damages for the
delay in the payment thereof. Therefore, since the kind
of interest involved in the joint judgment of the lower
court sought to be enforced in this case is interest by
way of damages, and not by way of earnings from loans,
etc. Art. 2209 of the Civil Code shall apply.
Concededly, there have been seeming variances in the above holdings.
The cases can perhaps be classified into two groups according to the
similarity of the issues involved and the corresponding rulings rendered
by the court. The "first group" would consist of the cases of Reformina
v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz(1986), Florendo
v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group"
would be Malayan Insurance Company v.Manila Port Service (1969),
Nakpil and Sons v. Court of Appeals (1988), and American Express
International v.Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either
the 6% (under the Civil Code) or 12% (under the Central Bank Circular)
interest per annum. It is easily discernible in these cases that there has
been a consistent holding that the Central Bank Circular imposing the
12% interest per annum applies only to loans or forbearance16 of money,
goods or credits, as well as to judgments involving such loan or
forbearance of money, goods or credits, and that the 6% interest under
the Civil Code governs when the transaction involves the payment of
indemnities in the concept of damage arising from the breach or a delay
in the performance of obligations in general. Observe, too, that in these
cases, a common time frame in the computation of the 6% interest per
annum has been applied, i.e., from the time the complaint is filed until
the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application
of the 6% or 12% interest per annum,17depending on whether or not the
amount involved is a loan or forbearance, on the one hand, or one of
indemnity for damage, on the other hand. Unlike, however, the "first
group" which remained consistent in holding that the running of the
legal interest should be from the time of the filing of the complaint until
fully paid, the "second group" varied on the commencement of the
running of the legal interest.
Malayan held that the amount awarded should bear legal interest from
the date of the decision of the court a quo,explaining that "if the suit were
for damages, 'unliquidated and not known until definitely ascertained,
assessed and determined by the courts after proof,' then, interest 'should
be from the date of the decision.'" American Express International
v. IAC, introduced a different time frame for reckoning the 6% interest by
ordering it to be "computed from the finality of (the) decision until paid."
The Nakpil and Sons case ruled that 12% interest per annum should be
imposed from the finality of the decision until the judgment amount is
paid.
The ostensible discord is not difficult to explain. The factual
circumstances may have called for different applications, guided by the
rule that the courts are vested with discretion, depending on the equities
of each case, on the award of interest. Nonetheless, it may not be unwise,
by way of clarification and reconciliation, to suggest the following rules of
thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts18 is breached, the contravenor can be
held liable for damages.19 The provisions under Title XVIII on "Damages"
of the Civil Code govern in determining the measure of recoverable
damages.20
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in
writing.21 Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded.22 In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 116923 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court24 at the rate of 6% per annum.25 No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty.26 Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision
is AFFIRMED with the MODIFICATION that the legal interest to be
paid is SIX PERCENT (6%) on the amount due computed from the
decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%)
interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount
upon finality of this decision until the payment thereof.
SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado,
Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno and
Kapunan, JJ., concur.
Mendoza, J., took no part.
Labor Law; Termination of Employment; Illegal Dismissals; By the
nature of an illegal dismissal case, the reliefs continue to add up until full
satisfaction, as expressed under Article 279 of the Labor Code.—No
essential change is made by a recomputation as this step is a necessary
consequence that flows from the nature of the illegality of dismissal
declared by the Labor Arbiter in that decision. A recomputation (or an
original computation, if no previous computation has been made) is a
part of the law — specifically, Article 279 of the Labor Code and the
established jurisprudence on this provision — that is read into the
decision. By the nature of an illegal dismissal case, the reliefs continue to
add up until full satisfaction, as expressed under Article 279 of the Labor
Code. The recomputation of the consequences of illegal dismissal upon
execution of the decision does not constitute an alteration or amendment
of the final decision being implemented. The illegal dismissal ruling
stands; only the computation of monetary consequences of this dismissal
is affected, and this is not a violation of the principle of immutability of
final judgments.
Same; Same; Same; Article 279 of the Labor Code provides for the
consequences of illegal dismissal in no uncertain terms, qualified only by
jurisprudence in its interpretation of when separation pay in lieu of
reinstatement is allowed.—That the amount respondents shall now pay
has greatly increased is a consequence that it cannot avoid as it is the
risk that it ran when it continued to seek recourses against the Labor
Arbiter’s decision. Article 279 provides for the consequences of illegal
dismissal in no uncertain terms, qualified only by jurisprudence in its
interpretation of when separation pay in lieu of reinstatement is allowed.
When that happens, the finality of the illegal dismissal decision becomes
the reckoning point instead of the reinstatement that the law decrees. In
allowing separation pay, the final decision effectively declares that the
employment relationship ended so that separation pay and backwages
are to be computed up to that point.
Interest Rates; In the absence of an express stipulation as to the rate of
interest that would govern the parties, the rate of legal interest for loans
or forbearance of any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%) per annum — as
reflected in the case of Eastern Shipping Lines vs. Court of Appeals, 234
SCRA 78 (1994), and Subsection X305.1 of the Manual of Regulations for
Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of
Regulations for Non-Bank Financial Institutions, before its amendment
by BSP-MB Circular No. 799 — but will now be six percent (6%) per
annum effective July 1, 2013.—In the absence of an express stipulation
as to the rate of interest that would govern the parties, the rate of legal
interest for loans or forbearance of any money, goods or credits and the
rate allowed in judgments shall no longer be twelve percent (12%) per
annum — as reflected in the case of Eastern Shipping Lines, Inc. v. Court
of Appeals, 234 SCRA 78 (1994) and Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the
Manual of Regulations for Non-Bank Financial Institutions, before its
amendment by BSP-MB Circular No. 799 — but will now be six percent
(6%) per annum effective July 1, 2013. It should be noted, nonetheless,
that the new rate could only be applied prospectively and not
retroactively. Consequently, the twelve percent (12%) per annum legal
interest shall apply only until June 30, 2013. Come July 1, 2013 the new
rate of six percent (6%) per annum shall be the prevailing rate of
interest when applicable.
Same; Monetary Board; The Bangko Sentral ng Pilipinas-Monetary
Board may prescribe the maximum rate or rates of interest for all loans or
renewals thereof or the forbearance of any money, goods or credits,
including those for loans of low priority such as consumer loans, as well
as such loans made by pawnshops, finance companies and similar credit
institutions.—In the recent case of Advocates for Truth in Lending, Inc.
and Eduardo B. Olaguer v. Bangko Sentral Monetary Board, 688 SCRA
530 (2013), this Court affirmed the authority of the BSP-MB to set
interest rates and to issue and enforce Circulars when it ruled that “the
BSP-MB may prescribe the maximum rate or rates of interest for all
loans or renewals thereof or the forbearance of any money, goods or
credits, including those for loans of low priority such as consumer loans,
as well as such loans made by pawnshops, finance companies and similar
credit institutions. It even authorizes the BSP-MB to prescribe different
maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries.”
; When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages awarded may
be imposed at the discretion of the court at the rate of 6% per annum.—
When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages,
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such
certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of
the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally
adjudged.
Same; When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, shall be 6% per
annum from such finality until its satisfaction.—When the judgment of
the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph
2, above, shall be 6% per annumfrom such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a
forbearance of credit.
Same; When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in writing; In
the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.—When the
obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be
6% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 189871 August 13, 2013
DARIO NACAR, PETITIONER,
vs.
GALLERY FRAMES AND/OR FELIPE BORDEY,
JR., RESPONDENTS.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the
Decision1 dated September 23, 2008 of the Court of Appeals (CA) in
CA-G.R. SP No. 98591, and the Resolution2 dated October 9, 2009
denying petitioner’s motion for reconsideration.
The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive dismissal
before the Arbitration Branch of the National Labor Relations
Commission (NLRC) against respondents Gallery Frames (GF) and/or
Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision 3 in favor
of petitioner and found that he was dismissed from employment
without a valid or just cause. Thus, petitioner was awarded
backwages and separation pay in lieu of reinstatement in the amount
of ₱158,919.92. The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to
discharge the burden of showing that complainant was dismissed
from employment for a just or valid cause. All the more, it is clear
from the records that complainant was never afforded due process
before he was terminated. As such, we are perforce constrained to
grant complainant’s prayer for the payments of separation pay in lieu
of reinstatement to his former position, considering the strained To pay jointly and severally the complainant the amount of nine (sic)
relationship between the parties, and his apparent reluctance to be five thousand nine hundred thirty-three and 36/100 (₱95,933.36)
reinstated, computed only up to promulgation of this decision as representing his backwages; and
follows:
All other claims are hereby dismissed for lack of merit.
SEPARATION PAY
SO ORDERED.4
Date Hired = August 1990

Rate
Date of Decision
Length of Service
= ₱198/day Respondents appealed to the NLRC, but it was dismissed for lack of
merit in the Resolution5 dated February 29, 2000. Accordingly, the
= Aug. 18, 1998 NLRC sustained the decision of the Labor Arbiter. Respondents filed
a motion for reconsideration, but it was denied.6
= 8 yrs. & 1 month

₱198.00 x 26 days x 8 months = ₱41,184.00 Dissatisfied, respondents filed a Petition for Review on Certiorari
before the CA. On August 24, 2000, the CA issued a Resolution
BACKWAGES dismissing the petition. Respondents filed a Motion for
Date Dismissed = January 24, 1997 Reconsideration, but it was likewise denied in a Resolution dated
May 8, 2001.7
Rate per day = ₱196.00
Respondents then sought relief before the Supreme Court, docketed
Date of Decisions = Aug. 18, 1998
as G.R. No. 151332. Finding no reversible error on the part of the
a) 1/24/97 to 2/5/98 = 12.36 mos. CA, this Court denied the petition in the Resolution dated April 17,
2002.8
₱196.00/day x 12.36 mos. = ₱62,986.56

b) 2/6/98 to 8/18/98 = 6.4 months An Entry of Judgment was later issued certifying that the resolution
became final and executory on May 27, 2002.9The case was,
Prevailing Rate per day = ₱62,986.00 thereafter, referred back to the Labor Arbiter. A pre-execution
conference was consequently scheduled, but respondents failed to
₱198.00 x 26 days x 6.4 mos. = ₱32,947.20 appear.10
TOTAL = ₱95.933.76
On November 5, 2002, petitioner filed a Motion for Correct
Computation, praying that his backwages be computed from the date
xxxx of his dismissal on January 24, 1997 up to the finality of the
Resolution of the Supreme Court on May 27, 2002.11 Upon
WHEREFORE, premises considered, judgment is hereby rendered recomputation, the Computation and Examination Unit of the NLRC
finding respondents guilty of constructive dismissal and are arrived at an updated amount in the sum of ₱471,320.31.12
therefore, ordered:
On December 2, 2002, a Writ of Execution13 was issued by the Labor
To pay jointly and severally the complainant the amount of sixty-two Arbiter ordering the Sheriff to collect from respondents the total
thousand nine hundred eighty-six pesos and 56/100 (₱62,986.56) amount of ₱471,320.31. Respondents filed a Motion to Quash Writ of
Pesos representing his separation pay; Execution, arguing, among other things, that since the Labor Arbiter
awarded separation pay of ₱62,986.56 and limited backwages of
₱95,933.36, no more recomputation is required to be made of the
said awards. They claimed that after the decision becomes final and
executory, the same cannot be altered or amended anymore.14 On
January 13, 2003, the Labor Arbiter issued an Order15 denying the
motion. Thus, an Alias Writ of Execution16 was issued on January
14, 2003.
Respondents again appealed before the NLRC, which on June 30,
2003 issued a Resolution17 granting the appeal in favor of the
respondents and ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the
Resolution of the NLRC to be final and executory. Consequently,
another pre-execution conference was held, but respondents failed to
appear on time. Meanwhile, petitioner moved that an Alias Writ of
Execution be issued to enforce the earlier recomputed judgment
award in the sum of ₱471,320.31.18
The records of the case were again forwarded to the Computation
and Examination Unit for recomputation, where the judgment award
of petitioner was reassessed to be in the total amount of only
₱147,560.19.
Petitioner then moved that a writ of execution be issued ordering
respondents to pay him the original amount as determined by the
Labor Arbiter in his Decision dated October 15, 1998, pending the
final computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of
Execution to satisfy the judgment award that was due to petitioner in
the amount of ₱147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-
computation of the monetary award to include the appropriate
interests.19
On May 10, 2005, the Labor Arbiter issued an Order20 granting the
motion, but only up to the amount of ₱11,459.73. The Labor Arbiter
reasoned that it is the October 15, 1998 Decision that should be
enforced considering that it was the one that became final and
executory. However, the Labor Arbiter reasoned that since the
decision states that the separation pay and backwages are computed
only up to the promulgation of the said decision, it is the amount of
₱158,919.92 that should be executed. Thus, since petitioner already
received ₱147,560.19, he is only entitled to the balance of
₱11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied
by the NLRC in its Resolution22 dated September 27, 2006. Petitioner
filed a Motion for Reconsideration, but it was likewise denied in the
Resolution23dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed
as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision24 denying the
petition. The CA opined that since petitioner no longer appealed the
October 15, 1998 Decision of the Labor Arbiter, which already
became final and executory, a belated correction thereof is no longer
allowed. The CA stated that there is nothing left to be done except to
enforce the said judgment. Consequently, it can no longer be
modified in any respect, except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the
Resolution25 dated October 9, 2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS
SERIOUSLY ERRED, COMMITTED GRAVE ABUSE OF DISCRETION
AND DECIDED CONTRARY TO LAW IN UPHOLDING THE
QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN,
SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER
MAGAT MAKING THE DISPOSITIVE PORTION OF THE OCTOBER
15, 1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT
TO AN OPINION EXPRESSED IN THE BODY OF THE SAME
DECISION.26
Petitioner argues that notwithstanding the fact that there was a
computation of backwages in the Labor Arbiter’s decision, the same
is not final until reinstatement is made or until finality of the
decision, in case of an award of separation pay. Petitioner maintains
that considering that the October 15, 1998 decision of the Labor
Arbiter did not become final and executory until the April 17, 2002
Resolution of the Supreme Court in G.R. No. 151332 was entered in
the Book of Entries on May 27, 2002, the reckoning point for the
computation of the backwages and separation pay should be on May
27, 2002 and not when the decision of the Labor Arbiter was
rendered on October 15, 1998. Further, petitioner posits that he is
also entitled to the payment of interest from the finality of the
decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and
limited backwages were awarded to petitioner by the October 15,
1998 decision of the Labor Arbiter, no more recomputation is
required to be made of said awards. Respondents insist that since
the decision clearly stated that the separation pay and backwages
are "computed only up to [the] promulgation of this decision," and
considering that petitioner no longer appealed the decision,
petitioner is only entitled to the award as computed by the Labor
Arbiter in the total amount of ₱158,919.92. Respondents added that
it was only during the execution proceedings that the petitioner
questioned the award, long after the decision had become final and
executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to petitioner at this
point of the proceedings would substantially vary the decision of the
Labor Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream
and Fast Foods v. Court of Appeals (Sixth Division),27 wherein the
issue submitted to the Court for resolution was the propriety of the
computation of the awards made, and whether this violated the
principle of immutability of judgment. Like in the present case, it
was a distinct feature of the judgment of the Labor Arbiter in the
above-cited case that the decision already provided for the
computation of the payable separation pay and backwages due and
did not further order the computation of the monetary awards up to
the time of the finality of the judgment. Also in Session Delights, the
dismissed employee failed to appeal the decision of the labor arbiter.
The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the
course of execution of the labor arbiter's original computation of the
awards made, pegged as of the time the decision was rendered and
confirmed with modification by a final CA decision, is legally proper.
The question is posed, given that the petitioner did not immediately
pay the awards stated in the original labor arbiter's decision; it
delayed payment because it continued with the litigation until final
judgment at the CA level.
A source of misunderstanding in implementing the final decision in
this case proceeds from the way the original labor arbiter framed his
decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed
because it has been confirmed with finality. This is the finding of the
illegality of the dismissal and the awards of separation pay in lieu of
reinstatement, backwages, attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face,
the computation the labor arbiter made shows that it was time-
bound as can be seen from the figures used in the computation. This
part, being merely a computation of what the first part of the
decision established and declared, can, by its nature, be re-
computed. This is the part, too, that the petitioner now posits should
no longer be re-computed because the computation is already in the
labor arbiter's decision that the CA had affirmed. The public and
private respondents, on the other hand, posit that a re-computation
is necessary because the relief in an illegal dismissal decision goes
all the way up to reinstatement if reinstatement is to be made, or up
to the finality of the decision, if separation pay is to be given in lieu
reinstatement.
That the labor arbiter's decision, at the same time that it found that
an illegal dismissal had taken place, also made a computation of the
award, is understandable in light of Section 3, Rule VIII of the then
NLRC Rules of Procedure which requires that a computation be
made. This Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and
at all events, as far as practicable, shall embody in any such decision
or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to
the finality of the labor arbiter's decision. As we noted above, this
implication is apparent from the terms of the computation itself, and
no question would have arisen had the parties terminated the case
and implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on
all counts - i.e., on the finding of illegality as well as on all the
consequent awards made. Hence, the petitioner appealed the case to
the NLRC which, in turn, affirmed the labor arbiter's decision. By
law, the NLRC decision is final, reviewable only by the CA on
jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on
jurisdictional grounds through a timely filed Rule 65 petition for
certiorari. The CA decision, finding that NLRC exceeded its authority
in affirming the payment of 13th month pay and indemnity, lapsed to
finality and was subsequently returned to the labor arbiter of origin
for execution.
It was at this point that the present case arose. Focusing on the core
illegal dismissal portion of the original labor arbiter's decision, the
implementing labor arbiter ordered the award re-computed; he
apparently read the figures originally ordered to be paid to be the
computation due had the case been terminated and implemented at
the labor arbiter's level. Thus, the labor arbiter re-computed the
award to include the separation pay and the backwages due up to
the finality of the CA decision that fully terminated the case on the
merits. Unfortunately, the labor arbiter's approved computation went
beyond the finality of the CA decision (July 29, 2003) and included
as well the payment for awards the final CA decision had deleted -
specifically, the proportionate 13th month pay and the indemnity
awards. Hence, the CA issued the decision now questioned in the
present petition.
We see no error in the CA decision confirming that a re-computation
is necessary as it essentially considered the labor arbiter's original
decision in accordance with its basic component parts as we
discussed above. To reiterate, the first part contains the finding of
illegality and its monetary consequences; the second part is the
computation of the awards or monetary consequences of the illegal
dismissal, computed as of the time of the labor arbiter's original
decision.28
Consequently, from the above disquisitions, under the terms of the
decision which is sought to be executed by the petitioner, no
essential change is made by a recomputation as this step is a
necessary consequence that flows from the nature of the illegality of
dismissal declared by the Labor Arbiter in that decision.29 A
recomputation (or an original computation, if no previous
computation has been made) is a part of the law – specifically, Article
279 of the Labor Code and the established jurisprudence on this
provision – that is read into the decision. By the nature of an illegal
dismissal case, the reliefs continue to add up until full satisfaction,
as expressed under Article 279 of the Labor Code. The recomputation
of the consequences of illegal dismissal upon execution of the
decision does not constitute an alteration or amendment of the final
decision being implemented. The illegal dismissal ruling stands; only
the computation of monetary consequences of this dismissal is
affected, and this is not a violation of the principle of immutability of
final judgments.30
That the amount respondents shall now pay has greatly increased is
a consequence that it cannot avoid as it is the risk that it ran when it
continued to seek recourses against the Labor Arbiter's decision.
Article 279 provides for the consequences of illegal dismissal in no
uncertain terms, qualified only by jurisprudence in its interpretation
of when separation pay in lieu of reinstatement is allowed. When that
happens, the finality of the illegal dismissal decision becomes the
reckoning point instead of the reinstatement that the law decrees. In
allowing separation pay, the final decision effectively declares that
the employment relationship ended so that separation pay and
backwages are to be computed up to that point.31
Finally, anent the payment of legal interest. In the landmark case of
Eastern Shipping Lines, Inc. v. Court of Appeals,32 the Court laid
down the guidelines regarding the manner of computing legal
interest, to wit:
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
 1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance
of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the
court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2,
above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board
(BSP-MB), in its Resolution No. 796 dated May 16, 2013, approved
the amendment of Section 234 of Circular No. 905, Series of 1982
and, accordingly, issued Circular No. 799,35 Series of 2013, effective
July 1, 2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013,
approved the following revisions governing the rate of interest in the
absence of stipulation in loan contracts, thereby amending Section 2
of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any
money, goods or credits and the rate allowed in judgments, in the
absence of an express contract as to such rate of interest, shall be
six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 36 of the Manual of
Regulations for Banks and Sections 4305Q.1,37 4305S.338 and
4303P.139 of the Manual of Regulations for Non-Bank Financial
Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as
to the rate of interest that would govern the parties, the rate of legal
interest for loans or forbearance of any money, goods or credits and
the rate allowed in judgments shall no longer be twelve percent (12%)
per annum - as reflected in the case of Eastern Shipping Lines40and
Subsection X305.1 of the Manual of Regulations for Banks and
Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of
Regulations for Non-Bank Financial Institutions, before its
amendment by BSP-MB Circular No. 799 - but will now be six
percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively
and not retroactively. Consequently, the twelve percent (12%) per
annum legal interest shall apply only until June 30, 2013. Come
July 1, 2013 the new rate of six percent (6%) per annum shall be the
prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc.
and Eduardo B. Olaguer v. Bangko Sentral Monetary Board,41 this
Court affirmed the authority of the BSP-MB to set interest rates and
to issue and enforce Circulars when it ruled that "the BSP-MB may
prescribe the maximum rate or rates of interest for all loans or
renewals thereof or the forbearance of any money, goods or credits,
including those for loans of low priority such as consumer loans, as
well as such loans made by pawnshops, finance companies and
similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of
borrowings, including deposits and deposit substitutes, or loans of
financial intermediaries."
Nonetheless, with regard to those judgments that have become final
and executory prior to July 1, 2013, said judgments shall not be
disturbed and shall continue to be implemented applying the rate of
interest fixed therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in
the case of Eastern Shipping Lines42 are accordingly modified to
embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil
Code govern in determining the measure of recoverable
damages.1âwphi1
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate
of interest shall be 6% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money,
is breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or
damages, except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code), but when such certainty cannot be so reasonably established
at the time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 6% per annum
from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and
executory prior to July 1, 2013, shall not be disturbed and shall
continue to be implemented applying the rate of interest fixed
therein.
WHEREFORE, premises considered, the Decision dated September
23, 2008 of the Court of Appeals in CA-G.R. SP No. 98591, and the
Resolution dated October 9, 2009 are REVERSED and SET ASIDE.
Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was
illegally dismissed on January 24, 1997 up to May 27, 2002,
when the Resolution of this Court in G.R. No. 151332
became final and executory;
(2) separation pay computed from August 1990 up to May
27, 2002 at the rate of one month pay per year of service;
and
(3) interest of twelve percent (12%) per annum of the total
monetary awards, computed from May 27, 2002 to June 30,
2013 and six percent (6%) per annum from July 1, 2013
until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another
recomputation of the total monetary benefits awarded and due to
petitioner in accordance with this Decision.
SO ORDERED.
Civil Law; Contracts; Parties are free to enter into agreements and
stipulate as to the terms and conditions of their contract, but such
freedom is not absolute; Hence, if the stipulations in the contract are
valid, the parties thereto are bound to comply with them, since such
contract is the law between the parties.―Parties are free to enter into
agreements and stipulate as to the terms and conditions of their
contract, but such freedom is not absolute. As Article 1306 of the Civil
Code provides, “The contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order, or
public policy.” Hence, if the stipulations in the contract are valid, the
parties thereto are bound to comply with them, since such contract is the
law between the parties. In this case, petitioners and respondent bank
agreed upon on a 23% p.a. interest rate on the P1.7 million loan.
However, petitioners now contend that the interest rate of 23% p.a.
imposed by respondent bank is excessive or unconscionable, invoking our
ruling in Medel v. Court of Appeals, 299 SCRA 481 (1998), Toring v.
Spouses Ganzon-Olan, 568 SCRA 376 (2008), and Chua v. Timan, 562
SCRA 146 (2008).
lower than those interest rates agreed upon by the parties in the above-
mentioned cases. Thus, there is no similarity of factual milieu for the
application of those cases. We do not consider the interest rate of 23%
p.a. agreed upon by petitioners and respondent bank to be
unconscionable.
Same; Same; A contract is the law between the parties and they are
bound by the stipulations therein.―Petitioners defaulted in the payment
of their loan obligation with respondent bank and their contract provided
for the payment of 12% p.a. penalty charge, and since there was no
showing that petitioners’ failure to perform their obligation was due
to force majeure or to respondent bank’s acts, petitioners cannot now
back out on their obligation to pay the penalty charge. A contract is the
law between the parties and they are bound by the stipulations therein.

Same; Interest Rates; In Toring v. Spouses Ganzon-Olan, 568 SCRA

376 (2008), the stipulated interest rates involved were 3% and 3.81% per
month on a P10 million loan, which we find under the circumstances
excessive and reduced the same to 1% per month.―In Medel v. Court of
Appeals, 299 SCRA 481 (1998), we found the stipulated interest rate of
66% p.a. or a 5.5% per month on a P500,000.00 loan excessive,
unconscionable and exorbitant, hence, contrary to morals if not against
the law and declared such stipulation void. In Toring v. Spouses Ganzon-
Olan, 568 SCRA 376 (2008), the stipulated interest rates involved were
3% and 3.81% per month on a P10 million loan, which we find under the
circumstances excessive and reduced the same to 1% per month. While
in Chua v. Timan, 562 SCRA 146 (2008), where the stipulated interest
rates were 7% and 5% a month, which are equivalent to 84% and 60%
p.a., respectively, we had reduced the same to 1% per month or 12% p.a.
We said that we need not unsettle the principle we had affirmed in a
plethora of cases that stipulated interest rates of 3% per month and
higher are excessive, unconscionable and exorbitant, hence, the
stipulation was void for being contrary to morals.

Same; Same; The Supreme Court does not consider the interest rate of
23% p.a. agreed upon by petitioners and respondent bank to be
unconscionable.―In this case, the interest rate agreed upon by the
parties was only 23% p.a., or less than 2% per month, which are much
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 197861 June 5, 2013
SPOUSES FLORENTINO T. MALLARI and AUREA V.
MALLARI, Petitioners,
vs.
PRUDENTIAL BANK (now BANK OF THE PHILIPPINE
ISLANDS), Respondent.
DECISION
PERALTA, J.:
Before us is a Petition for Review on Certiorari under Rule 45, assailing
the Decision1 dated June 17, 2010 and the Resolution2 dated July 20,
2011 of the Court of Appeals (CA) in CA-G.R. CV No. 65993.
The antecedent facts are as follows:
On December 11, 1984, petitioner Florentino T. Mallari (Florentino)
obtained from respondent Prudential Bank-Tarlac Branch (respondent
bank), a loan in the amount of ₱300,000.00 as evidenced by Promissory
Note (PN) No. BD 84-055.3 Under the promissory note, the loan was
subject to an interest rate of 21% per annum (p.a.), attorney's fees
equivalent to 15% of the total amount due but not less than ₱200.00 and,
in case of default, a penalty and collection charges of 12% p.a. of the total
amount due. The loan had a maturity date of January 10, 1985, but was
renewed up to February 17, 1985. Petitioner Florentino executed a Deed
of Assignment4 wherein he authorized the respondent bank to pay his
loan with his time deposit with the latter in the amount of ₱300,000.00.
On December 22, 1989, petitioners spouses Florentino and Aurea Mallari
(petitioners) obtained again from respondent bank another loan of ₱1.7
million as evidenced by PN No. BDS 606-895 with a maturity date of
March 22, 1990. They stipulated that the loan will bear 23% interest p.a.,
attorney's fees equivalent to 15% p.a. of the total amount due, but not
less than ₱200.00, and penalty and collection charges of 12% p.a.
Petitioners executed a Deed of Real Estate Mortgage6 in favor of
respondent bank covering petitioners' property under Transfer
Certificate of Title (TCT) No. T-215175 of the Register of Deeds of Tarlac
to answer for the said loan.
Petitioners failed to settle their loan obligations with respondent bank,
thus, the latter, through its lawyer, sent a demand letter to the former
for them to pay their obligations, which when computed up to January
31, 1992, amounted to ₱571,218.54 for PN No. BD 84-055 and
₱2,991,294.82 for PN No. BDS 606-89.
On February 25, 1992, respondent bank filed with the Regional Trial
Court (RTC) of Tarlac, a petition for the extrajudicial foreclosure of
petitioners' mortgaged property for the satisfaction of the latter's
obligation of ₱1,700,000.00 secured by such mortgage, thus, the auction
sale was set by the Provincial Sheriff on April 23, 1992.7
On April 10, 1992, respondent bank's Assistant Manager sent petitioners
two (2) separate Statements of Account as of April 23, 1992, i.e., the loan
of ₱300,000.00 was increased to ₱594,043.54, while the ₱1,700,000.00
loan was already ₱3,171,836.18.
On April 20, 1992, petitioners filed a complaint for annulment of
mortgage, deeds, injunction, preliminary injunction, temporary
restraining order and damages claiming, among others, that: (1) the
₱300,000.00 loan obligation should have been considered paid, because
the time deposit with the same amount under Certificate of Time Deposit
No. 284051 had already been assigned to respondent bank; (2)
respondent bank still added the ₱300,000.00 loan to the ₱1.7 million loan
obligation for purposes of applying the proceeds of the auction sale; and
(3) they realized that there were onerous terms and conditions imposed
by respondent bank when it tried to unilaterally increase the charges
and interest over and above those stipulated. Petitioners asked the court
to restrain respondent bank from proceeding with the scheduled
foreclosure sale.
Respondent bank filed its Answer with counterclaim arguing that: (1) the
interest rates were clearly provided in the promissory notes, which were
used in computing for interest charges; (2) as early as January 1986,
petitioners' time deposit was made to apply for the payment of interest of
their ₱300,000.00 loan; and (3) the statement of account as of April 10,
1992 provided for a computation of interest and penalty charges only
from May 26, 1989, since the proceeds of petitioners' time deposit was
applied to the payment of interest and penalty charges for the preceding
period. Respondent bank also claimed that petitioners were fully
apprised of the bank's terms and conditions; and that the extrajudicial
foreclosure was sought for the satisfaction of the second loan in the
amount of ₱1.7 million covered by PN No. BDS 606-89 and the real
estate mortgage, and not the ₱300,000.00 loan covered by another PN
No. 84-055.
In an Order8 dated November 10, 1992, the RTC denied the Application
for a Writ of Preliminary Injunction. However, in petitioners'
Supplemental Motion for Issuance of a Restraining Order and/or
Preliminary Injunction to enjoin respondent bank and the Provincial
Sheriff from effecting or conducting the auction sale, the RTC reversed
itself and issued the restraining order in its Order9 dated January 14,
1993.
Respondent bank filed its Motion to Lift Restraining Order, which the
RTC granted in its Order10 dated March 9, 1993. Respondent bank then
proceeded with the extrajudicial foreclosure of the mortgaged property.
On July 7, 1993, a Certificate of Sale was issued to respondent bank
being the highest bidder in the amount of ₱3,500,000.00.
Subsequently, respondent bank filed a Motion to Dismiss Complaint 11 for
failure to prosecute action for unreasonable length of time to which
petitioners filed their Opposition.12 On November 19, 1998, the RTC
issued its Order13 denying respondent bank's Motion to Dismiss
Complaint.
Trial thereafter ensued. Petitioner Florentino was presented as the lone
witness for the plaintiffs. Subsequently, respondent bank filed a
Demurrer to Evidence.
On November 15, 1999, the RTC issued its Order14 granting respondent's
demurrer to evidence, the dispositive portion of which reads:
WHEREFORE, this case is hereby ordered DISMISSED. Considering
there is no evidence of bad faith, the Court need not order the plaintiffs
to pay damages under the general concept that there should be no
premium on the right to litigate.
NO COSTS.
SO ORDERED.15
The RTC found that as to the ₱300,000.00 loan, petitioners had assigned
petitioner Florentino's time deposit in the amount of ₱300,000.00 in
favor of respondent bank, which maturity coincided with petitioners' loan
maturity. Thus, if the loan was unpaid, which was later extended to
February 17, 1985, respondent bank should had just applied the time
deposit to the loan. However, respondent bank did not, and allowed the
loan interest to accumulate reaching the amount of ₱594,043.54 as of
April 10, 1992, hence, the amount of ₱292,600.00 as penalty charges was
unjust and without basis.
As to the ₱1.7 million loan which petitioners obtained from respondent
bank after the ₱300,000.00 loan, it had reached the amount of
₱3,171,836.18 per Statement of Account dated April 27, 1993, which was
computed based on the 23% interest rate and 12% penalty charge agreed
upon by the parties; and that contrary to petitioners' claim, respondent
bank did not add the ₱300,000.00 loan to the ₱1.7 million loan obligation
for purposes of applying the proceeds of the auction sale.
The RTC found no legal basis for petitioners' claim that since the total
obligation was ₱1.7 million and respondent bank's bid price was ₱3.5
million, the latter should return to petitioners the difference of ₱1.8
million. It found that since petitioners' obligation had reached
₱2,991,294.82 as of January 31, 1992, but the certificate of sale was
executed by the sheriff only on July 7, 1993, after the restraining order
was lifted, the stipulated interest and penalty charges from January 31,
1992 to July 7, 1993 added to the loan already amounted to ₱3.5 million
as of the auction sale.
The RTC found that the 23% interest rate p.a., which was then the
prevailing loan rate of interest could not be considered unconscionable,
since banks are not hospitable or equitable institutions but are entities
formed primarily for profit. It also found that Article 1229 of the Civil
Code invoked by petitioners for the reduction of the interest was not
applicable, since petitioners had not paid any single centavo of the ₱1.7
million loan which showed they had not complied with any part of the
obligation.
Petitioners appealed the RTC decision to the CA. A Comment was filed
by respondent bank and petitioners filed their Reply thereto.
On June 17, 2010, the CA issued its assailed Decision, the dispositive
portion of which reads:
WHEREFORE, the instant appeal is hereby DENIED. The Order dated
November 15, 1999 issued by the Regional Trial Court (RTC), Branch 64,
Tarlac City, in Civil Case No. 7550 is hereby AFFIRMED.16
The CA found that the time deposit of ₱300,000.00 was equivalent only
to the principal amount of the loan of ₱300,000.00 and would not be
sufficient to cover the interest, penalty, collection charges and attorney's
fees agreed upon, thus, in the Statement of Account dated April 10, 1992,
the outstanding balance of petitioners' loan was ₱594,043.54. It also
found not persuasive petitioners' claim that the ₱300,000.00 loan was
added to the ₱1.7 million loan. The CA, likewise, found that the interest
rates and penalty charges imposed were not unconscionable and adopted
in toto the findings of the RTC on the matter.
Petitioners filed their Motion for Reconsideration, which the CA denied
in a Resolution dated July 20, 2011.
Hence, petitioners filed this petition for review arguing that:
THE HON. COURT OF APPEALS ERRED IN AFFIRMING THE
ORDER OF THE RTC-BRANCH 64, TARLAC CITY, DATED
NOVEMBER 15, 1999, DESPITE THE FACT THAT THE SAME IS
CONTRARY TO SETTLED JURISPRUDENCE ON THE MATTER.17
The issue for resolution is whether the 23% p.a. interest rate and the
12% p.a. penalty charge on petitioners' ₱1,700,000.00 loan to which they
agreed upon is excessive or unconscionable under the circumstances.
Parties are free to enter into agreements and stipulate as to the terms
and conditions of their contract, but such freedom is not absolute. As
Article 1306 of the Civil Code provides, "The contracting parties may
establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy." Hence, if the stipulations in the
contract are valid, the parties thereto are bound to comply with them,
since such contract is the law between the parties. In this case,
petitioners and respondent bank agreed upon on a 23% p.a. interest rate
on the ₱1.7 million loan. However, petitioners now contend that the
interest rate of 23% p.a. imposed by respondent bank is excessive or
unconscionable, invoking our ruling in Medel v. Court of
Appeals,18 Toring v. Spouses Ganzon-Olan,19 and Chua v. Timan.20
We are not persuaded.
In Medel v. Court of Appeals,21 we found the stipulated interest rate of
66% p.a. or a 5.5% per month on a ₱500,000.00 loan excessive,
unconscionable and exorbitant, hence, contrary to morals if not against
the law and declared such stipulation void. In Toring v. Spouses Ganzon-
Olan,22 the stipulated interest rates involved were 3% and 3.81% per
month on a ₱10 million loan, which we find under the circumstances
excessive and reduced the same to 1% per month. While in Chua v.
Timan,23 where the stipulated interest rates were 7% and 5% a month,
which are equivalent to 84% and 60% p.a., respectively, we had reduced
the same to 1% per month or 12% p.a. We said that we need not unsettle
the principle we had affirmed in a plethora of cases that stipulated
interest rates of 3% per month and higher are excessive, unconscionable
and exorbitant, hence, the stipulation was void for being contrary to
morals.24
In this case, the interest rate agreed upon by the parties was only 23%
p.a., or less than 2% per month, which are much lower than those
interest rates agreed upon by the parties in the above-mentioned cases.
Thus, there is no similarity of factual milieu for the application of those
cases.
We do not consider the interest rate of 23% p.a. agreed upon by
petitioners and respondent bank to be unconscionable.
In Villanueva v. Court of Appeals,25 where the issue raised was whether
the 24% p.a. stipulated interest rate is unreasonable under the
circumstances, we answered in the negative and held:
In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino
Savings and Mortgage Bank, Dagupan City Branch, this Court held that
the interest rate of 24% per annum on a loan of ₱244,000.00, agreed
upon by the parties, may not be considered as unconscionable and
excessive. As such, the Court ruled that the borrowers cannot renege on
their obligation to comply with what is incumbent upon them under the
contract of loan as the said contract is the law between the parties and
they are bound by its stipulations.
Also, in Garcia v. Court of Appeals, this Court sustained the agreement
of the parties to a 24% per annum interest on an ₱8,649,250.00 loan
finding the same to be reasonable and clearly evidenced by the amended
credit line agreement entered into by the parties as well as two
promissory notes executed by the borrower in favor of the lender.
Based on the above jurisprudence, the Court finds that the 24% per
annum interest rate, provided for in the subject mortgage contracts for a
loan of ₱225,000.00, may not be considered unconscionable. Moreover,
considering that the mortgage agreement was freely entered into by both
parties, the same is the law between them and they are bound to comply
with the provisions contained therein.26
breach. x x x28 And in Development Bank of the Philippines v. Family
Foods Manufacturing Co., Ltd.,29 we held that:
x x x The enforcement of the penalty can be demanded by the creditor
only when the non-performance is due to the fault or fraud of the debtor.
The non-performance gives rise to the presumption of fault; in order to
avoid the payment of the penalty, the debtor has the burden of proving
an excuse - the failure of the performance was due to either force
majeure or the acts of the creditor himself.30
Here, petitioners defaulted in the payment of their loan obligation with
respondent bank and their contract provided for the payment of 12% p.a.
penalty charge, and since there was no showing that petitioners' failure
to perform their obligation was due to force majeure or to respondent
bank's acts, petitioners cannot now back out on their obligation to pay
the penalty charge. A contract is the law between the parties and they
are bound by the stipulations therein.
WHEREFORE, the petition for review is DENIED. The Decision dated
June 17, 2010 and the Resolution dated July 20, 2011 of the Court of
Appeals are hereby AFFIRMED.

Clearly, jurisprudence establish that the 24% p.a. stipulated interest rate SO ORDERED.
was not considered unconscionable, thus, the 23% p.a. interest rate
imposed on petitioners' loan in this case can by no means be considered
excessive or unconscionable. DIOSDADO M. PERALTA
Associate Justice

We also do not find the stipulated 12% p.a. penalty charge excessive or
unconscionable.

In Ruiz v. CA,27 we held:

The 1% surcharge on the principal loan for every month of default is

valid. This surcharge or penalty stipulated in a loan agreement in case of
default partakes of the nature of liquidated damages under Art. 2227 of
the New Civil Code, and is separate and distinct from interest payment.
Also referred to as a penalty clause, it is expressly recognized by law. It
is an accessory undertaking to assume greater liability on the part of an
obligor in case of breach of an obligation. The obligor would then be
bound to pay the stipulated amount of indemnity without the necessity of
proof on the existence and on the measure of damages caused by the
 Civil Law; Contracts; Interest Rates; In view of Central Bank Same; Same; Same; A party to a contract cannot deny the validity
Circular No. 905 s. 1982 which suspended the Usury Law ceiling on thereof after enjoying its benefits without outrage to one’s sense of justice
interest effective January 1, 1983, parties to a loan agreement have wide and fairness; Courts have no power to relieve parties from obligations
latitude to stipulate interest rates; Such stipulated interest rates may be voluntarily assumed, simply because their contracts turned out to be
declared as illegal if the same is unconscionable.—In view of Central disastrous or unwise investments.—Jocelyn already availed herself of the
Bank Circular No. 905 s. 1982, which suspended the Usury Law ceiling benefits of the “Acknowledgment of Debt,” the validity of which she now
on interest effective January 1, 1983, parties to a loan agreement have impugns. As aptly found by the RTC and the CA, Jocelyn was making a
wide latitude to stipulate interest rates. Nevertheless, such stipulated business out of the loaned amounts. She was actually using the money to
interest rates may be declared as illegal if the same is unconscionable. make advance payments for her prospective clients so that her sales
There is certainly nothing in said circular which grants lenders carte production would increase. Accordingly, she did not mind the 6% to 7%
blanche authority to raise interest rates to levels which will either interest per month as she was getting a 50% rebate on her sales. Clearly,
enslave their borrowers or lead to a hemorrhaging of their assets. In fact, by her own acts, Jocelyn is estopped from impugning the validity of the
in Medel v. Court of Appeals, 299 SCRA 481 (1998), we annulled a “Acknowledgment of Debt.” “[A] party to a contract cannot deny the
stipulated 5.5% per month or 66% per annuminterest with additional validity thereof after enjoying its benefits without outrage to one’s sense
service charge of 2% per annum and penalty charge of 1% per month on a of justice and fairness.” “It is a long established doctrine that the law
P500,000.00 loan for being excessive, iniquitous, unconscionable and does not relieve a party from the effects of an unwise, foolish or
exorbitant. disastrous contract, entered into with all the required formalities and
with full awareness of what she was doing. Courts have no power to
Same; Same; Same; A litigant may be denied relief by a court of relieve parties from obligations voluntarily assumed, simply because
equity on the ground that has been inequitable, unfair, and dishonest or their contracts turned out to be disastrous or unwise investments.”
fraudulent or deceitful as to the controversy in issue.—After years of
benefiting from the proceeds of the loans bearing an interest rate of 6%
to 7% per month and paying for the same, Jocelyn cannot now go to court
to have the said interest rate annulled on the ground that it is excessive,
iniquitous, unconscionable, exorbitant, and absolutely revolting to the
conscience of man. “This is so because among the maxims of equity are
(1) he who seeks equity must do equity, and (2) he who comes into equity
must come with clean hands. The latter is a frequently stated maxim
which is also expressed in the principle that he who has done inequity
shall not have equity. It signifies that a litigant may be denied relief by a
court of equity on the ground that his conduct has been inequitable,
unfair and dishonest, or fraudulent, or deceitful as to the controversy in
issue.”
Same; Same; Estoppel; Essential Elements of Estoppel.—The essential
elements of estoppel are: (1) conduct amounting to false representation or
concealment of material facts or at least calculated to convey the
impression that the facts are otherwise than, and inconsistent with,
those which the party subsequently attempts to assert; (2) intent, or at
least expectation, that this conduct shall be acted upon by, or at least
influence, the other party; and, (3) knowledge, actual or constructive, of
the real facts. FIRST DIVISION

JOCELYN M. TOLEDO , G.R. No. 172139

 Petitioner, 1) August 15, 1993

Present:

CORONA, C. J., Chairperson,

- versus - LEONARDO-DE CASTRO, P 30,000.00
DEL CASTILLO, 2) April 21, 1994 100,000.00
ABAD,⃰ and 3) October 2, 1995 30,000.00
PEREZ, JJ. 4) October 9, 1995 30,000.00
5) May 22, 1997 100,000.00 with 7% monthly interest
MARILOU M. HYDEN, Promulgated: TOTAL AMOUNT P 290,000.00[4]
Respondent. December 8, 2010 OF LOAN
x---------------------------------------------------------------- From August 15, 1993 up to December 31, 1997, Jocelyn had been religiously
---x paying Marilou the stipulated monthly interest by issuing checks and depositing
sums of money in the bank account of the latter. However, the total principal
DECISION amount of P290,000.00 remained unpaid. Thus, in April 1998, Marilou visited
Jocelyn in her office at CAP in Cebu City and asked Jocelyn and the other
DEL CASTILLO, J.: employees who were likewise indebted to her to acknowledge their debts. A
document entitled Acknowledgment of Debt[5] for the amount of P290,000.00 was
It is true that the imposition of an unconscionable rate of interest on a money signed by Jocelyn with two of her subordinates as witnesses. The said amount
debt is immoral and unjust and the court may come to the aid of the aggrieved represents the principal consolidated amount of the aforementioned previous
party to that contract. However, before doing so, courts have to consider the debts due on December 25, 1998. Also on said occasion, Jocelyn issued five
settled principle that the law will not relieve a party from the effects of an checks to Marilou representing renewal payment of her five previous loans, viz:
unwise, foolish or disastrous contract if such party had full awareness of what
she was doing. Check No. 0010761 dated ......... P 30,000.00
September 2, 1998
This Petition for Review on Certiorari[1] assails the Decision[2] dated August 24, Check No. 0010762 dated ......... 30,000.00
2005 of the Court of Appeals (CA) in CA-G.R. CV No. 79805, which affirmed the September 9, 1998
Decision dated March 10, 2003[3] of the Regional Trial Court (RTC), Check No. 0010763 dated ......... 30,000.00
Branch 22, Cebu City in Civil Case No. CEB-22867. Also assailed is the September 15, 1998
Resolution dated March 8, 2006 denying the motion for reconsideration. Check No. 0010764 dated ......... 100,000.00
September 22, 1998
Factual Antecedents Check No. 0010765 dated ......... 100,000.00
September 25, 1998
Petitioner Jocelyn M. Toledo (Jocelyn), who was then the Vice-President of the TOTAL P 290,000.00
College Assurance Plan (CAP) Phils., Inc., obtained several loans from In June 1998, Jocelyn asked Marilou for the recall of Check No.
respondent Marilou M. Hyden (Marilou). The transactions are briefly 0010761 in the amount of P30,000.00 and replaced the same with six checks, in
summarized below: staggered amounts, namely:

Check No. 0010494 dated July 2, ......... P 6,625.00

1998
Check No. 0010495 dated August 2, ......... 6,300.00
1998
 Check No. 0010496 dated ......... 5,975.00
September 2, 1998
Check No. 0010497 dated October 2, ......... 6,500.00
1998
Check No. 0010498 dated November ......... 5,325.00
2, 1998
Check No. 0010499 dated December ......... 5,000.00
2, 1998
TOTAL P 35,725.00
After honoring Check Nos. 0010494, 0010495 and 0010496, Jocelyn ordered the
stop payment on the remaining checks and on October 27, 1998, filed with the
RTC of Cebu City a complaint[6] against Marilou for Declaration of Nullity and
Payment, Annulment, Sum of Money, Injunction and Damages.
Jocelyn averred that Marilou forced, threatened and intimidated her into signing
the Acknowledgment of Debt and at the same time forced her to issue the seven
postdated checks. She claimed that Marilou even threatened to sue her for
violation of Batas Pambansa (BP) Blg. 22 or the Bouncing Checks Law if she will
not sign the said document and draw the above-mentioned checks. Jocelyn
further claimed that the application of her total payment of P528,550.00 to
interest alone is illegal, unfounded, unjust, oppressive and contrary to law
because there was no written agreement to pay interest.
On November 23, 1998, Marilou filed an Answer[7] with Special
Affirmative Defenses and Counterclaim alleging that Jocelyn voluntarily
obtained the said loans knowing fully well that the interest rate was at 6% to 7%
per month. In fact, a 6% to 7% advance interest was already deducted from the
loan amount given to Jocelyn.
Ruling of the Regional Trial Court
The court a quo did not find any showing that Jocelyn was forced,
threatened, or intimidated in signing the document referred to as
Acknowledgment of Debt and in issuing the postdated checks. Thus, in its March
10, 2003 Decision the trial court ruled in favor of Marilou, viz:
WHEREFORE, premised on the foregoing, the
Court hereby declares the document Acknowledgment of
Debt valid and binding. PLAINTIFF is indebted to
DEFENDANT [for] the amount of TWO HUNDRED
NINETY THOUSAND (P290,000.00) PESOS since
December 25, 1998 less the amount of EIGHTEEN
THOUSAND NINE HUNDRED (P18,900.00) PESOS,
equivalent to the three checks made good (P6,625.00 dated
07-02-1998; P6,300.00 dated 08-02-1998; and P5,975.00 dated
09-02-1998).
Consequently, PLAINTIFF is hereby ordered to pay
DEFENDANT the amount of TWO HUNDRED SEVENTY
ONE THOUSAND ONE HUNDRED (P271,100.00) PESOS
due on December 25, 1998 with a 12% interest per annum or
1% interest per month until such time that the said amount
shall have been fully paid.
No pronouncement as to costs.
SO ORDERED.[8]
On March 26, 2003, Jocelyn filed an Earnest Motion for Reconsideration,[9] which
was denied by the trial court in its Order[10] dated April 29, 2003 stating that it
finds no sufficient reason to disturb its March 10, 2003 Decision.
Ruling of the Court of Appeals
On appeal, Jocelyn asserts that she had made payments in the total
amount of P778,000.00 for a principal amount of loan of only P290,000.00. What
is appalling, according to Jocelyn, was that such payments covered only the
interest because of the excessive, iniquitous, unconscionable and exorbitant
imposition of the 6% to 7% monthly interest.
On August 24, 2005, the CA issued its Decision which provides:
WHEREFORE, premises considered, the Decision
dated March 10, 2003 and the Order dated April 29, 2003, of
the Regional Trial Court, 7th Judicial Region, Branch
22, Cebu City, in Civil Case No. CEB-22867 are
hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.[11]
The Motion for Reconsideration[12] filed by Jocelyn was denied by the CA through
its Resolution[13] dated March 8, 2006.
 Issues
Hence, this petition raising the following issues:
I.
Whether the CA gravely erred when it held that the
imposition of interest at the rate of six percent (6%) to seven
percent (7%) is not contrary to law, morals, good customs,
public order or public policy.
II.
Whether the CA gravely erred when it failed to declare that
the Acknowledgment of Debt is an inexistent contract that is
void from the very beginning pursuant to Article 1409 of the
New Civil Code.
Petitioners Arguments
Jocelyn posits that the CA erred when it held that the imposition of interest at
the rates of 6% to 7% per month is not contrary to law, not unconscionable and
not contrary to morals. She likewise contends that the CA erred in ruling that
the Acknowledgment of Debt is valid and binding. According to Jocelyn, even
assuming that the execution of said document was not attended with force,
threat and intimidation, the same must nevertheless be declared null and void
for being contrary to law and public policy. This is borne out by the fact that the
payments in the total amount of P778,000.00 was applied to interest payment
alone. This only proves that the transaction was iniquitous, excessive, oppressive
and unconscionable.
Respondents Arguments
On the other hand, Marilou would like this Court to consider the fact
that the document referred to as Acknowledgment of Debt was executed in the
safe surroundings of the office of Jocelyn and it was witnessed by two of her
staff. If at all there had been coercion, then Jocelyn could have easily prevented
her staff from affixing their signatures to said document. In fact, petitioner had
admitted that she was the one who went to the tables of her staff to let them sign
the said document.
Our Ruling
The petition is without merit.
The 6% to 7% interest
per month paid by
Jocelyn is not excessive
under the
circumstances of this
case.
In view of Central Bank Circular No. 905 s. 1982, which suspended the Usury
Law ceiling on interest effective January 1, 1983, parties to a loan agreement
have wide latitude to stipulate interest rates. Nevertheless, such stipulated
interest rates may be declared as illegal if the same is unconscionable.[14] There is
certainly nothing in said circular which grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets.[15] In fact, in Medel v. Court of Appeals,[16] we
annulled a stipulated 5.5% per month or 66% per annum interest with
additional service charge of 2% per annum and penalty charge of 1% per month
on a P500,000.00 loan for being excessive, iniquitous, unconscionable and
exorbitant.
In this case, however, we cannot consider the disputed 6% to 7% monthly
interest rate to be iniquitous or unconscionable vis--vis the principle laid down
in Medel. Noteworthy is the fact that in Medel, the defendant-spouses were
never able to pay their indebtedness from the very beginning and when their
obligations ballooned into a staggering sum, the creditors filed a collection case
against them. In this case, there was no urgency of the need for money on the
part of Jocelyn, the debtor, which compelled her to enter into said loan
transactions. She used the money from the loans to make advance payments for
prospective clients of educational plans offered by her employer. In this way, her
sales production would increase, thereby entitling her to 50% rebate on her
sales. This is the reason why she did not mind the 6% to 7% monthly
interest. Notably too, a business transaction of this nature between Jocelyn and
Marilou continued for more than five years. Jocelyn religiously paid the agreed
amount of interest until she ordered for stop payment on some of the checks
issued to Marilou. The checks were in fact sufficiently funded when she ordered
the stop payment and then filed a case questioning the imposition of a 6% to 7%
interest rate for being allegedly iniquitous or unconscionable and, hence,
contrary to morals.
It was clearly shown that before Jocelyn availed of said loans, she knew fully
well that the same carried with it an interest rate of 6% to 7% per month, yet she
did not complain. In fact, when she availed of said loans, an advance interest of
6% to 7% was already deducted from the loan amount, yet she never uttered a
word of protest.
After years of benefiting from the proceeds of the loans bearing an
interest rate of 6% to 7% per month and paying for the same, Jocelyn cannot now
go to court to have the said interest rate annulled on the ground that it is
excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to the
conscience of man. This is so because among the maxims of equity are (1) he who
seeks equity must do equity, and (2) he who comes into equity must come with
clean hands. The latter is a frequently stated maxim which is also expressed in
the principle that he who has done inequity shall not have equity. It signifies
that a litigant may be denied relief by a court of equity on the ground that his
conduct has been inequitable, unfair and dishonest, or fraudulent, or deceitful as
to the controversy in issue. [17]
We are convinced that Jocelyn did not come to court for equitable relief with
equity or with clean hands. It is patently clear from the above summary of the
facts that the conduct of Jocelyn can by no means be characterized as nobly fair,
just, and reasonable. This Court likewise notes certain acts of Jocelyn before
filing the case with the RTC. In September 1998, she requested Marilou not to
deposit her checks as she can cover the checks only the following month. On the
next month, Jocelyn again requested for another extension of one month. It
turned out that she was only sweet-talking Marilou into believing that she had
no money at that time. But as testified by Serapio Romarate,[18] an employee of
the Bank of Commerce where Jocelyn is one of their clients, there was an
available balance of P276,203.03 in the latters account and yet she ordered for
the stop payments of the seven checks which can actually be covered by the
available funds in said account. She then caught Marilou by surprise when she
surreptitiously filed a case for declaration of nullity of the document and for
damages.
The document
Acknowledgment of
Debt is valid and
binding.
Jocelyn seeks for the nullification of the document entitled Acknowledgment of
Debt and wants this Court to declare that she is no longer indebted to Marilou in
the amount of P290,000.00 as she had already paid a total amount
of P778,000.00. She claims that said document is an inexistent contract that is
void from the very beginning as clearly provided for by Article 1409[19] of the New
Civil Code.
Jocelyn further claims that she signed the said document and issued the seven
postdated checks because Marilou threatened to sue her for violation of BP Blg.
22.
Jocelyn is misguided. Even if there was indeed such threat made by
Marilou, the same is not considered as threat that would vitiate consent. Article
1335 of the New Civil Code is very specific on this matter. It provides:
Art. 1335. There is violence when in order to wrest
consent, serious or irresistible force is employed.
xxxx
A threat to enforce ones claim through
competent authority, if the claim is just or legal, does
not vitiate consent. (Emphasis supplied.)
Clearly, we cannot grant Jocelyn the relief she seeks.
As can be seen from the records of the case, Jocelyn has failed to prove her claim
that she was made to sign the document Acknowledgment of Debt and draw the
seven Bank of Commerce checks through force, threat and intimidation. As
earlier stressed, said document was signed in the office of Jocelyn, a high
ranking executive of CAP, and it was Jocelyn herself who went to the table of her
two subordinates to procure their signatures as witnesses to the execution of said
document. If indeed, she was forced to sign said document, then Jocelyn should
have immediately taken the proper legal remedy. But she did not. Furthermore,
it must be noted that after the execution of said document, Jocelyn honored the
first three checks before filing the complaint with the RTC. If indeed she was
forced she would never have made good on the first three checks.
It is provided, as one of the conclusive presumptions under Rule 131, Section
2(a), of the Rules of Court that, Whenever a party has, by his own declaration,
act or omission, intentionally and deliberately led another to believe a particular
thing to be true, and to act upon such belief, he cannot, in any litigation arising
out of such declaration, act or omission, be permitted to falsify it. This is known
as the principle of estoppel.
The essential elements of estoppel are: (1) conduct amounting to false
representation or concealment of material facts or at least calculated to convey
the impression that the facts are otherwise than, and inconsistent with, those
which the party subsequently attempts to assert; (2) intent, or at least
expectation, that this conduct shall be acted upon by, or at least influence, the
other party; and, (3) knowledge, actual or constructive, of the real facts.[20]

Here, it is uncontested that Jocelyn had in fact signed the Acknowledgment of

Debt in April 1998 and two of her subordinates served as witnesses to its
execution, knowing fully well the nature of the contract she was entering
into. Next, Jocelyn issued five checks in favor of Marilou representing renewal
payment of her loans amounting to P290,000.00. In June 1998, she asked to
recall Check No. 0010761 in the amount of P30,000.00 and replaced the same
with six checks, in staggered amounts. All these are indicia that Jocelyn treated
the Acknowledgment of Debt as a valid and binding contract.

More significantly, Jocelyn already availed herself of the benefits of the

Acknowledgment of Debt, the validity of which she now impugns. As aptly found
by the RTC and the CA, Jocelyn was making a business out of the loaned
amounts. She was actually using the money to make advance payments for her
prospective clients so that her sales production would increase. Accordingly, she
did not mind the 6% to 7% interest per month as she was getting a 50% rebate
on her sales.

Clearly, by her own acts, Jocelyn is estopped from impugning the validity of the
Acknowledgment of Debt. [A] party to a contract cannot deny the validity thereof
after enjoying its benefits without outrage to ones sense of justice and
fairness.[21] It is a long established doctrine that the law does not relieve a party
from the effects of an unwise, foolish or disastrous contract, entered into with all
the required formalities and with full awareness of what she was doing. Courts
have no power to relieve parties from obligations voluntarily assumed, simply
because their contracts turned out to be disastrous or unwise investments.[22]

WHEREFORE, the instant petition for review on certiorari is DENIED. The

Decision of the Court of Appeals in CA-G.R. CV No. 79805 dated August 24,
2005 affirming the Decision dated March 10, 2003 of the Regional Trial Court,
Branch 22, Cebu City, in Civil Case No. CEB-22867 is AFFIRMED.

SO ORDERED.
 Corporation Law; Board of Directors; Under the Corporation Law, event which constitutes the condition.” In the case at bar, there is no
unless otherwise provided, corporate powers are exercised by the Board of showing of compliance with the condition for allowing Yamamoto to take
Directors.—The resolution of the petition hinges, in the main, on whether the machineries and equipment, namely, his agreement to the deduction
the advice in the letter of Atty. Doce that Yamamoto may retrieve the of their value from his capital contribution due him in the buy-out of his
machineries and equipment, which admittedly were part of his interests in NLII. Yamamoto’s allegation that he agreed to the condition
investment, bound the corporation. The Court holds in the negative. remained just that, no proof thereof having been presented.
Indeed, without a Board Resolution authorizing respondent Nishino to
act for and in behalf of the corporation, he cannot bind the latter. Under Corporation Law; Trust Fund Doctrine; Words and Phrases; Under
the Corporation Law, unless otherwise provided, corporate powers are the trust fund doctrine, the capital stock, property, and other assets of a
exercised by the Board of Directors. corporation are regarded as equity in trust for the payment of corporate
creditors which are preferred over the stockholders in the distribution of
Same; Doctrine of Piercing the Veil of Corporate Fiction; Elements.— corporate assets.—It is settled that the property of a corporation is not
While the veil of separate corporate personality may be pierced when the the property of its stockholders or members. Under the trust fund
corporation is merely an adjunct, a business conduit, or alter ego of a doctrine, the capital stock, property, and other assets of a corporation are
person, the mere ownership by a single stockholder of even all or nearly regarded as equity in trust for the payment of corporate creditors which
all of the capital stocks of a corporation is not by itself a sufficient ground are preferred over the stockholders in the distribution of corporate
to disregard the separate corporate personality. The elements assets. The distribution of corporate assets and property cannot be made
determinative of the applicability of the doctrine of piercing the veil of to depend on the whims and caprices of the stockholders, officers, or
corporate fiction follow: “1. Control, not mere majority or complete stock directors of the corporation unless the indispensable conditions and
control, but complete domination, not only of finances but of policy and procedures for the protection of corporate creditors are followed.
business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind,
will or existence of its own; 2. Such control must have been used by the
defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust act in
contravention of the plaintiff’s legal rights; and 3. The aforesaid control
and breach of duty must proximately cause the injury or unjust loss
complained of. The absence of any one of these elements prevents
“piercing the corporate veil.” In applying the ‘instrumentality’ or ‘alter
ego’ doctrine, the courts are concerned with reality and not form, with how
the corporation operated and the individual defendant’s relationship to
that operation.” (Italics in the original; emphasis and underscoring
supplied)

Obligations and Contracts; Without acceptance, a mere offer

produces no obligation.—It bears noting, however, that the
aforementioned paragraph 12 of the letter is followed by a request for
Yamamoto to give his “comments on all the above, soonest.” What was
thus proffered to Yamamoto was not a promise, but a mere offer, subject
to his acceptance. Without acceptance, a mere offer produces no
obligation. Thus, under Article 1181 of the Civil Code, “[i]n conditional
obligations, the acquisition of rights, as well as the extinguishment or
loss of those already acquired, shall depend upon the happening of the
 of WAKO, reducing Yamamotos investment therein to, by his claim,
10%,[2] less than 10% according to Nishino.[3]

The corporate name of WAKO was later changed to, as

reflected earlier, its current name NLII.

SECOND DIVISION Negotiations subsequently ensued in light of a planned

takeover of NLII by Nishino who would buy-out the shares of stock of
Yamamoto. In the course of the negotiations, Yoshinobu and
RYUICHI YAMAMOTO, G.R. No. 150283 Nishinos counsel Atty. Emmanuel G. Doce (Atty. Doce) advised
Petitioner, Yamamoto by letter dated October 30, 1991, the pertinent portions
Present: of which follow:

QUISUMBING,* J., Chairperson, Hereunder is a simple memorandum of the

CARPIO MORALES,** subject matters discussed with me by Mr. Yoshinobu
- versus - TINGA, Nishino yesterday, October 29th, based on the letter
VELASCO, JR., and of Mr. Ikuo Nishino from Japan, and which I am now
BRION, JJ. transmitting to you.[4]

xxxx
NISHINO LEATHER INDUSTRIES, INC. and Promulgated:
IKUO NISHINO, April 16, 2008 12. Machinery and Equipment:
Respondents.
x---------------------------------------------- The following machinery/equipment have
---x been contributed by you to the company:

DECISION Splitting machine - 1 unit

Samming machine - 1 unit
CARPIO MORALES, J.: Forklift - 1 unit
In 1983, petitioner, Ryuichi Yamamoto (Yamamoto), a Drums - 4 units
Japanese national, organized under Philippine laws Wako Toggling machine - 2 units
Enterprises Manila, Incorporated (WAKO), a corporation engaged
principally in leather tanning, now known as Nishino Leather Regarding the above machines, you may take
Industries, Inc. (NLII), one of herein respondents. them out with you (for your own use and sale) if
you want, provided, the value of such machines
In 1987, Yamamoto and the other respondent, Ikuo Nishino is deducted from your and Wakos capital
(Nishino), also a Japanese national, forged a Memorandum of contributions, which will be paid to you.
Agreement under which they agreed to enter into a joint venture
wherein Nishino would acquire such number of shares of stock Kindly let me know of your comments on
equivalent to 70% of the authorized capital stock of WAKO. all the above, soonest.

Eventually, Nishino and his brother[1] Yoshinobu Nishino x x x x[5] (Emphasis and underscoring
(Yoshinobu) acquired more than 70% of the authorized capital stock supplied)

On the basis of such letter, Yamamoto attempted to recover
the machineries and equipment which were, by Yamamotos
admission, part of his investment in the corporation,[6] but he was
frustrated by respondents, drawing Yamamoto to file on January 15,
1992 before the Regional Trial Court (RTC) of Makati a
complaint[7] against them for replevin.
Branch 45 of the Makati RTC issued a writ of replevin after
Yamamoto filed a bond. [8]
In their Answer with Counterclaim,[9] respondents claimed
that the machineries and equipment subject of replevin form part of
Yamamotos capital contributions in consideration of his equity in
NLII and should thus be treated as corporate property; and that the
above-said letter of Atty. Doce to Yamamoto was merely a
proposal, conditioned on [Yamamotos] sell-out to . . . Nishino of his
entire equity,[10] which proposal was yet to be authorized by the
stockholders and Board of Directors of NLII.
By way of Counterclaim, respondents, alleging that they
suffered damage due to the seizure via the implementation of the writ
of replevin over the machineries and equipment, prayed for the
award to them of moral and exemplary damages, attorneys fees and
litigation expenses, and costs of suit.
The trial court, by Decision of June 9, 1995, decided the case
in favor of Yamamoto,[11] disposing thus:
WHEREFORE, judgment is hereby rendered:
(1) declaring plaintiff as the rightful owner and
possessor of the machineries in question, and
making the writ of seizure permanent; (2) ordering
defendants to pay plaintiff attorneys fees and
expenses of litigation in the amount of Fifty
Thousand Pesos (P50,000.00), Philippine Currency;
(3) dismissing defendants counterclaims for lack of
merit; and (4) ordering defendants to pay the costs of
suit.
SO ORDERED.[12] (Underscoring
supplied)
On appeal,[13] the Court of Appeals held in favor of herein
respondents and accordingly reversed the RTC decision and
dismissed the complaint.[14] In so holding, the appellate court found
that the machineries and equipment claimed by Yamamoto are
corporate property of NLII and may not thus be retrieved without the
authority of the NLII Board of Directors;[15] and that petitioners
argument that Nishino and Yamamoto cannot hide behind the shield
of corporate fiction does not lie,[16] nor does petitioners invocation of
the doctrine of promissory estoppel.[17] At the same time, the Court of
Appeals found no ground to support respondents Counterclaim.[18]
The Court of Appeals having denied[19] his Motion for
Reconsideration,[20] Yamamoto filed the present petition,[21] faulting
the Court of Appeals
A.
x x x IN HOLDING THAT THE VEIL OF CORPORATE
FICTION SHOULD NOT BE PIERCED IN THE CASE
AT BAR.
B.
x x x IN HOLDING THAT THE DOCTRINE OF
PROMISSORY ESTOPPEL DOES NOT APPLY TO
THE CASE AT BAR.
C.
x x x IN HOLDING THAT RESPONDENTS ARE NOT
LIABLE FOR ATTORNEYS FEES.[22]
The resolution of the petition hinges, in the main, on
whether the advice in the letter of Atty. Doce that Yamamoto may
retrieve the machineries and equipment, which admittedly were part
of his investment, bound the corporation. The Court holds in the
negative.
Indeed, without a Board Resolution authorizing respondent
Nishino to act for and in behalf of the corporation, he cannot bind the
latter. Under the Corporation Law, unless otherwise provided,
corporate powers are exercised by the Board of Directors.[23]

Urging this Court to pierce the veil of corporate fiction,
Yamamoto argues, viz:
During the negotiations, the issue as to the
ownership of the Machiner[ies] never came
up. Neither did the issue on the proper procedure to
be taken to execute the complete take-over of the
Company come up since Ikuo, Yoshinobu, and
Yamamoto were the owners thereof, the presence of
other stockholders being only for the purpose of
complying with the minimum requirements of the
law.
What course of action the Company decides
to do or not to do depends not on the other members
of the Board of Directors. It depends on what Ikuo
and Yoshinobu decide. The Company is but a
mere instrumentality of Ikuo [and] Yoshinobu.[24]
xxxx
x x x The Company hardly holds board
meetings. It has an inactive board, the directors are
directors in name only and are there to do the
bidding of the Nish[i]nos, nothing more. Its minutes
are paper minutes. x x x [25]
xxxx
The fact that the parties started at a 70-30
ratio and Yamamotos percentage declined to 10%
does not mean the 20% went to others. x x x The
20% went to no one else but Ikuo himself. x x
x Yoshinobu is the younger brother of Ikuo and
has no say at all in the business. Only Ikuo
makes the decisions. There were, therefore, no
other members of the Board who have not given
their approval.[26] (Emphasis and underscoring
supplied)
While the veil of separate corporate personality may be
pierced when the corporation is merely an adjunct, a business
conduit, or alter ego of a person,[27] the mere ownership by a single
stockholder of even all or nearly all of the capital stocks of a
corporation is not by itself a sufficient ground to disregard the
separate corporate personality.[28]
The elements determinative of the applicability of the
doctrine of piercing the veil of corporate fiction follow:
1. Control, not mere majority or complete
stock control, but complete domination, not only of
finances but of policy and business practice in respect
to the transaction attacked so that the corporate
entity as to this transaction had at the time no
separate mind, will or existence of its own;
2. Such control must have been used by the
defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of the
plaintiffs legal rights; and
3. The aforesaid control and breach of duty
must proximately cause the injury or unjust loss
complained of.
The absence of any one of these elements
prevents piercing the corporate veil. In applying
the instrumentality or alter ego doctrine, the courts
are concerned with reality and not form, with how the
corporation operated and the individual defendants
relationship to that operation.[29] (Italics in the
original; emphasis and underscoring supplied)
In relation to the second element, to disregard the separate juridical
personality of a corporation, the wrongdoing or unjust act in
contravention of a plaintiffs legal rights must be clearly and
convincingly established; it cannot be presumed.[30] Without a
demonstration that any of the evils sought to be prevented by the
doctrine is present, it does not apply.[31]
In the case at bar, there is no showing that Nishino used the
separate personality of NLII to unjustly act or do wrong to Yamamoto
in contravention of his legal rights.
 Yamamoto argues, in another
that promissory estoppel lies against respondents, thus:
Under the doctrine of promissory estoppel, x
x x estoppel may arise from the making of a promise,
even though without consideration, if it was
intended that the promise should be relied upon and
in fact it was relied upon, and if a refusal to enforce
it would be virtually to sanction the perpetration of
fraud or would result in other injustice.
x x x Ikuo and Yoshinobu wanted Yamamoto
out of the Company. For this purpose negotiations
were had between the parties. Having expressly
given Yamamoto, through the Letter and through a
subsequent meeting at the Manila Peninsula where
Ikuo himself confirmed that Yamamoto may take out
the Machinery from the Company anytime,
respondents should not be allowed to turn around
and do the exact opposite of what they have
represented they will do.
In paragraph twelve (12) of the Letter,
Yamamoto was expressly advised that he could take
out the Machinery if he wanted to so, provided that
the value of said machines would be deducted from
his capital contribution x x x.
xxxx
Respondents cannot now argue that they did
not intend for Yamamoto to rely upon the
Letter. That was the purpose of the Letter to begin
with. Petitioner[s] in fact, relied upon said Letter and
such reliance was further strengthened during their
meeting at the Manila Peninsula.
To sanction respondents attempt to evade
their obligation would be to sanction the
perpetration of fraud and injustice against
petitioner.[32] (Underscoring supplied)
vein, It bears noting, however, that the aforementioned paragraph
12 of the letter is followed by a request for Yamamoto to give
his comments on all the above, soonest.[33]
What was thus proffered to Yamamoto was not a promise,
but a mere offer, subject to his acceptance. Without acceptance, a
mere offer produces no obligation.[34]
Thus, under Article 1181 of the Civil Code, [i]n conditional
obligations, the acquisition of rights, as well as the extinguishment
or loss of those already acquired, shall depend upon the happening
of the event which constitutes the condition. In the case at bar, there
is no showing of compliance with the condition for allowing
Yamamoto to take the machineries and equipment, namely, his
agreement to the deduction of their value from his capital
contribution due him in the buy-out of his interests in
NLII. Yamamotos allegation that he agreed to the
condition[35] remained just that, no proof thereof having been
presented.
The machineries and equipment, which comprised
Yamamotos investment in NLII,[36] thus remained part of the capital
property of the corporation.[37]
It is settled that the property of a corporation is not the
property of its stockholders or members.[38] Under the trust fund
doctrine, the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment of
corporate creditors which are preferred over the stockholders in the
distribution of corporate assets.[39] The distribution of corporate
assets and property cannot be made to depend on the whims and
caprices of the stockholders, officers, or directors of the corporation
unless the indispensable conditions and procedures for the
protection of corporate creditors are followed.[40]
WHEREFORE, the petition is DENIED.
Costs against petitioner.
SO ORDERED.
CONCHITA CARPIO MORALES
Associate Justice
 Actions; Pleadings, Practice and Procedure; The object of pleadings
is to draw the lines of battle between the litigants and to indicate fairly
the nature of the claims or defenses of both parties; Courts of justice have
no jurisdiction or power to decide a question not in issue.—This is not an
instance where a party merely failed to assign an issue as an error in the
brief nor failed to argue a material point on appeal that was raised in the
trial court and supported by the record. Neither is this a case where a
party raised an error closely related to, nor dependent on the resolution
of, an error properly assigned in his brief. This is a situation where a
party completely changes his theory of the case on appeal and abandons
his previous assignment of errors in his brief, which plainly should not be
allowed as anathema to due process. Petitioners should be reminded that
the object of pleadings is to draw the lines of battle between the litigants
and to indicate fairly the nature of the claims or defenses of both parties.
In Philippine National Construction Corporation v. Court of Appeals, 467
SCRA 569 (2005), we held that “[w]hen a party adopts a certain theory in
the trial court, he will not be permitted to change his theory on appeal,
for to permit him to do so would not only be unfair to the other party but
it would also be offensive to the basic rules of fair play, justice and due
process.” We have also previously ruled that “courts of justice have no
jurisdiction or power to decide a question not in issue. Thus, a judgment
that goes beyond the issues and purports to adjudicate something on
which the court did not hear the parties, is not only irregular but also
extrajudicial and invalid. The rule rests on the fundamental tenets of fair
play.”
Obligations and Contracts; Sales; A provision in a Conditional Deed of
Sale stating that the vendee shall pay the balance of the purchase price
when he has successfully negotiated and secured a road right of way is
not a condition on the perfection of the contract nor on the validity of the
entire contract or its compliance as contemplated by Article 1308 of the
Civil Code—such a condition is not purely potestative—such a condition
is likewise dependent on chance as there is no guarantee that the vendee
and the third-party landowners would come to an agreement regarding
the road right of way, a type mixed condition expressly allowed under
Article 1182 of the Civil Code.—In the past, this Court has distinguished
between a condition imposed on the perfection of a contract and a
condition imposed merely on the performance of an obligation. While
failure to comply with the first condition results in the failure of a
contract, failure to comply with the second merely gives the other party
the option to either refuse to proceed with the sale or to waive the
condition. This principle is evident in Article 1545 of the Civil Code on
sales, which provides in part: Art. 1545. Where the obligation of either
party to a contract of sale is subject to any condition which is not
performed, such party may refuse to proceed with the contract or he may
waive performance of the condition x x x. Paragraph 1(b) of the
Conditional Deed of Sale, stating that respondent shall pay the balance
of the purchase price when he has successfully negotiated and secured a
road right of way, is not a condition on the perfection of the contract nor
on the validity of the entire contract or its compliance as contemplated in
Article 1308. It is a condition imposed only on respondent’s obligation to
pay the remainder of the purchase price. In our view and applying
Article 1182, such a condition is not purely potestative as petitioners
contend. It is not dependent on the sole will of the debtor but also on the
will of third persons who own the adjacent land and from whom the road
right of way shall be negotiated. In a manner of speaking, such a
condition is likewise dependent on chance as there is no guarantee that
respondent and the third party-landowners would come to an agreement
regarding the road right of way. This type of mixed condition is expressly
allowed under Article 1182 of the Civil Code.
Same; Same; Interpretation of Contracts; A basic rule in the
interpretation of contracts is that the contract should be taken as a
whole.—It is petitioners’ strategy to insist that the Court examine the
first sentence of paragraph 5 alone and, resist a correlation of such
sentence with other provisions of the contract. Petitioners’ view,
however, ignores a basic rule in the interpretation of contracts—that the
contract should be taken as a whole. Article 1374 of the Civil Code
provides that “[t]he various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result
from all of them taken jointly.” The same Code further sets down the rule
that “[i]f some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.” Similarly, under the Rules of Court it is
prescribed that “[i]n the construction of an instrument where there are
several provisions or particulars, such a construction is, if possible, to be
adopted as will give effect to all” and “for the proper construction of an
instrument, the circumstances under which it was made, including the
situation of the subject thereof and of the parties to it, may be shown, so
that the judge may be placed in the position of those whose language he
is to interpret.”
Same; Same; Where the so-called potestative condition is imposed
not on the birth of the obligation but on its fulfillment, only the condition
is avoided, leaving unaffected the obligation itself.—In any event, even if
we assume for the sake of argument that the grant to Rodriguez of an
option to rescind, in the manner provided for in the contract, is Rodriguez is given a period of thirty (30) days from the finality of this
tantamount to a potestative condition, not being a condition affecting the decision to negotiate a road right of way. In the event no road right of
perfection of the contract, only the said condition would be considered way is secured by Rodriguez at the end of said period, the parties shall
void and the rest of the contract will remain valid. In Romero, the Court reassess and discuss other options as stipulated in paragraph 1(b) of the
observed that “where the so-called ‘potestative condition’ is imposed not Conditional Deed of Sale and, for this purpose, they are given a period of
on the birth of the obligation but on its fulfillment, only the condition is thirty (30) days to agree on a course of action. Should the discussions of
avoided, leaving unaffected the obligation itself.” the parties prove futile after the said thirty (30)-day period, immediately
upon the expiration of said period for discussion, Rodriguez may (a)
Same; Same; Being the primary law between the parties, the contract exercise his option to rescind the contract, subject to the return of his
governs the adjudication of their rights and obligations—a court has no downpayment, in accordance with the provisions of paragraphs 1(b) and
alternative but to enforce the contractual stipulations in the manner they 5 of the Conditional Deed of Sale or (b) waive the road right of way and
have been agreed upon and written.—It cannot be gainsaid that pay the balance of the deducted purchase price as determined in the RTC
“contracts have the force of law between the contracting parties and Decision dated May 30, 1992.
should be complied with in good faith.” We have also previously ruled
that “[b]eing the primary law between the parties, the contract governs
the adjudication of their rights and obligations. A court has no
alternative but to enforce the contractual stipulations in the manner
they have been agreed upon and written.” We find no merit in
petitioners’ contention that their parents were merely “duped” into
accepting the questioned provisions in the Conditional Deed of Sale. We
note that although the contract was between Agapita Catungal and
Rodriguez, Jose Catungal nonetheless signed thereon to signify his
marital consent to the same. We concur with the trial court’s finding that
the spouses Catungals’ claim of being misled into signing the contract
was contrary to human experience and conventional wisdom since it was
Jose Catungal who was a practicing lawyer while Rodriguez was a non-
lawyer. It can be reasonably presumed that Atty. Catungal and his wife
reviewed the provisions of the contract, understood and accepted its
provisions before they affixed their signatures thereon.

Same; Same; The Court, having made the observation that it was
desirable for the vendor to file a separate action to fix the period for the
vendee’s obligation to negotiate a road right of way, the Court finds it
necessary to fix said period in these proceedings.—After thorough review
of the records of this case, we have come to the conclusion that
petitioners failed to demonstrate that the Court of Appeals committed
any reversible error in deciding the present controversy. However,
having made the observation that it was desirable for the Catungals to
file a separate action to fix the period for respondent Rodriguez’s
obligation to negotiate a road right of way, the Court finds it necessary to
fix said period in these proceedings. It is but equitable for us to make a
determination of the issue here to obviate further delay and in line with
the judicial policy of avoiding multiplicity of suits. If still warranted,
 Before the Court is a Petition for Review on Certiorari, assailing the
FIRST DIVISION following issuances of the Court of Appeals in CA-G.R. CV No. 40627
consolidated with CA-G.R. SP No. 27565: (a) the August 8, 2000
Decision,[1] which affirmed the Decision[2] dated May 30, 1992 of the
Regional Trial Court (RTC), Branch 27 of Lapu-lapu City, Cebu in
Civil Case No. 2365-L, and (b) the January 30, 2001
ROLANDO T. CATUNGAL, JOSE G.R. No. 146839 Resolution,[3] denying herein petitioners motion for reconsideration of
T. CATUNGAL, JR., CAROLYN T. the August 8, 2000 Decision.
CATUNGAL and ERLINDA
CATUNGAL-WESSEL, Present: The relevant factual and procedural antecedents of this case are as
Petitioners, follows:

CORONA, C.J.,
Chairperson,
VELASCO, JR., This controversy arose from a Complaint for Damages and Injunction
LEONARDO-DE CASTRO, with Preliminary Injunction/Restraining Order[4] filed on December
DEL CASTILLO, and 10, 1990 by herein respondent Angel S. Rodriguez (Rodriguez), with
PEREZ, JJ. the RTC, Branch 27, Lapu-lapu City, Cebu, docketed as Civil Case
- versus - No. 2365-L against the spouses Agapita and Jose Catungal (the
Promulgated: spouses Catungal), the parents of petitioners.

March 23, 2011

In the said Complaint, it was alleged that Agapita T. Catungal

(Agapita) owned a parcel of land (Lot 10963) with an area of 65,246
square meters, covered by Original Certificate of Title (OCT) No.
ANGEL S. RODRIGUEZ, 105[5] in her name situated in the Barrio of Talamban, Cebu
City. The said property was allegedly the exclusive paraphernal
Respondent. property of Agapita.
x----------------------------------------------
-----x
On April 23, 1990, Agapita, with the consent of her husband Jose,
entered into a Contract to Sell[6] with respondent
Rodriguez. Subsequently, the Contract to Sell was purportedly
upgraded into a Conditional Deed of Sale[7] dated July 26, 1990
between the same parties. Both the Contract to Sell and the
DECISION Conditional Deed of Sale were annotated on the title.

The provisions of the Conditional Deed of Sale pertinent to the

LEONARDO-DE CASTRO, J.: present dispute are quoted below:

1. The VENDOR for and in consideration of the sum
of TWENTY[-]FIVE MILLION PESOS
(P25,000,000.00) payable as follows:
a. FIVE HUNDRED THOUSAND PESOS
(P500,000.00) downpayment upon the signing of this
agreement, receipt of which sum is hereby
acknowledged in full from the VENDEE.
b. The balance of TWENTY[-]FOUR MILLION FIVE
HUNDRED THOUSAND PESOS (P24,500,000.00)
shall be payable in five separate checks, made to the
order of JOSE Ch. CATUNGAL, the first check shall
be for FOUR MILLION FIVE HUNDRED THOUSAND
PESOS (P4,500,000.00) and the remaining balance
to be paid in four checks in the amounts of FIVE
MILLION PESOS (P5,000,000.00) each after the
VENDEE have (sic) successfully negotiated, secured
and provided a Road Right of Way consisting of 12
meters in width cutting across Lot 10884 up to the
national road, either by widening the existing Road
Right of Way or by securing a new Road Right of Way
of 12 meters in width. If however said Road Right of
Way could not be negotiated, the VENDEE shall give
notice to the VENDOR for them to reassess and solve
the problem by taking other options and should the
situation ultimately prove futile, he shall take steps
to rescind or cancel the herein Conditional Deed of
Sale.
c. That the access road or Road Right of Way leading
to Lot 10963 shall be the responsibility of the
VENDEE to secure and any or all cost relative to the
acquisition thereof shall be borne solely by the
VENDEE. He shall, however, be accorded with
enough time necessary for the success of his
endeavor, granting him a free hand in negotiating for
the passage.
BY THESE PRESENTS, the VENDOR do hereby
agree to sell by way of herein CONDITIONAL DEED
OF SALE to VENDEE, his heirs, successors and
assigns, the real property described in the Original
Certificate of Title No. 105 x x x.
xxxx
5. That the VENDEE has the option to rescind the
sale. In the event the VENDEE exercises his option
to rescind the herein Conditional Deed of Sale, the
VENDEE shall notify the VENDOR by way of a
written notice relinquishing his rights over the
property. The VENDEE shall then be reimbursed by
the VENDOR the sum of FIVE HUNDRED
THOUSAND PESOS (P500,000.00) representing the
downpayment, interest free, payable but contingent
upon the event that the VENDOR shall have been
able to sell the property to another party.[8]
In accordance with the Conditional Deed of Sale, Rodriguez
purportedly secured the necessary surveys and plans and through
his efforts, the property was reclassified from agricultural land into
residential land which he claimed substantially increased the
propertys value. He likewise alleged that he actively negotiated for
the road right of way as stipulated in the contract.[9]
Rodriguez further claimed that on August 31, 1990 the spouses
Catungal requested an advance of P5,000,000.00 on the purchase
price for personal reasons. Rodriquez allegedly refused on the ground implementation of defendants rescission of their
that the amount was substantial and was not due under the terms of Conditional Deed of Sale with plaintiff [Rodriguez].
their agreement. Shortly after his refusal to pay the advance, he
purportedly learned that the Catungals were offering the property for
sale to third parties.[10]
2. After hearing, a writ of preliminary injunction be
issued upon such reasonable bond as may be fixed
by the court enjoining defendants and other persons
Thereafter, Rodriguez received letters dated October 22, acting in their behalf from performing any of the acts
1990,[11] October 24, 1990[12] and October 29, 1990,[13] all signed by mentioned in the next preceding paragraph.
Jose Catungal who was a lawyer, essentially demanding that the
former make up his mind about buying the land or exercising his 3. After trial, a Decision be rendered:
option to buy because the spouses Catungal allegedly received other
offers and they needed money to pay for personal obligations and for
investing in other properties/business ventures. Should Rodriguez
fail to exercise his option to buy the land, the Catungals warned that a) Making the injunction permanent;
they would consider the contract cancelled and that they were free to
look for other buyers.

b) Condemning defendants to pay to

plaintiff, jointly and solidarily:
In a letter dated November 4, 1990,[14] Rodriguez registered his
objections to what he termed the Catungals unwarranted demands
in view of the terms of the Conditional Deed of Sale which allowed
him sufficient time to negotiate a road right of way and granted him, Actual damages in the amount
the vendee, the exclusive right to rescind the contract. Still, on of P400,000.00 for their unlawful rescission of the
November 15, 1990, Rodriguez purportedly received a letter dated Agreement and their performance of acts in violation
November 9, 1990[15] from Atty. Catungal, stating that the contract or disregard of the said Agreement;
had been cancelled and terminated.

Moral damages in the amount

Contending that the Catungals unilateral rescission of the of P200,000.00;
Conditional Deed of Sale was unjustified, arbitrary and unwarranted,
Rodriquez prayed in his Complaint, that:

1. Upon the filing of this complaint, a restraining Exemplary damages in the amount
order be issued enjoining defendants [the spouses of P200,000.00; Expenses of litigation and attorneys
Catungal], their employees, agents, representatives fees in the amount of P100,000.00; and
or other persons acting in their behalf from offering
the property subject of this case for sale to third
persons; from entertaining offers or proposals by
Costs of suit.[16]
third persons to purchase the said property; and, in
general, from performing acts in furtherance or

On December 12, 1990, the trial court issued a temporary
restraining order and set the application for a writ of preliminary
injunction for hearing on December 21, 1990 with a directive to the
spouses Catungal to show cause within five days from notice why
preliminary injunction should not be granted. The trial court likewise
ordered that summons be served on them.[17]
Thereafter, the spouses Catungal filed their opposition[18] to the
issuance of a writ of preliminary injunction and later filed a motion
to dismiss[19] on the ground of improper venue. According to the
Catungals, the subject property was located in Cebu City and thus,
the complaint should have been filed in Cebu City, not Lapu-lapu
City. Rodriguez opposed the motion to dismiss on the ground that
his action was a personal action as its subject was breach of a
contract, the Conditional Deed of Sale, and not title to, or possession
of real property.[20]
In an Order dated January 17, 1991,[21] the trial court denied the
motion to dismiss and ruled that the complaint involved a personal
action, being merely for damages with a prayer for injunction.
Subsequently, on January 30, 1991, the trial court ordered the
issuance of a writ of preliminary injunction upon posting by
Rodriguez of a bond in the amount of P100,000.00 to answer for
damages that the defendants may sustain by reason of the
injunction.
On February 1, 1991, the spouses Catungal filed their Answer with
Counterclaim[22] alleging that they had the right to rescind the
contract in view of (1) Rodriguezs failure to negotiate the road right of
way despite the lapse of several months since the signing of the
contract, and (2) his refusal to pay the additional amount
of P5,000,000.00 asked by the Catungals, which to them indicated
his lack of funds to purchase the property. The Catungals likewise
contended that Rodriguez did not have an exclusive right to rescind
the contract and that the contract, being reciprocal, meant both
parties had the right to rescind.[23] The spouses Catungal further
claimed that it was Rodriguez who was in breach of their agreement
and guilty of bad faith which justified their rescission of the
contract.[24] By way of counterclaim, the spouses Catungal prayed for
actual and consequential damages in the form of unearned interests
from the balance (of the purchase price in the amount)
of P24,500,000.00, moral and exemplary damages in the amount
of P2,000,000.00, attorneys fees in the amount of P200,000.00 and
costs of suits and litigation expenses in the amount
of P10,000.00.[25] The spouses Catungal prayed for the dismissal of
the complaint and the grant of their counterclaim.
The Catungals amended their Answer twice,[26] retaining their basic
allegations but amplifying their charges of contractual breach and
bad faith on the part of Rodriguez and adding the argument that in
view of Article 1191 of the Civil Code, the power to rescind reciprocal
obligations is granted by the law itself to both parties and does not
need an express stipulation to grant the same to the injured party. In
the Second Amended Answer with Counterclaim, the spouses
Catungal added a prayer for the trial court to order the Register of
Deeds to cancel the annotations of the two contracts at the back of
their OCT.[27]
On October 24, 1991, Rodriguez filed an Amended
Complaint,[28] adding allegations to the effect that the Catungals were
guilty of several misrepresentations which purportedly induced
Rodriguez to buy the property at the price of P25,000,000.00. Among
others, it was alleged that the spouses Catungal misrepresented that
their Lot 10963 includes a flat portion of land which later turned out
to be a separate lot (Lot 10986) owned by Teodora Tudtud who sold
the same to one Antonio Pablo. The Catungals also allegedly
misrepresented that the road right of way will only traverse two lots
owned by Anatolia Tudtud and her daughter Sally who were their
relatives and who had already agreed to sell a portion of the said lots
for the road right of way at a price of P550.00 per square
meter. However, because of the Catungals acts of offering the
property to other buyers who offered to buy the road lots
for P2,500.00 per square meter, the adjacent lot owners were no
longer willing to sell the road lots to Rodriguez at P550.00 per square
meter but were asking for a price of P3,500.00 per square meter. In
other words, instead of assisting Rodriguez in his efforts to negotiate
the road right of way, the spouses Catungal allegedly intentionally
and maliciously defeated Rodriguezs negotiations for a road right of
way in order to justify rescission of the said contract and enable
them to offer the property to other buyers.
Despite requesting the trial court for an extension of time to file an
amended Answer,[29] the Catungals did not file an amended Answer
and instead filed an Urgent Motion to Dismiss[30] again invoking the
ground of improper venue. In the meantime, for failure to file an
amended Answer within the period allowed, the trial court set the
case for pre-trial on December 20, 1991.
During the pre-trial held on December 20, 1991, the trial court
denied in open court the Catungals Urgent Motion to Dismiss for
violation of the rules and for being repetitious and having been
previously denied.[31] However, Atty. Catungal refused to enter into
pre-trial which prompted the trial court to declare the defendants in
default and to set the presentation of the plaintiffs evidence on
February 14, 1992.[32]
On December 23, 1991, the Catungals filed a motion for
reconsideration[33] of the December 20, 1991 Order denying their
Urgent Motion to Dismiss but the trial court denied reconsideration
in an Order dated February 3, 1992.[34] Undeterred, the Catungals
subsequently filed a Motion to Lift and to Set Aside Order of
Default[35] but it was likewise denied for being in violation of the rules
and for being not meritorious.[36] On February 28, 1992, the
Catungals filed a Petition for Certiorari and Prohibition[37] with the
Court of Appeals, questioning the denial of their motion to dismiss
and the order of default. This was docketed as CA-G.R. SP No.
27565.
Meanwhile, Rodriguez proceeded to present his evidence
before the trial court.
In a Decision dated May 30, 1992, the trial court ruled in favor of
Rodriguez, finding that: (a) under the contract it was complainant
(Rodriguez) that had the option to rescind the sale; (b) Rodriguezs
obligation to pay the balance of the purchase price arises only upon
successful negotiation of the road right of way; (c) he proved his
diligent efforts to negotiate the road right of way; (d) the spouses
Catungal were guilty of misrepresentation which defeated Rodriguezs
efforts to acquire the road right of way; and (e) the Catungals
rescission of the contract had no basis and was in bad faith. Thus,
the trial court made the injunction permanent, ordered the
Catungals to reduce the purchase price by the amount of acquisition
of Lot 10963 which they misrepresented was part of the property
sold but was in fact owned by a third party and ordered them to
pay P100,000.00 as damages, P30,000.00 as attorneys fees and
costs.
The Catungals appealed the decision to the Court of Appeals,
asserting the commission of the following errors by the trial court in
their appellants brief[38] dated February 9, 1994:
I
THE COURT A QUO ERRED IN NOT DISMISSING
OF (SIC) THE CASE ON THE GROUNDS OF
IMPROPER VENUE AND LACK OF JURISDICTION.
II
THE COURT A QUO ERRED IN CONSIDERING THE
CASE AS A PERSONAL AND NOT A REAL ACTION.
III
GRANTING WITHOUT ADMITTING THAT VENUE
WAS PROPERLY LAID AND THE CASE IS A
PERSONAL ACTION, THE COURT A QUO ERRED IN
DECLARING THE DEFENDANTS IN DEFAULT
DURING THE PRE-TRIAL WHEN AT THAT TIME THE
DEFENDANTS HAD ALREADY FILED THEIR
ANSWER TO THE COMPLAINT.
IV
THE COURT A QUO ERRED IN CONSIDERING THE
DEFENDANTS AS HAVING LOST THEIR LEGAL
STANDING IN COURT WHEN AT MOST THEY
COULD ONLY BE CONSIDERED AS IN DEFAULT
AND STILL ENTITLED TO NOTICES OF ALL
FURTHER PROCEEDINGS ESPECIALLY AFTER
THEY HAD FILED THE MOTION TO LIFT THE
ORDER OF DEFAULT.
V THE DEFENDANTS ON THE BASIS OF EVIDENCE
THE COURT A QUO ERRED IN ISSUING THE WRIT
[OF] PRELIMINARY INJUNCTION RESTRAINING
THE EXERCISE OF ACTS OF OWNERSHIP AND
OTHER RIGHTS OVER REAL PROPERTY OUTSIDE
OF THE COURTS TERRITORIAL JURISDICTION
AND INCLUDING PERSONS WHO WERE NOT
BROUGHT UNDER ITS JURISDICTION, THUS THE
NULLITY OF THE WRIT.
VI
THE COURT A QUO ERRED IN NOT RESTRAINING
ITSELF MOTU PROP[R]IO FROM CONTINUING WITH
THE PROCEEDINGS IN THE CASE AND IN
RENDERING DECISION THEREIN IF ONLY FOR
REASON OF COURTESY AND FAIRNESS BEING
MANDATED AS DISPENSER OF FAIR AND EQUAL
JUSTICE TO ALL AND SUNDRY WITHOUT FEAR OR
FAVOR IT HAVING BEEN SERVED EARLIER WITH A
COPY OF THE PETITION FOR CERTIORARI
QUESTIONING ITS VENUE AND JURISDICTION IN
CA-G.R. NO. SP 27565 IN FACT NOTICES FOR THE
FILING OF COMMENT THERETO HAD ALREADY
BEEN SENT OUT BY THE HONORABLE COURT OF
APPEALS, SECOND DIVISION, AND THE COURT A
QUO WAS FURNISHED WITH COPY OF SAID
NOTICE.
VII
THE COURT A QUO ERRED IN DECIDING THE
CASE IN FAVOR OF THE PLAINTIFF AND AGAINST
WHICH ARE IMAGINARY, FABRICATED, AND
DEVOID OF TRUTH, TO BE STATED IN DETAIL IN
THE DISCUSSION OF THIS PARTICULAR ERROR,
AND, THEREFORE, THE DECISION IS
REVERSIBLE.[39]
On August 31, 1995, after being granted several extensions,
Rodriguez filed his appellees brief,[40] essentially arguing the
correctness of the trial courts Decision regarding the foregoing issues
raised by the Catungals. Subsequently, the Catungals filed a Reply
Brief[41] dated October 16, 1995.

From the filing of the appellants brief in 1994 up to the filing
of the Reply Brief, the spouses Catungal were represented by
appellant Jose Catungal himself. However, a new counsel for the
Catungals, Atty. Jesus N. Borromeo (Atty. Borromeo), entered his
appearance before the Court of Appeals on September 2, 1997.[42] On
the same date, Atty. Borromeo filed a Motion for Leave of Court to
File Citation of Authorities[43] and a Citation of Authorities.[44] This
would be followed by Atty. Borromeos filing of an Additional Citation
of Authority and Second Additional Citation of Authority both on
November 17, 1997.[45]
During the pendency of the case with the Court of Appeals,
Agapita Catungal passed away and thus, her husband, Jose, filed on
February 17, 1999 a motion for Agapitas substitution by her
surviving children.[46]
On August 8, 2000, the Court of Appeals rendered a
Decision in the consolidated cases CA-G.R. CV No. 40627 and CA-
G.R. SP No. 27565,[47] affirming the trial courts Decision.
In a Motion for Reconsideration dated August 21,
2000,[48] counsel for the Catungals, Atty. Borromeo, argued for the
first time that paragraphs 1(b) and 5[49] of the Conditional Deed of
Sale, whether taken separately or jointly, violated the principle of
mutuality of contracts under Article 1308 of the Civil Code and thus,
said contract was void ab initio. He adverted to the cases mentioned
in his various citations of authorities to support his argument of
nullity of the contract and his position that this issue may be raised
for the first time on appeal.
Meanwhile, a Second Motion for Substitution[50] was filed by
Atty. Borromeo in view of the death of Jose Catungal.
In a Resolution dated January 30, 2001, the Court of Appeals
allowed the substitution of the deceased Agapita and Jose Catungal
by their surviving heirs and denied the motion for reconsideration for
lack of merit
Hence, the heirs of Agapita and Jose Catungal filed on
March 27, 2001 the present petition for review,[51] which essentially
argued that the Court of Appeals erred in not finding that
paragraphs 1(b) and/or 5 of the Conditional Deed of Sale, violated
the principle of mutuality of contracts under Article 1308 of the Civil
Code. Thus, said contract was supposedly void ab initio and the
Catungals rescission thereof was superfluous.
In his Comment,[52] Rodriguez highlighted that (a) petitioners
were raising new matters that cannot be passed upon on appeal; (b)
the validity of the Conditional Deed of Sale was already admitted and
petitioners cannot be allowed to change theories on appeal; (c) the
questioned paragraphs of the Conditional Deed of Sale were valid;
and (d) petitioners were the ones who committed fraud and breach of
contract and were not entitled to relief for not having come to court
with clean hands.
The Court gave due course to the Petition[53] and the parties
filed their respective Memoranda.
The issues to be resolved in the case at bar can be summed
into two questions:
I. Are petitioners allowed to raise their theory of
nullity of the Conditional Deed of Sale for the first
time on appeal?
 II. Do paragraphs 1(b) and 5 of the Conditional
Deed of Sale violate the principle of mutuality of
contracts under Article 1308 of the Civil Code?
On petitioners change of
theory
Petitioners claimed that the Court of Appeals should have
reversed the trial courts Decision on the ground of the alleged nullity
of paragraphs 1(b) and 5 of the Conditional Deed of Sale
notwithstanding that the same was not raised as an error in their
appellants brief. Citing Catholic Bishop of Balanga v. Court of
Appeals,[54] petitioners argued in the Petition that this case falls
under the following exceptions:
(3) Matters not assigned as errors on appeal
but consideration of which is necessary in arriving at
a just decision and complete resolution of the case
or to serve the interest of justice or to avoid
dispensing piecemeal justice;
(4) Matters not specifically assigned as
errors on appeal but raised in the trial court and are
matters of record having some bearing on the issue
submitted which the parties failed to raise or which
the lower court ignored;
(5) Matters not assigned as errors on appeal
but closely related to an error assigned; and
(6) Matters not assigned as errors but upon
which the determination of a question properly
assigned is dependent.[55]
We are not persuaded.
This is not an instance where a party merely failed to assign
an issue as an error in the brief nor failed to argue a material point
on appeal that was raised in the trial court and supported by the
record. Neither is this a case where a party raised an error closely
related to, nor dependent on the resolution of, an error properly
assigned in his brief. This is a situation where a party completely
changes his theory of the case on appeal and abandons his previous
assignment of errors in his brief, which plainly should not be allowed
as anathema to due process.
Petitioners should be reminded that the object of pleadings is
to draw the lines of battle between the litigants and to indicate fairly
the nature of the claims or defenses of both parties.[56] In Philippine
National Construction Corporation v. Court of Appeals,[57] we held that
[w]hen a party adopts a certain theory in the trial court, he will not
be permitted to change his theory on appeal, for to permit him to do
so would not only be unfair to the other party but it would also be
offensive to the basic rules of fair play, justice and due process.[58]
We have also previously ruled that courts of justice have no
jurisdiction or power to decide a question not in issue. Thus, a
judgment that goes beyond the issues and purports to adjudicate
something on which the court did not hear the parties, is not only
irregular but also extrajudicial and invalid. The rule rests on the
fundamental tenets of fair play.[59]
 During the proceedings before the trial court, the spouses
Catungal never claimed that the provisions in the Conditional Deed
of Sale, stipulating that the payment of the balance of the purchase
price was contingent upon the successful negotiation of a road right
of way (paragraph 1[b]) and granting Rodriguez the option to rescind
(paragraph 5), were void for allegedly making the fulfillment of the
contract dependent solely on the will of Rodriguez.
On the contrary, with respect to paragraph 1(b), the
Catungals did not aver in the Answer (and its amended versions) that
the payment of the purchase price was subject to the will of
Rodriguez but rather they claimed that paragraph 1(b) in relation to
1(c) only presupposed a reasonable time be given to Rodriguez to
negotiate the road right of way. However, it was petitioners theory
that more than sufficient time had already been given Rodriguez to
negotiate the road right of way. Consequently, Rodriguezs
refusal/failure to pay the balance of the purchase price, upon
demand, was allegedly indicative of lack of funds and a breach of the
contract on the part of Rodriguez.
Anent paragraph 5 of the Conditional Deed of Sale, regarding
Rodriguezs option to rescind, it was petitioners theory in the court a
quo that notwithstanding such provision, they retained the right to
rescind the contract for Rodriguezs breach of the same under Article
1191 of the Civil Code.
Verily, the first time petitioners raised their theory of the
nullity of the Conditional Deed of Sale in view of the questioned
provisions was only in their Motion for Reconsideration of the Court
of Appeals Decision, affirming the trial courts judgment. The
previous filing of various citations of authorities by Atty. Borromeo
and the Court of Appeals resolutions noting such citations were of no
moment. The citations of authorities merely listed cases and their
main rulings without even any mention of their relevance to the
present case or any prayer for the Court of Appeals to consider
them.In sum, the Court of Appeals did not err in disregarding the
citations of authorities or in denying petitioners motion for
reconsideration of the assailed August 8, 2000 Decision in view of
the proscription against changing legal theories on appeal.
Ruling on the questioned
provisions of the
Conditional Deed of Sale
Even assuming for the sake of argument that this Court may
overlook the procedural misstep of petitioners, we still cannot uphold
their belatedly proffered arguments.
At the outset, it should be noted that what the parties entered into is
a Conditional Deed of Sale, whereby the spouses Catungal agreed to
sell and Rodriguez agreed to buy Lot 10963 conditioned on the
payment of a certain price but the payment of the purchase price
was additionally made contingent on the successful negotiation of a
road right of way. It is elementary that [i]n conditional obligations,
the acquisition of rights, as well as the extinguishment or loss of
those already acquired, shall depend upon the happening of the
event which constitutes the condition.[60]
Petitioners rely on Article 1308 of the Civil Code to support their
conclusion regarding the claimed nullity of the aforementioned
provisions. Article 1308 states that [t]he contract must bind both
contracting parties; its validity or compliance cannot be left to the
will of one of them.
Article 1182 of the Civil Code, in turn, provides:
Art. 1182. When the fulfillment of the condition
depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends
 upon chance or upon the will of a third person, the
obligation shall take effect in conformity with the
provisions of this Code.
In the past, this Court has distinguished between a condition
imposed on the perfection of a contract and a condition imposed
merely on the performance of an obligation. While failure to comply
with the first condition results in the failure of a contract, failure to
comply with the second merely gives the other party the option to
either refuse to proceed with the sale or to waive the
condition.[61] This principle is evident in Article 1545 of the Civil Code
on sales, which provides in part:
Art. 1545. Where the obligation of either party to a
contract of sale is subject to any condition which is
not performed, such party may refuse to proceed
with the contract or he may waive performance of
the condition x x x.
Paragraph 1(b) of the Conditional Deed of Sale, stating that
respondent shall pay the balance of the purchase price when he has
successfully negotiated and secured a road right of way, is not a
condition on the perfection of the contract nor on the validity of the
entire contract or its compliance as contemplated in Article 1308. It
is a condition imposed only on respondents obligation to pay the
remainder of the purchase price. In our view and applying Article
1182, such a condition is not purely potestative as petitioners
contend. It is not dependent on the sole will of the debtor but also on
the will of third persons who own the adjacent land and from whom
the road right of way shall be negotiated. In a manner of speaking,
such a condition is likewise dependent on chance as there is no
guarantee that respondent and the third party-landowners would
come to an agreement regarding the road right of way. This type of
mixed condition is expressly allowed under Article 1182 of the Civil
Code.
Analogous to the present case is Romero v. Court of
Appeals,[62] wherein the Court interpreted the legal effect of a
condition in a deed of sale that the balance of the purchase price
would be paid by the vendee when the vendor has successfully
ejected the informal settlers occupying the property. In Romero, we
found that such a condition did not affect the perfection of the
contract but only imposed a condition on the fulfillment of the
obligation to pay the balance of the purchase price, to wit:
From the moment the contract is perfected,
the parties are bound not only to the fulfillment of
what has been expressly stipulated but also to all
the consequences which, according to their nature,
may be in keeping with good faith, usage and law.
Under the agreement, private respondent is
obligated to evict the squatters on the property. The
ejectment of the squatters is a condition the
operative act of which sets into motion the
period of compliance by petitioner of his own
obligation, i.e., to pay the balance of the
purchase price. Private respondent's failure to
remove the squatters from the property" within
the stipulated period gives petitioner the right to
either refuse to proceed with the agreement or
waive that condition in consonance with Article
1545 of the Civil Code. This option clearly belongs
to petitioner and not to private respondent.
We share the opinion of the appellate
court that the undertaking required of private
respondent does not constitute a "potestative
condition dependent solely on his will" that
might, otherwise, be void in accordance with
Article 1182 of the Civil Code but a "mixed"
condition "dependent not on the will of the
 vendor alone but also of third persons like the
squatters and government agencies and
personnel concerned." We must hasten to add,
however, that where the so-called "potestative
condition" is imposed not on the birth of the
obligation but on its fulfillment, only the condition is
avoided, leaving unaffected the obligation
itself.[63] (Emphases supplied.)
From the provisions of the Conditional Deed of Sale subject
matter of this case, it was the vendee (Rodriguez) that had the
obligation to successfully negotiate and secure the road right of
way.However, in the decision of the trial court, which was affirmed
by the Court of Appeals, it was found that respondent Rodriguez
diligently exerted efforts to secure the road right of way but the
spouses Catungal, in bad faith, contributed to the collapse of the
negotiations for said road right of way. To quote from the trial courts
decision:
It is therefore apparent that the vendees
obligations (sic) to pay the balance of the purchase
price arises only when the road-right-of-way to the
property shall have been successfully negotiated,
secured and provided. In other words, the obligation
to pay the balance is conditioned upon the
acquisition of the road-right-of-way, in accordance
with paragraph 2 of Article 1181 of the New Civil
Code. Accordingly, an obligation dependent upon a
suspensive condition cannot be demanded until after
the condition takes place because it is only after the
fulfillment of the condition that the obligation arises.
(Javier v[s] CA 183 SCRA) Exhibits H, D, P, R, T, FF
and JJ show that plaintiff [Rodriguez] indeed was
diligent in his efforts to negotiate for a road-
right-of-way to the property. The written offers,
proposals and follow-up of his proposals show that
plaintiff [Rodriguez] went all out in his efforts to
immediately acquire an access road to the property,
even going to the extent of offering P3,000.00 per
square meter for the road lots (Exh. Q) from the
original P550.00 per sq. meter. This Court also notes
that defendant (sic) [the Catungals] made
misrepresentation in the negotiation they have
entered into with plaintiff [Rodriguez]. (Exhs. F
and G) The misrepresentation of defendant (sic) [the
Catungals] as to the third lot (Lot 10986) to be part
and parcel of the subject property [(]Lot
10963) contributed in defeating the plaintiffs
[Rodriguezs] effort in acquiring the road-right-of-
way to the property. Defendants [the Catungals]
cannot now invoke the non-fulfillment of the
condition in the contract as a ground for
rescission when defendants [the Catungals]
themselves are guilty of preventing the
fulfillment of such condition.
From the foregoing, this Court is of the
considered view that rescission of the conditional
deed of sale by the defendants is without any legal or
factual basis.[64] x x x. (Emphases supplied.)
In all, we see no cogent reason to disturb the foregoing
factual findings of the trial court.
Furthermore, it is evident from the language of paragraph
1(b) that the condition precedent (for respondents obligation to pay
the balance of the purchase price to arise) in itself partly involves an
obligation to do, i.e., the undertaking of respondent to negotiate and
secure a road right of way at his own expense.[65] It does not escape
our notice as well, that far from disclaiming paragraph 1(b) as void, it
was the Catungals contention before the trial court that said
provision should be read in relation to paragraph 1(c) which stated:
 c. That the access road or Road Right of Way
leading to Lot 10963 shall be the responsibility of
the VENDEE to secure and any or all cost relative to
the acquisition thereof shall be borne solely by the
VENDEE. He shall, however, be accorded with
enough time necessary for the success of his
endeavor, granting him a free hand in negotiating
for the passage.[66] (Emphasis supplied.)
The Catungals interpretation of the foregoing stipulation was
that Rodriguezs obligation to negotiate and secure a road right of
way was one with a period and that period, i.e., enough time to
negotiate, had already lapsed by the time they demanded the
payment of P5,000,000.00 from respondent. Even assuming
arguendo that the Catungals were correct that the respondents
obligation to negotiate a road right of way was one with an uncertain
period, their rescission of the Conditional Deed of Sale would still be
unwarranted. Based on their own theory, the Catungals had a
remedy under Article 1197 of the Civil Code, which mandates:
Art. 1197. If the obligation does not fix a
period, but from its nature and the circumstances it
can be inferred that a period was intended, the
courts may fix the duration thereof.
The courts shall also fix the duration of the
period when it depends upon the will of the debtor.
In every case, the courts shall determine
such period as may under the circumstances have
been probably contemplated by the parties. Once
fixed by the courts, the period cannot be changed by
them.
What the Catungals should have done was to first file an
action in court to fix the period within which Rodriguez should
accomplish the successful negotiation of the road right of way
pursuant to the above quoted provision. Thus, the Catungals
demand for Rodriguez to make an additional payment
of P5,000,000.00 was premature and Rodriguezs failure to accede to
such demand did not justify the rescission of the contract.
With respect to petitioners argument that paragraph 5 of the
Conditional Deed of Sale likewise rendered the said contract void, we
find no merit to this theory. Paragraph 5 provides:
5. That the VENDEE has the option to
rescind the sale. In the event the VENDEE exercises
his option to rescind the herein Conditional Deed of
Sale, the VENDEE shall notify the VENDOR by way
of a written notice relinquishing his rights over the
property. The VENDEE shall then be reimbursed by
the VENDOR the sum of FIVE HUNDRED
THOUSAND PESOS (P500,000.00) representing the
downpayment, interest free, payable but contingent
upon the event that the VENDOR shall have been
able to sell the property to another party.[67]
Petitioners posited that the above stipulation was the deadliest
provision in the Conditional Deed of Sale for violating the principle of
mutuality of contracts since it purportedly rendered the contract
subject to the will of respondent.
We do not agree.

It is petitioners strategy to insist that the Court examine the
first sentence of paragraph 5 alone and resist a correlation of such
sentence with other provisions of the contract. Petitioners view,
however, ignores a basic rule in the interpretation of contracts that
the contract should be taken as a whole.
Article 1374 of the Civil Code provides that [t]he various
stipulations of a contract shall be interpreted together, attributing to
the doubtful ones that sense which may result from all of them taken
jointly. The same Code further sets down the rule that [i]f some
stipulation of any contract should admit of several meanings, it shall
be understood as bearing that import which is most adequate to
render it effectual.[68]
Similarly, under the Rules of Court it is prescribed that [i]n
the construction of an instrument where there are several provisions
or particulars, such a construction is, if possible, to be adopted as
will give effect to all[69] and for the proper construction of an
instrument, the circumstances under which it was made, including
the situation of the subject thereof and of the parties to it, may be
shown, so that the judge may be placed in the position of those
whose language he is to interpret.[70]
Bearing in mind the aforementioned interpretative rules, we
find that the first sentence of paragraph 5 must be taken in relation
with the rest of paragraph 5 and with the other provisions of the
Conditional Deed of Sale.
Reading paragraph 5 in its entirety will show that Rodriguezs
option to rescind the contract is not absolute as it is subject to the
requirement that there should be written notice to the vendor and
the vendor shall only return Rodriguezs downpayment
of P500,000.00, without interest, when the vendor shall have been
able to sell the property to another party. That what is stipulated to
be returned is only the downpayment of P500,000.00 in the event
that Rodriguez exercises his option to rescind is significant. To recall,
paragraph 1(b) of the contract clearly states that the installments on
the balance of the purchase price shall only be paid upon successful
negotiation and procurement of a road right of way. It is clear from
such provision that the existence of a road right of way is a material
consideration for Rodriguez to purchase the property. Thus, prior to
him being able to procure the road right of way, by express
stipulation in the contract, he is not bound to make additional
payments to the Catungals. It was further stipulated in paragraph
1(b) that: [i]f however said road right of way cannot be negotiated, the
VENDEE shall give notice to the VENDOR for them to reassess and
solve the problem by taking other options and should the situation
ultimately prove futile, he [Rodriguez] shall take steps to rescind
or [cancel] the herein Conditional Deed of Sale. The intention of
the parties for providing subsequently in paragraph 5 that Rodriguez
has the option to rescind the sale is undeniably only limited to the
contingency that Rodriguez shall not be able to secure the road right
of way. Indeed, if the parties intended to give Rodriguez the absolute
option to rescind the sale at any time, the contract would have
provided for the return of all payments made by Rodriguez and not
only the downpayment. To our mind, the reason only the
downpayment was stipulated to be returned is that the vendees
option to rescind can only be exercised in the event that no road
right of way is secured and, thus, the vendee has not made any
additional payments, other than his downpayment.
In sum, Rodriguezs option to rescind the contract is not
purely potestative but rather also subject to the
same mixed condition as his obligation to pay the balance of the
purchase price i.e., the negotiation of a road right of way. In the
event the condition is fulfilled (or the negotiation is successful),
Rodriguez must pay the balance of the purchase price. In the event
the condition is not fulfilled (or the negotiation fails), Rodriguez has
the choice either (a) to not proceed with the sale and demand return
of his downpayment or (b) considering that the condition was
imposed for his benefit, to waive the condition and still pay the
purchase price despite the lack of road access. This is the most just
interpretation of the parties contract that gives effect to all its
provisions.
In any event, even if we assume for the sake of argument
that the grant to Rodriguez of an option to rescind, in the manner
provided for in the contract, is tantamount to a potestative condition,
not being a condition affecting the perfection of the contract, only the
said condition would be considered void and the rest of the contract
will remain valid. In Romero, the Court observed that where the so-
called potestative condition is imposed not on the birth of the
obligation but on its fulfillment, only the condition is avoided, leaving
unaffected the obligation itself.[71]
It cannot be gainsaid that contracts have the force of law
between the contracting parties and should be complied with in good
faith.[72] We have also previously ruled that [b]eing the primary law
between the parties, the contract governs the adjudication of their
rights and obligations. A court has no alternative but to enforce the
contractual stipulations in the manner they have been agreed upon
and written.[73] We find no merit in petitioners contention that their
parents were merely duped into accepting the questioned provisions
in the Conditional Deed of Sale. We note that although the contract
was between Agapita Catungal and Rodriguez, Jose Catungal
nonetheless signed thereon to signify his marital consent to the
same. We concur with the trial courts finding that the spouses
Catungals claim of being misled into signing the contract was
contrary to human experience and conventional wisdom since it was
Jose Catungal who was a practicing lawyer while Rodriquez was a
non-lawyer.[74] It can be reasonably presumed that Atty. Catungal
and his wife reviewed the provisions of the contract, understood and
accepted its provisions before they affixed their signatures thereon.
After thorough review of the records of this case, we have come to the
conclusion that petitioners failed to demonstrate that the Court of
Appeals committed any reversible error in deciding the present
controversy. However, having made the observation that it was
desirable for the Catungals to file a separate action to fix the period
for respondent Rodriguezs obligation to negotiate a road right of way,
the Court finds it necessary to fix said period in these proceedings. It
is but equitable for us to make a determination of the issue here to
obviate further delay and in line with the judicial policy of avoiding
multiplicity of suits.
If still warranted, Rodriguez is given a period of thirty
(30) days from the finality of this decision to negotiate a road
right of way. In the event no road right of way is secured by
Rodriquez at the end of said period, the parties shall reassess
and discuss other options as stipulated in paragraph 1(b) of the
Conditional Deed of Sale and, for this purpose, they are given a
period of thirty (30) days to agree on a course of action. Should
the discussions of the parties prove futile after the said thirty
(30)-day period, immediately upon the expiration of said period
for discussion, Rodriguez may (a) exercise his option to rescind
the contract, subject to the return of his downpayment, in
accordance with the provisions of paragraphs 1(b) and 5 of the
Conditional Deed of Sale or (b) waive the road right of way and
pay the balance of the deducted purchase price as determined in
the RTC Decision dated May 30, 1992.
WHEREFORE, the Decision dated August 8, 2000 and
the Resolution dated January 30, 2001 of the Court of Appeals in
CA-G.R. CV No. 40627 consolidated with CA-G.R. SP No. 27565
are AFFIRMED with the following MODIFICATION:
If still warranted, respondent Angel S. Rodriguez is given
a period of thirty (30) days from the finality of this Decision to
negotiate a road right of way. In the event no road right of way is
secured by respondent at the end of said period, the parties shall
reassess and discuss other options as stipulated in paragraph
1(b) of the Conditional Deed of Sale and, for this purpose, they
are given a period of thirty (30) days to agree on a course of
action. Should the discussions of the parties prove futile after
the said thirty (30)-day period, immediately upon the expiration
of said period for discussion, Rodriguez may (a) exercise his
option to rescind the contract, subject to the return of his
downpayment, in accordance with the provisions of paragraphs
1(b) and 5 of the Conditional Deed of Sale or (b) waive the road
right of way and pay the balance of the deducted purchase price
as determined in the RTC Decision dated May 30, 1992.
No pronouncement as to costs.
SO ORDERED.
Civil Law; Obligations; Reciprocal Obligations; Reciprocal obligations are
those that arise from the same cause, and in which each party is a debtor
and a creditor of the other at the same time, such that the obligations of
one are dependent upon the obligations of the other.—The obligations of
the parties under the JVA were unquestionably reciprocal. Reciprocal
obligations are those that arise from the same cause, and in which each
party is a debtor and a creditor of the other at the same time, such that
the obligations of one are dependent upon the obligations of the other.
They are to be performed simultaneously, so that the performance by one
is conditioned upon the simultaneous fulfillment by the other. As the
Court has expounded in Consolidated Industrial Gases, Inc. v. Alabang
Medical Center, 709 SCRA 409 (2013): Reciprocal obligations are those
which arise from the same cause, and in which each party is a debtor and
a creditor of the other, such that the obligation of one is dependent upon
the obligation of the other. They are to be performed simultaneously, so
that the performance of one is conditioned upon the simultaneous
fulfillment of the other. 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. x x x x In
reciprocal obligations, before a party can demand the performance of the
obligation of the other, the former must also perform its own obligation.
For its failure to turn over a complete project in accordance with the
terms and conditions of the installation contracts, CIGI cannot demand
for the payment of the contract price balance from AMC, which, in turn,
cannot legally be ordered to pay
Same; Same; Conditional Obligations; Suspensive Conditions; According
to Article 1184 of the Civil Code, the condition that some event happen at
a determinate time shall extinguish the obligation as soon as the time
expires, or if it has become indubitable that the event will not take
place.—According to Article 1184 of the Civil Code, the condition that
some event happen at a determinate time shall extinguish the obligation
as soon as the time expires, or if it has become indubitable that the event
will not take place. Here, the common cause of the parties in entering
into the joint venture was the development of the joint venture property
into the residential subdivision as to eventually profit therefrom.
Consequently, all of the obligations under the JVA were subject to the
happening of the complete development of the joint venture property, or
if it would become indubitable that the completion would not take place,
like when an obligation, whether continuous or activity, was not
performed. Should any of the obligations, whether continuous or activity,
be not performed, all the other remaining obligations would not ripen
into demandable obligations while those already performed would cease
to take effect. This is because every single obligation of each party under
the JVA rested on the common cause of profiting from the developed
subdivision.
.FIRST DIVISION
G.R. No. 169694, December 09, 2015
MEGAWORLD PROPERTIES AND HOLDINGS, INC., EMPIRE EAST
LAND HOLDINGS, INC., AND ANDREW L. TAN,
Petitioners,
v.
MAJESTIC FINANCE AND INVESTMENT CO., INC., RHODORA
LOPEZ-LIM, AND PAULINA CRUZ,
Respondents.
DECISION
BERSAMIN, J.:
This case arises from a dispute on whether either party of a joint
venture agreement to develop property into a residential subdivision
has already performed its obligation as to entitle it to demand the
performance of the other's reciprocal
obligation.chanRoblesvirtualLawlibrary
The Case
Under review is the decision promulgated on April 27,
2005,1 whereby the Court of Appeals (CA) upheld the order issued on
November 5, 2002 by the Regional Trial Court, Branch 67, in Pasig
City (RTC) in Civil Case No. 67813 directing the defendants
(petitioners herein) to perform their obligation to provide round-the-
clock security for the property under development.2 Also appealed is
the resolution promulgated on September 12, 2005 denying the
petitioners' motion for reconsideration.3chanRoblesvirtualLawlibrary
 Antecedents
On September 23, 1994, Megaworld Properties and Holdings, Inc.
(developer) entered into a Joint Venture Agreement (JVA)4 with
Majestic Finance and Investment Co., Inc. (owner) for the
development of the residential subdivision located in Brgy. Alingaro,
General Trias, Cavite. According to the JVA, the development of the
215 hectares of land belonging to the owner (joint venture property)
would be for the sole account of the developer;5 and that upon
completion of the development of the subdivision, the owner would
compensate the developer in the form of saleable residential
subdivision lots.6 The JVA further provided that the developer would
advance all the costs for the relocation and resettlement of the
occupants of the joint venture property, subject to reimbursement by
the owner;7 and that the developer would deposit the initial amount
of P10,000,000.00 to defray the expenses for the relocation and
settlement, and the costs for obtaining from the Government the
exemptions and conversion permits, and the required
clearances.8chanroblesvirtuallawlibrary
On September 24, 1994, the developer and owner agreed, through
the addendum to the JVA,9 to increase the initial deposit for the
settlement of claims and the relocation of the tenants from
P10,000,000.00 to P60,000,000.00.
On October 27, 1994, the developer, by deed of
assignment,10 transferred, conveyed and assigned to Empire East
Land Holdings, Inc. (developer/assignee) all its rights and obligations
under the JVA including the addendum.
On February 29, 2000, the owner filed in the RTC a complaint for
specific performance with damages against the developer, the
developer/assignee, and respondent Andrew Tan, who are now the
petitioners herein. The complaint, docketed as Civil Case No. 67813,
was mainly based on the failure of the petitioners to comply with
their obligations under the JVA,11 including the obligation to
maintain a strong security force to safeguard the entire joint venture
property of 215 hectares from illegal entrants and occupants.
Following the joinder of issues by the petitioners' answer with
counterclaim, and by the respondents' reply with answer to the
counterclaim, the RTC set the pre-trial of the case. At the conclusion
of the pre-trial conference, the presentation of the owner's evidence
was suspended because of the parties' manifestation that they would
settle the case amicably. It appears that the parties negotiated with
each other on how to implement the JVA and the addendum.
On September 16, 2002, the owner filed in the RTC a manifestation
and motion,12 praying therein that the petitioners be directed to
provide round-the-clock security for the joint venture property in
order to defend and protect it from the invasion of unauthorized
persons. The petitioners opposed the manifestation and
motion,13 pointing out that: (1) the move to have them provide
security in the properties was premature; and (2) under the principle
of reciprocal obligations, the owner could not compel them to
perform their obligations under the JVA if the owner itself refused to
honor its obligations under the JVA and the addendum.
On November 5, 2002, the RTC issued its first assailed
order,14 directing the developer to provide sufficient round-the-clock
security for the protection of the joint venture property, as follows:
For consideration is a "Manifestation and Motion" filed by plaintiff,
through counsel, defendants having filed their Opposition thereto,
the incident is now ripe for resolution.
After a careful examination of the records of this case, the Court
believes that the defendants should provide security for the 215
hectares land subject of the joint venture agreement to protect it
from unlawful elements as well as to avoid undue damage which may
be caused by the settling of squatters. As specified in Article III par.
(j) of the joint venture agreement which was entered into by plaintiffs
and defendants, the latter shall at its exclusive account and sole
expense secure the land in question from the influx of squatters
and/or unauthorized settlers, occupants, tillers, cultivators and the
likes from date of execution of this agreement.
WHEREFORE, and as prayed for, the Court hereby directs the
defendants to provide sufficient round the clock security for the
protection of the 215 hectares land subject of the joint venture
agreement during the pendency of this case.
SO ORDERED.
The petitioners sought the reconsideration of the November 5, 2002
order,15 but the RTC denied the motion on May 19, 2003,16 observing
that there was no reason to reverse the order in question considering
that the allegations in the motion for reconsideration, being a mere
rehash of those made earlier, had already been passed upon.
On August 4, 2003, the petitioners instituted a special civil action
for certiorari in the CA,17 claiming therein that the RTC thereby
gravely abused its discretion amounting to lack or excess of
jurisdiction in issuing the order of November 5, 2002, specifying the
following grounds, namely:
THE PUBLIC RESPONDENT GRAVELY ABUSED HIS DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
DIRECTING PETITIONERS TO PROVIDE ROUND THE CLOCK
SECURITY GUARDS ON THE SUBJECT PROPERTIES.
I. THE PUBLIC RESPONDENT ARBITRARILY AND PREMATURELY
DISPOSED OF ONE OF THE RELIEF[S] PRAYED FOR BY PRIVATE
RESPONDENTS IN THEIR COMPLAINT WHEN TRIAL HAS NOT
EVEN STARTED.
II. PUBLIC RESPONDENT ARBITRARILY DISREGARDED THE FACT
THAT THE PARTIES ARE DISCUSSING HOW TO PURSUE THE JVA.
III. PUBLIC RESPONDENT ARBITRARILY DISREGARDED THE
PRINCIPLE OF "RECIPROCAL OBLIGATIONS" UNDER THE CIVIL
CODE.
On April 27, 2005, the CA promulgated its assailed decision
dismissing the petitioner's petition for certiorari,18 ruling thusly:
On the merits of the petition, our examination of the records shows
nothing whimsical or arbitrary in the respondent judge's order
directing the petitioners to provide security over the joint venture
property. Like the respondent judge, we believe that the obligation of
the petitioners under the JVA to provide security in the area, as
spelled out under Article II, par. (c) and Article III, paragraphs (h)
and (j), is well established, thus:
x x x x
These clear and categorical provisions in the JVA -which petitioners
themselves do not question -obviously belie their contention that the
respondent judge's order to provide security for the property is
premature at this stage. The petitioner's obligation to secure the
property under the JVA arose upon the execution of the Agreement,
or as soon as the petitioners acquired possession of the joint venture
property in 1994, and is therefore already demandable. The settled
rule is that "contracts are the laws between the contracting parties,
and if their terms are clear and leave no room for doubt as to their
intentions, the contracts are obligatory no matter what their forms
may be, whenever the essential requisites for their validity are
present." Thus, unless the existence of this particular obligation -
i.e., to secure the joint venture property - is challenged, petitioners
are bound to respect the terms of the Agreement and of his obligation
as the law between them and MAJESTIC.
We stress along this line that the complaint MAJESTIC filed below is
for specific performance and is not for rescission of contract. The
complaint presupposes existing obligations on the part of the
petitioners that MAJESTIC seeks to be carried out in accordance
with the terms of the Agreement. Significantly, MAJESTIC did not
pray in the complaint that petitioners be ordered to secure the area
from the influx of illegal settlers and squatters because petitioner's
obligation in this regard commenced upon the execution of the JVA
and hence, is already an existing obligation. What it did ask is for the
petitioners to maintain a strong security force at all times over the
area, in keeping with their commitment to secure the area from the
influx of illegal settlers and occupant. To be sure, to "maintain"
means "to continue", "to carry on", to "hold or keep in any particular
state or condition" and presupposes an obligation that already
began. Thus, contrary to petitioner's submissions, the question of
whether or not they have the obligation to provide security in the
area is not at all an issue in the case below. The issue MAJESTIC
presented below is whether or not petitioner should be ordered to
maintain a strong security force within the joint venture property.
Hence, in issuing the assailed orders, the public respondent
prejudged no issue that is yet to be resolved after the parties shall
have presented their evidence.
Our conclusion (that the petitioner's obligation to secure and protect
the joint venture property is a non-issue in the case below)
necessarily explains why the first assailed order -although not in the
form of a preliminary mandatory injunction -is nonetheless legally
justified. As an established and undisputed interim measure pending
the resolution of the case on the merits, we do not see its
enforcement as hindrance to whatever negotiations the parties may
undertake to settle their dispute.
Nor do we find the principle of reciprocal obligations a justification
for petitioner's refusal to perform their commitment of safeguarding
the joint venture property. For, while it is true that the JVA gives rise
to reciprocal obligations from both parties, these obligations are not
necessarily demandable at the same time. MAJESTIC's initial
obligation under the JVA is to deliver or surrender to the petitioners
the possession of the joint venture property -an obligation it fulfilled
upon the execution of the Agreement. MAJESTIC's obligation under
the JVA to deliver to the petitioners the titles to the joint venture
property and to reimburse them for tenant-related expenses are
demandable at later stages of the contract or upon completion of the
development, and therefore may not be used by the petitioners as an
excuse for not complying with their own currently demandable
obligation.
All told, we believe that securing and protecting the area from
unlawful elements benefits both the developer and the landowner
who are equally keen in safeguarding their interests in the project.
Otherwise stated, incursion by unlawful settlers into an unsecured
and unprotected joint venture property can only cause great loss and
damage to both parties. Reasons of practicality within legal
parameters, rather than grave abuse of discretion, therefore underlie
the respondent judge's challenged orders.
WHEREFORE, premises considered, we hereby DISMISS the petition
for lack of merit.
SO ORDERED.19 (Emphasis omitted)
On May 26, 2005, the petitioners filed a motion for
reconsideration,20 but the CA denied the motion on September 12,
2005.21chanroblesvirtuallawlibrary
Hence, this appeal by petition for review
on certiorari.chanRoblesvirtualLawlibrary
Issues
The petitioner submits the following issues:
a. Whether or not the petitioners are obligated to perform their
obligations under the JVA, including that of providing
round-the-clock security for the subject properties, despite
respondents' failure or refusal to acknowledge, or perform
their reciprocal obligations there;
b. Whether or not the RTC gravely abused its discretion in
directing the petitioners to perform their obligations under
the JVA, including that of providing round-the-clock security
for the subject properties, although the JVA had been
suspended due to the parties' disagreement as to how to
implement the same;
c. Whether or not the RTC gravely abused its discretion in
issuing the first and second assailed orders and prematurely
resolving and disposing of one of the causes of action of the
respondents, which was to provide round-the-clock security
for the subject properties, an issue proposed by the
respondents, even before the termination of the pre-trial;
d. Whether or not the RTC gravely abused its discretion in
issuing the first and second assailed orders in clear
disregard of the mandatory requirements of Rule 58 of
the Rules of Court.22chanroblesvirtuallawlibrary
Ruling of the Court
The appeal is meritorious. The CA erred in upholding the November
5, 2002 order of the RTC.
The obligations of the parties under the JVA were unquestionably
reciprocal. Reciprocal obligations are those that arise from the same
cause, and in which each party is a debtor and a creditor of the other
at the same time, such that the obligations of one are dependent
upon the obligations of the other. They are to be performed
simultaneously, so that the performance by one is conditioned upon
the simultaneous fulfillment by the other.23 As the Court has
expounded in Consolidated Industrial Gases, Inc. v. Alabang Medical
Center:24chanroblesvirtuallawlibrary
Reciprocal obligations are those which arise from the same cause,
and in which each party is a debtor and a creditor of the other, such
that the obligation of one is dependent upon the obligation of the
other. They are to be performed simultaneously, so that the
performance of one is conditioned upon the simultaneous fulfillment
of the other. In reciprocal obligations, neither party incurs in delay if
the successful Art. IIIa par. 2
the other does not comply or is not ready to comply in a proper
development of the Project Deposit P10M
manner with what is incumbent upon him. From the moment one of
Art. V par. 2
the parties fulfills his obligation, delay by the other begins.
Pay real estate taxes
Art. II(g)
xxxx
Warrant absolute
ownership
In reciprocal obligations, before a party can demand the performance
of the obligation of the other, the former must also perform its own DEVELOPER to Art. II(b) Art. V par. 2
obligation. For its failure to turn over a complete project in negotiate Deliver any and all Pay real estate
accordance with the terms and conditions of the installation immediately with documents required for taxes
contracts, CIGI cannot demand for the payment of the contract price all tenants, the successful Art. II(c)
balance from AMC, which, in turn, cannot legally be ordered to settlers, development of the Project Take possession of
pay.25chanrobleslaw occupants, tillers, Art. V par. 2 the parcels of land
cultivators of the Pay real estate taxes Art. III (j)
The determination of default on the part of either of the parties land in question. Art. II(c) Secure property
depends on the terms of the JVA that clearly categorized the parties' Allow DEVELOPER to take from invasion of
several obligations into two types. possession of subject squatters and
property other elements
The first type related to the continuous obligations that would be Art. III (c)
continuously performed from the moment of the execution of the JVA To negotiate with
until the parties shall have achieved the purpose of their joint occupants
venture. The continuous obligations under the JVA were as follows:
(1) the developer would secure the joint venture property from DEVELOPER to Art. II(b) Art. V par. 2
unauthorized occupants;26 (2) the owner would allow the developer to pay and settle all Deliver any and all Pay real estate
take possession of the joint venture property;27 (3) the owner would monetary claims documents required for taxes
deliver any and all documents necessary for the accomplishment of of all tenants, the successful Art. II(c)
each activity;28 and (4) both the developer and the owner would pay settlers, development of the Project Take possession of
the real estate taxes.29chanroblesvirtuallawlibrary occupants, tillers, Art. V par. 2 the parcels of land
cultivators of the Pay real estate taxes Art. III (j)
The second type referred to the activity obligations. The following land. Art. VI Secure property
table shows the activity obligations of the parties under the JVA, to Must consent on the from invasion of
wit: reasonableness of the squatters and
expenses. other elements
Art. III(a) par. 1
SEQUENCE OF ACTIVITIES (Article XIV of the JVA) Advance expense
for settlement and
ACTIVITY OWNER DEVELOPER
relocation
OBLIGATION OBLIGATION
Art. III(a) par. 2
Signing of JVA. Sign JVA Sign JVA Deposit P10M in a
Art. II(b) Art. V par. 2 joint account of
Deliver any and all Pay real estate parties.
documents required for taxes
DEVELOPER to Art. II(b) Art. V par. 2 conversion conversion/reclassification other elements
relocate and Deliver any and all Pay real estate application of the of subject property Art. III(a)
transfer all the documents required for taxes land in question Art. III(b) Advance expenses
tenants, settlers, the successful Art. III(c) within a period of Give DEVELOPER for exemption,
occupants, tillers, development of the Project Take possession of one and a half (1 authority to apply for conversion, re-
cultivators of the Art. V par. 2 the parcels of land 1/2) years from exemption, conversion and classification
land to their Pay real estate taxes Art. III(j) date of execution re-classification. expenses.
relocation site, Art. II(d) Secure property of this Agreement Art. VI Art.III(b) secure
and shall Agree to allocate and from invasion of subject to a six (6) Must consent on the exemption and
endeavor to fulfill aggregate a resettlement squatters and month extension. reasonableness of the conversion permit
the same and the site within the property other elements expenses.
two immediately subject to mutually Art. III(a) par. 1
preceding accepted conditions. Advance expense DEVELOPER to Art.III(i) Art. III(d)
paragraphs (b & c) Art. VI for settlement and lay out a complete Give written conformity to Complete
up to the extent of Must consent on the relocation Development Plan the development plan comprehensive
75% reasonableness of the Art. III(a)par. 2 development plan
accomplishment expenses. Deposit P10M in a (within 6 months
thereof within a joint account of to one year from
period of one (1) OWNER and the execution of
year from date of DEVELOPER the JVA)
execution of this Art. III(c)
Agreement. The Relocate the DEVELOPER to Art. II(b) Art. V par. 2
remaining 25% of occupants apply for and Deliver any and all Pay real estate
the same secure all documents required for taxes
requirements shall necessary the successful Art. II(c)
be fully development development of the Project Take possession of
accomplished permit, Art. V par. 2 the parcels of land
within another 6 performance Pay real estate taxes Art. III (j)
months from date bonds, Secure property
of expiration of the environmental from invasion of
original one-year compliance squatters and
period. certificate, license other elements
to sell and all Art. III(f)
DEVELOPER to Art. II(b) Art. V par. 2 other related Secure
apply for and Deliver any and all Pay real estate requirement from development
secure exemption documents required for taxes the pertinent permit, ECC,
or conversion the successful Art. II(c) Municipal License to Sell, etc.
permit and such development of the Project Take possession of Government,
other related Art. V par. 2 the parcels of land DENR, HLURB
requirements Pay real estate taxes Art. III (j) and other
needed for the Art. II(f) Secure property governmental
approval of Assist DEVELOPER secure from invasion of agencies
exemption or exemption from CARL and squatters and concerned within
a period of 2 years respective names relocation, application for
from date of of the parties form exemption, conversion, re-
execution of this the register of classification.
Agreement. deeds.

DEVELOPER Art. II(b) Art. V par. 2 Market and Sell Fix selling date Fix selling date
construction Deliver any and all Pay real estate the property
stage/ground documents required for taxes
breaking to the successful Art. II(c) Owner to
commence after development of the Project Take possession of reimburse and pay
release of DAR Art. V par. 2 the parcels of land the DEVELOPER
exemption permit Pay real estate taxes Art. III (j)
or conversion Secure property
clearance and from invasion of The activities under the JVA fell into seven major categories,
approval of other squatters and specifically: (l)the relocation of the occupants; (2) the completion of
required permits other elements the development plan; (3) the securing of exemption and conversion
by pertinent Art. III(e) permits; (4) the obtention of the development permits from
agencies of the Mobilize government agencies; (5) the development of the subject land; (6) the
government. development work issuance of titles for the subdivided lots; and (7) the selling of the
and solely pay its subdivided lots and the reimbursement of the advances.
expenses
Art. III(f) For the first activity (i.e., the relocation of the occupants), the
Develop the developer was obliged to negotiate with the occupants, to advance
property and solely payment for disturbance compensation, and to relocate the
pay its expenses on occupants to an area within the subject land, while the owner was
necessary permits obliged to agree to and to allocate the resettlement site within the
property, and to approve the expenses to be incurred for the process.
DEVELOPER to Art. II(b) Art. V par. 2
secure approval of Deliver any and all Pay real estate Should the owner fail to allocate the site for the resettlement, the
obligation of the developer to relocate would not be demandable.
subdivision plan documents required for taxes
Conversely, should the developer fail to negotiate with the occupants,
and technical the successful Art. II(c)
the owner's obligation to allocate the resettlement site would not
description from development of the Project Take possession of
become due.
the Bureau of Art. V par. 2 the parcels of land
Lands based on Pay real estate taxes Art. III (j)
As to the second activity (i.e., the completion of the development
the approved Art. II(a) Secure property
plan), the developer had the obligation to lay out the plan, but the
scheme and Deliver titles to from invasion of
owner needed to conform to the plan before the same was finalized.
thereafter to DEVELOPER squatters and
Accordingly, the final development plan would not be generated
petition, follow-up Art. II(a) other elements
should the owner fail to approve the lay-out plan; nor would the
and secure the Execute Deed of Art. III(k)
owner be able to approve if no such plan had been initially laid out
release of Assignment Process titling of
by the developer.
individual titles for Art. III(a) lots
all lots in the Pay all expenses for
In each activity, the obligation of each party was dependent upon the
project in the settlement of claims,
obligation of the other. Although their obligations were to be
performed simultaneously, the performance of an activity obligation
was still conditioned upon the fulfillment of the continuous
obligation, and vice versa. Should either party cease to perform a
continuous obligation, the other's subsequent activity obligation
would not accrue. Conversely, if an activity obligation was not
performed by either party, the continuous obligation of the other
would cease to take effect. The performance of the continuous
obligation was subject to the resolutory condition that
the precedent obligation of the other party, whether continuous or
activity, was fulfilled as it became due. Otherwise, the continuous
obligation would be extinguished.
According to Article 1184 of the Civil Code, the condition that some
event happen at a determinate time shall extinguish the obligation as
soon as the time expires, or if it has become indubitable that the
event will not take place. Here, the common cause of the parties in
entering into the joint venture was the development of the joint
venture property into the residential subdivision as to eventually
profit therefrom. Consequently, all of the obligations under the JVA
were subject to the happening of the complete development of the
joint venture property, or if it would become indubitable that the
completion would not take place, like when an obligation, whether
continuous or activity, was not performed. Should any of the
obligations, whether continuous or activity, be not performed, all the
other remainingobligations would not ripen into demandable
obligations while those already performed would cease to take effect.
This is because every single obligation of each party under the JVA
rested on the common cause of profiting from the developed
subdivision.
It appears that upon the execution of the JVA, the parties were
performing their respective obligations until disagreement arose
between them that affected the subsequent performance of their
accrued obligations. Being reciprocal in nature, their respective
obligations as the owner and the developer were dependent upon the
performance by the other of its obligations; hence, any claim of delay
or non-performance against the other could prosper only if the
complaining party had faithfully complied with its own correlative
obligation.30chanroblesvirtuallawlibrary
A respected commentator has cogently observed in this
connection:31chanroblesvirtuallawlibrary
§ 135. Same; consequences of simultaneous performance. As a
consequence of the rule of simultaneous performance, if the party
who has not performed his obligation demands performance from the
other, the latter may interpose the defense of unfulfilled contract
(exceptio non adimpleli contraclus) by virtue of which he cannot be
obliged to perform while the other's obligation remains unfulfilled.
Hence, the Spanish Supreme Court has ruled that the non-
performance of one party is justified if based on the non-performance
of the other; that the party who has failed to perform cannot demand
performance from the other; and that judicial approval is not
necessary to release a party from his obligation, the non-performance
of the other being a sufficient defense against any demand for
performance by the guilty party.
Another consequence of simultaneous performance is the rule
of compensatio morae, that is to say that neither party incurs in
delay if the other does not 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 obligations, delay by the other begins.
Yet, the record is bereft of the proof to support the lower courts'
unanimous conclusion that the owner had already performed its
correlative obligation under the JVA as to place itself in the position
to demand that the developer should already perform its obligation of
providing the round-the-clock security on the property. In issuing its
order of November 5, 2002, therefore, the RTC acted whimsically
because it did not first ascertain whether or not the precedent
reciprocal obligation of the owner upon which the demanded
obligation of the developer was dependent had already been
performed. Without such showing that the developer had ceased to
perform a continuous obligation to provide security over the joint
venture property despite complete fulfillment by the owner of all its
accrued obligations, the owner had no right to demand from the
developer the round-the-clock security over the 215 hectares of land.
The CA further gravely erred in characterizing the order for the
petitioners to implement the round-the-clock security provision of
the JVA and the addendum as an established and undisputed
interim measure that could be issued pending the resolution of the
case on the merits.
Apart from the provisional remedies expressly recognized and made
available under Rule 56 to Rule 61 of the Rules of Court, the Court
has sanctioned only the issuance of the status quo ante order but
only to maintain the last, actual, peaceable and uncontested state of
things that preceded the controversy.32 The eminent Justice Florenz
D. Regalado,33 an authority on remedial law, has delineated the
nature of the status quo ante order, and distinguished it from the
provisional remedy of temporary restraining order, as follows:
There have been instances when the Supreme Court has issued
a status quo order which, as the very term connotes, is merely
intended to maintain the last, actual, peaceable and uncontested
state of things which preceded the controversy. This was resorted to
when the projected proceedings in the case made the conservation of
the status quo desirable or essential, but the affected party neither
sought such relief or the allegations in his pleading did not
sufficiently make out a case for a temporary restraining order. The
status quo order was thus issued motu proprio on equitable
considerations. Also, unlike a temporary restraining order or a
preliminary injunction, a status quo order is more in the nature of a
cease and desist order, since it neither directs the doing or undoing
of acts as in the case of prohibitory or mandatory injunctive relief.
The further distinction is provided by the present amendment in the
sense that, unlike the amended rule on restraining orders, a status
quoorder does not require the posting of a bond.
The order of November 5, 2002, by directing the developer to provide
sufficient round-the-clock security for the protection of the joint
venture property during the pendency of the case, was not of the
nature of the status quo ante order because the developer, as averred
in the complaint, had not yet provided a single security watchman to
secure the entire 215 hectares of land for several years.34 Also, the
owner stated in the comment to the petition that the developer had
dismissed all the security guards posted in the property since
1997.35 At the time of the filing of the complaint for specific
performance on February 29, 2000, therefore, the last actual,
peaceable and uncontested state of things preceding the controversy
was the absence of such security, not the installation of the security
personnel/measures. In fact, the failure of the developer to provide
the round-the-clock security itself became the controversy that
impelled the owner to bring the action against the petitioners.
By preliminarily directing the developer to provide sufficient round-
the-clock security for the protection of the joint venture property
during the pendency of the case, the November 5, 2002 order of the
RTC did not come under the category of the status quo ante order
that would issue upon equitable consideration, or even of an
injunctive relief that would issue under Rule 58 of the Rules of Court.
Hence, the issuance of the order constituted a blatant jurisdictional
error that needed to be excised. Verily, a jurisdictional error is one by
which the act complained of was issued by the court without or in
excess of jurisdiction.36Without jurisdiction means that the court
acted with absolute want of jurisdiction. Excess of jurisdiction means
that the court has jurisdiction but has transcended the same or
acted without any statutory authority.37chanroblesvirtuallawlibrary
Although the RTC undoubtedly had jurisdiction to hear and decide
the principal action for specific performance as well as to act on the
motions submitted to it in the course of the proceedings, the
distinction between jurisdiction over the case and jurisdiction to
issue an interlocutory order as an ancillary remedy incident to the
principal action should be discerned. We have frequently declared
that a court may have jurisdiction over the principal action but may
nevertheless act irregularly or in excess of its jurisdiction in the
course of its proceedings by the granting of an auxiliary
remedy.38 In Leung Ben v. O'Brien,39 for instance, this Court has thus
clarified:
It may be observed in this connection that the word "jurisdiction" as
used in attachment cases, has reference not only to the authority of
the court to entertain the principal action but also to its authority to
issue the attachment, as dependent upon the existence of the
statutory ground. (6 C. J., 89.) This distinction between jurisdiction
to issue the attachment as an ancillary remedy incident to the
principal litigation is of importance; as a court's jurisdiction over the
main action may be complete, and yet it may lack authority to grant
an attachment as ancillary to such action. This distinction between
jurisdiction over the ancillary has been recognized by this court in
connection with actions involving the appointment of a receiver.
Thus in Rocha & Co. vs. Crossfield and Figueras (6 Phil. Rep., 355),
a receiver had been appointed without legal justification. It was held
that the order making the appointment was beyond the jurisdiction
of the court; and though the court admittedly had jurisdiction of the
main cause, the order was vacated by this court upon application a
writ of certiorari. (See Blanco vs. Ambler, 3 Phil. Rep., 358, Blanco
vs. Ambler and McMicking 3 Phil. Rep., 735, Yangco vs. Rohde, 1
Phil. Rep., 404.)
By parity of reasoning it must follow that when a court issues a writ
of attachment for which there is no statutory authority, it is acting
irregularly and in excess of its jurisdiction, in the sense necessary to
justify the Supreme Court in granting relief by the writ of certiorari.

WHEREFORE, the Court GRANTS the petition for review

on certiorari; REVERSES and SETS ASIDE the decision promulgated
on April 27, 2005 and the resolution promulgated on September 12,
2005; NULLIFIES the orders issued on November 5, 2002 and May
19, 2003 in Civil Case No. 67813 by the Regional Trial Court, Branch
67, in Pasig City; DIRECTS the Regional Trial Court, Branch 67, in
Pasig City to resume the proceedings in Civil Case No. 67813 with
dispatch; and ORDERS the respondents to pay the costs of suit.

SO ORDERED.cralawlawlibrary

Sereno, C.J., Leonardo-De Castro, Perez, and Perlas-Bernabe, JJ.,

concur.
 Constitutional Law; Judicial Power; Actual Case or Controversy;
The Constitution under Section 1, Article VIII expressly directs the
Judiciary, as a matter of power and duty, not only to settle actual
controversies involving rights which are legally demandable and
enforceable but, to determine whether or not there has been a grave abuse
of discretion amounting to lack or excess of jurisdiction on the part of any
branch or instrumentality of the Government.—The Constitution under
Section 1, Article VIII expressly directs the Judiciary, as a matter of
power and duty, not only to settle actual controversies involving rights
which are legally demandable and enforceable but, to determine whether
or not there has been a grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of any branch or instrumentality of the
Government. We thus have the duty to take cognizance of allegations of
grave abuse of discretion in this case, involving the sale by PSALM of a
power plant, which supposedly contravenes the policy on competitive
public bidding.
Power Sector Assets and Liabilities Management Corporation;
Jurisdiction; Republic Act (RA) No. 9136 created Power Sector Assets and
Liabilities Management Corporation (PSALM) for the principal purpose
of undertaking the mandated privatization of all disposable assets of the
National Power Corporation (NPC) as well as Independent Power
Producer (IPP) contracts in an optimal manner.—R.A. No. 9136 created
PSALM for the principal purpose of undertaking the mandated
privatization of all disposable assets of the NPC as well as IPP contracts
in an optimal manner. Such disposition is made subject to all existing
laws, rules and regulations. Thus, the implementing rules of R.A. No.
9136 provided guidelines in the privatization to be conducted by PSALM,
among which are: (a) The Privatization value to the National
Government of the NPC generation assets, real estate, other disposable
assets as well as IPP contracts shall be optimized; x x x x (d) All assets
of NPC shall be sold in an open and transparent manner through
public bidding, and the same shall apply to the disposition of IPP
contracts.
Remedial Law; Civil Procedure; Locus Standi; Legislators have the
standing to maintain inviolate the prerogatives, powers and privileges
vested by the Constitution in their office and are allowed to sue to
question the validity of any official action which they claim infringes their
prerogatives as legislators.—We have held that legislators have the
standing to maintain inviolate the prerogatives, powers and privileges
vested by the Constitution in their office and are allowed to sue to
question the validity of any official action which they claim infringes
their prerogatives as legislators. In this case, there was no allegation of
usurpation of legislative function as petitioner is suing in his capacity as
Chairperson of the Committee created pursuant to Section 62 of R.A. No.
9136. Such position by itself is not sufficient to vest petitioner with
standing to institute the present suit. Notably, the enumerated functions
of the Committee under the aforesaid provision are basically “in aid of
legislation.” Notwithstanding, the Court leans on the doctrine that “the
rule on standing is a matter of procedure, hence, can be relaxed for
nontraditional plaintiffs like ordinary citizens, taxpayers, and legislators
when the public interest so requires, such as when the matter is of
transcendental importance, of overreaching significance to society, or of
paramount public interest.” When the proceeding involves the assertion
of a public right, the mere fact that the petitioner is a citizen satisfies the
requirement of personal interest.
Civil Law; Lease; Right of First Refusal; When a lease contract
contains a right of first refusal, the lessor is under a legal duty to the
lessee not to sell to anybody at any price until after he has made an offer
to sell to the latter at a certain price and the lessee has failed to accept
it.—A right to top is a variation of the right of first refusal often
incorporated in lease contracts. When a lease contract contains a right of
first refusal, the lessor is under a legal duty to the lessee not to sell to
anybody at any price until after he has made an offer to sell to the latter
at a certain price and the lessee has failed to accept it. The lessee has a
right that the lessor’s first offer shall be in his favor. While sometimes
referred to as a “first option to buy” or “option of first refusal,” a right of
first refusal is not an option contract.
Same; Same; Same; “Right of First Refusal” and “Option to
Purchase,” Distinguished.—We explained the distinction between a right
of first refusal and option to purchase in Spouses Vazquez v. Ayala
Corporation, 443 SCRA 231 (2004), to wit: 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. In a
right of first refusal, on the other hand, while the object might be made
determinate, the exercise of the right would be dependent not only on the
grantor’s eventual intention to enter into a binding juridical relation
with another but also on terms, including the price, that are yet to be
firmed up.
Bids and Bidding; Government Contracts; In this jurisdiction,
public bidding is the established procedure in the grant of government
contracts. The award of public contracts, through public bidding, is a
matter of public policy.—Stipulations on right of first refusal over the
leased premises have been held to be valid as they are commonly
inserted in contracts of lease for the benefit of lessees who wanted to be
assured that they shall be given the first crack or the first option to buy
the property at the price which the owner is willing to accept. Where
such right of first refusal is incorporated in lease contracts involving
public assets, however, courts go beyond ascertaining and giving effect to
the intent of the contracting parties. For in this jurisdiction, public
bidding is the established procedure in the grant of government
contracts. The award of public contracts, through public bidding, is a
matter of public policy.
Same; Same; In the award of government contracts, the law requires
a competitive public bidding, which aims to protect the public interest by
giving the public the best possible advantages thru open competition.—In
the award of government contracts, the law requires a competitive public
bidding, which aims to protect the public interest by giving the public the
best possible advantages thru open competition. It is a mechanism that
enables the government agency to avoid or preclude anomalies in the
execution of public contracts.
Velasco, Jr.,J., Concurring Opinion:
Civil Law; Lease; Right of First Refusal; Bids and Bidding; Right to
Top; View that jurisprudence is clear that “right to top” stipulations are
weighed with the taint of invalidity for contravening the policy requiring
government contracts to be awarded through public bidding.—
Jurisprudence is clear that “right to top” stipulations are weighed with
the taint of invalidity for contravening the policy requiring government
contracts to be awarded through public bidding. These clauses are
cleansed of the stain only in the narrow instance wherein the right is
founded on the beneficiary’s interest on the object over which the right is
to be exercised, and only when the government stands to benefit from the
stipulation.
Same; Same; Same; Same; View that the “right of first refusal,” as
the phrase itself connotes, requires that the contract be offered first to the
beneficiary before being offered to the public.—The “right of first refusal,”
as the phrase itself connotes, requires that the contract be offered first to
the beneficiary before being offered to the public. In order to have full
compliance with the contractual right granting a party the first option to
purchase, the sale of the properties for the price for which they were
finally sold to a third person should have likewise been first offered to
the former. Further, there should be identity of the terms and conditions
to be offered to the buyer holding a right of first refusal if such right is
not to be rendered illusory.
Same; Same; Same; Same; View that public bidding is an essential
first step in the exercise of the right of first refusal because it is only after
the public bidding that the Government will have basis with which to
offer the beneficiary the option to accept or reject the terms of the subject of
procurement.—The concept of “right of first refusal” is not irreconcilable
with the national policy requiring government disposition to be subject to
public bidding. In fact, public bidding is an essential first step in the
exercise of the right because it is only after the public bidding that the
Government will have basis with which to offer the beneficiary the option
to accept or reject the terms of the subject of procurement. If the
beneficiary so participates, he will automatically be awarded the project
so long as he is eligible and meets the minimum requirements outlined in
the bid documents. In awarding the project, the procuring entity, in
effect, disregards the offers from other bidders, regardless of whether or
not they are more advantageous to the government.
Same; Same; Same; “Right to Match” and “Right to Top,”
Distinguished.—In contradistinction, the “right to match” and “right to
top” can only be exercised once the best or highest bid is determined. The
“right to match” grants the beneficiary the right to offer the same
amount as the highest bid to beat the highest bidder, while the “right to
top” accords the beneficiary the right to offer a higher amount to beat the
highest bid.
Same; Same; Same; View that while the “right of first refusal”
entails the right to be offered the project first, the “right to match” and
“right to top” can be seen as the right to be offered last.—While the “right
of first refusal” entails the right to be offered the project first, the “right
to match” and “right to top” can be seen as the right to be offered last.
Moreover, in exercising the right of first refusal, the contract price is
dictated primarily by the bid documents and the offer by the beneficiary
need not exceed the minimum requirements set by the government. On
the other hand, the contract price, in the exercise of the right to match or
right to top, is dependent on the highest bid from the participants in the
bidding process.
SPECIAL THIRD DIVISION
G.R. No. 212686, October 05, 2016
SERGIO R. OSMEÑA III, Petitioner, v. POWER SECTOR ASSETS
AND LIABILITIES MANAGEMENT CORPORATION, EMMANUEL R.
LEDESMA, JR., SPC POWER CORPORATION, AND THERMA
POWER VISAYAS, INC., Respondents.
RESOLUTION
VELASCO JR., J.:
For resolution of the Court is the Manifestation/Motion dated March
16, 2016 of private respondent Therma Power Visayas, Inc. (TPVI). As
TVPI expounded,1 a Notice of Award dated April 30, 2014 was issued
in its favor for the purchase of the Naga Power Plant Complex
(NPPC). The award, however, was cancelled because of the exercise
by SPC Power Corporation (SPC) of its Right to Top. TVPI then
implores the Court to clarify the effect on the Notice of Award of the
subsequent annulment of the said Right to Top in our September 28,
2015 Decision, and prays for the reinstatement thereof.
The Facts
On December 27, 2013, the Board of Directors of the Power Sector
Assets and Liabilities Management Corporation (PSALM) approved
the commencement of the 3rd round of bidding for the sale of the
153.1MW NPPC. Respondents SPC Power Corporation (SPC) and
TVPI submitted their respective bids for the project.2 The results of
the bidding are as follows:3
TPVI SPC
a. Purchase Price 441,191,500.00 211,391,388.88
b. Rentals 588,735,000.00 588,735,000.00
c. Option Price 58,873,500.00 58,873,500.00
Financial Bid, PhP 1,088,800,000.00 858,999,888.88
In due course, PSALM issued a Notice of Award dated April 30, 2014
in favor of TPVI, declaring the latter as the Winning Bidder. The
execution of a Land Lease Agreement (LLA) and Assets Purchase
Agreement (APA) in favor of TPVI, however, was subject to SPC's non-
exercise of its Right to Top. The pertinent portion of the Notice of
Award provides:4
In accordance with the bidding procedures for the sale of the
153.1MW Naga Power Plant dated 6 February 2014, the Power Sector
Assets and Liabilities Management Corporation (PSALM) Privatization
Bids and Awards Committee (PBAC) hereby issues this Notice of
Award which declares that TPVI is the Winning Bidder for the Sale of
NPP.
PSALM's execution of the APA, however, shall be subject to the
second paragraph of Section IB-20 (Award to the Winning Bidder) of
the Bidding Procedures, which provides that: "PSALM's entering into
the Asset Purchase Agreement with the Winning Bidder shall be
subject to SPC's rights under Section 3.02 of the LLA. Hence, if the
exercise of the rights of SPC under Section 3.02 of the LLA is legally
and validly consummated, PSALM shall not enter into the Asset
Purchase Agreement with the Winning Bidder. Should SPC not exercise
its rights under Section 3.02 of the LLA or if the exercise of the rights of
SPC under Section 3.02 of the LLA is not legally and validly
consummated, upon notice by PSALM, the Winning Bidder must enter
into and fully and faithfully comply with the Asset Purchase
Agreement."
On the assumption that SPC validly exercised its Right to Top,
PSALM executed the NPPC-APA and NPPC-LLA in SPC's favor,
cancelling TPVI's Notice of Award in the process. The Right to Top
and the resultant agreements from its exercise, however, were
subsequently nullified by the Court through its September 28, 2015
Decision, the dispositive portion of which reads:
WHEREFORE, the petition is hereby GIVEN DUE COURSE and the
writ prayed for accordingly GRANTED. The right of first refusal (right
to top) granted to Saicon Power Corporation under the 2009 Naga
LBGT-LLA is hereby declared NULL and VOID. Consequently, the
Asset Purchase Agreement (NPPC-APA) and Land Lease Agreement
(NPPC-LLA) executed by the Power Sector Assets and Liabilities
Management Corporation and SPC are ANNULLED and SET ASIDE.
No costs.
SO ORDERED.
Petitioner Sergio R. Osmeña III (Osmeña) and respondents PSALM
and SPC filed their respective motions for reconsideration.
Meanwhile, respondent TPVI filed the instant Manifestation/Motion
wherein it maintained that the nullification of SPC's Right to Top
calls for the reinstatement of the cancelled April 30, 2014 Notice of
Award in its favor.
The Court resolved to deny with finality SPC's motion on December
9, 2015,5 and those of Osmeña and PSALM on April 6, 2016.
Notwithstanding the denial with finality of their respective motions,
they were nevertheless required to comment on TPVI's
Manifestation/Motion that remained unresolved.6 For their part,
respondents SPC and PSALM contend that the Decision resulted in
the material alteration of the terms of the public bidding and called
for the conduct of another in its stead.
Our Ruling
TPVI's motion is impressed with merit.
The Bidding Procedures contain a severability clause that allows
the award in favor of TPVI to survive
Section IB-20 of the PSALM Bidding Procedures pertinently
provides:7
Anything in these bidding procedures notwithstanding, PSALM's
entering into the Asset Purchase Agreement with the Winning Bidder
shall be subject to SPC's rights under Section 3.02 of the LLA.
Hence, if the exercise of the rights of SPC under Section 3.02 of the
LLA is legally and validly consummated, PSALM shall not enter
into the Asset Purchase Agreement with the Winning Bidder. Should
SPC not exercise its rights under Section 3.02 of the LLA or if
the exercise of the rights of SPC under Section 3.02 of the LLA
is not legally or validly consummated, upon Notice by PSALM, the
Winning Bidder must enter into and fully and faithfully comply with
the Asset Purchase Agreement. (emphasis added)
Tucked at the end of the guidelines, however, is a severability
clause that reads:8
IB-28 General Conditions
xxxx
26. If any one or more of the provisions of the Bidding
Procedures or any part of the bidding package is held to be
invalid, illegal or unenforceable, the validity, legality, or
enforceability of the remaining provisions will not be affected
thereby and shall remain in full force and effect. (emphasis
added)
Contrary to the postulations of respondents PSALM and SPC, the
nullification of the Right to Top did not change the complexion of the
bidding. By no means should this be considered an alteration of the
terms of the public bidding, let alone a material one, for it was clearly
a contingency expressly covered by the provisions of the Bidding
Procedure as evidenced by the severability clause.
The afore-quoted severability clause conveys the clear intention to
isolate and detach any invalid provision from the rest so that the
latter may continue to be in force and effect. It operates to salvage
the surviving provisions of the Bidding Procedures as valid, legal,
and enforceable, despite the nullity of a component part.
Our Decision nullifying SPC's Right to Top ought not then be
construed as the nullification of the entire third round of the public
bidding. It merely called for the application of the severability clause
to prevent PSALM, as much as possible, from having to repeat the
process for the fourth time. Consistently, the Court never expressly
declared the third round of bidding as invalid. Clear from the
language of the dispositive portion of the Court's Decision is that the
nullification was limited only to SPC's Right to Top and the NPPC-
LLA and NPPC-APA in its favor, nothing more. The results of the
prior conducted bidding process should then be upheld, and the
Notice of Award dated April 30, 2014, reinstated.
The Notice of Award dated April 30, 2014 is a perfected contract
between PSALM and TPVI.9 As can be recalled, it states that the
obligation of PSALM to execute the NPPC-APA and NPPC-LLA in favor
of TPVI is conditioned on SPC's non-exercise or failure to legally and
validly exercise its Right to Top. This agreement is the law between
the contracting parties with which they are required to comply in
good faith.10chanrobleslaw
In view of the Court's Decision, however, the condition in the Notice
of Award should be deemed as not written, and the obligation to
award the NPPC-LLA and NPPC-APA to TPVI, due and demandable.
Furthermore, the mutual obligation of the parties to abide by their
covenant in good faith remains, entitling TPVI to demand compliance
from PSALM, including the award of the purchase contracts in its
favor. This is but the proper application of the severability clause.
Articles 1181 and 1185 of the Civil Code find application in this
case
The award of the NPPC-LLA and NPPC-LLA to TPVI further finds
justification under Arts. 1181 and 1185 of the Civil Code, viz:
Article 1181. In conditional obligations, the acquisition of rights, as
well as the extinguishment or loss of those already acquired, shall
depend upon the happening of the event which constitutes the
condition.
xxxx
Article 1185. The condition that some event will not happen at
a determinate time shall render the obligation effective from the
moment the time indicated has elapsed, or if it has become evident
that the event cannot occur. x x x (emphasis added)
The Court explained in The Wellex Group, Inc. v. U-Land Airlines, Co.,
Ltd.11 that, under Art. 1185, if an obligation is conditioned on the
non-occurrence of a particular event at a determinate time, that
obligation arises (a) at the lapse of the indicated time, or (b) if it has
become evident that the event cannot occur. To illustrate:12
Petitioner Wellex and respondent U-Land bound themselves to
negotiate with each other within a 40-day period to enter into a share
purchase agreement. If no share purchase agreement was entered
into, both parties would be freed from their respective undertakings.
It is the non-occurrence or non-execution of the share purchase
agreement that would give rise to the obligation to both parties to
free each other from their respective undertakings. This includes
returning to each other all that they received in pursuit of entering
into the share purchase agreement.
At the lapse of the 40-day period, the parties failed to enter into a
share purchase agreement. This lapse is the first circumstance
provided for in Article 118.5 that gives rise to the obligation. Applying
Article 1185, the parties were then obligated to return to each other
all that they had received in order to be freed from their respective
undertakings.
However, the parties continued their negotiations after the lapse of
the 40-day period. They made subsequent transactions with the
intention to enter into the share purchase agreement. Despite that,
they still failed to enter into a share purchase agreement.
Communication between the parties ceased, and no further
transactions took place.
It became evident that, once again, the parties would not enter into
the share purchase agreement. This is the second circumstance
provided for in Article 1185. Thus, the obligation to free each other
from their respective undertakings remained.
In the case at bar, PSALM's obligation to award the contract in TPVI's
favor was dependent on the non-occurrence of an event: SPC's legal
and valid exercise of its Right to Top. As phrased by PSALM: "the
approval of the sale to TPVI was a conditional one, the consummation
of which is dependent on the non-exercise by SPC of its right to
top."13 It has become apparent, however, that such event will never
occur. SPC can never legally and validly invoke its Right to Top in
view of its nullity. The condition, therefore, is deemed complied with
by operation of law, and the obligation to execute the purchase
contracts in favor of TPVI, due and demandable.
There was genuine competition when the public bidding was
conducted
In JG Summit Holdings, Inc. v. Court of Appeals,14 the Court
enumerated the three principles of public bidding, thusly: (1) the
offer to the public; (2) an opportunity for competition; and (3) a basis
for comparison of bids. As long as these three principles are complied
with, the public bidding can be considered valid and legal.
In the case at bar, respondents PSALM and SPC challenge the
conduct of the bidding process for allegedly violating the second
principle. They posit that SPC's Right to Top prevented genuine
competition by discouraging other corporations from submitting their
respective bids.
PSALM and SPC's contentions are untenable.
It bears stressing on the outset that the severability clause under IB-
28, paragraph 26 was known to the bidders, as it was embodied in
the Bidding Procedures itself. Thus, any interested party had prior
knowledge of the possibility of the eventual nullification of SPC's
Right to Top and of its repercussions.
That aside, the allegation that the Right to Top discouraged parties
from participating in the bidding process is speculative. There is no
guarantee that conducting another round of bidding will increase the
number of bidders.
To put the situation into perspective, it is well to recall that SPC's
right to top can be found in IB-20 of the Bidding Procedure. Thus,
parties interested in buying the NPPC would only know of SPC's
Right to Top if they availed of the bid documents. There is no
showing, however, that there is a disparity between the number of
parties who purchased the bid documents, on the one hand, and the
number of parties who actually submitted their respective bids, on
the other. Only then could PSALM and SPC have possibly, but not
even conclusively, established that the Right to Top dissuaded other
parties from submitting their bids.
It is likewise worthy to note that this is already the third round of
bidding for the purchase of NPPC and in this round, only two
companies participated: respondents SPC and TPVI. It may then be
that the properties subjected to bidding are just really not attractive
assets to begin with so as to appeal to the public.
Furthermore, almost three (3) years had already elapsed since the
third round of bidding commenced, and even longer since the first.
NPPC's assets, by now, have already significantly depreciated and
may no longer fetch the same price as that offered by TPVI. It is not
entirely implausible, therefore, that the new bids would even be
lower than TPVI's winning bid.
Similarly, there is no assurance that the new winning bid would be
higher than TPVI's proposal, for it is possible that the Right to Top
even encouraged TPVI to maximize its bid in this third round. It
could even be said that the existence of the Right to Top drove the
interested parties to bid an amount that would have been difficult, if
not impossible, for SPC to meet, if not exceed.
To pursue the argument that other parties were dissuaded by the
Right to Top would be to consider its exercise as an absolute
eventual certainty rather than a mere possibility. This would run
counter to the clear language of the Bidding Guidelines that the
contract will be awarded to the winning bidder "should SPC not
exercise its right."
Neither can SPC claim that its Right to Top influenced its bid. That
SPC mistakenly rested chiefly on its Right to Top is no one's fault but
its own. To recall, SPC's Right to Top is embodied in Sec. 3.02 of the
LBGT-LLA.15 The same document, however, likewise contains a
severability clause that mirrors that in paragraph 26 of IB-28 of the
Bidding Procedure:16
14.16. Severability
If any one or more of the provisions of this Agreement is declared
invalid or unenforceable in any respect under any Philippine Law,
the validity, legality or enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired.
Thus, SPC was fully aware of the possibility that the Land-Based Gas
Turbine (LBGT)-LLA provisions, the Right to Top included, would not
necessarily be upheld by the courts at every turn.
Moreover, the Court was also not remiss in reminding bidders of
government contracts against their blind reliance on their alleged
preferential rights. As held in LTFRB v. Stronghold:17
In the field of public contracts, these stipulations are weighed with
the taint of invalidity for contravening the policy requiring
government contracts to be awarded through public bidding. Unless
clearly falling under statutory exceptions, government contracts for
the procurement of goods or services are required to undergo public
bidding "to protect the public interest by giving the public the best
possible advantages thru open competition." x x x
These clauses escape the taint of invalidity only in the narrow
instance where the right of first refusal (or "right to top") is
founded on the beneficiary's "interest on the object over which
the right of first refusal is to be exercised" (such as a "tenant with
respect to the land occupied, a lessee vis-a-vis the property leased, a
stockholder as regards shares of stock, and a mortgagor in relation
to the subject of the mortgage") and the government stands to benefit
from the stipulation. x x x (emphasis added)
The above disquisition served as nothing less than a warning. The
clear message conveyed is that the advantage granted is generally
viewed as invalid, in consonance with the more fundamental
principle that all government procurement must undergo public
bidding under equal terms. It must first be established that the
beneficiary has an existing interest in the object of the contract
before his preferential right can "escape the taint of invalidity.
In this case, however, SPC had knowledge that it did not possess the
requisite subsisting interest in the NPPC project. It was then aware
that its Right to Top under the LBGT contract, which involves a
separate and distinct power plant from that in the NPPC project,
could not possibly be able to withstand judicial scrutiny.
In view of the foregoing circumstances—the Severability Clause in
Sec. 14.16 of the LBGT-LLA and in IB-28 of the Bidding Procedure,
the Court's warning in Stronghold, and SPC's knowledge of its lack of
subsisting interest—SPC should, therefore, be bound by its initial bid
of P858,999,888.88. It was never deprived of a fair chance to bid,
notwithstanding the Court's subsequent nullification of its Right to
Top. It was simply mistaken when it put much premium on its
alleged Right to Top when it calculated its bid, even though it knew
or ought to have known of its defect.
SPC did not legally and validly exercise its Right to Top
Regardless of whether or not the Right to Top was nullified, however,
the award of the purchase contracts to TPVI would still be in order,
for it appears that SPC did not validly exercise its erstwhile
advantage.
The exercise of the Right to Top is no different from the manner of
perfecting any other sales contract. It is perfected by mere consent,
upon a meeting of the minds on the offer and the acceptance thereof
based on subject matter, price and terms of
payment.18chanrobleslaw
In the case at bar, PSALM Chief Emmanuel R. Ledesma, Jr., on April
29, 2014, wrote to SPC informing the latter that it has the right to
top the winning bid of TPVI for a 10-year lease on NPPC that will
expire on January 29, 2020. The letter likewise directed SPC to pay
within thirty (30) days should it exercise the said right. This is
constitutive of a defmite offer.
In reply, SPC wrote to PSALM in the following wise:19
As SPC also participated in the bidding, the bid for the lease
component clearly computed on the basis of, and was for twenty-five
(25) years. However, by now stating in your letter that the "lease
has a Term often (10) years and will expire on 29 January
2020," SPC would effectively have less than six (6) years from today
to use the property, which is extremely short for the lease component
computed and based on the twenty-five (25) year term that was
offered during the bidding. While we are aware that the second
paragraph of Section 3.02 of the LLA-LBGT provides that the
property covered by the right to top will be "governed" by the LLA-
LBGT, we are of the reasonable belief that this does not include
"Term" under Section 2.01 thereof considering that the "Draft Land
Lease Agreement for the 153.1-MW Naga Power Plant," which formed
part of the bid documents, specifically provided for a "Term" of
twenty-five (25) years.
On the basis of the foregoing, SPC confirms that it is exercising its
right to top the winning bid of TPVI and will pay the amount of
P1,143,240,000.00 on the understanding that the Term of the
lease is twenty-five (25) years from closing date.
It is clear from the tenor of SPC's letter that its acceptance of
PSALM's offer can never be categorized as unqualified. Instead, what
SPC communicated was its counter-offer for a longer lease period.
This is further made evident by our pronouncement in Development
Bank of the Philippines v. Medrano(Medrano),20 to wit:
Under the law, a contract is perfected by mere consent, that is, from
the moment that there is a meeting of the offer and the acceptance
upon the thing and the cause that constitute the contract. The law
requires that the offer must be certain and the acceptance absolute
and unqualified. An acceptance of an offer may be express and
implied; a qualified offer constitutes a counter-offer. Case law holds
that an offer, to be considered certain, must be definite, while an
acceptance is considered absolute and unqualified when it is
identical in all respects with that of the offer so as to produce
consent or a meeting of the minds. We have also previously held
that the ascertainment of whether there is a meeting of minds on the
offer and acceptance depends on the circumstances surrounding the
case.
As applied, it can readily be seen that there is no identity between
what was offered and what was accepted. There is a glaring
difference not only in the term of the lease but also in its reckoning
period. It cannot then meet the criteria of an "unqualified acceptance"
as discussed in the Medrano case.
Furthermore, whether the lease should only be until 2020 or 25
years from closing date was an issue that reached the Office of the
Government Corporate Counsel (OGCC). Through Opinion No. 98,
Series of 2014,21 dated May 21, 2014, the OGCC opined in the
following wise:22
We agree with PSALM's position that SPC's Right to Top should be
consistent with the 2009 LLA provisions. It is established that the
2009 LLA is the source of SPC's Right to Top and explicitly provides
that such right is to be exercised in accordance with its provisions.
Section 3.02 of the 2009 LLA is clear. If SPC opts to exercise the
Right to Top, the property will form part of the Leased Premises and
shall be subject to the LLA's provisions. Section 2.01 of the LLA is
explicit that the lease shall expire on 29 January 2020. Should SPC
opt to exercise the Right to Top, it must do so within the 2009 LLA's
parameters.
Thus, when the 30-day period to exercise the Right to Top was about
to lapse, the standing offer to SPC was for a lease expiring on
January 29, 2020. Without SPC communicating its unqualified
acceptance of such offer before the Right to Top expired, the award of
the purchase contracts to TPVI became due.
Although the Department of Justice eventually found for SPC on
June 23, 2014,23 the 30-day period to exercise the Right to Top has
already elapsed, and the said right, by then, could no longer be
validly or legally consummated. It was incumbent upon SPC to seek
judicial intervention to toll the running of the 30-day period pending
the resolution of the issue. No recourse, however, was interposed by
SPC.
The finality of Decision prevents the Court from departing from
the clear language of the ruling
Lastly, in treating the Manifestation/Motion, due regard must be
given to the finality of the judgment accorded to the Court's
September 28, 2015 ruling. Jurisprudence teaches that a decision
that has acquired finality becomes immutable and unalterable, and
may no longer be modified in any respect, even if the modification is
meant to correct erroneous conclusions of fact and law, and whether
it be made by the court that rendered it or by the Highest Court of
the land.24chanrobleslaw
The dispositive portion of the September 28, 2015 Decision is clear.
Only SPC's Right to Top and the documents executed pursuant to its
exercise were nullified by the Court. The Court never invalidated
the entire bidding process since it was not established that there
was a deviation from the procedure outlined in Republic Act No.
9184, otherwise known as the Government Procurement Reform Act,
nor from the bidding guidelines. The acts of the procuring agency
prior to SPC's exercise of its Right to Top, therefore, subsist.
Consequently, there is merit in TPVI's motion that the Notice of
Award dated April 30, 2014 be reinstated and the purchase contracts
in its favor ordered executed.
This should in no way be construed as a departure from the express
wording of the Court's Decision. On the contrary, it adheres to the
plain wording of its fallo: that only SPC's Right to Top and the NPPC-
LLA and NPPC-APA in its favor were declared null and void.
Furthermore, it bears stressing in this case that the finality of the
September 28, 2015 Decision extends only to petitioner Osmeña and
respondents SPC and PSALM. Noticeably, while their respective
motions for reconsideration have already been denied with finality,
the Court has yet to resolve TPVI's pending Manifestation/Motion.
The Court even ordered the other parties to Comment thereon,
thereby reserving the power to grant the same. The Court can still,
therefore, grant TPVI's motion and uphold the validity of the prior-
conducted bidding process.
In any event, the Court is not precluded from rendering a nunc pro
tunc judgment to amend the dispositive portion of the September 28,
2015 Decision for it to truly reflect the action of the
Court.25cralawredThe lack of directive in the fallo on how to proceed
from the nullification of SPC's Right to Top and its NPPC-APA and
NPPC-LLA contracts, nothing more, left the parties at a quandary,
prompting them to seek judicial intervention anew. The Court must,
therefore, supply herein what was inadvertently omitted in the
Decision—the natural and logical consequence of our September 28,
2015 ruling. Otherwise, a rejection of the plea of TPVI will only
spawn a multiplicity of suits and clogging of the court docket. Such
event is without a doubt contrary to the established policy of the
Court to provide in its rules of procedure a just, speedy, and
inexpensive disposition of every action and
proceeding.26chanrobleslaw
WHEREFORE, premises considered, the Manifestation/Motion dated
March 16, 2016 of respondent TPVI is hereby GRANTED. The Entry
of Judgment is LIFTED. The fallo of the September 28, 2015
Decision is hereby amended to include a directive that the April 30,
2014 Notice of Award in favor of said respondent be REINSTATED,
excluding the portion therein granting to SPC the Right to Top.
Respondent PSALM is further directed to execute the NPPC-APA and
NPPC-LLA in favor of respondent TPVI with dispatch. As amended,
the fallo of said Decision shall read:
WHEREFORE, the petition is hereby GIVEN DUE COURSE and the
writ prayed for accordingly GRANTED. The right of first refusal (right
to top) granted to Salcon Power Corporation (now SPC Power
Corporation) under the 2009 Naga LBGT-LLA is hereby
declared NULL and VOID. Consequently, the Asset Purchase
Agreement (NPPC-APA) and Land Lease Agreement (NPPC-LLA)
executed by the Power Sector Assets and Liabilities Management
Corporation and SPC are ANNULLED and SET ASIDE. The Notice of
Award dated April 30, 2014 in favor of Therma Power Visayas, Inc. is
hereby REINSTATED, excluding the portion therein granting to SPC
the Right to Top. Respondent PSALM is directed to execute the
NPPC-APA and NPPC-LLA in favor of TPVI with dispatch.

No costs.

SO ORDERED.
Perez, and Reyes, JJ., concur.
Peralta, J., I join the opinion of J. Jardeleza.
Jardeleza, J., see dissenting opinion.
 Civil Law; Contracts; Sales; Contract of Sale and Contract to Sell THIRD DIVISION
Distinguished.—In a contract of sale, the seller conveys ownership of the
property to the buyer upon the perfection of the contract. Should the RAYMUNDO S. DE LEON, G.R. No. 170405
buyer default in the payment of the purchase price, the seller may either Petitioner,
sue for the collection thereof or have the contract judicially resolved and Present:
set aside. The non-payment of the price is therefore a negative resolutory
condition. On the other hand, a contract to sell is subject to a positive CORONA, J., Chairperson,
suspensive condition. The buyer does not acquire ownership of the CARPIO,*
property until he fully pays the purchase price. For this reason, if the - v e r s u s - VELASCO, JR.,
buyer defaults in the payment thereof, the seller can only sue for NACHURA and
damages. PERALTA, JJ.
BENITA T. ONG.[1],
Same; Same; Same; Seller obliged to transfer title over the Respondent. Promulgated:
properties and deliver the same to the buyer; Execution of a notarized February 2,
deed of sale is equivalent to the delivery of a thing sold.—Settled is the 2010
rule that the seller is obliged to transfer title over the properties and
deliver the same to the buyer. In this regard, Article 1498 of the Civil x--------------------------------------------------
x
Code provides that, as a rule, the execution of a notarized deed of sale is
equivalent to the delivery of a thing sold.
DECISION
CORONA, J.:
Same; Same; Same; Condition regarding the approval of the
assumption of mortgage considered fulfilled as petitioner prevented its
fulfillment by paying his outstanding obligation and taking back the On March 10, 1993, petitioner Raymundo S. de Leon sold three
certificates of title without even notifying respondent.—Even parcels of land[2] with improvements situated in Antipolo, Rizal to
assuming arguendo that the agreement of the parties was subject to the respondent Benita T. Ong. As these properties were mortgaged to
condition that RSLAI had to approve the assumption of mortgage, the Real Savings and Loan Association, Incorporated (RSLAI), petitioner
said condition was considered fulfilled as petitioner prevented its and respondent executed a notarized deed of absolute sale with
fulfillment by paying his outstanding obligation and taking back the assumption of mortgage[3] stating:
certificates of title without even notifying respondent. In this connection, xxxxxxxxx
Article 1186 of the Civil Code provides: Article 1186. The condition shall
be deemed fulfilled when the obligor voluntarily prevents its fulfillment. That for and in consideration of the sum of ONE
MILLION ONE HUNDRED THOUSAND PESOS (P1.1
Same; Same; Same; Definition of a Buyer in Good Faith.—A million), Philippine currency, the receipt whereof is
purchaser in good faith is one who buys the property of another without hereby acknowledged from [RESPONDENT] to the
notice that some other person has a right to, or an interest in, such entire satisfaction of
property and pays a full and fair price for the same at the time of such [PETITIONER], said [PETITIONER] does hereby
purchase, or before he has notice of some other person’s claim or interest sell, transfer and convey in a manner absolute
in the property. The law requires, on the part of the buyer, lack of notice and irrevocable, unto said [RESPONDENT], his
of a defect in the title of the seller and payment in full of the fair price at heirs and assigns that certain real estate together
the time of the sale or prior to having notice of any defect in the seller’s with the buildings and other improvements existing
title. thereon, situated in [Barrio] Mayamot, Antipolo,
Rizal under the following terms and conditions:

1. That upon full payment of
[respondent] of the amount of FOUR
HUNDRED FIFTEEN THOUSAND FIVE
HUNDRED (P415,000), [petitioner] shall
execute and sign a deed of assumption
of mortgage in favor of [respondent]
without any further cost whatsoever;
2. That [respondent] shall assume
payment of the outstanding loan of SIX
HUNDRED EIGHTY FOUR THOUSAND
FIVE HUNDRED PESOS (P684,500) with
REAL SAVINGS AND LOAN,[4] Cainta,
Rizal (emphasis supplied)
xxxxxxxxx
Pursuant to this deed, respondent gave petitioner P415,500
as partial payment. Petitioner, on the other hand, handed the keys to
the properties and wrote a letter informing RSLAI of the sale and
authorizing it to accept payment from respondent and release the
certificates of title.
Thereafter, respondent undertook repairs and made
improvements on the properties.[5] Respondent likewise informed
RSLAI of her agreement with petitioner for her to assume petitioners
outstanding loan. RSLAI required her to undergo credit investigation.
Subsequently, respondent learned that petitioner again sold
the same properties to one Leona Viloria after March 10, 1993 and
changed the locks, rendering the keys he gave her useless.
Respondent thus proceeded to RSLAI to inquire about the credit
investigation. However, she was informed that petitioner had already
paid the amount due and had taken back the certificates of title.
Respondent persistently contacted petitioner but her efforts
proved futile.
On June 18, 1993, respondent filed a complaint for specific
performance, declaration of nullity of the second sale and
damages[6] against petitioner and Viloria in the Regional Trial Court
(RTC) of Antipolo, Rizal, Branch 74. She claimed that since petitioner
had previously sold the properties to her on March 10, 1993, he no
longer had the right to sell the same to Viloria. Thus, petitioner
fraudulently deprived her of the properties.
Petitioner, on the other hand, insisted that respondent did
not have a cause of action against him and consequently prayed for
the dismissal of the complaint. He claimed that since the transaction
was subject to a condition (i.e., that RSLAI approve the assumption
of mortgage), they only entered into a contract to sell. Inasmuch as
respondent did apply for a loan from RSLAI, the condition did not
arise. Consequently, the sale was not perfected and he could freely
dispose of the properties. Furthermore, he made a counter-claim for
damages as respondent filed the complaint allegedly with gross and
evident bad faith.
Because respondent was a licensed real estate broker, the
RTC concluded that she knew that the validity of the sale was
subject to a condition. The perfection of a contract of sale depended
on RSLAIs approval of the assumption of mortgage. Since RSLAI did
not allow respondent to assume petitioners obligation, the RTC held
that the sale was never perfected.
In a decision dated August 27, 1999,[7] the RTC dismissed
the complaint for lack of cause of action and ordered respondent to
pay petitioner P100,000 moral damages, P20,000 attorneys fees and
the cost of suit.
Aggrieved, respondent appealed to the Court of Appeals
(CA),[8] asserting that the court a quo erred in dismissing the
complaint.
The CA found that the March 10, 2003 contract executed by
the parties did not impose any condition on the sale and held that
the parties entered into a contract of sale. Consequently, because
petitioner no longer owned the properties when he sold them to
Viloria, it declared the second sale void. Moreover, it found petitioner
liable for moral and exemplary damages for fraudulently depriving
respondent of the properties.
In a decision dated July 22, 2005,[9] the CA upheld the sale
to respondent and nullified the sale to Viloria. It likewise ordered
respondent to reimburse petitioner P715,250 (or the amount he paid
to RSLAI). Petitioner, on the other hand, was ordered to deliver the
certificates of titles to respondent and pay her P50,000 moral
damages and P15,000 exemplary damages.
Petitioner moved for reconsideration but it was denied in a resolution
dated November 11, 2005.[10] Hence, this petition,[11] with the sole
issue being whether the parties entered into a contract of sale or a
contract to sell.
Petitioner insists that he entered into a contract to sell since the
validity of the transaction was subject to a suspensive condition, that
is, the approval by RSLAI of respondents assumption of mortgage.
Because RSLAI did not allow respondent to assume his (petitioners)
obligation, the condition never materialized. Consequently, there was
no sale.
Respondent, on the other hand, asserts that they entered into a
contract of sale as petitioner already conveyed full ownership of the
subject properties upon the execution of the deed.
We modify the decision of the CA.
CONTRACT OF SALE OR CONTRACT TO SELL?
The RTC and the CA had conflicting interpretations of the March 10,
1993 deed. The RTC ruled that it was a contract to sell while the CA
held that it was a contract of sale.
In a contract of sale, the seller conveys ownership of the
property to the buyer upon the perfection of the contract. Should the
buyer default in the payment of the purchase price, the seller may
either sue for the collection thereof or have the contract judicially
resolved and set aside. The non-payment of the price is therefore a
negative resolutory condition.[12]
On the other hand, a contract to sell is subject to a positive
suspensive condition. The buyer does not acquire ownership of the
property until he fully pays the purchase price. For this reason, if the
buyer defaults in the payment thereof, the seller can only sue for
damages.[13]
The deed executed by the parties (as previously quoted) stated that
petitioner sold the properties to respondent in a manner absolute and
irrevocable for a sum of P1.1 million.[14] With regard to the manner of
payment, it required respondent to pay P415,500 in cash to
petitioner upon the execution of the deed, with the
balance[15] payable directly to RSLAI (on behalf of petitioner) within a
reasonable time.[16] Nothing in said instrument implied that
petitioner reserved ownership of the properties until the full payment
of the purchase price.[17] On the contrary, the terms and conditions of
the deed only affected the manner of payment, not the immediate
transfer of ownership (upon the execution of the notarized contract)
from petitioner as seller to respondent as buyer. Otherwise stated,
the said terms and conditions pertained to the performance of the
contract, not the perfection thereof nor the transfer of ownership.
Settled is the rule that the seller is obliged to transfer title over the
properties and deliver the same to the buyer.[18] In this regard, Article
1498 of the Civil Code[19] provides that, as a rule, the execution of a
notarized deed of sale is equivalent to the delivery of a thing sold.
In this instance, petitioner executed a notarized deed of
absolute sale in favor of respondent. Moreover, not only did
petitioner turn over the keys to the properties to respondent, he also
authorized RSLAI to receive payment from respondent and release
his certificates of title to her. The totality of petitioners acts clearly
indicates that he had unqualifiedly delivered and transferred
ownership of the properties to respondent. Clearly, it was a contract
of sale the parties entered into.
Furthermore, even assuming arguendo that the agreement of
the parties was subject to the condition that RSLAI had to approve
the assumption of mortgage, the said condition was considered
fulfilled as petitioner prevented its fulfillment by paying his
outstanding obligation and taking back the certificates of title
without even notifying respondent. In this connection, Article 1186 of
the Civil Code provides:
Article 1186. The condition shall be deemed fulfilled
when the obligor voluntarily prevents its fulfillment.
VOID SALE OR DOUBLE SALE?
Petitioner sold the same properties to two buyers, first to
respondent and then to Viloria on two separate
occasions.[20] However, the second sale was not void for the sole
reason that petitioner had previously sold the same properties to
respondent. On this account, the CA erred.
This case involves a double sale as the disputed properties
were sold validly on two separate occasions by the same seller to the
two different buyers in good faith.
Article 1544 of the Civil Code provides:
Article 1544. If the same thing should have
been sold to different vendees, the ownership shall
be transferred to the person who may have first
taken possession thereof in good faith, if it should be
movable property.
Should it be immovable property, the ownership
shall belong to the person acquiring it who in
good faith first recorded it in the Registry of
Property.
Should there be no inscription, the ownership
shall pertain to the person who in good faith was
first in the possession; and, in the absence
thereof, to the person who presents the oldest
title, provided there is good faith. (emphasis
supplied)
This provision clearly states that the rules on double or multiple
sales apply only to purchasers in good faith. Needless to say, it
disqualifies any purchaser in bad faith.
A purchaser in good faith is one who buys the property of
another without notice that some other person has a right to, or an
interest in, such property and pays a full and fair price for the same
at the time of such purchase, or before he has notice of some other
persons claim or interest in the property.[21] The law requires, on the
part of the buyer, lack of notice of a defect in the title of the seller
and payment in full of the fair price at the time of the sale or prior to
having notice of any defect in the sellers title.
Was respondent a purchaser in good faith? Yes.
Respondent purchased the properties, knowing they were
encumbered only by the mortgage to RSLAI. According to her
agreement with petitioner, respondent had the obligation to assume
the balance of petitioners outstanding obligation to RSLAI.
Consequently, respondent informed RSLAI of the sale and of her
assumption of petitioners obligation. However, because petitioner
surreptitiously paid his outstanding obligation and took back her
certificates of title, petitioner himself rendered respondents
obligation to assume petitioners indebtedness to RSLAI impossible to
perform.
Article 1266 of the Civil Code provides:
Article 1266. The debtor in obligations to do
shall be released when the prestation become legally
or physically impossible without the fault of the
obligor.
Since respondents obligation to assume petitioners outstanding
balance with RSLAI became impossible without her fault, she was
released from the said obligation. Moreover, because petitioner
himself willfully prevented the condition vis--vis the payment of the
remainder of the purchase price, the said condition is considered
fulfilled pursuant to Article 1186 of the Civil Code. For purposes,
therefore, of determining whether respondent was a purchaser in
good faith, she is deemed to have fully complied with the condition of
the payment of the remainder of the purchase price.
Respondent was not aware of any interest in or a claim on
the properties other than the mortgage to RSLAI which
she undertook to assume. Moreover, Viloria bought the properties
from petitioner after the latter sold them to respondent. Respondent
was therefore a purchaser in good faith. Hence, the rules on double
sale are applicable.
Article 1544 of the Civil Code provides that when neither
buyer registered the sale of the properties with the registrar of deeds,
the one who took prior possession of the properties shall be the
lawful owner thereof.
In this instance, petitioner delivered the properties to
respondent when he executed the notarized deed[22] and handed over
to respondent the keys to the properties. For this reason, respondent
took actual possession and exercised control thereof by making
repairs and improvements thereon. Clearly, the sale was perfected
and consummated on March 10, 1993. Thus, respondent became the
lawful owner of the properties.
 Nonetheless, while the condition as to the payment of the
balance of the purchase price was deemed fulfilled, respondents
obligation to pay it subsisted. Otherwise, she would be unjustly
enriched at the expense of petitioner.

Therefore, respondent must pay petitioner P684,500, the

amount stated in the deed. This is because the provisions, terms and
conditions of the contract constitute the law between the parties.
Moreover, the deed itself provided that the assumption of mortgage
was without any further cost whatsoever. Petitioner, on the other
hand, must deliver the certificates of title to respondent. We likewise
affirm the award of damages.

WHEREFORE, the July 22, 2005 decision and November 11,

2005 resolution of the Court of Appeals in CA-G.R. CV No. 59748 are
hereby AFFIRMED with MODIFICATION insofar as respondent
Benita T. Ong is ordered to pay petitioner Raymundo de
Leon P684,500 representing the balance of the purchase price as
provided in their March 10, 1993 agreement.

Costs against petitioner.

SO ORDERED.

RENATO C. CORONA
Associate Justice
Chairperson
 THIRD DIVISION
G.R. No. 199455, June 27, 2018
FEDERAL EXPRESS CORPORATION, Petitioner, v. LUWALHATI R.
ANTONINO AND ELIZA BETTINA RICASA
ANTONINO, Respondents.
DECISION
LEONEN, J.:
The duty of common carriers to observe extraordinary diligence in
shipping goods does not terminate until delivery to the consignee or
to the specific person authorized to receive the shipped goods.
Failure to deliver to the person authorized to receive the goods is
tantamount to loss of the goods, thereby engendering the common
carrier's liability for loss. Ambiguities in contracts of carriage, which
are contracts of adhesion, must be interpreted against the common
carrier that prepared these contracts.
This resolves a Petition for Review on Certiorari1 under Rule 45 of the
1997 Rules of Civil Procedure praying that the assailed Court of
Appeals August 31, 2011 Decision2 and November 21, 2011
Resolution3 in CA-G.R. CV No. 91216 be reversed and set aside and
that Luwalhati R. Antonino (Luwalhati) and Eliza Bettina Ricasa
Antonino (Eliza) be held liable on Federal Express Corporation's
(FedEx) counterclaim.
The assailed Court of Appeals August 31, 2011 Decision denied the
appeal filed by FedEx and affirmed the May 8, 2008 Decision 4 of
Branch 217, Regional Trial Court, Quezon City, awarding moral and
exemplary damages, and attorney's fees to Luwalhati and Eliza.5 In
its assailed November 21, 2011 Resolution, the Court of Appeals
denied FedEx's Motion for Reconsideration.6
Eliza was the owner of Unit 22-A (the Unit) in Allegro Condominium,
located at 62 West 62nd St., New York, United States.7 In November
2003, monthly common charges on the Unit became due. These
charges were for the period of July 2003 to November 2003, and
were for a total amount of US$9,742.81.8
On December 15, 2003, Luwalhati and Eliza were in the Philippines.
As the monthly common charges on the Unit had become due, they
decided to send several Citibank checks to Veronica Z. Sison (Sison),
who was based in New York. Citibank checks allegedly amounting to
US$17,726.18 for the payment of monthly charges and
US$11,619.35 for the payment of real estate taxes were sent by
Luwalhati through FedEx with Account No. x2546-4948-1 and
Tracking No. 8442 4588 4268. The package was addressed to Sison
who was tasked to deliver the checks payable to Maxwell-Kates, Inc.
and to the New York County Department of Finance. Sison allegedly
did not receive the package, resulting in the non-payment of
Luwalhati and Eliza's obligations and the foreclosure of the Unit.9
Upon learning that the checks were sent on December 15, 2003,
Sison contacted FedEx on February 9, 2004 to inquire about the
non-delivery. She was informed that the package was delivered to her
neighbor but there was no signed receipt.10
On March 14, 2004, Luwalhati and Eliza, through their counsel, sent
a demand letter to FedEx for payment of damages due to the non-
delivery of the package, but FedEx refused to heed their
demand.11Hence, on April 5, 2004, they filed their Complaint12 for
damages.
FedEx claimed that Luwalhati and Eliza "ha[d] no cause of action
against it because [they] failed to comply with a condition precedent,
that of filing a written notice of claim within the 45 calendar days
from the acceptance of the shipment."13 It added that it was absolved
of liability as Luwalhati and Eliza shipped prohibited items and
misdeclared these items as "documents."14 It pointed to conditions
under its Air Waybill prohibiting the "transportation of money
(including but not limited to coins or negotiable instruments
equivalent to cash such as endorsed stocks and bonds)."15
In its May 8, 2008 Decision,16 the Regional Trial Court ruled for
Luwalhati and Eliza, awarding them moral and exemplary damages,
and attorney's fees.17
The Regional Trial Court found that Luwalhati failed to accurately
declare the contents of the package as "checks."18 However, it ruled
that a check is not legal tender or a "negotiable instrument
equivalent to cash," as prohibited by the Air Waybill.19 It explained
that common carriers are presumed to be at fault whenever goods
are lost.20 Luwalhati testified on the non-delivery of the package.
FedEx, on the other hand, claimed that the shipment was released
without the signature of the actual recipient, as authorized by the
shipper or recipient. However, it failed to show that this
authorization was made; thus, it was still liable for the loss of the
package.21
On non-compliance with a condition precedent, it ruled that under
the Air Waybill, the prescriptive period for filing an action was
"within two (2) years from the date of delivery of the shipment or
from the date on which the shipment should have been
delivered."22 Luwalhati and Eliza's demand letter made on March 11,
2004 was within the two (2)-year period sanctioned by the Air
Waybill.23 The trial court also noted that they were given a "run-
around" by FedEx employees, and thus, were deemed to have
complied with the filing of the formal claim.24
The dispositive portion of the Regional Trial Court May 8, 2008
Decision read:
WHEREFORE, judgment is hereby rendered in favor of plaintiffs
Luwalhati R. Antonino and Eliza Bettina Ricasa Antonino ordering
the following:
1) The amount of P200,000.00 by way of moral damages;
2) The amount of P100,000.00 by way of exemplary damages; and
[3]) The amount of P150,000.00 as and for attorney's fees. Costs
against defendant.
The counterclaim is ordered dismissed.
SO ORDERED.25
In its assailed August 31, 2011 Decision,26 the Court of Appeals
affirmed the ruling of the Regional Trial Court.27 According to it, by
accepting the package despite its supposed defect, FedEx was
deemed to have acquiesced to the transaction. Thus, it must deliver
the package in good condition and could not subsequently deny
liability for loss.28 The Court of Appeals sustained the Regional Trial
Court's conclusion that checks are not legal tender, and thus, not
covered by the Air Waybill's prohibition.29 It further noted that an Air
Waybill is a contract of adhesion and should be construed against
the party that drafted it.30
The dispositive portion of the Court of Appeals August 31, 2011
Decision read:
WHEREFORE, premises considered, the present appeal is hereby
DENIED. The assailed May 08, 2008 Decision of the Regional Trial
Court, Branch 217, Quezon City in Civil case No. Q-04-52325 is
AFFIRMED. Costs against the herein appellant.
SO ORDERED.31
Following the Court of Appeals' denial32 of its Motion for
Reconsideration, FedEx filed the present Petition.
For resolution of this Court is the sole issue of whether or not
petitioner Federal Express Corporation may be held liable for
damages on account of its failure to deliver the checks shipped by
respondents Luwalhati R. Antonino and Eliza Bettina Ricasa
Antonino to the consignee Veronica Sison.
I
Petitioner disclaims liability because of respondents' failure to
comply with a condition precedent, that is, the filing of a written
notice of a claim for non-delivery or misdelivery within 45 days from
acceptance of the shipment.33 The Regional Trial Court found the
condition precedent to have been substantially complied with and
attributed respondents' noncompliance to FedEx for giving them a
run-around.34 This Court affirms this finding.
A provision in a contract of carriage requiring the filing of a formal
claim within a specified period is a valid stipulation. Jurisprudence
maintains that compliance with this provision is a legitimate
condition precedent to an action for damages arising from loss of the
shipment:
More particularly, where the contract of shipment contains a
reasonable requirement of giving notice of loss of or injury to the
goods, the giving of such notice is a condition precedent to the action
for loss or injury or the right to enforce the carrier's liability. Such
requirement is not an empty formalism. The fundamental reason or
purpose of such a stipulation is not to relieve the carrier from just
liability, but reasonably to inform it that the shipment has been
damaged and that it is charged with liability therefor, and to give it
an opportunity to examine the nature and extent of the injury. This
protects the carrier by affording it an opportunity to make an
investigation of a claim while the matter is fresh and easily
investigated so as to safeguard itself from false and fraudulent
claims.35 (Citation omitted)
Petitioner's Air Waybill stipulates the following on filing of claims:
Claims for Loss, Damage, or Delay. All claims must be made in
writing and within strict time limits. See any applicable tariff, our
service guide or our standard conditions for carriage for details.
The right to damages against us shall be extinguished unless an
action is brought within two (2) years from the date of delivery of the
shipment or from the date on which the shipment should have been
delivered.
Within forty-five (45) days after notification of the claim, it must be
documented by sending to us [all the] relevant information about it.36
For their claim to prosper, respondents must, thus, surpass two (2)
hurdles: first, the filing of their formal claim within 45 days; and
second, the subsequent filing of the action within two (2) years.
There is no dispute on respondents' compliance with the second
period as their Complaint was filed on April 5, 2004.37
In appraising respondents' compliance with the first condition, this
Court is guided by settled standards in jurisprudence.
In Philippine Airlines, Inc. v. Court of Appeals,38 Philippine Airlines
alleged that shipper Gilda Mejia (Mejia) failed to file a formal claim
within the period stated in the Air Waybill.39 This Court ruled that
there was substantial compliance with the period because of the
zealous efforts demonstrated by Mejia in following up her
claim.40 These efforts coupled with Philippine Airlines' "tossing
around the claim and leaving it unresolved for an indefinite period of
time" led this Court to deem the requisite period satisfied. 41 This is
pursuant to Article 1186 of the New Civil Code which provides that
"[t]he condition shall be deemed fulfilled when the obligor voluntarily
prevents its fulfillment":42
Considering the abovementioned incident and private respondent
Mejia's own zealous efforts in following up the claim, it was clearly
not her fault that the letter of demand for damages could only be
filed, after months of exasperating follow-up of the claim, on August
13, 1990. If there was any failure at all to file the formal claim within
the prescriptive period contemplated in the air waybill, this was
largely because of PAL's own doing, the consequences of which
cannot, in all fairness, be attributed to private respondent.
Even if the claim for damages was conditioned on the timely filing of
a formal claim, 'under Article 1186 of the Civil Code that condition
was deemed fulfilled, considering that the collective action of PAL's
personnel in tossing around the claim and leaving it unresolved for
an indefinite period of time was tantamount to "voluntarily
preventing its fulfillment." On grounds of equity, the filing of the
baggage freight claim, which sufficiently informed PAL of the damage
sustained by private respondent's cargo, constituted substantial
compliance with the requirement in the contract for the filing of a
formal claim.43 (Citations omitted)
Here, the Court of Appeals detailed the efforts made by respondent
Luwalhati and consignee Sison. It also noted petitioner's ambiguous
and evasive responses, nonchalant handling of respondents'
concerns, and how these bogged down respondents' actions and
impaired their compliance with the required 45-day period:
Anent the issues concerning lack of cause of action and their so-
called "run-around" matter, We uphold the lower court's finding that
the herein appellees complied with the requirement for the
immediate filing of a formal claim for damages as required in the Air
Waybill or, at least, We find that there was substantial compliance
therewith. Luwalhati testified that the addressee, Veronica Z. Sison
promptly traced the whereabouts of the said package, but to no avail.
Her testimony narrated what happened thereafter, thus:
". . . "A And then I asked my friend Mrs. Veronica Sison to trace
it, Sir.
"COURT: All right. She was informed that it was lost. What steps
did you take to find out or to recover back this package?

". . .

"ATTY. ALENTAJAN:

"Q What did you do to Fedex? "Q What did she report to you?

". . .

"A She reported to me that first, she checked with the

Fedex and the first answer was they were going to trace
WITNESS: First, I asked the secretary here to call Fedex Manila and it. The second answer was that, it was delivered to the
they said, the record show that it was sent to New York, lady, her neighbor and the neighbor completely denied it
Your Honor. and as they show a signature that is not my signature,
so the next time she called again, another person
answered. She called to say that the neighbor did not
receive and the person on the other line I think she got
". . . his name, said that, it is because it is December and we
usually do that just leave it and then they cut the line
ATTY. ALENTAJAN:
and so I asked my friend to issue a sworn statement in
"Q After calling Fedex, what did Fedex do? the form of affidavit and have it notarized in the
Philippine Embassy or Consulate, Sir. That is what she
did.

"A None, sir. They washed their hands because according to

them it is New York because they have sent it. Their
records show that New York received it, Sir. "Q On your part here in the Philippines after doing that,
after instructing Veronica Sison, what else did you do
because of this violation?

"Q New York Fedex?

"A I think the next step was to issue a demand letter
because any way I do not want to go to Court, it is so
"A Yes, Sir. hard, Sir."

The foregoing event show Luwalhati's own ardent campaign in

"Q Now what else did you do after that? following up the claim. To the Court's mind, it is beyond her control
why the demand letter for damages was only sent subsequent to her
infuriating follow-ups regarding the whereabouts of the said package.
We can surmise that if there was any omission at all to file the said
claim within the prescriptive period provided for under the Air
Waybill it was mostly due to herein appellant's own behavior, the
outcome thereof cannot, by any chance, be imputed to the herein
appellees.44 (Grammatical errors in the original)
Petitioner has been unable to persuasively refute Luwalhati's
recollection of the efforts that she and Sison exerted, and of the
responses it gave them. It instead insists that the 45-day period
stated in its Air Waybill is sacrosanct. This Court is unable to bring
itself to sustaining petitioner's appeal to a convenient reprieve. It is
one with the Regional Trial Court and the Court of Appeals in
stressing that respondents' inability to expediently file a formal claim
can only be attributed to petitioner hampering its fulfillment. Thus,
respondents must be deemed to have substantially complied with the
requisite 45-day period for filing a formal claim.
II
The Civil Code mandates common carriers to observe extraordinary
diligence in caring for the goods they are transporting:
Article 1733. Common carriers, from the nature of their business
and for reasons of public policy, are bound to observe extraordinary
diligence in the vigilance over the goods and for the safety of the
passengers transported by them, according to all the circumstances
of each case.
"Extraordinary diligence is that extreme measure of care and caution
which persons of unusual prudence and circumspection use for
securing and preserving their own property or rights."45 Consistent
with the mandate of extraordinary diligence, the Civil Code stipulates
that in case of loss or damage to goods, common carriers are
presumed to be negligent or at fault,46 except in the following
instances:
(1) Flood, storm, earthquake, lightning, or other natural disaster or
calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the
containers;
(5) Order or act or competent public authority.47
In all other cases, common carriers must prove that they exercised
extraordinary diligence in the performance of their duties, if they are
to be absolved of liability.48
The responsibility of common carriers to exercise extraordinary
diligence lasts from the time the goods are unconditionally placed in
their possession until they are delivered "to the consignee, or to the
person who has a right to receive them."49 Thus, part of the
extraordinary responsibility of common carriers is the duty to ensure
that shipments are received by none but "the person who has a right
to receive them."50 Common carriers must ascertain the identity of
the recipient. Failing to deliver shipment to the designated recipient
amounts to a failure to deliver. The shipment shall then be
considered lost, and liability for this loss ensues.
Petitioner is unable to prove that it exercised extraordinary diligence
in ensuring delivery of the package to its designated consignee. It
claims to have made a delivery but it even admits that it was not to
the designated consignee. It asserts instead that it was authorized to
release the package without the signature of the designated recipient
and that the neighbor of the consignee, one identified only as "LGAA
385507," received it.51 This fails to impress.
The assertion that receipt was made by "LGAA 385507" amounts to
little, if any, value in proving petitioner's successful discharge of its
duty. "LGAA 385507" is nothing but an alphanumeric code that
outside of petitioner's personnel and internal systems signifies
nothing. This code does not represent a definite, readily identifiable
person, contrary to how commonly accepted identifiers, such as
numbers attached to official, public, or professional identifications
like social security numbers and professional license numbers,
function. Reliance on this code is tantamount to reliance on nothing
more than petitioner's bare, self-serving allegations. Certainly, this
cannot satisfy the requisite of extraordinary diligence consummated
through delivery to none but "the person who has a right to
receive"52 the package.
Given the circumstances in this case, the more reasonable
conclusion is that the package was not delivered. The package
shipped by respondents should then be considered lost, thereby
engendering the liability of a common carrier for this loss.
Petitioner cannot but be liable for this loss. It failed to ensure that
the package was delivered to the named consignee. It admitted to
delivering to a mere neighbor. Even as it claimed this, it failed to
identify that neighbor.
III
Petitioner further asserts that respondents violated the terms of the
Air Waybill by shipping checks. It adds that this violation exempts it
from liability.53
This is untenable.
Petitioner's International Air Waybill states:
Items Not Acceptable for Transportation. We do not accept
transportation of money (including but not limited to coins or
negotiable instruments equivalent to cash such as endorsed stocks
and bonds). We exclude all liability for shipments of such items
accepted by mistake. Other items may be accepted for carriage only
to limited destinations or under restricted conditions. We reserve the
right to reject packages based upon these limitations or for reasons
of safety or security. You may consult our Service Guide, Standard
Conditions of Carriage, or any applicable tariff for specific
details.54 (Emphasis in the original)
The prohibition has a singular object: money. What follows the
phrase "transportation of money" is a phrase enclosed in
parentheses, and commencing with the words "including but not
limited to." The additional phrase, enclosed as it is in parentheses, is
not the object of the prohibition, but merely a postscript to the word
"money." Moreover, its introductory words "including but not limited
to" signify that the items that follow are illustrative examples; they
are not qualifiers that are integral to or inseverable from "money."
Despite the utterance of the enclosed phrase, the singular
prohibition remains: money.
Money is "what is generally acceptable in exchange for goods."55 It
can take many forms, most commonly as coins and banknotes.
Despite its myriad forms, its key element is its general
acceptability.56 Laws usually define what can be considered as a
generally acceptable medium of exchange.57 In the Philippines,
Republic Act No. 7653, otherwise known as The New Central Bank
Act, defines "legal tender" as follows:
All notes and coins issued by the Bangko Sentral shall be fully
guaranteed by the Government of the Republic of the Philippines and
shall be legal tender in the Philippines for all debts, both public and
private: Provided, however, That, unless otherwise fixed by the
Monetary Board, coins shall be legal tender in amounts not
exceeding Fifty pesos (P50.00) for denomination of Twenty-five
centavos and above, and in amounts not exceeding Twenty pesos
(P20.00) for denominations of Ten centavos or less.58
It is settled in jurisprudence that checks, being only negotiable
instruments, are only substitutes for money and are not legal tender;
more so when the check has a named payee and is not payable to
bearer. In Philippine Airlines, Inc. v. Court of Appeals,59 this Court
ruled that the payment of a check to the sheriff did not satisfy the
judgment debt as checks are not considered legal tender. This has
been maintained in other cases decided by this Court. In Cebu
International Finance Corporation v. Court of Appeals,60 this Court
held that the debts paid in a money market transaction through the
use of a check is not a valid tender of payment as a check is not legal
tender in the Philippines. Further, in Bank of the Philippine Islands v.
Court of Appeals,61 this Court held that "a check, whether a
manager's check or ordinary check, is not legal tender."62
The Air Waybill's prohibition mentions "negotiable instruments" only
in the course of making an example. Thus, they are not prohibited
items themselves. Moreover, the illustrative example does not even
pertain to negotiable instruments per se but to "negotiable
instruments equivalent to cash."63
The checks involved here are payable to specific payees, Maxwell-
Kates, Inc. and the New York County Department of Finance.64 Thus,
they are order instruments. They are not payable to their bearer,
i.e., bearer instruments. Order instruments differ from bearer
instruments in their manner of negotiation:
Under Section 30 of the [Negotiable Instruments Law], an order
instrument requires an indorsement from the payee or holder before
it may be validly negotiated. A bearer instrument, on the other hand,
does not require an indorsement to be validly negotiated.65
There is no question that checks, whether payable to order or to
bearer, so long as they comply with the requirements under Section
1 of the Negotiable Instruments Law, are negotiable
instruments.66 The more relevant consideration is whether checks
with a specified payee are negotiable instruments equivalent to cash,
as contemplated in the example added to the Air Waybill's
prohibition.
reason should respondents be exculpated from liability for shipping
documents or instruments, which are reasonably understood as not
being money, and for being unable to declare them as such.
Ultimately, in shipping checks, respondents were not violating
petitioner's Air Waybill. From this, it follows that they committed no
breach of warranty that would absolve petitioner of liability.
WHEREFORE, the Petition for Review on Certiorari is DENIED. The
assailed August 31, 2011 Decision and November 21, 2011
Resolution of the Court of Appeals in CA-G.R. CV No. 91216
are AFFIRMED.
SO ORDERED.
Velasco, Jr., (Chairperson), Bersamin, Martires, and Gesmundo, JJ.,
concur.

This Court thinks not. An order instrument, which has to be

endorsed by the payee before it may be negotiated,67 cannot be a
negotiable instrument equivalent to cash. It is worth emphasizing
that the instruments given as further examples under the Air Waybill
must be endorsed to be considered equivalent to cash:68

Items Not Acceptable for Transportation. We do not accept

transportation of money (including but not limited to coins or
negotiable instruments equivalent to cash such as endorsed stocks
and bonds). ... (Emphasis in the original)69

What this Court's protracted discussion reveals is that petitioner's

Air Waybill lends itself to a great deal of confusion. The clarity of its
terms leaves much to be desired. This lack of clarity can only militate
against petitioner's cause.

The contract between petitioner and respondents is a contract of

adhesion; it was prepared solely by petitioner for respondents to
conform to.70 Although not automatically void, any ambiguity in a
contract of adhesion is construed strictly against the party that
prepared it.71 Accordingly, the prohibition against transporting
money must be restrictively construed against petitioner and
liberally for respondents. Viewed through this lens, with greater
 Actions; A well-settled rule in procedural law is that the allegations
in the body of the pleading or the complaint, and not its title, determine
the nature of an action.—A well-settled rule in procedural law is that the
allegations in the body of the pleading or the complaint, and not its title,
determine the nature of an action. An examination of Fong’s complaint
shows that although it was labeled as an action for a sum of
money and damages, it was actually a complaint for rescission.
The following allegations in the complaint support this finding:
9. Notwithstanding the aforesaid remittances, defendant failed
for an unreasonable length of time to submit a valuation of the
equipment of D.C. Danton and Bakcomx x x. 10. Worse, despite
repeated reminders from plaintiff, defendant failed to accomplish
the organization and incorporation of the proposed holding
company, contrary to his representation to promptly do so. x x x x
17. Considering that the incorporation of the proposed holding
company failed to materialize, despite the lapse of one year and
four months from the time of subscription, plaintiff has the right
to revoke his pre-incorporation subscription. Such revocation
entitles plaintiff to a refund of the amount of P5,000,000.00 he
remitted to defendant, representing advances made in favor of
defendant to be considered as payment on plaintiff’s subscription to the
proposed holding company upon its incorporation, plus interest from
receipt by defendant of said amount until fully paid.
Civil Law; Obligations; Reciprocal Obligations; Rescission; As a
contractual remedy, rescission is available when one of the parties
substantially fails to do what he has obligated himself to perform.—As a
contractual remedy, rescission is available when one of the parties
substantially fails to do what he has obligated himself to perform. It aims
to address the breach of faith and the violation of reciprocity between two
parties in a contract. Under Article 1191 of the Civil Code, the right of
rescission is inherent in reciprocal obligations, viz.: The power to rescind
obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
Same; Same; Same; Words and Phrases; Reciprocal obligations are
those which arise from the same cause, in which each party is a debtor
and a creditor of the other, such that the obligation of one is dependent on
the obligation of the other.—Reciprocal obligations are those which arise
from the same cause, in which each party is a debtor and a creditor of the
other, such that the obligation of one is dependent on the obligation of
the other. Fong and Dueñas’ execution of a joint venture agreement
created between them reciprocal obligations that must be performed in
order to fully consummate the contract and achieve the purpose for
which it was entered into. Both parties verbally agreed to incorporate a
company that would hold the shares of Danton and Bakcom and which,
in turn, would be the platform for their food business. Fong obligated
himself to contribute half of the capital or P32.5 Million in cash. On the
other hand, Dueñasbound himself to shoulder the other half by
contributing his Danton and Bakcom shares, which were allegedly also
valued at P32.5 Million. Aside from this, Dueñas undertook to process
Alliance’s incorporation and registration with the SEC.
Corporations; Authorized Capital Stocks; Under the Corporation
Code, before a stock corporation may be incorporated and registered, it is
required that at least twenty-five percent (25%) of its authorized capital
stock as stated in the articles of incorporation, be first subscribed at the
time of incorporation, and at least 25% of the total subscription, be paid
upon subscription.—Under the Corporation Code, before a stock
corporation may be incorporated and registered, it is required that at
least twenty-five percent (25%) of its authorized capital stock as stated in
the articles of incorporation, be first subscribed at the time of
incorporation, and at least twenty-five percent (25%) of the total
subscription, be paid upon subscription. To prove compliance with this
requirement, the SEC requires the incorporators to submit a treasurer’s
affidavit and a certificate of bank deposit, showing the existence of an
amount compliant with the prescribed capital subscription. In this light,
we conclude that Fong’s cash contributions play an indispensable
part in Alliance’s incorporation. The process necessarily requires the
money not only to fund Alliance’s registration with the SEC but also its
initial capital subscription.
Civil Law; Obligations; Reciprocal Obligations; Rescission; After
rescission, the parties must go back to their original status before they
entered into the agreement.—As the Court cannot precisely determine
who between the parties first violated the agreement, we apply the
second part of Article 1192 which states: “if it cannot be determined
which of the parties first violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages.” In these lights,
the Court holds that the joint venture agreement
between Fong and Dueñas is deemed extinguished through
rescission under Article 1192 in relation with Article 1191 of the
Civil Code. Dueñasmust therefore return the P5 Million
that Fong initially contributed since rescission requires mutual
restitution. After rescission, the parties must go back to their
original status before they entered into the
agreement. Dueñas cannot keep Fong’s contribution as this would He was an old acquaintance of Fong as they were former
constitute unjust enrichment. No damages shall be awarded to any party schoolmates at the De La Salle University.6
in accordance with the rule under Article 1192 of the Civil Code that in
case of mutual breach and the first infractor of the contract cannot Sometime in November 1996, Dueñas and Fong entered into a verbal
exactly be determined, each party shall bear his own damages. joint venture contract where they agreed to engage in the food
business and to incorporate a holding company under the name
Alliance Holdings, Inc. (Alliance or the proposed corporation). Its
capitalization would be Sixty Five Million Pesos (₱65 Million), to
Republic of the Philippines which they would contribute in equal parts.7
SUPREME COURT
Manila The parties agreed that Fong would contribute Thirty Two Million
and Five Hundred Thousand Pesos (₱32.5 Million) in cash while
SECOND DIVISION Dueñas would contribute all his Danton and Bakcom shares which
he valued at ₱32.5 Million.8 Fong required Dueñas to submit the
financial documents supporting the valuation of these shares.
G.R. No. 185592 June 15, 2015

On November 25, 1996, Fong started remitting in tranches his share

GEORGE C. FONG, Petitioner,
in the proposed corporation’s capital. He made the remittances
vs.
under the impression that his contribution would be applied as his
JOSE V. DUEÑAS, Respondent.
subscription to fifty percent (50%) of Alliance’s total shareholdings.
On the other hand, Dueñas started processing the
DECISION Boboli9 international license that they would use in their food
business. Fong’s cash contributions are summarized below.10
BRION, J.:
Date Amount
We resolve in this petition for review on certiorari1 the challenge to
the September 16, 2008 decision2 and the December 8, 2008
resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 88396. November 25, 1996 ₱1,980,475.20

These assailed CA rulings annulled the June 27, 2006 decision 4 and January 14, 1997 ₱1,000,000.00
October 30, 2006 order5 of the Regional Trial Court of Makati,
Branch 64 (trial court), which directed respondent Jose V. Dueñas
(Dueñas) to pay Five Million Pesos (₱5 Million) to petitioner George C. February 8, 1997 ₱500,000.00
Fong (Fong), and imposed a six percent (6%) annual interest on this
amount.
March 7, 1997 ₱100,000.00

Factual Antecedents
April 28, 1997 ₱500,000.00
Dueñas is engaged in the bakery, food manufacturing, and retailing
business, which are all operated under his two companies, D.C. June 13, 1997 ₱919,524.80
DANTON, Inc. (Danton) and Bakcom Food Industries, Inc. (Bakcom).
 Total ₱5,000,000.00
On June 13, 1997, Fong sent a letter to Dueñas informing him of his
decision to limit his total contribution from ₱32.5 Million to ₱5
Million. This letter reads:
June 13, 1997
Mr. Jose Dueñas
c/o Camira Industries
Re: Proposed JV in Bakcom, D.C. Danton and Boboli
Dear Jojit,
Enclosed is our check for ₱919,534.80 representing our additional
advances to subject company in process of incorporation. This will
make our total advances to date amounting to ₱5 million.
Since we agreed in principal late last year to pursue subject matter,
the delays in implementing the joint venture have caused us to
rethink our position. First, we were faced with the ‘personal’ factor
which was explained to you one time. This has caused us to turn
down a number of business opportunities. Secondly, since last year,
the operation of Century 21 has been taking more time from us than
anticipated. That is why we decided to relinquish our original plan to
manage and operate ‘Boboli’ knowing this limitation. For us, it does
not make sense anymore to go for a significant shareholding when
we cannot be hands on and participate actively as originally planned.
For your information, we will probably be giving up our subway
franchise too.
Together with our business advisers and legal counsel, we came to a
decision to hold our commitment (from advances to investment) at
₱5 million only for now from the original plan of ₱32.5 million, if this
is acceptable to you.
We know that our decision will somewhat upset the overall plans.
But it will probably be more problematic for us in the long run if we
continue full speed. We have put our money down in trust and good
faith despite the much delayed financials. We continue to believe in
your game plan and capabilities to achieve the desired goals for
subject undertaking. Please permit us instead to be just a modest
silent investor now with a take out plan when time and price is right.
Thank you for your kind understanding and consideration.
With best regards.
(Signed) George Fong11
Fong observed that despite his ₱5 Million contribution, Dueñas still
failed to give him the financial documents on the valuation of the
Danton and Bakcom shares. Thus, except for Dueñas’
representations, Fong had nothing to rely on to ensure that these
shares were really valued at ₱32.5 Million. Moreover, Dueñas failed
to incorporate and register Alliance with the Securities and Exchange
Commission (SEC).12
These circumstances convinced Fong that Dueñas would no longer
honor his obligations in their joint venture agreement.13 Thus, on
October 30, 1997, Fong wrote Dueñas informing him of his decision
to cancel the joint venture agreement. He also asked for the refund of
the ₱5 Million that he advanced.14 In response, Dueñas admitted
that he could not immediately return the money since he used it to
defray the business expenses of Danton and Bakcom.15
To meet Fong’s demand, Dueñas proposed several schemes for
payment of the ₱5 Million.16 However, Fong did not accept any of
these proposed schemes. On March 25, 1998, Fong wrote a final
letter of demand17 informing Dueñas that he would file a judicial
action against him should he still fail to pay after receipt of this
written demand.
Since Dueñas did not pay, Fong filed a complaint against him for
collection of a sum of money and damages18 on April 24, 1998.
The Trial Court’s Ruling
In its June 27, 2006 decision, the trial court ruled in favor of Fong
and held that a careful examination of the complaint shows that
although it was labeled as an action for collection of a sum of money,
it was actually an action for rescission.19
The trial court noted that Dueñas’ failure to furnish Fong with the
financial documents on the valuation of the Danton and Bakcom
shares, as well as the almost one year delay in the incorporation of
Alliance, caused Fong to rescind the joint venture
agreement.20 According to the trial court, these are adequate and
acceptable reasons for rescission.
The trial court also held that Dueñas erroneously invested Fong’s
cash contributions in his two companies, Danton and Bakcom. The
signed receipts,21 presented as evidence, expressly provided that
each remittance should be applied as advance subscription to Fong’s
shareholding in Alliance. Thus, Dueñas’ investment of the money in
Danton and Bakcom was clearly unauthorized and contrary to the
parties’ agreement.
Since Dueñas was unjustly enriched by Fong’s advance capital
contributions, the trial court ordered him to return the money
amounting to ₱5 Million and to pay ten percent (10%) of this amount
in attorney’s fees, as well as the cost of the suit.22
Fong filed a partial motion for reconsideration from the trial court’s
June 27, 2006 decision and asked for the imposition of a six percent
(6%) annual interest, computed from the date of extrajudicial
demand until full payment of the award. The trial court granted this
prayer in its October 30, 2006 order.23
The CA’s Ruling
Dueñas responded to the trial court’s ruling through an appeal with
the CA, which granted the appeal and annulled the trial court’s
ruling.
The CA ruled that Fong’s June 13, 1997 letter evidenced his
intention to convert his cash contributions from "advances" to the
proposed corporation’s shares, to mere "investments." Thus, contrary
to the trial court’s ruling, Dueñas correctly invested Fong’s ₱5
Million contribution to Bakcom and Danton. This did not deviate
from the parties’ original agreement as eventually, the shares of
these two companies would form part of Alliance’s capital.24
Lastly, the CA held that the June 13, 1997 letter showed that Fong
knew all along that he could not immediately ask for the return of
his ₱5 Million investment. Thus, whether the action filed was a
complaint for collection of a sum of money, or rescission, it must still
fail.25
The Petition
Fong submits that the CA erred when it ruled that his June 13, 1997
letter showed his intent to convert his contributions from advance
subscriptions to Alliance’s shares, to investments in Dueñas’ two
companies. Contrary to the CA’s findings, the receipts and the letter
expressly mentioned that his contributions should all be treated as
his share subscription to Alliance.26 Also, Fong argues that Dueñas’
unjustified retention of the ₱5 Million and its appropriation to his
(Dueñas’) own business, amounted to unjust enrichment; and that
he contributed to fund Alliance’s capital and incorporation, not to
pay for Danton and Bakcom’s business expenses.27
The Case for Dueñas
Dueñas contends that he could no longer refund the ₱5 Million since
he had already applied it to his two companies; that this is proper
since Danton and Bakcom’s shares would also form part of his
capital contribution to Alliance.28
Moreover, the incorporation did not push through because Fong
unilaterally rescinded the joint venture agreement by limiting his
investment from ₱32.5 Million to ₱5 Million.29 Thus, it was Fong who
first breached the contract, not he. Consequently, Fong’s failure to
comply with his undertaking disqualified him from seeking the
agreement’s rescission.30
The Court's Ruling
We resolve to GRANT the petition.
At the outset, the Court notes that the parties’ joint venture
agreement to incorporate a company that would hold the shares of
Danton and Bakcom and that would serve as the business vehicle for
their food enterprise, is a valid agreement. The failure to reduce the
agreement to writing does not affect its validity or enforceability as
there is no law or regulation which provides that an agreement to
incorporate must be in writing.
With this as premise, we now address the related issues raised by
the parties.
The body rather than the title of
the complaint determines the
nature of the action.
A well-settled rule in procedural law is that the allegations in the
body of the pleading or the complaint, and not its title, determine the
nature of an action.31
An examination of Fong’s complaint shows that although it was
labeled as an action for a sum of money and damages, it was
actually a complaint for rescission. The following allegations in the
complaint support this finding:
9. Notwithstanding the aforesaid remittances, defendant failed for an
unreasonable length of time to submit a valuation of the equipment
of D.C. Danton and Bakcom x x x.
10. Worse, despite repeated reminders from plaintiff, defendant failed
to accomplish the organization and incorporation of the proposed
holding company, contrary to his representation to promptly do so.
xxxx
17. Considering that the incorporation of the proposed holding
company failed to materialize, despite the lapse of one year and four
months from the time of subscription, plaintiff has the right to
revoke his pre-incorporation subscription. Such revocation entitles
plaintiff to a refund of the amount of ₱5,000,000.00 he remitted to
defendant, representing advances made in favor of defendant to be
considered as payment on plaintiff’s subscription to the proposed
holding company upon its incorporation, plus interest from receipt
by defendant of said amount until fully paid. [Emphasis supplied.]
Fong’s allegations primarily pertained to his cancellation of their
verbal agreement because Dueñas failed to perform his obligations to
provide verifiable documents on the valuation of the Danton’s and
Bakcom’s shares, and to incorporate the proposed corporation. These
allegations clearly show that what Fong sought was the joint venture
agreement’s rescission.
As a contractual remedy, rescission is available when one of the
parties substantially fails to do what he has obligated himself to
perform.32 It aims to address the breach of faith and the violation of
reciprocity between two parties in a contract.33 Under Article 1191 of
the Civil Code, the right of rescission is inherent in reciprocal
obligations, viz:
The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon
him. [Emphasis supplied.]
Dueñas submits that Fong’s prayer for the return of his cash
contribution supports his claim that Fong’s complaint is an action
for collection of a sum of money. However, Dueñas failed to
appreciate that the ultimate effect of rescission is to restore the
parties to their original status before they entered in a contract. As
the Court ruled in Unlad Resources v. Dragon:34 Rescission has the
effect of "unmaking a contract, or its undoing from the beginning,
and not merely its termination." Hence, rescission creates the
obligation to return the object of the contract. It can be carried out
only when the one who demands rescission can return whatever he
may be obliged to restore. To rescind is to declare a contract void at
its inception and to put an end to it as though it never was. It is not
merely to terminate it and release the parties from further obligations
to each other, but to abrogate it from the beginning and restore the
parties to their relative positions as if no contract has been made.
Accordingly, when a decree for rescission is handed down, it is the
duty of the court to require both parties to surrender that which they
have respectively received and to place each other as far as
practicable in his original situation.35 [Emphasis supplied.]
In this light, we rule that Fong’s prayer for the return of his
contribution did not automatically convert the action to a complaint
for a sum of money. The mutual restitution of the parties’ original
contributions is only a necessary consequence of their agreement’s
rescission. Rescission under Art. 1191 is
applicable in the present case
Reciprocal obligations are those which arise from the same cause, in
which each party is a debtor and a creditor of the other, such that
the obligation of one is dependent on the obligation of the other.36
Fong and Dueñas’ execution of a joint venture agreement created
between them reciprocal obligations that must be performed in order
to fully consummate the contract and achieve the purpose for which
it was entered into.
Both parties verbally agreed to incorporate a company that would
hold the shares of Danton and Bakcom and which, in turn, would be
the platform for their food business. Fong obligated himself to
contribute half of the capital or ₱32.5 Million in cash. On the other
hand, Dueñas bound himself to shoulder the other half by
contributing his Danton and Bakcom shares, which were allegedly
also valued at ₱32.5 Million. Aside from this, Dueñas undertook
toprocess Alliance’s incorporation and registration with the SEC.
When the proposed company remained unincorporated by October
30, 1997, Fong cancelled the joint venture agreement and demanded
the return of his ₱5 Million contribution.
For his part, Dueñas explained that he could not immediately return
the ₱5 Million since he had invested it in his two companies. He
found nothing irregular in this as eventually, the Danton and
Bakcom shares would form part of Alliance’s capital.
Dueñas’ assertion is erroneous.
The parties never agreed that Fong would invest his money in
Danton and Bakcom. Contrary toDueñas’ submission, Fong’s
understanding was that his money would be applied to his
shareholdings in Alliance. As shown in Fong’s June13, 1997 letter,
this fact remained to be true even after he limited his contribution to
₱5 Million, viz:
Dear Jojit,
Enclosed is our check for ₱919,534.80 representing our additional
advances to subject company in process of incorporation. This will
make our total advances to date amounting to ₱5
million.37[Emphasis supplied.]
Moreover, under the Corporation Code, before a stock corporation
may be incorporated and registered, itis required that at least twenty
five percent (25%) of its authorized capital stock as stated in the
articles of incorporation, be first subscribed at the time of
incorporation, and at least twenty five percent (25%) of the total
subscription, be paid upon subscription.38
To prove compliance with this requirement, the SEC requires the
incorporators to submit a treasurer’s affidavit and a certificate of
bank deposit, showing the existence of an amount compliant with
the prescribed capital subscription.39
In this light, we conclude that Fong’s cash contributions play an
indispensable part in Alliance’s incorporation. The process
necessarily requires the money not only to fund Alliance’s
registration with the SEC but also its initial capital subscription.
This is evident in the receipts which Dueñas himself executed, one of
which provides:
I, JOSE V. DUEÑAS, hereby acknowledge the receipt on January 14,
1997 of the amount of One Million Pesos (Php1,000,000.00) Check
No. 118 118 7014 Metro Bank, Pasong Tamo branch dated January
13, 1997 from Mr. George Fong, which amount shall constitute an
advance of the contribution or investment of Mr. Fong in the joint
venture which he and I are in the process of organizing. Specifically,
this amount will be considered as part of Mr. Fong’s subscription to
the shares of stock of the joint venture company which we will
incorporate to embody and carry out our joint venture.40 [Emphasis
supplied.]
Thus, Dueñas erred when he invested Fong’s contributions in his
two companies. This money should have been used in processing
Alliance’s registration. Its incorporation would not materialize if there
would be no funds for its initial capital. Moreover, Dueñas
represented that Danton and Bakcom’s shares were valued at ₱32.5
Million. If this was true, then there was no need for Fong’s additional
₱5 Million investment, which may possibly increase the value of the
Danton and Bakcom shares.
Under these circumstances, the Court agrees with the trial court that
Dueñas violated his agreement with Fong. Aside from unilaterally
applying Fong’s contributions to his two companies, Dueñas also
failed to deliver the valuation documents of the Danton and Bakcom
shares to prove that the combined values of their capital
contributions actually amounted to ₱32.5 Million. These acts led to
Dueñas’ delay in incorporating the planned holding company, thus
resulting in his breach of the contract.
On this basis, Dueñas’ breach justified Fong’s rescission of the joint
venture agreement under Article 1191. As the Court ruled in Velarde
v. Court of Appeals:41
The right of rescission of a party to an obligation under Article 1191
of the Civil Code is predicated on a breach of faith by the other party
who violates the reciprocity between them. The breach contemplated
in the said provision is the obligor’s failure to comply with an existing
obligation. When the obligor cannot comply with what is incumbent
upon it, the obligee may seek rescission and in the absence of any
just cause for the court to determine the period of compliance, the
court shall decree the rescission.
In the present case, private respondents validly exercised their right
to rescind the contract, because of the failure of petitioners to comply
with their obligation to pay the balance of the purchase price.
Indubitably, the latter violated the very essence of reciprocity in the
contract of sale, a violation that consequently gave rise to private
respondents’ right to rescind the same in accordance with
law.42 [Emphasis supplied.]
However, the Court notes that Fong also breached his obligation in
the joint venture agreement. In his June 13, 1997 letter, Fong
expressly informed Dueñas that he would be limiting his cash
contribution from ₱32.5 Million to ₱5 Million because of the following
reasons which we quote verbatim:
1. First, we were faced with the ‘personal’ factor which was
explained to you one time. This has caused us to turn down
a number of business opportunities;
2. Secondly, since last year, the operation of Century 21 has
been taking more time from us than anticipated. That is why
we decided to relinquish our original plan to manage and
operate ‘Boboli’ knowing this limitation. For us, it does not
make sense anymore to go for a significant shareholding
when we cannot be hands on and participate actively as
originally planned.43 x x x.
Although these reasons appear to be valid, they do not erase the fact
that Fong still reneged on his original promise to contribute ₱32.5
Million. The joint venture agreement was not reduced to writing and
the evidence does not show if the parties agreed on valid causes that
would justify the limitation of the parties’ capital contributions. Their
only admission was that they obligated themselves to contribute
₱32.5 Million each.
Hence, Fong’s diminution of his capital share to ₱5 Million also
amounted to a substantial breach of the joint venture agreement,
which breach occurred before Fong decided to rescind his agreement
with Dueñas. Thus, Fong also contributed to the non-incorporation
of Alliance that needed ₱65 Million as capital to operate.
Fong cannot entirely blame Dueñas since the substantial reduction
of his capital contribution also greatly impeded the implementation
of their agreement to engage in the food business and to incorporate
a holding company for it.
As both parties failed to comply with their respective reciprocal
obligations, we apply Article 1192 of the Civil Code, which provides:
Art. 1192. In case both parties have committed a breach of the
obligation, the liability of the first in fractor shall be equitably
tempered by the courts. If it cannot be determined which of the
parties first violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages. [Emphasis
supplied.]
Notably, the Court is not aware of the schedule of performance of the
parties’ obligations since the joint venture agreement was never
reduced to writing. The facts, however, show that both parties began
performing their obligations after executing the joint venture
agreement. Fong started remitting his share while Dueñas started
processing the Boboli international license for the proposed
corporation’s food business.
breach and the first infractor of the contract cannot exactly be
determined, each party shall bear his own damages.
WHEREFORE, premises considered, we hereby GRANT the petition
and reverse the September 16, 2008 decision and December 8, 2008
resolution of the Court of Appeals in CA-G.R. CV No. 88396.
Respondent Jose V. Dueñas is ordered to RETURN Five Million Pesos
to petitioner George C. Fong. This amount shall incur an interest of
six percent (6%) per annum from the date of finality of this judgment
until fully paid.45 The parties' respective claims for damages are
deemed EXTINGUISHED and each of them shall bear his own
damages.

The absence of a written contract renders the Court unsure as to SO ORDERED.

whose obligation must be performed first. It is possible that the
parties agreed that Fong would infuse capital first and Dueñas’ ARTURO D. BRION
submission of the documents on the Danton and Bakcom shares Associate Justice
would just follow. It could also be the other way around. Further, the
parties could have even agreed to simultaneously perform their
respective obligations.

Despite these gray areas, the fact that both Fong and Dueñas
substantially contributed to the non-incorporation of Alliance and to
the failure of their food business plans remains certain.

As the Court cannot precisely determine who between the parties

first violated the agreement, we apply the second part of Article 1192
which states: "if it cannot be determined which of the parties first
violated the contract, the same shall be deemed extinguished, and
each shall bear his own damages. "

In these lights, the Court holds that the joint venture agreement
between Fong and Dueñas is deemed extinguished through
rescission under Article 1192 in relation with Article 1191 of the Civil
Code. Dueñas must therefore return the ₱5 Million that Fong initially
contributed since rescission requires mutual restitution.44 After
rescission, the parties must go back to their original status before
they entered into the agreement. Dueñas cannot keep Fong's
contribution as this would constitute unjust enrichment.

No damages shall be awarded to any party in accordance with the

rule under Article 1192 of the Civil Code that in case of mutual
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 162802 October 9, 2013
EDS MANUFACTURING, INC., Petitioner,
vs.
HEALTHCHECK INTERNATIONAL INC., Respondent.
DECISION
PERALTA, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules
of Court seeking the reversal of the Decision1dated November 28,
2003 and Resolution2 dated March 16, 2004 of the Court of Appeals
(CA) in CA-G.R. CV No. 69420.
The facts, as found by the CA, are as follows:
The plaintiff Healthcheck Inc. is a 1-lcalth Maintenance Organization
HMO) that provides prepaid health and medical insurance coverage
to its clients. To under gird its program, it maintains a network of
accredited hospitals and medical clinics, one of which is the De La
Salle University Medical Center located at Dasmariñas. Cavite. Being
within the access of this medical facility, the defendant Eds
Manufacturing Inc. with about 5,000 employees at Imus, Cavite saw
fit in April 1998 to obtain insurance coverage from it. They entered
into a one-year contract from May 1, 1998 to April 30, 1999 in which
HCI was to provide the 4,191 employees of EMI and their 4,592
dependents as host of medical services and benefits. Attached to the
Agreement was a Service Program which listed the services that HCI
would provide and the responsibilities that EMI would undertake in
order to avail of the services. Putting the Agreement into effect, EMI
paid the full premium for the coverage in the staggering amount of
₱8,826,307.50.
Only two months into the program, problems began to loom in the
horizon. On July 17, HCI notified EMI that its accreditation with
DLSUMC was suspended and advised it to avail of the services of
nearby accredited institutions. A more detailed communication to
subscribers came out days later informing them of the problems of
the HMO industry in the wake of the Asian regional financial crisis
and proposing interim measures for the unexpired service contracts.
In a quickly convened meeting, EMI and HCI hammered out this
handwritten 5-point agreement:
"1) Healthcheck to furnish EMI with list of procedural
enhancements by 7/24 (FRI)-hospitals & professional fees
payment.
2) Healthcheck to reduce no. of accredited hospitals to
improve monitoring of bills for payment & other problems.
3) EMI to study the possibility of adding ‘LIABILITY CLAUSE’
to existing contract; to furnish HC copy for its review.
4) No renewal of contract w/ HC should there be another
suspension of services in any hospitals to be chosen (w/
regard to item #2.) w/in the present contract period.
5) HC decision on APE provided by 7/24(FRI)."
Although HCI had yet to settle its accounts with it, DLSUMC
resumed services on July 24. In another meeting with EMI on August
3, HCI undertook to settle all its accounts with DLSUMC in order to
maintain its accreditation. Despite this commitment, HCI failed to
preserve its credit standing with DLSUMC prompting the latter to
suspend its accreditation for a second time from August 15 to 20. A
third suspension was still to follow on September 9 and remained in
force until the end of the contract period.
Until the difficulties between HCI and its client came to a head in
September 1998, complaints from EMI employees and workers were
pouring in that their HMO cards were not being honored by the
DLSUMC and other hospitals and physicians. On September 3, EMI
formally notified HCI that it was rescinding their April 1998
Agreement on account of HCI’s serious and repeated breach of its
undertaking including but not limited to the unjustified non-
availability of services. It demanded a return of premium for the
unused period after September 3, giving a ballpark figure of ₱6
million.
What went in the way of the rescission of the contract, the fly in the
ointment so to speak, was the failure of EMI to collect all the HMO
cards of the employees and surrender them to HCI as stipulated in
the Agreement. HCI had to tell EMI on October 12, 1998 that its
employees were still utilizing the cards even beyond the
pretermination date set by EMI. It asked for the surrender of the
cards so that it could process the pretermination of the contract and
finalize the reconciliation of accounts. Until we have received the IDs,
HCI said, we will consider your account with us ongoing and
existing, thus subject for inclusion to present billing and payment.
Without responding to this reminder, EMI sent HCI two letters in
January 1999 demanding for the payment of ₱5,884,205 as the 2/3
portion of the premium that remained unutilized after the Agreement
was rescinded in the previous September. The computation was
made on the basis of these observations:
- that EMI paid premium of ₱8,826,307.50
- Healthcheck’s accreditation with DLSUMC was suspended
on July 17, August 15 and Sept. 9, 1998 by reason of
Healthcheck’s unjustified failure to pay its benefits to the
hospital.
- That Healthcheck’s accreditation with other hospitals and
individual physicians was also suspended on various dates
for the same reason.
- That, in effect Healthcheck managed to comply with its
obligation only for the first 4 months of the year-long
contract, or 1/3 thereof.
HCI pre-empted EMI’s threat of legal action by instituting the present
case before the Regional Trial Court of Pasig. The cause of action it
presented was the unlawful pretermination of the contract and
failure of EMI to submit to a joint reconciliation of accounts and
deliver such assets as properly belonged to HCI. EMI responded with
an answer alleging that HCI reneged on its duty to provide adequate
medical coverage after EMI paid the premium in full. Having
rescinded the contract, it claimed that it was entitled to the
unutilized portion of the premium, and that the accounting required
by HCI could not be undertaken until it submitted the monthly
utilization reports mentioned in the Agreement. EMI asked for the
dismissal of the complaint and interposed a counterclaim for
damages and unutilized premium of ₱5,884,205.
In September 2000, after trial, the court ruled in favor of HCI. It
found that EMI’s rescission of the Agreement on September 3, 1998
was not done through court action or by a notarial act and was
based on casual or slight breaches of the contract. Moreover, despite
the announced rescission, the employees of EMI continued to avail of
HCI’s services until March 1999. The services rendered by HCI from
May 1998 to March 1999 purportedly came to a total of
₱10,149,821.13. The court deducted from this figure the premium
paid by EMI, leaving a net payable to HCI of ₱1,323,513.63, in
addition to moral damages and attorney’s fees. EMI’s counterclaims,
on the other hand, were dismissed for lack of merit.3
On appeal, the CA reversed the decision of the Regional Trial Court
(RTC) of Pasig City and ruled that although Healthcheck
International, (HCI) substantially breached their agreement, it also
appears that Eds Manufacturing, Inc. (EMI) did not validly rescind
the contract between them. Thus, the CA dismissed the complaint
filed by HCI, while at the same time dismissing the counterclaim filed
by EMI.
Undeterred, EMI filed a Motion for Partial Reconsideration against
said decision. However, the same was denied in a Resolution dated
March 16, 2004.
Hence, EMI filed the present petition raising the following issues for
our resolution:
A
THE COURT OF APPEALS, WHILE CORRECTLY
OVERTURNING THE RTC’S DECISION BY DISMISSING THE
COMPLAINT, COMMITTED A REVERSIBLE AND GROSS
ERROR WHEN IT LIKEWISE DISMISSED THE
COUNTERCLAIM ON THE GROUND THAT PETITIONER EMI
 DID NOT ACTUALLY RESCIND THE CONTRACT WHICH
RULING BY THE APPELLATE COURT ALREADY WENT
BEYOND THE AGREED/SUBMITTED ISSUES FOR
ADJUDICATION.
B 1385 and 1388 and the Mortgage Law.5
THE COURT OF APPEALS COMMITTED SERIOUS ERROR
OF LAW IN ADMITTING THE UTILIZATION REPORTS AS
COMPETENT EVIDENCE OF THE PURPORTED NON-
RESCISSION, WHEN SUCH EVIDENCE IS DOUBLE
HEARSAY INASMUCH AS THE PERSON WHO PREPARED
THE SAME DID NOT TESTIFY IN COURT AND HIS
UNAVAILABILITY WAS UNEXPLAINED.
C It is probable that the petitioner’s confusion arose from the defective
THE COURT OF APPEALS MADE A GRAVE ERROR WHEN IT
DECLARED THAT PETITIONER, BY SUPPOSEDLY
ALLOWING THE UTILIZATIONS AFTER THE RESCISSION,
NEGATED ITS CLAIMED PRE-TERMINATION OF THE
CONTRACT AND THEREFORE FORFEITED ITS ₱5.8M
CLAIMS FOR UNUTILIZED PREMIUMS.4
Simply, the issue is whether or not there was a valid rescission of the
Agreement between the parties.
We rule in the negative.
First, Article 1191 of the Civil Code states:
The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either
case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with Articles
The general rule is that rescission (more appropriately, resolution ) of
a contract will not be permitted for a slight or casual breach, but
only for such substantial and fundamental violations as would defeat
the very object of the parties in making the agreement.6
In his concurring opinion in Universal Food Corporation v. Court of
Appeals,7 Justice J.B.L. Reyes clarifies:
technique of the new Code that terms both instances as "rescission"
without distinction between them; unlike the previous Spanish Code
of 1889 that differentiated between "resolution" for breach of
stipulations from "rescission" by reason of lesion or damage. But the
terminological vagueness does not justify confusing one case with
the other, considering the patent difference in causes and results of
either action.8
Reiterating the aforementioned pronouncement, this Court in Pryce
Corporation v. Philippine Amusement Gaming Corporation 9 held
that:
Relevantly, it has been pointed out that resolution was originally
used in Article 1124 of the old Civil Code, and that the term became
the basis for rescission under Article 1191 (and conformably, also
Article 1659).10
Thus, the rescission referred to in Article 1191, more appropriately
referred to as resolution, is on the breach of faith by one of the
parties which is violative of the reciprocity between them.11
In the present case, it is apparent that HCI violated its contract with
EMI to provide medical service to its employees in a substantial way.
As aptly found by the CA, the various reports made by the EMI
employees from July to August 1998 are living testaments to the
gross denial of services to them at a time when the delivery was
crucial to their health and lives.
However, although a ground exists to validly rescind the contract
between the parties, it appears that EMI failed to judicially rescind
the same. In Iringan v. Court of Appeals,12 this Court reiterated the
rule that in the absence of a stipulation, a party cannot unilaterally
and extrajudicially rescind a contract. A judicial or notarial act is
necessary before a valid rescission (or resolution) can take place.
Thus –
Clearly, a judicial or notarial act is necessary before a valid
rescission can take place, whether or not automatic rescission has
been stipulated. It is to be noted that the law uses the phrase "even
though" emphasizing that when no stipulation is found on automatic
rescission, the judicial or notarial requirement still applies.
decree of the court and not the mere act of the vendor. Since a
judicial or notarial act is required by law for a valid rescission to take
place, the letter written by respondent declaring his intention to
rescind did not operate to validly rescind the contract.13
What is more, it is evident that EMI had not rescinded the contract
at all. As observed by the CA, despite EMI s pronouncement, it failed
to surrender the HMO cards of its employees although this was
required by the Agreement, and allowed them to continue using them
beyond the date of the rescission. The in-patient and the out-patient
utilization reports submitted by 1 ICI shows entries as late as March
1999, signifying that EMI employees 1 were availing of the services
until the contract period were almost over. The continued use by
them of their privileges under the contract, with the apparent
consent of EMI, belies any intention to cancel or rescind it, even as
they felt that they ought to have received more than what they got.

xxxx WHEREFORE premises considered, the Decision dated November 28,

2003 and Resolution dated March 16, 2004 of the Court of Appeals,
in CA-G.R. CV No. 69420, arc hereby AFFIRMED SO ORDERED.
But in our view, even if Article 1191 were applicable, petitioner
would still not be entitled to automatic rescission. In Escueta v.
Pando, we ruled that under Article 1124 (now Article 1191) of the DIOSDADO M. PERALTA
Civil Code, the right to resolve reciprocal obligations, is deemed Associate Justice
implied in case one of the obligors shall fail to comply with what is
incumbent upon him. But that right must be invoked judicially. The
same article also provides: "The Court shall decree the resolution
demanded, unless there should be grounds which justify the
allowance of a term for the performance of the obligation."

This requirement has been retained in the third paragraph of Article

1191, which states that "the court shall decree the rescission
claimed, unless there be just cause authorizing the fixing of a
period."

Consequently, even if the right to rescind is made available to the

injured party, the obligation is not ipso facto erased by the failure of
the other party to comply with what is incumbent upon him.

The party entitled to rescind should apply to the court for a decree of
rescission. The right cannot be exercised solely on a party’s own
judgment that the other committed a breach of the obligation. The
operative act which produces the resolution of the contract is the
 Civil Law; Sales; Contract of Sale; Reciprocal Obligations; A
contract of sale entails reciprocal obligations.—A contract of sale, such as
that entered into by petitioner and respondent, entails reciprocal
obligations. As explained in Spouses Velarde v. Court of Appeals, 361
SCRA 56 (2001), “[i]n a contract of sale, the seller obligates itself to
transfer the ownership of and deliver a determinate thing, and the buyer
to pay therefor a price certain in money or its equivalent.”
Same; Contracts; Rescission; Jurisprudence has long settled that the
restoration of the contracting parties to their original state is the very
essence of rescission.—Respondent correctly notes that rescission under
Article 1911 results in mutual restitution. Jurisprudence has long settled
that the restoration of the contracting parties to their original state is
the very essence of rescission. In Spouses Velarde v. Court of Appeals,
361 SCRA 56 (2001): Considering that the rescission of the contract is
based on Article 1191 of the Civil Code, mutual restitution is required to
bring back the parties to their original situation prior to the inception of
the contract. Accordingly, the initial payment of P800,000 and the
corresponding mortgage payments . . . should be returned by private
respondents, lest the latter unjustly enrich themselves at the expense of
the former. Rescission creates the obligation to return the object of the
contract. It can be carried out only when the one who demands rescission
can return whatever he may be obliged to restore. To rescind is to declare
a contract void at its inception and to put an end to it as though it never
was. It is not merely to terminate it and release the parties from further
obligations to each other, but to abrogate it from the beginning and
restore the parties to their relative positions as if no contract has been
made.
Same; Same; Same; Liquidated Damages; Mutual restitution under
Article 1191 is no license for the negation of contractually stipulated
liquidated damages.—Contrary to respondent’s assertion, mutual
restitution under Article 1191 is, however, no license for the negation of
contractually stipulated liquidated damages. Article 1191 itself clearly
states that the options of rescission and specific performance come with
“with the payment of damages in either case.” The very same breach or
delay in performance that triggers rescission is what makes damages
due. When the contracting parties, by their own free acts of will, agreed
on what these damages ought to be, they established the law between
themselves. Their contemplation of the consequences proper in the event
of a breach has been articulated. When courts are, thereafter, confronted
with the need to award damages in tandem with rescission, courts must
not lose sight of how the parties have explicitly stated, in their own
language, these consequences. To uphold both Article 1191 of the Civil
Code and the parties’ will, contractually stipulated liquidated damages
must, as a rule, be maintained.
Bids and Bidding; Jurisprudence has established the impropriety of
modifying awarded contracts that were previously subjected to public
bidding.—Respondent’s attempt at rectification came too late and under
such circumstances that petitioner was no longer even in a position to
accept respondent’s offer. As petitioner notes, by the time respondent
made its offer, the Complaint for rescission and damages had already
been filed before the Regional Trial Court of Pasay City. If at all, the
offer was nothing more than a belated reaction to undercut litigation. By
the time respondent made its attempt at rectification, petitioner was no
longer capable of accommodating contractual modifications.
Jurisprudence has established the impropriety of modifying awarded
contracts that were previously subjected to public bidding, such as that
between petitioner and respondent: An essential element of a publicly
bidded contract is that all bidders must be on equal footing. Not simply
in terms of application of the procedural rules and regulations imposed
by the relevant government agency, but more importantly, on the
contract bidded upon. Each bidder must be able to bid on the same thing.
The rationale is obvious. If the winning bidder is allowed to later include
or modify certain provisions in the contract awarded such that the
contract is altered in any material respect, then the essence of fair
competition in the public bidding is destroyed. A public bidding would
indeed be a farce if after the contract is awarded, the winning bidder may
modify the contract and include provisions which are favorable to it that
were not previously made available to the other bidders.
Damages; Liquidated Damages; Words and Phrases; By definition,
liquidated damages are a penalty, meant to impress upon defaulting
obligors the graver consequences of their own culpability.—By definition,
liquidated damages are a penalty, meant to impress upon defaulting
obligors the graverconsequences of their own culpability. Liquidated
damages must necessarily make noncompliance more cumbersome than
compliance. Otherwise, contracts might as well make no threat of a
penalty at all: Liquidated damages are those that the parties agree to be
paid in case of a breach. As worded, the amount agreed upon answers for
damages suffered by the owner due to delays in the completion of the
project. Under Philippine laws, these damages take the nature of
penalties. A penal clause is an accessory undertaking to assume greater
liability in case of a breach. It is attached to an obligation in order to
ensure performance.
 SECOND DIVISION
On October 4, 1997, the Philippine Economic Zone Authority published
G.R. No. 185765, September 28, 2016 an invitation to bid in the Business Daily for its acquisition of two (2)
brand new fire truck units "with a capacity of 4,000-5,000 liters [of]
water and 500-1,000 liters [of chemical foam,] with complete
PHILIPPINE ECONOMIC ZONE
accessories."8chanrobleslaw
AUTHORITY, Petitioner, v. PILHINO SALES
CORPORATION, Respondent.
Three (3) companies participated in the bidding: Starbilt Enterprise, Inc.,
Shurway Industries, Inc., and Pilhino.9 Pilhino secured the contract for
DECISION the acquisition of the fire trucks.10 The contract price was initially at
P3,000,000.00 per truck, but this was reduced after negotiation to
LEONEN, J.: P2,900,000.00 per truck.11chanrobleslaw

The contract awarded to Pilhino stipulated that Pilhino was to deliver to

Although the provisions of a contract are legally null and void, the
the Philippine Economic Zone Authority two (2) FF3HP brand fire trucks
stipulated method of computing liquidated damages may be accepted as
within 45 days of receipt of a purchase order from the Philippine
evidence of the intent of the parties. The provisions, therefore, can be
Economic Zone Authority.12 A further stipulation stated that "[i]n case of
basis for finding a factual anchor for liquidated damages. The liable
fail[u]re to deliver the . . . good on the date specified . . . , the Supplier
party may nevertheless present better evidence to establish a more
agree[s] to pay penalty at the rate of 1/10 of 1% of the total contract price
accurate basis for awarding damages. In this case, the respondent failed
for each days [sic] commencing on the first day after the date stipulated
to do so.
above."13chanrobleslaw
This resolves a Petition for Review on Certiorari1 praying that the
The Philippine Economic Zone Authority furnished Pilhino with a
assailed May 2, 2008 Decision2 and November 25, 2008 Resolution3 of the
purchase order dated November 6, 1997.14 Pilhino failed to deliver the
Court of Appeals in CA G.R. CV No. 86406 be reversed and set aside and
trucks as it had committed.15 This prompted the Philippine Economic
that the Decision4 dated November 2, 2005 of Branch 108 of the Regional
Zone Authority to make formal demands on Pilhino on July 27,
Trial Court of Pasay City in Civil Case No. 00-0343 be reinstated.
199816 and on February 23, 1999.17 As Pilhino still failed to comply, the
Philippine Economic Zone Authority filed before the Regional Trial Court
The Regional Trial Court's November 2, 2005 Decision ruled in favor of
of Pasay City a Complaint18 for rescission of contract and damages. This
petitioner Philippine Economic Zone Authority, which, as plaintiff,
was docketed as Civil Case No. 00-0343 and raffled to Branch
brought an action for rescission of contract and damages against the
108.19chanrobleslaw
defendant, now respondent Pilhino Sales Corporation
(Pilhino).5chanrobleslaw
In its defense, Pilhino claimed that there was no starting date from
which its obligation to deliver could be reckoned, considering that the
The assailed Court of Appeals Decision partly granted Pilhino's appeal
Complaint supposedly failed to allege acceptance by Pilhino of the
by reducing the amount of liquidated damages due from it to the
purchase order.20 Pilhino suggested that there was not even a meeting of
Philippine Economic Zone Authority, and by deleting the forfeiture of its
minds between it and the Philippine Economic Zone
performance bond.6 The assailed Court of Appeals Resolution denied the
Authority.21chanrobleslaw
Philippine Economic Zone Authority's Motion for
Reconsideration.7chanrobleslaw
In its November 2, 2005 Decision,22 the Regional Trial Court ruled for
the Philippine Economic Zone Authority. The dispositive portion of the
The facts are not disputed, and all that is in issue is the consequence of
Decision reads:
Pilhino's contractual breach.
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendant ordering the latter to:
1. Pay the plaintiff in liquidated damages a[t] the rate of
1/10 of 1% of the total contract price of Php
5,800,000.00 for each day of delay commencing from
June 19, 1998.
2. Pay the plaintiff exemplary damages in the amount of
Php 100,00[0].00.
3. That the contract be declared rescinded and the
performance bond posted by the defendant be forfeited
in favor of the plaintiff.
4. For defendant to pay the cost of the suit.
SO ORDERED.23chanroblesvirtuallawlibrary
Pilhino then appealed before the Court of Appeals.
In its assailed May 2, 2008 Decision,24 the Court of Appeals partly
granted Pilhino's appeal by deleting the forfeiture of Pilhino's
performance bond and pegging the liquidated damages due from it to the
Philippine Economic Zone Authority in the amount of P1,400,000.00.
The Court of Appeals debunked Pilhino's claim that there was no
meeting of minds. It emphasized that Pilhino "manifested its
acquiescence . . . [to] the Purchase Order . . . when it submitted to [the
Philippine Economic Zone Authority] a Performance Bond dated 02 June
1999 and Indemnity Agreement dated 09 June 1998 duly signed by its
Vice President."25cralawred It added that in a subsequent letter dated
March 29, 199926 "signed by [Pilhino's] Hino Division Manager Edgar R.
Santiago and noted by VP-Operations Roberto R. Garcia, [Pilhino]
admitted that it can no longer meet the requirements regarding the
specification on the two (2) units of fire truck[s]."27chanrobleslaw
In this March 29, 1999 letter, Pilhino not only acknowledged its inability
to meet its obligations but also proposed a modified arrangement with
the Philippine Economic Zone Authority:
[P]lease allow us to submit our new proposal for your
consideration (please see attached specifications). Our price for
this new specification if P3,600,000.00/unit. However, we are
willing to shoulder the difference between the original price of
P2,900,000.00/unit and P3,600,000.00 in lieu of the penalty. May
we also request your good office to stop the accumulation of the
penalty [.]28chanroblesvirtuallawlibrary
In calibrating the amount of liquidated damages, the Court of Appeals
cited Articles 122929 and 222730 of the Civil Code. It reasoned that
through its March 29, 1999 letter, Pilhino made an attempt at
rectification or mitigation:
In the instant case, we consider the supervening reality that after
appellant's failure to deliver to appellee the two (2) brand new units of
fire trucks in accordance with the specifications previously agreed upon,
appellant nevertheless tried to remedy the situation by offering to
appellee new specifications at P3,600,000.00 per unit; and expressed
willingness to shoulder the difference between the original price (based
on the contract) of P2,900,000.00 per unit and the price corresponding to
the new specifications. Further, it is undisputed that appellee has not
paid any amount to appellant in connection with said undelivered two (2)
brand new units of fire trucks. We thus equitably reduce said liquidated
damages to P1,400,000.00, which is the difference between the contract
price of P5,800,000.00 and P7,200,000.00 based on the new specifications
for two (2) new units of fire trucks.31chanroblesvirtuallawlibrary
The Philippine Economic Zone Authority moved for reconsideration of
the modifications to the Regional Trial Court's award. As this Motion
was denied in the Court of Appeals' assailed November 25, 2008
Resolution,32 the Philippine Economic Zone Authority filed the present
Petition.
Petitioner asks for the reinstatement of the Regional Trial Court's award
asserting that it already suffered damage when respondent Pilhino Sales
Corporation failed to deliver the trucks on time;33 that the contractually
stipulated penalty of 1/10 of 1% of the contract price for every day of
delay was neither unreasonable34 nor contrary to law, morals, or public
order;35 that the stipulation on liquidated damages was freely entered
into by it and respondent;36 and that the Court of Appeals' computation
had no basis in fact and law.37 Regarding respondent's supposed attempt
at mitigation, petitioner notes that by the time the offer was made, the
Complaint for rescission and damages had already been filed38 and was,
therefore, inconsequential and hardly a remedy.
Commenting on petitioner's Petition,39 respondent raises the question of:
Whether or not a contract can be rescinded and declared void ab initio,
and then thus rescinded, can a stipulation for liquidated damages or
penalty contained in that very same contract be given separate life, force
and effect, that is, separate and distinct from the rescinded and voided
contract itself?40chanroblesvirtuallawlibrary
Therefore, respondent suggests that with the rescission of its contract
with petitioner must have come the negation of the contractual
stipulation on liquidated damages and the obliteration of its liability for
such liquidated damages.41chanrobleslaw
We resolve the twin issues of:
First, the propriety of an award based on contractually stipulated
liquidated damages notwithstanding the rescission of the same contract
stipulating it; and Second, on the assumption that such award is proper,
the propriety of the Court of Appeals' reduction of the liquidated
damages due to petitioner.
I can be carried out only when the one who demands rescission can return
Respondent's intimation that with the rescission of a contract necessarily
and inexorably follows the obliteration of liability for what the same
contracts stipulates as liquidated damages42 is entirely misplaced.
A contract of. sale, such as that entered into by petitioner and
respondent, entails reciprocal obligations. As explained in Spouses
Velarde v. Court of Appeals,43 "[i]n a contract of sale, the seller obligates
itself to transfer the ownership of and deliver a determinate thing, and
the buyer to pay therefor a price certain in money or its
equivalent."44chanrobleslaw
Rescission on account of breach of reciprocal obligations is provided for in
Article 1191 of the Civil Code:
Article 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may
also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with articles 1385 and 1388
and the Mortgage Law. (Emphasis supplied)
Respondent correctly notes that rescission under Article 1911 results in
mutual restitution. Jurisprudence has long settled that the restoration of
the contracting parties to their original state is the very essence of
rescission. In Spouses Velarde:
Considering that the rescission of the contract is based on Article 1191 of
the Civil Code, mutual restitution is required to bring back the parties to
their original situation prior to the inception of the contract. Accordingly,
the initial payment of P800,000 and the corresponding mortgage
payments . . . should be returned by private respondents, lest the latter
unjustly enrich themselves at the expense of the former.
Rescission creates the obligation to return the object of the contract. It
whatever he may be obliged to restore. To rescind is to declare a contract
void at its inception and to put an end to it as though it never was. It is
not merely to terminate it and release the parties from further
obligations to each other, but to abrogate it from the beginning and
restore the parties to their relative positions as if no contract has been
made.45 (Citations omitted)
Laperal v. Solid Homes, Inc.46 has explained how the restitution spoken
of in rescission under Article 1385 of the Civil Code equally holds true for
rescission under Article 1191 of the Civil Code:
Despite the fact that Article 1124 of the old Civil Code from whence
Article 1191 was taken, used the term "resolution", the amendment
thereto (presently, Article 1191) explicitly and clearly used the term
"rescission". Unless Article 1191 is subsequently amended to revert back
to the term "resolution", this Court has no alternative but to apply the
law, as it is written.
Again, since Article 1385 of the Civil Code expressly and clearly states
that "rescission creates the obligation to return the things which were
the object of the contract, together with their fruits, and the price with
its interest," the Court finds no justification to sustain petitioners'
position that said Article 1385 does not apply to rescission under Article
1191.
In Palay, Inc. vs. Clave, this Court applied Article 1385 in a case
involving "resolution" under Article 1191, thus:
Regarding the second issue on refund of the installment payments made
by private respondent. Article 1385 of the Civil Code provides:
"ART. 1385. Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price
with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.
"Neither shall rescission take place when the things which are the object
of the contract are legally in the possession of third persons who did not
act in bad faith.
"In this case, indemnity for damages may be demanded from the person
causing the loss."
As a consequence of the resolution by petitioners, rights to the lot should
be restored to private respondent or the same should be replaced by
another acceptable lot. However, considering that the property had
already been sold to a third person and there is no evidence on record
that other lots are still available, private respondent is entitled to the
refund of installments paid plus interest at the legal rate of 12%
computed from the date of the institution of the action. It would be most
inequitable if petitioners were to be allowed to retain private
respondent's payments and at the same time appropriate the proceeds of
the second sale to another.
Applying the clear language of the law and the consistent jurisprudence
on the matter, therefore, the Court rules that rescission under Article
1191 in the present case, carries with it the corresponding obligation of
restitution.47 (Citations omitted)
Contrary to respondent's assertion, mutual restitution under Article
1191 is, however, no license for the negation of contractually stipulated
liquidated damages.
Article 1191 itself clearly states that the options of rescission and specific
performance come with "with the payment of damages in either case."
The very same breach or delay in performance that triggers rescission is
what makes damages due.
When the contracting parties, by their own free acts of will, agreed on
what these damages ought to be, they established the law between
themselves. Their contemplation of the consequences proper in the event
of a breach has been articulated. When courts are, thereafter, confronted
with the need to award damages in tandem with rescission, courts must
not lose sight of how the parties have explicitly stated, in their own
language, these consequences. To uphold both Article 1191 of the Civil
Code and the parties' will, contractually stipulated liquidated damages
must, as a rule,48 be maintained.
What respondent purports to be the ensuing nullification of liquidated
damages is not a novel question in jurisprudence. This matter has been
settled, and respondent's position has been rebuked. In Laperal:
This notwithstanding, the Court does not agree with the Court of
Appeals that, as a consequence of the obligation of mutual restitution in
this case, petitioners should return the amount of P5,200,833.27 to
respondent.
Article 1191 states that "the injured party may choose between
fulfillment and rescission of the obligation, with the payment of damages
in either case." In other words, while petitioners are indeed obliged to
return the said amount to respondent under Article 1385, assuming said
figure is correct, respondent is at the same time liable to petitioners in
the same amount as liquidated damages by virtue of the
forfeiture/penalty clause as freely stipulated upon by the parties in the
Addendum, paragraphs 1 and 2 of which respectively read:
WHEREAS, included as part of said agreement are the following:
chanRoblesvirtualLawlibrary1. Further to the stipulations on paragraph
10, upon default of performances, violations and/or non-compliance with
the terms and conditions herein agreed upon by the DEVELOPER
wherein it appears that the DEVELOPER deliberately abandoned or
discontinued the work on the project, said party shall lose any
entitlement, if any, to any refund and/or advances it may have incurred
in connection with or relative to previous development works in the
subdivision; likewise, all improvements of whatever nature and kind
introduced by the DEVELOPER on the property, existing as of the date
of default or violation, shall automatically belong to the OWNER without
obligation on his part to pay for the costs thereof.
2. Similarly with the same condition of default or violation obtaining, as
stated in paragraph 10 of said agreement, all advances made and
remittances of proceeds from reservations and sales given by the
DEVELOPER to the OWNER as provided for in this agreement shall be
deemed absolutely forfeited in favor of the OWNER, resulting to waiver
of DEVELOPER'S rights, if any, with respect to said amount(s).
If this Court recognized the right of the parties to stipulate on an
extrajudicial rescission under Article 1191, there is no reason why this
Court will not allow the parties to stipulate on the matter of damages in
case of such rescission under Book IV, Title VIII, Chapter 3, Section 2 of
the Civil Code governing liquidated damages.49 (Citations omitted)
We see no reason for departing from this. It is true that Laperal involved
extrajudicial rescission, while this case involves rescission through
judicial action. The distinction between judicial and extrajudicial
rescission is in how extrajudicial rescission is possible only when the
contract has an express stipulation to that effect.50 This distinction does
not diminish the rights of a contracting party under Article 1191 of the
Civil Code and is immaterial for purposes of the availability of liquidated
damages.
To sustain respondent's claim would be to sustain an absurdity and an
injustice. Respondent's position suggests that with rescission must
necessarily come the obliteration of the punitive consequence which, to
begin with, was the product of its own (along with the other contracting
party's) volition. Its position turns delinquency into a profitable
enterprise, enabling contractual breach to itself be the means for evading
its own fallout. It is a position we cannot tolerate.
II
In calibrating the amount of liquidated damages, the Court of Appeals
relied on how respondent supposedly attempted to rectify things "by
offering to [petitioner] new specifications at P3,600,000.00 per unit; and
expressed willingness to shoulder the difference between the original
price (based on the contract) of P2,900,000.00 per unit and the price
corresponding to the new specifications."51chanrobleslaw
As underscored by petitioner, however, this offer was inconsequential
and hardly a remedy to the predicament it found itself in.
Petitioner already suffered damage by respondent's mere delay.
Philippine Economic Zone Authority Director General Lilia B. De Lima's
internal memorandum to its Board of Directors emphasized what was, at
the time, the specific urgency of obtaining fire trucks:
1. With the increase in the number of locator-enterprises at the regular
zones, there is a need for additional units of fire trucks to address any
eventuality. The onset of the El Niño phenomena further makes it
imperative that PEZA be more prepared.
2. At present, there are only six (6) units of serviceable fire trucks
distributed as follows:
chanRoblesvirtualLawlibrary
Bataan EZ 2 Supreme Court of Minnesota:
Baguio City EZ 1
Cavite EZ 1 The law is well settled that where, as in this case, municipal
Mactan EZ 252 (Emphasis supplied)
The Court of Appeals itself recognized that "time was of the essence
when the contract . . . was awarded to [respondent] and the non-
compliance therewith exposed [petitioner's] operations [at]
risk."53chanrobleslaw
Respondent's attempt at rectification came too late and under such
circumstances that petitioner was no longer even in a position to accept
respondent's offer. As petitioner notes, by the time respondent made its
offer, the Complaint for rescission and damages had already been filed
before the Regional-Trial Court of Pasay City.54 If at all, the offer was
nothing more than a belated reaction to undercut litigation.
By the time respondent made its attempt at rectification, petitioner was
no longer capable of accommodating contractual modifications.
Jurisprudence has established the impropriety of modifying awarded
contracts that were previously subjected to public bidding, such as that
between petitioner and respondent:
An essential element of a publicly bidded contract is that all
bidders must be on equal footing. Not simply in terms of
application of the procedural rules and regulations imposed by
the relevant government agency, but more importantly, on the
contract bidded upon. Each bidder must be able to bid on the
same thing. The rationale is obvious. If the winning bidder is
allowed to later include or modify certain provisions in the
contract awarded such that the contract is altered in any
material respect, then the essence of fair competition in the public
bidding is destroyed. A public bidding would indeed be a farce if
after the contract is awarded, the winning bidder may modify the
contract and include provisions which are favorable to it that
were not previously made available to the other bidders. Thus:
It is inherent in public biddings that there shall be a fair
competition among the bidders. The specifications in such
biddings provide the common ground or basis for the bidders.
The specifications should, accordingly, operate equally or
indiscriminately upon all bidders.
The same rule was restated by Chief Justice Stuart of the
authorities can only let a contract for public work to the lowest
responsible bidder, the proposals and specifications therefore
must be so framed as to permit free and full competition. Nor
 can they enter into a contract with the best bidder containing
substantial provisions beneficial to him, not included or
contemplated in the terms and specifications upon which the bids
were invited.55 (Emphasis supplied)

By definition, liquidated damages are a penalty, meant to impress upon

defaulting obligors the graverconsequences of their own culpability.
Liquidated damages must necessarily make non-compliance more
cumbersome than compliance. Otherwise, contracts might as well make
no threat of a penalty at all:

Liquidated damages are those that the parties agree to be paid

in case of a breach. As worded, the amount agreed upon answers
for damages suffered by the owner due to delays in the
completion of the project. Under Philippine laws, these damages
take the nature of penalties. A penal clause is an accessory
undertaking to assume greater liability in case of a breach. It is
attached to an obligation in order to ensure
performance.56(Citations omitted)

Respondent cannot now balk at the natural result of its own breach. As
for the Court of Appeals, we find it to be in error in frustrating the
express terms of the contract that respondent actively endeavored to be
awarded to it. The exigencies that impelled petitioner to obtain fire
trucks made it imperative for respondent to act with dispatch. Instead, it
dragged its feet, left petitioner with inadequate means for addressing the
very emergencies that engendered the need for fire trucks, and forced it
into litigation to enforce its rights.

WHEREFORE, the Petition is GRANTED. The assailed May 2, 2008

Decision and November 25, 2008 Resolution of the Court of Appeals in
CA G.R. CV No. 86406 are REVERSED and SET ASIDE. The Decision
dated November 2, 2005 of Branch 108 of the Regional Trial Court of
Pasay City in Civil Case No. 00-0343 is REINSTATED.

SO ORDERED.chanRoblesvirtualLawlibrary

Brion,**(Acting Chairperson), Del Castillo, and Mendoza, JJ., concur.

Carpio, J., on official leave.
 Civil Law; Obligations; Indivisible Obligations; An obligation is
indivisible when it cannot be validly performed in parts, whatever may be
the nature of the thing which is the object thereof. The indivisibility refers
to the prestation and not to the object thereof.—In Nazareno v. Court of
Appeals, 343 SCRA 637 (2000), the indivisibility of an obligation is tested
against whether it can be the subject of partial performance: An
obligation is indivisible when it cannot be validly performed in parts,
whatever may be the nature of the thing which is the object thereof. The
indivisibility refers to the prestation and not to the object thereof. In the
present case, the Deed of Sale of January 29, 1970 supposedly conveyed
the six lots to Natividad. The obligation is clearly indivisible because the
performance of the contract cannot be done in parts, otherwise the value
of what is transferred is diminished. Petitioners are therefore mistaken
in basing the indivisibility of a contract on the number of obligors.
Same; Contracts; Contract of Sale; A contract of sale is perfected
upon the meeting of minds as to the object and the price, and the parties
may reciprocally demand the performance of their respective obligations
from that point on.—The contract between the parties is one of sale,
where one party obligates himself or herself to transfer the ownership
and deliver a determinate thing, while the other pays a certain price in
money or its equivalent. A contract of sale is perfected upon the meeting
of minds as to the object and the price, and the parties may reciprocally
demand the performance of their respective obligations from that point
on.
Same; Same; Rescission of Contracts; Rescission under Article 1191
has the effect of mutual restitution.—Rescission under Article 1191 has
the effect of mutual restitution. In Velarde v. Court of Appeals, 361 SCRA
56 (2001): Rescission abrogates the contract from its inception and
requires a mutual restitution of benefits received. . . . . Rescission creates
the obligation to return the object of the contract. It can be carried out
only when the one who demands rescission can return whatever he may be
obliged to restore. To rescind is to declare a contract void at its inception
and to put an end to it as though it never was. It is not merely to
terminate it and release the parties from further obligations to each other,
but to abrogate it from the beginning and restore the parties to their
relative positions as if no contract has been made.
Same; Same; Same; When rescission is sought under Article 1191 of
the Civil Code, it need not be judicially invoked because the power to
resolve is implied in reciprocal obligations.—When rescission is sought
under Article 1191 of the Civil Code, it need not be judicially invoked
because the power to resolve is implied in reciprocal obligations. The
right to resolve allows an injured party to minimize the damages he or
she may suffer on account of the other party’s failure to perform what is
incumbent upon him or her. When a party fails to comply with his or her
obligation, the other party’s right to resolve the contract is triggered. The
resolution immediately produces legal effects if the nonperforming party
does not question the resolution. Court intervention only becomes
necessary when the party who allegedly failed to comply with his or her
obligation disputes the resolution of the contract. Since both parties in
this case have exercised their right to resolve under Article 1191, there is
no need for a judicial decree before the resolution produces effects.
Remedial Law; Civil Procedure; Appeals; Petition for Review on
Certiorari; A petition for review on certiorari under Rule 45 shall only
pertain to questions of law.—The issue of damages is a factual one. A
petition for review on certiorari under Rule 45 shall only pertain to
questions of law. It is not the duty of this court to reevaluate the
evidence adduced before the lower courts. Furthermore, unless the
petition clearly shows that there is grave abuse of discretion, the findings
of fact of the trial court as affirmed by the Court of Appeals are
conclusive upon this court.
Damages; Moral Damages; Exemplary Damages; Moral damages
are granted to alleviate the moral suffering suffered by a party due to an
act of another, but it is not intended to enrich the victim at the defendant’s
expense; Exemplary damages, on the other hand, are awarded when the
injurious act is attended by bad faith.—The award for moral and
exemplary damages also appears to be sufficient. Moral damages are
granted to alleviate the moral suffering suffered by a party due to an act
of another, but it is not intended to enrich the victim at the defendant’s
expense. It is not meant to punish the culpable party and, therefore,
must always be reasonable vis-à-vis the injury caused. Exemplary
damages, on the other hand, are awarded when the injurious act is
attended by bad faith. In this case, respondent was found to have
misrepresented its right over the generator set that was seized. As such,
it is properly liable for exemplary damages as an example to the public.
SECOND DIVISION
January 11, 2016
 G.R. No. 167615
SPOUSES ALEXANDER AND JULIE LAM, Doing Business Under the
Name and Style "COLORKWIK LABORATORIES" AND "COLORKWIK
PHOTO SUPPLY",
Petitioners,
vs.
KODAK PHILIPPINES, LTD.,
Respondent.
DECISION
LEONEN, J.:
This is a Petition for Review on Certiorari filed on April 20, 2005
assailing the March 30, 2005 Decision1 and September 9, 2005
Amended Decision2 of the Court of Appeals, which modified the
February 26, 1999 Decision3 of the Regional Trial Court by reducing
the amount of damages awarded to petitioners Spouses Alexander
and Julie Lam (Lam Spouses).4 The Lam Spouses argue that
respondent Kodak Philippines, Ltd.’s breach of their contract of sale
entitles them to damages more than the amount awarded by the
Court of Appeals.5
I
On January 8, 1992, the Lam Spouses and Kodak Philippines, Ltd.
entered into an agreement (Letter Agreement) for the sale of three (3)
units of the Kodak Minilab System 22XL6 (Minilab Equipment) in the
amount of ₱1,796,000.00 per unit,7 with the following terms:
This confirms our verbal agreement for Kodak Phils., Ltd. To provide
Colorkwik Laboratories, Inc. with three (3) units Kodak Minilab
System 22XL . . . for your proposed outlets in Rizal Avenue (Manila),
Tagum (Davao del Norte), and your existing Multicolor photo counter
in Cotabato City under the following terms and conditions:
1. Said Minilab Equipment packages will avail a total of 19%
multiple order discount based on prevailing equipment price
provided said equipment packages will be purchased not
later than June 30, 1992.
2. 19% Multiple Order Discount shall be applied in the form
of merchandise and delivered in advance immediately after
signing of the contract.
* Also includes start-up packages worth P61,000.00.
3. NO DOWNPAYMENT.
4. Minilab Equipment Package shall be payable in 48
monthly installments at THIRTY FIVE THOUSAND PESOS
(P35,000.00) inclusive of 24% interest rate for the first 12
months; the balance shall be re-amortized for the remaining
36 months and the prevailing interest shall be applied.
5. Prevailing price of Kodak Minilab System 22XL as of
January 8, 1992 is at ONE MILLION SEVEN HUNDRED
NINETY SIX THOUSAND PESOS.
6. Price is subject to change without prior notice.
*Secured with PDCs; 1st monthly amortization due 45 days
after installation[.]8
On January 15, 1992, Kodak Philippines, Ltd. delivered one (1) unit
of the Minilab Equipment in Tagum, Davao Province.9 The delivered
unit was installed by Noritsu representatives on March 9,
1992.10 The Lam Spouses issued postdated checks amounting to
₱35,000.00 each for 12 months as payment for the first delivered
unit, with the first check due on March 31, 1992.11
The Lam Spouses requested that Kodak Philippines, Ltd. not
negotiate the check dated March 31, 1992 allegedly due to
insufficiency of funds.12 The same request was made for the check
due on April 30, 1992. However, both checks were negotiated by
Kodak Philippines, Ltd. and were honored by the depository
bank.13 The 10 other checks were subsequently dishonored after the
Lam Spouses ordered the depository bank to stop payment.14
Kodak Philippines, Ltd. canceled the sale and demanded that the
Lam Spouses return the unit it delivered together with its
accessories.15 The Lam Spouses ignored the demand but also
rescinded the contract through the letter dated November 18, 1992
on account of Kodak Philippines, Ltd.’s failure to deliver the two (2)
remaining Minilab Equipment units.16
On November 25, 1992, Kodak Philippines, Ltd. filed a Complaint for
replevin and/or recovery of sum of money. The case was raffled to
Branch 61 of the Regional Trial Court, Makati City.17 The Summons
and a copy of Kodak Philippines, Ltd.’s Complaint was personally
served on the Lam Spouses.18
The Lam Spouses failed to appear during the pre-trial conference
and submit their pre-trial brief despite being given
extensions.19 Thus, on July 30, 1993, they were declared in
default.20 Kodak Philippines, Ltd. presented evidence ex-parte.21 The
trial court issued the Decision in favor of Kodak Philippines, Ltd.
ordering the seizure of the Minilab Equipment, which included the
lone delivered unit, its standard accessories, and a separate
generator set.22 Based on this Decision, Kodak Philippines, Ltd. was
able to obtain a writ of seizure on December 16, 1992 for the Minilab
Equipment installed at the Lam Spouses’ outlet in Tagum, Davao
Province.23 The writ was enforced on December 21, 1992, and Kodak
Philippines, Ltd. gained possession of the Minilab Equipment unit,
accessories, and the generator set.24
The Lam Spouses then filed before the Court of Appeals a Petition to
Set Aside the Orders issued by the trial court dated July 30, 1993
and August 13, 1993. These Orders were subsequently set aside by
the Court of Appeals Ninth Division, and the case was remanded to
the trial court for pre-trial.25
On September 12, 1995, an Urgent Motion for Inhibition was filed
against Judge Fernando V. Gorospe, Jr.,26 who had issued the writ of
seizure.27 The ground for the motion for inhibition was not provided.
Nevertheless, Judge Fernando V. Gorospe Jr. inhibited himself, and
the case was reassigned to Branch 65 of the Regional Trial Court,
Makati City on October 3, 1995.28
In the Decision dated February 26, 1999, the Regional Trial Court
found that Kodak Philippines, Ltd. defaulted in the performance of
its obligation under its Letter Agreement with the Lam Spouses. 29 It
held that Kodak Philippines, Ltd.’s failure to deliver two (2) out of the
three (3) units of the Minilab Equipment caused the Lam Spouses to
stop paying for the rest of the installments.30 The trial court noted
that while the Letter Agreement did not specify a period within which
the delivery of all units was to be made, the Civil Code provides
"reasonable time" as the standard period for compliance:
The second paragraph of Article 1521 of the Civil Code provides:
Where by a contract of sale the seller is bound to send the goods to
the buyer, but no time for sending them is fixed, the seller is bound
to send them within a reasonable time.
What constitutes reasonable time is dependent on the circumstances
availing both on the part of the seller and the buyer. In this case,
delivery of the first unit was made five (5) days after the date of the
agreement. Delivery of the other two (2) units, however, was never
made despite the lapse of at least three (3) months.31
Kodak Philippines, Ltd. failed to give a sufficient explanation for its
failure to deliver all three (3) purchased units within a reasonable
time.32
The trial court found:
Kodak would have the court believe that it did not deliver the other
two (2) units due to the failure of defendants to make good the
installments subsequent to the second. The court is not convinced.
First of all, there should have been simultaneous delivery on account
of the circumstances surrounding the transaction. . . . Even after the
first delivery . . . no delivery was made despite repeated demands
from the defendants and despite the fact no installments were due.
Then in March and in April (three and four months respectively from
the date of the agreement and the first delivery) when the
installments due were both honored, still no delivery was made.
Second, although it might be said that Kodak was testing the waters
with just one delivery - determining first defendants’ capacity to pay -
it was not at liberty to do so. It is implicit in the letter agreement that
delivery within a reasonable time was of the essence and failure to so
deliver within a reasonable time and despite demand would render
the vendor in default.
....
Third, at least two (2) checks were honored. If indeed Kodak refused
delivery on account of defendants’ inability to pay, non-delivery
during the two (2) months that payments were honored is
unjustified.33
Nevertheless, the trial court also ruled that when the Lam Spouses
accepted delivery of the first unit, they became liable for the fair
value of the goods received:
On the other hand, defendants accepted delivery of one (1) unit.
Under Article 1522 of the Civil Code, in the event the buyer accepts
incomplete delivery and uses the goods so delivered, not then
knowing that there would not be any further delivery by the seller,
the buyer shall be liable only for the fair value to him of the goods
received. In other words, the buyer is still liable for the value of the
property received. Defendants were under obligation to pay the
amount of the unit. Failure of delivery of the other units did not
thereby give unto them the right to suspend payment on the unit
delivered. Indeed, in incomplete deliveries, the buyer has the remedy
of refusing payment unless delivery is first made. In this case
though, payment for the two undelivered units have not even
commenced; the installments made were for only one (1) unit.
Hence, Kodak is right to retrieve the unit delivered.34
The Lam Spouses were under obligation to pay for the amount of one
unit, and the failure to deliver the remaining units did not give them
the right to suspend payment for the unit already
delivered.35 However, the trial court held that since Kodak
Philippines, Ltd. had elected to cancel the sale and retrieve the
delivered unit, it could no longer seek payment for any deterioration
that the unit may have suffered while under the custody of the Lam
Spouses.36
As to the generator set, the trial court ruled that Kodak Philippines,
Ltd. attempted to mislead the court by claiming that it had delivered
the generator set with its accessories to the Lam Spouses, when the
evidence showed that the Lam Spouses had purchased it from Davao
Ken Trading, not from Kodak Philippines, Ltd.37 Thus, the generator
set that Kodak Philippines, Ltd. wrongfully took from the Lam
Spouses should be replaced.38
The dispositive portion of the Regional Trial Court Decision reads:
PREMISES CONSIDERED, the case is hereby dismissed. Plaintiff is
ordered to pay the following:
1) PHP 130,000.00 representing the amount of the generator
set, plus legal interest at 12% per annum from December
1992 until fully paid; and
2) PHP 1,300,000.00 as actual expenses in the renovation of
the Tagum, Davao and Rizal Ave., Manila outlets.
SO ORDERED.39
On March 31, 1999, the Lam Spouses filed their Notice of Partial
Appeal, raising as an issue the Regional Trial Court’s failure to order
Kodak Philippines, Ltd. to pay: (1) ₱2,040,000 in actual damages; (2)
₱50,000,000 in moral damages; (3) ₱20,000,000 in exemplary
damages; (4) ₱353,000 in attorney’s fees; and (5) ₱300,000 as
litigation expenses.40 The Lam Spouses did not appeal the Regional
Trial Court’s award for the generator set and the renovation
expenses.41
Kodak Philippines, Ltd. also filed an appeal. However, the Court of
Appeals42 dismissed it on December 16, 2002 for Kodak Philippines,
Ltd.’s failure to file its appellant’s brief, without prejudice to the
continuation of the Lam Spouses’ appeal.43 The Court of Appeals’
December 16, 2002 Resolution denying Kodak Philippines, Ltd.’s
appeal became final and executory on January 4, 2003.44
In the Decision45 dated March 30, 2005, the Court of Appeals Special
Fourteenth Division modified the February 26, 1999 Decision of the
Regional Trial Court:
WHEREFORE, PREMISES CONSIDERED, the Assailed Decision
dated 26 February 1999 of the Regional Trial Court, Branch 65 in
Civil Case No. 92-3442 is hereby MODIFIED. Plaintiff-appellant is
ordered to pay the following:
1. P130,000.00 representing the amount of the generator
set, plus legal interest at 12% per annum from December
1992 until fully paid; and
2. P440,000.00 as actual damages;
3. P25,000.00 as moral damages; and
4. P50,000.00 as exemplary damages.
SO ORDERED.46 (Emphasis supplied)
The Court of Appeals agreed with the trial court’s Decision, but
extensively discussed the basis for the modification of the dispositive
portion.
The Court of Appeals ruled that the Letter Agreement executed by
the parties showed that their obligations were susceptible of partial
performance. Under Article 1225 of the New Civil Code, their
obligations are divisible:
In determining the divisibility of an obligation, the following factors
may be considered, to wit: (1) the will or intention of the parties,
which may be expressed or presumed; (2) the objective or purpose of
the stipulated prestation; (3) the nature of the thing; and (4)
provisions of law affecting the prestation.
Applying the foregoing factors to this case, We found that the
intention of the parties is to be bound separately for each Minilab
Equipment to be delivered as shown by the separate purchase price
for each of the item, by the acceptance of Sps. Lam of separate
deliveries for the first Minilab Equipment and for those of the
remaining two and the separate payment arrangements for each of the
equipment. Under this premise, Sps. Lam shall be liable for the entire
amount of the purchase price of the Minilab
Equipment delivered considering that Kodak had already completely
fulfilled its obligation to deliver the same. . . .
Third, it is also evident that the contract is one that is severable in
character as demonstrated by the separate purchase price for each of
the minilab equipment. "If the part to be performed by one party
consists in several distinct and separate items and the price is
apportioned to each of them, the contract will generally be held to be
severable. In such case, each distinct stipulation relating to a
separate subject matter will be treated as a separate
contract." Considering this, Kodak's breach of its obligation to deliver
the other two (2) equipment cannot bar its recovery for the full payment
of the equipment already delivered. As far as Kodak is concerned, it
had already fully complied with its separable obligation to deliver the
first unit of Minilab Equipment.47 (Emphasis supplied)
The Court of Appeals held that the issuance of a writ of replevin is
proper insofar as the delivered Minilab Equipment unit and its
standard accessories are concerned, since Kodak Philippines, Ltd.
had the right to possess it:48
The purchase price of said equipment is P1,796,000.00 which, under
the agreement is payable with forty eight (48) monthly amortization.
It is undisputed that Sps. Lam made payments which amounted to
Two Hundred Seventy Thousand Pesos (P270,000.00) through the
following checks: Metrobank Check Nos. 00892620 and 00892621
dated 31 March 1992 and 30 April 1992 respectively in the amount
of Thirty Five Thousand Pesos (P35,000.00) each, and BPI Family
Check dated 31 July 1992 amounting to Two Hundred Thousand
Pesos (P200,000.00). This being the case, Sps. Lam are still liable to
Kodak in the amount of One Million Five Hundred Twenty Six
Thousand Pesos (P1,526,000.00), which is payable in several
monthly amortization, pursuant to the Letter Agreement. However,
Sps. Lam admitted that sometime in May 1992, they had already
ordered their drawee bank to stop the payment on all the other checks
they had issued to Kodak as payment for the Minilab Equipment
delivered to them. Clearly then, Kodak ha[d] the right to repossess the
said equipment, through this replevin suit. Sps. Lam cannot excuse
themselves from paying in full the purchase price of the equipment
delivered to them on account of Kodak’s breach of the contract to
deliver the other two (2) Minilab Equipment, as contemplated in the
Letter Agreement.49(Emphasis supplied)
Echoing the ruling of the trial court, the Court of Appeals held that
the liability of the Lam Spouses to pay the remaining balance for the
first delivered unit is based on the second sentence of Article 1592 of
the New Civil Code.50 The Lam Spouses’ receipt and use of the
Minilab Equipment before they knew that Kodak Philippines, Ltd.
would not deliver the two (2) remaining units has made them liable
for the unpaid portion of the purchase price.51
The Court of Appeals noted that Kodak Philippines, Ltd. sought the
rescission of its contract with the Lam Spouses in the letter dated
October 14, 1992.52 The rescission was based on Article 1191 of the
New Civil Code, which provides: "The power to rescind obligations is
implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him."53 In its letter, Kodak
Philippines, Ltd. demanded that the Lam Spouses surrender the lone
delivered unit of Minilab Equipment along with its standard
accessories.54
The Court of Appeals likewise noted that the Lam Spouses rescinded
the contract through its letter dated November 18, 1992 on account
of Kodak Philippines, Inc.’s breach of the parties’ agreement to
deliver the two (2) remaining units.55
As a result of this rescission under Article 1191, the Court of Appeals
ruled that "both parties must be restored to their original situation,
as far as practicable, as if the contract was never entered into."56 The
Court of Appeals ratiocinated that Article 1191 had the effect of
extinguishing the obligatory relation as if one was never created:57
To rescind is to declare a contract void in its inception and to put an
end to it as though it never were. It is not merely to terminate it and
to release parties from further obligations to each other but abrogate
it from the beginning and restore parties to relative positions which
they would have occupied had no contract been made.58
The Lam Spouses were ordered to relinquish possession of the
Minilab Equipment unit and its standard accessories, while Kodak
Philippines, Ltd. was ordered to return the amount of ₱270,000.00,
tendered by the Lam Spouses as partial payment.59
As to the actual damages sought by the parties, the Court of Appeals
found that the Lam Spouses were able to substantiate the following:
Incentive fee paid to Mr. Ruales in the amount of P100,000.00; the
rider to the contract of lease which made the Sps. Lam liable, by way
of advance payment, in the amount of P40,000.00, the same being
intended for the repair of the flooring of the leased premises; and
lastly, the payment of P300,000.00, as compromise agreement for
the pre-termination of the contract of lease with Ruales.60
The total amount is ₱440,000.00. The Court of Appeals found that
all other claims made by the Lam Spouses were not supported by
evidence, either through official receipts or check payments.61
As regards the generator set improperly seized from Kodak
Philippines, Ltd. on the basis of the writ of replevin, the Court of
Appeals found that there was no basis for the Lam Spouses’ claim for
reasonable rental of ₱5,000.00. It held that the trial court’s award of
12% interest, in addition to the cost of the generator set in the
amount of ₱130,000.00, is sufficient compensation for whatever
damage the Lam Spouses suffered on account of its improper
seizure.62
The Court of Appeals also ruled on the Lam Spouses’ entitlement to
moral and exemplary damages, as well as attorney’s fees and
litigation expenses:
In seeking recovery of the Minilab Equipment, Kodak cannot be
considered to have manifested bad faith and malevolence because as
earlier ruled upon, it was well within its right to do the same.
However, with respect to the seizure of the generator set, where
Kodak misrepresented to the court a quo its alleged right over the
said item, Kodak’s bad faith and abuse of judicial processes become
self-evident. Considering the off-setting circumstances attendant, the
amount of P25,000.00 by way of moral damages is considered
sufficient.
In addition, so as to serve as an example to the public that an
application for replevin should not be accompanied by any false
claims and misrepresentation, the amount of P50,000.00 by way of
exemplary damages should be pegged against Kodak.
With respect to the attorney’s fees and litigation expenses, We find
that there is no basis to award Sps. Lam the amount sought for.63
Kodak Philippines, Ltd. moved for reconsideration of the Court of
Appeals Decision, but it was denied for lack of merit.64 However, the
Court of Appeals noted that the Lam Spouses’ Opposition correctly
pointed out that the additional award of ₱270,000.00 made by the
trial court was not mentioned in the decretal portion of the March
30, 2005 Decision:
Going over the Decision, specifically page 12 thereof, the Court noted
that, in addition to the amount of Two Hundred Seventy Thousand
(P270,000.00) which plaintiff-appellant should return to the
defendantsappellants, the Court also ruled that defendants-
appellants should, in turn, relinquish possession of the Minilab
Equipment and the standard accessories to plaintiff-appellant.
Inadvertently, these material items were not mentioned in the
decretal portion of the Decision. Hence, the proper correction should
herein be made.65
The Lam Spouses filed this Petition for Review on April 14, 2005. On
the other hand, Kodak Philippines, Ltd. filed its Motion for
Reconsideration66 before the Court of Appeals on April 22, 2005.
While the Petition for Review on Certiorari filed by the Lam Spouses
was pending before this court, the Court of Appeals Special
Fourteenth Division, acting on Kodak Philippines, Ltd.’s Motion for
Reconsideration, issued the Amended Decision67 dated September 9,
2005. The dispositive portion of the Decision reads:
WHEREFORE, premises considered, this Court resolved that:
A. Plaintiff-appellant’s Motion for Reconsideration is
hereby DENIED for lack of merit.
B. The decretal portion of the 30 March 2005 Decision
should now read as follows:
"WHEREFORE, PREMISES CONSIDERED, the Assailed Decision
dated 26 February 1999 of the Regional Trial Court, Branch 65 in
Civil Cases No. 92-3442 is hereby MODIFIED. Plaintiff-appellant is
ordered to pay the following:
a. P270,000.00 representing the partial payment made on
the Minilab equipment.
b. P130,000.00 representing the amount of the generator
set, plus legal interest at 12% per annum from December
1992 until fully paid;
c. P440,000.00 as actual damages;
d. P25,000.00 as moral damages; and
e. P50,000.00 as exemplary damages.
Upon the other hand, defendants-appellants are hereby ordered to
return to plaintiff-appellant the Minilab equipment and the standard
accessories delivered by plaintiff-appellant.
SO ORDERED."
SO ORDERED.68 (Emphasis in the original)
Upon receiving the Amended Decision of the Court of Appeals, Kodak
Philippines, Ltd. filed a Motion for Extension of Time to File an
Appeal by Certiorari under Rule 45 of the 1997 Rules of Civil
Procedure before this court.69
This was docketed as G.R. No. 169639. In the Motion for
Consolidation dated November 2, 2005, the Lam Spouses moved that
G.R. No. 167615 and G.R. No. 169639 be consolidated since both
involved the same parties, issues, transactions, and essential facts
and circumstances.70
In the Resolution dated November 16, 2005, this court noted the
Lam Spouses’ September 23 and September 30, 2005 Manifestations
praying that the Court of Appeals’ September 9, 2005 Amended
Decision be considered in the resolution of the Petition for Review on
Certiorari.71 It also granted the Lam Spouses’ Motion for
Consolidation.72
In the Resolution73 dated September 20, 2006, this court
deconsolidated G.R No. 167615 from G.R. No. 169639 and declared
G.R. No. 169639 closed and terminated since Kodak Philippines, Ltd.
failed to file its Petition for Review.
 II
We resolve the following issues:
First, whether the contract between petitioners Spouses Alexander
and Julie Lam and respondent Kodak Philippines, Ltd. pertained to
obligations that are severable, divisible, and susceptible of partial
performance under Article 1225 of the New Civil Code; and
Second, upon rescission of the contract, what the parties are entitled
to under Article 1190 and Article 1522 of the New Civil Code.
Petitioners argue that the Letter Agreement it executed with
respondent for three (3) Minilab Equipment units was not severable,
divisible, and susceptible of partial performance. Respondent’s
recovery of the delivered unit was unjustified.74
Petitioners assert that the obligations of the parties were not
susceptible of partial performance since the Letter Agreement was for
a package deal consisting of three (3) units.75 For the delivery of
these units, petitioners were obliged to pay 48 monthly payments,
the total of which constituted one debt.76 Having relied on
respondent’s assurance that the three units would be delivered at
the same time, petitioners simultaneously rented and renovated
three stores in anticipation of simultaneous operations.77 Petitioners
argue that the divisibility of the object does not necessarily determine
the divisibility of the obligation since the latter is tested against its
susceptibility to a partial performance.78 They argue that even if the
object is susceptible of separate deliveries, the transaction is
indivisible if the parties intended the realization of all parts of the
agreed obligation.79
Petitioners support the claim that it was the parties’ intention to
have an indivisible agreement by asserting that the payments they
made to respondent were intended to be applied to the whole
package of three units.80 The postdated checks were also intended as
initial payment for the whole package.81 The separate purchase price
for each item was merely intended to particularize the unit prices,
not to negate the indivisible nature of their transaction.82 As to the
issue of delivery, petitioners claim that their acceptance of separate
deliveries of the units was solely due to the constraints faced by
respondent, who had sole control over delivery matters.83
With the obligation being indivisible, petitioners argue that
respondent’s failure to comply with its obligation to deliver the two
(2) remaining Minilab Equipment units amounted to a breach.
Petitioners claim that the breach entitled them to the remedy of
rescission and damages under Article 1191 of the New Civil Code.84
Petitioners also argue that they are entitled to moral damages more
than the ₱50,000.00 awarded by the Court of Appeals since
respondent’s wrongful act of accusing them of non-payment of their
obligations caused them sleepless nights, mental anguish, and
wounded feelings.85 They further claim that, to serve as an example
for the public good, they are entitled to exemplary damages as
respondent, in making false allegations, acted in evident bad faith
and in a wanton, oppressive, capricious, and malevolent manner.86
Petitioners also assert that they are entitled to attorney’s fees and
litigation expenses under Article 2208 of the New Civil Code since
respondent’s act of bringing a suit against them was baseless and
malicious. This prompted them to engage the services of a lawyer.87
Respondent argues that the parties’ Letter Agreement contained
divisible obligations susceptible of partial performance as defined by
Article 1225 of the New Civil Code.88 In respondent’s view, it was the
intention of the parties to be bound separately for each individually
priced Minilab Equipment unit to be delivered to different outlets:89
The three (3) Minilab Equipment are intended by petitioners LAM for
install[a]tion at their Tagum, Davao del Norte, Sta. Cruz, Manila and
Cotabato City outlets. Each of these units [is] independent from one
another, as many of them may perform its own job without the other.
Clearly the objective or purpose of the prestation, the obligation is
divisible.
The nature of each unit of the three (3) Minilab Equipment is such
that one can perform its own functions, without awaiting for the
other units to perform and complete its job. So much so, the nature
of the object of the Letter Agreement is susceptible of partial
performance, thus the obligation is divisible.90
With the contract being severable in character, respondent argues
that it performed its obligation when it delivered one unit of the
Minilab Equipment.91 Since each unit could perform on its own,
there was no need to await the delivery of the other units to complete
its job.92 Respondent then is of the view that when petitioners
ordered the depository bank to stop payment of the issued checks
covering the first delivered unit, they violated their obligations under
the Letter Agreement since respondent was already entitled to full
payment.93
Respondent also argues that petitioners benefited from the use of the
Minilab Equipment for 10 months—from March to December 1992—
despite having paid only two (2) monthly installments. 94 Respondent
avers that the two monthly installments amounting to ₱70,000.00
should be the subject of an offset against the amount the Court of
Appeals awarded to petitioners.95
Respondent further avers that petitioners have no basis for claiming
damages since the seizure and recovery of the Minilab Equipment
was not in bad faith and respondent was well within its right.96
III
The Letter Agreement contained an indivisible obligation.
Both parties rely on the Letter Agreement97 as basis of their
respective obligations. Written by respondent’s Jeffrey T. Go and
Antonio V. Mines and addressed to petitioner Alexander Lam, the
Letter Agreement contemplated a "package deal" involving three (3)
units of the Kodak Minilab System 22XL, with the following terms
and conditions:
This confirms our verbal agreement for Kodak Phils., Ltd. to provide
Colorkwik Laboratories, Inc. with three (3) units Kodak Minilab
System 22XL . . . for your proposed outlets in Rizal Avenue (Manila),
Tagum (Davao del Norte), and your existing Multicolor photo counter
in Cotabato City under the following terms and conditions:
1. Said Minilab Equipment packages will avail a total of 19%
multiple order discount based on prevailing equipment price
provided said equipment packages will be purchased not
later than June 30, 1992.
2. 19% Multiple Order Discount shall be applied in the form
of merchandise and delivered in advance immediately after
signing of the contract.
* Also includes start-up packages worth P61,000.00.
3. NO DOWNPAYMENT.
4. Minilab Equipment Package shall be payable in 48
monthly installments at THIRTY FIVE THOUSAND PESOS
(P35,000.00) inclusive of 24% interest rate for the first 12
months; the balance shall be re-amortized for the remaining
36 months and the prevailing interest shall be applied.
5. Prevailing price of Kodak Minilab System 22XL as of
January 8, 1992 is at ONE MILLION SEVEN HUNDRED
NINETY SIX THOUSAND PESOS.
6. Price is subject to change without prior notice.
*Secured with PDCs; 1st monthly amortization due 45 days
after installation[.]98
Based on the foregoing, the intention of the parties is for there to be
a single transaction covering all three (3) units of the Minilab
Equipment. Respondent’s obligation was to deliver all products
purchased under a "package," and, in turn, petitioners’ obligation
was to pay for the total purchase price, payable in installments.
The intention of the parties to bind themselves to an indivisible
obligation can be further discerned through their direct acts in
relation to the package deal. There was only one agreement covering
all three (3) units of the Minilab Equipment and their accessories.
The Letter Agreement specified only one purpose for the buyer, which
was to obtain these units for three different outlets. If the intention of
the parties were to have a divisible contract, then separate
agreements could have been made for each Minilab Equipment unit
instead of covering all three in one package deal. Furthermore, the
19% multiple order discount as contained in the Letter Agreement
was applied to all three acquired units.99 The "no downpayment"
term contained in the Letter Agreement was also applicable to all the
Minilab Equipment units. Lastly, the fourth clause of the Letter
Agreement clearly referred to the object of the contract as "Minilab
Equipment Package."
In ruling that the contract between the parties intended to cover
divisible obligations, the Court of Appeals highlighted: (a) the
separate purchase price of each item; (b) petitioners’ acceptance of
separate deliveries of the units; and (c) the separate payment
arrangements for each unit.100 However, through the specified terms
and conditions, the tenor of the Letter Agreement indicated an
intention for a single transaction. This intent must prevail even
though the articles involved are physically separable and capable of
being paid for and delivered individually, consistent with the New
Civil Code:
Article 1225. For the purposes of the preceding articles, obligations
to give definite things and those which are not susceptible of partial
performance shall be deemed to be indivisible.
When the obligation has for its object the execution of a certain
number of days of work, the accomplishment of work by metrical
units, or analogous things which by their nature are susceptible of
partial performance, it shall be divisible.
However, even though the object or service may be physically
divisible, an obligation is indivisible if so provided by law or intended
by the parties. (Emphasis supplied)
In Nazareno v. Court of Appeals,101the indivisibility of an obligation
is tested against whether it can be the subject of partial performance:
An obligation is indivisible when it cannot be validly performed in
parts, whatever may be the nature of the thing which is the object
thereof. The indivisibility refers to the prestation and not to the object
thereof. In the present case, the Deed of Sale of January 29, 1970
supposedly conveyed the six lots to Natividad. The obligation is
clearly indivisible because the performance of the contract cannot be
done in parts, otherwise the value of what is transferred is
diminished. Petitioners are therefore mistaken in basing the
indivisibility of a contract on the number of obligors.102 (Emphasis
supplied, citation omitted)
There is no indication in the Letter Agreement that the units
petitioners ordered were covered by three (3) separate transactions.
The factors considered by the Court of Appeals are mere incidents of
the execution of the obligation, which is to deliver three units of the
Minilab Equipment on the part of respondent and payment for all
three on the part of petitioners. The intention to create an indivisible
contract is apparent from the benefits that the Letter Agreement
afforded to both parties. Petitioners were given the 19% discount on
account of a multiple order, with the discount being equally
applicable to all units that they sought to acquire. The provision on
"no downpayment" was also applicable to all units. Respondent, in
turn, was entitled to payment of all three Minilab Equipment units,
payable by installments.
IV
With both parties opting for rescission of the contract under Article
1191, the Court of Appeals correctly ordered for restitution.
The contract between the parties is one of sale, where one party
obligates himself or herself to transfer the ownership and deliver a
determinate thing, while the other pays a certain price in money or
its equivalent.103 A contract of sale is perfected upon the meeting of
minds as to the object and the price, and the parties may reciprocally
demand the performance of their respective obligations from that
point on.104
The Court of Appeals correctly noted that respondent had rescinded
the parties’ Letter Agreement through the letter dated October 14,
1992.105 It likewise noted petitioners’ rescission through the letter
dated November 18, 1992.106This rescission from both parties is
founded on Article 1191 of the New Civil Code:
The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between the fulfilment and the
rescission of the obligation, with the payment of damages in either
case. He may also seek rescission, even after he has chosen
fulfilment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.
Rescission under Article 1191 has the effect of mutual
restitution.107 In Velarde v. Court of Appeals:108
Rescission abrogates the contract from its inception and requires a
mutual restitution of benefits received.
....
Rescission creates the obligation to return the object of the contract. It
can be carried out only when the one who demands rescission can
return whatever he may be obliged to restore. To rescind is to declare
a contract void at its inception and to put an end to it as though it
never was. It is not merely to terminate it and release the parties from
further obligations to each other, but to abrogate it from the beginning
and restore the parties to their relative positions as if no contract has
been made.109 (Emphasis supplied, citations omitted)
The Court of Appeals correctly ruled that both parties must be
restored to their original situation as far as practicable, as if the
contract was never entered into. Petitioners must relinquish
possession of the delivered Minilab Equipment unit and accessories,
while respondent must return the amount tendered by petitioners as
partial payment for the unit received. Further, respondent cannot
claim that the two (2) monthly installments should be offset against
the amount awarded by the Court of Appeals to petitioners because
the effect of rescission under Article 1191 is to bring the parties back
to their original positions before the contract was entered into. Also
in Velarde:
As discussed earlier, the breach committed by petitioners was the
nonperformance of a reciprocal obligation, not a violation of the
terms and conditions of the mortgage contract. Therefore, the
automatic rescission and forfeiture of payment clauses stipulated in
the contract does not apply. Instead, Civil Code provisions shall
govern and regulate the resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191
of the Civil Code, mutual restitution is required to bring back the
parties to their original situation prior to the inception of the contract.
Accordingly, the initial payment of ₱800,000 and the corresponding
mortgage payments in the amounts of ₱27,225, ₱23,000 and ₱23,925
(totaling ₱874,150.00) advanced by petitioners should be returned by
private respondents, lest the latter unjustly enrich themselves at the
expense of the former.110 (Emphasis supplied)
When rescission is sought under Article 1191 of the Civil Code, it
need not be judicially invoked because the power to resolve is implied
in reciprocal obligations.111 The right to resolve allows an injured
party to minimize the damages he or she may suffer on account of
the other party’s failure to perform what is incumbent upon him or
her.112 When a party fails to comply with his or her obligation, the
other party’s right to resolve the contract is triggered.113 The
resolution immediately produces legal effects if the non-performing
party does not question the resolution.114 Court intervention only
becomes necessary when the party who allegedly failed to comply
with his or her obligation disputes the resolution of the
contract.115 Since both parties in this case have exercised their right
to resolve under Article 1191, there is no need for a judicial decree
before the resolution produces effects.
V
The issue of damages is a factual one. A petition for review on
certiorari under Rule 45 shall only pertain to questions of law.116 It is
not the duty of this court to re-evaluate the evidence adduced before
the lower courts.117Furthermore, unless the petition clearly shows
that there is grave abuse of discretion, the findings of fact of the trial
court as affirmed by the Court of Appeals are conclusive upon this
court.118 In Lorzano v. Tabayag, Jr.:119
For a question to be one of law, the same must not involve an
examination of the probative value of the evidence presented by the
litigants or any of them. The resolution of the issue must rest solely
on what the law provides on the given set of circumstances. Once it is
clear that the issue invites a review of the evidence presented, the
question posed is one of fact.
....
For the same reason, we would ordinarily disregard the petitioner’s
allegation as to the propriety of the award of moral damages and
attorney’s fees in favor of the respondent as it is a question of fact.
Thus, questions on whether or not there was a preponderance of
evidence to justify the award of damages or whether or not there was
a causal connection between the given set of facts and the damage
suffered by the private complainant or whether or not the act from
which civil liability might arise exists are questions of fact.
Essentially, the petitioner is questioning the award of moral damages
and attorney’s fees in favor of the respondent as the same is
supposedly not fully supported by evidence. However, in the final
analysis, the question of whether the said award is fully supported by
evidence is a factual question as it would necessitate whether the
evidence adduced in support of the same has any probative value. For
a question to be one of law, it must involve no examination of the
probative value of the evidence presented by the litigants or any of
them.120 (Emphasis supplied, citations omitted)
The damages awarded by the Court of Appeals were supported by
documentary evidence.121 Petitioners failed to show any reason why
the factual determination of the Court of Appeals must be reviewed,
especially in light of their failure to produce receipts or check
payments to support their other claim for actual damages.122
Furthermore, the actual damages amounting to ₱2,040,000.00 being
sought by petitioners123 must be tempered on account of their own
failure to pay the rest of the installments for the delivered unit. This
failure on their part is a breach of their obligation, for which the
liability of respondent, for its failure to deliver the remaining units,
shall be equitably tempered on account of Article 1192 of the New
Civil Code.124 In Central Bank of the Philippines v. Court of Appeals:125
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 ₱17,000.00
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 ₱17,000.00 debt. The liability of Sulpicio M. Tolentino for
interest on his ₱17,000.00 debt shall not be included in offsetting
the liabilities of both parties. Since Sulpicio M. Tolentino derived
some benefit for his use of the ₱17,000.00, it is just that he should
account for the interest thereon.126 (Emphasis supplied)
The award for moral and exemplary damages also appears to be
sufficient. Moral damages are granted to alleviate the moral suffering
suffered by a party due to an act of another, but it is not intended to
enrich the victim at the defendant’s expense.127 It is not meant to
punish the culpable party and, therefore, must always be reasonable
vis-a-vis the injury caused.128 Exemplary damages, on the other
hand, are awarded when the injurious act is attended by bad
faith.129 In this case, respondent was found to have misrepresented
its right over the generator set that was seized. As such, it is properly
liable for exemplary damages as an example to the public.130
However, the dispositive portion of the Court of Appeals Amended
Decision dated September 9, 2005 must be modified to include the
recovery of attorney’s fees and costs of suit in favor of petitioners.
In Sunbanun v. Go:131
Furthermore, we affirm the award of exemplary damages and
attorney’s fees. Exemplary damages may be awarded when a
wrongful act is accompanied by bad faith or when the defendant
acted in a wanton, fraudulent, reckless, oppressive, or malevolent
manner which would justify an award of exemplary damages under
Article 2232 of the Civil Code. Since the award of exemplary damages
is proper in this case, attorney’s fees and cost of the suit may also be
recovered as provided under Article 2208 of the Civil
Code.132 (Emphasis supplied, citation omitted)
Based on the amount awarded for moral and exemplary damages, it
is reasonable to award petitioners ₱20,000.00 as attorney’s fees.
WHEREFORE, the Petition is DENIED. The Amended Decision dated
September 9, 2005 is AFFIRMED with MODIFICATION. Respondent
Kodak Philippines, Ltd. is ordered to pay petitioners Alexander and
Julie Lam:
 (a) P270,000.00, representing the partial payment made on
the Minilab Equipment;

(b) P130,000.00, representing the amount of the generator

set, plus legal interest at 12% .per annum from December
1992 until fully paid;

(c) P440,000.00 as actual damages;

(d) P25,000.00 as moral damages;

(e) P50,000.00 as exemplary damages; and

(f) P20,000.00 as attorney's fees.

Petitioners are ordered to return the Kodak Minilab System 22XL

unit and its standard accessories to respondent.

SO ORDERED.

MARVIC M.V.F. LEONEN

Associate Justice
 Ejectment; Unlawful Detainer; Lease; Since the lease contract was
executed for a determinate time, such contract ceased on the day fixed
without need of further demand; A notice to vacate constitutes an express
act on the part of the lessor that he no longer consents to the continued
occupation by the lessee of the property.—It bears stressing that after the
subject lease contract expired on July 15, 1995, petitioner was already
unlawfully withholding possession of the leased premises from
respondent as to entitle the latter to file her complaint for ejectment
against petitioner as defendant. Since the lease contract was executed for
a determinate time, such contract ceased on the day fixed without need
of further demand. A notice to vacate constitutes an express act on the
part of the lessor that he no longer consents to the continued occupation
by the lessee of the property. Hence, respondent, as plaintiff in the trial
court, had a cause of action for ejectment against petitioner who was the
defendant below.
Same; Same; Same; The clause “renewable upon agreement of the
parties” in the lease contract is clear and admits of no other
interpretation: the contract is renewable only upon agreement of the
parties—if no such agreement is forged, petitioner has no other option
except to vacate the property.—It is true that petitioner and respondent
agreed that the subject lease contract was “renewable upon agreement.”
The Court notes, however, that the effect of petitioner’s intransigent
refusal to pay the P30,000.00 monthly rental proposed by respondent
was the failure of the parties to agree on the renewal of the contract. The
clause “renewable upon agreement of the parties” in the lease contract is
clear and admits of no other interpretation: the contract is
renewable only upon agreement of the parties. If no such agreement is
forged, petitioner has no other option except to vacate the property.
Same; Same; Same; Respondent, as the owner of the property whose
title is recognized in the lease contract, was not obliged to agree to renew
the lease contract, much less negotiate with petitioner for such renewal if
she opts not to renew the agreement; A contract can only be renewed upon
the mutual agreement of the parties or at the will of both of them.—Even
petitioner himself admits that under the subject clause, the lease
contract would not be automatically renewed upon its expiration on July
31, 1995. Respondent, as the owner of the property whose title is
recognized in the lease contract, was not obliged to agree to renew the
lease contract, much less negotiate with petitioner for such renewal if she
opts not to renew the agreement. Since the renewal of the contract
contemplates the death of the old contract, it is necessary that a new one
be executed by the parties. A contract can only be renewed upon the
mutual agreement of the parties or at the will of both of them.
Same; Same; Same; Builder in Good Faith; As a mere lessee whose
possession after the expiration of the contract is at the sufferance of the
owner of the property, he cannot claim to be a builder in good faith.—The
issue of whether a lessee may be considered a builder in good faith was
resolved by the Court in Geminiano v. Court of Appeals, 259 SCRA 344
(1966). The Court stressed that the private respondents therein, being
mere lessees, knew that their occupation of the premises would continue
only for the life of the lease, and as such, could not be considered as
possessors nor builders in good faith. The Court went on to explain: “In a
plethora of cases, this Court has held that Article 448 of the Civil Code,
in relation to Article 546 of the same Code, which allows full
reimbursement of useful improvements and retention of the premises
until reimbursement is made, applies only to a possessor in good
faith, i.e., one who builds on land with the belief that he is the owner
thereof. It does not apply where one’s only interest is that of a lessee
under a rental contract; otherwise, it would always be in the power of the
tenant to “improve” his landlord out of his property.” In this case, there is
no question that petitioner was initially a lawful possessor because his
entry into the property is by virtue of a lease contract with respondent.
However, as a mere lessee whose possession after the expiration of the
contract is at the sufferance of the owner of the property, he cannot claim
to be a builder in good faith. Under Article 1678 of the New Civil Code,
petitioner is entitled to one-half of the value of the improvements only if
respondent, as the owner, decides to appropriate the improvements.
Since respondent refused to appropriate the improvements, petitioner
cannot compel her to reimburse to him one-half their value. The sole
right of petitioner under Article 1678 is to remove the improvements
without causing any more damage upon the property leased than is
necessary.
Same; Same; Same; Fair Rental Value; Words and Phrases;Fair
rental value is defined as the amount at which a willing lessee would pay
and a willing lessor would receive for the use of a certain property, neither
being under compulsion and both parties having a reasonable knowledge
of all facts, such as the extent, character and utility of the property, sales
and holding prices of similar land and the highest and best use of the
property.—In Asian Transmission Corporation v. Canlubang Sugar
Estates, 410 SCRA 202 (2003), the Court ruled that the reasonable
compensation contemplated under said Rule partakes of the nature of
actual damages. While the trial court may fix the reasonable amount of
rent, it must base its action on the evidence adduced by the parties. The
Court also ruled that “fair rental value is defined as the amount at which FIRST DIVISION
a willing lessee would pay and a willing lessor would receive for the use
of a certain property, neither being under compulsion and both parties
having a reasonable knowledge of all facts, such as the extent, character JOHNNY JOSEFA, G.R. No. 163429
and utility of the property, sales and holding prices of similar land and Petitioner,
the highest and best use of the property.” The Court further held that the Present:
rental value refers to “the value as ascertained by proof of what the
property would rent or by evidence of other facts from which the fair - versus - PANGANIBAN, C.J., Chairperson,
rental value may be determined.” In D.O. Plaza Management YNARES-SANTIAGO,
Corporation v. Co-Owners Heirs of Andres Atega, 447 SCRA 171 (2004), AUSTRIA-
the Court ruled that the following factors may be considered in MARTINEZ,
determining the reasonableness of the rental charged: (a) the prevailing LOURDES SAN CALLEJO, SR., and
rates in the vicinity; (b) location of the property; (c) use of the property; BUENAVENTURA, CHICO-NAZARIO, JJ.
(d) inflation rate; and (e) the testimony of one of the private respondents. represented by Attorneys-in-
Fact, TERESITA SAN
BUENAVENTURA and/or Promulgated:
RAUL SAN BUENAVENTURA,
Respondents. March 3, 2006

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

DECISION

CALLEJO, SR., J.:

Before us is a Petition for Review on Certiorari for the reversal

of the Court of Appeals (CA) Decision[1] in CA-G.R. SP No. 69546.

The antecedent facts are as follows:

Lourdes San Buenaventura is the owner of a 364-square meter

parcel of land in Pasig City, covered by Transfer Certificate of Title No.
PT-76848.[2]

On July 15, 1990, Johnny Josefa entered into a Contract of

Lease[3] with San Buenaventura over the said parcel of land. The parties
agreed, inter alia, that
 1. The period covered by this lease agreement
is from August 1, 1990 to July 31, 1995, or a period of 4. To pay plaintiff the amount of PhP
five (5) years, renewable upon agreement of the 100,000.00 as and by way of exemplary damages;
parties.[4]
5. To pay plaintiff the amount of PhP 50,000.00
Upon the expiry of the contract, San Buenaventura wrote Josefa and PhP 1,500.00/per appearance as and by way of
informing him that the lease would no longer be extended but that he attorneys fees; and
may continue with the lease at a rental rate of P30,000.00 a
month.[5] Josefa was told to vacate the property and pay any arrearages 6. To pay costs of suit and expenses of
litigations.
if he opted not to lease the property after the expiration of the lease
contract. However, Josefa refused to vacate the premises. He continued
Other reliefs just and equitable under the
to occupy the property and paid a monthly rental of P15,400.00 which
premises are likewise prayed for.[10]
San Buenaventura received. However, the latter subsequently made
demands for Josefa to vacate the property in a Letter dated June 3,
In his Answer,[11] Josefa averred that San Buenaventura had no
1998.[6] Josefa still refused to leave the premises.[7]
cause of action against him because, under the contract, she (San
Buenaventura) was obliged to renew the lease. Josefa pointed out that
This prompted San Buenaventura to file a complaint for
because of this commitment to renew the contract, he had made
unlawful detainer against Josefa which was, however, dismissed due to
renovations and improvements on the land. Josefa also set up attorneys
the plaintiffs failure to secure a certification from the lupon ng
fees as counterclaim against San Buenaventura. He likewise prayed that
barangay.[8] San Buenaventura refiled the Complaint[9] on July 9,
should the lease contract not be renewed, San Buenaventura be ordered
1998 with the Metropolitan Trial Court (MeTC) of Pasig City. The
to reimburse to him the cost of the improvements in the amount of not
complaint, docketed as Civil Case No. 6798, was raffled to Branch 69. It
less than P3 million.
contained the following prayer:
On July 15, 1999, the MeTC rendered its Decision,[12] the
WHEREFORE, premises considered, plaintiff
dispositive portion of which reads:
respectfully prays that this Honorable Court, after due
hearing, lender [sic] judgment, in favor of plaintiff and
WHEREFORE, premises considered, judgment
against defendant, ordering the latter:
is hereby rendered ordering herein defendant and all
persons claiming rights under him to vacate the subject
1. To vacate the premises and to deliver the
leased premises located as (sic) A. Mabini St.,
peaceful possession thereof to plaintiff;
Capasigan, Pasig City and surrender possession thereof
to the plaintiff; ordering defendant to pay P10,000.00 as
and for attorneys fees, the same being deemed just and
equitable, and to pay the costs of suit.
2. To pay plaintiff the amount equivalent to the
deficit on monthly rentals from August 1, 1995 up to
The claim for moral and exemplary damages is
the time that defendant actually surrenders possession
denied, the same not being recoverable in an ejectment
of the property at the rate of PhP 30,000.00 per month;
suit. Moreover, for lack of basis, the claim for deficit in
monthly rentals from August 1, 1995 is likewise denied.
3. To pay plaintiff the amount of PhP
Defendant is, therefore, directed to continue to pay
100,000.00 as and by way of moral damages;
reasonable compensation for his continued use and
 occupation of the subject premises at the old rate
of P15,000.00 a month from the time of the institution
of this complaint until defendant and all person[s]
claiming rights under him shall have completely
vacated the premises.
Defendants counterclaim is dismissed for want
of basis.
SO ORDERED.[13]
The MeTC declared that the phrase renewable upon agreement
of the parties in the lease contract implied mutuality, i.e., both parties
consent to the renewal of the lease. Thus, San Buenaventuras demand
for Josefa to vacate the premises after the expiration of the lease
necessarily negates the idea of her consent to such renewal. The court
also held that the clause does not and cannot constitute a commitment or
a promise on the part of San Buenaventura to renew the lease.[14]
Josefa appealed the decision to the Regional Trial Court
(RTC). On June 27, 2001, the RTC rendered its Decision[15] reversing and
setting aside the ruling of the MeTC and dismissing San Buenaventuras
complaint. The decretal portion of the decision reads:
WHEREFORE, premises considered, the
questioned Decision is REVERSED and SET ASIDE,
and the Complaint in Civil Case No. 6798 hereby
DISMISSED.[16]
The RTC held that the inclusion of the renewal clause in the
contract showed the intent on the part of both parties to extend the lease
without any condition or requirement of mutual agreement. It declared
that the phrase was merely a useless addition for the convenience of any
party who may wish, in bad faith, to back out of the extension of the
lease. According to the RTC, the only time that phrase may come into
play is when both parties mutually decline to extend the lease, but when
only one party insists on the extension while the other refuses, the latter
party is bound by the term.[17]
This time, San Buenaventura appealed to the CA via a Petition
for Review under Rule 42 of the Revised Rules of Court, where she
alleged the following:
5.1 Petitioner respectfully submits that the
REGIONAL TRIAL COURT erred in finding that the
phrase renewable upon agreement of the parties is an
outright intent of the parties to renew the contract upon
its expiration.
5.2 Petitioner respectfully submits that the
REGIONAL TRIAL COURT erred in finding that the
phrase renewable upon agreement of the parties does
not mean that there has to be mutual consent before
the lease contract may be extended.
5.3 Petitioner respectfully submits that the
REGIONAL TRIAL COURT erred in finding that the
phrase renewable upon agreement of the parties is
indeed renewable and without any condition or
requirement of mutual agreement notwithstanding the
phrase upon agreement of the parties which the Court
found as a useless addition for the convenience of any
party who may wish, in bad faith, to back out of the
extension.
5.4 Petitioner respectfully submits that the
REGIONAL TRIAL COURT erred in finding that the
act of sending defendant a demand to vacate, signifying
her lack of intention to renew the lease is in violation of
the terms and conditions of the lease contract.
5.5 Petitioner submits that the Regional Trial
Court erred in not ordering respondent to pay PHP
30,000.00 monthly rental.
5.6 Petitioner respectfully submits that the
REGIONAL TRIAL COURT erred in dismissing the
ejectment Complaint.[18]
 San Buenaventura argued that the RTC failed to apply the
ruling of this Court in Fernandez v. Court of Appeals,[19] where a similar
clause in the lease contract of the parties was construed.
On November 22, 2002, the CA granted the petition and
reversed the decision of the RTC. The fallo of the decision reads:
IN VIEW OF ALL THE FOREGOING, the
challenged RTC Decision is hereby REVERSED and
SET ASIDE, reinstating in the process the earlier
judgment of the MTC in Civil Case No. 6798, with a
modification that herein respondent Josefa is ordered to
pay petitioner San Buenaventura rentals in the sum
of P30,000.00 a month from the first demand therefor
until he vacates the leased premises. In all other
respect[s], the MTC Decision stands. No cost.
SO ORDERED.[20]
The appellate court declared that, after the expiration of the
five-year period in the lease contract, the owner of the property had the
right not only to terminate the lease but to demand a new rental rate. It
held that it was unfair for the lessee to refuse to pay the demanded
increased rate and still remain in possession of the property. The CA also
ruled that Josefa could not claim to be a builder in good faith since he
knew that he was only a lessee, whose rights relative to the
improvements he introduced on the property are governed by Article
1678 of the New Civil Code.
Josefa (now petitioner) filed the instant petition against San
Buenaventura (respondent) and raises the following issues for
resolution: (a) whether the lease contract between petitioner and
respondent contained a renewal clause, and as such, they had agreed to
extend the period of the lease after July 31, 1995; (b) whether petitioner
is entitled to reimbursement for his improvements on the leased
premises; and (c) whether petitioner is obliged to pay P30,000.00 a
month by way of reasonable compensation for his continued occupancy of
the property.
On the first issue, petitioner recalls that his predecessor had leased the
property way back in 1939, and that said lease had always been
renewed. Petitioner insists that when his lease contract with respondent
was executed on July 15, 1990, a commitment was made to renew it upon
its expiration on July 31, 1995, which was why the clause renewable
upon agreement of the parties was incorporated in the lease contract. He
posits that respondent could not unilaterally cancel the lease contract
without affording him an opportunity to negotiate for its renewal. While
the clause could not be construed to mean that the lease contract would
be automatically renewed
after its expiry, the provision negates the right of respondent to
terminate the lease until after negotiations for its renewal should prove
to be unsuccessful. However, he also maintains that respondent had the
obligation to renew the lease contract without modifying any of its terms
and conditions. He posits that the ruling of this Court in Fernandez v.
Court of Appeals[21] is not controlling in this case.
Respondent, for her part, avers that a similar issue was raised and
resolved by this Court in the following cases: Fernandez v. Court of
Appeals,[22] Heirs of Amando Dalisay v. Court of Appeals,[23]Buce v. Court
of Appeals,[24] and LL and Company Development and Agro-Industrial
Corporation v. Huang Chao Chun.[25] Respondent asserts that the rulings
of this Court in said cases should apply.
The contention of petitioner has no merit.
It bears stressing that after the subject lease contract expired on July 15,
1995, petitioner was already unlawfully withholding possession of the
leased premises from respondent as to entitle the latter to file her
complaint for ejectment against petitioner as defendant.[26] Since the
lease contract was executed for a determinate time, such contract ceased
on the day fixed without need of further demand.[27] A notice to vacate
constitutes an express act on the part of the lessor that he no longer
consents to the continued occupation by the lessee of the
property.[28] Hence, respondent, as plaintiff in the trial court, had a cause
of action for ejectment against petitioner who was the defendant below.
It is true that petitioner and respondent agreed that the subject lease
contract was renewable upon agreement. The Court notes, however, that
the effect of petitioners intransigent refusal to pay theP30,000.00
monthly rental proposed by respondent was the failure of the parties to
agree on the renewal of the contract. The clause renewable upon
agreement of the parties in the lease contract is clear and admits of no
other interpretation: the contract is renewable only upon agreement of
the parties. If no such agreement is forged, petitioner has no other option
except to vacate the property.
Even petitioner himself admits that under the subject clause, the lease
contract would not be automatically renewed upon its expiration on July
31, 1995. Respondent, as the owner of the property whose title is
recognized in the lease contract, was not obliged to agree to renew the
lease contract, much less negotiate with petitioner for such renewal if she
opts not to renew the agreement. Since the renewal of the contract
contemplates the death of the old contract, it is necessary that a new one
be executed by the parties.[29] A contract can only be renewed upon the
mutual agreement of the parties or at the will of both of them. After all,
as the Court ruled in Buce v. Court of Appeals:[30]
In the case at bar, it was not specifically indicated who
may exercise the option to renew, neither was it stated
that the option was given for the benefit of herein
petitioner. Thus, pursuant to the Fernandez ruling and
Article 1196 of the Civil Code, the period of the lease
contract is deemed to have been set for the benefit of
both parties. Renewal of the contract may be had only
upon their mutual agreement or at the will of both of
them. Since the private respondents were not amenable
to a renewal, they cannot be compelled to execute a new
contract when the old contract terminated on 1 June
1994. It is the owner-lessors prerogative to terminate
the lease at its expiration. The continuance, effectivity
and fulfillment of a contract of lease cannot be made to
depend exclusively upon the free and uncontrolled
choice of the lessee between continuing the payment of
the rentals or not, completely depriving the owner of
any say in the matter. Mutuality does not obtain in
such a contract of lease and no equality exists between
the lessor and the lessee since the life of the contract
would be dictated solely by the lessee.[31]
In Fernandez v. Court of Appeals,[32] the Court ruled that the stipulation
of the parties in their lease contract to be renewable at the option of both
parties stresses that the faculty to renew was given not to the lessee
alone nor to the lessor by himself but to the two simultaneously; hence,
both must agree to renew if a new contract is to come about.
Petitioners contention that respondents had verbally agreed to extend
the lease indefinitely is inadmissible to qualify the terms of the written
contract under the parole evidence rule, and unenforceable under the
statute of frauds.[33]
On the second issue, petitioner avers that the CA erred in denying his
claim for compensation of one-half of the value of the improvements he
had introduced in the property amounting to P3,000,000.00. Citing
Article 1678 of the New Civil Code,[34] he avers that while he may not be
a possessor in good faith being a lessee, he is a builder in good faith since
his possession as lessee is lawful; as such, he is entitled to recover one-
half of the value of his useful improvements. Petitioner insists that the
CA erred in applying Article 526[35] of the New Civil Code.
The Court is not persuaded.
The issue of whether a lessee may be considered a builder in good faith
was resolved by the Court in Geminiano v. Court of Appeals.[36] The
Court stressed that the private respondents therein, being mere lessees,
knew that their occupation of the premises would continue only for the
life of the lease, and as such, could not be considered as possessors nor
builders in good faith.
The Court went on to explain:
In a plethora of cases, this Court has held that
Article 448 of the Civil Code, in relation to Article 546
of the same Code, which allows full reimbursement of
useful improvements and retention of the premises
until reimbursement is made, applies only to a
possessor in good faith, i.e., one who builds on land with
the belief that he is the owner thereof. It does not apply
where ones only interest is that of a lessee under a
rental contract; otherwise, it would always be in the
 power of the tenant to improve his landlord out of his
property.[37]
In this case, there is no question that petitioner was initially a lawful
possessor because his entry into the property is by virtue of a lease
contract with respondent. However, as a mere lessee whose possession
after the expiration of the contract is at the sufferance of the owner of the
property, he cannot claim to be a builder in good faith. Under Article
1678 of the New Civil Code, petitioner is entitled to one-half of the value
of the improvements only if respondent, as the owner, decides to
appropriate the improvements. Since respondent refused to appropriate
the improvements, petitioner cannot compel her to reimburse to him one-
half their value.[38] The sole right of petitioner under Article 1678 is to
remove the improvements without causing any more damage upon the
property leased than is necessary.[39]
On the third issue, petitioner avers that the CA erred in ordering him to
pay P30,000.00 monthly rental for the renewal of the lease contract. He
maintains that the amount has no factual basis and is exorbitant.
The submission of petitioner has no merit. In the first place, the
CA awarded the P30,000.00 monthly rentals not for the renewal of the
lease contract, but as compensation for petitioners continued occupancy
of the property after the lease expired. However, we agree with
petitioners contention that the increase of the award to P30,000.00 has
no factual basis, considering that the appellate court failed to state its
basis for doubling the amount adjudged by the trial court. It simply
increased the award in the dispositive portion of its decision. Rule 70,
Section 17 of the 1997 Rules of Civil Procedure reads:
SEC. 17. Judgment. If after trial the court finds that
the allegations of the complaint are true, it shall render
judgment in favor of the plaintiff for the restitution of
the premises, the sum justly due as arrears of rent or as
reasonable compensation for the use and occupation of
the premises, attorneys fees and costs. If it finds that
said allegations are not true, it shall render judgment
for the defendant to recover his costs. If a counterclaim
is established, the court shall render judgment for the
sum found in arrears from either party and award costs
as justice requires. (Emphasis added)
In Asian Transmission Corporation v. Canlubang Sugar Estates,[40] the
Court ruled that the reasonable compensation contemplated under said
Rule partakes of the nature of actual damages. While the trial court may
fix the reasonable amount of rent, it must base its action on the evidence
adduced by the parties. The Court also ruled that fair rental value is
defined as the amount at which a willing lessee would pay and a willing
lessor would receive for the use of a certain property, neither being under
compulsion and both parties having a reasonable knowledge of all facts,
such as the extent, character and utility of the property, sales and
holding prices of similar land and the highest and best use of the
property. The Court further held that the rental value refers to the value
as ascertained by proof of what the property would rent or by evidence of
other facts from which the fair rental value may be determined.[41]
In D.O. Plaza Management Corporation v. Co-Owners Heirs of Andres
Atega,[42] the Court ruled that the following factors may be considered in
determining the reasonableness of the rental charged: (a) the prevailing
rates in the vicinity; (b) location of the property; (c) use of the
property; (d) inflation rate; and (e) the testimony of one of the private
respondents.[43]
In the present case, there is no evidence on record to justify the increase
of the award to P30,000.00. Respondents bare proposal to increase the
monthly rental to P30,000.00 after July 31, 1995 cannot be the factual
basis for such increase in the compensation due to petitioner for
respondents occupancy on the property after the lease contract
expired. Thus, aside from unilaterally and perfunctorily increasing such
rentals, the appellate court also ignored the trial courts award
of P15,000.00 which was based on the evidence on record. As this Court
emphasized in Asian Transmission Corporation v. Canlubang Sugar
Estates:[44]
But the court made no ratiocination as to how it arrived
at the amount of P15,000,000 with reference to the
evidence that the respondent adduced, if any, to prove
the said claim, vis--vis the evidence adduced by the respondent, as plaintiff, would be able to adduce
petitioner. The court made a conclusion without any preponderant evidence to prove its claim.[45]
factual basis. What is so worrisome is that under their
MOA, the parties fixed the annual rental of the The Court holds that the trial courts award of P15,000.00 as reasonable
property for the period of July 1, 1991 to June 30, compensation for petitioners occupancy of the property after the
1992 at P3,373,352.80; and for the period of July 1, expiration of the lease should be maintained.
1992 to June 30, 1993 at the said amount plus 8% or in
the amount of P3,642,187.50. But in its decision, the
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY
MTC increased the amount by no less than 500% for the
GRANTED. The decision of the Court of Appeals is AFFIRMED WITH
period of July 1, 1993 onwards. The trial court did not
MODIFICATION. The award of P30,000.00 a month, by way of
bother to explain or elucidate how and for what reason
the rental value of the property was increased by 500% reasonable compensation for petitioner Johnny Josefas occupancy of the
from P3,642,187.50 to P15,000,000 annually. property from July 31, 1995, is DELETED, and the award of P15,000.00
a month made by the MeTC of Pasig City, Branch 69,
The CA decision is likewise as nebulous. It affirmed the is REINSTATED. No costs.
decision of the RTC, which affirmed on appeal the
decision of the MTC, fixing the reasonable SO ORDERED.
compensation at P15,000,000 simply because the
petitioner offered no controverting evidence as to the
fair rental value of the leased property ROMEO J. CALLEJO, SR.
Associate Justice
With respect to the rental fixed by the
trial court, suffice it to say that
petitioner failed to present
controverting evidence as to the fair
rental value of the leased
premises. The burden of proof to show
that the
rental demanded is unconscionable or
exorbitant rests upon the lessee. The
trial court had the authority to fix the
reasonable value for the continued use
and occupancy of the premises after
termination of the lease contract.

It must be underscored that the respondent was the

plaintiff in the MTC. It had the burden to adduce
evidence to prove the fair rental value or reasonable
compensation for the leased property. If the respondent
failed to discharge its burden, the petitioner was not
obligated to adduce controverting evidence. The burden
of evidence would be shifted to the petitioner only if the
 Civil Law; Donations; Civil Procedure; The issue of whether or not Same; Same; Same; It has been 16 years since the execution of the
petitioner DECS was able to comply with the condition imposed in the deed of donation. Petitioner DECS failed to use the property for the
deed of donation is one of fact. Under Rule 45 of the 1997 Rules of Civil purpose specified in the deed of donation. In fine, petitioner DECS has no
Procedure, only questions of law may be raised in a petition for review on use for the property, hence, the same shall be reverted to the
certiorari, for the simple reason that the Supreme Court is not a trier of respondents.—It has been 16 years since the execution of the deed of
facts.—The issue of whether or not petitioner DECS was able to comply donation. Petitioner DECS failed to use the property for the purpose
with the condition imposed in the deed of donation is one of fact. There is specified in the deed of donation. The property remained barren and
a question of fact when the doubt or difference arises as to the truth or unutilized. Even after respondents sought the return of the property
falsehood of alleged facts or when the query necessarily solicits before the courts, petitioner DECS still failed to draw up plans to use the
calibration of the whole evidence considering mostly the credibility of property for school purposes. In fine, petitioner DECS has no use for the
witnesses, existence and relevancy of specific surrounding circumstances, property; hence, the same shall be reverted to the respondents.
their relation to each other and to the whole and probabilities of the
situation. Under Rule 45 of the 1997 Rules of Civil Procedure, only
questions of law may be raised in a petition for review on certiorari, for
the simple reason that this Court is not a trier of facts. It is not for the
Court to calibrate the evidence on record, as this is the function of the
trial court. Although there are well-defined exceptions to the rule,
nevertheless, after a review of the records, we find no justification to
depart therefrom. Moreover, the trial court’s findings of facts, as affirmed
by the appellate court on appeal, are binding on this Court, unless the
trial and appellate courts overlooked, misconstrued or misinterpreted
facts and circumstances of substance which, if considered, would change
the outcome of the case. The case has been reviewed thoroughly, and we
find no justification to reverse the CA decision.

Same; Same; Contracts; It must be stressed that the donation is

onerous because the DECS, as donee, was burdened with the obligation to
utilize the land donated for school purposes. Under Article 733 of the New
Civil Code, a donation with an onerous cause is essentially a contract and
is thus governed by the rules on contract.—We reject the contention of the
OSG that respondents’ cause of action is already barred by prescription
under Article 764 of the New Civil Code, or four years from the non-
compliance with the condition in the deed of donation. Since such failure
to comply with the condition of utilizing the property for school purposes
became manifest sometime in 1988 when the DECS utilized another
property for the construction of the school building, the four-year
prescriptive period did not commence on such date. Petitioner was given
more than enough time to comply with the condition, and it cannot be
allowed to use this fact to its advantage. It must be stressed that the
donation is onerous because the DECS, as donee, was burdened with the
obligation to utilize the land donated for school purposes. Under Article
733 of the New Civil Code, a donation with an onerous cause is
essentially a contract and is thus governed by the rules on contract.
 FIRST DIVISION
On August 3, 1981, the spouses Dulay executed a deed of
donation[3] over a 10,000-square-meter portion of their property in
THE SECRETARY OF G.R. No. 164748 favor of the Ministry of Education and Culture (now the Department
EDUCATION and DR. BENITO
of Education, Culture and Sports [DECS]). The deed provided, among
TUMAMAO, Schools Division Present:
others:
Superintendent of Isabela,
Petitioners,
PANGANIBAN, C.J., Chairperson, That for and in consideration of the benefits that
YNARES-SANTIAGO, may be derived from the use of the above described
AUSTRIA-MARTINEZ, property which is intended for school purposes, the
- versus - CALLEJO, SR., and said DONORS do by by (sic) these presents
CHICO-NAZARIO, JJ. TRANSFER AND CONVEY by way of DONATION
unto the DONEE, its successors and assigns, the
HEIRS OF RUFINO DULAY, Promulgated: above property to become effective upon the signing
SR., represented by IGNACIA of this document.[4]
VICENTE, RUFINO DULAY, January 27, 2006
JR., SUSANA DULAY, The property was subdivided. On April 13, 1983, Transfer Certificate
ADELAIDA DULAY, of Title (TCT) No. T-143337[5] covering the portion identified
LUZVIMINDA DULAY and as Lot 8858-A was issued in the name of the Ministry of Education
CECILIA DULAY, and Culture, represented by Laurencio C. Ramel, the Superintendent
Respondents. of Schools of Isabela. However, the property was not used for school
x---------------------------------------------- purposes and remained idle.
----x
Sometime in 1988, the DECS, through its Secretary, started
construction of the Rizal National High School building on a parcel of
DECISION land it acquired from Alejandro Feliciano. The school site was about
2 kilometers away from the land donated by the spouses Dulay.

CALLEJO, SR., J.: In a letter[6] to the DECS Secretary dated August 19, 1994,
the spouses Dulay requested that the property be returned to them
considering that the land was never used since 1981, or a period of
This is a petition for review on certiorari of the Decision[1] of the Court more than 13 years. On
of Appeals (CA) in CA-G.R. CV No. 78314 which affirmed the August 28, 1994, the Barangay Council of
Decision[2] of the Regional Trial Court (RTC) of SantiagoCity, Isabela, Rizal, Santiago City issued Resolution No. 39[7] recognizing the right
Branch 35, in Civil Case No. 35-2397. of the donors to redeem the subject parcel of land because of the
DECS failure to utilize it for the intended purpose. It further resolved
that the Rizal National High School no longer needed the donated
The spouses Rufino Dulay, Sr. and Ignacia Vicente were the owners
land considering its distance from the main campus and [the] failure
of a parcel of land located in Rizal, Santiago, Isabela, with an area of
to utilize the property for a long period of time.
29,002 square meters. The lot was covered by Original Certificate of
Title No. P-6776.
On December 22, 1994, Rufino Dulay, Sr. passed away at the age of
80.[8] His heirs sought the help of the Sangguniang
Panlungsod of Santiago City via an undated letter[9] requesting the
approval of a resolution allowing them to redeem the donated
property. The Sangguniang Panlungsod denied the request inasmuch
as the city government was not a party to the deed of donation.[10]
On August 31, 1997, the heirs of Dulay, Sr., herein respondents,
filed a complaint for the revocation of the deed of donation and
cancellation of TCT No. T-143337 before the RTC of Santiago City,
Isabela, Branch 35, against the DECS Secretary and Dr. Benito
Tumamao, the Schools Division Superintendent of
Isabela. Respondents alleged that there was a condition in the deed
of donation: that the DECS, as donee, utilize the subject property for
school purposes, that is, the construction of a building to house
the Rizal National High School. Respondents alleged that the DECS
did not fulfill the condition and that the land remained idle up to the
present. Respondents also averred that the donation inter vivos was
inofficious, since the late Rufino Dulay, Sr. donated more than what
he could give by will.
Petitioners, through the Office of the Solicitor General (OSG),
interposed the following defenses: (a) the DECS complied with said
condition because the land was being used by the school as its
technology
and home economics laboratory; (b) the donation was not inofficious
for the donors were the owners of five other parcels of land, all
located at Rizal, Santiago City; (c) the DECS acquired the disputed
property by virtue of purchase made on December 8, 1997 by
the barangay of Rizal, Santiago City in the amount of P18,000.00 as
certified by its former Barangay Captain, Jesus San Juan;[11] and (d)
the action of the respondents had prescribed. The OSG also claimed
that students planted a portion of the land with rice, mahogany
seedlings, and fruit-bearing trees; the produce would then be sold
and the proceeds used for the construction of a school building on
the subject property.
In their Reply,[12] respondents denied that the donated land was
being used as a technology and home economics laboratory, and
averred that there were no improvements on the property. Moreover,
the fact that rice was planted on the lot was contrary to the intended
purpose of the donation. The respondents likewise denied that the
property had been sold to the barangay. While the other properties of
the late donor had been sold, the deeds thereon had not been
registered, and the tax declarations not yet transferred in the names
of the purchasers.
Thereafter, trial ensued. On March 6, 2001, an ocular
inspection of the property was conducted by the parties and their
respective counsels, including the Presiding Judge. It was confirmed
that the land was barren, save for a small portion which was planted
with palay. A demolished house was also found in the periphery of
the donated lot.[13]
On December 26, 2002, the trial court rendered its decision
in favor of respondents. The fallo reads:
WHEREFORE, in the light of the foregoing
considerations, the Court hereby DECLARES the
deed of donation, Exhibit A, executed by the late
Rufino Dulay, Sr. and his wife Ignacia Vicente over a
portion of the land covered by O.C.T. No. P-6776 and
now covered by T.C.T. No. T-143337 in the name of
the donee Department of Education and Culture as
REVOKED. The defendant DECS is ORDERED to
execute the deed of reconveyance of the land in favor
of the plaintiffs heirs of Rufino Dulay, Sr.
SO ORDERED.[14]
In revoking the deed of donation, the trial court ruled that the
donation was subject to a resolutory condition, namely, that the land
donated shall be used for school purposes. It was no longer
necessary to determine the intended school purpose because it was
established that the donee did not use the land. Thus, the condition
was not complied with since the property was donated in July
1981. Moreover, the DECS did not intend to use the property for
school purposes because a school had already been built and
established in another lot located in the same barangay, about two
kilometers away from the subject land. Finally, the trial court
rejected petitioners contention that the donation was inofficious.
Aggrieved, the OSG appealed the decision to the CA.
On July 30, 2004, the appellate court rendered judgment affirming
the decision. The court held that the DECS failed to comply with the
condition in the donation, that is, to use the property for school
purposes. The CA further ruled that the donation was onerous
considering that the donee was burdened with the obligation to
utilize the land for school purposes; therefore, the four-year
prescriptive period under Article 764 of the New Civil Code did not
apply. Moreover, the CA declared that a deed of
donation is considered a written contract and is governed by Article
1144 of the New Civil Code, which provides for a 10-year prescriptive
period from the time the cause of action accrues. According to the
CA, the respondents cause of action for the revocation of the
donation should be reckoned from the expiration of a reasonable
opportunity for the DECS to comply with what was incumbent upon
it.
Petitioners filed a motion for reconsideration, which the CA denied.
Petitioners seek relief from this Court via petition for review
on certiorari, contending that:
I.
THE DEPARTMENT OF EDUCATION, THROUGH
THE RIZAL NATIONAL HIGH SCHOOL, HAD
COMPLIED WITH THE CONDITION IMPOSED IN
THE DEED OF DONATION.
II.
RESPONDENTS RIGHT TO SEEK THE REVOCATION
OF THE DEED OF DONATION, IF THERE BE ANY,
IS ALREADY BARRED BY PRESCRIPTION AND
LACHES.[15]
The Court shall resolve the issues raised by petitioners seriatim.
The donee failed to comply with
the condition imposed in the deed
of donation
The issue of whether or not petitioner DECS was able to comply with
the condition imposed in the deed of donation is one of fact. There is
a question of fact when the doubt or difference arises as to the truth
or falsehood of alleged facts or when the query necessarily solicits
calibration of the whole evidence considering mostly the credibility of
witnesses, existence and relevancy of specific surrounding
circumstances, their relation to each other and to the whole and
probabilities of the situation.[16] Under Rule 45 of the 1997 Rules of
Civil Procedure, only questions of law may be raised in a petition for
review on certiorari, for the simple reason that this Court is not a
trier of facts. It is not for the Court to calibrate the evidence on
record, as this is the function of the trial court.Although there are
well-defined exceptions to the rule, nevertheless, after a review of the
records, we find no justification to depart therefrom. Moreover, the
trial courts findings of facts, as affirmed by the appellate court on
appeal, are binding on this Court, unless the trial and appellate
courts overlooked, misconstrued or misinterpreted facts and
circumstances of substance which, if considered, would change the
outcome of the case. The case has been reviewed thoroughly, and we
find no justification to reverse the CA decision.
Petitioners, through the OSG, maintain that the condition (to use the
property for school purposes) is not limited to the construction of a
school building, but includes utilizing it as a technology and home
economics laboratory where students and teachers plant palay,
mahogany seedlings, and fruit-bearing trees. The OSG insists that
the donee did not specify in the deed that the property should be
used for the construction of a school building. According to the OSG,
the proceeds of the harvest were used and are still being used by
the Rizal National High School for the construction and improvement
of its present school site. Moreover, it was verified that there
was palay planted on the donated property during the ocular
inspection on the property.
In their comment on the petition, respondents dispute petitioners
contentions, and aver that no evidence was presented to prove that,
indeed, palay, mahogany seedlings and fruit-bearing trees were
planted on the property. Respondents also emphasized that when the
trial court inspected the subject property, it was discovered to be
barren and without any improvement although some portions thereof
were planted with palay. Petitioners even failed to adduce evidence to
identify the person who planted the palay.
The contention of petitioners has no merit.
As gleaned from the CA decision, petitioners failed to prove
that the donated property was used for school purposes as indicated
in the deed of donation:
We find it difficult to sustain that the defendant-
appellants have complied with the condition of
donation. It is not amiss to state that other than the
bare allegation of the defendant-appellants, there is
nothing in the records that could concretely prove
that the condition of donation has been complied
with by the defendant-appellants. In the same
breadth, the planting of palay on the land donated
can hardly be considered and could not have been
the school purposes referred to and intended by the
donors when they had donated the land in
question. Also, the posture of the defendant-
appellants that the land donated is being used as
technology and home economics laboratory of the
Rizal National High School is far from being the
truth considering that not only is the said school
located two kilometers away from the land donated
but also there was not even a single classroom built
on the land donated that would reasonably indicate
that, indeed, classes have been conducted
therein. These observations, together with the
unrebutted ocular inspection report made by the
trial court which revealed that the land donated
remains idle and without any improvement thereon
for more than a decade since the time of the
donation, give Us no other alternative but to
conclude that the defendant-appellants have,
indeed, failed to comply with what is incumbent
upon them in the deed of donation.[17]
In its Order[18] dated March 6, 2001, the RTC reiterated that during
the ocular inspection of the property conducted in the presence of
the litigants and their counsel, it observed that the land was barren;
there were no improvements on the donated property though a
portion thereof was planted with palay [and a demolished house
built in 1979.]
Moreover, petitioners failed to adduce a shred of evidence to
prove that the palay found in the property was planted by DECS
personnel or at its instance or even by students of
the Rizal NationalHigh School. No evidence was adduced to prove
that there were existing plans to use the property for school
purposes. Petitioners even debilitated their cause when
they claimed in the trial court that the barangay acquired the
property by purchase, relying on the certification of
former Barangay Captain Jesus San Juan.
The right to seek the revocation of
donation had not yet prescribed
when respondents filed their complaint
Anent the second issue, we reject the contention of the OSG that
respondents cause of action is already barred by prescription under
Article 764 of the New Civil Code, or four years from the non-
compliance with the condition in the deed of donation. Since such
failure to comply with the condition of utilizing the property for
school purposes became manifest sometime in 1988 when the DECS
utilized another property for the construction of the school building,
the four-year prescriptive period did not commence on such
date. Petitioner was given more than enough time to comply with the
condition, and it cannot be allowed to use this fact to its
advantage. It must be stressed that the donation is onerous because
the DECS, as donee, was burdened with the obligation to utilize the
land donated for school purposes. Under Article 733 of the New Civil
Code, a donation with an onerous cause is essentially a contract and
is thus governed by the rules on contract.[19] We fully agree with the
ruling of the appellate court:
 xxx With this, [we] decline to apply the four-year
prescriptive period for the revocation of donation
provided under Article 764 of the New Civil Code and
instead apply the general rules on contracts since
Article 733 of the same Code, specifically provided
that onerous donations shall be governed by the
rules on contracts.
Corollarily, since a deed of donation is considered a
written contract, it is governed by Article 1144 of the
New Civil Code, which provides that the prescriptive
period for an action arising from a written contract is
ten (10) years from the time the cause of action
accrues. In the case of donation, the accrual of the
cause of action is from the expiration of the time
within which the donee must comply with the
conditions or obligations of the donation. In the
instant case, however, it must be noted that the
subject donation fixed no period within which the
donee can comply with the condition of donation. As
such, resort to Article 1197 of
obligation does not determine the period but from its nature and
circumstances it can be inferred that a period was intended, the
general rule cannot be applied because to do so would be a mere
technicality and would serve no other purpose than to delay or lead
to an unnecessary and expensive multiplication of suits.[22]
Altogether, it has been 16 years since the execution of the deed of
donation. Petitioner DECS failed to use the property for the purpose
specified in the deed of donation. The property remained barren and
unutilized. Even after respondents sought the return of the property
before the courts, petitioner DECS still failed to draw up plans to use
the property for school purposes. In fine, petitioner DECS has no use
for the property; hence, the same shall be reverted to the
respondents.
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 78314 dated July 30,
2004 is AFFIRMED.

the New Civil Code is necessary. Said article SO ORDERED.

provides that if the obligation does not fix a period,
but from its nature and the circumstances it can be
inferred that a period was intended, the courts may ROMEO J. CALLEJO, SR.
fix the duration thereof. Indeed, from the nature and Associate Justice
circumstances of the condition of the subject
donation, it can be inferred that a period was
contemplated by the donors. The donors could not
have intended their property to remain idle for a very
long period of time when, in fact, they specifically
obliged the defendant-appellants to utilize the land
donated for school purposes and thus put it in good
use. xxx[20]

In Central Philippine University v. Court of Appeals,[21] a case squarely

in point, we have established that the legal possibility of bringing the
action begins with the expiration of a reasonable opportunity for
the donee to fulfill what has been charged upon it by the
donor. Likewise, we held that even if Article 1197 of the New Civil
Code provides that the courts may fix the duration when the
Civil Law; Obligations; Alternative Obligations; In an alternative
obligation, there is more than one object, and the fulfillment of one is
sufficient, determined by the choice of the debtor who generally has the
right of election.—“In an alternative obligation, there is more than one
object, and the fulfillment of one is sufficient, determined by the choice of
the debtor who generally has the right of election.” The right of election
is extinguished when the party who may exercise that option
categorically and unequivocally makes his or her choice known. The
choice of the debtor must also be communicated to the creditor who must
receive notice of it since: The object of this notice is to give the creditor . .
. opportunity to express his consent, or to impugn the election made by
the debtor, and only after said notice shall the election take legal effect
when consented by the creditor, or if impugned by the latter, when
declared proper by a competent court.
Same; Same; Novation; Novation extinguishes an obligation
between two parties when there is a substitution of objects or debtors or
when there is subrogation of the creditor.—Novation extinguishes an
obligation between two parties when there is a substitution of objects or
debtors or when there is subrogation of the creditor. It occurs only when
the new contract declares so “in unequivocal terms” or that “the old and
the new obligations be on every point incompatible with each other.”
Same; Same; Same; The consent of the creditor must also be secured
for the novation to be valid.—The consent of the creditor must also be
secured for the novation to be valid: Novation must be expressly
consented to. Moreover, the conflicting intention and acts of the parties
underscore the absence of any express disclosure or circumstances with
which to deduce a clear and unequivocal intent by the parties to novate
the old agreement.
Same; Damages; Moral Damages; Moral damages are not awarded
as a matter of right but only after the party claiming it proved that the
breach was due to fraud or bad faith.—Under Article 2220 of the Civil
Code, moral damages may be awarded in case of breach of contract where
the breach is due to fraud or bad faith: Art. 2220. Willfull injury to
property may be a legal ground for awarding moral damages if the court
should find that, under the circumstances, such damages are justly
due. The same rule applies to breaches of contract where the
defendant acted fraudulently or in bad faith. (Emphasis supplied)
Moral damages are not awarded as a matter of right but only after the
party claiming it proved that the breach was due to fraud or bad faith. As
this court stated: Moral damages are not recoverable simply because a
contract has been breached. They are recoverable only if the party from
whom it is claimed acted fraudulently or in bad faith or in wanton
disregard of his contractual obligations. The breach must be wanton,
reckless, malicious or in bad faith, and oppressive or abusive.
Same; Same; Abuse of Rights; Persons who have the right to enter
into contractual relations must exercise that right with honesty and good
faith. Failure to do so results in an abuse of that right, which may become
the basis of an action for damages.—Breaches of contract done in bad
faith, however, are not specified within this enumeration. When a party
breaches a contract, he or she goes against Article 19 of the Civil Code,
which states: Article 19. Every person must, in the exercise of his rights
and in the performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith. Persons who have the right to
enter into contractual relations must exercise that right with honesty
and good faith. Failure to do so results in an abuse of that right, which
may become the basis of an action for damages. Article 19, however,
cannot be its sole basis: Article 19 is the general rule which governs the
conduct of human relations. By itself, it is not the basis of an actionable
tort. Article 19 describes the degree of care required so that an actionable
tort may arise when it is alleged together with Article 20 or Article 21.
Same; Same; Exemplary Damages; Exemplary damages may also be
awarded in this case to serve as a deterrent to those who use fraudulent
means to evade their liabilities.—Business owners must always be
forthright in their dealings. They cannot be allowed to renege on their
obligations, considering that these obligations were freely entered into by
them. Exemplary damages may also be awarded in this case to serve as a
deterrent to those who use fraudulent means to evade their liabilities.
Since the award of exemplary damages is proper, attorney’s fees and cost
of the suit may also be recovered. Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation, attorney’s fees and expenses
of litigation, other than judicial costs, cannot be recovered, except: (1)
When exemplary damages are awarded[.]
Same; Obligations; Liability of Corporate Officers; As a general
rule, directors, officers, or employees of a corporation cannot be held
personally liable for obligations incurred by the corporation.—As a
general rule, directors, officers, or employees of a corporation cannot be
held personally liable for obligations incurred by the corporation.
However, this veil of corporate fiction may be pierced if complainant is
able to prove, as in this case, that (1) the officer is guilty of negligence or
bad faith, and (2) such negligence or bad faith was clearly and
convincingly proven. Here, petitioner Santos entered into a contract with with reasonable certainty. Accordingly, where the demand is established
respondent in her capacity as the President and Chief Executive Officer with reasonable certainty, the interest shall begin to run from the time
of Arco Pulp and Paper. She also issued the check in partial payment of the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but
petitioner corporation’s obligations to respondent on behalf of petitioner when such certainty cannot be so reasonably established at the time the
Arco Pulp and Paper. This is clear on the face of the check bearing the demand is made, the interest shall begin to run only from the date the
account name, “Arco Pulp & Paper, Co., Inc.” Any obligation arising from judgment of the court is made (at which time the quantification of
these acts would not, ordinarily, be petitioner Santos’ personal damages may be deemed to have been reasonably ascertained). The
undertaking for which she would be solidarily liable with petitioner Arco actual base for the computation of legal interest shall, in any case, be on
Pulp and Paper. the amount finally adjudged. 3. When the judgment of the court
awarding a sum of money becomes final and executory, the rate of legal
Same; Same; Rates of Interest; In view of the promulgation by the interest, whether the case falls under paragraph 1 or paragraph 2, above,
Supreme Court of the decision dated August 13, 2013 in Nacar v. Gallery shall be 6% per annum from such finality until its satisfaction, this
Frames, 703 SCRA 439, the rate of interest due on the obligation must be interim period being deemed to be by then an equivalent to a forbearance
modified from 12% per annum to 6% per annum from the time of of credit. And, in addition to the above, judgments that have become final
demand.—In view, however, of the promulgation by this court of the and executory prior to July 1, 2013, shall not be disturbed and shall
decision dated August 13, 2013 in Nacar v. Gallery Frames, 703 SCRA continue to be implemented applying the rate of interest fixed therein.
439, the rate of interest due on the obligation must be modified from
12% per annum to 6% per annum from the time of demand. Nacar
effectively amended the guidelines stated in Eastern Shipping v. Court of
Appeals, 234 SCRA 78 (1994), and we have laid down the following
guidelines with regard to the rate of legal interest: To recapitulate and
for future guidance, the guidelines laid down in the case
of Eastern Shipping Lines are accordingly modified to embody
BSP-MB Circular No. 799, as follows: I. When an obligation,
regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on “Damages” of the Civil Code govern
in determining the measure of recoverable damages. II. With regard
particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows: 1. When the obligation is breached,
and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per
annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code. 2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of
6% per annum. No interest, however, shall be adjudged on unliquidated
claims or damages, except when or until the demand can be established
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 206806 June 25, 2014
ARCO PULP AND PAPER CO., INC. and CANDIDA A.
SANTOS, Petitioners,
vs.
DAN T. LIM, doing business under the name and style of
QUALITY PAPERS & PLASTIC PRODUCTS
ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to
extinguish an obligation. It cannot be presumed and may be implied
only if the old and new contracts are incompatible on every point.
Before us is a petition for review on certiorari1 assailing the Court of
Appeals’ decision2 in CA-G.R. CV No. 95709, which stemmed from a
complaint3 filed in the Regional Trial Court of Valenzuela City,
Branch 171, for collection of sum of money.
The facts are as follows:
Dan T. Lim works in the business of supplying scrap papers,
cartons, and other raw materials, under the name Quality Paper and
Plastic Products, Enterprises, to factories engaged in the paper mill
business.4 From February 2007 to March 2007, he delivered scrap
papers worth 7,220,968.31 to Arco Pulp and Paper Company, Inc.
(Arco Pulp and Paper) through its Chief Executive Officer and
President, Candida A. Santos.5 The parties allegedly agreed that Arco
Pulp and Paper would either pay Dan T. Lim the value of the raw
materials or deliver to him their finished products of equivalent
value.6
Dan T. Lim alleged that when he delivered the raw materials, Arco
Pulp and Paper issued a post-dated check dated April 18, 20077 in
the amount of 1,487,766.68 as partial payment, with the assurance
that the check would not bounce.8 When he deposited the check on
April 18, 2007, it was dishonored for being drawn against a closed
account.9
On the same day, Arco Pulp and Paper and a certain Eric Sy
executed a memorandum of agreement10 where Arco Pulp and Paper
bound themselves to deliver their finished products to Megapack
Container Corporation, owned by Eric Sy, for his account. According
to the memorandum, the raw materials would be supplied by Dan T.
Lim, through his company, Quality Paper and Plastic Products. The
memorandum of agreement reads as follows:
Per meeting held at ARCO, April 18, 2007, it has been mutually
agreed between Mrs. Candida A. Santos and Mr. Eric Sy that ARCO
will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches
at the price of ₱18.50 per kg. to Megapack Container for Mr. Eric
Sy’s account. Schedule of deliveries are as follows:
....
It has been agreed further that the Local OCC materials to be used
for the production of the above Test Liners will be supplied by
Quality Paper & Plastic Products Ent., total of 600 Metric Tons at
₱6.50 per kg. (price subject to change per advance notice). Quantity
of Local OCC delivery will be based on the quantity of Test Liner
delivered to Megapack Container Corp. based on the above
production schedule.11
On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper
demanding payment of the amount of 7,220,968.31, but no payment
was made to him.13
Dan T. Lim filed a complaint14 for collection of sum of money with
prayer for attachment with the Regional Trial Court, Branch 171,
Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its
answer15 but failed to have its representatives attend the pre-trial
hearing. Hence, the trial court allowed Dan T. Lim to present his
evidence ex parte.16
On September 19, 2008, the trial court rendered a judgment in favor
of Arco Pulp and Paper and dismissed the complaint, holding that
when Arco Pulp and Paper and Eric Sy entered into the
memorandum of agreement, novation took place, which extinguished
Arco Pulp and Paper’s obligation to Dan T. Lim.17
Dan T. Lim appealed18 the judgment with the Court of Appeals.
According to him, novation did not take place since the
memorandum of agreement between Arco Pulp and Paper and Eric
Sy was an exclusive and private agreement between them. He argued
that if his name was mentioned in the contract, it was only for
supplying the parties their required scrap papers, where his
conformity through a separate contract was indispensable.19
On January 11, 2013, the Court of Appeals20 rendered a
decision21 reversing and setting aside the judgment dated September
19, 2008 and ordering Arco Pulp and Paper to jointly and severally
pay Dan T. Lim the amount of ₱7,220,968.31 with interest at 12%
per annum from the time of demand; ₱50,000.00 moral damages;
₱50,000.00 exemplary damages; and ₱50,000.00 attorney’s fees.22
The appellate court ruled that the facts and circumstances in this
case clearly showed the existence of an alternative obligation.23 It
also ruled that Dan T. Lim was entitled to damages and attorney’s
fees due to the bad faith exhibited by Arco Pulp and Paper in not
honoring its undertaking.24
Its motion for reconsideration25 having been denied,26 Arco Pulp and
Paper and its President and Chief Executive Officer, Candida A.
Santos, bring this petition for review on certiorari.
On one hand, petitioners argue that the execution of the
memorandum of agreement constituted a novation of the original
obligation since Eric Sy became the new debtor of respondent. They
also argue that there is no legal basis to hold petitioner Candida A.
Santos personally liable for the transaction that petitioner
corporation entered into with respondent. The Court of Appeals, they
allege, also erred in awarding moral and exemplary damages and
attorney’s fees to respondent who did not show proof that he was
entitled to damages.27
Respondent, on the other hand, argues that the Court of Appeals
was correct in ruling that there was no proper novation in this case.
He argues that the Court of Appeals was correct in ordering the
payment of 7,220,968.31 with damages since the debt of petitioners
remains unpaid.28 He also argues that the Court of Appeals was
correct in holding petitioners solidarily liable since petitioner
Candida A. Santos was "the prime mover for such outstanding
corporate liability."29 In their reply, petitioners reiterate that novation
took place since there was nothing in the memorandum of agreement
showing that the obligation was alternative. They also argue that
when respondent allowed them to deliver the finished products to
Eric Sy, the original obligation was novated.30
A rejoinder was submitted by respondent, but it was noted without
action in view of A.M. No. 99-2-04-SC dated November 21, 2000.31
The issues to be resolved by this court are as follows:
1. Whether the obligation between the parties was
extinguished by novation
2. Whether Candida A. Santos was solidarily liable with Arco
Pulp and Paper Co., Inc.
3. Whether moral damages, exemplary damages, and
attorney’s fees can be awarded
The petition is denied.
The obligation between the parties was an alternative obligation
The rule on alternative obligations is governed by Article 1199 of the
Civil Code, which states:
Article 1199. A person alternatively bound by different prestations
shall completely perform one of them.
The creditor cannot be compelled to receive part of one and part of
the other undertaking.
"In an alternative obligation, there is more than one object, and the
fulfillment of one is sufficient, determined by the choice of the debtor
who generally has the right of election."32 The right of election is
extinguished when the party who may exercise that option
categorically and unequivocally makes his or her choice known.33
The choice of the debtor must also be communicated to the creditor
who must receive notice of it since: The object of this notice is to give
the creditor . . . opportunity to express his consent, or to impugn the
election made by the debtor, and only after said notice shall the
election take legal effect when consented by the creditor, or if
impugned by the latter, when declared proper by a competent
court.34
According to the factual findings of the trial court and the appellate
court, the original contract between the parties was for respondent to
deliver scrap papers worth ₱7,220,968.31 to petitioner Arco Pulp
and Paper. The payment for this delivery became petitioner Arco Pulp
and Paper’s obligation. By agreement, petitioner Arco Pulp and
Paper, as the debtor, had the option to either (1) pay the price or(2)
deliver the finished products of equivalent value to respondent.35
The appellate court, therefore, correctly identified the obligation
between the parties as an alternative obligation, whereby petitioner
Arco Pulp and Paper, after receiving the raw materials from
respondent, would either pay him the price of the raw materials or,
in the alternative, deliver to him the finished products of equivalent
value.
When petitioner Arco Pulp and Paper tendered a check to respondent
in partial payment for the scrap papers, they exercised their option
to pay the price. Respondent’s receipt of the check and his
subsequent act of depositing it constituted his notice of petitioner
Arco Pulp and Paper’s option to pay.
This choice was also shown by the terms of the memorandum of
agreement, which was executed on the same day. The memorandum
declared in clear terms that the delivery of petitioner Arco Pulp and
Paper’s finished products would be to a third person, thereby
extinguishing the option to deliver the finished products of
equivalent value to respondent.
The memorandum of agreement did not constitute a novation of
the original contract
The trial court erroneously ruled that the execution of the
memorandum of agreement constituted a novation of the contract
between the parties. When petitioner Arco Pulp and Paper opted
instead to deliver the finished products to a third person, it did not
novate the original obligation between the parties.
The rules on novation are outlined in the Civil Code, thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
(1203)
Article 1292. In order that an obligation may be extinguished by
another which substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other. (1204)
Article 1293. Novation which consists in substituting a new debtor in
the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him the
rights mentioned in Articles 1236 and 1237. (1205a)
Novation extinguishes an obligation between two parties when there
is a substitution of objects or debtors or when there is subrogation of
the creditor. It occurs only when the new contract declares so "in
unequivocal terms" or that "the old and the new obligations be on
every point incompatible with each other."36
Novation was extensively discussed by this court in Garcia v.
Llamas:37
Novation is a mode of extinguishing an obligation by changing its
objects or principal obligations, by substituting a new debtor in place
of the old one, or by subrogating a third person to the rights of the
creditor. Article 1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in
the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the
debtor: (1) expromision and (2) delegacion. In expromision, the
initiative for the change does not come from — and may even be
made without the knowledge of — the debtor, since it consists of a
third person’s assumption of the obligation. As such, it logically
requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third person
who consents to the substitution and assumes the obligation; thus,
the consent of these three persons are necessary. Both modes of
substitution by the debtor require the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when
an old obligation is terminated by the creation of a new one that
takes the place of the former. It is merely modificatory when the old
obligation subsists to the extent that it remains compatible with the
amendatory agreement. Whether extinctive or modificatory, novation
is made either by changing the object or the principal conditions,
referred to as objective or real novation; or by substituting the person
of the debtor or subrogating a third person to the rights of the
creditor, an act known as subjective or personal novation. For
novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible
with the old one on every point. The test of incompatibility is whether
the two obligations can stand together, each one with its own
independent existence.38 (Emphasis supplied)
Because novation requires that it be clear and unequivocal, it is
never presumed, thus:
In the civil law setting, novatio is literally construed as to make new.
So it is deeply rooted in the Roman Law jurisprudence, the principle
— novatio non praesumitur —that novation is never presumed.At
bottom, for novation tobe a jural reality, its animus must be ever
present, debitum pro debito — basically extinguishing the old
obligation for the new one.39 (Emphasis supplied) There is nothing in
the memorandum of agreement that states that with its execution,
the obligation of petitioner Arco Pulp and Paper to respondent would
be extinguished. It also does not state that Eric Sy somehow
substituted petitioner Arco Pulp and Paper as respondent’s debtor. It
merely shows that petitioner Arco Pulp and Paper opted to deliver the
finished products to a third person instead.
The consent of the creditor must also be secured for the novation to
be valid:
Novation must be expressly consented to. Moreover, the conflicting
intention and acts of the parties underscore the absence of any
express disclosure or circumstances with which to deduce a clear
and unequivocal intent by the parties to novate the old
agreement.40 (Emphasis supplied)
In this case, respondent was not privy to the memorandum of
agreement, thus, his conformity to the contract need not be secured.
This is clear from the first line of the memorandum, which states:
Per meeting held at ARCO, April 18, 2007, it has been mutually
agreed between Mrs. Candida A. Santos and Mr. Eric Sy. . . .41
If the memorandum of agreement was intended to novate the original
agreement between the parties, respondent must have first agreed to
the substitution of Eric Sy as his new debtor. The memorandum of
agreement must also state in clear and unequivocal terms that it has
replaced the original obligation of petitioner Arco Pulp and Paper to
respondent. Neither of these circumstances is present in this case.
Petitioner Arco Pulp and Paper’s act of tendering partial payment to
respondent also conflicts with their alleged intent to pass on their
obligation to Eric Sy. When respondent sent his letter of demand to
petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that
the former neither acknowledged nor consented to the latter as his
new debtor. These acts, when taken together, clearly show that
novation did not take place. Since there was no novation, petitioner
Arco Pulp and Paper’s obligation to respondent remains valid and
existing. Petitioner Arco Pulp and Paper, therefore, must still pay
respondent the full amount of ₱7,220,968.31.
Petitioners are liable for damages
Under Article 2220 of the Civil Code, moral damages may be awarded
in case of breach of contract where the breach is due to fraud or bad
faith:
Art. 2220. Willfull injury to property may be a legal ground for
awarding moral damages if the court should find that, under the
circumstances, such damages are justly due. The same rule applies
to breaches of contract where the defendant acted fraudulently or in
bad faith. (Emphasis supplied)
Moral damages are not awarded as a matter of right but only after
the party claiming it proved that the breach was due to fraud or bad
faith. As this court stated:
Moral damages are not recoverable simply because a contract has
been breached. They are recoverable only if the party from whom it is
claimed acted fraudulently or in bad faith or in wanton disregard of
his contractual obligations. The breach must be wanton, reckless,
malicious or in bad faith, and oppressive or abusive.42
Further, the following requisites must be proven for the recovery of
moral damages:
An award of moral damages would require certain conditions to be
met, to wit: (1)first, there must be an injury, whether physical,
mental or psychological, clearly sustained by the claimant; (2)
second, there must be culpable act or omission factually established;
(3) third, the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4)
fourth, the award of damages is predicated on any of the cases stated
in Article 2219 of the Civil Code.43
Here, the injury suffered by respondent is the loss of ₱7,220,968.31
from his business. This has remained unpaid since 2007. This injury
undoubtedly was caused by petitioner Arco Pulp and Paper’s act of
refusing to pay its obligations.
When the obligation became due and demandable, petitioner Arco
Pulp and Paper not only issued an unfunded check but also entered
into a contract with a third person in an effort to evade its liability.
This proves the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code provides that
moral damages may be awarded in the following instances:
Article 2219. Moral damages may be recovered in the following and
analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
 (9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28,
29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not specified
within this enumeration. When a party breaches a contract, he or
she goes against Article 19 of the Civil Code, which states: Article 19.
Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith.
Persons who have the right to enter into contractual relations must
exercise that right with honesty and good faith. Failure to do so
results in an abuse of that right, which may become the basis of an
action for damages. Article 19, however, cannot be its sole basis:
Article 19 is the general rule which governs the conduct of human
relations. By itself, it is not the basis of an actionable tort. Article 19
describes the degree of care required so that an actionable tort may
arise when it is alleged together with Article 20 or Article 21.44
Article 20 and 21 of the Civil Code are as follows:
Article 20. Every person who, contrary to law, wilfully or negligently
causes damage to another, shall indemnify the latter for the same.
Article 21.Any person who wilfully causes loss or injury to another in
a manner that is contrary to morals, good customs or public policy
shall compensate the latter for the damage.
To be actionable, Article 20 requires a violation of law, while Article
21 only concerns with lawful acts that are contrary to morals, good
customs, and public policy:
Article 20 concerns violations of existing law as basis for an injury. It
allows recovery should the act have been willful or negligent. Willful
may refer to the intention to do the act and the desire to achieve the
outcome which is considered by the plaintiff in tort action as
injurious. Negligence may refer to a situation where the act was
consciously done but without intending the result which the plaintiff
considers as injurious.
Article 21, on the other hand, concerns injuries that may be caused
by acts which are not necessarily proscribed by law. This article
requires that the act be willful, that is, that there was an intention to
do the act and a desire to achieve the outcome. In cases under
Article 21, the legal issues revolve around whether such outcome
should be considered a legal injury on the part of the plaintiff or
whether the commission of the act was done in violation of the
standards of care required in Article 19.45
When parties act in bad faith and do not faithfully comply with their
obligations under contract, they run the risk of violating Article 1159
of the Civil Code:
Article 1159. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good
faith.
Article 2219, therefore, is not an exhaustive list of the instances
where moral damages may be recovered since it only specifies,
among others, Article 21. When a party reneges on his or her
obligations arising from contracts in bad faith, the act is not only
contrary to morals, good customs, and public policy; it is also a
violation of Article 1159. Breaches of contract become the basis of
moral damages, not only under Article 2220, but also under Articles
19 and 20 in relation to Article 1159.
Moral damages, however, are not recoverable on the mere breach of
the contract. Article 2220 requires that the breach be done
fraudulently or in bad faith. In Adriano v. Lasala:46
To recover moral damages in an action for breach of contract, the
breach must be palpably wanton, reckless and malicious, in bad
faith, oppressive, or abusive. Hence, the person claiming bad faith
must prove its existence by clear and convincing evidence for the law
always presumes good faith.
Bad faith does not simply connote bad judgment or negligence. It
imports a dishonest purpose or some moral obliquity and conscious
doing of a wrong, a breach of known duty through some motive or
interest or ill will that partakes of the nature of fraud. It is, therefore,
a question of intention, which can be inferred from one’s conduct
and/or contemporaneous statements.47 (Emphasis supplied)
Since a finding of bad faith is generally premised on the intent of the
doer, it requires an examination of the circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in partial
payment of its obligation to respondent, it was presumably with the
knowledge that it was being drawn against a closed account. Worse,
it attempted to shift their obligations to a third person without the
consent of respondent.
Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest
purpose or some moral obliquity and conscious doing of a wrong, a
breach of known duty through some motive or interest or ill will that
partakes of the nature of fraud."48 Moral damages may, therefore, be
awarded.
Exemplary damages may also be awarded. Under the Civil Code,
exemplary damages are due in the following circumstances:
Article 2232. In contracts and quasi-contracts, the court may award
exemplary damages if the defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner.
Article 2233. Exemplary damages cannot be recovered as a matter of
right; the court will decide whether or not they should be
adjudicated.
Article 2234. While the amount of the exemplary damages need not
be proven, the plaintiff must show that he is entitled to moral,
temperate or compensatory damages before the court may consider
the question of whether or not exemplary damages should be
awarded.
In Tankeh v. Development Bank of the Philippines,49 we stated that:
The purpose of exemplary damages is to serve as a deterrent to
future and subsequent parties from the commission of a similar
offense. The case of People v. Ranteciting People v. Dalisay held that:
Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or
corrective damages are intended to serve as a deterrent to serious
wrong doings, and as a vindication of undue sufferings and wanton
invasion of the rights of an injured or a punishment for those guilty
of outrageous conduct. These terms are generally, but not always,
used interchangeably. In common law, there is preference in the use
of exemplary damages when the award is to account for injury to
feelings and for the sense of indignity and humiliation suffered by a
person as a result of an injury that has been maliciously and
wantonly inflicted, the theory being that there should be
compensation for the hurt caused by the highly reprehensible
conduct of the defendant—associated with such circumstances as
willfulness, wantonness, malice, gross negligence or recklessness,
oppression, insult or fraud or gross fraud—that intensifies the
injury. The terms punitive or vindictive damages are often used to
refer to those species of damages that may be awarded against a
person to punish him for his outrageous conduct. In either case,
these damages are intended in good measure to deter the wrongdoer
and others like him from similar conduct in the future.50 (Emphasis
supplied; citations omitted)
The requisites for the award of exemplary damages are as follows:
(1) they may be imposed by way of example in addition to
compensatory damages, and only after the claimant's right to
them has been established;
(2) that they cannot be recovered as a matter of right, their
determination depending upon the amount of compensatory
damages that may be awarded to the claimant; and
(3) the act must be accompanied by bad faith or done in a
wanton, fraudulent, oppressive or malevolent manner.51
Business owners must always be forthright in their dealings. They
cannot be allowed to renege on their obligations, considering that
these obligations were freely entered into by them. Exemplary
damages may also be awarded in this case to serve as a deterrent to
those who use fraudulent means to evade their liabilities.
Since the award of exemplary damages is proper, attorney’s fees and
cost of the suit may also be recovered.
Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation, attorney's fees and
expenses of litigation, other than judicial costs, cannot be recovered,
except:
(1) When exemplary damages are awarded[.]
Petitioner Candida A. Santos is solidarily liable with petitioner
corporation
Petitioners argue that the finding of solidary liability was erroneous
since no evidence was adduced to prove that the transaction was
also a personal undertaking of petitioner Santos. We disagree.
In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated
that:
Basic is the rule in corporation law that a corporation is a juridical
entity which is vested with a legal personality separate and distinct
from those acting for and in its behalf and, in general, from the
people comprising it. Following this principle, obligations incurred by
the corporation, acting through its directors, officers and employees,
are its sole liabilities. A director, officer or employee of a corporation
is generally not held personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be disregarded if it is
used as a means to perpetrate fraud or an illegal act, or as a vehicle
for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues.
....
Before a director or officer of a corporation can be held personally
liable for corporate obligations, however, the following requisites
must concur: (1) the complainant must allege in the complaint that
the director or officer assented to patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad
faith; and (2) the complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith.
While it is true that the determination of the existence of any of the
circumstances that would warrant the piercing of the veil of
corporate fiction is a question of fact which cannot be the subject of
a petition for review on certiorari under Rule 45, this Court can take
cognizance of factual issues if the findings of the lower court are not
supported by the evidence on record or are based on a
misapprehension of facts.53 (Emphasis supplied)
As a general rule, directors, officers, or employees of a corporation
cannot be held personally liable for obligations incurred by the
corporation. However, this veil of corporate fiction may be pierced if
complainant is able to prove, as in this case, that (1) the officer is
guilty of negligence or bad faith, and (2) such negligence or bad faith
was clearly and convincingly proven.
Here, petitioner Santos entered into a contract with respondent in
her capacity as the President and Chief Executive Officer of Arco
Pulp and Paper. She also issued the check in partial payment of
petitioner corporation’s obligations to respondent on behalf of
petitioner Arco Pulp and Paper. This is clear on the face of the check
bearing the account name, "Arco Pulp & Paper, Co., Inc."54 Any
obligation arising from these acts would not, ordinarily, be petitioner
Santos’ personal undertaking for which she would be solidarily liable
with petitioner Arco Pulp and Paper.
We find, however, that the corporate veil must be pierced. In Livesey
v. Binswanger Philippines:55
Piercing the veil of corporate fiction is an equitable doctrine
developed to address situations where the separate corporate
personality of a corporation is abused or used for wrongful purposes.
Under the doctrine, the corporate existence may be disregarded
where the entity is formed or used for non-legitimate purposes, such
as to evade a just and due obligation, or to justify a wrong, to shield
or perpetrate fraud or to carry out similar or inequitable
considerations, other unjustifiable aims or intentions, in which case,
the fiction will be disregarded and the individuals composing it and
the two corporations will be treated as identical.56 (Emphasis
supplied)
According to the Court of Appeals, petitioner Santos was solidarily
liable with petitioner Arco Pulp and Paper, stating that:
In the present case, We find bad faith on the part of the [petitioners]
when they unjustifiably refused to honor their undertaking in favor
of the [respondent]. After the check in the amount of 1,487,766.68
issued by [petitioner] Santos was dishonored for being drawn against
a closed account, [petitioner] corporation denied any privity with
[respondent]. These acts prompted the [respondent] to avail of the
remedies provided by law in order to protect his rights.57
We agree with the Court of Appeals. Petitioner Santos cannot be
allowed to hide behind the corporate veil.1âwphi1 When petitioner
Arco Pulp and Paper’s obligation to respondent became due and
demandable, she not only issued an unfunded check but also
contracted with a third party in an effort to shift petitioner Arco Pulp
and Paper’s liability. She unjustifiably refused to honor petitioner
corporation’s obligations to respondent. These acts clearly amount to
bad faith. In this instance, the corporate veil may be pierced, and
petitioner Santos may be held solidarily liable with petitioner Arco
Pulp and Paper.
The rate of interest due on the obligation must be reduced in
view of Nacar v. Gallery Frames58
In view, however, of the promulgation by this court of the decision
dated August 13, 2013 in Nacar v. Gallery Frames,59 the rate of
interest due on the obligation must be modified from 12% per annum
to 6% per annum from the time of demand.
Nacar effectively amended the guidelines stated in Eastern Shipping
v. Court of Appeals,60 and we have laid down the following guidelines
with regard to the rate of legal interest:
To recapitulate and for future guidance, the guidelines laid down in
the case of Eastern Shipping Linesare accordingly modified to
embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the contravenor
can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of
recoverable damages.
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest
shall be 6% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance
of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages, except when or
until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the
court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2,
above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and
executory prior to July 1, 2013, shall not be disturbed and shall
continue to be implemented applying the rate of interest fixed
therein.61 (Emphasis supplied; citations omitted.)
According to these guidelines, the interest due on the obligation of
₱7,220,968.31 should now be at 6% per annum, computed from May
5, 2007, when respondent sent his letter of demand to petitioners.
This interest shall continue to be due from the finality of this
decision until its full satisfaction.

WHEREFORE, the petition is DENIED in part. The decision in CA-

G.R. CV No. 95709 is AFFIRMED.

Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are
hereby ordered solidarily to pay respondent Dan T. Lim the amount
of ₱7,220,968.31 with interest of 6% per annum at the time of
demand until finality of judgment and its full satisfaction, with moral
damages in the amount of ₱50,000.00, exemplary damages in the
amount of ₱50,000.00, and attorney's fees in the amount of
₱50,000.00.

SO ORDERED.

MARVIC MARIO VICTOR F. LEONEN

Associate Justice
 Mercantile Law; Negotiable Instruments Law; Promissory Notes;
Words and Phrases; A promissory note (PN) is a solemn acknowledgment
of a debt and a formal commitment to repay it on the date and under the
conditions agreed upon by the borrower and the lender.—“A promissory
note is a solemn acknowledgment of a debt and a formal commitment to
repay it on the date and under the conditions agreed upon by the
borrower and the lender. A person who signs such an instrument is
bound to honor it as a legitimate obligation duly assumed by him
through the signature he affixes thereto as a token of his good faith. If he
reneges on his promise without cause, he forfeits the sympathy and
assistance of this Court and deserves instead its sharp repudiation.”
Civil Law; Obligations; Solidary Obligations; Where there is a
concurrence of two (2) or more creditors or of two or more debtors in one
(1) and the same obligation, Article 1207 provides that among them,
“[t]here is a solidary liability only when the obligation expressly so states,
or when the law or the nature of the obligation requires solidarity.”—
According to Article 2047 of the Civil Code, if a person binds himself
solidarily with the principal debtor, the provisions of Articles 1207 to
1222 of the Civil Code (Section 4, Chapter 3, Title I, Book IV) on joint
and solidary obligations shall be observed. Thus, where there is a
concurrence of two or more creditors or of two or more debtors in one and
the same obligation, Article 1207 provides that among them, “[t]here is a
solidary liability only when the obligation expressly so states, or when
the law or the nature of the obligation requires solidarity.” It is settled
that when the obligor or obligors undertake to be “jointly and severally”
liable, it means that the obligation is solidary. In this case, the spouses
Sinamban expressly bound themselves to be jointly and severally, or
solidarily, liable with the principal makers of the PNs, the spouses
Manalastas.
Same; Same; Same; Article 1216 of the Civil Code provides that
[t]he creditor may proceed against any one (1) of the solidary debtors or
some or all of them simultaneously.—Article 1216 of the Civil Code
provides that “[t]he creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made against
one of them shall not be an obstacle to those which may subsequently be
directed against the others, so long as the debt has not been fully
collected.” Article 1252 of the Civil Code does not apply, as urged by the
petitioners, because in the said article the situation contemplated is that
of a debtor with several debts due, whereas the reverse is true, with each
solidary debt imputable to several debtors.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 193890 March 11, 2015
ESTANISLAO and AFRICA SINAMBAN, Petitioners,
vs.
CHINA BANKING CORPORATION, Respondent.
DECISION
REYES, J.:
Before this Court is a Petition for Review on Certiorari1 of the
Decision2 dated May 19, 2010 of the Court of Appeals (CA) in CA-
G.R. CV. No. 66274 modifying the Decision3 dated July 30, 1999 of
the Regional Trial Court (RTC) of San Fernando City, Pampanga,
Branch 45 for Sum of Money in Civil Case No. 11708.
Factual Antecedents
On February 19, 1990, the spouses Danilo and Magdalena
Manalastas (spouses Manalastas) executed a Real Estate Mortgage
(REM)4 in favor of respondent China Banking Corporation
(Chinabank) over two real estate properties covered by Transfer
Certificate of Title Nos. 173532-R and 173533-R, Registry of Deeds of
Pampanga, to secure a loan from Chinabank of ₱700,000.00
intended as working capital in their rice milling business. During the
next few years, they executed several amendments to the mortgage
contract progressively increasing their credit line secured by the
aforesaid mortgage. Thus, from ₱700,000.00 in 1990, their loan limit
was increased to ₱1,140,000.00 on October 31, 1990, then to
₱1,300,000.00 on March 4, 1991, and then to2,450,000.00 on
March 23, 1994.5 The spouses Manalastas executed several
promissory notes (PNs) in favor of Chinabank. In two of the PNs,
petitioners Estanislao and Africa Sinamban (spouses Sinamban)
signed as co-makers.
On November 18, 1998, Chinabank filed a Complaint6 for sum of (c) PN No. CLF 5-93 has an outstanding principal of
money, docketed as Civil Case No. 11708, against the spouses ₱148,255.08, cumulative interest of ₱64,461.84, and
Manalastas and the spouses Sinamban (collectively called the cumulative penalties of ₱156,541.58, or a total amount due
defendants) before the RTC. The complaint alleged that they reneged of ₱369,258.50. Note that from the original amount of
on their loan obligations under the PNs which the spouses ₱1,300,000.00, the loan principal had been reduced to only
Manalastas executed in favor of Chinabank on different dates, ₱148,255.08 as of May 18, 1998.12
namely:
CHINA BANKING CORPORATION
1. PN No. OACL 634-95, dated April 24, 1995, for a loan San Fernando, Pampanga
principal of ₱1,800,000.00, with interest at 23% per annum; SPS. DANILO & MAGDALENA MANALASTAS
the spouses Manalastas signed alone as makers.7 STATEMENT OF ACCOUNT
As of May 18, 1998
2. PN No. OACL 636-95, dated May 23, 1995, for a loan
principal of 325,000.00, with interest at 21% per annum; the 36%
spouses Sinamban signed as solidary co-makers;8 PN NUMBER PRINCIPAL INTEREST PENALTY FEE TOTAL

3. PN No. CLF 5-93, dated February 26, 1991, for a loan

principal of ₱1,300,000.00, with interest at 22.5% per OACL 636-95 325,000.00 184,679.00 258,050.00 767,729.00
annum; only Estanislao Sinamban signed as solidary co-
maker.9 OACL 634-95 1,800,000.00 1,035,787.50 1,429,200.00 4,264,987.50

All of the three promissory notes carried an acceleration clause

CLF 005-93 148,255.08 64,461.84 156,541.58 369,258.50
stating that if the borrowers failed to pay any stipulated interest, ----------------------- ----------------------- ------------------- ------------------
installment or loan amortization as they accrued, the notes shall, at ---- -----
the option of Chinabank and without need of notice, immediately
become due and demandable. A penalty clause also provides that an
additional amount shall be paid equivalent to 1/10 of 1% per day of TOTAL P2,273,255.08 1,284,928.34 1,843,791.58 5,401,975.00
the total amount due from date of default until fully paid, and the
further sum of 10% of the total amount due, inclusive of interests, TOTAL AMOUNT DUE 5,401,975.00
charges and penalties, as and for attorney’s fees and costs.10
PLUS 10% ATTORNEY’S FEE 540,197.50
In Chinabank’s Statement of Account11 dated May 18, 1998, ------------------
reproduced below, the outstanding balances of the three loans are -----
broken down, as follows: 5,942,172.50

(a) PN No. OACL 636-95 has an outstanding principal of ADD: OTHER EXPENSES
₱325,000.00, cumulative interest of ₱184,679.00, and
cumulative penalties of ₱258,050.00, or a total amount due INSURANCE PREMIUM 22,618.37
of ₱767,729.00; (b) PN No. OACL 634-95 has an outstanding
principal of ₱1,800,000.00, cumulative interest of
₱1,035,787.50, and cumulative penalties of 1,429,200.00, or POSTING OF NOTICE OF SALE 700.00
a total amount due of 4,264,987.50; and
 PUBLICATION FEE 17,500.00 On the basis of the above statement of account, and
pursuant to the promissory notes, Chinabank instituted
extrajudicial foreclosure proceedings against the mortgage
REGISTRATION OF CERTIFICATE OF SALE (MISC.) 1,000.00
security. The foreclosure sale was held on May 18, 1998,
with Chinabank offering the highest bid of ₱4,600,000.00,
REGISTRATION OF CERTIFICATE OF SALE (REGISTER OF DEEDS) but by then the defendants’ total obligations on the three
promissory notes had risen to ₱5,401,975.00, before
Registration fee 10,923.00
attorney’s fees of 10% and auction expenses, leaving a loan
deficiency of ₱1,758,427.87.14 Thus, in the complaint before
the RTC, Chinabank prayed to direct the defendants to
Entry fee 30.00 jointly and severally settle the said deficiency, plus 12%
interest per annum after May 18, 1998,15 the date of the
Legal fund 20.00 auction sale.16

BIR certification 60.00 The spouses Sinamban, in their Answer17 dated February
26, 1999, averred that they do not recall having executed PN
No. OACL 636-95 for ₱325,000.00 on May 23, 1995, or PN
Doc. stamps tax 69,000.00 No. CLF 5-93 for ₱1,300,000.00 on February 26, 1991, and
had no participation in the execution of PN No. OACL 634-95
Capital Gains tax 276,000.00 356,033.00 for ₱1,800,000.00 on April 24, 1995. They however admitted
------------------ that they signed some PN forms as co-makers upon the
----- request of the spouses Manalastas who are their relatives;
although they insisted that they derived no money or other
EXPENSES INCURRED ON OCULAR INSPECTION MADE 404.00 benefits from the loans. They denied knowing about the
ON mortgage security provided by the spouses Manalastas, or
TCT#173532-R & TCT#173533-R that the latter defaulted on their loans. They also refused to
acknowledge the loan deficiency of ₱1,758,427.87 on the
PNs, insisting that the mortgage collateral was worth more
ATTORNEY’S FEE 18,000.00
than ₱10,000,000.00, enough to answer for all the loans,
interests and penalties. They also claimed that they were not
notified of the auction sale, and denied that they knew about
416,255.37 the Certificate of Sale18 and the Statement of Account dated
May 18, 1998, and insisted that Chinabank manipulated the
foreclosure sale to exclude them therefrom. By way of
LESS: BID PRICE 4,600,000.00
counterclaim, the Spouses Sinamban prayed for damages
----------
-
and attorney’s fees of 25%, plus litigation expenses and costs
of suit.

GRAND TOTAL - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,758,427.87 13

------ The spouses Manalastas were declared in default in the RTC

Order19 dated April 6, 1999, and Chinabank was allowed to
present evidence ex parte as against them, but at the pre-
trial conference held on July 5, 1999, the spouses Sinamban
and their counsel also did not appear;20 hence, in the
Order21 dated July 5, 1999, the RTC allowed Chinabank to
present evidence ex parte against the defendants before the
Branch Clerk of Court. During the testimony of Rosario D.
Yabut, Branch Manager of Chinabank-San Fernando
Branch, all the foregoing facts were adduced and confirmed,
particularly the identity of the pertinent loan documents and
the signatures of the defendants. On July 21, 1999, the
court admitted the exhibits of Chinabank and declared the
case submitted for decision.22
Ruling of the RTC
On July 30, 1999, the RTC rendered its Decision23 with the
following dispositive portion: WHEREFORE, premises
considered, judgment is hereby rendered in favor of plaintiff
China Banking Corporation and against defendant Sps.
Danilo and Magdalena Manalastas and defendant Sps.
Estanislao and Africa Sinamban to jointly and severally pay
[Chinabank] the amount of ₱1,758,427.87, representing the
deficiency between the acquisition cost of the foreclosed real
estate properties and the outstanding obligation of
defendants at the time of the foreclosure sale; interest at the
legal rate of 12% per annum from and after May 18, 1998;
attorney’s fees equivalent to 10% of the aforesaid deficiency
amount and the litigation and costs of suit.
SO ORDERED.24
On Motion for Reconsideration25 of the spouses Sinamban
dated August 27, 1999, to which Chinabank filed an
Opposition26 dated September 14, 1999, the RTC in its
Order27 dated October 22, 1999 set aside the Decision dated
July 30, 1999 with respect to the spouses Sinamban, in this
wise:
As it is undisputed that Exhibit "B" (Promissory Note dated
April 24, 1995 in the amount of ₱1,800,000.00), was not
signed by the Spouses Sinamban it would not be equitable
that the said defendants be made solidarily liable for the
payment of the said note as co-makers of their co-defendants
Spouses Manalastas who are the one[s] principally liable
thereto. Prescinding from this premise, the movant spouses
could only be held liable for the two (2) promissory notes
they have signed, Promissory Notes dated May 23, 1995 in
the amount of ₱325,000.00 and February 26, 1991 in the
amount of ₱1,300,000.00, Exhibits "A" and "C", respectively.
As the total amount of the said notes is only ₱1,625,000.00,
so even if we would add the interests due thereon, there is
no way that the said outstanding loan exceed[s] the
acquisition cost of the foreclosed real estate properties
subject hereof in the amount of ₱4,600,000.00.It would
appear then that the Spouses Sinamban could not be held
liable for the deficiency in the amount of ₱1,758,427.87
which should justly be borne alone by the defendant
Spouses Manalastas. Guided by law and equity on the
matter, the court will not hesitate to amend a portion of its
assailed decision to serve the interest of justice.
WHEREFORE, premises considered, the decision dated July
30, 1999 is hereby Reconsidered and Set Aside with respect
to the Spouses Estanislao and Africa Sinamban hereby
Relieving them from any liability arising from the said
Decision which is affirmed in toto with respect to Spouses
Manalastas.
SO ORDERED.28 (Emphases ours)
The RTC ruled that the proceeds of the auction were
sufficient to answer for the two PNs co-signed by the spouses
Sinamban, including interest and penalties thereon, and
therefore the spouses Manalastas should solely assume the
deficiency of ₱1,758,427.87. Chinabank moved for
reconsideration on November 11, 1999,29 to which the
spouses Sinamban filed their comment/opposition on
November 23, 1999.30
On December 8, 1999, the RTC set aside its Order dated
October 22, 1999 and reinstated its Decision dated July 30,
1999, with modification, as follows:31
WHEREFORE, premises considered, the instant Motion for
Reconsideration of plaintiff is Granted.
Order dated October 22, 1999 is hereby Set Aside.
Accordingly, the dispositive portion of the Decision dated
July 30, 1999 is hereby Modified to read as follows:
WHEREFORE, premises considered, judgment [is] hereby
rendered in favor of plaintiff China Banking Corporation and
against the defendant Sps. Danilo and Magdalena
Manalastas and defendant Sps. Estanislao and Africa
Sinamban, ordering them to pay as follows:
1. For defendant Sps. Danilo and Magdalena
Manalastas, the amount of ₱1,758,427.87, the
deficiency between the acquisition cost of the
foreclosed real properties and their outstanding
obligation;
2. For defendant Sps. Sinamban a percentage of
₱1,758,427.87, jointly and severally with the
defendant Sps. [Manalastas] only on two (2)
promissory notes;
3. The corresponding interests thereon at legal rate;
4. Attorney’s fees; and
5. Costs of suit.
SO ORDERED.32
This time the RTC held that the spouses Sinamban must,
solidarily with the spouses Manalastas, proportionately
answer for the loan deficiency pertaining to the two PNs they
co-signed, since the mortgage security provided by the
spouses Manalastas secured all three PNs and thus also
benefited them as co-makers. But since they did not co-sign
PN No. OACL 634-95, the deficiency judgment pertaining
thereto will be the sole liability of the spouses Manalastas.
Ruling of the CA
From the Order dated December 8, 1999 of the RTC, the
spouses Sinamban appealed to the CA on January 4, 2000,
docketed as CA-G.R. CV. No. 66274, interposing the
following errors of the RTC, viz:
I
THE LOWER COURT ERRED WHENIT HELD
DEFENDANTSAPPELLANTS SPS. SINAMBAN LIABLE TO
PAY A PERCENTAGE OF ₱1,758,427.87, JOINTLY AND
SEVERALLY WITH THE DEFENDANTS SPS. MANALASTAS
ON THE TWO PROMISSORY NOTES (EXHIBITS ‘C’ AND ‘A’).
II
THE LOWER COURT ERRED WHEN IT RECONSIDERED
AND SET ASIDE ITS PREVIOUS ORDER DATED 22
OCTOBER 1999 RELIEVING DEFENDANTS-APPELLANTS
SPS. SINAMBAN FROM ANY LIABILITY ARISING FROM THE
DECISION DATED 30 JULY 1999.
III
THE LOWER COURT ERRED WHEN IT RENDERED THE
VAGUE ORDER OF 8 DECEMBER 1999 (ANNEX ‘B’
HEREOF).33
On May 19, 2010, the CA rendered judgment denying the
appeal, the fallo of which reads: WHEREFORE, considering
the foregoing disquisition, the appeal is DENIED. The
Decision dated 30 July 1999 and the Order dated 08
December 1999 of the Regional Trial Court of San Fernando,
Pampanga, Branch 45 in Civil Case No. 11708are hereby
AFFIRMED with MODIFICATION in that:
1. Sps. Danilo and Magdalena Manalastas are
solidarily liable for the deficiency amount of
Php507,741.62 (inclusive of 10% attorney’s fees) on
Promissory Note No. OACL 634-95 dated 24 April
1995;
2. Sps. Estanislao and Africa Sinamban are
solidarily liable with Sps. Danilo and Magdalena
 Manalastas for the amount of Php844,501.90
(inclusive of 10% attorney’s fees) on Promissory Note
No. OACL00636-95 dated 23 May 1995;
3. Estanislao Sinamban and Sps. Danilo and
Magdalena Manalastas are solidarily liable for the
amount of Php406,184.35 (inclusive of 10%
attorney’s fees) on Promissory Note No. CLF 5-93
dated 26 February 1991; and
4. The foregoing amounts shall bear interest at the
rate of 12% per annum from 18 November 1998
until fully paid.
SO ORDERED.34 (Some emphasis ours)
Petition for Review to the Supreme Court
In this petition for review, the spouses Sinamban seek to be
completely relieved of any liability on the PNs, solidary or
otherwise, by interposing the following issues:
5.1 Whether or not the Honorable Court of Appeals
erred in not considering that the Sps. Sinamban’s
obligations under PN# OACL 636-95 dated May 23,
1995 in the principal sum of Php325,000.00 and
PN# CLF 5-93 dated February 26, 1991 in the
principal sum of Php1,300,000.00 are more onerous
and burdensome on their part as mere sureties (co-
makers) of their co-defendants-spouses Danilo and
Magdalena Manalastas’ (hereinafter referred to as
the "Sps. Manalastas") obligations over the same,
compared to the Sps. Manalastas’ sole obligation
under PN# OACL 634-95 dated 24 April 1995 in the
principal amount of Php1,800,000.00, such that the
proceeds of the auction sale of the properties
securing all the three (3) promissory notes should
first be applied to satisfy the promissory notes
signed by the Sps. Sinamban; and
5.2 Whether or not the Honorable Court of Appeals
erred in not considering the facts indubitably
showing that it is the Sps. Sinamban, as the
debtors, and not the respondent bank, who are given
the choice under Article 1252 of the Civil Code to
have the proceeds of the auction sale applied as
payments to their obligations under PN# OACL 636-
95 dated 23 May 1995 and PN# CLF 5-93 dated 26
February 1991.35
Ruling of the Court
The Court modifies the CA decision.
A co-maker of a PN who binds
himself with the maker "jointly and
severally" renders himself directly
and primarily liable with the maker
on the debt, without reference to his
solvency.
"A promissory note is a solemn acknowledgment of a debt
and a formal commitment to repay it on the date and under
the conditions agreed upon by the borrower and the lender.
A person who signs such an instrument is bound to honor it
as a legitimate obligation duly assumed by him through the
signature he affixes thereto as a token of his good faith. If he
reneges on his promise without cause, he forfeits the
sympathy and assistance of this Court and deserves instead
its sharp repudiation."36
Employing words of common commercial usage and well-
accepted legal significance, the three subject PNs uniformly
describe the solidary nature and extent of the obligation
assumed by each of the defendants in Civil Case No. 11708,
to wit:
"FOR VALUE RECEIVED, I/We jointly and severally promise
to pay to the CHINA BANKING CORPORATION or its order
the sum of PESOS x x x[.]"37 (Emphasis ours)
According to Article 2047 of the Civil Code,38 if a person
binds himself solidarily with the principal debtor, the
provisions of Articles 1207 to 1222 of the Civil Code (Section
4, Chapter 3,Title I, Book IV) on joint and solidary
obligations shall be observed. Thus, where there is a
concurrence of two or more creditors or of two or more
debtors in one and the same obligation, Article 1207
provides that among them, "[t]here is a solidary liability only
when the obligation expressly so states, or when the law or
the nature of the obligation requires solidarity." It is settled
that when the obligor or obligors undertake to be "jointly and
severally" liable, it means that the obligation is solidary. 39 In
this case, the spouses Sinamban expressly bound
themselves to be jointly and severally, or solidarily, liable
with the principal makers of the PNs, the spouses
Manalastas.
Moreover, as the CA pointed out, in Paragraph 5 of the PNs,
the borrowers and their co-makers expressly authorized
Chinabank, as follows:
[T]o apply to the payment of this note and/or any other
particular obligation or obligations of all or any one of us to
the CHINA BANKING CORPORATION as the said Corporation
may select, irrespective of the dates of maturity, whether or
not said obligations are then due, any or all moneys,
securities and things of value which are now or which may
hereafter be in its hands on deposit or otherwise to the credit
of, or belonging to, all or any one of us, and the CHINA
BANKING CORPORATION is hereby authorized to sell at
public or private sale such securities or things of value for
the purpose of applying their proceeds to such payments.40
Pursuant to Article 1216 of the Civil Code, as well as
Paragraph 5 of the PNs, Chinabank opted to proceed
against the co-debtors simultaneously, as implied in its
May 18, 1998 statement of account when it applied the
entire amount of its auction bid to the aggregate amount
of the loan obligations.
The PNs were executed to acknowledge each loan obtained
from the credit line extended by Chinabank, which the
principal makers and true beneficiaries, the spouses
Manalastas, secured with a REM they executed over their
properties. As the RTC noted in its Order dated December 8,
1999, "the real estate mortgage was constituted to secure all
the three (3) promissory notes," concluding that "[j]ust as the
liability of the [spouses] Sinamban was lessened by the
foreclosure proceedings, so must they also share in the
deficiency judgment, in proportion to the PNs they co-signed
with the [spouses] Manalastas, but notthe entire deficiency
judgment of ₱1,758,427.87."41
Significantly, in modifying the RTC’s second amended
decision, which provides for the pro rata distribution of the
loan deficiency of ₱1,758,427.87, the CA first applied the
entire net proceeds of the auction sale of ₱4,183,744.63
(after auction expenses of ₱416,255.37), to PN No. OACL
634-95, which on May 18, 1998 had an outstanding balance
of ₱4,264,987.50, inclusive of interest and penalties, plus
10% attorney’s fees, or a total of ₱4,691,486.25. Thus,
₱4,691,486.25 less ₱4,183,744.63 leaves a deficiency on PN
No. OACL 634-95 of ₱507,741.62, which is due solely from
the spouses Manalastas.
As for PN No. OACL 636-95, the CA ordered the spouses
Sinamban to pay, solidarily with the spouses Manalastas,
the entire amount due thereon, ₱844,501.90, consisting of
the loan principal of ₱767,729.00 plus accrued interest,
penalties and 10% attorney’s fees; concerning PN No. CLF 5-
93, the CA ordered the spouses Sinamban to pay, solidarily
with the spouses Manalastas, the amount of ₱406,184.35,
consisting of the balance of the loan principal of
₱369,258.50 plus accrued interest, penalties and 10%
attorney’s fees. The CA further ordered the payment of 12%
interest per annum from November 18, 1998, the date of
judicial demand, until fully paid, on the above deficiencies.
Article 1216 of the Civil Code provides that "[t]he creditor
may proceed against any one of the solidary debtors or some
or all of them simultaneously. The demand made against one
of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the
debt has not been fully collected." Article 1252 42 of the Civil
Code does not apply, as urged by the petitioners, because in
the said article the situation contemplated is that of a debtor
with several debts due, whereas the reverse is true, with
each solidary debt imputable to several debtors.
While the CA correctly noted that the choice is given to the
solidary creditor to determine against whom he wishes to
enforce payment, the CA stated that Chinabank, in the
exercise of the aforesaid option, chose to apply the net
proceeds of the extrajudicial foreclosure sale first to the PN
solely signed by spouses Manalastas.43 Thus, the net
proceeds were applied first to PN No. OACL 634-95 in the
principal amount of ₱1,800,000.00, instead of pro rata to all
three PNs due.
The Court finds this factual conclusion of the CA not
supported by any evidence or any previous
arrangement.1âwphi1 To the contrary, as clearly shown in
its Statement of Account dated May 18, 1998, Chinabank
opted to apply the entire auction proceeds to the aggregate
amount of the three PNs due, ₱5,401,975.00 (before
attorney’s fees and auction expenses). Had it chosen to
enforce the debts as ruled by the CA, the Statement of
Account would have shown that the loan due on PN No.
OACL 634-95 which is ₱4,691,486.25, should have been
deducted first from the net auction proceeds of
₱4,183,744.63, arriving at a deficiency of ₱507,741.62on PN
No. OACL 634-95 alone; thereby, leaving no remainder of the
proceeds available to partially settle the other two PNs. As it
appears, the auction proceeds are not even sufficient to
cover just PN No. OACL 634-95 alone.
But as the Court has noted, by deducting the auction
proceeds from the aggregate amount of the three loans due,
Chinabank in effect opted to apply the entire proceeds of the
auction simultaneously to all the three loans. This implies
that each PN will assume a pro rata portion of the resulting
deficiency on the total indebtedness as bears upon each PN’s
outstanding balance. Contrary to the spouses Sinamban’s
insistence, none of the three PNs is more onerous than the
others to justify applying the proceeds according to Article
1254 of the Civil Code, in relation to Articles 1252 and
1253.44 Since each loan, represented by each PN, was
obtained under a single credit line extended by Chinabank
for the working capital requirements of the spouses
Manalastas’ rice milling business, which credit line was
secured also by a single REM over their properties, then each
PN is simultaneously covered by the same mortgage security,
the foreclosure of which will also benefit them
proportionately. No PN enjoys any priority or preference in
payment over the others, with the only difference being that
the spouses Sinamban are solidarily liable for the deficiency
on two of them.
Pursuant, then, to the order or manner of application of the
auction proceeds chosen by Chinabank, the solidary liability
of the defendants pertaining to each PN shall be as follows:
a) PN No. OACL 634-95, with a balance as of May
18, 1998 of ₱4,264,987.50: its share in the total
deficiency is computed as the ratio of ₱4,264,987.50
to ₱5,401,975.00, multiplied by ₱1,758,427.87, or
₱1,388,320.55, (not ₱507,741.62 as found by the
CA);
b) PN No. OACL 636-95, with a balance of
₱767,729.00 as of May 18, 1998: its share in the
deficiency is computed as the ratio of ₱767,729.00
to ₱5,401,975.00, multiplied by ₱1,758,427.87, or
₱249,907.87, (not ₱844,501.90 as computed by the
CA);
c) PN No. CLF 5-93, with an outstanding balance of
₱369,258.50 as of May 18, 1998: its share in the
deficiency is computed as the ratio of ₱369,258.50
to ₱5,401,975.00, multiplied by ₱1,758,427.87, or
₱120,199.45, (not ₱406,184.35 as found by the CA).
In short, in the CA decision, the spouses Manalastas would
be solely liable on PN No. OACL 634-95 for only
₱507,741.62(instead of the much bigger amount of
₱1,388,320.55which this Court found), whereas the spouses
Sinamban would be solidarily liable with the spouses
Manalastas for a total deficiency of ₱1,250,686.25 on PN No.
OACL 636-95 and PN No. CLF 5-93. But under the Court’s
interpretation, the spouses Sinamban are solidarily liable
with the spouses Manalastas for only ₱370,107.32on the
said two PNs, for a significant difference of ₱880,578.93.
Pursuant to Monetary Board Circular No. 799, effective 3. Estanislao Sinamban and spouses Danilo and
July 1, 2013, the rate of interest for the loan or Magdalena Manalastas are solidarily liable for the
forbearance of any money, goods or credits and the rate deficiency amount of ₱120,199.45 (inclusive of 10%
allowed in judgments, in the absence of an express attorney’s fees) on Promissory Note No. CLF 5-93
contract as to such rate of interest, has been reduced to dated February 26, 1991; and
six percent (6%) per annum.
4. The foregoing amounts shall bear interest at the
The subject three PNs bear interests ranging from 21% to rate of twelve percent (12%) per annum from
23% per annum, exclusive of penalty of 1% on the overdue November 18, 1998 to June 30, 2013, and six
amount per month of delay, whereas in its complaint, percent (6%) per annum from July 1, 2013 until
Chinabank prayed to recover only the legal rate of 12% on fully paid.
whatever judgment it could obtain. Meanwhile, the Monetary
Board of the Bangko Sentral ng Pilipinas in its Resolution SO ORDERED.
No. 796 dated May 16, 2013, and now embodied in Monetary
Board Circular No. 799, has effective July 1, 2013 reduced
to 6%, from 12%, the legal rate of interest for the loan or BIENVENIDO L. REYES
forbearance of any money, goods or credits and the rate Associate Justice
allowed in judgments, in the absence of stipulation.45 Since
Chinabank demanded only the legal, not the stipulated,
interest rate on the deficiency and attorney’s fees due, the
defendants will solidarily pay interest on their shares in the
deficiency at the rate of 12% from November 18, 1998 to
June 30, 2013, and 6% from July 1, 2013 until fully paid.
WHEREFORE, the Decision of the Court of Appeals dated
May 19, 2010 in CA-G.R. CV No. 66274 is MODIFIED. The
Decision dated July 30, 1999 and the Order dated December
8, 1999 of the Regional Trial Court of San Fernando City,
Pampanga, Branch 45 in Civil Case No. 11708 are hereby
AFFIRMED with MODIFICATIONS as follows:

1. Spouses Danilo and Magdalena Manalastas are

solidarily liable for the deficiency amount of
1,388,320.55 (inclusive of 10% attorney’s fees) on
Promissory Note No. OACL 634-95 dated April 24,
1995;

2. Spouses Estanislao and Africa Sinamban are

solidarily liable with spouses Danilo and Magdalena
Manalastas for the deficiency amount of
₱249,907.87(inclusive of 10% attorney’s fees) on
Promissory Note No. OACL 636-95 dated May 23,
1995;
 Civil Law; Agency; The principal is liable for damages caused by the Republic of the Philippines
negligent act of the agent.—With regard to the delivery of the petroleum, Villaruz Supreme Court
was acting as the agent of petitioner Petron. For a fee, he delivered the petroleum Manila
products on its behalf. Notably, petitioner even imposed a penalty clause in SECOND DIVISION
instances when there was a violation of the hauling contract, wherein it may
impose a penalty ranging from a written warning to the termination of the
contract. Therefore, as far as the dealer was concerned with regard to the terms ofPETRON CORPORATION, G.R. No. 151038
the dealership contract, acts of Villaruz and his employees are also acts of Petitioner,
petitioner. Both the RTC and the CA held that Villaruz failed to rebut the
Present:
presumption that the employer was negligent in the supervision of an employee
- versus -
who caused damages to another; and, thus, petitioner should likewise be held
CARPIO, J.,
accountable for the negligence of Villaruz and Igdanis.
Chairperson,
Spouses Cesar Jovero and Erma F. PEREZ,
Same; Same; The liability of the principal and the agent to third persons is
Cudilla, Spouses Lonito Tan and SERENO,
joint and solidary.—To reiterate, petitioner, the dealer Rubin Uy—acting throughLuzvilla Samson, and Spouses REYES, and
his agent, Dortina Uy—shared the responsibility for the maintenance of theRogelio Limpoco and Lucia Josue,
PERLAS-BERNABE, JJ.
equipment used in the gasoline station and for making sure that the unloadingbeing represented by Pio Josue,
and the storage of highly flammable products were without incident. As both wereRespondents. Promulgated:
equally negligent in those aspects, petitioner cannot pursue a claim against the
dealer for the incident. Therefore, both are solidarily liable to respondents for January 18, 2012
damages caused by the fire.

Same; Actual Damages; Interest Rates; The benchmark for the computation ofx - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
interest rate on the amount of actual damages is from the moment judgment- - - - x
becomes final and executory.—In the interest of substantial justice, we deem it Decision
necessary to impose legal interest on the awarded actual damages at the rate ofSERENO, J.:
6% per annum from the time the cases were filed with the lower court; and 12%The present case is a Petition for Review1 under Rule 45 filed by
from the time the judgment herein becomes
petitioner Petron Corporation. Petitioner assails the Decision2 of the
Court of Appeals (CA), which affirmed the Decision of the Regional
Trial Court (RTC) of Iloilo City in consolidated Civil Case Nos. 19633,
19684, 20122, respectively filed by herein respondents.
The facts of the case are as follows:

On 25 April 1984, Rubin Uy entered into a Contract of Lease

with Cesar J. Jovero over a property located at E. Reyes Ave.,
Estancia, Iloilo for the purpose of operating a gasoline station for a
period of five (5) years.
 On 30 April 1984, petitioner, a domestic corporation engaged
in the importation and distribution of gasoline and other petroleum
products, entered into a Retail Dealer Contract3 with Rubin Uy for
the period 1 May 1984 to 30 April 1989. Under the dealership
contract, petitioner sold its products in quantities as ordered by the
dealer. It likewise obligated itself to deliver the products to the dealer
at the places agreed upon by the parties. The dealer, meanwhile,
obligated himself to exclusively maintain petitioner’s trademarks and
brand names in his gasoline station. The parties also agreed that the
dealer shall make good, settle and pay, and hold petitioner harmless
against all losses and claims including those of the parties, their
agents and employees – for death, personal injury or property
damage arising out of any use or condition of the dealer’s premises
or the equipment and facilities thereon, regardless of any defects
therein; the dealer’s non-performance of the contract; or the storage
and handling of products on the premises.
In order to comply with its obligation to deliver the petroleum
products to the dealer, petitioner contracted the hauling services of
Jose Villaruz, who did business under the name Gale Freight
Services. The hauling contract4 was executed in March 1988 for a
period of three years, renewable for another three upon agreement of
the parties.
Under the hauling contract, Villaruz specifically assigned
three (3) units of tank trucks exclusively for the hauling
requirements of petitioner for the delivery of the latter’s products,
namely tank trucks with the plate numbers FVG 605, FVG 581 and
FVG 583. Delivery “includes not only transportation but also proper
loading and unloading and delivery.”5 The parties also agreed that
Villaruz shall save petitioner from any and all claims of third persons
arising out of, but not necessarily limited to, his performance of the
terms and conditions of the contract. Furthermore, Villaruz obligated
himself to be answerable to petitioner for damage to its plant,
equipment and facilities, including those of its employees, dealers
and customers, resulting from his negligence and/or lack of
diligence.
Meanwhile, on 27 October 1988, Rubin Uy executed a
Special Power of Attorney (SPA) in favor of Chiong Uy authorizing the
latter to manage and administer the gasoline station. Chiong Uy and
his wife, Dortina M. Uy, operated the gasoline station as agents of
Rubin Uy. However, on 27 November 1990, Chiong Uy left for Hong
Kong, leaving Dortina Uy to manage the gasoline station.
On 3 January 1991, around ten o’clock in the morning,
Ronnie Allanaraiz, an employee of the gasoline station, ordered from
petitioner various petroleum products. Petitioner then requested the
services of Villaruz for the delivery of the products to the gasoline
station in Estancia, Iloilo. He, however, used a tank truck different
from the trucks specifically enumerated in the hauling contract
executed with petitioner. Petitioner nevertheless allowed the
transport and delivery of its products to Estancia in the tank truck
driven by Pepito Igdanis.
During the unloading of the petroleum from the tank truck
into the fill pipe that led to the gasoline station’s underground tank,
for reasons unknown, a fire started in the fill pipe and spread to the
rubber hose connected to the tank truck. During this time, driver
Pepito Igdanis was nowhere to be found. Bystanders then tried to put
out the flames. It was then that Igdanis returned to the gasoline
station with a bag of dried fish in hand. Seeing the fire, he got into
the truck without detaching the rubber hose from the fill pipe and
drove in reverse, dragging the burning fuel hose along the way. As a
result, a conflagration started and consumed the nearby properties
of herein defendants, spouses Cesar J. Jovero and Erma Cudilla-
Jovero, amounting to P1,500,000; of spouses Leonito Tan and
Luzvilla Samson, amounting to P800,000; and of spouses Rogelio
Limpoco and Lucia Josue Limpoco, amounting to P4,112,000.
 Herein respondents thereafter filed separate actions for
damages against petitioner, Villaruz, Rubin Uy, and Dortina Uy,
docketed as Civil Case Nos. 19633, 19684 and 20122 at the Regional
Trial Court (RTC) of Iloilo City. The cases, having arisen from the
same set of facts, were subsequently consolidated. Respondents
alleged that the negligence of petitioner and its co-defendants in the
conduct of their businesses caused the fire that destroyed the
former’s properties.
In its separate Answer, petitioner Petron alleged that the
petroleum products were already paid for and owned by Rubin Uy
and Dortina Uy. Moreover, it alleged that Villaruz was responsible for
the safe delivery of the products by virtue of the hauling contract.
Thus, petitioner asserted, liability for the damages caused by the fire
rested on Rubin Uy and Villaruz. Petitioner likewise filed a cross-
claim against its co-defendants for contribution, indemnity,
subrogation, or other reliefs for all expenses and damages that it may
have suffered by virtue of the incident. It also filed a counterclaim
against respondents herein.
On 27 April 1998, after trial on the merits, the RTC rendered
its Decision in favor of respondents and found petitioner and its co-
defendants solidarily liable for damages. The dispositive portion of
the Decision states:
WHEREFORE, in view of the foregoing,
DECISION is hereby rendered:
1. Declaring defendants Petron Corporation, Jose
Villaruz, Pepito Igdanis, Rubin Uy and Dortina Uy as
being negligent in the conduct of their business
activities, which led to the conflagration of January
3, 1991 at E. Reyes Avenue, Estancia, Iloilo, which
resulted to (sic) the damages suffered by all the
plaintiffs;
2. Ordering all the aforenamed defendants to pay
solidarily all the plaintiffs as follows:
1. In Civil Case No. 19633, plaintiffs-spouses Cesar J.
Jovero and Erma Cudilla-Jovero the amount
of P1,500,00.00 as actual damages; P2,000.00 as
litigation expenses; P4,000.00 as attorney’s fees, and
to pay the costs;
2. In Civil Case No. 19684, to pay plaintiffs-spouses
Leonito Tan and Luzvilla Samson the sum
of P800,000.00 as actual damages, P2,000.00 as
litigation expenses; P4,000.00 as attorney’s fees and
to pay the costs;
3. In Civil Case No. 20122, to pay the plaintiffs-spouses
Rogelio C. Limpoco and Lucia Josue Limpoco the
amount of P4,112,000.00 as actual
damages; P2,000.00 as litigation
expenses; P5,000.00 as attorney’s fees, and to pay
the costs.
The counter-claims of the defendants
against all the plaintiffs are hereby dismissed.
The cross-claims of the defendants against
each other are likewise dismissed as they are all in
“pari delicto”.
SO ORDERED.6
The RTC held that Igdanis, as the driver of the tank truck,
was negligent in the performance of his work when he left
the tank truck while it was in the process of unloading the
petroleum. He was also negligent when he drove the truck in
reverse without detaching the burning fuel hose. The trial
court stated that defendant Villaruz failed to convince the
court that he had exercised due diligence in the hiring and
supervision of his employees.
The RTC likewise held that petitioner was negligent in
allowing Villaruz to use a tank truck that was not included among
the trucks specifically enumerated under the hauling contract.
Finally, the court ruled that the gasoline station was owned
and operated by Rubin Uy and Dortina Uy at the time of the incident.
 Petitioner and co-defendants Dortina Uy and Rubin Uy
thereafter filed their separate Notices of Appeal.
Petitioner, in its appeal, insisted that it had already sold and
transferred ownership of its petroleum products to the dealer, Rubin
Uy, upon payment and receipt of these products at its depot. Thus, it
asserted, it ceased to own the products even during transit and while
being unloaded at the gasoline station. It also stated that the
transportation, delivery, receipt and storage of the petroleum
products were solely the responsibility of hauler Villaruz, who was
neither an employee nor an agent of petitioner. It reiterated that
liability rested on Rubin Uy and Villaruz pursuant to the respective
contracts it had executed with them.
Petitioner also alleged that the RTC erred in ruling that the
former was negligent in allowing the use of a tank truck not specified
in the hauling contract. Petitioner thus insisted that it had examined
the tank truck and found it to be in good condition. It added that,
since the fire did not originate from the tank truck, the proximate
cause of the fire was not attributable to any defect in the truck.
Finally, petitioner alleged that respondents failed to prove
that the damages they suffered were the direct result of any culpable
act or omission on its part.
Meanwhile, defendant Villaruz allegedly proved during trial
that he had exercised diligence in the selection and supervision of
his employees and, thus, he was not responsible for the damages
caused by the fire. In addition, he alleged that Igdanis, whom
respondents failed to implead as a defendant in the lower court, did
not have a chance to defend himself. Since there was no showing
that any act or omission of Igdanis was the proximate cause of the
fire, Villaruz insisted that the latter himself could not be held liable
for the acts of his employee, who was not even impleaded or proven
to be negligent.
Dortina Uy, in her appeal, alleged that she had no direct
participation in the management or administration of the gasoline
station. She also alleged that she was not the employer of Igdanis,
the driver of the tank truck who had caused the fire to spread in the
vicinity.
Since defendant Rubin Uy failed to file his Appellant’s Brief
within the reglementary period, the CA dismissed his appeal.7
Respondents, meanwhile, maintained that petitioner Petron
was negligent in selling and storing its products in a gasoline station
without an existing dealer’s contract from May 1989 up to the time of
the incident on 3 January 1991. They contended that petitioner, in
effect, was itself operating the gasoline station, with the dealer as
mere agent of the former. Respondents also insisted that petitioner
had the obligation to ensure that the gasoline station was safe and
properly maintained, considering the products stored and sold there.
Likewise, they asserted that petitioner was responsible for the safe
delivery and proper storage of its goods in the gasoline station, and
that this responsibility would cease only when the goods had been
sold to the end consumer.
Additionally, respondents contended that petitioner Petron
was also negligent when the latter allowed the use of an unaccredited
truck in violation of its hauling contract with Villaruz.
On 12 December 2001, the CA promulgated its Decision
affirming that of the trial court, to wit:
WHEREFORE, premises considered, the
instant appeals are DISMISSED and the assailed
consolidated Decision of the court a quo dated 27
April 1998 in Civil Case Nos. 19633, 19684 and
20122 is AFFIRMED in all respects. Costs against
appellants.
SO ORDERED.8
 The appellate court upheld the findings of the RTC that
petitioner Petron was negligent for having allowed the operation of
the gasoline station absent a valid dealership contract. Thus, the CA
considered the gasoline station as one run by petitioner itself, and
the persons managing the gasoline station as petitioner’s mere
agents. Even if a valid dealership contract existed, petitioner was still
liable for damages, because there was as yet no complete delivery of
its products. The fire had broken out while petroleum was being
unloaded from the tank truck to the storage tank.
The CA further held that petitioner was also negligent in
allowing Villaruz to use an unaccredited tank truck for the transport
and delivery of the petroleum at the time of the incident.
With regard to the liability of Villaruz, the appellate court
found him to be negligent in the conduct of his business. Thus, he
was made liable for the damages caused by his employee in
accordance with Article 2180 in relation to Article 2176 of the Civil
Code.
Finally, with regard to Dortina Uy, the CA held that, as one
of the operators of the gasoline station, she failed to submit evidence
that she had exercised due diligence in the operation thereof.
Dissatisfied with the CA’s ruling, petitioner is now before us
with the present Petition for Review.
Petitioner presents the following issues for the resolution of
this Court:
1. Whether or not Petron may be considered at fault for
continuing to do business with Rubin Uy, an independent
petroleum dealer, without renewing or extending their
expired dealership agreement;
2. Whether or not a causal connection exists between Petron’s
failure to renew or extend its dealership contract with Rubin
Uy and the fire that inflicted damages on the buildings
surrounding the latter’s gas station;
3. Whether or not Petron is liable for the fire that occurred
during the unloading by an independent hauler of the fuel it
sold to an equally independent dealer at the latter’s gas
station; and
4. Whether or not a supplier of fuel can be held liable for the
neglect of others in distributing and storing such fuel. 9
In the present case, petitioner does not implead its co-
defendants Villaruz, Rubin Uy and Dortina Uy. Neither does it assail
the dismissal by the lower courts of the cross-claim or counterclaim
it filed against its co-defendants and herein respondents,
respectively. Nor is there any question on respondents’ right to claim
damages. Petitioner merely prays for absolution from liability
resulting from the fire by claiming that it had no direct participation
in the incident.
In support of the issues raised above, petitioner contends
that, first, there was an implied renewal of the dealership contract –
Rubin Uy remained as the operator of the gasoline station. It further
contends that there is no law supporting the conclusion of the CA
that, upon expiration of the contract, the dealer automatically
became the supplier’s agent.
Second, petitioner asserts that there was no rational link
between its alleged neglect in renewing the dealership agreement and
the act that caused the fire.
Third, petitioner insists that ownership of the petroleum
products was transferred when the dealer’s representative, Ronnie
Allanaraiz, went to petitioner’s oil depot, bought and paid for the
gasoline, and had Villaruz’s tank truck receive the products for
delivery.
 Moreover, petitioner points out, neither Igdanis nor Villaruz
was its employee and, thus, it cannot be held vicariously liable for
the damages to respondents caused by Igdanis. Furthermore, it
asserted that the tank truck transporting the petroleum – though not
included in the enumeration in the hauling contract – had complied
with the standards required of Villaruz.
Petitioner also alleges that there was no evidence that the
fire was attributable to its distribution and storage safety measures.
Finally, petitioner states that both hauler and dealer must
bear the costs of their acts and those of their employees, considering
that this was an explicit provision in their respective contracts with
it.
The Petition has some merit.
We first discuss the liability of petitioner in relation to the
dealership contract.
Petitioner, as an importer and a distributer of gasoline and
other petroleum product, executed with a dealer of these products an
exclusive dealership agreement for mutual benefit and gain. On one
hand, petitioner benefits from the sale of its products, as well as the
advertisement it gains when it broadens its geographical coverage in
contracting with independent dealers in different areas. The products
sold and the services rendered by the dealer also contribute to its
goodwill. Thus, despite the transfer of ownership upon the sale and
delivery of its products, petitioner still imposes the obligation on the
dealer to exclusively carry its products.
The dealer also benefits from the dealership agreement, not
only from the resale of the products of petitioner, but also from the
latter’s goodwill.
However, with the use of its trade name and trademark,
petitioner and the dealer inform and guarantee to the public that the
products and services are of a particular standard or quality. More
importantly, the public, which is not privy to the dealership contract,
assumes that the gasoline station is owned or operated by petitioner.
Thus, respondents, who suffered damages from the act or omission
that occurred in the gasoline station and that caused the fire, may
file an action against petitioner based on the representations it made
to the public. As far as the public is concerned, it is enough that the
establishment carries exclusively the name and products of
petitioner to assume that the latter is liable for acts done within the
premises.
Second, respondents have a claim against petitioner based
on the dealership agreement.
The RTC and the CA ruled that, by virtue of the expiration of
the dealership contract, the dealer was relegated to being petitioner’s
agent. On this point, we agree with petitioner that the expiration or
nonexistence of a dealership contract did not ipso facto transform the
relationship of the dealer and petitioner into one of agency. As far as
the parties to the dealership contract were concerned, the rights and
obligations as to them still subsisted, since they continued to
mutually benefit from the agreement. Thus, neither party can claim
that it is no longer bound by the terms of the contract and the
expiration thereof.
We then judiciously reviewed the terms of the contract and
found that petitioner is liable to respondents for the damages caused
by the fire.
As petitioner itself points out, it owns the equipment relevant
to the handling and storage of gasoline, including the gasoline
pumps and the underground tank.10 It is also responsible for the
delivery of the petroleum to the dealer. The incident occurred at the
time the petroleum was being unloaded to the underground tank
petitioner owned. Aside from failing to show the actual cause of the
fire, it also failed to rebut the presumption that it was negligent in
the maintenance of its properties and in the conduct of its business.
Petitioner contends that under paragraph 8 of the dealership
contract, the dealer’s liability is as follows:
LOSSES AND CLAIMS. BUYER shall make
good, settle and pay, and hold SELLER harmless
against all losses and claims (including those of the
parties, their agents and employees) for death,
personal injury or property arising out of (1) any use
or condition of BUYER’s premises or the equipment
and facilities thereon, regardless of any defects
therein (2) BUYER’s non-performance of this
contract, or (3) the storage and handling of products
on the premises.
While both parties to the contract have the right to provide a
clause for non-liability, petitioner admits that they both
share the maintenance of its equipment. Petitioner states
that its responsibility extended to “the operating condition of
the gasoline station, e.g. whether the fuel pumps were
functioning properly.”11
Moreover, it cannot be denied that petitioner likewise
obligated itself to deliver the products to the dealer. When
the incident occurred, petitioner, through Gale Freight
Services, was still in the process of fulfilling its obligation to
the dealer. We disagree with its contention that delivery was
perfected upon payment of the goods at its depot. There was
yet no complete delivery of the goods as evidenced by the
aforementioned hauling contract petitioner executed with
Villaruz. That contract made it clear that delivery would only
be perfected upon the complete unloading of the gasoline.
Thus, with regard to the delivery of the petroleum, Villaruz was
acting as the agent of petitioner Petron. For a fee, he delivered the
petroleum products on its behalf. Notably, petitioner even imposed a
penalty clause in instances when there was a violation of the hauling
contract, wherein it may impose a penalty ranging from a written
warning to the termination of the contract. Therefore, as far as the
dealer was concerned with regard to the terms of the dealership
contract, acts of Villaruz and his employees are also acts of
petitioner. Both the RTC and the CA held that Villaruz failed to rebut
the presumption that the employer was negligent in the supervision
of an employee who caused damages to another; and, thus,
petitioner should likewise be held accountable for the negligence of
Villaruz and Igdanis.
To reiterate, petitioner, the dealer Rubin Uy – acting through
his agent, Dortina Uy – shared the responsibility for the maintenance
of the equipment used in the gasoline station and for making sure
that the unloading and the storage of highly flammable products
were without incident. As both were equally negligent in those
aspects, petitioner cannot pursue a claim against the dealer for the
incident. Therefore, both are solidarily liable to respondents for
damages caused by the fire.
Petitioner was likewise negligent in allowing a tank truck
different from that specifically provided under its hauling contract
with Villaruz. The enumeration and specification of particular tank
trucks in the contract serve a purpose – to ensure the safe
transportation, storage and delivery of highly flammable products.
Under the hauling contract, these requirements are as follows:12
1. Duly registered under the hired
truck (TH) classification and subject
to the rules and regulations of Land
Transportation Commission (LTC)
and Board of Transportation (BOT).
2. Properly sealed and calibrated in
accordance with the requirements of
NSTA.
3. Equipped with safety and other
auxiliary equipment as specified by
 PETROPHIL (Petron) as per attached allegations. This, petitioner failed to do. To reiterate, it was not able
Annex “8”.13
to prove the proximate cause of the fire, only the involvement of the
4. Provided with fire permits and other
permits required by the government tank truck and the underground storage tank. Notably, both pieces
authorities. of equipment were under its responsibility. Absent any positive
5. In good working condition and in determination of the cause of the fire, a presumption exists that
good appearance at all times,
6. Fully complying with the tank truck there was something wrong with the truck or the underground
color scheme, standard truck storage tank, or both. Petitioner, which had the obligation to ensure
number, bumper stripes, hauler’s that the truck was safe, is likewise liable for the operation of that
name on cab door, and such other
truck.
similar requirements for good
appearance as may be required by
PETROPHIL. Petitioner maintains that by virtue of the hauling contract,
Annex “B” attached to the contract, which refers to the tank Villaruz must be held responsible for the acts of Igdanis, the driver of
truck safety and accessories equipment, likewise provides that the the tank truck. In this aspect, petitioner is correct. While it may be
following are the specified safety equipment and other accessories for vicariously liable to third persons for damages caused by Villaruz,
tank truck operations:14 the latter is nevertheless liable to petitioner by virtue of the non-
liability clause in the hauling contract. Under this provision, he
1. Fire extinguisher, Type B & C saved petitioner from any and all claims of third persons arising out
2. Manhole covers
3. Manhole cover gasket of, but not necessarily limited to, his performance of the terms and
4. Product level markers conditions of this agreement. Petitioner even obligated him to
5. Manhole cover pins maintain an acceptable Merchandise Floater Policy to provide
6. NIST Calibration and scale
insurance coverage for the products entrusted to him; and a
7. Discharge valves (quick closing)
8. Front Fenders Comprehensive General Liability Insurance to cover any and all
9. Door glasses claims for damages for personal injury, including death or damages
10. ________ (illegible) glasses to property, which may arise from operations under the contract.15
11. Windshield
12. Wipers Thus, Villaruz is also liable to petitioner based on the
13. Horn hauling contract. Under Rule 6, Sec. 8 of the Rules of Court,
14. Floor matting petitioner may enforce the terms of the hauling contract against him.
15. Ceiling
However, considering that it did not implead Villaruz in the present
16. Seats
17. (Illegible) case, nor did it assail the Decision of the CA in dismissing the cross-
18. Air hose connector claim, petitioner can no longer go after him based on that cross-
claim.
With respect to the claims of third persons, it is not enough Nonetheless, this is not the same as saying that Villaruz is
for petitioner to allege that the tank truck met the same no longer solidarily liable to respondents.
requirements provided under the contract; it must duly prove its
 As the employer of Igdanis, Villaruz was impleaded by herein
respondents in the lower court and was found to be solidarily liable
with his other co-defendants. Absent an appeal before this Court
assailing the ruling of the lower court and the CA, Villaruz remains
to be solidarily liable with petitioner and co-defendants Rubin Uy
and Dortina Uy. Thus, petitioner may only claim contribution from
him in accordance with Article 1217 of the Civil Code, and not by
virtue of its hauling contract, in the event that respondents decide to
proceed against petitioner alone for the satisfaction of judgment. Art.
1217 states:
Payment made by one of the solidary debtors
extinguishes the obligation. If two or more solidary
debtors offer to pay, the creditor may choose which
offer to accept.
He who made the payment may claim
from his co-debtors only the share which
corresponds to each, with the interest for the
payment already made. If the payment is made
before the debt is due, no interest for the intervening
period may be demanded. (Emphasis supplied)
The share, meanwhile, of solidary debtors is contained in
Art. 1208, to wit:
If from the law, or the nature of the wording
of the obligations to which the preceding article
refers the contrary does not appear, the credit of
debt shall be presumed to be divided into as
many equal shares as there are creditors or
debtors, the credits or debts being considered
distinct from one another, subject to the Rules of
Court governing the multiplicity of
suits. (Emphasis supplied)
To put it simply, based on the ruling of the lower courts,
there are four (4) persons who are liable to pay damages to
respondents. The latter may proceed against any one of the solidary
debtors or some or all of them simultaneously, pursuant to Article
1216 of the Civil Code. These solidary debtors are petitioner Petron,
the hauler Villaruz, the operator Dortina Uy and the dealer Rubin
Uy. To determine the liability of each defendant to one another, the
amount of damages shall be divided by four, representing the share
of each defendant. Supposedly, under the hauling contract,
petitioner may require Villaruz to indemnify it for its share. However,
because it was not able to maintain the cross-claim filed against him,
it shall be liable for its own share under Article 1208 and can no
longer seek indemnification or subrogation from him under its
dismissed cross-claim. Petitioner may not pursue its cross-claim
against Rubin Uy and Dortina Uy, because the cross-claims against
them were also dismissed; moreover, they were all equally liable for
the conflagration as discussed herein.
Finally, the incident occurred in 1992. Almost 20 years have
passed; yet, respondents, who were innocent bystanders, have not
been compensated for the loss of their homes, properties and
livelihood. Notably, neither the RTC nor the CA imposed legal interest
on the actual damages that it awarded respondents. In Eastern
Shipping Lines v. Court of Appeals,16 enunciated in PCI Leasing &
Finance Inc. v. Trojan Metal Industries, Inc.,17 we laid down the rules
for the imposition of legal interest as follows:
I. When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII
on “Damages” of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest
in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it
consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the
interest due should be that which may have
been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest In the interest of substantial justice, we deem it necessary to
from the time it is judicially demanded. In
impose legal interest on the awarded actual damages at the rate of
the absence of stipulation, the rate of
interest shall be 12% per annum to be 6% per annum from the time the cases were filed with the lower
computed from default, i.e., from judicial or court; and 12% from the time the judgment herein becomes final and
extrajudicial demand under and subject to executory up to the satisfaction of such judgment.
the provisions of Article 1169 of the Civil
Code. WHEREFORE, in view of the foregoing, we AFFIRM the
Decision of the Court of Appeals in Civil Case No. 60845 insofar as
2. When an obligation, not constituting a herein petitioner has been held solidarily liable to pay damages to
loan or forbearance of money, is breached,
respondents. The CA Decision is, however, MODIFIED and the
an interest on the amount of damages
awarded may be imposed at the discretion of actual damages awarded to respondents shall be subject to the rate
the court at the rate of 6% per annum. No of legal interest of 6% per annum from the time of filing of Civil Case
interest, however, shall be adjudged on Nos. 19633, 19684 and 20122 with the Regional Trial Court of Iloilo
unliquidated claims or damages except
when or until the demand can be City up to the time this judgment becomes final and executory.
established with reasonable certainty. Henceforth, the rate of legal interest shall be 12% until the
Accordingly, where the demand is satisfaction of judgment.
established with reasonable certainty, the
interest shall begin to run from the time the
claim is made judicially or extrajudicially Costs against petitioner.
(Art. 1169, Civil Code) but when such SO ORDERED.
certainty cannot be so reasonably
established at the time the demand is made,
the interest shall begin to run only from the
date the judgment of the court is made (at
which time the quantification of damages
may be deemed to have been reasonably
ascertained). The actual base for the
computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court
awarding a sum of money becomes final and
executory, the rate of legal interest, whether
the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per
annum from such finality until its
satisfaction, this interim period being
deemed to be by then an equivalent to a
forbearance of credit.
Obligations and Contracts; Suretyship; Although the contract of a surety SECOND DIVISION
is in essence secondary only to a valid principal obligation, the surety
becomes liable for the debt or duty of another although it possesses no
direct or personal interest over the obligations nor does it receive any
benefit therefrom.—As provided in Article 2047, the surety undertakes to
ASSET BUILDERS G.R. No. 187116
be bound solidarily with the principal obligor. That undertaking makes a
CORPORATION,
surety agreement an ancillary contract as it presupposes the existence of
Petitioner, Present:
a principal contract. Although the contract of a surety is in essence
secondary only to a valid principal obligation, the surety becomes liable
CARPIO, J., Chairperson,
for the debt or duty of another although it possesses no direct or personal
NACHURA,
interest over the obligations nor does it receive any benefit therefrom.
LEONARDO-DE CASTRO,*
Let it be stressed that notwithstanding the fact that the surety contract - versus - PERALTA, and
is secondary to the principal obligation, the surety assumes liability as a MENDOZA, JJ.
regular party to the undertaking.

Same; Same; Suretyship, in essence, contains two types of

relationship—the principal relationship between the obligee and the STRONGHOLD INSURANCE
obligor, and the accessory surety relationship between the principal and COMPANY, INCORPORATED,
the surety.—Suretyship, in essence, contains two types of relationship— Respondent. Promulgated:
the principal relationship between the obligee (petitioner) and the October 18, 2010
obligor (Lucky Star), and the accessory surety relationship between the
principal (Lucky Star) and the surety (respondent). In this arrangement,
X ----------------------------------------------------------------------------------
the obligee accepts the surety’s solidary undertaking to pay if the obligor
----X
does not pay. Such acceptance, however, does not change in any material
way the obligee’s relationship with the principal obligor. Neither does it
make the surety an active party to the principal obligee-obligor DECISION
relationship. Thus, the acceptance does not give the surety the right to
intervene in the principal contract. The surety’s role arises only upon the
obligor’s default, at which time, it can be directly held liable by the
obligee for payment as a solidary obligor. MENDOZA, J.:

This petition for review on certiorari under Rule 45 of the 1997 Rules
of Civil Procedure assails the February 27, 2009 Decision[1] of the
Regional Trial Court, Pasig City, Branch 71 (RTC), in Civil Case No.
71034, ordering defendant Lucky Star to pay petitioner Asset
Builders Corporation the sum of P575,000.00 with damages, but
absolving respondent Stronghold Insurance Company, Incorporated
(Stronghold) of any liability on its Surety Bond and Performance
Bond.
THE FACTS That we, LUCKY STAR DRILLING &
CONSTRUCTION CORP., 168 ACACIA St., Octagon
On April 28, 2006, Asset Builders Corporation (ABC) entered into an Industrial Estate Subd., Pasig City as principal, and
agreement with Lucky Star Drilling & Construction STRONGHOLD INSURANCE COMPANY, INC., a
corporation duly organized and existing under and
Corporation (Lucky Star) as part of the completion of its project to
by virtue of laws of the Philippines, as surety, are
construct the ACG Commercial Complex on NHA held and firmly bound unto ASSET BUILDERS
Avenue corner Olalia Street, Barangay Dela Paz, Antipolo City.[2] As CORPORATION to the sum of Pesos FIVE HUNDRED
can be gleaned from the Purchase Order,[3] Lucky Star was to supply SEVENTY FIVE THOUSAND ONLY (P575,000.00)
labor, materials, tools, and equipment including technical Philippine Currency, for the payment of which, well
supervision to drill one (1) exploratory production well on the project and truly to be made, we bind ourselves, our heirs,
site. The total contract price for the said project executors, administrators, successors and assigns,
was P1,150,000.00. The salient terms and conditions of said jointly and severally, firmly by these presents.
agreement are as follows:
i. Lump sum price--------PHP1,150,000.00; THE CONDITIONS OF THIS OBLIGATION
ARE AS FOLLOWS:
ii. 50% downpayment---upon submission of
surety bond in an equivalent amount and To fully and faithfully guarantee
performance bond equivalent to 30 % of contract the repayment to be done through
amount; deductions from periodic billings of the
advance payment made or to be made by
iii. Completion date-----60 calendar days; the Obligee to the Principal in connection
with the supply of labor, materials, tools
iv. Penalty----2/10 of 1% of total contract amount and equipment including technical
for every day of delay; supervision to drill one (1) exploratory
production well located at NIA Ave. cor.
v. Terms---50% down payment to be released Olalia St., Brgy. dela
after submission of bonds; Paz, Antipolo City. This bond is callable on
demand.
vi. RetentionSubject to 10% retention to be
released after the project is accepted by the The liability of the surety company
owner; upon determination under this bond shall
in no case exceed the penal sum of
PESOS: FIVE HUNDRED SEVENTY FIVE
To guarantee faithful compliance with their agreement,
THOUSAND (P575,000.00) only, Philippine
Lucky Star engaged respondent Stronghold which issued two (2)
Currency.
bonds in favor of petitioner. The first, SURETY BOND G(16) No.
141558, dated May 9, 2006, covers the sum of P575,000.00[4] or the WHEREAS, the Obligee requires said
required downpayment for the drilling work. The full text of the principal to give a good and sufficient bond in the
surety bond is herein quoted: above stated sum to secure the full and faithful
performance on his part of said undertakings.

KNOW ALL MEN BY THESE PRESENTS:

 NOW, THEREFORE, if the above bounden
principal shall in all respects duly and fully observe
and perform all and singular the aforesaid [co]-
venants, conditions and agreements to the true
intent and meaning thereof, then this obligation
shall be null and void, otherwise to remain in full
force and effect.
Liability of surety on this bond will expire
on May 09, 2007 and said bond will be cancelled five
DAYS after its expiration, unless surety is notified of
and existing obligations hereunder.
x x x[5]
With respect to the second contract, PERFORMANCE BOND
G(13) No. 115388, dated May 09, 2006, it covers the sum
of P345,000.00.[6] Thus:
KNOW ALL MEN BY THESE PRESENTS:
That we, LUCKY STAR DRILLING & CONSTRUCTION
of 168 Acacia St., Octagon Indl., contractor, of
Estate, Sub., Pasig City Philippines, as principal and
the STRONGHOLD INSURANCE COMPANY, INC. a
corporation duly organized and existing under and
by virtue of the laws of the Philippines, with head
office at Makati, as Surety, are held and firmly
bound unto the ASSET BUILDERS CORPORATION
and to any individual, firm, partnership, corporation
or association supplying the principal with labor or
materials in the penal sum of THREE HUNDRED
FORTY FIVE THOUSAND ONLY (P345,000.00),
Philippine Currency, for the payment of which sum,
well and truly to be made, we bind ourselves, our
heirs, executors, administrators, successors and
assigns, jointly and severally, firmly by these
presents.
The CONDITIONS OF THIS OBLIGATION
are as follows;
WHEREAS the above bounden principal on the ___
day of __________, 19__ entered into a contract with
the ASSET BUILDERS CORPORATION represented
by _________________, to fully and faithfully.
Comply with the supply of labor, materials,
tools and equipment including technical
supervision to drill one (1) exploratory
production well located at NIA
Ave. cor. Olalia St., Brgy. Dela
Paz, Antipolo City. This bond is callable on
demand.
WHEREAS, the liability of the Surety Company
under this bond shall in no case exceed the sum of
PESOS THREE HUNDRED FORTY FIVE THOUSAND
ONLY (P345,000.00) Philippine Currency, inclusive
of interest, attorneys fee, and other damages, and
shall not be liable for any advances of the obligee to
the principal.
WHEREAS, said contract requires the said principal
to give a good and sufficient bond in the above-
stated sum to secure the full and faithfull
performance on its part of said contract, and the
satisfaction of obligations for materials used and
labor employed upon the work;
NOW THEREFORE, if the principal shall
perform well and truly and fulfill all the
undertakings, covenants, terms, conditions, and
agreements of said contract during the original term
of said contract and any extension thereof that may
be granted by the obligee, with notice to the surety
and during the life of any guaranty required under
the contract, and shall also perform well and truly
and fulfill all the undertakings, covenants, terms,
conditions, and agreements of any and all duly
authorized modifications of said contract that may
hereinafter be made, without notice to the surety
except when such modifications increase the
contract price; and such principal contractor or his
or its sub-contractors shall promptly make payment
to any individual, firm, partnership, corporation or
 association supplying the principal of its sub-
contractors with labor and materials in the
prosecution of the work provided for in the said
contract, then, this obligation shall be null and void;
otherwise it shall remain in full force and effect. Any
extension of the period of time which may be granted
by the obligee to the contractor shall be considered
as given, and any modifications of said contract
shall be considered as authorized, with the express
consent of the Surety.
The right of any individual, firm, partnership,
corporation or association supplying the contractor
with labor or materials for the prosecution of the
work hereinbefore stated, to institute action on the
penal bond, pursuant to the provision of Act No.
3688, is hereby acknowledge and confirmed. x x x
On May 20, 2006, ABC paid Lucky Star P575,000.00 (with 2%
withholding tax) as advance payment, representing 50% of the
contract price.[7] Lucky Star, thereafter, commenced the drilling
work.By July 18, 2006, just a few days before the agreed completion
date of 60 calendar days, Lucky Star managed to accomplish only
ten (10) % of the drilling work. On the same date, petitioner sent a
demand letter to Lucky Star for the immediate completion of the
drilling work[8] with a threat to cancel the agreement and forfeit the
bonds should it still fail to complete said project within the agreed
period.
On August 3, 2006, ABC sent a Notice of Rescission of Contract with
Demand for Damages to Lucky Star.[9] Pertinent portions of said
notice read:
Pursuant to paragraph 1 of the Terms and
Conditions of the service contract, notice is hereby
made on you of the rescission of the contract and
accordingly demand is hereby made on you, within
seven (7) days from receipt hereof:
(1) to refund the down payment of PHP563,500.00,
plus legal interest thereon;
(2) to pay liquidated damages equivalent to 2/10 of
1% of the contract price for every day of delay, or a
total of PHP138,000.00;
(3) to pay the amount guaranteed by your
performance bond in the amount of PHP345,000.00;
(4) to pay PHP150,000.00 in other consequential
damages;
(5) to pay exemplary damages in the amount
of PHP150,000.00;
(6) to vacate the project site, together with all your
men and equipment.
Should you refuse to comply with our demand
within the above period, we shall be constrained to
sue you in court, in which event we shall demand
payment of attorneys fees in the amount of at least
PHP100,000.0.
On August 16, 2006, ABC sent a Notice of Claim for payment to
Stronghold to make good its obligation under its bonds.[10]
Despite notice, ABC did not receive any reply either from Lucky Star
or Stronghold, prompting it to file its Complaint for Rescission with
Damages against both before the RTC[11] on November 21, 2006.
In its Answer (with Complusory Counterclaim and Cross-Claim),
dated January 24, 2007, Stronghold denied any liability arguing that
ABC had not shown any proof that it made an advance payment of
50% of the contract price of the project. It further averred that ABCs
rescission of its contract with Lucky Star virtually revoked the claims
against the two bonds and absolved them from further liability.[12]
Lucky Star, on the other hand, failed to file a responsive
pleading within the prescribed period and, thus, was declared in
default by the RTC in its Order dated August 24, 2007.[13]
On February 27, 2009, the RTC rendered the assailed decision Defendant Stronghold Insurance Company, Inc.s
ordering Lucky Star to pay ABC but absolving Stronghold from compulsory counterclaim and cross-claim are
liability.[14] Relevant parts of the decision, including the decretal dismissed.[15]
portion, read:
Hence, this petition.

On the liability of defendant Stronghold Petitioner ABC prays for the reversal of the challenged
Insurance, the Court rules on the negative. decision based on the following
The surety bond and performance bond
executed by defendants Lucky Star and Stronghold GROUNDS
Insurance are in the nature of accessory contracts
which depend for its existence upon another A. The Lower Court seriously erred and
contract. Thus, when the agreement (Exhibit A) unjustly ACTED ARBITRARILY with
between the plaintiff and defendant Asset Builders manifest bias and grave abuse of
was rescinded, the surety and performance bond discretion, CONTRARY to applicable
were automatically cancelled. laws and established jurisprudence in declaring
the automatic CANCELLATION of respondent
WHEREFORE, in view of the foregoing, Strongholds Surety Bond and Performance Bond,
judgment is hereby rendered in favor of the plaintiff because:
and against defendant Lucky Star Drilling &
Construction, ordering the latter as follows: (a) Despite rescission, there
exists a continuing VALID PRINCIPAL
1. to pay plaintiff in the amount of OBLIGATION guaranteed by
PHP575,000.00 as actual Respondents Bonds, arising out of the
damages plus legal interest from Contractors DEFAULTand Non-
the filing of the complaint; performance.
(b) Upon breach by its
2. to pay plaintiff in the amount of Principal/contractor,
PHP100,000.00 as liquidated the LIABILITIES of Respondents bonds
damages; had already ACCRUED, automatically
attached, and had become
3. to pay plaintiff in the amount of already DIRECT,
PHP50,000.00 as exemplary PRIMARY and ABSOLUTE, even
damages; before Petitioners legitimate exercise of
its option under Art. 1191 of the New
4. to pay plaintiff in the amount of Civil Code.
PHP 50,000.00 as attorneys
fees; (c) Rescission does
NOT AFFECT the liabilities of the
5. to pay the costs of the suit. Respondent Stronghold as
its LIABILITIES on its subject bonds
have already
become INTERWOVEN and INSEPARABL
 E with the liabilities of its Principal, the
Contractor Lucky Star.
B. With the Lower Courts completely
erroneous ruling on the liabilities of Respondents
bonds, the Lower Court equally ERRED with
manifest bias and grave abuse, in its FAILURE to
comply with the duty of court to make a finding
of unreasonable denial or withholding by
Respondent Stronghold or Petitioners claims and
impose upon the Respondent
the penalties provided for under Section 241 and
244 of the Insurance Code.[16]
Essentially, the primary issue is whether or not respondent
insurance company, as surety, can be held liable under its bonds.
The Court rules in the affirmative.
Respondent, along with its principal, Lucky Star, bound
itself to the petitioner when it executed in its favor surety and
performance bonds. The contents of the said contracts clearly
establish that the parties entered into a surety agreement as defined
under Article 2047 of the New Civil Code. Thus:
Art. 2047. By guaranty a person, called the
guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter
should fail to do so.
If a person binds himself solidarily with the
principal debtor, the provisions of Section 4, Chapter
3, Title I of this Book shall be observed. In such
case the contract is called a suretyship.
[Emphasis supplied]
As provided in Article 2047, the surety undertakes to be
bound solidarily with the principal obligor. That undertaking makes
a surety agreement an ancillary contract as it presupposes the
existence of a principal contract. Although the contract of a surety is
in essence secondary only to a valid principal obligation, the surety
becomes liable for the debt or duty of another although it possesses
no direct or personal interest over the obligations nor does it receive
any benefit therefrom.[17] Let it be stressed that notwithstanding the
fact that the surety contract is secondary to the principal obligation,
the surety assumes liability as a regular party to the undertaking.[18]
Stronghold Insurance Company, Inc. v. Republic-Asahi Glass
Corporation,[19] reiterating the ruling in Garcia v. Court of
Appeals,[20] expounds on the nature of the suretys liability:
X x x. The suretys obligation is not an
original and direct one for the performance of his
own act, but merely accessory or collateral to the
obligation contracted by the
principal. Nevertheless,although the contract of a
surety is in essence secondary only to a valid
principal obligation, his liability to the creditor or
promisee of the principal is said to be direct,
primary and absolute; in other words, he
is directly and equally bound with the principal.
Suretyship, in essence, contains two types of relationship
the principal relationship between the obligee (petitioner) and the
obligor (Lucky Star), and the accessory surety relationship between
the principal (Lucky Star) and the surety (respondent). In this
arrangement, the obligee accepts the suretys solidary undertaking to
pay if the obligor does not pay. Such acceptance, however, does not
change in any material way the obligees relationship with the
principal obligor. Neither does it make the surety an active party to
the principal obligee-obligor relationship. Thus, the acceptance does
not give the surety the right to intervene in the principal
contract. The suretys role arises only upon the obligors default, at
which time, it can be directly held liable by the obligee for payment
as a solidary obligor.[21]
In the case at bench, when Lucky Star failed to finish the
drilling work within the agreed time frame despite petitioners
demand for completion, it was already in delay. Due to this default,
Lucky Stars liability attached and, as a necessary consequence,
respondents liability under the surety agreement arose.
Undeniably, when Lucky Star reneged on its undertaking
with the petitioner and further failed to return the P575,000.00
downpayment that was already advanced to it, respondent, as
surety, became solidarily bound with Lucky Star for the repayment of
the said amount to petitioner. The clause, this bond is callable on
demand, strongly speaks of respondents primary and direct Star for the payment of P575,000.00 and the payment
responsibility to the petitioner. of P345,000.00 on the basis of its performance bond.

Accordingly, after liability has attached to the principal, the SO ORDERED.

obligee or, in this case, the petitioner, can exercise the right to
proceed against Lucky Star or respondent or both. Article 1216 of the
New Civil Code states: JOSE CATRAL MENDOZA
The creditor may proceed against any one of Associate Justice
the solidary debtors or some or all of them
simultaneously. The demand made against one of
them shall not be an obstacle to those which may
subsequently be directed against the others, so long
as the debt has not been fully collected.

Contrary to the trial courts ruling, respondent insurance

company was not automatically released from any liability when
petitioner resorted to the rescission of the principal contract for
failure of the other party to perform its undertaking. Precisely, the
liability of the surety arising from the surety contracts comes to life
upon the solidary obligors default. It should be emphasized that
petitioner had to choose rescission in order to prevent further loss
that may arise from the delay of the progress of the project. Without
a doubt, Lucky Stars unsatisfactory progress in the drilling work and
its failure to complete it in due time amount to non-performance of
its obligation.

In fine, respondent should be answerable to petitioner on

account of Lucky Stars non-performance of its obligation as
guaranteed by the performance bond.

Finally, Article 1217[22] of the New Civil Code acknowledges

the right of reimbursement from a co-debtor (the principal co-debtor,
in case of suretyship) in favor of the one who paid (the surety). Thus,
respondent is entitled to reimbursement from Lucky Star for the
amount it may be required to pay petitioner arising from its bonds.

WHEREFORE, the February 27, 2009 Decision of the

Regional Trial Court, Pasig City, Branch 71,
is AFFIRMED with MODIFICATION. Respondent Stronghold
Insurance is hereby declared jointly and severally liable with Lucky