#1 - G.R. No.

138814

April 16, 2009

MAKATI STOCK EXCHANGE, INC., MA. VIVIAN YUCHENGCO, ADOLFO M. DUARTE, MYRON C. PAPA,
NORBERTO C. NAZARENO, GEORGE UY-TIOCO, ANTONIO A. LOPA, RAMON B. ARNAIZ, LUIS J.L.
VIRATA, and ANTONIO GARCIA, JR. Petitioners, vs.
MIGUEL V. CAMPOS, substituted by JULIA ORTIGAS VDA. DE CAMPOS,1 Respondent.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 seeking the reversal of the Decision2 dated 11
February 1997 and Resolution dated 18 May 1999 of the Court of Appeals in CA-G.R. SP No. 38455.
The facts of the case are as follows:
SEC Case No. 02-94-4678 was instituted on 10 February 1994 by respondent Miguel V. Campos, who filed
with the Securities, Investigation and Clearing Department (SICD) of the Securities and Exchange
Commission (SEC), a Petition against herein petitioners Makati Stock Exchange, Inc. (MKSE) and MKSE
directors, Ma. Vivian Yuchengco, Adolfo M. Duarte, Myron C. Papa, Norberto C. Nazareno, George Uy-Tioco,
Antonio A, Lopa, Ramon B. Arnaiz, Luis J.L. Virata, and Antonio Garcia, Jr. Respondent, in said Petition,
sought: (1) the nullification of the Resolution dated 3 June 1993 of the MKSE Board of Directors, which
allegedly deprived him of his right to participate equally in the allocation of Initial Public Offerings (IPO) of
corporations registered with MKSE; (2) the delivery of the IPO shares he was allegedly deprived of, for which
he would pay IPO prices; and (3) the payment of P2 million as moral damages, P1 million as exemplary
damages, and P500,000.00 as attorneys fees and litigation expenses.
On 14 February 1994, the SICD issued an Order granting respondents prayer for the issuance of a
Temporary Restraining Order to enjoin petitioners from implementing or enforcing the 3 June 1993 Resolution
of the MKSE Board of Directors.
The SICD subsequently issued another Order on 10 March 1994 granting respondents application for a Writ
of Preliminary Injunction, to continuously enjoin, during the pendency of SEC Case No. 02-94-4678, the
implementation or enforcement of the MKSE Board Resolution in question. Petitioners assailed this SICD
Order dated 10 March 1994 in a Petition for Certiorari filed with the SEC en banc, docketed as SEC-EB No.
393.
On 11 March 1994, petitioners filed a Motion to Dismiss respondents Petition in SEC Case No. 02-94-4678,
based on the following grounds: (1) the Petition became moot due to the cancellation of the license of MKSE;
(2) the SICD had no jurisdiction over the Petition; and (3) the Petition failed to state a cause of action.
The SICD denied petitioners Motion to Dismiss in an Order dated 4 May 1994. Petitioners again challenged
the 4 May 1994 Order of SICD before the SEC en banc through another Petition for Certiorari, docketed as
SEC-EB No. 403.
In an Order dated 31 May 1995 in SEC-EB No. 393, the SEC en banc nullified the 10 March 1994 Order of
SICD in SEC Case No. 02-94-4678 granting a Writ of Preliminary Injunction in favor of respondent. Likewise,
in an Order dated 14 August 1995 in SEC-EB No. 403, the SEC en banc annulled the 4 May 1994 Order of
SICD in SEC Case No. 02-94-4678 denying petitioners Motion to Dismiss, and accordingly ordered the
dismissal of respondents Petition before the SICD.

Respondent filed a Petition for Certiorari with the Court of Appeals assailing the Orders of the SEC en banc
dated 31 May 1995 and 14 August 1995 in SEC-EB No. 393 and SEC-EB No. 403, respectively.
Respondents Petition before the appellate court was docketed as CA-G.R. SP No. 38455.
On 11 February 1997, the Court of Appeals promulgated its Decision in CA-G.R. SP No. 38455, granting
respondents Petition for Certiorari, thus:
WHEREFORE, the petition in so far as it prays for annulment of the Orders dated May 31, 1995 and August
14, 1995 in SEC-EB Case Nos. 393 and 403 is GRANTED. The said orders are hereby rendered null and void
and set aside.
Petitioners filed a Motion for Reconsideration of the foregoing Decision but it was denied by the Court of
Appeals in a Resolution dated 18 May 1999.
Hence, the present Petition for Review raising the following arguments:
I.
THE SEC EN BANC DID NOT COMMIT GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION WHEN IT DISMISSED THE PETITION FILED BY RESPONDENT BECAUSE
ON ITS FACE, IT FAILED TO STATE A CAUSE OF ACTION.
II.
THE GRANT OF THE IPO ALLOCATIONS IN FAVOR OF RESPONDENT WAS A MERE
ACCOMMODATION GIVEN TO HIM BY THE BOARD OF [DIRECTORS] OF THE MAKATI STOCK
EXCHANGE, INC.
III.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE SEC EN BANC COMMITTED GRAVE ABUSE
OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT MADE AN
EXTENDED INQUIRY AND PROCEEDED TO MAKE A DETERMINATION AS TO THE TRUTH OF
RESPONDENTS ALLEGATIONS IN HIS PETITION AND USED AS BASIS THE EVIDENCE ADDUCED
DURING THE HEARING ON THE APPLICATION FOR THE WRIT OF PRELIMINARY INJUNCTION TO
DETERMINE THE EXISTENCE OR VALIDITY OF A STATED CAUSE OF ACTION.
IV.
IPO ALLOCATIONS GRANTED TO BROKERS ARE NOT TO BE BOUGHT BY THE BROKERS FOR
THEMSELVES BUT ARE TO BE DISTRIBUTED TO THE INVESTING PUBLIC. HENCE, RESPONDENTS
CLAIM FOR DAMAGES IS ILLUSORY AND HIS PETITION A NUISANCE SUIT.3
On 18 September 2001, counsel for respondent manifested to this Court that his client died on 7 May 2001. In
a Resolution dated 24 October 2001, the Court directed the substitution of respondent by his surviving
spouse, Julia Ortigas vda. de Campos.
Petitioners want this Court to affirm the dismissal by the SEC en banc of respondents Petition in SEC Case
No. 02-94-4678 for failure to state a cause of action. On the other hand, respondent insists on the sufficiency
of his Petition and seeks the continuation of the proceedings before the SICD.
A cause of action is the act or omission by which a party violates a right of another.4 A complaint states a
cause of action where it contains three essential elements of a cause of action, namely: (1) the legal right of

the plaintiff, (2) the correlative obligation of the defendant, and (3) the act or omission of the defendant in
violation of said legal right. If these elements are absent, the complaint becomes vulnerable to dismissal on
the ground of failure to state a cause of action.
If a defendant moves to dismiss the complaint on the ground of lack of cause of action, he is regarded as
having hypothetically admitted all the averments thereof. The test of sufficiency of the facts found in a
complaint as constituting a cause of action is whether or not admitting the facts alleged, the court can render
a valid judgment upon the same in accordance with the prayer thereof. The hypothetical admission extends to
the relevant and material facts well pleaded in the complaint and inferences fairly deducible therefrom. Hence,
if the allegations in the complaint furnish sufficient basis by which the complaint can be maintained, the same
should not be dismissed regardless of the defense that may be assessed by the defendant.5
Given the foregoing, the issue of whether respondents Petition in SEC Case No. 02-94-4678 sufficiently
states a cause of action may be alternatively stated as whether, hypothetically admitting to be true the
allegations in respondents Petition in SEC Case No. 02-94-4678, the SICD may render a valid judgment in
accordance with the prayer of said Petition.
A reading of the exact text of respondents Petition in SEC Case No. 02-94-4678 is, therefore, unavoidable.
Pertinent portions of the said Petition reads:
7. In recognition of petitioners invaluable services, the general membership of respondent corporation
[MKSE] passed a resolution sometime in 1989 amending its Articles of Incorporation, to include the following
provision therein:
"ELEVENTH WHEREAS, Mr. Miguel Campos is the only surviving incorporator of the Makati Stock
Exchange, Inc. who has maintained his membership;
"WHEREAS, he has unselfishly served the Exchange in various capacities, as governor from 1977 to the
present and as President from 1972 to 1976 and again as President from 1988 to the present;
"WHEREAS, such dedicated service and leadership which has contributed to the advancement and well being
not only of the Exchange and its members but also to the Securities industry, needs to be recognized and
appreciated;
"WHEREAS, as such, the Board of Governors in its meeting held on February 09, 1989 has correspondingly
adopted a resolution recognizing his valuable service to the Exchange, reward the same, and preserve for
posterity such recognition by proposing a resolution to the membership body which would make him as
Chairman Emeritus for life and install in the Exchange premises a commemorative bronze plaque in his
honor;
"NOW, THEREFORE, for and in consideration of the above premises, the position of the "Chairman Emeritus"
to be occupied by Mr. Miguel Campos during his lifetime and irregardless of his continued membership in the
Exchange with the Privilege to attend all membership meetings as well as the meetings of the Board of
Governors of the Exchange, is hereby created."
8. Hence, to this day, petitioner is not only an active member of the respondent corporation, but its Chairman
Emeritus as well.
9. Correspondingly, at all times material to this petition, as an active member and Chairman Emeritus of
respondent corporation, petitioner has always enjoyed the right given to all the other members to participate
equally in the Initial Public Offerings (IPOs for brevity) of corporations.

10. IPOs are shares of corporations offered for sale to the public, prior to the listing in the trading floor of the
countrys two stock exchanges. Normally, Twenty Five Percent (25%) of these shares are divided equally
between the two stock exchanges which in turn divide these equally among their members, who pay therefor
at the offering price.
11. However, on June 3, 1993, during a meeting of the Board of Directors of respondent-corporation,
individual respondents passed a resolution to stop giving petitioner the IPOs he is entitled to, based on the
ground that these shares were allegedly benefiting Gerardo O. Lanuza, Jr., who these individual respondents
wanted to get even with, for having filed cases before the Securities and Exchange (SEC) for their
disqualification as member of the Board of Directors of respondent corporation.
12. Hence, from June 3, 1993 up to the present time, petitioner has been deprived of his right to subscribe to
the IPOs of corporations listing in the stock market at their offering prices.
13. The collective act of the individual respondents in depriving petitioner of his right to a share in the IPOs for
the aforementioned reason, is unjust, dishonest and done in bad faith, causing petitioner substantial financial
damage.6
There is no question that the Petition in SEC Case No. 02-94-4678 asserts a right in favor of respondent,
particularly, respondents alleged right to subscribe to the IPOs of corporations listed in the stock market at
their offering prices; and stipulates the correlative obligation of petitioners to respect respondents right,
specifically, by continuing to allow respondent to subscribe to the IPOs of corporations listed in the stock
market at their offering prices.
However, the terms right and obligation in respondents Petition are not magic words that would automatically
lead to the conclusion that such Petition sufficiently states a cause of action. Right and obligation are legal
terms with specific legal meaning. A right is a claim or title to an interest in anything whatsoever that is
enforceable by law.7An obligation is defined in the Civil Code as a juridical necessity to give, to do or not to
do.8 For every right enjoyed by any person, there is a corresponding obligation on the part of another person
to respect such right. Thus, Justice J.B.L. Reyes offers9 the definition given by Arias Ramos as a more
complete definition:
An obligation is a juridical relation whereby a person (called the creditor) may demand from another (called
the debtor) the observance of a determinative conduct (the giving, doing or not doing), and in case of breach,
may demand satisfaction from the assets of the latter.
The Civil Code enumerates the sources of obligations:
Art. 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.
Therefore, an obligation imposed on a person, and the corresponding right granted to another, must be rooted
in at least one of these five sources. The mere assertion of a right and claim of an obligation in an initiatory
pleading, whether a Complaint or Petition, without identifying the basis or source thereof, is merely a

conclusion of fact and law. A pleading should state the ultimate facts essential to the rights of action or
defense asserted, as distinguished from mere conclusions of fact or conclusions of law.10 Thus, a Complaint
or Petition filed by a person claiming a right to the Office of the President of this Republic, but without stating
the source of his purported right, cannot be said to have sufficiently stated a cause of action. Also, a person
claiming to be the owner of a parcel of land cannot merely state that he has a right to the ownership thereof,
but must likewise assert in the Complaint either a mode of acquisition of ownership or at least a certificate of
title in his name.
In the case at bar, although the Petition in SEC Case No. 02-94-4678 does allege respondents right to
subscribe to the IPOs of corporations listed in the stock market at their offering prices, and petitioners
obligation to continue respecting and observing such right, the Petition utterly failed to lay down the source or
basis of respondents right and/or petitioners obligation.
Respondent merely quoted in his Petition the MKSE Board Resolution, passed sometime in 1989, granting
him the position of Chairman Emeritus of MKSE for life. However, there is nothing in the said Petition from
which the Court can deduce that respondent, by virtue of his position as Chairman Emeritus of MKSE, was
granted by law, contract, or any other legal source, the right to subscribe to the IPOs of corporations listed in
the stock market at their offering prices.
A meticulous review of the Petition reveals that the allocation of IPO shares was merely alleged to have been
done in accord with a practice normally observed by the members of the stock exchange, to wit:
IPOs are shares of corporations offered for sale to the public, prior to their listing in the trading floor of the
countrys two stock exchanges. Normally, Twenty-Five Percent (25%) of these shares are divided equally
between the two stock exchanges which in turn divide these equally among their members, who pay therefor
at the offering price.11 (Emphasis supplied)
A practice or custom is, as a general rule, not a source of a legally demandable or enforceable right.12 Indeed,
in labor cases, benefits which were voluntarily given by the employer, and which have ripened into company
practice, are considered as rights that cannot be diminished by the employer.13 Nevertheless, even in such
cases, the source of the employees right is not custom, but ultimately, the law, since Article 100 of the Labor
Code explicitly prohibits elimination or diminution of benefits.
There is no such law in this case that converts the practice of allocating IPO shares to MKSE members, for
subscription at their offering prices, into an enforceable or demandable right. Thus, even if it is hypothetically
admitted that normally, twenty five percent (25%) of the IPOs are divided equally between the two stock
exchanges -- which, in turn, divide their respective allocation equally among their members, including the
Chairman Emeritus, who pay for IPO shares at the offering price -- the Court cannot grant respondents
prayer for damages which allegedly resulted from the MKSE Board Resolution dated 3 June 1993 deviating
from said practice by no longer allocating any shares to respondent.
1avv phi1

Accordingly, the instant Petition should be granted. The Petition in SEC Case No. 02-94-4678 should be
dismissed for failure to state a cause of action. It does not matter that the SEC en banc, in its Order dated 14
August 1995 in SEC-EB No. 403, overstepped its bounds by not limiting itself to the issue of whether
respondents Petition before the SICD sufficiently stated a cause of action. The SEC en banc may have been
mistaken in considering extraneous evidence in granting petitioners Motion to Dismiss, but its discussion
thereof are merely superfluous and obiter dictum. In the main, the SEC en banc did correctly dismiss the
Petition in SEC Case No. 02-94-4678 for its failure to state the basis for respondents alleged right, to wit:
Private respondent Campos has failed to establish the basis or authority for his alleged right to participate
equally in the IPO allocations of the Exchange. He cited paragraph 11 of the amended articles of
incorporation of the Exchange in support of his position but a careful reading of the said provision shows
nothing therein that would bear out his claim. The provision merely created the position of chairman emeritus

of the Exchange but it mentioned nothing about conferring upon the occupant thereof the right to receive IPO
allocations.14
With the dismissal of respondents Petition in SEC Case No. 02-94-4678, there is no more need for this Court
to resolve the propriety of the issuance by SCID of a writ of preliminary injunction in said case.
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 11 February 1997 and
its Resolution dated 18 May 1999 in CA-G.R. SP No. 38455 are REVERSED and SET ASIDE. The Orders
dated 31 May 1995 and 14 August 1995 of the Securities and Exchange Commission en banc in SEC-EB
Case No. 393 and No. 403, respectively, are hereby reinstated. No pronouncement as to costs.
SO ORDERED.
#2 - G.R. No. 83748 May 12, 1989
FLAVIO K MACASAET & ASSOCIATES, INC., petitioner, vs.
COMMISSION ON AUDIT and PHILIPPINE TOURISM AUTHORITY, respondents.
F. Sumulong & Associates Law Offices for petitioner.

MELENCIO-HERRERA, J.:
In this Petition for Certiorari, pursuant to Section 7, Article IX of the 1987 Constitution, 1 petitioner, Flavio K.
Macasaet & Associates, Inc., prays that the ruling of public respondent Commission on Audit (COA) denying its
claim for completion of payment of professional fees be overturned. The facts follow. On 15 September 1977
respondent Philippine Tourism Authority (PTA) entered into a Contract for "Project Design and Management
Services for the development of the proposed Zamboanga Golf and Country Club, Calarian, Zamboanga City" with
petitioner company, but originally with Flavio K Macasaet alone (hereinafter referred to simply as the "Contract").

Under the Contract, PTA obligated itself to pay petitioner a professional fee of seven (7%) of the actual
construction cost, as follows:
ARTICLE IV PROFESSIONAL FEE
In consideration for the professional services to be performed by Designer under Article I of
this Agreement, the Authority shall pay seven percent (7%) of the actual construction cost.
In addition, a Schedule of Payments was provided for while the construction was in progress and up to its final
completion, thus:
ARTICLE V SCHEDULE OF PAYMENTS
1. Upon the execution of the Agreement but not more than fifteen (15) days, a minimum
payment equivalent to 10 percent of the professional fee as provided in Art. IV computed upon
a reasonable estimated construction cost of the project.
2. Upon the completion of the schematic design services, but not more than 15 days after the
submission of the schematic design to the Authority, a sum equivalent to 15% of the
professional fee as stated in Art. IV computed upon the reasonable estimated construction
cost of the project.

3. Upon completion of the design development services, but not more than 15 days after
submission of the design development to the authority, a sum equivalent to 20% of the
professional fee as stated in Art. IV, computed upon the reasonable estimated construction
cost.
4. Upon completion of the contract document services but not more than 15 days after
submission of the contract document to the Authority, a sum equivalent to 25% of the
professional fee as stated in Art. IV, shall be paid computed on the same basis as above.
5. Upon completion of the work and acceptance thereof by the Authority, the balance of the
professional fee, computed on the final actual project cost shall be paid. (Emphasis supplied)
Pursuant to the foregoing Schedule, the PTA made periodic payments of the stipulated professional fees to
petitioner. And, upon completion of the project, PTA paid petitioners what it perceived to be the balance of the
latter's professional fees.
It turned out, however, that after the project was completed, PTA paid Supra Construction Company, the main
contractor, the additional sum of P3,148,198.26 representing the escalation cost of the contract price due to
the increase in the price of construction materials.
Upon learning of the price escalation, petitioner requested payment of P219,302.47 additional professional
fee representing seven (7%) percent of P3,148,198.26.
On 3 July 1985 PTA denied payment on the ground that "the subject price escalation referred to increased
cost of construction materials and did not entail additional work on the part of petitioner as to entitle it to
additional compensation under Article VI of the contract." 2
Reconsiderations sought by the petitioner, up to respondent COA, were to no avail. The latter expressed the
opinion that "to allow subject claim in the absence of a showing that extra or additional services had been
rendered by claimant would certainly result in overpayment to him to the prejudice of the Government" (1st
Indorsement, July 10, 1987, p. 3, Rollo, p. 42).
Hence this Petition, to which we gave due course.
The basic issue for resolution is petitioner's entitlement to additional professional fees, which, in turn, hinges
on whether or not the price escalation should be included in the "final actual project cost."
Public respondents, through the Solicitor General, maintain that petitioner had been paid its professional fee
upon completion of the project and that its claim for additional payment is without any legal and factual basis
for, after all, no additional architectural services were rendered other than the ones under the terms of the
Contract. On the other hand, petitioner anchors its claim to additional professional fees, not on any change in
services rendered, but on Article IV, and paragraph 5 of Article V, of the Contract, supra.
The very terminologies used in the Contract call for affirmative relief in petitioner's favor.
Under Article IV of said Contract, petitioner was to be entitled to seven (7%) of the "actual construction cost."
Under paragraphs 1, 2, 3, and 4, Article V, periodic payments were to be based on a "reasonable estimated
construction cost." ultimately, under paragraph 5, Article V, the balance of the professional fee was to be
computed on the basis of "the final actual project cost."
The use of the terms "actual construction cost", gradating into "final actual project cost" is not without
significance. The real intendment of the parties, as shown by paragraph 5, Article V, of their Contract was to
base the ultimate balance of petitioner's professional fees not on "actual construction cost" alone but on the

final actual project cost; not on "construction cost" alone but on "project cost." By so providing, the Contract
allowed for flexibility based on actuality and as a matter of equity for the contracting parties. For evidently, the
final actual project cost would not necessarily tally with the actual construction cost initially computed. The
"final actual project cost" covers the totality of all costs as actually and finally determined, and logically
includes the escalation cost of the contract price.
It matters not that the price escalation awarded to the construction company did not entail additional work for
petitioner. As a matter of fact, neither did it for the main contractor. The increased cost of materials was not
the doing of either contracting party.
That an escalation clause was not specifically provided for in the Contract is of no moment either for it may be
considered as already "built-in" and understood from the very terms "actual construction cost," and eventually
"final actual project cost."
Article VI of the Contract, supra, has no bearing on the present controversy either. It speaks of any major
change in the planning and engineering aspects necessitating the award and payment of additional
compensation. Admittedly, there was no additional work by petitioner, which required additional
compensation. Rather, petitioner's claim is for payment of the balance of its professional fees based on the
"final actual project cost" and not for additional compensation based on Article VI.
The terminologies in the contract being clear, leaving no doubt as to the intention of the contracting parties,
their literal meaning control (Article 1370, Civil Code). The price escalation cost must be deemed included in
the final actual project cost and petitioner held entitled to the payment of its additional professional fees.
Obligations arising from contract have the force of law between the contracting parties and should be
complied with in good faith (Article 11 59, Civil Code).
WHEREFORE, the ruling of respondent Commission on Audit is hereby SET ASIDE and respondent
Philippines Tourism Authority is hereby ordered to pay petitioner the additional amount of P219,302.47 to
complete the payment of its professional fee under their Contract for Project Design and Management
Services.
SO ORDERED.
#3 - G.R. No. 140047

July 13, 2004

PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner, vs.

V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO;
SOLEDAD C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST INTEGRATED
BONDING AND INSURANCE COMPANY, INC., respondents.

DECISION
DAVIDE, JR., C.J.:
This case is an offshoot of a service contract entered into by a Filipino construction firm with the Iraqi
Government for the construction of the Institute of Physical Therapy-Medical Center, Phase II, in Baghdad,
Iraq, at a time when the Iran-Iraq war was ongoing.
In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No. 91-1906 and
assigned to Branch 58, petitioner Philippine Export and Foreign Loan Guarantee Corporation1 (hereinafter
Philguarantee) sought reimbursement from the respondents of the sum of money it paid to Al Ahli Bank of
Kuwait pursuant to a guarantee it issued for respondent V.P. Eusebio Construction, Inc. (VPECI).

The factual and procedural antecedents in this case are as follows:

On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and Construction,
Baghdad, Iraq, awarded the construction of the Institute of Physical TherapyMedical Rehabilitation Center,
Phase II, in Baghdad, Iraq, (hereinafter the Project) to Ajyal Trading and Contracting Company (hereinafter
Ajyal), a firm duly licensed with the Kuwait Chamber of Commerce for a total contract price of
ID5,416,089/046 (or about US$18,739,668).2
On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-Plex
International, Inc. (hereinafter 3-Plex), a local contractor engaged in construction business, entered into a joint
venture agreement with Ajyal wherein the former undertook the execution of the entire Project, while the latter
would be entitled to a commission of 4% of the contract price.3 Later, or on 8 April 1981, respondent 3-Plex,
not being accredited by or registered with the Philippine Overseas Construction Board (POCB), assigned and
transferred all its rights and interests under the joint venture agreement to VPECI, a construction and
engineering firm duly registered with the POCB.4 However, on 2 May 1981, 3-Plex and VPECI entered into an
agreement that the execution of the Project would be under their joint management.5
The SOB required the contractors to submit (1) a performance bond of ID271,808/610 representing 5% of the
total contract price and (2) an advance payment bond of ID541,608/901 representing 10% of the advance
payment to be released upon signing of the contract.6 To comply with these requirements, respondents 3-Plex
and VPECI applied for the issuance of a guarantee with petitioner Philguarantee, a government financial
institution empowered to issue guarantees for qualified Filipino contractors to secure the performance of
approved service contracts abroad.7
Petitioner Philguarantee approved respondents' application. Subsequently, letters of guarantee8 were issued
by Philguarantee to the Rafidain Bank of Baghdad covering 100% of the performance and advance payment
bonds, but they were not accepted by SOB. What SOB required was a letter-guarantee from Rafidain Bank,
the government bank of Iraq. Rafidain Bank then issued a performance bond in favor of SOB on the condition
that another foreign bank, not Philguarantee, would issue a counter-guarantee to cover its exposure. Al Ahli
Bank of Kuwait was, therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it required a
similar counter-guarantee in its favor from the petitioner. Thus, three layers of guarantees had to be
arranged.9
Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor of Al Ahli
Bank of Kuwait Letter of Guarantee No. 81-194-F 10 (Performance Bond Guarantee) in the amount of
ID271,808/610 and Letter of Guarantee No. 81-195-F11 (Advance Payment Guarantee) in the amount of
ID541,608/901, both for a term of eighteen months from 25 May 1981. These letters of guarantee were
secured by (1) a Deed of Undertaking12 executed by respondents VPECI, Spouses Vicente P. Eusebio and
Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos and Iluminada Santos; and (2) a surety
bond13 issued by respondent First Integrated Bonding and Insurance Company, Inc. (FIBICI). The Surety
Bond was later amended on 23 June 1981 to increase the amount of coverage from P6.4 million to P6.967
million and to change the bank in whose favor the petitioner's guarantee was issued, from Rafidain Bank to Al
Ahli Bank of Kuwait.14
On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract15 for the
construction of the Institute of Physical Therapy Medical Rehabilitation Center, Phase II, in Baghdad, Iraq,
wherein the joint venture contractor undertook to complete the Project within a period of 547 days or 18
months. Under the Contract, the Joint Venture would supply manpower and materials, and SOB would refund
to the former 25% of the project cost in Iraqi Dinar and the 75% in US dollars at the exchange rate of 1 Dinar
to 3.37777 US Dollars.16
The construction, which was supposed to start on 2 June 1981, commenced only on the last week of August
1981. Because of this delay and the slow progress of the construction work due to some setbacks and
difficulties, the Project was not completed on 15 November 1982 as scheduled. But in October 1982, upon

foreseeing the impossibility of meeting the deadline and upon the request of Al Ahli Bank, the joint venture
contractor worked for the renewal or extension of the Performance Bond and Advance Payment Guarantee.
Petitioner's Letters of Guarantee Nos. 81-194-F (Performance Bond) and 81-195-F (Advance Payment Bond)
with expiry date of 25 November 1982 were then renewed or extended to 9 February 1983 and 9 March 1983,
respectively.17 The surety bond was also extended for another period of one year, from 12 May 1982 to 12
May 1983.18 The Performance Bond was further extended twelve times with validity of up to 8 December
1986,19 while the Advance Payment Guarantee was extended three times more up to 24 May 1984 when the
latter was cancelled after full refund or reimbursement by the joint venture contractor.20 The surety bond was
likewise extended to 8 May 1987.21
As of March 1986, the status of the Project was 51% accomplished, meaning the structures were already
finished. The remaining 47% consisted in electro-mechanical works and the 2%, sanitary works, which both
required importation of equipment and materials.22
On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full payment of its
performance bond counter-guarantee.
Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI requested Iraq Trade
and Economic Development Minister Mohammad Fadhi Hussein to recall the telex call on the performance
guarantee for being a drastic action in contravention of its mutual agreement with the latter that (1) the
imposition of penalty would be held in abeyance until the completion of the project; and (2) the time extension
would be open, depending on the developments on the negotiations for a foreign loan to finance the
completion of the project.23It also wrote SOB protesting the call for lack of factual or legal basis, since the
failure to complete the Project was due to (1) the Iraqi government's lack of foreign exchange with which to
pay its (VPECI's) accomplishments and (2) SOB's noncompliance for the past several years with the provision
in the contract that 75% of the billings would be paid in US dollars.24 Subsequently, or on 19 November 1986,
respondent VPECI advised the petitioner not to pay yet Al Ahli Bank because efforts were being exerted for
the amicable settlement of the Project.25
On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that it had already
paid to Rafidain Bank the sum of US$876,564 under its letter of guarantee, and demanding reimbursement by
the petitioner of what it paid to the latter bank plus interest thereon and related expenses.26
Both petitioner Philguarantee and respondent VPECI sought the assistance of some government agencies of
the Philippines. On 10 August 1987, VPECI requested the Central Bank to hold in abeyance the payment by
the petitioner "to allow the diplomatic machinery to take its course, for otherwise, the Philippine government ,
through the Philguarantee and the Central Bank, would become instruments of the Iraqi Government in
consummating a clear act of injustice and inequity committed against a Filipino contractor."27
On 27 August 1987, the Central Bank authorized the remittance for its account of the amount of US$876,564
(equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of the performance counterguarantee for VPECI's project in Iraq. 28
On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank, and
reiterated the joint and solidary obligation of the respondents to reimburse the petitioner for the advances
made on its counter-guarantee.29
The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January 1988.30 Then, on
6 May 1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83 representing interest and penalty
charges demanded by the latter bank.31
On 19 June 1991, the petitioner sent to the respondents separate letters demanding full payment of the
amount of P47,872,373.98 plus accruing interest, penalty charges, and 10% attorney's fees pursuant to their
joint and solidary obligations under the deed of undertaking and surety bond.32 When the respondents failed to
10

pay, the petitioner filed on 9 July 1991 a civil case for collection of a sum of money against the respondents
before the RTC of Makati City.
After due trial, the trial court ruled against Philguarantee and held that the latter had no valid cause of action
against the respondents. It opined that at the time the call was made on the guarantee which was executed
for a specific period, the guarantee had already lapsed or expired. There was no valid renewal or extension of
the guarantee for failure of the petitioner to secure respondents' express consent thereto. The trial court also
found that the joint venture contractor incurred no delay in the execution of the Project. Considering the
Project owner's violations of the contract which rendered impossible the joint venture contractor's performance
of its undertaking, no valid call on the guarantee could be made. Furthermore, the trial court held that no valid
notice was first made by the Project owner SOB to the joint venture contractor before the call on the
guarantee. Accordingly, it dismissed the complaint, as well as the counterclaims and cross-claim, and ordered
the petitioner to pay attorney's fees of P100,000 to respondents VPECI and Eusebio Spouses and P100,000
to 3-Plex and the Santos Spouses, plus costs. 33
In its 14 June 1999 Decision,34 the Court of Appeals affirmed the trial court's decision, ratiocinating as follows:
First, appellant cannot deny the fact that it was fully aware of the status of project implementation as
well as the problems besetting the contractors, between 1982 to 1985, having sent some of its people
to Baghdad during that period. The successive renewals/extensions of the guarantees in fact, was
prompted by delays, not solely attributable to the contractors, and such extension understandably
allowed by the SOB (project owner) which had not anyway complied with its contractual commitment
to tender 75% of payment in US Dollars, and which still retained overdue amounts collectible by
VPECI.

Second, appellant was very much aware of the violations committed by the SOB of its contractual
undertakings with VPECI, principally, the payment of foreign currency (US$) for 75% of the total
contract price, as well as of the complications and injustice that will result from its payment of the full
amount of the performance guarantee, as evident in PHILGUARANTEE's letter dated 13 May 1987
.

Third, appellant was fully aware that SOB was in fact still obligated to the Joint Venture and there was
still an amount collectible from and still being retained by the project owner, which amount can be setoff with the sum covered by the performance guarantee.

Fourth, well-apprised of the above conditions obtaining at the Project site and cognizant of the war
situation at the time in Iraq, appellant, though earlier has made representations with the SOB
regarding a possible amicable termination of the Project as suggested by VPECI, made a complete
turn-around and insisted on acting in favor of the unjustified "call" by the foreign banks.35
The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the Court of Appeals
erred in affirming the trial court's ruling that
I
RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY EXECUTED
IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF ITS COUNTER-

11

GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO RESPONDENTS WHAT IT HAD

PAID UNDER THE SAID COUNTER-GUARANTEE.
II
PETITIONER CANNOT CLAIM SUBROGATION.
III
IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE UNDER
THEIR DEED OF UNDERTAKING.36
The main issue in this case is whether the petitioner is entitled to reimbursement of what it paid under Letter
of Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the deed of undertaking and surety
bond from the respondents.
The petitioner asserts that since the guarantee it issued was absolute, unconditional, and irrevocable the
nature and extent of its liability are analogous to those of suretyship. Its liability accrued upon the failure of the
respondents to finish the construction of the Institute of Physical Therapy Buildings in Baghdad.
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
contract is called suretyship. 37
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. In
both contracts, there is a promise to answer for the debt or default of another. However, in this jurisdiction,
they may be distinguished thus:
1. A surety is usually bound with his principal by the same instrument executed at the same time and
on the same consideration. On the other hand, the contract of guaranty is the guarantor's own
separate undertaking often supported by a consideration separate from that supporting the contract of
the principal; the original contract of his principal is not his contract.
2. A surety assumes liability as a regular party to the undertaking; while the liability of a guarantor is
conditional depending on the failure of the primary debtor to pay the obligation.
3. The obligation of a surety is primary, while that of a guarantor is secondary.
4. A surety is an original promissor and debtor from the beginning, while a guarantor is charged on his
own undertaking.
5. A surety is, ordinarily, held to know every default of his principal; whereas a guarantor is not bound
to take notice of the non-performance of his principal.
6. Usually, a surety will not be discharged either by the mere indulgence of the creditor to the principal
or by want of notice of the default of the principal, no matter how much he may be injured thereby. A
guarantor is often discharged by the mere indulgence of the creditor to the principal, and is usually not
liable unless notified of the default of the principal. 38
In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-194-F, which provides in
part as follows:

12

In consideration of your issuing the above performance guarantee/counter-guarantee, we hereby

unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194 F to pay you on your first
written or telex demand Iraq Dinars Two Hundred Seventy One Thousand Eight Hundred Eight and
fils six hundred ten (ID271,808/610) representing 100% of the performance bond required of V.P.
EUSEBIO for the construction of the Physical Therapy Institute, Phase II, Baghdad, Iraq, plus interest
and other incidental expenses related thereto.
In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation unpaid but in
no case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus interest and other incidental
expenses. (Emphasis supplied)39
Guided by the abovementioned distinctions between a surety and a guaranty, as well as the factual milieu of
this case, we find that the Court of Appeals and the trial court were correct in ruling that the petitioner is a
guarantor and not a surety. That the guarantee issued by the petitioner is unconditional and irrevocable does
not make the petitioner a surety. As a guaranty, it is still characterized by its subsidiary and conditional quality
because it does not take effect until the fulfillment of the condition, namely, that the principal obligor should fail
in his obligation at the time and in the form he bound himself.40 In other words, an unconditional guarantee is
still subject to the condition that the principal debtor should default in his obligation first before resort to the
guarantor could be had. A conditional guaranty, as opposed to an unconditional guaranty, is one which
depends upon some extraneous event, beyond the mere default of the principal, and generally upon notice of
the principal's default and reasonable diligence in exhausting proper remedies against the principal.41
It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default by respondent
VPECI the petitioner shall pay, the obligation assumed by the petitioner was simply that of an unconditional
guaranty, not conditional guaranty. But as earlier ruled the fact that petitioner's guaranty is unconditional does
not make it a surety. Besides, surety is never presumed. A party should not be considered a surety where the
contract itself stipulates that he is acting only as a guarantor. It is only when the guarantor binds himself
solidarily with the principal debtor that the contract becomes one of suretyship.42
Having determined petitioner's liability as guarantor, the next question we have to grapple with is whether the
respondent contractor has defaulted in its obligations that would justify resort to the guaranty. This is a mixed
question of fact and law that is better addressed by the lower courts, since this Court is not a trier of facts.
It is a fundamental and settled rule that the findings of fact of the trial court and the Court of Appeals are
binding or conclusive upon this Court unless they are not supported by the evidence or unless strong and
cogent reasons dictate otherwise.43 The factual findings of the Court of Appeals are normally not reviewable
by us under Rule 45 of the Rules of Court except when they are at variance with those of the trial court. 44 The
trial court and the Court of Appeals were in unison that the respondent contractor cannot be considered to
have defaulted in its obligations because the cause of the delay was not primarily attributable to it.
A corollary issue is what law should be applied in determining whether the respondent contractor
has defaulted in the performance of its obligations under the service contract. The question of whether there
is a breach of an agreement, which includes default or mora,45 pertains to the essential or intrinsic validity of a
contract. 46
No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule followed by
most legal systems, however, is that the intrinsic validity of a contract must be governed by the lex
contractus or "proper law of the contract." This is the law voluntarily agreed upon by the parties (the lex loci
voluntatis) or the law intended by them either expressly or implicitly (the lex loci intentionis). The law selected
may be implied from such factors as substantial connection with the transaction, or the nationality or domicile
of the parties.47Philippine courts would do well to adopt the first and most basic rule in most legal systems,
namely, to allow the parties to select the law applicable to their contract, subject to the limitation that it is not
against the law, morals, or public policy of the forum and that the chosen law must bear a substantive
relationship to the transaction. 48

13

It must be noted that the service contract between SOB and VPECI contains no express choice of the law that
would govern it. In the United States and Europe, the two rules that now seem to have emerged as "kings of
the hill" are (1) the parties may choose the governing law; and (2) in the absence of such a choice, the
applicable law is that of the State that "has the most significant relationship to the transaction and the
parties."49 Another authority proposed that all matters relating to the time, place, and manner of performance
and valid excuses for non-performance are determined by the law of the place of performance or lex loci
solutionis, which is useful because it is undoubtedly always connected to the contract in a significant way.50
In this case, the laws of Iraq bear substantial connection to the transaction, since one of the parties is the Iraqi
Government and the place of performance is in Iraq. Hence, the issue of whether respondent VPECI
defaulted in its obligations may be determined by the laws of Iraq. However, since that foreign law was not
properly pleaded or proved, the presumption of identity or similarity, otherwise known as the processual
presumption, comes into play. Where foreign law is not pleaded or, even if pleaded, is not proved, the
presumption is that foreign law is the same as ours.51
Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: "In reciprocal obligations, neither
party incurs in delay if the other party does not comply or is not ready to comply in a proper manner with what
is incumbent upon him."
Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause
imputable to the former. 52 It is the non-fulfillment of an obligation with respect to time.53
It is undisputed that only 51.7% of the total work had been accomplished. The 48.3% unfinished portion
consisted in the purchase and installation of electro-mechanical equipment and materials, which were
available from foreign suppliers, thus requiring US Dollars for their importation. The monthly billings and
payments made by SOB54reveal that the agreement between the parties was a periodic payment by the
Project owner to the contractor depending on the percentage of accomplishment within the period. 55 The
payments were, in turn, to be used by the contractor to finance the subsequent phase of the work. 56 However,
as explained by VPECI in its letter to the Department of Foreign Affairs (DFA), the payment by SOB purely in
Dinars adversely affected the completion of the project; thus:
4. Despite protests from the plaintiff, SOB continued paying the accomplishment billings of the
Contractor purely in Iraqi Dinars and which payment came only after some delays.
5. SOB is fully aware of the following:

5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign currency (US$), to
finance the purchase of various equipment, materials, supplies, tools and to pay for the cost of project
management, supervision and skilled labor not available in Iraq and therefore have to be imported and
or obtained from the Philippines and other sources outside Iraq.
5.3 That the Ministry of Labor and Employment of the Philippines requires the remittance into the
Philippines of 70% of the salaries of Filipino workers working abroad in US Dollars;

5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot be used to
purchase equipment, materials, supplies, etc. outside of Iraq;
5.6 That most of the materials specified by SOB in the CONTRACT are not available in Iraq and
therefore have to be imported;

14

5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui Dinars) out of Iraq and
hence, imported materials, equipment, etc., cannot be purchased or obtained using Iraqui Dinars as
medium of acquisition.

8. Following the approved construction program of the CONTRACT, upon completion of the civil works
portion of the installation of equipment for the building, should immediately follow, however, the
CONTRACT specified that these equipment which are to be installed and to form part of the
PROJECT have to be procured outside Iraq since these are not being locally manufactured. Copy f
the relevant portion of the Technical Specification is hereto attached as Annex "C" and made an
integral part hereof;

10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist the Iraqi
government in completing the PROJECT, the Contractor without any obligation on its part to do so but
with the knowledge and consent of SOB and the Ministry of Housing & Construction of Iraq, offered to
arrange on behalf of SOB, a foreign currency loan, through the facilities of Circle International S.A.,
the Contractor's Sub-contractor and SACE MEDIO CREDITO which will act as the guarantor for this
foreign currency loan.
Arrangements were first made with Banco di Roma. Negotiation started in June 1985. SOB is
informed of the developments of this negotiation, attached is a copy of the draft of the loan Agreement
between SOB as the Borrower and Agent. The Several Banks, as Lender, and counter-guaranteed by
Istituto Centrale Per II Credito A Medio Termine (Mediocredito) Sezione Speciale Per L'Assicurazione
Del Credito All'Exportazione (Sace). Negotiations went on and continued until it suddenly collapsed
due to the reported default by Iraq in the payment of its obligations with Italian government, copy of
the news clipping dated June 18, 1986 is hereto attached as Annex "D" to form an integral part hereof;
15. On September 15, 1986, Contractor received information from Circle International S.A. that
because of the news report that Iraq defaulted in its obligations with European banks, the approval by
Banco di Roma of the loan to SOB shall be deferred indefinitely, a copy of the letter of Circle
International together with the news clippings are hereto attached as Annexes "F" and "F-1",
respectively.57
As found by both the Court of Appeals and the trial court, the delay or the non-completion of the Project was
caused by factors not imputable to the respondent contractor. It was rather due mainly to the persistent
violations by SOB of the terms and conditions of the contract, particularly its failure to pay 75% of the
accomplished work in US Dollars. Indeed, where one of the parties to a contract does not perform in a proper
manner the prestation which he is bound to perform under the contract, he is not entitled to demand the
performance of the other party. A party does not incur in delay if the other party fails to perform the obligation
incumbent upon him.
The petitioner, however, maintains that the payments by SOB of the monthly billings in purely Iraqi Dinars did
not render impossible the performance of the Project by VPECI. Such posture is quite contrary to its previous
representations. In his 26 March 1987 letter to the Office of the Middle Eastern and African Affairs (OMEAA),
DFA, Manila, petitioner's Executive Vice-President Jesus M. Taedo stated that while VPECI had taken every
possible measure to complete the Project, the war situation in Iraq, particularly the lack of foreign exchange,
was proving to be a great obstacle; thus:
VPECI has taken every possible measure for the completion of the project but the war situation in Iraq
particularly the lack of foreign exchange is proving to be a great obstacle. Our performance
counterguarantee was called last 26 October 1986 when the negotiations for a foreign currency loan
15

with the Italian government through Banco de Roma bogged down following news report that Iraq has
defaulted in its obligation with major European banks. Unless the situation in Iraq is improved as to
allay the bank's apprehension, there is no assurance that the project will ever be completed. 58
In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the
obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the
creditor requires the performance because it must appear that the tolerance or benevolence of the creditor
must have ended. 59
As stated earlier, SOB cannot yet demand complete performance from VPECI because it has not yet itself
performed its obligation in a proper manner, particularly the payment of the 75% of the cost of the Project in
US Dollars. The VPECI cannot yet be said to have incurred in delay. Even assuming that there was delay and
that the delay was attributable to VPECI, still the effects of that delay ceased upon the renunciation by the
creditor, SOB, which could be implied when the latter granted several extensions of time to the
former. 60 Besides, no demand has yet been made by SOB against the respondent contractor. Demand is
generally necessary even if a period has been fixed in the obligation. And default generally begins from the
moment the creditor demands judicially or extra-judicially the performance of the obligation. Without such
demand, the effects of default will not arise.61
Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot be compelled to
pay the creditor SOB unless the property of the debtor VPECI has been exhausted and all legal remedies
against the said debtor have been resorted to by the creditor.62 It could also set up compensation as regards
what the creditor SOB may owe the principal debtor VPECI.63 In this case, however, the petitioner has clearly
waived these rights and remedies by making the payment of an obligation that was yet to be shown to be
rightfully due the creditor and demandable of the principal debtor.
As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor had collectibles
from SOB which could be set off with the amount covered by the performance guarantee. In February 1987,
the OMEAA transmitted to the petitioner a copy of a telex dated 10 February 1987 of the Philippine
Ambassador in Baghdad, Iraq, informing it of the note verbale sent by the Iraqi Ministry of Foreign Affairs
stating that the past due obligations of the joint venture contractor from the petitioner would "be deducted from
the dues of the two contractors."64
Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the petitioner raised
as among the arguments to be presented in support of the cancellation of the counter-guarantee the fact that
the amount of ID281,414/066 retained by SOB from the Project was more than enough to cover the counterguarantee of ID271,808/610; thus:
6.1 Present the following arguments in cancelling the counterguarantee:
The Iraqi Government does not have the foreign exchange to fulfill its contractual obligations
of paying 75% of progress billings in US dollars.

It could also be argued that the amount of ID281,414/066 retained by SOB from the
proposed project is more than the amount of the outstanding counterguarantee.65
In a nutshell, since the petitioner was aware of the contractor's outstanding receivables from SOB, it should
have set up compensation as was proposed in its project situationer.
Moreover, the petitioner was very much aware of the predicament of the respondents. In fact, in its 13 May
1987 letter to the OMEAA, DFA, Manila, it stated:

16

VPECI also maintains that the delay in the completion of the project was mainly due to SOB's violation
of contract terms and as such, call on the guarantee has no basis.
While PHILGUARANTEE is prepared to honor its commitment under the guarantee,
PHILGUARANTEE does not want to be an instrument in any case of inequity committed against a
Filipino contractor. It is for this reason that we are constrained to seek your assistance not only in
ascertaining the veracity of Al Ahli Bank's claim that it has paid Rafidain Bank but possibly averting
such an event. As any payment effected by the banks will complicate matters, we cannot help
underscore the urgency of VPECI's bid for government intervention for the amicable termination of the
contract and release of the performance guarantee. 66
But surprisingly, though fully cognizant of SOB's violations of the service contract and VPECI's outstanding
receivables from SOB, as well as the situation obtaining in the Project site compounded by the Iran-Iraq war,
the petitioner opted to pay the second layer guarantor not only the full amount of the performance bond
counter-guarantee but also interests and penalty charges.
This brings us to the next question: May the petitioner as a guarantor secure reimbursement from the
respondents for what it has paid under Letter of Guarantee No. 81-194-F?
As a rule, a guarantor who pays for a debtor should be indemnified by the latter67 and would be legally
subrogated to the rights which the creditor has against the debtor.68 However, a person who makes payment
without the knowledge or against the will of the debtor has the right to recover only insofar as the payment
has been beneficial to the debtor.69 If the obligation was subject to defenses on the part of the debtor, the
same defenses which could have been set up against the creditor can be set up against the paying
guarantor.70
From the findings of the Court of Appeals and the trial court, it is clear that the payment made by the petitioner
guarantor did not in any way benefit the principal debtor, given the project status and the conditions obtaining
at the Project site at that time. Moreover, the respondent contractor was found to have valid defenses against
SOB, which are fully supported by evidence and which have been meritoriously set up against the paying
guarantor, the petitioner in this case. And even if the deed of undertaking and the surety bond secured
petitioner's guaranty, the petitioner is precluded from enforcing the same by reason of the petitioner's undue
payment on the guaranty. Rights under the deed of undertaking and the surety bond do not arise because
these contracts depend on the validity of the enforcement of the guaranty.
The petitioner guarantor should have waited for the natural course of guaranty: the debtor VPECI should
have, in the first place, defaulted in its obligation and that the creditor SOB should have first made a demand
from the principal debtor. It is only when the debtor does not or cannot pay, in whole or in part, that the
guarantor should pay.71 When the petitioner guarantor in this case paid against the will of the debtor VPECI,
the debtor VPECI may set up against it defenses available against the creditor SOB at the time of payment.
This is the hard lesson that the petitioner must learn.
As the government arm in pursuing its objective of providing "the necessary support and assistance in order
to enable [Filipino exporters and contractors to operate viably under the prevailing economic and business
conditions,"72 the petitioner should have exercised prudence and caution under the circumstances. As aptly
put by the Court of Appeals, it would be the height of inequity to allow the petitioner to pass on its losses to
the Filipino contractor VPECI which had sternly warned against paying the Al Ahli Bank and constantly
apprised it of the developments in the Project implementation.
WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the decision of the
Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED.
No pronouncement as to costs. SO ORDERED.

17

#4 - G.R. No. 117190 January 2, 1997

JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND GENERAL
MERCHANDISING, petitioner, vs.
COURT OF APPEALS and VICENTE HERCE JR., respondents.

BELLOSILLO, J.:
This case involves the proper interpretation of the contract entered into between the parties.
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the name and style J.M.T.
Engineering and General Merchandising proposed to respondent Vicente Herce Jr. to construct a windmill
system for him. After some negotiations they agreed on the construction of the windmill for a consideration of
P60,000.00 with a one-year guaranty from the date of completion and acceptance by respondent Herce Jr. of
the project. Pursuant to the agreement respondent paid petitioner a down payment of P30,000.00 and an
installment payment of P15,000.00, leaving a balance of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent to pay the balance, petitioner filed a complaint
to collect the amount. In his Answer before the trial court respondent denied the claim saying that he had
already paid this amount to the San Pedro General Merchandising Inc. (SPGMI) which constructed the deep
well to which the windmill system was to be connected. According to respondent, since the deep well formed
part of the system the payment he tendered to SPGMI should be credited to his account by petitioner.
Moreover, assuming that he owed petitioner a balance of P15,000.00, this should be offset by the defects in
the windmill system which caused the structure to collapse after a strong wind hit their place. 1
Petitioner denied that the construction of a deep well was included in the agreement to build the windmill
system, for the contract price of P60,000.00 was solely for the windmill assembly and its installation, exclusive
of other incidental materials needed for the project. He also disowned any obligation to repair or reconstruct
the system and insisted that he delivered it in good and working condition to respondent who accepted the
same without protest. Besides, its collapse was attributable to a typhoon, a force majeure, which relieved him
of any liability.
In finding for plaintiff, the trial court held that the construction of the deep well was not part of the windmill
project as evidenced clearly by the letter proposals submitted by petitioner to respondent. 2 It noted that "[i]f the
intention of the parties is to include the construction of the deep well in the project, the same should be stated in the
proposals. In the absence of such an agreement, it could be safely concluded that the construction of the deep well
is not a part of the project undertaken by the plaintiff." 3 With respect to the repair of the windmill, the trial court
found that "there is no clear and convincing proof that the windmill system fell down due to the defect of the
construction." 4

The Court of Appeals reversed the trial court. It ruled that the construction of the deep well was included in the
agreement of the parties because the term "deep well" was mentioned in both proposals. It also gave
credence to the testimony of respondent's witness Guillermo Pili, the proprietor of SPGMI which installed the
deep well, that petitioner Tanguilig told him that the cost of constructing the deep well would be deducted from
the contract price of P60,000.00. Upon these premises the appellate court concluded that respondent's
payment of P15,000.00 to SPGMI should be applied to his remaining balance with petitioner thus effectively
extinguishing his contractual obligation. However, it rejected petitioner's claim of force majeure and ordered
the latter to reconstruct the windmill in accordance with the stipulated one-year guaranty.
His motion for reconsideration having been denied by the Court of Appeals, petitioner now seeks relief from
this Court. He raises two issues: firstly, whether the agreement to construct the windmill system included the

18

installation of a deep well and, secondly, whether petitioner is under obligation to reconstruct the windmill after
it collapsed.
We reverse the appellate court on the first issue but sustain it on the second.
The preponderance of evidence supports the finding of the trial court that the installation of a deep well was
not included in the proposals of petitioner to construct a windmill system for respondent. There were in fact
two (2) proposals: one dated 19 May 1987 which pegged the contract price at P87,000.00 (Exh. "1"). This was
rejected by respondent. The other was submitted three days later, i.e., on 22 May 1987 which contained more
specifications but proposed a lower contract price of P60,000.00 (Exh. "A"). The latter proposal was accepted
by respondent and the construction immediately followed. The pertinent portions of the first letter-proposal
(Exh. "1") are reproduced hereunder
In connection with your Windmill System and Installation, we would like to quote to you as follows:
One (1) Set Windmill suitable for 2 inches diameter deepwell, 2 HP, capacity, 14
feet in diameter, with 20 pieces blade, Tower 40 feet high, including mechanism which
is not advisable to operate during extra-intensity wind. Excluding cylinder pump.
UNIT CONTRACT PRICE P87,000.00
The second letter-proposal (Exh. "A") provides as follows:
In connection with your Windmill system, Supply of Labor Materials and Installation, operated water
pump, we would like to quote to you as
follows
One (1) set Windmill assembly for 2 inches or 3 inches deep-well pump, 6 Stroke,
14 feet diameter, 1-lot blade materials, 40 feet Tower complete with standard
appurtenances up to Cylinder pump, shafting U.S. adjustable International Metal.
One (1) lot Angle bar, G.I. pipe, Reducer Coupling, Elbow Gate valve, cross Tee
coupling.
One (1) lot Float valve.
One (1) lot Concreting materials foundation.
F. O. B. Laguna
Contract Price P60,000.00
Notably, nowhere in either proposal is the installation of a deep well mentioned, even remotely. Neither is
there an itemization or description of the materials to be used in constructing the deep well. There is
absolutely no mention in the two (2) documents that a deep well pump is a component of the proposed
windmill system. The contract prices fixed in both proposals cover only the features specifically described
therein and no other. While the words "deep well" and "deep well pump" are mentioned in both, these do not
indicate that a deep well is part of the windmill system. They merely describe the type of deep well pump for
which the proposed windmill would be suitable. As correctly pointed out by petitioner, the words "deep well"
preceded by the prepositions "for" and "suitable for" were meant only to convey the idea that the proposed
windmill would be appropriate for a deep well pump with a diameter of 2 to 3 inches. For if the real intent of
petitioner was to include a deep well in the agreement to construct a windmill, he would have used instead the
conjunctions "and" or "with." Since the terms of the instruments are clear and leave no doubt as to their
meaning they should not be disturbed.

19

Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the parties shall be
accorded primordial consideration 5 and, in case
of doubt, their contemporaneous and subsequent acts shall be principally considered. 6 An examination of such
contemporaneous and subsequent acts of respondent as well as the attendant circumstances does not persuade
us to uphold him.

Respondent insists that petitioner verbally agreed that the contract price of P60,000.00 covered the
installation of a deep well pump. He contends that since petitioner did not have the capacity to install the
pump the latter agreed to have a third party do the work the cost of which was to be deducted from the
contract price. To prove his point, he presented Guillermo Pili of SPGMI who declared that petitioner Tanguilig
approached him with a letter from respondent Herce Jr. asking him to build a deep well pump as "part of the
price/contract which Engineer (Herce) had with Mr. Tanguilig." 7
We are disinclined to accept the version of respondent. The claim of Pili that Herce Jr. wrote him a letter is
unsubstantiated. The alleged letter was never presented in court by private respondent for reasons known
only to him. But granting that this written communication existed, it could not have simply contained a request
for Pili to install a deep well; it would have also mentioned the party who would pay for the undertaking. It
strains credulity that respondent would keep silent on this matter and leave it all to petitioner Tanguilig to
verbally convey to Pili that the deep well was part of the windmill construction and that its payment would
come from the contract price of P60,000.00.
We find it also unusual that Pili would readily consent to build a deep well the payment for which would come
supposedly from the windmill contract price on the mere representation of petitioner, whom he had never met
before, without a written commitment at least from the former. For if indeed the deep well were part of the
windmill project, the contract for its installation would have been strictly a matter between petitioner and Pili
himself with the former assuming the obligation to pay the price. That it was respondent Herce Jr. himself who
paid for the deep well by handing over to Pili the amount of P15,000.00 clearly indicates that the contract for
the deep well was not part of the windmill project but a separate agreement between respondent and Pili.
Besides, if the price of P60,000.00 included the deep well, the obligation of respondent was to pay the entire
amount to petitioner without prejudice to any action that Guillermo Pili or SPGMI may take, if any, against the
latter. Significantly, when asked why he tendered payment directly to Pili and not to petitioner, respondent
explained, rather lamely, that he did it "because he has (sic) the money, so (he) just paid the money in his
possession." 8
Can respondent claim that Pili accepted his payment on behalf of petitioner? No. While the law is clear that
"payment shall be made to the person in whose favor the obligation has been constituted, or his successor in
interest, or any person authorized to receive it," 9 it does not appear from the record that Pili and/or SPGMI was
so authorized.

Respondent cannot claim the benefit of the law concerning "payments made by a third person." 10 The Civil
Code provisions do not apply in the instant case because no creditor-debtor relationship between petitioner and
Guillermo Pili and/or SPGMI has been established regarding the construction of the deep well. Specifically, witness
Pili did not testify that he entered into a contract with petitioner for the construction of respondent's deep well. If
SPGMI was really commissioned by petitioner to construct the deep well, an agreement particularly to this effect
should have been entered into.

The contemporaneous and subsequent acts of the parties concerned effectively belie respondent's
assertions. These circumstances only show that the construction of the well by SPGMI was for the
sole account of respondent and that petitioner merely supervised the installation of the well because
the windmill was to be connected to it. There is no legal nor factual basis by which this Court can
impose upon petitioner an obligation he did not expressly assume nor ratify.
The second issue is not a novel one. In a long line of cases 11 this Court has consistently held that in
order for a party to claim exemption from liability by reason of fortuitous event under Art. 1174 of the Civil

20

Code the event should be the sole and proximate cause of the loss or destruction of the object of the
contract. In Nakpil vs. Court of Appeals, 12 four (4) requisites must concur: (a) the cause of the breach of the
obligation must be independent of the will of the debtor; (b) the event must be either unforeseeable or
unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a
normal manner; and, (d) the debtor must be free from any participation in or aggravation of the injury to the
creditor.

Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous event.
Interestingly, the evidence does not disclose that there was actually a typhoon on the day the windmill
collapsed. Petitioner merely stated that there was a "strong wind." But a strong wind in this case
cannot be fortuitous unforeseeable nor unavoidable. On the contrary, a strong wind should be
present in places where windmills are constructed, otherwise the windmills will not turn.
The appellate court correctly observed that "given the newly-constructed windmill system, the same
would not have collapsed had there been no inherent defect in it which could only be attributable to
the appellee."13 It emphasized that respondent had in his favor the presumption that "things have
happened according to the ordinary course of nature and the ordinary habits of life." 14 This presumption
has not been rebutted by petitioner.

Finally, petitioner's argument that private respondent was already in default in the payment of his
outstanding balance of P15,000.00 and hence should bear his own loss, is untenable. In reciprocal
obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. 15 When the windmill failed to function properly it
became incumbent upon petitioner to institute the proper repairs in accordance with the guaranty stated in
the contract. Thus, respondent cannot be said to have incurred in delay; instead, it is petitioner who should
bear the expenses for the reconstruction of the windmill. Article 1167 of the Civil Code is explicit on this
point that if a person obliged to do something fails to do it, the same shall be executed at his cost.

WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE HERCE JR. is directed to
pay petitioner JACINTO M. TANGUILIG the balance of P15,000.00 with interest at the legal rate from
the date of the filing of the complaint. In return, petitioner is ordered to "reconstruct subject defective
windmill system, in accordance with the one-year guaranty" 16 and to complete the same within three (3)
months from the finality of this decision.

SO ORDERED.
#5 - G.R. No. 115129 February 12, 1997
IGNACIO BARZAGA, petitioner, vs.
COURT OF APPEALS and ANGELITO ALVIAR, respondents.

BELLOSILLO, J.:
The Fates ordained that Christmas 1990 be bleak for Ignacio Barzaga and his family. On the nineteenth of
December Ignacio's wife succumbed to a debilitating ailment after prolonged pain and suffering. Forewarned
by her attending physicians of her impending death, she expressed her wish to be laid to rest before
Christmas day to spare her family from keeping lonely vigil over her remains while the whole of Christendom
celebrate the Nativity of their Redeemer.
Drained to the bone from the tragedy that befell his family yet preoccupied with overseeing the wake for his
departed wife, Ignacio Barzaga set out to arrange for her interment on the twenty-fourth of December in

21

obedience semper fidelis to her dying wish. But her final entreaty, unfortunately, could not be carried out. Dire
events conspired to block his plans that forthwith gave him and his family their gloomiest Christmas ever.
This is Barzaga's story. On 21 December 1990, at about three o'clock in the afternoon, he went to the
hardware store of respondent Angelito Alviar to inquire about the availability of certain materials to be used in
the construction of a niche for his wife. He also asked if the materials could be delivered at once. Marina
Boncales, Alviar's storekeeper, replied that she had yet to verify if the store had pending deliveries that
afternoon because if there were then all subsequent purchases would have to be delivered the following day.
With that reply petitioner left.
At seven o'clock the following morning, 22 December, Barzaga returned to Alviar's hardware store to follow up
his purchase of construction materials. He told the store employees that the materials he was buying would
have to be delivered at the Memorial Cemetery in Dasmarinas, Cavite, by eight o'clock that morning since his
hired workers were already at the burial site and time was of the essence. Marina Boncales agreed to deliver
the items at the designated time, date and place. With this assurance, Barzaga purchased the materials and
paid in full the amount of P2,110.00. Thereafter he joined his workers at the cemetery, which was only a
kilometer away, to await the delivery.
The construction materials did not arrive at eight o'clock as promised. At nine o'clock, the delivery was still
nowhere in sight. Barzaga returned to the hardware store to inquire about the delay. Boncales assured him
that although the delivery truck was not yet around it had already left the garage and that as soon as it arrived
the materials would be brought over to the cemetery in no time at all. That left petitioner no choice but to
rejoin his workers at the memorial park and wait for the materials.
By ten o'clock, there was still no delivery. This prompted petitioner to return to the store to inquire about the
materials. But he received the same answer from respondent's employees who even cajoled him to go back
to the burial place as they would just follow with his construction materials.
After hours of waiting which seemed interminable to him Barzaga became extremely upset. He decided
to dismiss his laborers for the day. He proceeded to the police station, which was just nearby, and lodged a
complaint against Alviar. He had his complaint entered in the police blotter. When he returned again to the
store he saw the delivery truck already there but the materials he purchased were not yet ready for loading.
Distressed that Alviar's employees were not the least concerned, despite his impassioned pleas, Barzaga
decided to cancel his transaction with the store and look for construction materials elsewhere.
In the afternoon of that day, petitioner was able to buy from another store. But since darkness was already
setting in and his workers had left, he made up his mind to start his project the following morning, 23
December. But he knew that the niche would not be finish in time for the scheduled burial the following day.
His laborers had to take a break on Christmas Day and they could only resume in the morning of the twentysixth. The niche was completed in the afternoon and Barzaga's wife was finally laid to rest. However, it was
two-and-a-half (2-1/2) days behind schedule.
On 21 January 1991, tormented perhaps by his inability to fulfill his wife's dying wish, Barzaga wrote private
respondent Alviar demanding recompense for the damage he suffered. Alviar did not respond. Consequently,
petitioner sued him before the Regional Trial Court. 1
Resisting petitioner's claim, private respondent contended that legal delay could not be validly ascribed to him
because no specific time of delivery was agreed upon between them. He pointed out that the invoices
evidencing the sale did not contain any stipulation as to the exact time of delivery and that assuming that the
materials were not delivered within the period desired by petitioner, the delivery truck suffered a flat tire on the
way to the store to pick up the materials. Besides, his men were ready to make the delivery by ten-thirty in the
morning of 22 December but petitioner refused to accept them. According to Alviar, it was this obstinate
refusal of petitioner to accept delivery that caused the delay in the construction of the niche and the

22

consequent failure of the family to inter their loved one on the twenty-fourth of December, and that, if at all, it
was petitioner and no other who brought about all his personal woes.
Upholding the proposition that respondent incurred in delay in the delivery of the construction materials
resulting in undue prejudice to petitioner, the trial court ordered respondent Alviar to pay petitioner (a)
P2,110.00 as refund for the purchase price of the materials with interest per annum computed at the legal rate
from the date of the filing of the complaint, (b) P5,000.00 as temperate damages, (c) P20,000.00 as moral
damages, (d) P5,000.00 as litigation expenses, and (e) P5,000.00 as attorney's fees.
On appeal, respondent Court of Appeals reversed the lower court and ruled that there was no contractual
commitment as to the exact time of delivery since this was not indicated in the invoice receipts covering the
sale. 2
The arrangement to deliver the materials merely implied that delivery should be made within a reasonable
time but that the conclusion that since petitioner's workers were already at the graveyard the delivery had to
be made at that precise moment, is non-sequitur. The Court of Appeals also held that assuming that there
was delay, petitioner still had sufficient time to construct the tomb and hold his wife's burial as she wished.
We sustain the trial court. An assiduous scrutiny of the record convinces us that respondent Angelito Alviar
was negligent and incurred in delay in the performance of his contractual obligation. This sufficiently entitles
petitioner Ignacio Barzaga to be indemnified for the damage he suffered as a consequence of delay or a
contractual breach. The law expressly provides that those who in the performance of their obligation are guilty
of fraud, negligence, or delay and those who in any manner contravene the tenor thereof, are liable for
damages. 3
Contrary to the appellate court's factual determination, there was a specific time agreed upon for the delivery
of the materials to the cemetery. Petitioner went to private respondent's store on 21 December precisely to
inquire if the materials he intended to purchase could be delivered immediately. But he was told by the
storekeeper that if there were still deliveries to be made that afternoon his order would be delivered the
following day. With this in mind Barzaga decided to buy the construction materials the following morning after
he was assured of immediate delivery according to his time frame. The argument that the invoices never
indicated a specific delivery time must fall in the face of the positive verbal commitment of respondent's
storekeeper. Consequently it was no longer necessary to indicate in the invoices the exact time the purchased
items were to be brought to the cemetery. In fact, storekeeper Boncales admitted that it was her custom not to
indicate the time of delivery whenever she prepared invoices. 4
Private respondent invokes fortuitous event as his handy excuse for that "bit of delay" in the delivery of
petitioner's purchases. He maintains that Barzaga should have allowed his delivery men a little more time to
bring the construction materials over to the cemetery since a few hours more would not really matter and
considering that his truck had a flat tire. Besides, according to him, Barzaga still had sufficient time to build the
tomb for his wife.
This is a gratuitous assertion that borders on callousness. Private respondent had no right to manipulate
petitioner's timetable and substitute it with his own. Petitioner had a deadline to meet. A few hours of delay
was no piddling matter to him who in his bereavement had yet to attend to other pressing family concerns.
Despite this, respondent's employees still made light of his earnest importunings for an immediate delivery. As
petitioner bitterly declared in court " . . . they (respondent's employees) were making a fool out of me." 5
We also find unacceptable respondent's justification that his truck had a flat tire, for this event, if indeed it
happened, was forseeable according to the trial court, and as such should have been reasonably guarded
against. The nature of private respondent's business requires that he should be ready at all times to meet
contingencies of this kind. One piece of testimony by respondent's witness Marina Boncales has caught our
attention - that the delivery truck arrived a little late than usual because it came from a delivery of materials in
Langcaan, Dasmarinas, Cavite. 6 Significantly, this information was withheld by Boncales from petitioner when the

23

latter was negotiating with her for the purchase of construction materials. Consequently, it is not unreasonable to
suppose that had she told petitioner of this fact and that the delivery of the materials would consequently be
delayed, petitioner would not have bought the materials from respondent's hardware store but elsewhere which
could meet his time requirement. The deliberate suppression of this information by itself manifests a certain degree
of bad faith on the part of respondent's storekeeper.

The appellate court appears to have belittled petitioner's submission that under the prevailing circumstances
time was of the essence in the delivery of the materials to the grave site. However, we find petitioner's
assertion to be anchored on solid ground. The niche had to be constructed at the very least on the twentysecond of December considering that it would take about two (2) days to finish the job if the interment was to
take place on the twenty-fourth of the month. Respondent's delay in the delivery of the construction materials
wasted so much time that construction of the tomb could start only on the twenty-third. It could not be ready
for the scheduled burial of petitioner's wife. This undoubtedly prolonged the wake, in addition to the fact that
work at the cemetery had to be put off on Christmas day.
This case is clearly one of non-performance of a reciprocal obligation. 7 In their contract of purchase and sale,
petitioner had already complied fully with what was required of him as purchaser, i.e., the payment of the purchase
price of P2,110.00. It was incumbent upon respondent to immediately fulfill his obligation to deliver the goods
otherwise delay would attach.

We therefore sustain the award of moral damages. It cannot be denied that petitioner and his family suffered
wounded feelings, mental anguish and serious anxiety while keeping watch on Christmas day over the
remains of their loved one who could not be laid to rest on the date she herself had chosen. There is no
gainsaying the inexpressible pain and sorrow Ignacio Barzaga and his family bore at that moment caused no
less by the ineptitude, cavalier behavior and bad faith of respondent and his employees in the performance of
an obligation voluntarily entered into.
We also affirm the grant of exemplary damages. The lackadaisical and feckless attitude of the employees of
respondent over which he exercised supervisory authority indicates gross negligence in the fulfillment of his
business obligations. Respondent Alviar and his employees should have exercised fairness and good
judgment in dealing with petitioner who was then grieving over the loss of his wife. Instead of commiserating
with him, respondent and his employees contributed to petitioner's anguish by causing him to bear the agony
resulting from his inability to fulfill his wife's dying wish.
We delete however the award of temperate damages. Under Art. 2224 of the Civil Code, temperate damages
are more than nominal but less than compensatory, and may be recovered when the court finds that some
pecuniary loss has been suffered but the amount cannot, from the nature of the case, be proved with
certainty. In this case, the trial court found that plaintiff suffered damages in the form of wages for the hired
workers for 22 December 1990 and expenses incurred during the extra two (2) days of the wake. The record
however does not show that petitioner presented proof of the actual amount of expenses he incurred which
seems to be the reason the trial court awarded to him temperate damages instead. This is an erroneous
application of the concept of temperate damages. While petitioner may have indeed suffered pecuniary
losses, these by their very nature could be established with certainty by means of payment receipts. As such,
the claim falls unequivocally within the realm of actual or compensatory damages. Petitioner's failure to prove
actual expenditure consequently conduces to a failure of his claim. For in determining actual damages, the
court cannot rely on mere assertions, speculations, conjectures or guesswork but must depend on competent
proof and on the best evidence obtainable regarding the actual amount of loss. 8
We affirm the award of attorney's fees and litigation expenses. Award of damages, attorney's fees and
litigation costs is left to the sound discretion of the court, and if such discretion be well exercised, as in this
case, it will not be disturbed on appeal. 9
WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE except insofar as it
GRANTED on a motion for reconsideration the refund by private respondent of the amount of P2,110.00 paid

24

by petitioner for the construction materials. Consequently, except for the award of P5,000.00 as temperate
damages which we delete, the decision of the Regional Trial Court granting petitioner (a) P2,110.00 as refund
for the value of materials with interest computed at the legal rate per annum from the date of the filing of the
case; (b) P20,000.00 as moral damages; (c) P10,000.00 as exemplary damages; (d) P5,000.00 as litigation
expenses; and (4) P5,000.00 as attorney's fees, is AFFIRMED. No costs.
SO ORDERED.
#6 - G.R. No. L-47379 May 16, 1988
NATIONAL POWER CORPORATION, petitioner, vs.
HONORABLE COURT OF APPEALS and ENGINEERING CONSTRUCTION, INC., respondents.
G.R. No. L-47481 May 16, 1988
ENGINEERING CONSTRUCTION, INC., petitioner, vs.
COUTRT OF APPEALS and NATIONAL POWER CORPORATION, respondents.
Raymundo A. Armovit for private respondent in L-47379.
The Solicitor General for petitioner.

GUTIERREZ, JR., J.:

These consolidated petitions seek to set aside the decision of the respondent Court of Appeals which
adjudged the National Power Corporation liable for damages against Engineering Construction, Inc. The
appellate court, however, reduced the amount of damages awarded by the trial court. Hence, both parties
filed their respective petitions: the National Power Corporation (NPC) in G.R. No. 47379, questioning the
decision of the Court of Appeals for holding it liable for damages and the Engineering Construction, Inc. (ECI)
in G.R. No. 47481, questioning the same decision for reducing the consequential damages and attorney's
fees and for eliminating the exemplary damages.
The facts are succinctly summarized by the respondent Court of Appeals, as follows:
On August 4, 1964, plaintiff Engineering Construction, Inc., being a successful bidder,
executed a contract in Manila with the National Waterworks and Sewerage Authority
(NAWASA), whereby the former undertook to furnish all tools, labor, equipment, and materials
(not furnished by Owner), and to construct the proposed 2nd lpo-Bicti Tunnel, Intake and
Outlet Structures, and Appurtenant Structures, and Appurtenant Features, at Norzagaray,
Bulacan, and to complete said works within eight hundred (800) calendar days from the date
the Contractor receives the formal notice to proceed (Exh. A).
The project involved two (2) major phases: the first phase comprising, the tunnel work
covering a distance of seven (7) kilometers, passing through the mountain, from the Ipo river,
a part of Norzagaray, Bulacan, where the Ipo Dam of the defendant National Power
Corporation is located, to Bicti; the other phase consisting of the outworks at both ends of the
tunnel.
By September 1967, the plaintiff corporation already had completed the first major phase of
the work, namely, the tunnel excavation work. Some portions of the outworks at the Bicti site

25

were still under construction. As soon as the plaintiff corporation had finished the tunnel
excavation work at the Bicti site, all the equipment no longer needed there were transferred to
the Ipo site where some projects were yet to be completed.
The record shows that on November 4,1967, typhoon 'Welming' hit Central Luzon, passing
through defendant's Angat Hydro-electric Project and Dam at lpo, Norzagaray, Bulacan.
Strong winds struck the project area, and heavy rains intermittently fell. Due to the heavy
downpour, the water in the reservoir of the Angat Dam was rising perilously at the rate of sixty
(60) centimeters per hour. To prevent an overflow of water from the dam, since the water level
had reached the danger height of 212 meters above sea level, the defendant corporation
caused the opening of the spillway gates." (pp. 45-46, L-47379, Rollo)
The appellate court sustained the findings of the trial court that the evidence preponlderantly established the
fact that due to the negligent manner with which the spillway gates of the Angat Dam were opened, an
extraordinary large volume of water rushed out of the gates, and hit the installations and construction works of
ECI at the lpo site with terrific impact, as a result of which the latter's stockpile of materials and supplies, camp
facilities and permanent structures and accessories either washed away, lost or destroyed.
The appellate court further found that:
It cannot be pretended that there was no negligence or that the appellant exercised
extraordinary care in the opening of the spillway gates of the Angat Dam. Maintainers of the
dam knew very well that it was far more safe to open them gradually. But the spillway gates
were opened only when typhoon Welming was already at its height, in a vain effort to race
against time and prevent the overflow of water from the dam as it 'was rising dangerously at
the rate of sixty centimeters per hour. 'Action could have been taken as early as November 3,
1967, when the water in the reservoir was still low. At that time, the gates of the dam could
have been opened in a regulated manner. Let it be stressed that the appellant knew of the
coming of the typhoon four days before it actually hit the project area. (p. 53, L-47379, Rollo)
As to the award of damages, the appellate court held:
We come now to the award of damages. The appellee submitted a list of estimated losses and
damages to the tunnel project (Ipo side) caused by the instant flooding of the Angat River
(Exh. J-1). The damages were itemized in four categories, to wit: Camp Facilities P55,700.00;
Equipment, Parts and Plant P375,659.51; Materials P107,175.80; and Permanent
Structures and accessories P137,250.00, with an aggregate total amount of P675,785.31.
The list is supported by several vouchers which were all submitted as Exhibits K to M-38 a, N
to O, P to U-2 and V to X- 60-a (Vide: Folders Nos. 1 to 4). The appellant did not submit proofs
to traverse the aforementioned documentary evidence. We hold that the lower court did not
commit any error in awarding P 675,785.31 as actual or compensatory damages.
However, We cannot sustain the award of P333,200.00 as consequential damages. This
amount is broken down as follows: P213,200.00 as and for the rentals of a crane to
temporarily replace the one "destroyed beyond repair," and P120,000.00 as one month bonus
which the appellee failed to realize in accordance with the contract which the appellee had
with NAWASA. Said rental of the crane allegedly covered the period of one year at the rate of
P40.00 an hour for 16 hours a day. The evidence, however, shows that the appellee bought a
crane also a crawler type, on November 10, 1967, six (6) days after the incident in question
(Exh N) And according to the lower court, which finding was never assailed, the appellee
resumed its normal construction work on the Ipo- Bicti Project after a stoppage of only one
month. There is no evidence when the appellee received the crane from the seller, Asian
Enterprise Limited. But there was an agreement that the shipment of the goods would be
effected within 60 days from the opening of the letter of credit (Exh. N). It appearing that the
<re||an1w>

26

contract of sale was consummated, We must conclude or at least assume that the crane was
delivered to the appellee within 60 days as stipulated. The appellee then could have availed of
the services of another crane for a period of only one month (after a work stoppage of one
month) at the rate of P 40.00 an hour for 16 hours a day or a total of P 19,200.00 as rental.
But the value of the new crane cannot be included as part of actual damages because the old
was reactivated after it was repaired. The cost of the repair was P 77,000.00 as shown in item
No. 1 under the Equipment, Parts and Plants category (Exh. J-1), which amount of repair was
already included in the actual or compensatory damages. (pp. 54-56, L-47379, Rollo)
The appellate court likewise rejected the award of unrealized bonus from NAWASA in the amount of
P120,000.00 (computed at P4,000.00 a day in case construction is finished before the specified time, i.e.,
within 800 calendar days), considering that the incident occurred after more than three (3) years or one
thousand one hundred seventy (1,170) days. The court also eliminated the award of exemplary damages as
there was no gross negligence on the part of NPC and reduced the amount of attorney's fees from
P50,000.00 to P30,000.00.
In these consolidated petitions, NPC assails the appellate court's decision as being erroneous on the ground
that the destruction and loss of the ECI's equipment and facilities were due to force majeure. It argues that the
rapid rise of the water level in the reservoir of its Angat Dam due to heavy rains brought about by the typhoon
was an extraordinary occurrence that could not have been foreseen, and thus, the subsequent release of
water through the spillway gates and its resultant effect, if any, on ECI's equipment and facilities may rightly
be attributed to force majeure.
On the other hand, ECI assails the reduction of the consequential damages from P333,200.00 to P19,000.00
on the grounds that the appellate court had no basis in concluding that ECI acquired a new Crawler-type
crane and therefore, it only can claim rentals for the temporary use of the leased crane for a period of one
month; and that the award of P4,000.00 a day or P120,000.00 a month bonus is justified since the period
limitation on ECI's contract with NAWASA had dual effects, i.e., bonus for earlier completion and liquidated
damages for delayed performance; and in either case at the rate of P4,000.00 daily. Thus, since NPC's
negligence compelled work stoppage for a period of one month, the said award of P120,000.00 is justified.
ECI further assailes the reduction of attorney's fees and the total elimination of exemplary damages.
Both petitions are without merit.
It is clear from the appellate court's decision that based on its findings of fact and that of the trial court's,
petitioner NPC was undoubtedly negligent because it opened the spillway gates of the Angat Dam only at the
height of typhoon "Welming" when it knew very well that it was safer to have opened the same gradually and
earlier, as it was also undeniable that NPC knew of the coming typhoon at least four days before it actually
struck. And even though the typhoon was an act of God or what we may call force majeure, NPC cannot
escape liability because its negligence was the proximate cause of the loss and damage. As we have ruled
in Juan F. Nakpil & Sons v. Court of Appeals, (144 SCRA 596, 606-607):
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a
corresponding fraud, negligence, delay or violation or contravention in any manner of the tenor
of the obligation as provided for in Article 1170 of the Civil Code, which results in loss or
damage, the obligor cannot escape liability.
The principle embodied in the act of God doctrine strictly requires that the act must be one
occasioned exclusively by the violence of nature and human agencies are to be excluded from
creating or entering into the cause of the mischief. When the effect, the cause of which is to be
considered, is found to be in part the result of the participation of man, whether it be from
active intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as

27

it was, and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 11741175).
Thus, it has been held that when the negligence of a person concurs with an act of God in
producing a loss, such person is not exempt from liability by showing that the immediate cause
of the damage was the act of God. To be exempt from liability for loss because of an act of
God, he must be free from any previous negligence or misconduct by which the loss or
damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker
v. Milan 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604;
Lasam v. Smith, 45 Phil. 657).
Furthermore, the question of whether or not there was negligence on the part of NPC is a question of fact
which properly falls within the jurisdiction of the Court of Appeals and will not be disturbed by this Court unless
the same is clearly unfounded. Thus, in Tolentino v. Court of appeals, (150 SCRA 26, 36) we ruled:
Moreover, the findings of fact of the Court of Appeals are generally final and conclusive upon
the Supreme Court (Leonardo v. Court of Appeals, 120 SCRA 890 [1983]. In fact it is settled
that the Supreme Court is not supposed to weigh evidence but only to determine its
substantially (Nuez v. Sandiganbayan, 100 SCRA 433 [1982] and will generally not disturb
said findings of fact when supported by substantial evidence (Aytona v. Court of Appeals, 113
SCRA 575 [1985]; Collector of Customs of Manila v. Intermediate Appellate Court, 137 SCRA
3 [1985]. On the other hand substantial evidence is defined as such relevant evidence as a
reasonable mind might accept as adequate to support a conclusion (Philippine Metal
Products, Inc. v. Court of Industrial Relations, 90 SCRA 135 [1979]; Police Commission v.
Lood, 127 SCRA 757 [1984]; Canete v. WCC, 136 SCRA 302 [1985])
Therefore, the respondent Court of Appeals did not err in holding the NPC liable for damages.
Likewise, it did not err in reducing the consequential damages from P333,200.00 to P19,000.00. As shown by
the records, while there was no categorical statement or admission on the part of ECI that it bought a new
crane to replace the damaged one, a sales contract was presented to the effect that the new crane would be
delivered to it by Asian Enterprises within 60 days from the opening of the letter of credit at the cost of
P106,336.75. The offer was made by Asian Enterprises a few days after the flood. As compared to the
amount of P106,336.75 for a brand new crane and paying the alleged amount of P4,000.00 a day as rental for
the use of a temporary crane, which use petitioner ECI alleged to have lasted for a period of one year, thus,
totalling P120,000.00, plus the fact that there was already a sales contract between it and Asian Enterprises,
there is no reason why ECI should opt to rent a temporary crane for a period of one year. The appellate court
also found that the damaged crane was subsequently repaired and reactivated and the cost of repair was
P77,000.00. Therefore, it included the said amount in the award of of compensatory damages, but not the
value of the new crane. We do not find anything erroneous in the decision of the appellate court that the
consequential damages should represent only the service of the temporary crane for one month. A contrary
ruling would result in the unjust enrichment of ECI.
The P120,000.00 bonus was also properly eliminated as the same was granted by the trial court on the
premise that it represented ECI's lost opportunity "to earn the one month bonus from NAWASA ... ." As stated
earlier, the loss or damage to ECI's equipment and facilities occurred long after the stipulated deadline to
finish the construction. No bonus, therefore, could have been possibly earned by ECI at that point in time. The
supposed liquidated damages for failure to finish the project within the stipulated period or the opposite of the
claim for bonus is not clearly presented in the records of these petitions. It is not shown that NAWASA
imposed them.
As to the question of exemplary damages, we sustain the appellate court in eliminating the same since it
found that there was no bad faith on the part of NPC and that neither can the latter's negligence be
considered gross. In Dee Hua Liong Electrical Equipment Corp. v. Reyes, (145 SCRA 713, 719) we ruled:

28

Neither may private respondent recover exemplary damages since he is not entitled to moral
or compensatory damages, and again because the petitioner is not shown to have acted in a
wanton, fraudulent, reckless or oppressive manner (Art. 2234, Civil Code; Yutuk v. Manila
Electric Co., 2 SCRA 377; Francisco v. Government Service Insurance System, 7 SCRA 577;
Gutierrez v. Villegas, 8 SCRA 527; Air France v. Carrascoso, 18 SCRA 155; Pan Pacific (Phil.)
v. Phil. Advertising Corp., 23 SCRA 977; Marchan v. Mendoza, 24 SCRA 888).
We also affirm the reduction of attorney's fees from P50,000.00 to P30,000.00. There are no compelling
reasons why we should set aside the appellate court's finding that the latter amount suffices for the services
rendered by ECI's counsel.
WHEREFORE, the petitions in G.R. No. 47379 and G.R. No. 47481 are both DISMISSED for LACK OF
MERIT. The decision appealed from is AFFIRMED.
SO ORDERED.
#7 - G.R. No. L-12219

March 15, 1918

AMADO PICART, plaintiff-appellant, vs.

FRANK SMITH, JR., defendant-appellee.
Alejo Mabanag for appellant.
G. E. Campbell for appellee.
STREET, J.:
In this action the plaintiff, Amado Picart, seeks to recover of the defendant, Frank Smith, jr., the sum of
P31,000, as damages alleged to have been caused by an automobile driven by the defendant. From a
judgment of the Court of First Instance of the Province of La Union absolving the defendant from liability the
plaintiff has appealed.
The occurrence which gave rise to the institution of this action took place on December 12, 1912, on the
Carlatan Bridge, at San Fernando, La Union. It appears that upon the occasion in question the plaintiff was
riding on his pony over said bridge. Before he had gotten half way across, the defendant approached from the
opposite direction in an automobile, going at the rate of about ten or twelve miles per hour. As the defendant
neared the bridge he saw a horseman on it and blew his horn to give warning of his approach. He continued
his course and after he had taken the bridge he gave two more successive blasts, as it appeared to him that
the man on horseback before him was not observing the rule of the road.
The plaintiff, it appears, saw the automobile coming and heard the warning signals. However, being perturbed
by the novelty of the apparition or the rapidity of the approach, he pulled the pony closely up against the
railing on the right side of the bridge instead of going to the left. He says that the reason he did this was that
he thought he did not have sufficient time to get over to the other side. The bridge is shown to have a length
of about 75 meters and a width of 4.80 meters. As the automobile approached, the defendant guided it toward
his left, that being the proper side of the road for the machine. In so doing the defendant assumed that the
horseman would move to the other side. The pony had not as yet exhibited fright, and the rider had made no
sign for the automobile to stop. Seeing that the pony was apparently quiet, the defendant, instead of veering
to the right while yet some distance away or slowing down, continued to approach directly toward the horse
without diminution of speed. When he had gotten quite near, there being then no possibility of the horse
getting across to the other side, the defendant quickly turned his car sufficiently to the right to escape hitting
the horse alongside of the railing where it as then standing; but in so doing the automobile passed in such
close proximity to the animal that it became frightened and turned its body across the bridge with its head
toward the railing. In so doing, it as struck on the hock of the left hind leg by the flange of the car and the limb

29

was broken. The horse fell and its rider was thrown off with some violence. From the evidence adduced in the
case we believe that when the accident occurred the free space where the pony stood between the
automobile and the railing of the bridge was probably less than one and one half meters. As a result of its
injuries the horse died. The plaintiff received contusions which caused temporary unconsciousness and
required medical attention for several days.
The question presented for decision is whether or not the defendant in maneuvering his car in the manner
above described was guilty of negligence such as gives rise to a civil obligation to repair the damage done;
and we are of the opinion that he is so liable. As the defendant started across the bridge, he had the right to
assume that the horse and the rider would pass over to the proper side; but as he moved toward the center of
the bridge it was demonstrated to his eyes that this would not be done; and he must in a moment have
perceived that it was too late for the horse to cross with safety in front of the moving vehicle. In the nature of
things this change of situation occurred while the automobile was yet some distance away; and from this
moment it was not longer within the power of the plaintiff to escape being run down by going to a place of
greater safety. The control of the situation had then passed entirely to the defendant; and it was his duty
either to bring his car to an immediate stop or, seeing that there were no other persons on the bridge, to take
the other side and pass sufficiently far away from the horse to avoid the danger of collision. Instead of doing
this, the defendant ran straight on until he was almost upon the horse. He was, we think, deceived into doing
this by the fact that the horse had not yet exhibited fright. But in view of the known nature of horses, there was
an appreciable risk that, if the animal in question was unacquainted with automobiles, he might get exited and
jump under the conditions which here confronted him. When the defendant exposed the horse and rider to
this danger he was, in our opinion, negligent in the eye of the law.
The test by which to determine the existence of negligence in a particular case may be stated as follows: Did
the defendant in doing the alleged negligent act use that person would have used in the same situation? If
not, then he is guilty of negligence. The law here in effect adopts the standard supposed to be supplied by the
imaginary conduct of the discreet paterfamilias of the Roman law. The existence of negligence in a given case
is not determined by reference to the personal judgment of the actor in the situation before him. The law
considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence
and determines liability by that.
The question as to what would constitute the conduct of a prudent man in a given situation must of course be
always determined in the light of human experience and in view of the facts involved in the particular case.
Abstract speculations cannot here be of much value but this much can be profitably said: Reasonable men
govern their conduct by the circumstances which are before them or known to them. They are not, and are not
supposed to be, omniscient of the future. Hence they can be expected to take care only when there is
something before them to suggest or warn of danger. Could a prudent man, in the case under consideration,
foresee harm as a result of the course actually pursued? If so, it was the duty of the actor to take precautions
to guard against that harm. Reasonable foresight of harm, followed by ignoring of the suggestion born of this
prevision, is always necessary before negligence can be held to exist. Stated in these terms, the proper
criterion for determining the existence of negligence in a given case is this: Conduct is said to be negligent
when a prudent man in the position of the tortfeasor would have foreseen that an effect harmful to another
was sufficiently probable to warrant his foregoing conduct or guarding against its consequences.
Applying this test to the conduct of the defendant in the present case we think that negligence is clearly
established. A prudent man, placed in the position of the defendant, would in our opinion, have recognized
that the course which he was pursuing was fraught with risk, and would therefore have foreseen harm to the
horse and the rider as reasonable consequence of that course. Under these circumstances the law imposed
on the defendant the duty to guard against the threatened harm.
It goes without saying that the plaintiff himself was not free from fault, for he was guilty of antecedent
negligence in planting himself on the wrong side of the road. But as we have already stated, the defendant
was also negligent; and in such case the problem always is to discover which agent is immediately and
directly responsible. It will be noted that the negligent acts of the two parties were not contemporaneous,

30

since the negligence of the defendant succeeded the negligence of the plaintiff by an appreciable interval.
Under these circumstances the law is that the person who has the last fair chance to avoid the impending
harm and fails to do so is chargeable with the consequences, without reference to the prior negligence of the
other party.
The decision in the case of Rkes vs. Atlantic, Gulf and Pacific Co. (7 Phil. Rep., 359) should perhaps be
mentioned in this connection. This Court there held that while contributory negligence on the part of the
person injured did not constitute a bar to recovery, it could be received in evidence to reduce the damages
which would otherwise have been assessed wholly against the other party. The defendant company had there
employed the plaintiff, as a laborer, to assist in transporting iron rails from a barge in Manila harbor to the
company's yards located not far away. The rails were conveyed upon cars which were hauled along a narrow
track. At certain spot near the water's edge the track gave way by reason of the combined effect of the weight
of the car and the insecurity of the road bed. The car was in consequence upset; the rails slid off; and the
plaintiff's leg was caught and broken. It appeared in evidence that the accident was due to the effects of the
typhoon which had dislodged one of the supports of the track. The court found that the defendant company
was negligent in having failed to repair the bed of the track and also that the plaintiff was, at the moment of
the accident, guilty of contributory negligence in walking at the side of the car instead of being in front or
behind. It was held that while the defendant was liable to the plaintiff by reason of its negligence in having
failed to keep the track in proper repair nevertheless the amount of the damages should be reduced on
account of the contributory negligence in the plaintiff. As will be seen the defendant's negligence in that case
consisted in an omission only. The liability of the company arose from its responsibility for the dangerous
condition of its track. In a case like the one now before us, where the defendant was actually present and
operating the automobile which caused the damage, we do not feel constrained to attempt to weigh the
negligence of the respective parties in order to apportion the damage according to the degree of their relative
fault. It is enough to say that the negligence of the defendant was in this case the immediate and determining
cause of the accident and that the antecedent negligence of the plaintiff was a more remote factor in the case.
A point of minor importance in the case is indicated in the special defense pleaded in the defendant's answer,
to the effect that the subject matter of the action had been previously adjudicated in the court of a justice of
the peace. In this connection it appears that soon after the accident in question occurred, the plaintiff caused
criminal proceedings to be instituted before a justice of the peace charging the defendant with the infliction of
serious injuries (lesiones graves). At the preliminary investigation the defendant was discharged by the
magistrate and the proceedings were dismissed. Conceding that the acquittal of the defendant at the trial
upon the merits in a criminal prosecution for the offense mentioned would be res adjudicata upon the question
of his civil liability arising from negligence -- a point upon which it is unnecessary to express an opinion -- the
action of the justice of the peace in dismissing the criminal proceeding upon the preliminary hearing can have
no effect. (See U. S. vs. Banzuela and Banzuela, 31 Phil. Rep., 564.)
From what has been said it results that the judgment of the lower court must be reversed, and judgment is her
rendered that the plaintiff recover of the defendant the sum of two hundred pesos (P200), with costs of other
instances. The sum here awarded is estimated to include the value of the horse, medical expenses of the
plaintiff, the loss or damage occasioned to articles of his apparel, and lawful interest on the whole to the date
of this recovery. The other damages claimed by the plaintiff are remote or otherwise of such character as not
to be recoverable. So ordered.

31

#8 - G.R. No. 179337

April 30, 2008

JOSEPH SALUDAGA, petitioner, vs.

FAR EASTERN UNIVERSITY and EDILBERTO C. DE JESUS in his capacity as President of
FEU, respondents.
DECISION
YNARES-SANTIAGO, J.:
This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the June 29, 2007
Decision2 of the Court of Appeals in CA-G.R. CV No. 87050, nullifying and setting aside the November 10,
2004 Decision3 of the Regional Trial Court of Manila, Branch 2, in Civil Case No. 98-89483 and dismissing the
complaint filed by petitioner; as well as its August 23, 2007 Resolution4 denying the Motion for
Reconsideration.5
The antecedent facts are as follows:
Petitioner Joseph Saludaga was a sophomore law student of respondent Far Eastern University (FEU) when
he was shot by Alejandro Rosete (Rosete), one of the security guards on duty at the school premises on
August 18, 1996. Petitioner was rushed to FEU-Dr. Nicanor Reyes Medical Foundation (FEU-NRMF) due to
the wound he sustained.6 Meanwhile, Rosete was brought to the police station where he explained that the
shooting was accidental. He was eventually released considering that no formal complaint was filed against
him.
Petitioner thereafter filed a complaint for damages against respondents on the ground that they breached their
obligation to provide students with a safe and secure environment and an atmosphere conducive to learning.
Respondents, in turn, filed a Third-Party Complaint7 against Galaxy Development and Management
Corporation (Galaxy), the agency contracted by respondent FEU to provide security services within its
premises and Mariano D. Imperial (Imperial), Galaxy's President, to indemnify them for whatever would be
adjudged in favor of petitioner, if any; and to pay attorney's fees and cost of the suit. On the other hand,
Galaxy and Imperial filed a Fourth-Party Complaint against AFP General Insurance.8
On November 10, 2004, the trial court rendered a decision in favor of petitioner, the dispositive portion of
which reads:
WHEREFORE, from the foregoing, judgment is hereby rendered ordering:
1. FEU and Edilberto de Jesus, in his capacity as president of FEU to pay jointly and severally
Joseph Saludaga the amount of P35,298.25 for actual damages with 12% interest per annum
from the filing of the complaint until fully paid; moral damages of P300,000.00, exemplary
damages of P500,000.00, attorney's fees of P100,000.00 and cost of the suit;
2. Galaxy Management and Development Corp. and its president, Col. Mariano Imperial to
indemnify jointly and severally 3rd party plaintiffs (FEU and Edilberto de Jesus in his capacity
as President of FEU) for the above-mentioned amounts;
3. And the 4th party complaint is dismissed for lack of cause of action. No pronouncement as
to costs.
SO ORDERED.9

32

Respondents appealed to the Court of Appeals which rendered the assailed Decision, the decretal portion of
which provides, viz:
WHEREFORE, the appeal is hereby GRANTED. The Decision dated November 10, 2004 is hereby
REVERSED and SET ASIDE. The complaint filed by Joseph Saludaga against appellant Far Eastern
University and its President in Civil Case No. 98-89483 is DISMISSED.
SO ORDERED.10
Petitioner filed a Motion for Reconsideration which was denied; hence, the instant petition based on the
following grounds:
THE COURT OF APPEALS SERIOUSLY ERRED IN MANNER CONTRARY TO LAW AND
JURISPRUDENCE IN RULING THAT:
5.1. THE SHOOTING INCIDENT IS A FORTUITOUS EVENT;
5.2. RESPONDENTS ARE NOT LIABLE FOR DAMAGES FOR THE INJURY RESULTING FROM A
GUNSHOT WOUND SUFFERED BY THE PETITIONER FROM THE HANDS OF NO LESS THAN
THEIR OWN SECURITY GUARD IN VIOLATION OF THEIR BUILT-IN CONTRACTUAL
OBLIGATION TO PETITIONER, BEING THEIR LAW STUDENT AT THAT TIME, TO PROVIDE HIM
WITH A SAFE AND SECURE EDUCATIONAL ENVIRONMENT;
5.3. SECURITY GAURD, ALEJANDRO ROSETE, WHO SHOT PETITIONER WHILE HE WAS
WALKING ON HIS WAY TO THE LAW LIBRARY OF RESPONDENT FEU IS NOT THEIR
EMPLOYEE BY VIRTUE OF THE CONTRACT FOR SECURITY SERVICES BETWEEN GALAXY
AND FEU NOTWITHSTANDING THE FACT THAT PETITIONER, NOT BEING A PARTY TO IT, IS
NOT BOUND BY THE SAME UNDER THE PRINCIPLE OF RELATIVITY OF CONTRACTS; and
5.4. RESPONDENT EXERCISED DUE DILIGENCE IN SELECTING GALAXY AS THE AGENCY
WHICH WOULD PROVIDE SECURITY SERVICES WITHIN THE PREMISES OF RESPONDENT
FEU.11
Petitioner is suing respondents for damages based on the alleged breach of student-school contract for a safe
learning environment. The pertinent portions of petitioner's Complaint read:
6.0. At the time of plaintiff's confinement, the defendants or any of their representative did not bother
to visit and inquire about his condition. This abject indifference on the part of the defendants continued
even after plaintiff was discharged from the hospital when not even a word of consolation was heard
from them. Plaintiff waited for more than one (1) year for the defendants to perform their moral
obligation but the wait was fruitless. This indifference and total lack of concern of defendants served to
exacerbate plaintiff's miserable condition.
xxxx
11.0. Defendants are responsible for ensuring the safety of its students while the latter are within the
University premises. And that should anything untoward happens to any of its students while they are
within the University's premises shall be the responsibility of the defendants. In this case, defendants,
despite being legally and morally bound, miserably failed to protect plaintiff from injury and thereafter,
to mitigate and compensate plaintiff for said injury;
12.0. When plaintiff enrolled with defendant FEU, a contract was entered into between them. Under
this contract, defendants are supposed to ensure that adequate steps are taken to provide an

33

atmosphere conducive to study and ensure the safety of the plaintiff while inside defendant FEU's
premises. In the instant case, the latter breached this contract when defendant allowed harm to befall
upon the plaintiff when he was shot at by, of all people, their security guard who was tasked to
maintain peace inside the campus.12
In Philippine School of Business Administration v. Court of Appeals,13 we held that:
When an academic institution accepts students for enrollment, there is established a contract between
them, resulting in bilateral obligations which both parties are bound to comply with. For its part, the
school undertakes to provide the student with an education that would presumably suffice to equip him
with the necessary tools and skills to pursue higher education or a profession. On the other hand, the
student covenants to abide by the school's academic requirements and observe its rules and
regulations.
Institutions of learning must also meet the implicit or "built-in" obligation of providing their students with
an atmosphere that promotes or assists in attaining its primary undertaking of imparting knowledge.
Certainly, no student can absorb the intricacies of physics or higher mathematics or explore the realm
of the arts and other sciences when bullets are flying or grenades exploding in the air or where there
looms around the school premises a constant threat to life and limb. Necessarily, the school must
ensure that adequate steps are taken to maintain peace and order within the campus premises and to
prevent the breakdown thereof.14
It is undisputed that petitioner was enrolled as a sophomore law student in respondent FEU. As such, there
was created a contractual obligation between the two parties. On petitioner's part, he was obliged to comply
with the rules and regulations of the school. On the other hand, respondent FEU, as a learning institution is
mandated to impart knowledge and equip its students with the necessary skills to pursue higher education or
a profession. At the same time, it is obliged to ensure and take adequate steps to maintain peace and order
within the campus.
It is settled that in culpa contractual, the mere proof of the existence of the contract and the failure of its
compliance justify, prima facie, a corresponding right of relief.15 In the instant case, we find that, when
petitioner was shot inside the campus by no less the security guard who was hired to maintain peace and
secure the premises, there is a prima facie showing that respondents failed to comply with its obligation to
provide a safe and secure environment to its students.
In order to avoid liability, however, respondents aver that the shooting incident was a fortuitous event because
they could not have reasonably foreseen nor avoided the accident caused by Rosete as he was not their
employee;16 and that they complied with their obligation to ensure a safe learning environment for their
students by having exercised due diligence in selecting the security services of Galaxy.
After a thorough review of the records, we find that respondents failed to discharge the burden of proving that
they exercised due diligence in providing a safe learning environment for their students. They failed to prove
that they ensured that the guards assigned in the campus met the requirements stipulated in the Security
Service Agreement. Indeed, certain documents about Galaxy were presented during trial; however, no
evidence as to the qualifications of Rosete as a security guard for the university was offered.
Respondents also failed to show that they undertook steps to ascertain and confirm that the security guards
assigned to them actually possess the qualifications required in the Security Service Agreement. It was not
proven that they examined the clearances, psychiatric test results, 201 files, and other vital documents
enumerated in its contract with Galaxy. Total reliance on the security agency about these matters or failure to
check the papers stating the qualifications of the guards is negligence on the part of respondents. A learning
institution should not be allowed to completely relinquish or abdicate security matters in its premises to the
security agency it hired. To do so would result to contracting away its inherent obligation to ensure a safe
learning environment for its students.

34

Consequently, respondents' defense of force majeure must fail. In order for force majeure to be considered,
respondents must show that no negligence or misconduct was committed that may have occasioned the loss.
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.17
Article 1170 of the Civil Code provides that those who are negligent in the performance of their obligations are
liable for damages. Accordingly, for breach of contract due to negligence in providing a safe learning
environment, respondent FEU is liable to petitioner for damages. It is essential in the award of damages that
the claimant must have satisfactorily proven during the trial the existence of the factual basis of the damages
and its causal connection to defendant's acts.18
In the instant case, it was established that petitioner spent P35,298.25 for his hospitalization and other
medical expenses.19 While the trial court correctly imposed interest on said amount, however, the case at bar
involves an obligation arising from a contract and not a loan or forbearance of money. As such, the proper
rate of legal interest is six percent (6%) per annum of the amount demanded. Such interest shall continue to
run from the filing of the complaint until the finality of this Decision.20 After this Decision becomes final and
executory, the applicable rate shall be twelve percent (12%) per annum until its satisfaction.
The other expenses being claimed by petitioner, such as transportation expenses and those incurred in hiring
a personal assistant while recuperating were however not duly supported by receipts.21 In the absence
thereof, no actual damages may be awarded. Nonetheless, temperate damages under Art. 2224 of the Civil
Code may be recovered where it has been shown that the claimant suffered some pecuniary loss but the
amount thereof cannot be proved with certainty. Hence, the amount of P20,000.00 as temperate damages is
awarded to petitioner.
As regards the award of moral damages, there is no hard and fast rule in the determination of what would be
a fair amount of moral damages since each case must be governed by its own peculiar circumstances.22 The
testimony of petitioner about his physical suffering, mental anguish, fright, serious anxiety, and moral shock
resulting from the shooting incident23 justify the award of moral damages. However, moral damages are in the
category of an award designed to compensate the claimant for actual injury suffered and not to impose a
penalty on the wrongdoer. The award is not meant to enrich the complainant at the expense of the defendant,
but to enable the injured party to obtain means, diversion, or amusements that will serve to obviate the moral
suffering he has undergone. It is aimed at the restoration, within the limits of the possible, of the spiritual
status quo ante, and should be proportionate to the suffering inflicted. Trial courts must then guard against the
award of exorbitant damages; they should exercise balanced restrained and measured objectivity to avoid
suspicion that it was due to passion, prejudice, or corruption on the part of the trial court.24 We deem it just
and reasonable under the circumstances to award petitioner moral damages in the amount of P100,000.00.
Likewise, attorney's fees and litigation expenses in the amount of P50,000.00 as part of damages is
reasonable in view of Article 2208 of the Civil Code.25 However, the award of exemplary damages is deleted
considering the absence of proof that respondents acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner.
We note that the trial court held respondent De Jesus solidarily liable with respondent FEU. In Powton
Conglomerate, Inc. v. Agcolicol,26 we held that:
[A] corporation is invested by law with a personality separate and distinct from those of the persons
composing it, such that, save for certain exceptions, corporate officers who entered into contracts in
behalf of the corporation cannot be held personally liable for the liabilities of the latter. Personal
liability of a corporate director, trustee or officer along (although not necessarily) with the corporation

35

may so validly attach, as a rule, only when - (1) he assents to a patently unlawful act of the
corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, or when there
is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2)
he consents to the issuance of watered down stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto; (3) he agrees to hold himself
personally and solidarily liable with the corporation; or (4) he is made by a specific provision of law
personally answerable for his corporate action.27
None of the foregoing exceptions was established in the instant case; hence, respondent De Jesus should not
be held solidarily liable with respondent FEU.
Incidentally, although the main cause of action in the instant case is the breach of the school-student contract,
petitioner, in the alternative, also holds respondents vicariously liable under Article 2180 of the Civil Code,
which provides:
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
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.
We agree with the findings of the Court of Appeals that respondents cannot be held liable for damages under
Art. 2180 of the Civil Code because respondents are not the employers of Rosete. The latter was employed
by Galaxy. The instructions issued by respondents' Security Consultant to Galaxy and its security guards are
ordinarily no more than requests commonly envisaged in the contract for services entered into by a principal
and a security agency. They cannot be construed as the element of control as to treat respondents as the
employers of Rosete.28
As held in Mercury Drug Corporation v. Libunao:29
In Soliman, Jr. v. Tuazon,30 we held that where the security agency recruits, hires and assigns the
works of its watchmen or security guards to a client, the employer of such guards or watchmen is such
agency, and not the client, since the latter has no hand in selecting the security guards. Thus, the duty
to observe the diligence of a good father of a family cannot be demanded from the said client:
[I]t is settled in our jurisdiction that where the security agency, as here, recruits, hires and
assigns the work of its watchmen or security guards, the agency is the employer of such
guards or watchmen. Liability for illegal or harmful acts committed by the security guards
attaches to the employer agency, and not to the clients or customers of such agency. As a
general rule, a client or customer of a security agency has no hand in selecting who among
the pool of security guards or watchmen employed by the agency shall be assigned to it; the
duty to observe the diligence of a good father of a family in the selection of the guards cannot,
in the ordinary course of events, be demanded from the client whose premises or property are
protected by the security guards.

36

xxxx
The fact that a client company may give instructions or directions to the security guards assigned to it,
does not, by itself, render the client responsible as an employer of the security guards concerned and
liable for their wrongful acts or omissions.31
We now come to respondents' Third Party Claim against Galaxy. In Firestone Tire and Rubber Company of
the Philippines v. Tempengko,32 we held that:
The third-party complaint is, therefore, a procedural device whereby a 'third party' who is neither a
party nor privy to the act or deed complained of by the plaintiff, may be brought into the case with
leave of court, by the defendant, who acts as third-party plaintiff to enforce against such third-party
defendant a right for contribution, indemnity, subrogation or any other relief, in respect of the plaintiff's
claim. The third-party complaint is actually independent of and separate and distinct from the plaintiff's
complaint. Were it not for this provision of the Rules of Court, it would have to be filed independently
and separately from the original complaint by the defendant against the third-party. But the Rules
permit defendant to bring in a third-party defendant or so to speak, to litigate his separate cause of
action in respect of plaintiff's claim against a third-party in the original and principal case with the
object of avoiding circuitry of action and unnecessary proliferation of law suits and of disposing
expeditiously in one litigation the entire subject matter arising from one particular set of facts.33
Respondents and Galaxy were able to litigate their respective claims and defenses in the course of the trial of
petitioner's complaint. Evidence duly supports the findings of the trial court that Galaxy is negligent not only in
the selection of its employees but also in their supervision. Indeed, no administrative sanction was imposed
against Rosete despite the shooting incident; moreover, he was even allowed to go on leave of absence
which led eventually to his disappearance.34 Galaxy also failed to monitor petitioner's condition or extend the
necessary assistance, other than the P5,000.00 initially given to petitioner. Galaxy and Imperial failed to make
good their pledge to reimburse petitioner's medical expenses.
For these acts of negligence and for having supplied respondent FEU with an unqualified security guard,
which resulted to the latter's breach of obligation to petitioner, it is proper to hold Galaxy liable to respondent
FEU for such damages equivalent to the above-mentioned amounts awarded to petitioner.
Unlike respondent De Jesus, we deem Imperial to be solidarily liable with Galaxy for being grossly negligent
in directing the affairs of the security agency. It was Imperial who assured petitioner that his medical expenses
will be shouldered by Galaxy but said representations were not fulfilled because they presumed that petitioner
and his family were no longer interested in filing a formal complaint against them.35
WHEREFORE, the petition is GRANTED. The June 29, 2007 Decision of the Court of Appeals in CA-G.R. CV
No. 87050 nullifying the Decision of the trial court and dismissing the complaint as well as the August 23,
2007 Resolution denying the Motion for Reconsideration are REVERSED and SET ASIDE. The Decision of
the Regional Trial Court of Manila, Branch 2, in Civil Case No. 98-89483 finding respondent FEU liable for
damages for breach of its obligation to provide students with a safe and secure learning atmosphere,
is AFFIRMED with the following MODIFICATIONS:
a. respondent Far Eastern University (FEU) is ORDERED to pay petitioner actual damages in the amount of
P35,298.25, plus 6% interest per annum from the filing of the complaint until the finality of this Decision. After
this decision becomes final and executory, the applicable rate shall be twelve percent (12%) per annum until
its satisfaction;
b. respondent FEU is also ORDERED to pay petitioner temperate damages in the amount of P20,000.00;
moral damages in the amount of P100,000.00; and attorney's fees and litigation expenses in the amount of
P50,000.00;

37

c. the award of exemplary damages is DELETED.

The Complaint against respondent Edilberto C. De Jesus is DISMISSED. The counterclaims of respondents
are likewise DISMISSED.
Galaxy Development and Management Corporation (Galaxy) and its president, Mariano D. Imperial
are ORDERED to jointly and severally pay respondent FEU damages equivalent to the above-mentioned
amounts awarded to petitioner. SO ORDERED.

#9 - [G.R. No. 138569. September 11, 2003]

THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF APPEALS and L.C.
DIAZ and COMPANY, CPAs, respondents.

DECISION
CARPIO, J.:
The Case
Before us is a petition for review of the Decision[1] of the Court of Appeals dated 27 October 1998 and its
Resolution dated 11 May 1999. The assailed decision reversed the Decision[2]of the Regional Trial Court of
Manila, Branch 8, absolving petitioner Consolidated Bank and Trust Corporation, now known as Solidbank
Corporation (Solidbank), of any liability. The questioned resolution of the appellate court denied the motion for
reconsideration of Solidbank but modified the decision by deleting the award of exemplary damages,
attorneys fees, expenses of litigation and cost of suit.

The Facts
Solidbank is a domestic banking corporation organized and existing under Philippine laws. Private
respondent L.C. Diaz and Company, CPAs (L.C. Diaz), is a professional partnership engaged in the practice
of accounting.
Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as Savings
Account No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya (Macaraya), filled up a savings
(cash) deposit slip for P990 and a savings (checks) deposit slip for P50.Macaraya instructed the messenger
of L.C. Diaz, Ismael Calapre (Calapre), to deposit the money with Solidbank. Macaraya also gave Calapre the
Solidbank passbook.
Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the passbook. The
teller acknowledged receipt of the deposit by returning to Calapre the duplicate copies of the two deposit
slips. Teller No. 6 stamped the deposit slips with the words DUPLICATE and SAVING TELLER 6
SOLIDBANK HEAD OFFICE. Since the transaction took time and Calapre had to make another deposit for
L.C. Diaz with Allied Bank, he left the passbook with Solidbank. Calapre then went to Allied Bank. When
Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that somebody got the
passbook.[3] Calapre went back to L.C. Diaz and reported the incident to Macaraya.
Macaraya immediately prepared a deposit slip in duplicate copies with a check of P200,000. Macaraya,
together with Calapre, went to Solidbank and presented to Teller No. 6 the deposit slip and check. The teller
stamped the words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE on the duplicate copy

38

of the deposit slip. When Macaraya asked for the passbook, Teller No. 6 told Macaraya that someone got the
passbook but she could not remember to whom she gave the passbook. When Macaraya asked Teller No. 6 if
Calapre got the passbook, Teller No. 6 answered that someone shorter than Calapre got the passbook.
Calapre was then standing beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check
for P90,000 drawn on Philippine Banking Corporation (PBC). This PBC check of L.C. Diaz was a check that it
had long closed.[4] PBC subsequently dishonored the check because of insufficient funds and because the
signature in the check differed from PBCs specimen signature. Failing to get back the passbook, Macaraya
went back to her office and reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel Alvarez.
The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz (Diaz),
called up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open a new
account.[5] On the same day, Diaz formally wrote Solidbank to make the same request. It was also on the
same day that L.C. Diaz learned of the unauthorized withdrawal the day before, 14 August 1991, of P300,000
from its savings account. The withdrawal slip for the P300,000 bore the signatures of the authorized
signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however, denied signing the
withdrawal slip. A certain Noel Tamayo received the P300,000.
In an Information[6] dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan (Ilagan)
and one Roscon Verdazola with Estafa through Falsification of Commercial Document. The Regional Trial
Court of Manila dismissed the criminal case after the City Prosecutor filed a Motion to Dismiss on 4 August
1992.
On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its
money. Solidbank refused.
On 25 August 1992, L.C. Diaz filed a Complaint[7] for Recovery of a Sum of Money against Solidbank with
the Regional Trial Court of Manila, Branch 8. After trial, the trial court rendered on 28 December 1994 a
decision absolving Solidbank and dismissing the complaint.
L.C. Diaz then appealed[8] to the Court of Appeals. On 27 October 1998, the Court of Appeals issued its
Decision reversing the decision of the trial court.
On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for reconsideration of
Solidbank. The appellate court, however, modified its decision by deleting the award of exemplary damages
and attorneys fees.

The Ruling of the Trial Court

In absolving Solidbank, the trial court applied the rules on savings account written on the passbook. The
rules state that possession of this book shall raise the presumption of ownership and any payment or
payments made by the bank upon the production of the said book and entry therein of the withdrawal shall
have the same effect as if made to the depositor personally.[9]
At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook, he also
presented a withdrawal slip with the signatures of the authorized signatories of L.C. Diaz. The specimen
signatures of these persons were in the signature cards. The teller stamped the withdrawal slip with the words
Saving Teller No. 5. The teller then passed on the withdrawal slip to Genere Manuel (Manuel) for
authentication. Manuel verified the signatures on the withdrawal slip. The withdrawal slip was then given to
another officer who compared the signatures on the withdrawal slip with the specimen on the signature cards.
The trial court concluded that Solidbank acted with care and observed the rules on savings account when it
allowed the withdrawal of P300,000 from the savings account of L.C. Diaz.
The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the signatures
on the withdrawal slip were forged. The trial court admonished L.C. Diaz for not offering in evidence the

39

National Bureau of Investigation (NBI) report on the authenticity of the signatures on the withdrawal slip
for P300,000. The trial court believed that L.C. Diaz did not offer this evidence because it is derogatory to its
action.
Another provision of the rules on savings account states that the depositor must keep the passbook
under lock and key.[10] When another person presents the passbook for withdrawal prior to Solidbanks receipt
of the notice of loss of the passbook, that person is considered as the owner of the passbook. The trial court
ruled that the passbook presented during the questioned transaction was now out of the lock and key and
presumptively ready for a business transaction.[11]
Solidbank did not have any participation in the custody and care of the passbook. The trial court believed
that Solidbanks act of allowing the withdrawal of P300,000 was not the direct and proximate cause of the loss.
The trial court held that L.C. Diazs negligence caused the unauthorized withdrawal. Three facts establish L.C.
Diazs negligence: (1) the possession of the passbook by a person other than the depositor L.C. Diaz; (2) the
presentation of a signed withdrawal receipt by an unauthorized person; and (3) the possession by an
unauthorized person of a PBC check long closed by L.C. Diaz, which check was deposited on the day of the
fraudulent withdrawal.
The trial court debunked L.C. Diazs contention that Solidbank did not follow the precautionary procedures
observed by the two parties whenever L.C. Diaz withdrew significant amounts from its account. L.C. Diaz
claimed that a letter must accompany withdrawals of more than P20,000. The letter must request Solidbank to
allow the withdrawal and convert the amount to a managers check. The bearer must also have a letter
authorizing him to withdraw the same amount. Another person driving a car must accompany the bearer so
that he would not walk from Solidbank to the office in making the withdrawal. The trial court pointed out that
L.C. Diaz disregarded these precautions in its past withdrawal. On 16 July 1991, L.C. Diaz withdrew P82,554
without any separate letter of authorization or any communication with Solidbank that the money be converted
into a managers check.
The trial court further justified the dismissal of the complaint by holding that the case was a last ditch
effort of L.C. Diaz to recover P300,000 after the dismissal of the criminal case against Ilagan.
The dispositive portion of the decision of the trial court reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint.
The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the amount of
Thirty Thousand Pesos (P30,000.00) as attorneys fees.
With costs against plaintiff.
SO ORDERED.[12]

The Ruling of the Court of Appeals

The Court of Appeals ruled that Solidbanks negligence was the proximate cause of the unauthorized
withdrawal of P300,000 from the savings account of L.C. Diaz. The appellate court reached this conclusion
after applying the provision of the Civil Code on quasi-delict, to wit:
Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation
between the parties, is called a quasi-delict and is governed by the provisions of this chapter.
The appellate court held that the three elements of a quasi-delict are present in this case, namely: (a)
damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person for whose

40

acts he must respond; and (c) the connection of cause and effect between the fault or negligence of the
defendant and the damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip
for P300,000 allowed the withdrawal without making the necessary inquiry. The appellate court stated that the
teller, who was not presented by Solidbank during trial, should have called up the depositor because the
money to be withdrawn was a significant amount. Had the teller called up L.C. Diaz, Solidbank would have
known that the withdrawal was unauthorized. The teller did not even verify the identity of the impostor who
made the withdrawal. Thus, the appellate court found Solidbank liable for its negligence in the selection and
supervision of its employees.
The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its
messenger and its messenger in leaving the passbook with the teller, Solidbank could not escape liability
because of the doctrine of last clear chance. Solidbank could have averted the injury suffered by L.C. Diaz
had it called up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of diligence required from Solidbank is more than that of a good
father of a family. The business and functions of banks are affected with public interest. Banks are obligated
to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of
their relationship with their clients. The Court of Appeals found Solidbank remiss in its duty, violating its
fiduciary relationship with L.C. Diaz.
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new one
entered.
1. Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay plaintiff-appellant
the sum of Three Hundred Thousand Pesos (P300,000.00), with interest thereon at the rate of
12% per annum from the date of filing of the complaint until paid, the sum of P20,000.00 as
exemplary damages, and P20,000.00 as attorneys fees and expenses of litigation as well as
the cost of suit; and
2. Ordering the dismissal of defendant-appellees counterclaim in the amount of P30,000.00 as
attorneys fees.
SO ORDERED.[13]
Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its decision but modified
the award of damages. The appellate court deleted the award of exemplary damages and attorneys fees.
Invoking Article 2231[14] of the Civil Code, the appellate court ruled that exemplary damages could be granted
if the defendant acted with gross negligence. Since Solidbank was guilty of simple negligence only, the award
of exemplary damages was not justified. Consequently, the award of attorneys fees was also disallowed
pursuant to Article 2208 of the Civil Code. The expenses of litigation and cost of suit were also not imposed
on Solidbank.
The dispositive portion of the Resolution reads as follows:
WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with modification by
deleting the award of exemplary damages and attorneys fees, expenses of litigation and cost of suit.
SO ORDERED.[15]
Hence, this petition.

41

The Issues
Solidbank seeks the review of the decision and resolution of the Court of Appeals on these grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK SHOULD SUFFER
THE LOSS BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED PRIVATE
RESPONDENT BY TELEPHONE BEFORE IT ALLOWED THE WITHDRAWAL
OF P300,000.00 TO RESPONDENTS MESSENGER EMERANO ILAGAN, SINCE THERE IS
NO AGREEMENT BETWEEN THE PARTIES IN THE OPERATION OF THE SAVINGS
ACCOUNT, NOR IS THERE ANY BANKING LAW, WHICH MANDATES THAT A BANK
TELLER SHOULD FIRST CALL UP THE DEPOSITOR BEFORE ALLOWING A
WITHDRAWAL OF A BIG AMOUNT IN A SAVINGS ACCOUNT.
II. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST CLEAR CHANCE
AND IN HOLDING THAT PETITIONER BANKS TELLER HAD THE LAST OPPORTUNITY TO
WITHHOLD THE WITHDRAWAL WHEN IT IS UNDISPUTED THAT THE TWO SIGNATURES
OF RESPONDENT ON THE WITHDRAWAL SLIP ARE GENUINE AND PRIVATE
RESPONDENTS PASSBOOK WAS DULY PRESENTED, AND CONTRARIWISE
RESPONDENT WAS NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS
MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND
OTHER FINANCIAL DOCUMENTS.
III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE IS A LAST
DITCH EFFORT OF PRIVATE RESPONDENT TO RECOVER ITS P300,000.00 AFTER
FAILING IN ITS EFFORTS TO RECOVER THE SAME FROM ITS EMPLOYEE EMERANO
ILAGAN.
IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES AWARDED
AGAINST PETITIONER UNDER ARTICLE 2197 OF THE CIVIL CODE, NOTWITHSTANDING
ITS FINDING THAT PETITIONER BANKS NEGLIGENCE WAS ONLY CONTRIBUTORY. [16]

The Ruling of the Court

The petition is partly meritorious.

Solidbanks Fiduciary Duty under the Law

The rulings of the trial court and the Court of Appeals conflict on the application of the law. The trial court
pinned the liability on L.C. Diaz based on the provisions of the rules on savings account, a recognition of the
contractual relationship between Solidbank and L.C. Diaz, the latter being a depositor of the former. On the
other hand, the Court of Appeals applied the law on quasi-delict to determine who between the two parties
was ultimately negligent. The law on quasi-delict or culpa aquiliana is generally applicable when there is no
pre-existing contractual relationship between the parties.
We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual.
The contract between the bank and its depositor is governed by the provisions of the Civil Code on
simple loan.[17] 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 debtorcreditor relationship between the bank and its depositor.The bank is the debtor and the depositor is the

42

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),[18] 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. [19] 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,[20] 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.[21]
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.[22] 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[23] at the time of the withdrawal already imposed on banks the same high standard of diligence
required under RA No. 8791.
However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the
bank and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the
bank to pay the depositor is failure to pay a simple loan, and not a breach of trust.[24] The law simply imposes
on the bank a higher standard of integrity and performance in complying with its obligations under the
contract of simple loan, beyond those required of non-bank debtors under a similar contract of simple loan.
The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do
not accept deposits to enrich depositors but to earn money for themselves. The law allows banks to offer the
lowest possible interest rate to depositors while charging the highest possible interest rate on their own
borrowers. The interest spread or differential belongs to the bank and not to the depositors who are not cestui
que trust of banks. If depositors are cestui que trust of banks, then the interest spread or income belongs to
the depositors, a situation that Congress certainly did not intend in enacting Section 2 of RA 8791.

Solidbanks Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that responsibility arising from negligence in the performance of
every kind of obligation is demandable. For breach of the savings deposit agreement due to negligence,
or culpa contractual, the bank is liable to its depositor.
Calapre left the passbook with Solidbank because the transaction took time and he had to go to Allied
Bank for another transaction. The passbook was still in the hands of the employees of Solidbank for the
processing of the deposit when Calapre left Solidbank. Solidbanks rules on savings account require that the
deposit book should be carefully guarded by the depositor and kept under lock and key, if possible. When the
passbook is in the possession of Solidbanks tellers during withdrawals, the law imposes on Solidbank and its
tellers an even higher degree of diligence in safeguarding the passbook.
Likewise, Solidbanks tellers must exercise a high degree of diligence in insuring that they return the
passbook only to the depositor or his authorized representative. The tellers know, or should know, that the
rules on savings account provide that any person in possession of the passbook is presumptively its owner. If
the tellers give the passbook to the wrong person, they would be clothing that person presumptive ownership
of the passbook, facilitating unauthorized withdrawals by that person. For failing to return the passbook to
Calapre, the authorized representative of L.C. Diaz, Solidbank and Teller No. 6 presumptively failed to

43

observe such high degree of diligence in safeguarding the passbook, and in insuring its return to the party
authorized to receive the same.
In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the
defendant was at fault or negligent. The burden is on the defendant to prove that he was not at fault or
negligent. In contrast, in culpa aquiliana the plaintiff has the burden of proving that the defendant was
negligent. In the present case, L.C. Diaz has established that Solidbank breached its contractual obligation to
return the passbook only to the authorized representative of L.C. Diaz. There is thus a presumption that
Solidbank was at fault and its teller was negligent in not returning the passbook to Calapre. The burden was
on Solidbank to prove that there was no negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No. 6, the teller
with whom Calapre left the passbook and who was supposed to return the passbook to him. The record does
not indicate that Teller No. 6 verified the identity of the person who retrieved the passbook. Solidbank also
failed to adduce in evidence its standard procedure in verifying the identity of the person retrieving the
passbook, if there is such a procedure, and that Teller No. 6 implemented this procedure in the present case.
Solidbank is bound by the negligence of its employees under the principle of respondeat superior or
command responsibility. The defense of exercising the required diligence in the selection and supervision of
employees is not a complete defense in culpa contractual, unlike in culpa aquiliana.[25]
The bank must not only exercise high standards of integrity and performance, it must also insure that its
employees do likewise because this is the only way to insure that the bank will comply with its fiduciary
duty. Solidbank failed to present the teller who had the duty to return to Calapre the passbook, and thus failed
to prove that this teller exercised the high standards of integrity and performance required of Solidbanks
employees.

Proximate Cause of the Unauthorized Withdrawal

Another point of disagreement between the trial and appellate courts is the proximate cause of the
unauthorized withdrawal. The trial court believed that L.C. Diazs negligence in not securing its passbook
under lock and key was the proximate cause that allowed the impostor to withdraw the P300,000. For the
appellate court, the proximate cause was the tellers negligence in processing the withdrawal without first
verifying with L.C. Diaz. We do not agree with either court.
Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient
intervening cause, produces the injury and without which the result would not have occurred.[26] Proximate
cause is determined by the facts of each case upon mixed considerations of logic, common sense, policy and
precedent.[27]
L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in
possession of the passbook while it was processing the deposit. After completion of the transaction,
Solidbank had the contractual obligation to return the passbook only to Calapre, the authorized representative
of L.C. Diaz. Solidbank failed to fulfill its contractual obligation because it gave the passbook to another
person.
Solidbanks failure to return the passbook to Calapre made possible the withdrawal of the P300,000 by
the impostor who took possession of the passbook. Under Solidbanks rules on savings account, mere
possession of the passbook raises the presumption of ownership. It was the negligent act of Solidbanks Teller
No. 6 that gave the impostor presumptive ownership of the passbook. Had the passbook not fallen into the
hands of the impostor, the loss of P300,000 would not have happened. Thus, the proximate cause of the
unauthorized withdrawal was Solidbanks negligence in not returning the passbook to Calapre.
We do not subscribe to the appellate courts theory that the proximate cause of the unauthorized
withdrawal was the tellers failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have the duty
to call up L.C. Diaz to confirm the withdrawal. There is no arrangement between Solidbank and L.C. Diaz to

44

this effect. Even the agreement between Solidbank and L.C. Diaz pertaining to measures that the parties
must observe whenever withdrawals of large amounts are made does not direct Solidbank to call up L.C.
Diaz.
There is no law mandating banks to call up their clients whenever their representatives withdraw
significant amounts from their accounts. L.C. Diaz therefore had the burden to prove that it is the usual
practice of Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz failed to
do so.
Teller No. 5 who processed the withdrawal could not have been put on guard to verify the
withdrawal. Prior to the withdrawal of P300,000, the impostor deposited with Teller No. 6 theP90,000 PBC
check, which later bounced. The impostor apparently deposited a large amount of money to deflect suspicion
from the withdrawal of a much bigger amount of money. The appellate court thus erred when it imposed on
Solidbank the duty to call up L.C. Diaz to confirm the withdrawal when no law requires this from banks and
when the teller had no reason to be suspicious of the transaction.
Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims that since
Ilagan was also a messenger of L.C. Diaz, he was familiar with its teller so that there was no more need for
the teller to verify the withdrawal. Solidbank relies on the following statements in the Booking and Information
Sheet of Emerano Ilagan:
xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the amount of
P90,000 which he deposited in favor of L.C. Diaz and Company. After successfully withdrawing this large sum
of money, accused Ilagan gave alias Rey (Noel Tamayo) his share of the loot. Ilagan then hired a taxicab in
the amount of P1,000 to transport him (Ilagan) to his home province at Bauan, Batangas.Ilagan extravagantly
and lavishly spent his money but a big part of his loot was wasted in cockfight and horse racing. Ilagan was
apprehended and meekly admitted his guilt.[28] (Emphasis supplied.)
L.C. Diaz refutes Solidbanks contention by pointing out that the person who withdrew the P300,000 was
a certain Noel Tamayo. Both the trial and appellate courts stated that this Noel Tamayo presented the
passbook with the withdrawal slip.
We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew
the P300,000. The Court is not a trier of facts. We find no justifiable reason to reverse the factual finding of
the trial court and the Court of Appeals. The tellers who processed the deposit of the P90,000 check and the
withdrawal of the P300,000 were not presented during trial to substantiate Solidbanks claim that Ilagan
deposited the check and made the questioned withdrawal. Moreover, the entry quoted by Solidbank does not
categorically state that Ilagan presented the withdrawal slip and the passbook.

Doctrine of Last Clear Chance

The doctrine of last clear chance states that where both parties are negligent but the negligent act of one
is appreciably later than that of the other, or where it is impossible to determine whose fault or negligence
caused the loss, the one who had the last clear opportunity to avoid the loss but failed to do so, is chargeable
with the loss.[29] Stated differently, the antecedent negligence of the plaintiff does not preclude him from
recovering damages caused by the supervening negligence of the defendant, who had the last fair chance to
prevent the impending harm by the exercise of due diligence.[30]
We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach of
contract due to negligence in the performance of its contractual obligation to L.C. Diaz. This is a case of culpa
contractual, where neither the contributory negligence of the plaintiff nor his last clear chance to avoid the
loss, would exonerate the defendant from liability.[31]Such contributory negligence or last clear chance by the
plaintiff merely serves to reduce the recovery of damages by the plaintiff but does not exculpate the defendant
from his breach of contract.[32]

45

Mitigated Damages
Under Article 1172, liability (for culpa contractual) may be regulated by the courts, according to the
circumstances. This means that if the defendant exercised the proper diligence in the selection and
supervision of its employee, or if the plaintiff was guilty of contributory negligence, then the courts may reduce
the award of damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing a withdrawal
slip signed by its authorized signatories to fall into the hands of an impostor. Thus, the liability of Solidbank
should be reduced.
In Philippine Bank of Commerce v. Court of Appeals,[33] where the Court held the depositor guilty of
contributory negligence, we allocated the damages between the depositor and the bank on a 40-60
ratio. Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual damages
awarded by the appellate court. Solidbank must pay the other 60% of the actual damages.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION. Petitioner
Solidbank Corporation shall pay private respondent L.C. Diaz and Company, CPAs only 60% of the actual
damages awarded by the Court of Appeals. The remaining 40% of the actual damages shall be borne by
private respondent L.C. Diaz and Company, CPAs. Proportionate costs.
SO ORDERED.

#10 - G.R. No. 150255. April 22, 2005

SCHMITZ TRANSPORT & BROKERAGE CORPORATION, Petitioners, vs.
TRANSPORT VENTURE, INC., INDUSTRIAL INSURANCE COMPANY, LTD., and BLACK SEA SHIPPING
AND DODWELL now INCHCAPE SHIPPING SERVICES, Respondents.
DECISION
CARPIO-MORALES, J.:
On petition for review is the June 27, 2001 Decision1 of the Court of Appeals, as well as its Resolution2 dated
September 28, 2001 denying the motion for reconsideration, which affirmed that of Branch 21 of the Regional
Trial Court (RTC) of Manila in Civil Case No. 92-631323 holding petitioner Schmitz Transport Brokerage
Corporation (Schmitz Transport), together with Black Sea Shipping Corporation (Black Sea), represented by
its ship agent Inchcape Shipping Inc. (Inchcape), and Transport Venture (TVI), solidarily liable for the loss of
37 hot rolled steel sheets in coil that were washed overboard a barge.
On September 25, 1991, SYTCO Pte Ltd. Singapore shipped from the port of Ilyichevsk, Russia on board M/V
"Alexander Saveliev" (a vessel of Russian registry and owned by Black Sea) 545 hot rolled steel sheets in coil
weighing 6,992,450 metric tons.
The cargoes, which were to be discharged at the port of Manila in favor of the consignee, Little Giant Steel
Pipe Corporation (Little Giant),4 were insured against all risks with Industrial Insurance Company Ltd.
(Industrial Insurance) under Marine Policy No. M-91-3747-TIS.5
The vessel arrived at the port of Manila on October 24, 1991 and the Philippine Ports Authority (PPA)
assigned it a place of berth at the outside breakwater at the Manila South Harbor.6
Schmitz Transport, whose services the consignee engaged to secure the requisite clearances, to receive the
cargoes from the shipside, and to deliver them to its (the consignees) warehouse at Cainta, Rizal,7 in turn
engaged the services of TVI to send a barge and tugboat at shipside.

46

On October 26, 1991, around 4:30 p.m., TVIs tugboat "Lailani" towed the barge "Erika V" to shipside.8
By 7:00 p.m. also of October 26, 1991, the tugboat, after positioning the barge alongside the vessel, left and
returned to the port terminal.9 At 9:00 p.m., arrastre operator Ocean Terminal Services Inc. commenced to
unload 37 of the 545 coils from the vessel unto the barge.
By 12:30 a.m. of October 27, 1991 during which the weather condition had become inclement due to an
approaching storm, the unloading unto the barge of the 37 coils was accomplished.10 No tugboat pulled the
barge back to the pier, however.
At around 5:30 a.m. of October 27, 1991, due to strong waves,11 the crew of the barge abandoned it and
transferred to the vessel. The barge pitched and rolled with the waves and eventually capsized, washing the
37 coils into the sea.12 At 7:00 a.m., a tugboat finally arrived to pull the already empty and damaged barge
back to the pier.13
Earnest efforts on the part of both the consignee Little Giant and Industrial Insurance to recover the lost
cargoes proved futile.14
Little Giant thus filed a formal claim against Industrial Insurance which paid it the amount of P5,246,113.11.
Little Giant thereupon executed a subrogation receipt15 in favor of Industrial Insurance.
Industrial Insurance later filed a complaint against Schmitz Transport, TVI, and Black Sea through its
representative Inchcape (the defendants) before the RTC of Manila, for the recovery of the amount it paid to
Little Giant plus adjustment fees, attorneys fees, and litigation expenses.16
Industrial Insurance faulted the defendants for undertaking the unloading of the cargoes while typhoon signal
No. 1 was raised in Metro Manila.17
By Decision of November 24, 1997, Branch 21 of the RTC held all the defendants negligent for unloading the
cargoes outside of the breakwater notwithstanding the storm signal.18 The dispositive portion of the decision
reads:
WHEREFORE, premises considered, the Court renders judgment in favor of the plaintiff, ordering the
defendants to pay plaintiff jointly and severally the sum of P5,246,113.11 with interest from the date the
complaint was filed until fully satisfied, as well as the sum of P5,000.00 representing the adjustment fee plus
the sum of 20% of the amount recoverable from the defendants as attorneys fees plus the costs of suit. The
counterclaims and cross claims of defendants are hereby DISMISSED for lack of [m]erit.19
To the trial courts decision, the defendants Schmitz Transport and TVI filed a joint motion for reconsideration
assailing the finding that they are common carriers and the award of excessive attorneys fees of more
than P1,000,000. And they argued that they were not motivated by gross or evident bad faith and that the
incident was caused by a fortuitous event. 20
By resolution of February 4, 1998, the trial court denied the motion for reconsideration. 21
All the defendants appealed to the Court of Appeals which, by decision of June 27, 2001, affirmed in toto the
decision of the trial court, 22 it finding that all the defendants were common carriers Black Sea and TVI for
engaging in the transport of goods and cargoes over the seas as a regular business and not as an isolated
transaction,23 and Schmitz Transport for entering into a contract with Little Giant to transport the cargoes from
ship to port for a fee.24

47

In holding all the defendants solidarily liable, the appellate court ruled that "each one was essential such that
without each others contributory negligence the incident would not have happened and so much so that the
person principally liable cannot be distinguished with sufficient accuracy."25
In discrediting the defense of fortuitous event, the appellate court held that "although defendants obviously
had nothing to do with the force of nature, they however had control of where to anchor the vessel, where
discharge will take place and even when the discharging will commence."26
The defendants respective motions for reconsideration having been denied by Resolution27 of September 28,
2001, Schmitz Transport (hereinafter referred to as petitioner) filed the present petition against TVI, Industrial
Insurance and Black Sea.
Petitioner asserts that in chartering the barge and tugboat of TVI, it was acting for its principal, consignee
Little Giant, hence, the transportation contract was by and between Little Giant and TVI.28
By Resolution of January 23, 2002, herein respondents Industrial Insurance, Black Sea, and TVI were
required to file their respective Comments.29
By its Comment, Black Sea argued that the cargoes were received by the consignee through petitioner in
good order, hence, it cannot be faulted, it having had no control and supervision thereover.30
For its part, TVI maintained that it acted as a passive party as it merely received the cargoes and transferred
them unto the barge upon the instruction of petitioner.31
In issue then are:
(1) Whether the loss of the cargoes was due to a fortuitous event, independent of any act of negligence on the
part of petitioner Black Sea and TVI, and
(2) If there was negligence, whether liability for the loss may attach to Black Sea, petitioner and TVI.
When a fortuitous event occurs, Article 1174 of the Civil Code absolves any party from any and all liability
arising therefrom:
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.
In order, to be considered a fortuitous event, however, (1) the cause of the unforeseen and unexpected
occurrence, or the failure of the debtor to comply with his obligation, must be independent of human will; (2) it
must be impossible to foresee the event which constitute the caso fortuito, or if it can be foreseen it must be
impossible to avoid; (3) the occurrence must be such as to render it impossible for the debtor to fulfill his
obligation in any manner; and (4) the obligor must be free from any participation in the aggravation of the
injury resulting to the creditor.32
[T]he principle embodied in the act of God doctrine strictly requires that the act must be occasioned solely by
the violence of nature. Human intervention is to be excluded from creating or entering into the cause of the
mischief. When the effect is found to be in part the result of the participation of man, whether due to his active
intervention or neglect or failure to act, the whole occurrence is then humanized and removed from the rules
applicable to the acts of God.33
The appellate court, in affirming the finding of the trial court that human intervention in the form of contributory
negligence by all the defendants resulted to the loss of the cargoes,34 held that unloading outside the

48

breakwater, instead of inside the breakwater, while a storm signal was up constitutes negligence.35 It thus
concluded that the proximate cause of the loss was Black Seas negligence in deciding to unload the cargoes
at an unsafe place and while a typhoon was approaching.36
From a review of the records of the case, there is no indication that there was greater risk in loading the
cargoes outside the breakwater. As the defendants proffered, the weather on October 26, 1991 remained
normal with moderate sea condition such that port operations continued and proceeded normally.37
The weather data report,38 furnished and verified by the Chief of the Climate Data Section of PAG-ASA and
marked as a common exhibit of the parties, states that while typhoon signal No. 1 was hoisted over Metro
Manila on October 23-31, 1991, the sea condition at the port of Manila at 5:00 p.m. - 11:00 p.m. of October
26, 1991 was moderate. It cannot, therefore, be said that the defendants were negligent in not unloading the
cargoes upon the barge on October 26, 1991 inside the breakwater.
That no tugboat towed back the barge to the pier after the cargoes were completely loaded by 12:30 in the
morning39 is, however, a material fact which the appellate court failed to properly consider and appreciate40
the proximate cause of the loss of the cargoes. Had the barge been towed back promptly to the pier, the
deteriorating sea conditions notwithstanding, the loss could have been avoided. But the barge was left floating
in open sea until big waves set in at 5:30 a.m., causing it to sink along with the cargoes.41 The loss thus falls
outside the "act of God doctrine."
The proximate cause of the loss having been determined, who among the parties is/are responsible therefor?
Contrary to petitioners insistence, this Court, as did the appellate court, finds that petitioner is a common
carrier. For it undertook to transport the cargoes from the shipside of "M/V Alexander Saveliev" to the
consignees warehouse at Cainta, Rizal. As the appellate court put it, "as long as a person or corporation
holds [itself] to the public for the purpose of transporting goods as [a] business, [it] is already considered a
common carrier regardless if [it] owns the vehicle to be used or has to hire one."42 That petitioner is a common
carrier, the testimony of its own Vice-President and General Manager Noel Aro that part of the services it
offers to its clients as a brokerage firm includes the transportation of cargoes reflects so.
Atty. Jubay: Will you please tell us what [are you] functions x x x as Executive Vice-President and General
Manager of said Company?
Mr. Aro: Well, I oversee the entire operation of the brokerage and transport business of the company. I also
handle the various division heads of the company for operation matters, and all other related functions that
the President may assign to me from time to time, Sir.
Q: Now, in connection [with] your duties and functions as you mentioned, will you please tell the Honorable
Court if you came to know the company by the name Little Giant Steel Pipe Corporation?
A: Yes, Sir. Actually, we are the brokerage firm of that Company.
Q: And since when have you been the brokerage firm of that company, if you can recall?
A: Since 1990, Sir.
Q: Now, you said that you are the brokerage firm of this Company. What work or duty did you perform in
behalf of this company?
A: We handled the releases (sic) of their cargo[es] from the Bureau of Customs. We [are] also in-charged of
the delivery of the goods to their warehouses. We also handled the clearances of their shipment at the Bureau
of Customs, Sir.

49

xxx
Q: Now, what precisely [was] your agreement with this Little Giant Steel Pipe Corporation with regards to this
shipment? What work did you do with this shipment?
A: We handled the unloading of the cargo[es] from vessel to lighter and then the delivery of [the] cargo[es]
from lighter to BASECO then to the truck and to the warehouse, Sir.
Q: Now, in connection with this work which you are doing, Mr. Witness, you are supposed to perform, what
equipment do (sic) you require or did you use in order to effect this unloading, transfer and delivery to the
warehouse?
A: Actually, we used the barges for the ship side operations, this unloading [from] vessel to lighter, and on this
we hired or we sub-contracted with [T]ransport Ventures, Inc. which [was] in-charged (sic) of the barges. Also,
in BASECO compound we are leasing cranes to have the cargo unloaded from the barge to trucks, [and] then
we used trucks to deliver [the cargoes] to the consignees warehouse, Sir.
Q: And whose trucks do you use from BASECO compound to the consignees warehouse?
A: We utilized of (sic) our own trucks and we have some other contracted trucks, Sir.
xxx
ATTY. JUBAY: Will you please explain to us, to the Honorable Court why is it you have to contract for the
barges of Transport Ventures Incorporated in this particular operation?
A: Firstly, we dont own any barges. That is why we hired the services of another firm whom we know
[al]ready for quite sometime, which is Transport Ventures, Inc. (Emphasis supplied)43
It is settled that under a given set of facts, a customs broker may be regarded as a common carrier. Thus, this
Court, in A.F. Sanchez Brokerage, Inc. v. The Honorable Court of Appeals,44 held:
The appellate court did not err in finding petitioner, a customs broker, to be also a common carrier, as defined
under Article 1732 of the Civil Code, to wit,
Art. 1732. Common carriers are persons, corporations, firms or associations engaged in the business of
carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their
services to the public.
xxx
Article 1732 does not distinguish between one whose principal business activity is the carrying of goods and
one who does such carrying only as an ancillary activity. The contention, therefore, of petitioner that it is not a
common carrier but a customs broker whose principal function is to prepare the correct customs declaration
and proper shipping documents as required by law is bereft of merit. It suffices that petitioner undertakes to
deliver the goods for pecuniary consideration.45
And in Calvo v. UCPB General Insurance Co. Inc.,46 this Court held that as the transportation of goods is an
integral part of a customs broker, the customs broker is also a common carrier. For to declare otherwise
"would be to deprive those with whom [it] contracts the protection which the law affords them notwithstanding
the fact that the obligation to carry goods for [its] customers, is part and parcel of petitioners business."47

50

As for petitioners argument that being the agent of Little Giant, any negligence it committed was deemed the
negligence of its principal, it does not persuade.
True, petitioner was the broker-agent of Little Giant in securing the release of the cargoes. In effecting the
transportation of the cargoes from the shipside and into Little Giants warehouse, however, petitioner was
discharging its own personal obligation under a contact of carriage.
Petitioner, which did not have any barge or tugboat, engaged the services of TVI as handler48 to provide the
barge and the tugboat. In their Service Contract,49 while Little Giant was named as the consignee, petitioner
did not disclose that it was acting on commission and was chartering the vessel for Little Giant.50 Little Giant
did not thus automatically become a party to the Service Contract and was not, therefore, bound by the terms
and conditions therein.
Not being a party to the service contract, Little Giant cannot directly sue TVI based thereon but it can maintain
a cause of action for negligence.51
In the case of TVI, while it acted as a private carrier for which it was under no duty to observe extraordinary
diligence, it was still required to observe ordinary diligence to ensure the proper and careful handling, care
and discharge of the carried goods.
Thus, Articles 1170 and 1173 of the Civil Code provide:
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.
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 2202, 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.
Was the reasonable care and caution which an ordinarily prudent person would have used in the same
situation exercised by TVI?52
This Court holds not.
TVIs failure to promptly provide a tugboat did not only increase the risk that might have been reasonably
anticipated during the shipside operation, but was the proximate cause of the loss. A man of ordinary
prudence would not leave a heavily loaded barge floating for a considerable number of hours, at such a
precarious time, and in the open sea, knowing that the barge does not have any power of its own and is totally
defenseless from the ravages of the sea. That it was nighttime and, therefore, the members of the crew of a
tugboat would be charging overtime pay did not excuse TVI from calling for one such tugboat.
As for petitioner, for it to be relieved of liability, it should, following Article 173953 of the Civil Code, prove that it
exercised due diligence to prevent or minimize the loss, before, during and after the occurrence of the storm
in order that it may be exempted from liability for the loss of the goods.
While petitioner sent checkers54 and a supervisor55 on board the vessel to counter-check the operations of
TVI, it failed to take all available and reasonable precautions to avoid the loss. After noting that TVI failed to
arrange for the prompt towage of the barge despite the deteriorating sea conditions, it should have
summoned the same or another tugboat to extend help, but it did not.

51

This Court holds then that petitioner and TVI are solidarily liable56 for the loss of the cargoes. The following
pronouncement of the Supreme Court is instructive:
The foundation of LRTAs liability is the contract of carriage and its obligation to indemnify the victim arises
from the breach of that contract by reason of its failure to exercise the high diligence required of the common
carrier. In the discharge of its commitment to ensure the safety of passengers, a carrier may choose to hire its
own employees or avail itself of the services of an outsider or an independent firm to undertake the task. In
either case, the common carrier is not relieved of its responsibilities under the contract of carriage.
Should Prudent be made likewise liable? If at all, that liability could only be for tort under the provisions of
Article 2176 and related provisions, in conjunction with Article 2180 of the Civil Code. x x x [O]ne might ask
further, how then must the liability of the common carrier, on one hand, and an independent contractor, on the
other hand, be described? It would be solidary. A contractual obligation can be breached by tort and when the
same act or omission causes the injury, one resulting in culpa contractual and the other in culpa aquiliana,
Article 2194 of the Civil Code can well apply. In fine, a liability for tort may arise even under a contract, where
tort is that which breaches the contract. Stated differently, when an act which constitutes a breach of contract
would have itself constituted the source of a quasi-delictual liability had no contract existed between the
parties, the contract can be said to have been breached by tort, thereby allowing the rules on tort to apply.57
As for Black Sea, its duty as a common carrier extended only from the time the goods were surrendered or
unconditionally placed in its possession and received for transportation until they were delivered actually or
constructively to consignee Little Giant.58
Parties to a contract of carriage may, however, agree upon a definition of delivery that extends the services
rendered by the carrier. In the case at bar, Bill of Lading No. 2 covering the shipment provides that delivery be
made "to the port of discharge or so near thereto as she may safely get, always afloat."59 The delivery of the
goods to the consignee was not from "pier to pier" but from the shipside of "M/V Alexander Saveliev" and into
barges, for which reason the consignee contracted the services of petitioner. Since Black Sea had
constructively delivered the cargoes to Little Giant, through petitioner, it had discharged its duty.60
In fine, no liability may thus attach to Black Sea.
Respecting the award of attorneys fees in an amount over P1,000,000.00 to Industrial Insurance, for lack of
factual and legal basis, this Court sets it aside. While Industrial Insurance was compelled to litigate its rights,
such fact by itself does not justify the award of attorneys fees under Article 2208 of the Civil Code. For no
sufficient showing of bad faith would be reflected in a partys persistence in a case other than an erroneous
conviction of the righteousness of his cause.61 To award attorneys fees to a party just because the judgment
is rendered in its favor would be tantamount to imposing a premium on ones right to litigate or seek judicial
redress of legitimate grievances.62
On the award of adjustment fees: The adjustment fees and expense of divers were incurred by Industrial
Insurance in its voluntary but unsuccessful efforts to locate and retrieve the lost cargo. They do not constitute
actual damages.63
As for the court a quos award of interest on the amount claimed, the same calls for modification following the
ruling in Eastern Shipping Lines, Inc. v. Court of Appeals64 that when the demand cannot be reasonably
established at the time the demand is made, the interest shall begin to run not from the time the claim is made
judicially or extrajudicially but from the date the judgment of the court is made (at which the time the
quantification of damages may be deemed to have been reasonably ascertained).65
WHEREFORE, judgment is hereby rendered ordering petitioner Schmitz Transport & Brokerage Corporation,
and Transport Venture Incorporation jointly and severally liable for the amount of P5,246,113.11 with the
MODIFICATION that interest at SIX PERCENT per annum of the amount due should be computed from the
promulgation on November 24, 1997 of the decision of the trial court. Costs against petitioner. SO ORDERED.
52

#11 - 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

53

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?

54

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

55

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."27Thus, 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

56

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

57

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.
#12 - G.R. No. 147324

May 25, 2004

PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, petitioner, vs.

GLOBE TELECOM, INC. (formerly Globe Mckay Cable and Radio Corporation), respondents.
x-----------------------------x
GLOBE TELECOM, INC., petitioner, vs.
PHILIPPINE COMMUNICATION SATELLITE CORPORATION, respondent.
DECISION
TINGA, J.:
Before the Court are two Petitions for Review assailing the Decision of the Court of Appeals, dated 27
February 2001, in CA-G.R. CV No. 63619.1
The facts of the case are undisputed.
For several years prior to 1991, Globe Mckay Cable and Radio Corporation, now Globe Telecom, Inc.
(Globe), had been engaged in the coordination of the provision of various communication facilities for the
military bases of the United States of America (US) in Clark Air Base, Angeles, Pampanga and Subic Naval
Base in Cubi Point, Zambales. The said communication facilities were installed and configured for the
exclusive use of the US Defense Communications Agency (USDCA), and for security reasons, were operated
only by its personnel or those of American companies contracted by it to operate said facilities. The USDCA
contracted with said American companies, and the latter, in turn, contracted with Globe for the use of the
communication facilities. Globe, on the other hand, contracted with local service providers such as the
Philippine Communications Satellite Corporation (Philcomsat) for the provision of the communication facilities.
58

On 07 May 1991, Philcomsat and Globe entered into an Agreement whereby Philcomsat obligated itself to
establish, operate and provide an IBS Standard B earth station (earth station) within Cubi Point for the
exclusive use of the USDCA.2 The term of the contract was for 60 months, or five (5) years.3 In turn, Globe
promised to pay Philcomsat monthly rentals for each leased circuit involved.4
At the time of the execution of the Agreement, both parties knew that the Military Bases Agreement between
the Republic of the Philippines and the US (RP-US Military Bases Agreement), which was the basis for the
occupancy of the Clark Air Base and Subic Naval Base in Cubi Point, was to expire in 1991. Under Section
25, Article XVIII of the 1987 Constitution, foreign military bases, troops or facilities, which include those
located at the US Naval Facility in Cubi Point, shall not be allowed in the Philippines unless a new treaty is
duly concurred in by the Senate and ratified by a majority of the votes cast by the people in a national
referendum when the Congress so requires, and such new treaty is recognized as such by the US
Government.
Subsequently, Philcomsat installed and established the earth station at Cubi Point and the USDCA made use
of the same.
On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141, expressing its decision
not to concur in the ratification of the Treaty of Friendship, Cooperation and Security and its Supplementary
Agreements that was supposed to extend the term of the use by the US of Subic Naval Base, among
others.5 The last two paragraphs of the Resolution state:
FINDING that the Treaty constitutes a defective framework for the continuing relationship between the
two countries in the spirit of friendship, cooperation and sovereign equality: Now, therefore, be it
Resolved by the Senate, as it is hereby resolved, To express its decision not to concur in the
ratification of the Treaty of Friendship, Cooperation and Security and its Supplementary Agreements,
at the same time reaffirming its desire to continue friendly relations with the government and people of
the United States of America.6
On 31 December 1991, the Philippine Government sent a Note Verbale to the US Government through the
US Embassy, notifying it of the Philippines termination of the RP-US Military Bases Agreement. The Note
Verbale stated that since the RP-US Military Bases Agreement, as amended, shall terminate on 31 December
1992, the withdrawal of all US military forces from Subic Naval Base should be completed by said date.
In a letter dated 06 August 1992, Globe notified Philcomsat of its intention to discontinue the use of the earth
station effective 08 November 1992 in view of the withdrawal of US military personnel from Subic Naval Base
after the termination of the RP-US Military Bases Agreement. Globe invoked as basis for the letter of
termination Section 8 (Default) of the Agreement, which provides:
Neither party shall be held liable or deemed to be in default for any failure to perform its obligation
under this Agreement if such failure results directly or indirectly from force majeure or fortuitous event.
Either party is thus precluded from performing its obligation until such force majeure or fortuitous
event shall terminate. For the purpose of this paragraph, force majeure shall mean circumstances
beyond the control of the party involved including, but not limited to, any law, order, regulation,
direction or request of the Government of the Philippines, strikes or other labor difficulties, insurrection
riots, national emergencies, war, acts of public enemies, fire, floods, typhoons or other catastrophies
or acts of God.
Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that "we expect [Globe] to know its
commitment to pay the stipulated rentals for the remaining terms of the Agreement even after [Globe] shall
have discontinue[d] the use of the earth station after November 08, 1992."7 Philcomsat referred to Section 7 of
the Agreement, stating as follows:
7. DISCONTINUANCE OF SERVICE

59

Should [Globe] decide to discontinue with the use of the earth station after it has been put into
operation, a written notice shall be served to PHILCOMSAT at least sixty (60) days prior to the
expected date of termination. Notwithstanding the non-use of the earth station, [Globe] shall continue
to pay PHILCOMSAT for the rental of the actual number of T1 circuits in use, but in no case shall be
less than the first two (2) T1 circuits, for the remaining life of the agreement. However, should
PHILCOMSAT make use or sell the earth station subject to this agreement, the obligation of [Globe] to
pay the rental for the remaining life of the agreement shall be at such monthly rate as may be agreed
upon by the parties.8
After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter dated 24 November 1993
demanding payment of its outstanding obligations under the Agreement amounting to US$4,910,136.00 plus
interest and attorneys fees. However, Globe refused to heed Philcomsats demand.
On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati a Complaint against Globe,
praying that the latter be ordered to pay liquidated damages under the Agreement, with legal interest,
exemplary damages, attorneys fees and costs of suit. The case was raffled to Branch 59 of said court.
Globe filed an Answer to the Complaint, insisting that it was constrained to end the Agreement due to the
termination of the RP-US Military Bases Agreement and the non-ratification by the Senate of the Treaty of
Friendship and Cooperation, which events constituted force majeure under the Agreement. Globe explained
that the occurrence of said events exempted it from paying rentals for the remaining period of the Agreement.
On 05 January 1999, the trial court rendered its Decision, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Ordering the defendant to pay the plaintiff the amount of Ninety Two Thousand Two
Hundred Thirty Eight US Dollars (US$92,238.00) or its equivalent in Philippine Currency
(computed at the exchange rate prevailing at the time of compliance or payment) representing
rentals for the month of December 1992 with interest thereon at the legal rate of twelve
percent (12%) per annum starting December 1992 until the amount is fully paid;
2. Ordering the defendant to pay the plaintiff the amount of Three Hundred Thousand
(P300,000.00) Pesos as and for attorneys fees;
3. Ordering the DISMISSAL of defendants counterclaim for lack of merit; and
4. With costs against the defendant.
SO ORDERED.9
Both parties appealed the trial courts Decision to the Court of Appeals.
Philcomsat claimed that the trial court erred in ruling that: (1) the non-ratification by the Senate of the Treaty
of Friendship, Cooperation and Security and its Supplementary Agreements constitutes force majeure which
exempts Globe from complying with its obligations under the Agreement; (2) Globe is not liable to pay the
rentals for the remainder of the term of the Agreement; and (3) Globe is not liable to Philcomsat for exemplary
damages.
Globe, on the other hand, contended that the RTC erred in holding it liable for payment of rent of the earth
station for December 1992 and of attorneys fees. It explained that it terminated Philcomsats services on 08
November 1992; hence, it had no reason to pay for rentals beyond that date.

60

On 27 February 2001, the Court of Appeals promulgated its Decision dismissing Philcomsats appeal for lack
of merit and affirming the trial courts finding that certain events constituting force majeure under Section 8 the
Agreement occurred and justified the non-payment by Globe of rentals for the remainder of the term of the
Agreement.
The appellate court ruled that the non-ratification by the Senate of the Treaty of Friendship, Cooperation and
Security, and its Supplementary Agreements, and the termination by the Philippine Government of the RP-US
Military Bases Agreement effective 31 December 1991 as stated in the Philippine Governments Note
Verbale to the US Government, are acts, directions, or requests of the Government of the Philippines which
constitute force majeure. In addition, there were circumstances beyond the control of the parties, such as the
issuance of a formal order by Cdr. Walter Corliss of the US Navy, the issuance of the letter notification from
ATT and the complete withdrawal of all US military forces and personnel from Cubi Point, which prevented
further use of the earth station under the Agreement.
However, the Court of Appeals ruled that although Globe sought to terminate Philcomsats services by 08
November 1992, it is still liable to pay rentals for the December 1992, amounting to US$92,238.00 plus
interest, considering that the US military forces and personnel completely withdrew from Cubi Point only on 31
December 1992.10
Both parties filed their respective Petitions for Review assailing the Decision of the Court of Appeals.
In G.R. No. 147324,11 petitioner Philcomsat raises the following assignments of error:
A. THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING A DEFINITION OF FORCE
MAJEURE DIFFERENT FROM WHAT ITS LEGAL DEFINITION FOUND IN ARTICLE 1174 OF THE
CIVIL CODE, PROVIDES, SO AS TO EXEMPT GLOBE TELECOM FROM COMPLYING WITH ITS
OBLIGATIONS UNDER THE SUBJECT AGREEMENT.
B. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT
LIABLE TO PHILCOMSAT FOR RENTALS FOR THE REMAINING TERM OF THE AGREEMENT,
DESPITE THE CLEAR TENOR OF SECTION 7 OF THE AGREEMENT.
C. THE HONORABLE OCURT OF APPEALS ERRED IN DELETING THE TRIAL COURTS AWARD
OF ATTORNEYS FEES IN FAVOR OF PHILCOMSAT.
D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT
LIABLE TO PHILCOMSAT FOR EXEMPLARY DAMAGES.12
Philcomsat argues that the termination of the RP-US Military Bases Agreement cannot be considered a
fortuitous event because the happening thereof was foreseeable. Although the Agreement was freely entered
into by both parties, Section 8 should be deemed ineffective because it is contrary to Article 1174 of the Civil
Code. Philcomsat posits the view that the validity of the parties definition of force majeure in Section 8 of the
Agreement as "circumstances beyond the control of the party involved including, but not limited to, any law,
order, regulation, direction or request of the Government of the Philippines, strikes or other labor difficulties,
insurrection riots, national emergencies, war, acts of public enemies, fire, floods, typhoons or other
catastrophies or acts of God," should be deemed subject to Article 1174 which defines fortuitous events as
events which could not be foreseen, or which, though foreseen, were inevitable.13
Philcomsat further claims that the Court of Appeals erred in holding that Globe is not liable to pay for the
rental of the earth station for the entire term of the Agreement because it runs counter to what was plainly
stipulated by the parties in Section 7 thereof. Moreover, said ruling is inconsistent with the appellate courts
pronouncement that Globe is liable to pay rentals for December 1992 even though it terminated Philcomsats
services effective 08 November 1992, because the US military and personnel completely withdrew from Cubi

61

Point only in December 1992. Philcomsat points out that it was Globe which proposed the five-year term of
the Agreement, and that the other provisions of the Agreement, such as Section 4.114 thereof, evince the
intent of Globe to be bound to pay rentals for the entire five-year term.15
Philcomsat also maintains that contrary to the appellate courts findings, it is entitled to attorneys fees and
exemplary damages.16
In its Comment to Philcomsats Petition, Globe asserts that Section 8 of the Agreement is not contrary to
Article 1174 of the Civil Code because said provision does not prohibit parties to a contract from providing for
other instances when they would be exempt from fulfilling their contractual obligations. Globe also claims that
the termination of the RP-US Military Bases Agreement constitutes force majeure and exempts it from
complying with its obligations under the Agreement.17 On the issue of the propriety of awarding attorneys fees
and exemplary damages to Philcomsat, Globe maintains that Philcomsat is not entitled thereto because in
refusing to pay rentals for the remainder of the term of the Agreement, Globe only acted in accordance with its
rights.18
In G.R. No. 147334,19 Globe, the petitioner therein, contends that the Court of Appeals erred in finding it liable
for the amount of US$92,238.00, representing rentals for December 1992, since Philcomsats services were
actually terminated on 08 November 1992.20
In its Comment, Philcomsat claims that Globes petition should be dismissed as it raises a factual issue which
is not cognizable by the Court in a petition for review on certiorari.21
On 15 August 2001, the Court issued a Resolution giving due course to Philcomsats Petition in G.R. No.
147324 and required the parties to submit their respective memoranda.22
Similarly, on 20 August 2001, the Court issued a Resolution giving due course to the Petition filed by Globe
in G.R. No. 147334 and required both parties to submit their memoranda.23
Philcomsat and Globe thereafter filed their respective Consolidated Memoranda in the two cases, reiterating
their arguments in their respective petitions.
The Court is tasked to resolve the following issues: (1) whether the termination of the RP-US Military Bases
Agreement, the non-ratification of the Treaty of Friendship, Cooperation and Security, and the consequent
withdrawal of US military forces and personnel from Cubi Point constitute force majeure which would exempt
Globe from complying with its obligation to pay rentals under its Agreement with Philcomsat; (2) whether
Globe is liable to pay rentals under the Agreement for the month of December 1992; and (3) whether
Philcomsat is entitled to attorneys fees and exemplary damages.
No reversible error was committed by the Court of Appeals in issuing the assailed Decision; hence the
petitions are denied.
There is no merit is Philcomsats argument that Section 8 of the Agreement cannot be given effect because
the enumeration of events constituting force majeure therein unduly expands the concept of a fortuitous event
under Article 1174 of the Civil Code and is therefore invalid.
In support of its position, Philcomsat contends that under Article 1174 of the Civil Code, an event must be
unforeseen in order to exempt a party to a contract from complying with its obligations therein. It insists that
since the expiration of the RP-US Military Bases Agreement, the non-ratification of the Treaty of Friendship,
Cooperation and Security and the withdrawal of US military forces and personnel from Cubi Point were not
unforeseeable, but were possibilities known to it and Globe at the time they entered into the Agreement, such

62

events cannot exempt Globe from performing its obligation of paying rentals for the entire five-year term
thereof.
However, Article 1174, which exempts an obligor from liability on account of fortuitous events or force
majeure, refers not only to events that are unforeseeable, but also to those which are foreseeable, but
inevitable:
Art. 1174. Except in cases specified by the law, or when it is otherwise declared by stipulation, or
when the nature of the obligation requires the assumption of risk, no person shall be responsible for
those events which, could not be foreseen, or which, though foreseen were inevitable.
A fortuitous event under Article 1174 may either be an "act of God," or natural occurrences such as floods or
typhoons,24 or an "act of man," such as riots, strikes or wars.25
Philcomsat and Globe agreed in Section 8 of the Agreement that the following events shall be deemed events
constituting force majeure:
1. Any law, order, regulation, direction or request of the Philippine Government;
2. Strikes or other labor difficulties;
3. Insurrection;
4. Riots;
5. National emergencies;
6. War;
7. Acts of public enemies;
8. Fire, floods, typhoons or other catastrophies or acts of God;
9. Other circumstances beyond the control of the parties.
Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of the parties. There is
nothing in the enumeration that runs contrary to, or expands, the concept of a fortuitous event under Article
1174.
Furthermore, under Article 130626 of the Civil Code, parties to a contract may establish such stipulations,
clauses, terms and conditions as they may deem fit, as long as the same do not run counter to the law,
morals, good customs, public order or public policy.27
Article 1159 of the Civil Code also provides that "[o]bligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith."28 Courts cannot stipulate for the
parties nor amend their agreement where the same does not contravene law, morals, good customs, public
order or public policy, for to do so would be to alter the real intent of the parties, and would run contrary to the
function of the courts to give force and effect thereto.29
Not being contrary to law, morals, good customs, public order, or public policy, Section 8 of the Agreement
which Philcomsat and Globe freely agreed upon has the force of law between them.30

63

In order that Globe may be exempt from non-compliance with its obligation to pay rentals under Section 8, the
concurrence of the following elements must be established: (1) the event must be independent of the human
will; (2) the occurrence must render it impossible for the debtor to fulfill the obligation in a normal manner; and
(3) the obligor must be free of participation in, or aggravation of, the injury to the creditor.31
The Court agrees with the Court of Appeals and the trial court that the abovementioned requisites are present
in the instant case. Philcomsat and Globe had no control over the non-renewal of the term of the RP-US
Military Bases Agreement when the same expired in 1991, because the prerogative to ratify the treaty
extending the life thereof belonged to the Senate. Neither did the parties have control over the subsequent
withdrawal of the US military forces and personnel from Cubi Point in December 1992:
Obviously the non-ratification by the Senate of the RP-US Military Bases Agreement (and its
Supplemental Agreements) under its Resolution No. 141. (Exhibit "2") on September 16, 1991 is
beyond the control of the parties. This resolution was followed by the sending on December 31, 1991
o[f] a "Note Verbale" (Exhibit "3") by the Philippine Government to the US Government notifying the
latter of the formers termination of the RP-US Military Bases Agreement (as amended) on 31
December 1992 and that accordingly, the withdrawal of all U.S. military forces from Subic Naval Base
should be completed by said date. Subsequently, defendant [Globe] received a formal order from Cdr.
Walter F. Corliss II Commander USN dated July 31, 1992 and a notification from ATT dated July 29,
1992 to terminate the provision of T1s services (via an IBS Standard B Earth Station) effective
November 08, 1992. Plaintiff [Philcomsat] was furnished with copies of the said order and letter by the
defendant on August 06, 1992.
Resolution No. 141 of the Philippine Senate and the Note Verbale of the Philippine Government to the
US Government are acts, direction or request of the Government of the Philippines and circumstances
beyond the control of the defendant. The formal order from Cdr. Walter Corliss of the USN, the letter
notification from ATT and the complete withdrawal of all the military forces and personnel from Cubi
Point in the year-end 1992 are also acts and circumstances beyond the control of the defendant.
Considering the foregoing, the Court finds and so holds that the afore-narrated circumstances
constitute "force majeure or fortuitous event(s) as defined under paragraph 8 of the Agreement.

From the foregoing, the Court finds that the defendant is exempted from paying the rentals for the
facility for the remaining term of the contract.
As a consequence of the termination of the RP-US Military Bases Agreement (as amended) the
continued stay of all US Military forces and personnel from Subic Naval Base would no longer be
allowed, hence, plaintiff would no longer be in any position to render the service it was obligated under
the Agreement. To put it blantly (sic), since the US military forces and personnel left or withdrew from
Cubi Point in the year end December 1992, there was no longer any necessity for the plaintiff to
continue maintaining the IBS facility. 32 (Emphasis in the original.)
The aforementioned events made impossible the continuation of the Agreement until the end of its five-year
term without fault on the part of either party. The Court of Appeals was thus correct in ruling that the
happening of such fortuitous events rendered Globe exempt from payment of rentals for the remainder of the
term of the Agreement.
Moreover, it would be unjust to require Globe to continue paying rentals even though Philcomsat cannot be
compelled to perform its corresponding obligation under the Agreement. As noted by the appellate court:

64

We also point out the sheer inequity of PHILCOMSATs position. PHILCOMSAT would like to charge
GLOBE rentals for the balance of the lease term without there being any corresponding
telecommunications service subject of the lease. It will be grossly unfair and iniquitous to hold GLOBE
liable for lease charges for a service that was not and could not have been rendered due to an act of
the government which was clearly beyond GLOBEs control. The binding effect of a contract on both
parties is based on the principle that the obligations arising from contracts have the force of law
between the contracting parties, and there must be mutuality between them based essentially on their
equality under which it is repugnant to have one party bound by the contract while leaving the other
party free therefrom (Allied Banking Corporation v. Court of Appeals, 284 SCRA 357).33
With respect to the issue of whether Globe is liable for payment of rentals for the month of December 1992,
the Court likewise affirms the appellate courts ruling that Globe should pay the same.
Although Globe alleged that it terminated the Agreement with Philcomsat effective 08 November 1992
pursuant to the formal order issued by Cdr. Corliss of the US Navy, the date when they actually ceased using
the earth station subject of the Agreement was not established during the trial.34 However, the trial court found
that the US military forces and personnel completely withdrew from Cubi Point only on 31 December
1992.35 Thus, until that date, the USDCA had control over the earth station and had the option of using the
same. Furthermore, Philcomsat could not have removed or rendered ineffective said communication facility
until after 31 December 1992 because Cubi Point was accessible only to US naval personnel up to that time.
Hence, the Court of Appeals did not err when it affirmed the trial courts ruling that Globe is liable for payment
of rentals until December 1992.
Neither did the appellate court commit any error in holding that Philcomsat is not entitled to attorneys fees
and exemplary damages.
The award of attorneys fees is the exception rather than the rule, and must be supported by factual, legal and
equitable justifications.36 In previously decided cases, the Court awarded attorneys fees where a party acted
in gross and evident bad faith in refusing to satisfy the other partys claims and compelled the former to litigate
to protect his rights;37 when the action filed is clearly unfounded,38 or where moral or exemplary damages are
awarded.39 However, in cases where both parties have legitimate claims against each other and no party
actually prevailed, such as in the present case where the claims of both parties were sustained in part, an
award of attorneys fees would not be warranted.40
Exemplary damages may be awarded in cases involving contracts or quasi-contracts, if the erring party acted
in a wanton, fraudulent, reckless, oppressive or malevolent manner.41 In the present case, it was not shown
that Globe acted wantonly or oppressively in not heeding Philcomsats demands for payment of rentals. It was
established during the trial of the case before the trial court that Globe had valid grounds for refusing to
comply with its contractual obligations after 1992.
WHEREFORE, the Petitions are DENIED for lack of merit. The assailed Decision of the Court of Appeals in
CA-G.R. CV No. 63619 is AFFIRMED.
SO ORDERED.
#13 - G.R. No. 117009 October 11, 1995
SECURITY BANK & TRUST COMPANY and ROSITO C. MANHIT, petitioners, vs.
COURT OF APPEALS and YSMAEL C. FERRER, respondents.
In this petition for review under Rule 45 of the Rules of Court, petitioners seek a review and reversal of the
decision * of respondent Court of Appeals in CA-G.R. CV No. 40450, entitled "Ysmael C. Ferrer v. Security

65

Bank and Trust Company, et. al." dated 31 August 1994, which affirmed the decision ** of the Regional Trial
Court, Branch 63, Makati in Civil Case No. 42712, a complaint for breach of contract with damages.
Private respondent Ysmael C. Ferrer was contracted by herein petitioners Security Bank and Trust Company
(SBTC) and Rosito C. Manhit to construct the building of SBTC in Davao City for the price of P1,760,000.00.
The contract dated 4 February 1980 provided that Ferrer would finish the construction in two hundred (200)
working days. Respondent Ferrer was able to complete the construction of the building on 15 August 1980
(within the contracted period) but he was compelled by a drastic increase in the cost of construction materials
to incur expenses of about P300,000.00 on top of the original cost. The additional expenses were made
known to petitioner SBTC thru its Vice-President Fely Sebastian and Supervising Architect Rudy de la Rama
as early as March 1980. Respondent Ferrer made timely demands for payment of the increased cost. Said
demands were supported by receipts, invoices, payrolls and other documents proving the additional
expenses.
In March 1981, SBTC thru Assistant Vice-President Susan Guanio and a representative of an architectural
firm consulted by SBTC, verified Ferrer's claims for additional cost. A recommendation was then made to
settle Ferrer's claim but only for P200,000.00. SBTC, instead of paying the recommended additional amount,
denied ever authorizing payment of any amount beyond the original contract price. SBTC likewise denied any
liability for the additional cost based on Article IX of the building contract which states:
If at any time prior to the completion of the work to be performed hereunder, increase in prices
of construction materials and/or labor shall supervene through no fault on the part of the
contractor whatsoever or any act of the government and its instrumentalities which directly or
indirectly affects the increase of the cost of the project, OWNER shall equitably make the
appropriate adjustment on mutual agreement of both parties.
Ysmael C. Ferrer then filed a complaint for breach of contract with damages. The trial court ruled for Ferrer
and ordered defendants SBTC and Rosito C. Manhit to pay:
a) P259,417.23 for the increase in price of labor and materials plus 12% interest thereon per
annum from 15 August 1980 until fully paid;
b) P24,000.00 as actual damages;
c) P20,000.00 as moral damages;
d) P20,000.00 as exemplary damages;
e) attorney's fees equivalent to 25% of the principal amount due; and
f) costs of suit.
On appeal, the Court of Appeals affirmed the trial court decision.
In the present petition for review, petitioners assign the following errors to the appellate court:
. . . IN HOLDING THAT PLAINTIFF-APPELLEE HAS, BY PREPONDERANCE OF EVIDENCE
SUFFICIENTLY PROVEN HIS CLAIM AGAINST THE DEFENDANTS-APPELLANTS.
. . . IN INTERPRETING AN OTHERWISE CLEAR AND UNAMBIGUOUS PROVISION OF
THE CONSTRUCTION CONTRACT.

66

. . . IN DISREGARDING THE EXPRESS PROVISION OF THE CONSTRUCTION

CONTRACT, THE LOWER COURT VIOLATED DEFENDANTS-APPELLANTS'
CONSTITUTIONAL GUARANTY OF NON IMPAIRMENT OF THE OBLIGATION OF
CONTRACT. 1
Petitioners argue that under the aforequoted Article IX of the building contract, any increase in the price of
labor and/or materials resulting in an increase in construction cost above the stipulated contract price will not
automatically make petitioners liable to pay for such increased cost, as any payment above the stipulated
contract price has been made subject to the condition that the "appropriate adjustment" will be made "upon
mutual agreement of both parties". It is contended that since there was no mutual agreement between the
parties, petitioners' obligation to pay amounts above the original contract price never materialized.
Respondent Ysmael C. Ferrer, through counsel, on the other hand, opposed the arguments raised by
petitioners. It is of note however that the pleadings filed with this Court by counsel for Ferrer hardly refute the
arguments raised by petitioners, as the contents of said pleadings are mostly quoted portions of the decision
of the Court of Appeals, devoid of adequate discussion of the merits of respondent's case. The Court, to be
sure, expects more diligence and legal know-how from lawyers than what has been exhibited by counsel for
respondent in the present case. Under these circumstances, the Court had to review the entire records of this
case to evaluate the merits of the issues raised by the contending parties.
Article 22 of the Civil Code which embodies the maxim, Nemo ex alterius incommodo debet lecupletari (no
man ought to be made rich out of another's injury) states:
Art. 22. Every person who through an act of performance by another, or any other means,
acquires or comes into possession of something at the expense of the latter without just or
legal ground, shall return the same to him.
The above-quoted article is part of the chapter of the Civil Code on Human Relations, the provisions of which
were formulated as "basic principles to be observed for the rightful relationship between human beings and for
the stability of the social order, . . . designed to indicate certain norms that spring from the fountain of good
conscience, . . . guides for human conduct [that] should run as golden threads through society to the end that
law may approach its supreme ideal which is the sway and dominance of justice." 2
In the present case, petitioners' arguments to support absence of liability for the cost of construction beyond
the original contract price are not persuasive.
Under the previously quoted Article IX of the construction contract, petitioners would make the appropriate
adjustment to the contract price in case the cost of the project increases through no fault of the contractor
(private respondent). Private respondent informed petitioners of the drastic increase in construction cost as
early as March 1980.
Petitioners in turn had the increased cost evaluated and audited. When private respondent demanded
payment of P259,417.23, petitioner bank's Vice-President Rosito C. Manhit and the bank's architectural
consultant were directed by the bank to verify and compute private respondent's claims of increased cost. A
recommendation was then made to settle private respondent's claim for P200,000.00. Despite this
recommendation and several demands from private respondent, SBTC failed to make payment. It denied
authorizing anyone to make a settlement of private respondent's claim and likewise denied any liability,
contending that the absence of a mutual agreement made private respondent's demand premature and
baseless.
Petitioners' arguments are specious.

67

It is not denied that private respondent incurred additional expenses in constructing petitioner bank's building
due to a drastic and unexpected increase in construction cost. In fact, petitioner bank admitted liability for
increased cost when a recommendation was made to settle private respondent's claim for P200,000.00.
Private respondent's claim for the increased amount was adequately proven during the trial by receipts,
invoices and other supporting documents.
Under Article 1182 of the Civil Code, a conditional obligation shall be void if its fulfillment depends upon the
sole will of the debtor. In the present case, the mutual agreement, the absence of which petitioner bank relies
upon to support its non-liability for the increased construction cost, is in effect a condition dependent on
petitioner bank's sole will, since private respondent would naturally and logically give consent to such an
agreement which would allow him recovery of the increased cost.
Further, it cannot be denied that petitioner bank derived benefits when private respondent completed the
construction even at an increased cost.
Hence, to allow petitioner bank to acquire the constructed building at a price far below its actual construction
cost would undoubtedly constitute unjust enrichment for the bank to the prejudice of private respondent. Such
unjust enrichment, as previously discussed, is not allowed by law.
Finally, with respect to the award of attorney's fees to respondent, the Court has previously held that, "even
with the presence of an agreement between the parties, the court may nevertheless reduce attorney's fees
though fixed in the contract when the amount thereof appears to be unconscionable or unreasonable." 3 As
previously noted, the diligence and legal know-how exhibited by counsel for private respondent hardly justify an
award of 25% of the principal amount due, which would be at least P60,000.00. Besides, the issues in this case are
far from complex and intricate. The award of attorney's fees is thus reduced to P10,000.00.

WHEREFORE, with the above modification in respect of the amount of attorney's fees, the appealed decision
of the Court of Appeals in CA G.R. CV No. 40450 is AFFIRMED.
SO ORDERED.
#14 - G.R. No. 174012

November 14, 2008

MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs.

BENJAMIN TUDTUD, BIENVENIDO TUDTUD, DAVID TUDTUD, JUSTINIANO BORGA, JOSE BORGA,
and FE DEL ROSARIO, represented by LYDIA ADLAWAN, Attorney-in-fact, respondents.
DECISION
CARPIO MORALES, J.:
The predecessors-in-interest of respondents Benjamin Tudtud et al. were the owners of a parcel of land in
Cebu City, identified as Lot No. 988 of the Banilad Estate and covered by Transfer Certificate of Title (TCT)
No. 27692.
In 1949, the National Airports Corporation (NAC), a public corporation of the Republic of the Philippines,
embarked on a program to expand the Cebu Lahug Airport. For this purpose, it sought to acquire, by
negotiated sale or expropriation, several lots adjoining the then existing airport.
By virtue of a judgment rendered by the third branch of the Court of First Instance in Civil Case No. R-1881,
the NAC acquired Lot No. 988, among other lots. TCT No. 26792 covering Lot No. 988 was thus cancelled
and TCT No. 27919 was issued in its stead in the name of the Republic of the Philippines. No structures
related to the operation of the Cebu Lahug Airport were constructed on Lot No. 988.

68

Lot No. 988 was later transferred to the Air Transport Office (ATO), and still later to petitioner Mactan Cebu
International Airport Authority (MCIAA) in 1990 via Republic Act No. 6958.
When the Mactan International Airport at Lapu Lapu City was opened for commercial flights, the Cebu Lahug
Airport was closed and abandoned and a significant area thereof was purchased by the Cebu Property
Ventures, Inc. for development as a commercial complex.
By letter of October 7, 1996 to the general manager of the MCIAA, Lydia Adlawan, acting as attorney-in-fact
of the original owners of Lot No. 988, demanded to repurchase the lot at the same price paid at the time of the
taking, without interest, no structures or improvements having been erected thereon and the Cebu Lahug
Airport having been closed and abandoned, hence, the purpose for which the lot was acquired no longer
existed.1
As the demand remained unheeded, respondents, represented by their attorney-in-fact Lydia Adlawan, filed a
Complaint2 before the Regional Trial Court (RTC) of Cebu City, docketed as Civil Case No. CEB-19464,
for reconveyance and damages with application for preliminary injunction/restraining order against the
MCIAA.
Respondents anchored their complaint on the assurance they claimed was made by the NAC that the original
owners and/or their successors-in-interest would be entitled to repurchase the lot when and in the event that it
was no longer used for airport purposes.3
In its Answer with Counterclaim,4 the MCIAA countered that, inter alia, the decision in Civil Case No. R-1881
did not lay any condition that the lots subject of expropriation would revert to their owners in case the
expansion of the Cebu Lahug Airport would not materialize.5
To prove their claim, respondents presented witnesses who testified that the NAC promised their
predecessors-in-interest-original owners of Lot No. 988 that it would be returned to them should the
expansion of the Cebu Lahug Airport not materialize.6 And respondents invoked this Court's ruling in MCIAA
v. Court of Appeals7 involving another lot acquired by the NAC for the expansion of the Cebu Lahug Airport. In
that case, although the deed of sale between the therein respondent Melba Limbaco's predecessor-in-interest
and NAC did not contain a provision for the repurchase of the therein subject lot should the purpose for its
acquisition ceased to exist, this Court allowed Melba Limbaco to recover the lot based on parole evidence that
the NAC promised the right of repurchase to her predecessor-in-interest.8
The MCIAA disputed the applicability to the present case of the immediately-cited MCIAA ruling, the NAC
having acquired Lot No. 988 not by a deed of sale but by virtue of a final judicial decree of expropriation which
cannot be modified by parole evidence.9
After trial, Branch 20 of the Cebu City RTC rendered judgment in favor of respondents, disposing as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiffs as against
defendant ordering the latter to reconvey the entire subject real property covered by T.C.T. No.
27919 within 15 days from receipt of this decision.
SO ORDERED.10 (Underscoring supplied)
On appeal,11 the Court of Appeals, by Decision of May 8, 200612 affirmed the RTC decision. Its Motion for
Reconsideration13 having been denied,14 the MCIAA filed the present petition,15 faulting the appellate court in
"disregarding" the following considerations:
I.

69

THE JUDGMENT OF EXPROPRIATION IN CIVIL CASE NO. R-1881 WAS ABSOLUTE AND
UNCONDITIONAL.
II.
RESPONDENTS' CLAIM OF ALLEGED VERBAL ASSURANCES FROM THE
GOVERNMENT VIOLATES THE STATUTE OF FRAUDS.
III.
THE BEST EVIDENCE SHOWING THE UNCONDITIONAL ACQUISITION OF LOT 988 IS THE
CERTIFICATE OF TITLE.16 (Underscoring supplied)
In insisting that the judgment in Civil Case No. R-1881 was absolute and unconditional, the MCIAA cites Fery
v. Municipality of Cabanatuan17 which held that:
x x x If x x x the decree of expropriation gives to the entity a fee simple title, then, of course, the land
becomes the absolute property of the expropriator, whether it be the State, a province, or municipality,
and in that case the non-user does not have the effect of defeating the title acquired by the
expropriation proceedings.
When land has been acquired for public use in fee simple, unconditionally, either by the exercise of
eminent domain or by purchase, the former owner retains no rights in the land, and the public use may
be abandoned, or the land may be devoted to a different use, without any impairment of the estate or
title acquired, or any reversion to the former owner.18 (Italics in the original; underscoring supplied)
MCIAA in fact offers the text of the trial court's decision in R-1881, inviting attention to the dispositive portion
thereof, to prove that the judgment of expropriation entered in favor of the government is absolute and
unconditional, and that there is nothing in the decision that would show that the government made any
assurance or stipulation whatsoever to reconvey the subject lot in case the expansion of the Lahug airport
would not materialize.19
But also in Fery, this Court, passing on the question of whether a private land which is expropriated for a
particular public use, but which particular public use is abandoned, may be returned to its former owner, held:
The answer to that question depends upon the character of the title acquired by the expropriator x x x.
If, for example, land is expropriated for a particular purpose, with the condition that when that purpose
is ended or abandoned the property shall return to its former owner, then, of course, when the
purpose is terminated or abandoned, the former owner reacquires the property so expropriated. If, for
example, land is expropriated for a public street and the expropriation is granted upon conditions that
the city can only use it for a public street, then, of course, when the city abandons its use as a public
street, it returns to the former owner, unless there is some statutory provision to the
contrary.20 (Underscoring supplied)
That nothing in the trial court's decision in Civil Case No. R-1881 indicates a condition attached to the
expropriation of the subject lot, this Court, in Heirs of Timoteo Moreno v. MCIAA21 involving the rights of
another former owner of lots also involved in Civil Case No. R-1881, noting the following portion of the body of
the said trial court's decision:
As for the public purpose of the expropriation proceeding, it cannot now be doubted. Although the
Mactan Airport is being constructed, it does not take away the actual usefulness and importance of the
Lahug Airport: it is handling the air traffic both civilian and military. From it aircrafts fly to Mindanao
and Visayas and pass through it on their return flights to the North and Manila. Then, no evidence was

70

adduced to show how soon is the Mactan Airport to be placed in operation and whether the Lahug
Airport will be closed immediately thereafter. It is for the other departments of the Government to
determine said matters. The Court cannot substitute its judgment for those of the said departments
and agencies. In the absence of such a showing, the Court will presume that the Lahug Airport will
continue to be in operation,22
held:
While the trial court in Civil Case No. R-1881 could have simply acknowledged the presence of public
purpose for the exercise of eminent domain regardless of the survival of Lahug Airport, the trial court
in its Decision chose not to do so but instead prefixed its finding of public purpose upon its
understanding that "Lahug Airport will continue to be in operation." Verily, these meaningful
statements in the body of the Decision warrant the conclusion that the expropriated properties would
remain to be so until it was confirmed that Lahug Airport was no longer "in operation". This inference
further implies two (2) things: (a) after the Lahug Airport ceased its undertaking as such and the
expropriated lots were not being used for any airport expansion project, the rights vis--vis the
expropriated Lots Nos. 916 and 920 as between the State and their former owners, petitioners
herein, must be equitably adjusted; and, (b) the foregoing unmistakable declarations in the
body of the Decision should merge with and become an intrinsic part of the fallo thereof which
under the premises is clearly inadequate since the dispositive portion is not in accord with the
findings as contained in the body thereof.23
On the Heirs of Moreno's motion for reconsideration, this Court affirmed its decision, emphasizing that
"the fallo of the decision in Civil Case No. R-1881 must be read in reference to the other portions of the
decision in which it forms a part[,]"24 and that "[a] reading of the Court's judgment must not be confined to the
dispositive portion alone; rather, it should be meaningfully construed in unanimity with the ratio
decidendi thereof to grasp the true intent and meaning of a decision."25
The MCIAA goes on, however, to cite MCIAA v. Court of Appeals and Chiongbian26 wherein this Court
rejected testimonial evidence of an assurance of a right to repurchase property acquired by the NAC under
the judgment in still the same Civil Case No. R-1881. The MCIAA's reliance on this case is misplaced. As this
Court noted in Heirs of Timoteo Moreno v. MCIAA,27 the respondent Chiongbian put forth inadmissible and
inconclusive evidence, Chiongbian's testimony as well as that of her witness as to the existence of the
agreement being hearsay.28
In contrast, in the case at bar, respondents' witness respondent Justiniano Borga himself, who represented
his mother-one of the original owners of subject lot during the negotiations between the NAC and the
landowners, declared that the original owners did not oppose the expropriation of the lot upon the assurance
of the NAC that they would reacquire it if it is no longer needed by the airport.29
Another witness for respondent, Eugenio Amores, an employee of the NAC, declared that in the course of
some meetings with the landowners when he accompanied the NAC legal team and was requested to jot
down what transpired thereat, he personally heard the NAC officials give the assurance claimed by
respondents.30
The MCIAA nevertheless urges this Court to reject respondents' testimonial evidence, citing Article 1403
(2)(e) of the Civil Code which places agreements for the sale of real property or an interest therein within the
coverage of the Statute of Frauds.
The Statute of Frauds applies, however, only to executory contracts.31 It does not apply to contracts which
have been completely or partially performed,32 the rationale thereof being as follows:
x x x In executory contracts there is a wide field for fraud because unless they be in writing there is no
palpable evidence of the intention of the contracting parties. The statute has precisely been enacted to
71

prevent fraud. However, if a contract has been totally or partially performed, the exclusion of parol
evidence would promote fraud or bad faith, for it would enable the defendant to keep the benefits
already delivered by him from the transaction in litigation, and, at the same time, evade the
obligations, responsibilities or liabilities assumed or contracted by him thereby.33 (Underscoring
supplied)
A word on MCIAA's argument that MCIAA v. Court of Appeals, supra, does not apply to the present case. As
reflected in the earlier-quoted ruling in Fery, the mode of acquisition for public purpose of a land - whether by
expropriation or by contract - is not material in determining whether the acquisition is with or without condition.
In fine, the decision in favor of respondents must be affirmed. The rights and duties between the MCIAA and
respondents are governed by Article 1190 of the Civil Code34 which provides:
When the conditions have for their purpose the extinguishment of an obligation to give, the parties,
upon the fulfillment of said conditions, shall return to each other what they have received.
In case of the loss, deterioration, or improvement of the thing, the provisions which, with respect to the
debtor, are laid down in the preceding article [Article 1189] shall be applied to the party who is bound
to return.
xxxx
While the MCIAA is obliged to reconvey Lot No. 988 to respondents, respondents must return to the MCIAA
what they received as just compensation for the expropriation of Lot No. 988, plus legal interest to be
computed from default,35 which in this case runs from the time the MCIAA complies with its obligation to the
respondents.36
Respondents must likewise pay the MCIAA the necessary expenses it may have incurred in sustaining Lot
No. 988 and the monetary value of its services in managing it to the extent that respondents were benefited
thereby.
Following Article 118737 of the Civil Code, the MCIAA may keep whatever income or fruits it may have
obtained from Lot No. 988, and respondents need not account for the interests that the amounts they received
as just compensation may have earned in the meantime.
In accordance with the earlier-quoted Article 1190 of the Civil Code vis--vis Article 1189 which provides that
"[i]f a thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor x x
x," respondents, as creditors, do not have to settle as part of the process of restitution the appreciation in
value of Lot 988 which is a natural consequence of nature and time.
WHEREFORE, the petition is, in light of the foregoing disquisition, DENIED. The May 8, 2006 Decision of the
Court of Appeals affirming that of Branch 20 of the Cebu City Regional Trial Court is AFFIRMED with
MODIFICATION as follows:
1. Respondents are ORDERED to return to the MCIAA the just compensation they received for the
expropriation of Lot No. 988 plus legal interest in the case of default, to be computed from the time the
MCIAA complies with its obligation to reconvey Lot No. 988 to them;
2. Respondents are ORDERED to pay the MCIAA the necessary expenses it incurred in sustaining
Lot No. 988 and the monetary value of its services to the extent that respondents were benefited
thereby;

72

3. The MCIAA is ENTITLED to keep whatever fruits and income it may have obtained from Lot No.
988; and
4. Respondents are also ENTITLED to keep whatever interests the amounts they received as just
compensation may have earned in the meantime, as well as the appreciation in value of Lot No. 988
which is a natural consequence of nature and time;
In light of the foregoing modifications, the case is REMANDED to Branch 20 the Regional Trial Court of Cebu
City only for the purpose of receiving evidence on the amounts that respondents will have to pay to the
MCIAA in accordance with this Court's decision.
SO ORDERED.
#15 - G.R. No. 23769

September 16, 1925

SONG FO & COMPANY, plaintiff-appellee, vs.

HAWAIIAN PHILIPPINE CO., defendant-appellant.
Hilado and Hilado, Ross, Lawrence and Selph and Antonio T. Carrascoso, Jr., for appellant.
Arroyo, Gurrea and Muller for appellee.
MALCOLM, J.:
In the court of First Instance of Iloilo, Song Fo & Company, plaintiff, presented a complaint with two causes of
action for breach of contract against the Hawaiian-Philippine Co., defendant, in which judgment was asked for
P70,369.50, with legal interest, and costs. In an amended answer and cross-complaint, the defendant set up
the special defense that since the plaintiff had defaulted in the payment for the molasses delivered to it by the
defendant under the contract between the parties, the latter was compelled to cancel and rescind the said
contract. The case was submitted for decision on a stipulation of facts and the exhibits therein mentioned. The
judgment of the trial court condemned the defendant to pay to the plaintiff a total of P35,317.93, with legal
interest from the date of the presentation of the complaint, and with costs.
From the judgment of the Court of First Instance the defendant only has appealed. In this court it has made
the following assignment of errors: "I. The lower court erred in finding that appellant had agreed to sell to the
appellee 400,000, and not only 300,000, gallons of molasses. II. The lower court erred in finding that the
appellant rescinded without sufficient cause the contract for the sale of molasses executed by it and the
appellee. III. The lower court erred in rendering judgment in favor of the appellee and not in favor of the
appellant in accordance with the prayer of its answer and cross-complaint. IV. The lower court erred in
denying appellant's motion for a new trial." The specified errors raise three questions which we will consider in
the order suggested by the appellant.
1. Did the defendant agree to sell to the plaintiff 400,000 gallons of molasses or 300,000 gallons of
molasses? The trial court found the former amount to be correct. The appellant contends that the
smaller amount was the basis of the agreement.
The contract of the parties is in writing. It is found principally in the documents, Exhibits F and G. The
First mentioned exhibit is a letter addressed by the administrator of the Hawaiian-Philippine Co. to
Song Fo & Company on December 13, 1922. It reads:
SILAY, OCC. NEGROS, P.I.
December 13, 1922

73

Messrs. SONG FO AND CO.

Iloilo, Iloilo.
DEAR SIRS: Confirming our conversation we had today with your Mr. Song Fo, who visited this
Central, we wish to state as follows:
He agreed to the delivery of 300,000 gallons of molasses at the same price as last year under the
same condition, and the same to start after the completion of our grinding season. He requested if
possible to let you have molasses during January, February and March or in other words, while we are
grinding, and we agreed with him that we would to the best of our ability, altho we are somewhat
handicapped. But we believe we can let you have 25,000 gallons during each of the milling months,
altho it interfere with the shipping of our own and planters sugars to Iloilo. Mr. Song Fo also asked if
we could supply him with another 100,000 gallons of molasses, and we stated we believe that this is
possible and will do our best to let you have these extra 100,000 gallons during the next year the
same to be taken by you before November 1st, 1923, along with the 300,000, making 400,000 gallons
in all.
Regarding the payment for our molasses, Mr. Song Fo gave us to understand that you would pay us
at the end of each month for molasses delivered to you.
Hoping that this is satisfactory and awaiting your answer regarding this matter, we remain.
Yours very truly,
HAWAIIAN-PHILIPPINE COMPANY
BY R. C. PITCAIRN
Administrator.
Exhibit G is the answer of the manager of Song Fo & Company to the Hawaiian-Philippine Co. on December
16, 1922. This letter reads:
December 16th, 1922.
Messrs. HAWAIIAN-PHILIPPINE CO.,
Silay, Neg. Occ., P.I.
DEAR SIRS: We are in receipt of your favours dated the 9th and the 13th inst. and understood all their
contents.
In connection to yours of the 13th inst. we regret to hear that you mentioned Mr. Song Fo the one who
visited your Central, but it was not for he was Mr. Song Heng, the representative and the manager of
Messrs. Song Fo & Co.
With reference to the contents of your letter dated the 13th inst. we confirm all the arrangements you
have stated and in order to make the contract clear, we hereby quote below our old contract as
amended, as per our new arrangements.
(a) Price, at 2 cents per gallon delivered at the central.
(b) All handling charges and expenses at the central and at the dock at Mambaguid for our account.

74

(c) For services of one locomotive and flat cars necessary for our six tanks at the rate of P48 for the
round trip dock to central and central to dock. This service to be restricted to one trip for the six tanks.
Yours very truly,
SONG FO & COMPANY
By __________________________
Manager.
We agree with appellant that the above quoted correspondence is susceptible of but one interpretation. The
Hawaiian-Philippine Co. agreed to deliver to Song Fo & Company 300,000 gallons of molasses. The
Hawaiian-Philippine Co. also believed it possible to accommodate Song Fo & Company by supplying the
latter company with an extra 100,000 gallons. But the language used with reference to the additional 100,000
gallons was not a definite promise. Still less did it constitute an obligation.
If Exhibit T relied upon by the trial court shows anything, it is simply that the defendant did not consider itself
obliged to deliver to the plaintiff molasses in any amount. On the other hand, Exhibit A, a letter written by the
manager of Song Fo & Company on October 17, 1922, expressly mentions an understanding between the
parties of a contract for P300,000 gallons of molasses.
We sustain appellant's point of view on the first question and rule that the contract between the parties
provided for the delivery by the Hawaiian-Philippine Co. to song Fo & Company of 300,000 gallons of
molasses.
2. Had the Hawaiian-Philippine Co. the right to rescind the contract of sale made with Song Fo & Company?
The trial judge answers No, the appellant Yes.
Turning to Exhibit F, we note this sentence: "Regarding the payment for our molasses, Mr. Song Fo (Mr. Song
Heng) gave us to understand that you would pay us at the end of each month for molasses delivered to you."
In Exhibit G, we find Song Fo & Company stating that they understand the contents of Exhibit F, and that they
confirm all the arrangements you have stated, and in order to make the contract clear, we hereby quote below
our old contract as amended, as per our new arrangements. (a) Price, at 2 cents per gallon delivered at the
central." In connection with the portion of the contract having reference to the payment for the molasses, the
parties have agree on a table showing the date of delivery of the molasses, the amount and date thereof, the
date of receipt of account by plaintiff, and date of payment. The table mentioned is as follows:

Date of
delivery

Account and date thereof

Date of
receipt of
account by
plaintiff

Date of
payment

1923

1923

1922
Dec. 18

P206.16

Dec. 26/22

Jan. 5

Feb. 20

Dec. 29

206.16

Jan. 3/23

do

Do

Jan. 5

206.16

Jan. 9/23

Mar. 7 or 8

Mar. 31

Feb. 12

206.16

Mar. 12/23

do

Do

1923

75

Feb. 27

206.16

do

do

Do

Mar. 5

206.16

do

do

Do

Mar. 16

206.16

Mar. 20/23

Apr. 2/23

Apr. 19

Mar. 24

206.16

Mar. 31/23

do

Do

Mar. 29

206.16

do

do

Do

Some doubt has risen as to when Song Fo & Company was expected to make payments for the molasses
delivered. Exhibit F speaks of payments "at the end of each month." Exhibit G is silent on the point. Exhibit M,
a letter of March 28, 1923, from Warner, Barnes & Co., Ltd., the agent of the Hawaiian-Philippine Co. to Song
Fo & Company, mentions "payment on presentation of bills for each delivery." Exhibit O, another letter from
Warner, Barnes & Co., Ltd. to Song Fo & Company dated April 2, 1923, is of a similar tenor. Exhibit P, a
communication sent direct by the Hawaiian-Philippine Co. to Song Fo & Company on April 2, 1923, by which
the Hawaiian-Philippine Co. gave notice of the termination of the contract, gave as the reason for the
rescission, the breach by Song Fo & Company of this condition: "You will recall that under the arrangements
made for taking our molasses, you were to meet our accounts upon presentation and at each delivery." Not
far removed from this statement, is the allegation of plaintiff in its complaint that "plaintiff agreed to pay
defendant, at the end of each month upon presentation accounts."
Resolving such ambiguity as exists and having in mind ordinary business practice, a reasonable deduction is
that Song Fo & Company was to pay the Hawaiian-Philippine Co. upon presentation of accounts at the end of
each month. Under this hypothesis, Song Fo & Company should have paid for the molasses delivered in
December, 1922, and for which accounts were received by it on January 5, 1923, not later than January 31 of
that year. Instead, payment was not made until February 20, 1923. All the rest of the molasses was paid for
either on time or ahead of time.
The terms of payment fixed by the parties are controlling. The time of payment stipulated for in the contract
should be treated as of the essence of the contract. Theoretically, agreeable to certain conditions which could
easily be imagined, the Hawaiian-Philippine Co. would have had the right to rescind the contract because of
the breach of Song Fo & Company. But actually, there is here present no outstanding fact which would legally
sanction the rescission of the contract by the Hawaiian-Philippine Co.
The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only
for such breaches as are so substantial and fundamental as to defeat the object of the parties in making the
agreement. A delay in payment for a small quantity of molasses for some twenty days is not such a violation
of an essential condition of the contract was warrants rescission for non-performance. Not only this, but the
Hawaiian-Philippine Co. waived this condition when it arose by accepting payment of the overdue accounts
and continuing with the contract. Thereafter, Song Fo & Company was not in default in payment so that the
Hawaiian-Philippine co. had in reality no excuse for writing its letter of April 2, 1923, cancelling the contract.
(Warner, Barnes & Co. vs. Inza [1922], 43 Phil., 505.)
We rule that the appellant had no legal right to rescind the contract of sale because of the failure of Song Fo &
Company to pay for the molasses within the time agreed upon by the parties. We sustain the finding of the
trial judge in this respect.
3. On the basis first, of a contract for 300,000 gallons of molasses, and second, of a contract imprudently
breached by the Hawaiian-Philippine Co., what is the measure of damages? We again turn to the facts as
agreed upon by the parties.

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The first cause of action of the plaintiff is based on the greater expense to which it was put in being compelled
to secure molasses from other sources. Three hundred thousand gallons of molasses was the total of the
agreement, as we have seen. As conceded by the plaintiff, 55,006 gallons of molasses were delivered by the
defendant to the plaintiff before the breach. This leaves 244,994 gallons of molasses undelivered which the
plaintiff had to purchase in the open market. As expressly conceded by the plaintiff at page 25 of its brief,
100,000 gallons of molasses were secured from the Central North Negros Sugar Co., Inc., at two centavos a
gallon. As this is the same price specified in the contract between the plaintiff and the defendant, the plaintiff
accordingly suffered no material loss in having to make this purchase. So 244,994 gallons minus the 100,000
gallons just mentioned leaves as a result 144,994 gallons. As to this amount, the plaintiff admits that it could
have secured it and more from the Central Victorias Milling Company, at three and one-half centavos per
gallon. In other words, the plaintiff had to pay the Central Victorias Milling company one and one-half
centavos a gallon more for the molasses than it would have had to pay the Hawaiian-Philippine Co.
Translated into pesos and centavos, this meant a loss to the plaintiff of approximately P2,174.91. As the
conditions existing at the central of the Hawaiian-Philippine Co. may have been different than those found at
the Central North Negros Sugar Co., Inc., and the Central Victorias Milling Company, and as not alone
through the delay but through expenses of transportation and incidental expenses, the plaintiff may have been
put to greater cost in making the purchase of the molasses in the open market, we would concede under the
first cause of action in round figures P3,000.
The second cause of action relates to lost profits on account of the breach of the contract. The only evidence
in the record on this question is the stipulation of counsel to the effect that had Mr. Song Heng, the manager
of Song Fo & Company, been called as a witness, he would have testified that the plaintiff would have
realized a profit of P14,948.43, if the contract of December 13, 1922, had been fulfilled by the defendant.
Indisputably, this statement falls far short of presenting proof on which to make a finding as to damages.
In the first place, the testimony which Mr. Song Heng would have given undoubtedly would follow the same
line of thought as found in the decision of the trial court, which we have found to be unsustainable. In the
second place, had Mr. Song Heng taken the witness-stand and made the statement attributed to him, it would
have been insufficient proof of the allegations of the complaint, and the fact that it is a part of the stipulation by
counsel does not change this result. And lastly, the testimony of the witness Song Heng, it we may dignify it
as such, is a mere conclusion, not a proven fact. As to what items up the more than P14,000 of alleged lost
profits, whether loss of sales or loss of customers, or what not, we have no means of knowing.
We rule that the plaintiff is entitled to recover damages from the defendant for breach of contract on the first
cause of action in the amount of P3,000 and on the second cause of action in no amount. Appellant's
assignments of error are accordingly found to be well taken in part and not well taken in part.
Agreeable to the foregoing, the judgment appealed from shall be modified and the plaintiff shall have and
recover from the defendant the sum of P3,000, with legal interest from October 2, 1923, until payment.
Without special finding as to costs in either instance, it is so ordered.
#16 - G.R. No. 126083

July 12, 2006

ANTONIO R. CORTES (in his capacity as Administrator of the estate of Claro S. Cortes), petitioner, vs.
HON. COURT OF APPEALS and VILLA ESPERANZA DEVELOPMENT CORPORATION, respondents.
DECISION
YNARES-SANTIAGO, J.:
The instant petition for review seeks the reversal of the June 13, 1996 Decision1 of the Court of Appeals in
CA-G.R. CV No. 47856, setting aside the June 24, 1993 Decision2 of the Regional Trial Court of Makati,

77

Branch 138, which rescinded the contract of sale entered into by petitioner Antonio Cortes (Cortes) and
private respondent Villa Esperanza Development Corporation (Corporation).
The antecedents show that for the purchase price of P3,700,000.00, the Corporation as buyer, and Cortes as
seller, entered into a contract of sale over the lots covered by Transfer Certificate of Title (TCT) No. 31113-A,
TCT No. 31913-A and TCT No. 32013-A, located at Baclaran, Paraaque, Metro Manila. On various dates in
1983, the Corporation advanced to Cortes the total sum of P1,213,000.00. Sometime in September 1983, the
parties executed a deed of absolute sale containing the following terms:3
1. Upon execution of this instrument, the Vendee shall pay unto the Vendor sum of TWO MILLION
AND TWO HUNDRED THOUSAND (P2,200,000.00) PESOS, Philippine Currency, less all advances
paid by the Vendee to the Vendor in connection with the sale;
2. The balance of ONE MILLION AND FIVE HUNDRED THOUSAND [P1,500,000.00] PESOS, Phil.
Currency shall be payable within ONE (1) YEAR from date of execution of this instrument, payment of
which shall be secured by an irrevocable standby letter of credit to be issued by any reputable local
banking institution acceptable to the Vendor.
xxxx
4. All expense for the registration of this document with the Register of Deeds concerned, including
the transfer tax, shall be divided equally between the Vendor and the Vendee. Payment of the capital
gains shall be exclusively for the account of the Vendor; 5% commission of Marcosa Sanchez to be
deducted upon signing of sale.4
Said Deed was retained by Cortes for notarization.
On January 14, 1985, the Corporation filed the instant case5 for specific performance seeking to compel
Cortes to deliver the TCTs and the original copy of the Deed of Absolute Sale. According to the Corporation,
despite its readiness and ability to pay the purchase price, Cortes refused delivery of the sought documents. It
thus prayed for the award of damages, attorney's fees and litigation expenses arising from Cortes' refusal to
deliver the same documents.
In his Answer with counterclaim,6 Cortes claimed that the owner's duplicate copy of the three TCTs were
surrendered to the Corporation and it is the latter which refused to pay in full the agreed down payment. He
added that portion of the subject property is occupied by his lessee who agreed to vacate the premises upon
payment of disturbance fee. However, due to the Corporation's failure to pay in full the sum of P2,200,000.00,
he in turn failed to fully pay the disturbance fee of the lessee who now refused to pay monthly rentals. He thus
prayed that the Corporation be ordered to pay the outstanding balance plus interest and in the alternative, to
cancel the sale and forfeit the P1,213,000.00 partial down payment, with damages in either case.
On June 24, 1993, the trial court rendered a decision rescinding the sale and directed Cortes to return to the
Corporation the amount of P1,213,000.00, plus interest. It ruled that pursuant to the contract of the parties,
the Corporation should have fully paid the amount of P2,200,000.00 upon the execution of the contract. It
stressed that such is the law between the parties because the Corporation failed to present evidence that
there was another agreement that modified the terms of payment as stated in the contract. And, having failed
to pay in full the amount of P2,200,000.00 despite Cortes' delivery of the Deed of Absolute Sale and the
TCTs, rescission of the contract is proper.
In its motion for reconsideration, the Corporation contended that the trial court failed to consider their
agreement that it would pay the balance of the down payment when Cortes delivers the TCTs. The motion
was, however, denied by the trial court holding that the rescission should stand because the Corporation did

78

not act on the offer of Cortes' counsel to deliver the TCTs upon payment of the balance of the down payment.
Thus:
The Court finds no merit in the [Corporation's] Motion for Reconsideration. As stated in the decision
sought to be reconsidered, [Cortes'] counsel at the pre-trial of this case, proposed that if [the
Corporation] completes the down payment agreed upon and make arrangement for the payment of
the balances of the purchase price, [Cortes] would sign the Deed of Sale and turn over the certificate
of title to the [Corporation]. [The Corporation] did nothing to comply with its undertaking under the
agreement between the parties.
WHEREFORE, in view of the foregoing considerations, the Motion for Reconsideration is hereby
DENIED.
SO ORDERED.7
On appeal, the Court of Appeals reversed the decision of the trial court and directed Cortes to execute a Deed
of Absolute Sale conveying the properties and to deliver the same to the Corporation together with the TCTs,
simultaneous with the Corporation's payment of the balance of the purchase price of P2,487,000.00. It found
that the parties agreed that the Corporation will fully pay the balance of the down payment upon Cortes'
delivery of the three TCTs to the Corporation. The records show that no such delivery was made, hence, the
Corporation was not remiss in the performance of its obligation and therefore justified in not paying the
balance. The decretal portion thereof, provides:
WHEREFORE, premises considered, [the Corporation's] appeal is GRANTED. The decision appealed
from is hereby REVERSED and SET ASIDE and a new judgment rendered ordering [Cortes] to
execute a deed of absolute sale conveying to [the Corporation] the parcels of land subject of and
described in the deed of absolute sale, Exhibit D. Simultaneously with the execution of the deed of
absolute sale and the delivery of the corresponding owner's duplicate copies of TCT Nos. 31113-A,
31931-A and 32013-A of the Registry of Deeds for the Province of Rizal, Metro Manila, District IV, [the
Corporation] shall pay [Cortes] the balance of the purchase price of P2,487,000.00. As agreed upon in
paragraph 4 of the Deed of Absolute Sale, Exhibit D, under terms and conditions, "All expenses for
the registration of this document (the deed of sale) with the Register of Deeds concerned, including
the transfer tax, shall be divided equally between [Cortes and the Corporation]. Payment of the capital
gains shall be exclusively for the account of the Vendor; 5% commission of Marcosa Sanchez to be
deducted upon signing of sale." There is no pronouncement as to costs.
SO ORDERED.8
Cortes filed the instant petition praying that the decision of the trial court rescinding the sale be reinstated.
There is no doubt that the contract of sale in question gave rise to a reciprocal obligation of the parties.
Reciprocal obligations are those which arise from the same cause, and 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.9
Article 1191 of the Civil Code, states:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
xxxx

79

As to when said failure or delay in performance arise, Article 1169 of the same Code provides that
ART. 1169
xxxx
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins. (Emphasis supplied)
The issue therefore is whether there is delay in the performance of the parties' obligation that would justify the
rescission of the contract of sale. To resolve this issue, we must first determine the true agreement of the
parties.
The settled rule is that the decisive factor in evaluating an agreement is the intention of the parties, as shown
not necessarily by the terminology used in the contract but by their conduct, words, actions and deeds prior
to, during and immediately after executing the agreement. As such, therefore, documentary and parol
evidence may be submitted and admitted to prove such intention.10
In the case at bar, the stipulation in the Deed of Absolute Sale was that the Corporation shall pay in full the
P2,200,000.00 down payment upon execution of the contract. However, as correctly noted by the Court of
Appeals, the transcript of stenographic notes reveal Cortes' admission that he agreed that the Corporation's
full payment of the sum of P2,200,000.00 would depend upon his delivery of the TCTs of the three lots. In
fact, his main defense in the Answer is that, he performed what is incumbent upon him by delivering to the
Corporation the TCTs and the carbon duplicate of the Deed of Absolute Sale, but the latter refused to pay in
full the down payment.11 Pertinent portion of the transcript, reads:
[Q] Now, why did you deliver these three titles to the plaintiff despite the fact that it has not been paid
in full the agreed down payment?
A Well, the broker told me that the down payment will be given if I surrender the titles.
Q Do you mean to say that the plaintiff agreed to pay in full the down payment of P2,200,000.00
provided you surrender or entrust to the plaintiff the titles?
A Yes, sir.12
What further confirmed the agreement to deliver the TCTs is the testimony of Cortes that the title of the lots
will be transferred in the name of the Corporation upon full payment of the P2,200,000.00 down payment.
Thus
ATTY. ANTARAN
Q Of course, you have it transferred in the name of the plaintiff, the title?
A Upon full payment.
xxxx
ATTY. SARTE
Q When you said upon full payment, are you referring to the agreed down payment of P2,200,000.00?

80

A Yes, sir.13
By agreeing to transfer title upon full payment of P2,200,000.00, Cortes' impliedly agreed to deliver the TCTs
to the Corporation in order to effect said transfer. Hence, the phrase "execution of this instrument" 14 as
appearing in the Deed of Absolute Sale, and which event would give rise to the Corporation's obligation to pay
in full the amount of P2,200,000.00, can not be construed as referring solely to the signing of the deed. The
meaning of "execution" in the instant case is not limited to the signing of a contract but includes as well the
performance or implementation or accomplishment of the parties' agreement.15 With the transfer of titles as
the corresponding reciprocal obligation of payment, Cortes' obligation is not only to affix his signature in the
Deed, but to set into motion the process that would facilitate the transfer of title of the lots, i.e., to have the
Deed notarized and to surrender the original copy thereof to the Corporation together with the TCTs.
Having established the true agreement of the parties, the Court must now determine whether Cortes delivered
the TCTs and the original Deed to the Corporation. The Court of Appeals found that Cortes never surrendered
said documents to the Corporation. Cortes testified that he delivered the same to Manny Sanchez, the son of
the broker, and that Manny told him that her mother, Marcosa Sanchez, delivered the same to the
Corporation.
Q Do you have any proof to show that you have indeed surrendered these titles to the plaintiff?
A Yes, sir.
Q I am showing to you a receipt dated October 29, 1983, what relation has this receipt with that
receipt that you have mentioned?
A That is the receipt of the real estate broker when she received the titles.
Q On top of the printed name is Manny Sanchez, there is a signature, do you know who is that Manny
Sanchez?
A That is the son of the broker.
xxxx
Q May we know the full name of the real estate broker?
A Marcosa Sanchez
xxxx
Q Do you know if the broker or Marcosa Sanchez indeed delivered the titles to the plaintiff?
A That is what [s]he told me. She gave them to the plaintiff.
x x x x.16
ATTY. ANTARAN
Q Are you really sure that the title is in the hands of the plaintiff?
xxxx

81

Q It is in the hands of the broker but there is no showing that it is in the hands of the plaintiff?
A Yes, sir.
COURT
Q How do you know that it was delivered to the plaintiff by the son of the broker?
A The broker told me that she delivered the title to the plaintiff.
ATTY. ANTARAN
Q Did she not show you any receipt that she delivered to [Mr.] Dragon17 the title without any receipt?
A I have not seen any receipt.
Q So, therefore, you are not sure whether the title has been delivered to the plaintiff or not. It is only
upon the allegation of the broker?
A Yes, sir.18
However, Marcosa Sanchez's unrebutted testimony is that, she did not receive the TCTs. She also denied
knowledge of delivery thereof to her son, Manny, thus:
Q The defendant, Antonio Cortes testified during the hearing on March 11, 1986 that he allegedly
gave you the title to the property in question, is it true?
A I did not receive the title.
Q He likewise said that the title was delivered to your son, do you know about that?
A I do not know anything about that.19
What further strengthened the findings of the Court of Appeals that Cortes did not surrender the subject
documents was the offer of Cortes' counsel at the pre-trial to deliver the TCTs and the Deed of Absolute Sale
if the Corporation will pay the balance of the down payment. Indeed, if the said documents were already in the
hands of the Corporation, there was no need for Cortes' counsel to make such offer.
Since Cortes did not perform his obligation to have the Deed notarized and to surrender the same together
with the TCTs, the trial court erred in concluding that he performed his part in the contract of sale and that it is
the Corporation alone that was remiss in the performance of its obligation. Actually, both parties were in
delay. Considering that their obligation was reciprocal, performance thereof must be simultaneous. The
mutual inaction of Cortes and the Corporation therefore gave rise to a compensation morae or default on the
part of both parties because neither has completed their part in their reciprocal obligation.20 Cortes is yet to
deliver the original copy of the notarized Deed and the TCTs, while the Corporation is yet to pay in full the
agreed down payment of P2,200,000.00. This mutual delay of the parties cancels out the effects of
default,21 such that it is as if no one is guilty of delay.22
We find no merit in Cortes' contention that the failure of the Corporation to act on the proposed settlement at
the pre-trial must be construed against the latter. Cortes argued that with his counsel's offer to surrender the
original Deed and the TCTs, the Corporation should have consigned the balance of the down payment. This
argument would have been correct if Cortes actually surrendered the Deed and the TCTs to the Corporation.

82

With such delivery, the Corporation would have been placed in default if it chose not to pay in full the required
down payment. Under Article 1169 of the Civil Code, from the moment one of the parties fulfills his obligation,
delay by the other begins. Since Cortes did not perform his part, the provision of the contract requiring the
Corporation to pay in full the down payment never acquired obligatory force. Moreover, the Corporation could
not be faulted for not automatically heeding to the offer of Cortes. For one, its complaint has a prayer for
damages which it may not want to waive by agreeing to the offer of Cortes' counsel. For another, the previous
representation of Cortes that the TCTs were already delivered to the Corporation when no such delivery was
in fact made, is enough reason for the Corporation to be more cautious in dealing with him.
The Court of Appeals therefore correctly ordered the parties to perform their respective obligation in the
contract of sale, i.e., for Cortes to, among others, deliver the necessary documents to the Corporation and for
the latter to pay in full, not only the down payment, but the entire purchase price. And since the Corporation
did not question the Court of Appeal's decision and even prayed for its affirmance, its payment should
rightfully consist not only of the amount of P987,000.00, representing the balance of the P2,200,000.00 down
payment, but the total amount of P2,487,000.00, the remaining balance in the P3,700,000.00 purchase price.
WHEREFORE, the petition is DENIED and the June 13, 1996 Decision of the Court of Appeals in CA-G.R. CV
No. 47856, is AFFIRMED.
SO ORDERED.
#17 - G.R. No. L-32811 March 31, 1980
FELIPE C. ROQUE, petitioner, vs.
NICANOR LAPUZ and THE COURT OF APPEALS, respondents.
Taada, Sanchez, Taada, Taada for petitioner.
N.M. Lapuz for respondent.

GUERRERO, J.:
Appeal by certiorari from the Resolution of the respondent court 1 dated October 12, 1970 in CA-G.R. No. L33998-R entitled "Felipe C. Roque, plaintiff-appellee, versus Nicanor Lapuz, defendant-appellant" amending its
original decision of April 23, 1970 which affirmed the decision of the Court of First Instance of Rizal (Quezon City
Branch) in Civil Case No. Q-4922 in favor of petitioner, and the Resolution of the respondent court denying
petitioner's motion for reconsideration.

The facts of this case are as recited in the decision of the Trial Court which was adopted and affirmed by the
Court of Appeals:
Sometime in 1964, prior to the approval by the National Planning Commission of the
consolidation and subdivision plan of plaintiff's property known as the Rockville Subdivision,
situated in Balintawak, Quezon City, plaintiff and defendant entered into an agreement of sale
covering Lots 1, 2 and 9, Block 1, of said property, with an aggregate area of 1,200 square
meters, payable in 120 equal monthly installments at the rate of P16.00, P15.00 per square
meter, respectively. In accordance with said agreement, defendant paid to plaintiff the sum of
P150.00 as deposit and the further sum of P740.56 to complete the payment of four monthly
installments covering the months of July, August, September, and October, 1954. (Exhs. A
and B). When the document Exhibit "A" was executed on June 25, 1954, the plan covering

83

plaintiff's property was merely tentative, and the plaintiff referred to the proposed lots
appearing in the tentative plan.
After the approval of the subdivision plan by the Bureau of Lands on January 24, 1955,
defendant requested plaintiff that he be allowed to abandon and substitute Lots 1, 2 and 9, the
subject matter of their previous agreement, with Lots 4 and 12, Block 2 of the approved
subdivision plan, of the Rockville Subdivision, with a total area of 725 square meters, which
are corner lots, to which request plaintiff graciously acceded.
The evidence discloses that defendant proposed to plaintiff modification of their previous
contract to sell because he found it quite difficult to pay the monthly installments on the three
lots, and besides the two lots he had chosen were better lots, being corner lots. In addition, it
was agreed that the purchase price of these two lots would be at the uniform rate of P17.00
per square (meter) payable in 120 equal monthly installments, with interest at 8% annually on
the balance unpaid. Pursuant to this new agreement, defendant occupied and possessed Lots
4 and 12, Block 2 of the approved subdivision plan, and enclosed them, including the portion
where his house now stands, with barbed wires and adobe walls.
However, aside from the deposit of P150.00 and the amount of P740.56 which were paid
under their previous agreement, defendant failed to make any further payment on account of
the agreed monthly installments for the two lots in dispute, under the new contract to sell.
Plaintiff demanded upon defendant not only to pay the stipulated monthly installments in
arrears, but also to make up-to-date his payments, but defendant, instead of complying with
the demands, kept on asking for extensions, promising at first that he would pay not only the
installments in arrears but also make up-to-date his payment, but later on refused altogether to
comply with plaintiff's demands.
Defendant was likewise requested by the plaintiff to sign the corresponding contract to sell in
accordance with his previous commitment. Again, defendant promised that he would sign the
required contract to sell when he shall have made up-to-date the stipulated monthly
installments on the lots in question, but subsequently backed out of his promise and refused to
sign any contract in noncompliance with what he had represented on several occasions. And
plaintiff relied on the good faith of defendant to make good his promise because defendant is a
professional and had been rather good to him (plaintiff).
On or about November 3, 1957, in a formal letter, plaintiff demanded upon defendant to vacate
the lots in question and to pay the reasonable rentals thereon at the rate of P60.00 per month
from August, 1955. (Exh. "B"). Notwithstanding the receipt of said letter, defendant did not
deem it wise nor proper to answer the same.
In reference to the mode of payment, the Honorable Court of Appeals found
Both parties are agreed that the period within which to pay the lots in question is ten years.
They however, disagree on the mode of payment. While the appellant claims that he could pay
the purchase price at any time within a period of ten years with a gradual proportionate
discount on the price, the appellee maintains that the appellant was bound to pay monthly
installments.
On this point, the trial court correctly held that
It is further argued by defendant that under the agreement to sell in question, he has the right
or option to pay the purchase price at anytime within a period of ten years from 1954, he being
entitled, at the same time, to a graduated reduction of the price. The Court is constrained to
reject this version not only because it is contradicted by the weight of evidence but also
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because it is not consistent with what is reasonable, plausible and credible. It is highly
improbable to expect plaintiff, or any real estate subdivision owner for that matter, to agree to
a sale of his land which would be payable anytime in ten years at the exclusive option of the
purchaser. There is no showing that defendant is a friend, a relative, or someone to whom
plaintiff had to be grateful, as would justify an assumption that he would have agreed to extend
to defendant such an extra- ordinary concession. Furthermore, the context of the document,
Exhibit "B", not to mention the other evidences on records is indicative that the real intention of
the parties is for the payment of the purchase price of the lot in question on an equal monthly
installment basis for a period of ten years (Exhibits "A", "II", "J" and "K").
On January 22, 1960, petitioner Felipe C, Roque (plaintiff below) filed the complaint against defendant
Nicanor Lapuz (private respondent herein) with the Court of First Instance of Rizal, Quezon City Branch, for
rescission and cancellation of the agreement of sale between them involving the two lots in question and
prayed that judgment be rendered ordering the rescission and cancellation of the agreement of sale, the
defendant to vacate the two parcels of land and remove his house therefrom and to pay to the plaintiff the
reasonable rental thereof at the rate of P60.00 a month from August 1955 until such time as he shall have
vacated the premises, and to pay the sum of P2,000.00 as attorney's fees, costs of the suit and award such
other relief or remedy as may be deemed just and equitable in the premises.
Defendant filed a Motion to Dismiss on the ground that the complaint states no cause of action, which motion
was denied by the court. Thereafter, defendant filed his Answer alleging that he bought three lots from the
plaintiff containing an aggregate area of 1,200 sq. meters and previously known as Lots 1, 2 and 9 of Block 1
of Rockville Subdivision at P16.00, P15.00 and P15.00, respectively, payable at any time within ten years.
Defendant admits having occupied the lots in question.
As affirmative and special defenses, defendant alleges that the complaint states no cause of action; that the
present action for rescission has prescribed; that no demand for payment of the balance was ever made; and
that the action being based on reciprocal obligations, before one party may compel performance, he must first
comply what is incumbent upon him.
As counterclaim, defendant alleges that because of the acts of the plaintiff, he lost two lots containing an area
of 800 sq. meters and as a consequence, he suffered moral damages in the amount of P200.000.00; that due
to the filing of the present action, he suffered moral damages amounting to P100,000.00 and incurred
expenses for attorney's fees in the sum of P5,000.00.
Plaintiff filed his Answer to the Counterclaim and denied the material averments thereof.
After due hearing, the trial court rendered judgment, the dispositive portion of which reads:
WHEREFORE, the Court renders judgment in favor of plain. plaintiff and against the
defendant, as follows:
(a) Declaring the agreement of sale between plaintiff and defendant involving the lots in
question (Lots 4 and 12, Block 2 of the approved subdivision plan of the Rockville Subdivision)
rescinded, resolved and cancelled;
(b) Ordering defendant to vacate the said lots and to remove his house therefrom and also to
pay plaintiff the reasonable rental thereof at the rate of P60.00 per month from August, 1955
until he shall have actually vacated the premises; and
(c) Condemning defendant to pay plaintiff the sum of P2,000.00 as attorney's fees, as well as
the costs of the suit. (Record on Appeal, p. 118)

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(a) Declaring the agreement of sale between plaintiff and defendant involving the lots in
question (Lots 4 and 12, Block 2 of the approved subdivision plan of the Rockville Subdivision)
rescinded, resolved and cancelled;
(b) Ordering defendant to vacate the said lots and to remove his house therefrom and also to
pay plaintiff the reasonable rental thereof at the rate of P60.00 per month from August, 1955
until he shall have actually vacated premises; and
(c) Condemning defendant to pay plaintiff the sum of P2,000.00 as attorney's fees, as well as
the costs of the suit. (Record on Appeal. p. 118)
Not satisfied with the decision of the trial court, defendant appealed to the Court of Appeals. The latter court,
finding the judgment appealed from being in accordance with law and evidence, affirmed the same.
In its decision, the appellate court, after holding that the findings of fact of the trial court are fully supported by
the evidence, found and held that the real intention of the parties is for the payment of the purchase price of
the lots in question on an equal monthly installment basis for the period of ten years; that there was
modification of the original agreement when defendant actually occupied Lots Nos. 4 and 12 of Block 2 which
were corner lots that commanded a better price instead of the original Lots Nos. 1, 2 and 9, Block I of the
Rockville Subdivision; that appellant's bare assertion that the agreement is not rescindable because the
appellee did not comply with his obligation to put up the requisite facilities in the subdivision was insufficient to
overcome the presumption that the law has been obeyed by the appellee; that the present action has not
prescribed since Article 1191 of the New Civil Code authorizing rescission in reciprocal obligations upon
noncompliance by one of the obligors is the applicable provision in relation to Article 1149 of the New Civil
Code; and that the present action was filed within five years from the time the right of action accrued.
Defendant filed a Motion for Reconsideration of the appellate court's decision on the following grounds:
First Neither the pleadings nor the evidence, testimonial, documentary or circumstantial,
justify the conclusion as to the existence of an alleged subsequent agreement novatory of the
original contract admittedly entered into between the parties:
Second There is nothing so unusual or extraordinary, as would render improbable the fixing
of ten ears as the period within which payment of the stipulated price was to be payable by
appellant;
Third Appellee has no right, under the circumstances on the case at bar, to demand and be
entitled to the rescission of the contract had with appellant;
Fourth Assuming that any action for rescission is availability to appellee, the same, contrary
to the findings of the decision herein, has prescribed;
Fifth Assumming further that appellee's action for rescission, if any, has not yet prescribed,
the same is at least barred by laches;
Sixth Assuming furthermore that a cause of action for rescission exists, appellant should
nevertheless be entitled to tile fixing of a period within which to comply with his obligation; and
Seventh At all events, the affirmance of the judgment for the payment of rentals on the
premises from August, 1955 and he taxing of attorney's fees against appellant are not
warranted b the circumstances at bar. (Rollo, pp. 87-88)

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Acting on the Motion for Reconsideration, the Court of Appeals sustained the sixth ground raised by the
appellant, that assuming that a cause of action for rescission exists, he should nevertheless be entitled to the
fixing of a period within which to comply with his obligation. The Court of Appeals, therefore, amended its
original decision in the following wise and manner:
WHEREFORE, our decision dated April 23, 1970 is hereby amended in the sense that the
defendant Nicanor Lapuz is hereby granted a period of ninety (90) days from entry hereof
within which to pay the balance of the purchase price in the amount of P11,434,44 with
interest thereon at the rate of 8% per annum from August 17, 1955 until fully paid. In the event
that the defendant fails to comply with his obligation as above stated within the period fixed
herein, our original judgment stands.
Petitioner Roque, as plaintiff-appellee below, filed a Motion for Reconsideration; the Court of Appeals denied
it. He now comes and appeals to this Court on a writ of certiorari.
The respondent Court of Appeals rationalizes its amending decision by considering that the house presently
erected on the land subject of the contract is worth P45,000.00, which improvements introduced by defendant
on the lots subject of the contract are very substantial, and thus being the case, "as a matter of justice and
equity, considering that the removal of defendant's house would amount to a virtual forfeiture of the value of
the house, the defendant should be granted a period within which to fulfill his obligations under the
agreement." Cited as authorities are the cases of Kapisanan Banahaw vs. Dejarme and Alvero, 55 Phil. 338,
344, where it is held that the discretionary power of the court to allow a period within which a person in default
may be permitted to perform the stipulation upon which the claim for resolution of the contract is based should
be exercised without hesitation in a case where a virtual forfeiture of valuable rights is sought to be enforced
as an act of mere reprisal for a refusal of the debtor to submit to a usurious charge, and the case of Puerto vs.
Go Ye Pin, 47 O.G. 264, holding that to oust the defendant from the lots without giving him a chance to
recover what his father and he himself had spent may amount to a virtual forfeiture of valuable rights.
As further reasons for allowing a period within which defendant could fulfill his obligation, the respondent court
held that there exists good reasons therefor, having in mind that which affords greater reciprocity of rights
(Ramos vs. Blas, 51 O.G. 1920); that after appellant had testified that plaintiff failed to comply with his part of
the contract to put up the requisite facilities in the subdivision, plaintiff did not introduce any evidence to rebut
defendant's testimony but simply relied. upon the presumption that the law has been obeyed, thus said
presumption had been successfully rebutted as Exhibit "5-D" shows that the road therein shown is not paved
The Court, however, concedes that plaintiff's failure to comply with his obligation to put up the necessary
facilities in the subdivision will not deter him from asking f r the rescission of the agreement since this
obligation is not correlative with defendant's obligation to buy the property.
Petitioner assails the decision of the Court of Appeals for the following alleged errors:
I. The Honorable Court of Appeals erred in applying paragraph 3, Article 1191 of the Civil
Code which refers to reciprocal obligations in general and, pursuant thereto, in granting
respondent Lapuz a period of ninety (90) days from entry of judgment within which to pay the
balance of the purchase price.
II. The Honorable Court of Appeals erred in not holding that Article 1592 of the same Code,
which specifically covers sales of immovable property and which constitutes an exception to
the third paragraph of Article 1191 of said Code, is applicable to the present case.
III. The Honorable Court of Appeals erred in not holding that respondent Lapuz cannot avail of
the provisions of Article 1191, paragraph 3 of the Civil Code aforesaid because he did not
raise in his answer or in any of the pleadings he filed in the trial court the question of whether
or not he is entitled, by reason of a just cause, to a fixing of a new period.

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IV. Assuming arguendo that the agreement entered into by and between petitioner and
respondent Lapuz was a mere promise to sell or contract to sell, under which title to the lots in
question did not pass from petitioner to respondent, still the Honorable Court of Appeals erred
in not holding that aforesaid respondent is not entitled to a new period within which to pay
petitioner the balance of P11,434.44 interest due on the purchase price of P12.325.00 of the
lots.
V. Assuming arguendo that paragraph 3, Article 1191 of the Civil Code is applicable and may
be availed of by respondent, the Honorable Court of Appeals nonetheless erred in not
declaring that aid respondent has not shown the existence of a just cause which would
authorize said Court to fix a new period within which to pay the balance aforesaid.
VI. The Honorable Court of Appeals erred in reconsidering its original decision promulgated on
April 23, 1970 which affirmed the decision of the trial court.
The above errors may, however, be synthesized into one issue and that is, whether private respondent is
entitled to the Benefits of the third paragraph of Article 1191, New Civil Code, for the fixing of period within
which he should comply with what is incumbent upon him, and that is to pay the balance of P11,434,44 with
interest thereon at the rate of 8% 1et annum from August 17, 1955 until fully paid since private respondent
had paid only P150.00 as deposit and 4 months intallments amounting to P740.46, or a total of P890.46, the
total price of the two lots agreed upon being P12,325.00.
For his part, petitioner maintains that respondent is not entitled to the Benefits of paragraph 3, Article 1191,
NCC and that instead, Article 1592 of the New Civil Code which specifically covers sales of immovable
property and which constitute an exception to the third paragraph of Art. 1191 of aid Code, is the applicable
law to the case at bar.
In resolving petitioner's assignment of errors, it is well that We lay clown the oda provisions and pertinent
rulings of the Supreme Court bearing on the crucial issue of whether Art. 1191, paragraph 3 of the New Civil
Code applies to the case at Bar as held by the appellate court and supported by the private respondent, or
Art. 1592 of the same Code which petitioner strongly argues in view of the peculiar facts and circumstances
attending this case. Article 1191, New Civil Code, provides:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one at the
obligors should not comply with hat is incumbent upon him
The injured partner 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.
Article 1592 also provides:
Art. 1592. In the sale of immovable property, even though it may have been stipulated that
upon failure to pay the price at the time agreed upon the rescission of the contract shall of
right take place, the vendee may pay, even after the expiration of the period, as long as no
demand for rescission of the contract has been made upon him either judicially or by a notarial
act. After the demand, the court may not grant him a new term.

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The controlling and latest jurisprudence is established and settled in the celebrated case of Luzon Brokerage
Co., Inc. vs. Maritime Building Co., Inc. and Myers Building Co., G.R. No. L-25885, January 31, 1972, 43
SCRA 93, originally decided in 1972, reiterated in the Resolution on Motion to Reconsider dated August 18,
1972, 46 SCRA 381 and emphatically repeated in the Resolution on Second Motion for Reconsideration
promulgated November 16, 1978, 86 SCRA 309, which once more denied Maritimes Second Motion for
Reconsideration of October 7, 1972. In the original decision, the Supreme Court speaking thru Justice J.B.L.
Reyes said:
Under the circumstances, the action of Maritime in suspending payments to Myers
Corporation was a breach of contract tainted with fraud or malice (dolo), as distinguished from
mere negligence (culpa), "dolo" being succinctly defined as a "conscious and intention design
to evade the normal fulfillment of existing obligations" (Capistrano, Civil Code of the
Philippines, Vol. 3, page 38), and therefore incompatible with good faith (Castan, Derecho
Civil, 7th Ed., Vol. 3, page 129; Diaz Pairo, Teoria de Obligaciones, Vol. 1, page 116).
Maritime having acted in bad faith, it was not entitled to ask the court to give it further time to
make payment and thereby erase the default or breach that it had deliberately incurred. Thus
the lower court committed no error in refusing to extend the periods for payment. To do
otherwise would be to sanction a deliberate and reiterated infringement of the contractual
obligations incurred by Maritime, an attitude repugnant to the stability and obligatory force of
contracts.
The decision reiterated the rule pointed out by the Supreme Court in Manuel vs. Rodriguez, 109 Phil. 1, p. 10,
that:
In contracts to sell, where ownership is retained by the seller and is not to pass until the fun
payment of the price, such payment, as we said is a positive suspensive condition, the failure
of which is not a breach, casual or serious, but simply an event that prevented the obligation of
the vendor to convey title from acquiring binding i force in accordance with Article 1117 of the
Old Civil Code. To argue that there was only a casual breach is to proceed from the
assumption that the contract is one of absolute sale, where non-payment is a resolutory
condition, which is not the case." Continuing, the Supreme Court declared:
... appellant overlooks that its contract with appellee Myers s not the ordinary sale envisaged
by Article 1592, transferring ownership simultaneously with the delivery of the real property
sold, but one in which the vendor retained ownership of the immovable object of the sale,
merely undertaking to convey it provided the buyer strictly complied with the terms of the
contract (see paragraph [d], ante page 5). In suing to recover possession of the building from
Maritime appellee Myers is not after the resolution or setting aside of the contract and the
restoration of the parties to the status quo ante as contemplated by Article 1592, but precisely
enforcing the Provisions of the agreement that it is no longer obligated to part with the
ownership or possession of the property because Maritime failed to comply with the specific
condition precedent, which is to pay the installments as they fell due.
The distinction between contracts of sale and contracts to sell with reserved title has been
recognized by this Court in repeated decisions upholding the power of promisors under
contracts to sell in case of failure of the other party to complete payment, to extrajudicially
terminate the operation of the contract, refuse conveyance and retain the sums or installments
already received, where such rights are expressly provided for, as in the case at bar.
In the Resolution denying the first Motion for Reconsideration, 46 SCRA 381, the Court again speaking thru
Justice J.B.L. Reyes, reiterated the rule that in a contract to sell, the full payment of the price through the
punctual performance of the monthly payments is a condition precedent to the execution of the final sale 4nd

89

to the transfer of the property from the owner to the proposed buyer; so that there will be no actual sale until
and unless full payment is made.
The Court further ruled that in seeking to oust Maritime for failure to pay the price as agreed upon, Myers was
not rescinding (or more properly, resolving) the contract but precisely enforcing it according to its expressed
terms. In its suit, Myers was not seeking restitution to it of the ownership of the thing sold (since it was never
disposed of), such restoration being the logical consequence of the fulfillment of a resolutory condition,
expressed or implied (Art. 1190); neither was it seeking a declaration that its obligation to sell was
extinguished. What is sought was a judicial declaration that because the suspensive condition (full and
punctual payment) had not been fulfilled, its obligation to sell to Maritime never arose or never became
effective and, therefore, it (Myers) was entitled to repossess the property object of the contract, possession
being a mere incident to its right of ownership.
The decision also stressed that "there can be no rescission or resolution of an obligation as yet non-existent,
because the suspensive condition did not happen. Article 1592 of the New Civil Code (Art. 1504 of Old Civil
Code) requiring demand by suit or notarial act in case the vendor of realty wants to rescind does not apply to
a contract to sell or promise to sell, where title remains with the vendor until fulfillment to a positive condition,
such as full payment of the price." (Manuel vs, Rodriguez, 109 Phil. 9)
Maritime's Second Motion for Reconsideration was denied in the Resolution of the Court dated November 16,
1978, 86 SCRA 305, where the governing law and precedents were briefly summarized in the strong and
emphatic language of Justice Teehankee, thus:
(a) The contract between the parties was a contract to sell or conditional sale with title
expressly reserved in the vendor Myers Building Co., Inc. Myers until the suspensive condition
of full and punctual payment of the full price shall have been met on pain of automatic
cancellation of the contract upon failure to pay any of the monthly installments when due and
retention of the sums theretofore paid as rentals. When the vendee, appellant Maritime,
willfully and in bad faith failed since March, 1961 to pay the P5,000. monthly installments
notwithstanding that it was punctually collecting P10,000. monthly rentals from the lessee
Luzon Brokerage Co., Myers was entitled, as it did in law and fact, to enforce the terms of the
contract to sell and to declare the same terminated and cancelled.
(b) Article 1592 (formerly Article 1504) of the new Civil Code is not applicable to such
contracts to self or conditional sales and no error was committed by the trial court in refusing
to extend the periods for payment.
(c) As stressed in the Court's decision, "it is irrelevant whether appellant Maritime's
infringement of its contract was casual or serious" for as pointed out in Manuel vs. Rodriguez,
'(I)n contracts to self. whether ownership is retained by the seller and is not to pass until the
full payment of the price, such payment, as we said, is a positive suspensive condition, the
failure of which is not a breach, casual or serious, but simply an event that prevented the
obligation of the vendor to convey title from acquiring binding force ...
(d) It should be noted, however, that Maritimes breach was far from casual but a most serious
breach of contract ...
(e) Even if the contract were considered an unconditional sale so that Article 1592 of the Civil
Code could be deemed applicable, Myers' answer to the complaint for interpleaded in the
court below constituted a judicial demand for rescission of the contract and by the very
provision of the cited codal article, 'after the demand, the court may not grant him a new term
for payment; and

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(f) Assumming further that Article 1191 of the new Civil Code governing rescission of
reciprocal obligations could be applied (although Article 1592 of the same Code is controlling
since it deals specifically with sales of real property), said article provides that '(T)he court
shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period' and there exists to "just cause" as shown above for the fixing of a further period. ...
Under the first and second assignments of error which petitioner jointly discusses, he argues that the
agreement entered into between him and the respondent is a perfected contract of purchase and sale within
the meaning of Article 1475 of the New Civil Code which provides that "the contract of sale is perfected at the
moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance, subject to the provisions of the law
governing the form of contract."
Petitioner contends that "(n)othing in the decision of the courts below would show that ownership of the
property remained with plaintiff for so long as the installments have not been fully paid. Which yields the
conclusion that, by the delivery of the lots to defendant, ownership likewise was transferred to the latter."
(Brief for the Petitioner, p. 15) And he concludes that the sale was consummated by the delivery of the two
lots, the subject thereof, by him to the respondent.
Under the findings of facts by the appellate court, it appears that the two lots subject of the agreement
between the parties herein were delivered by the petitioner to the private respondent who took possession
thereof and occupied the same and thereafter built his house thereon, enclosing the lots with adobe stone
walls and barbed wires. But the property being registered under the Land Registration Act, it is the act of
registration of the Deed of Sale which could legally effect the transfer of title of ownership to the transferee,
pursuant to Section 50 of Act 496. (Manuel vs. Rodriguez, et al., 109 Phil. 1; Buzon vs. Lichauco, 13 Phil.
354; Tuazon vs. Raymundo, 28 Phil. 635: Worcestor vs. Ocampo, 34 Phil. 646). Hence, We hold that the
contract between the petitioner and the respondent was a contract to sell where the ownership or title is
retained by the seller and is not to pass until the full payment of the price, such payment being a positive
suspensive condition and failure of which is not a breach, casual or serious, but simply an event that
prevented the obligation of the vendor to convey title from acquiring binding force.
In the case at bar, there is no writing or document evidencing the agreement originally entered into between
petitioner and private respondent except the receipt showing the initial deposit of P150.00 as shown in Exh.
"A" and the payment of the 4- months installment made by respondent corresponding to July, 1954 to
October, 1954 in the sum of P740.56 as shown in Exh. "B". Neither is there any writing or document
evidencing the modified agreement when the 3 lots were changed to Lots 4 and 12 with a reduced area of
725 sq. meters, which are corner lots. This absence of a formal deed of conveyance is a very strong
indication that the parties did not intend immediate transfer of ownership and title, but only a transfer after full
payment of the price. Parenthetically, We must say that the standard printed contracts for the sale of the lots
in the Rockville Subdivision on a monthly installment basis showing the terms and conditions thereof are
immaterial to the case at bar since they have not been signed by either of the parties to this case.
Upon the law and jurisprudence hereinabove cited and considering the nature of the transaction or agreement
between petitioner and respondent which We affirm and sustain to be a contract to sell, the following
resolutions of petitioner's assignment of errors necessarily arise, and so We hold that:
1. The first and second assignments of errors are without merit.
The overwhelming weight of authority culminating in the Luzon Brokerage vs. Maritime cases has laid down
the rule that Article 1592 of the New Civil Code does not apply to a contract to sell where title remains with the
vendor until full payment of the price as in the case at bar. This is the ruling in Caridad Estates vs. Santero, 71
Phil. 120; Aldea vs. Inquimboy 86 Phil. 1601; Jocon vs. Capitol Subdivision, Inc., L-6573, Feb. 28,
1955; Miranda vs. Caridad Estates, L-2077 and Aspuria vs. Caridad Estates, L-2121 Oct. 3, 1950, all
reiterated in Manuel vs. Rodriguez, et al. 109 Phil. 1, L-13435, July 27, 1960. We agree with the respondent

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Court of Appeals that Art, 1191 of the New Civil Code is the applicable provision where the obligee, like
petitioner herein, elects to rescind or cancel his obligation to deliver the ownership of the two lots in question
for failure of the respondent to pay in fun the purchase price on the basis of 120 monthly equal installments,
promptly and punctually for a period of 10 years.
2. We hold that respondent as obligor is not entitled to the benefits of paragraph 3 of Art. 1191, NCC Having
been in default, he is not entitled to the new period of 90 days from entry of judgment within which to pay
petitioner the balance of P11,434.44 with interest due on the purchase price of P12,325.00 for the two lots.
Respondent a paid P150.00 as deposit under Exh. "A" and P740.56 for the 4-months installments
corresponding to the months of July to October, 1954. The judgment of the lower court and the Court of
Appeals held that respondent was under the obligation to pay the purchase price of the lots m question on an
equal monthly installment basis for a period of ten years, or 120 equal monthly installments. Beginning
November, 1954, respondent began to default in complying with his obligation and continued to do so for the
remaining 116 monthly interest. His refusal to pay further installments on the purchase price, his insistence
that he had the option to pay the purchase price any time in ten years inspire of the clearness and certainty of
his agreement with the petitioner as evidenced further by the receipt, Exh. "B", his dilatory tactic of refusing to
sign the necessary contract of sale on the pretext that he will sign later when he shall have updated his
monthly payments in arrears but which he never attempted to update, and his failure to deposit or make
available any amount since the execution of Exh "B" on June 28, 1954 up to the present or a period of 26
years, are all unreasonable and unjustified which altogether manifest clear bad faith and malice on the part of
respondent puzzle making inapplicable and unwarranted the benefits of paragraph 3, Art. 1191, N.C.C. To
allow and grant respondent an additional period for him to pay the balance of the purchase price, which
balance is about 92% of the agreed price, would be tantamount to excusing his bad faith and sanctioning the
deliberate infringement of a contractual obligation that is repugnant and contrary to the stability, security and
obligatory force of contracts. Moreover, respondent's failure to pay the succeeding 116 monthly installments
after paying only 4 monthly installments is a substantial and material breach on his part, not merely casual,
which takes the case out of the application of the benefits of pa paragraph 3, Art. 1191, N.C.C.
At any rate, the fact that respondent failed to comply with the suspensive condition which is the full payment
of the price through the punctual performance of the monthly payments rendered petitioner's obligation to sell
ineffective and, therefore, petitioner was entitled to repossess the property object of the contract, possession
being a mere incident to his right of ownership (Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., et
al. 46 SCRA 381).
3. We further rule that there exists no just cause authorizing the fixing of a new period within which private
respondent may pay the balance of the purchase price. The equitable grounds or considerations which are
the basis of the respondent court in the fixing of an additional period because respondent had constructed
valuable improvements on the land, that he has built his house on the property worth P45,000.00 and placed
adobe stone walls with barbed wires around, do not warrant the fixing of an additional period. We cannot
sanction this claim for equity of the respondent for to grant the same would place the vendor at the mercy of
the vendee who can easily construct substantial improvements on the land but beyond the capacity of the
vendor to reimburse in case he elects to rescind the contract by reason of the vendee's default or deliberate
refusal to pay or continue paying the purchase price of the land. Under this design, strategem or scheme, the
vendee can cleverly and easily "improve out" the vendor of his land.
More than that, respondent has not been honest, fair and reciprocal with the petitioner, hence it would not be
fair and reasonable to the petitioner to apply a solution that affords greater reciprocity of rights which the
appealed decision tried to effect between the parties. As matters stand, respondent has been enjoying the
possession and occupancy of the land without paying the other 116 monthly installments as they fall due. The
scales of justice are already tipped in respondent,s favor under the amended decision of the respondent
court. It is only right that We strive and search for the application of the law whereby 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 (Art. 19, New Civil Code)

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In the case at bar, respondent has not acted in good faith. With malice and deliberate intent, he has twisted
the clear import of his agreement with the petitioner in order to suit his ends and delay the fulfillment of his
obligation to pay the land he had enjoyed for the last 26 years, more than twice the period of ten years that he
obliged himself to complete payment of the price.
4. Respondent's contention that petitioner has not complied with his obligation to put up the necessary
facilities in the Rockville Subdivision is not sufficient nor does it constitute good reason to justify the grant of
an additional period of 90 days from entry of judgment within which respondent may pay the balance of the
purchase price agreed upon. The Judgment of the appellate court concedes that petitioner's failure to comply
with his obligation to put up the necessary facilities in the subdivision will not deter him from asking for the
rescission of the agreement since his obligation is not correlative with respondent's obligation to buy the
property. Since this is so conceded, then the right of the petitioner to rescind the agreement upon the
happening or in the event that respondent fails or defaults in any of the monthly installments would be
rendered nugatory and ineffective. The right of rescission would then depend upon an extraneous
consideration which the law does not contemplate.
Besides, at the rate the two lots were sold to respondent with a combined area of 725 sq. meters at the
uniform price of P17.00 per sq. meter making a total price of P12,325.00, it is highly doubtful if not improbable
that aside from his obligation to deliver title and transfer ownership to the respondent as a reciprocal
obligation to that of the respondent in paying the price in full and promptly as the installments fall due,
petitioner would have assumed the additional obligation "to provide the subdivision with streets ... provide said
streets with street pavements concrete curbs and gutters, fillings as required by regulations, adequate
drainage facilities, tree plantings, adequate water facilities" as required under Ordinance No. 2969 of Quezon
City approved on May 11, 1956 (Answer of Defendant, Record on Appeal, pp. 35-36) which was two years
after the agreement in question was entered into June, 1y54.
The fact remains, however, that respondent has not protested to the petitioner nor to the authorities
concerned the alleged failure of petitioner to put up and provide such facilities in the subdivision because he
knew too well that he has paid only the aggregate sum of P890.56 which represents more or less 7% of the
agreed price of P12,325.00 and that he has not paid the real estate taxes assessed by the government on his
house erected on the property under litigation. Neither has respondent made any allegation in his Answer and
in all his pleadings before the court up to the promulgation of the Resolution dated October 12, 1970 by the
Court of Appeals, to the effect that he was entitled to a new period within which to comply with his obligation,
hence the Court could not proceed to do so unless the Answer is first amended. (Gregorio Araneta, Inc. vs.
Philippine Sugar Estates Development Co., Ltd., G.R. No. L-22558, May 31, 1967, 20 SCRA 330, 335). It is
quite clear that it is already too late in the day for respondent to claim an additional period within which to
comply with his obligation.
Precedents there are in Philippine jurisprudence where the Supreme Court granted the buyer of real property
additional period within which to complete payment of the purchase price on grounds of equity and justice as
in (1) J.M. Tuazon Co., Inc. vs. Javier, 31 SCRA 829 where the vendee religiously satisfied the monthly
installments for eight years and paid a total of P4,134.08 including interests on the principal obligation of only
P3,691.20, the price of the land; after default, the vendee was willing to pay all arrears, in fact offered the
same to the vendor; the court granted an additional period of 60 days -from receipt of judgment for the vendee
to make all installment in arrears plus interest; (2) in Legarda Hermanos vs. Saldaa, 55 SCRA 324, the Court
ruled that where one purchase, from a subdivision owner two lots and has paid more than the value of one lot,
the former is entitled to a certificate of title to one lot in case of default.
On the other hand there are also cases where rescission was not granted and no new or additional period
was authorized. Thus, in Caridad Estates vs. Santero, 71 Phil. 114, the vendee paid, totalling P7,590.00 or
about 25% of the purchase price of P30,000.00 for the three lots involved and when the vendor demanded
revocation upon the vendee's default two years after, the vendee offered to pay the arears in check which the
vendor refused; and the Court sustained the revocation and ordered the vendee ousted from the possession
of the land. In Ayala y Cia vs. Arcache, 98 Phil. 273, the total price of the land was P457,404.00 payable in

93

installments; the buyer initially paid P100,000.00 or about 25% of the agreed price; the Court ordered
rescission in view of the substantial breach and granted no extension to the vendee to comply with his
obligation.
The doctrinal rulings that "a slight or casual breach of contract is not a ground for rescission. It must be so
substantial and fundamental to defeat the object of the parties" (Gregorio Araneta Inc. vs. Tuazon de Paterno,
L-2886, August 22, 1962; Villanueva vs. Yulo, L-12985, Dec. 29,1959); that "where time is not of the essence
of t agreement, a slight delay on the part of one party in the performance of his obligation is not a sufficient
ground for the rescission of the agreement"( Biando vs. Embestro L-11919, July 27, 1959; cases cited in
Notes appended to Universal Foods Corporation vs. Court of Appeals, 33 SCRA 1), convince and persuade
Us that in the case at bar where the breach, delay or default was committed as early as in the payment of the
fifth monthly installment for November, 1954, that such failure continued and persisted the next month and
every month thereafter in 1955, 1956, 1957 and year after year to the end of the ten-year period in 1964 (10
years is respondent's contention) and even to this time, now more than twice as long a time as the original
period without respondent adding, or even offering to add a single centavo to the sum he had originally paid in
1954 which represents a mere 7% of the total price agreed upon, equity and justice may not be invoked and
applied. One who seeks equity and justice must come to court with clean hands, which can hardly be said of
the private respondent.
One final point, on the supposed substantial improvements erected on the land, respondent's house. To grant
the period to the respondent because of the substantial value of his house is to make the land an accessory
to the house. This is unjust and unconscionable since it is a rule in Our Law that buildings and constructions
are regarded as mere accessories to the land which is the principal, following the Roman maxim "omne quod
solo inadeficatur solo cedit" (Everything that is built on the soil yields to the soil).
Pursuant to Art. 1191, New Civil Code, petitioner is entitled to rescission with payment of damages which the
trial court and the appellate court, in the latter's original decision, granted in the form of rental at the rate of
P60.00 per month from August, 1955 until respondent shall have actually vacated the premises, plus
P2,000.00 as attorney's fees. We affirm the same to be fair and reasonable. We also sustain the right of the
petitioner to the possession of the land, ordering thereby respondent to vacate the same and remove his
house therefrom.
WHEREFORE, IN VIEW OF THE FOREGOING, the Resolution appealed from dated October 12, 1970 is
hereby REVERSED. The decision of the respondent court dated April 23, 1970 is hereby REINSTATED and
AFFIRMED, with costs against private respondent.
SO ORDERED.
#18 - [G.R. No. 127206. September 12, 2003]
PERLA PALMA GIL, VICENTE HIZON, JR., and ANGEL PALMA GIL, petitioners, vs. HON. COURT OF
APPEALS, HEIRS OF EMILIO MATULAC, CONSTANCIO MAGLANA, AGAPITO PACETES & The
REGISTER OF DEEDS OF DAVAO CITY, respondents.
DECISION
CALLEJO, SR., J.:
For review on appeal by certiorari are the Decision[1] of the Court of Appeals in CA-G.R. CV. No. 43188
promulgated on March 19, 1996, and its Resolution[2] dated October 17, 1996, denying the petitioners Motion
for Reconsideration of the said decision.
The appealed decision affirmed in toto the judgment of the Regional Trial Court, Davao City, Branch 16,
in Civil Case No. 15,356 which dismissed the complaint of the herein petitioners.

94

The Antecedents
Concepcion Palma Gil, and her sister, Nieves Palma Gil, married to Angel Villarica, were the co-owners
of a parcel of commercial land with an area of 829 square meters, identified as Lot No. 59-C, covered by
Transfer Certificate of Title (TCT) No. 432 located in Davao City. The spouses Angel and Nieves Villarica had
constructed a two-storey commercial building on the property. On October 13, 1953, Concepcion filed a
complaint against her sister Nieves with the then Court of First Instance of Davao City, docketed as Civil Case
No. 1160 for specific performance, to compel the defendant to cede and deliver to her an undivided portion of
the said property with an area of 256.2 square meters. After due proceedings, the court rendered judgment on
April 7, 1954 in favor of Concepcion, ordering the defendant to deliver to the plaintiff an undivided portion of
the said property with an area of 256.2 square meters:
A la vista de los datos expuestos, el Juzgado dicta sentencia condenando a la demanda, Nieves Palma Gil de
Villarica, cumpla con los terminos del documento (Exh. A) ordenando a aquella que otogue los documentos
necesarios traspasando a favor de la demandante (CONCEPCION PALMA GIL), 256 metros cuadrados con
20 centimetros del Lote No. 56-C descrito mas particularmente en el Certificado de Titulo No. 432.[3]
Nieves appealed to the Court of Appeals which affirmed the assailed decision. In due course, the
decision became final and executory. On motion of the plaintiff (Concepcion), the court issued a writ of
execution. Nieves, however, refused to execute the requisite deed in favor of her sister. On April 27, 1956, the
court issued an order authorizing ex-officio Sheriff Eriberto Unson to execute the requisite deed of transfer to
the plaintiff over an undivided portion of the property with a total area of 256.2 square meters. Instead of doing
so, the sheriff had the property subdivided into four lots namely, Lot 59-C-1, with an area of 218 square
meters; Lot 59-C-2, with an area of 38 square meters; Lot 59-C-3, with an area of 14 square meters; and Lot
59-C-4, with an area of 560 square meters, all covered by a subdivision plan. The sheriff thereafter executed
a Deed of Transfer to Concepcion over Lot 59-C-1 and Lot 59-C-2 with a total area of 256.2 square meters.
On October 24, 1956, Concepcion executed a deed of absolute sale over Lot 59-C-1 in favor of
Iluminada Pacetes. In the said deed, the area of Lot 59-C-1 appeared as 256 square meters although under
the subdivision plan, the area of the property was only 218 square meters. The vendee obliged herself to pay
the said amount, to wit:
1. The purchase price of P21,600.00 shall be paid as follows: P7,500.00 to be paid upon the signing of this
instrument; and the balance of P14,100.00 to be paid upon the delivery of the corresponding Certificate of
Title in the name of the VENDEE.[4]
Under the deed of absolute sale, the parties further agreed as follows:
2. That the VENDOR shall, within the period of ONE HUNDRED TWENTY (120) DAYS, from the signing of
this agreement, undertake and work for the issuance of the corresponding Certificate of Title of the said Lot
No. 59-C-1 in her favor with the proper government office or offices, to the end that the same can be duly
transferred in the name of the herein VENDEE, by virtue thereof.
3. That pending the full and complete payment of the purchase price to the VENDOR, the VENDEE shall
collect and receive any and all rentals and such other income from the land above-described for her own
account and benefit, this right of the VENDEE to begin from December 1, 1956.[5]
In the meantime, Nieves filed a motion in Civil Case No. 1160 to compel the sheriff to report on his
compliance with the courts Order dated April 27, 1956. The motion was denied. A motion for reconsideration
of the denial met the same fate. Nieves appealed to the Court of Appeals, which appeal was docketed as CAG.R. No. 22438-R.
In a parallel development, Concepcion filed a complaint for unlawful detainer against the spouses Angel
and Nieves Villarica with the Municipal Trial Court docketed as Civil Case No. 2246. On October 4, 1956, the

95

court rendered judgment in favor of the plaintiff and against the defendants, the decretal portion of which
reads as follows:
From the foregoing, it is indeed evident and clear that the herein defendants have been unlawfully withholding
possession of the land from the plaintiff, and hereby finds in favor of the plaintiff, and against the defendants,
ordering the latter to vacate the premises described in the complaint, removing whatever improvements they
have constructed thereon. The defendants are further judged to pay the plaintiff the amount of ONE
HUNDRED FIFTY PESOS (P150.00) a month from the time of the filing of this complaint until the lot is finally
vacated in concept of rentals, deprived of the plaintiff due to the unlawful possession of the defendants, and to
pay the costs of this suit.[6]
The decision became final and executory but the plaintiff did not file any motion for a writ of execution.
The spouses Angel and Nieves Villarica filed a complaint on October 24, 1956 against the sheriff and
Concepcion with the Court of First Instance of Davao City, docketed as Civil Case No. 2151 for the
nullification of the deed of transfer executed by the sheriff.[7]
On December 21, 1956, Iluminada Pacetes filed a motion to intervene in Civil Case No. 2151, as vendee
of the property subject of the case, which was granted by the court. She then filed a motion to dismiss the
complaint. The court granted the motion. Nieves appealed to the Court of Appeals which appeal was
docketed as CA-G.R. No. 22008-R. Nieves appeals in Civil Cases Nos. 1160 and 2151 were certified by the
CA to this Court, docketed as G.R. No. L-15799 and G.R. No. L-15801.
On the basis of the deed of transfer executed by Sheriff Iriberto A. Unson, the Register of Deeds issued
TCT No. 7450 over Lot 59-C-1 and 59-C-2 on July 17, 1957 in the name of Concepcion, with a total area of
256.2 square meters. However, the latter failed to transfer title to the property to and under the name of
Iluminada Pacetes. Consequently, the latter did not remit the balance of the purchase price of the property
to Concepcion.
In the interim, the spouses Angel and Nieves Villarica executed a real estate mortgage over Lot 59-C-4 in
favor of Prudential Bank as security for a loan. On August 4, 1959, Concepcion died intestate and was
survived by Nieves Villarica and her nephews and nieces. Iluminada filed a motion in Civil Case No. 1160 for
her substitution as party-plaintiff in lieu of the deceased Concepcion. On August 2, 1961, the court issued an
order granting the motion.
On August 31, 1961, this Court rendered judgment in G.R. Nos. L-15799 and L-15801 setting aside the
deed of transfer executed by the sheriff in favor of Concepcion Palma Gil, and remanding the records to the
trial court for further proceedings.[8] In compliance with the Decision of this Court in G.R. No. L-15801, the trial
court conducted further proceedings in Civil Case No. 1160 and discovered that the defendant had mortgaged
Lot 59-C-4 to the Prudential Bank. Consequently, the court issued an order on February 17, 1964, declaring
that the defendant had waived the benefits of the Decision of the Court on August 31, 1961 in G.R. No. L15801; thus, the conveyance of the property made by Concepcion in favor of Iluminada on October 24,
1956 must stand. Nieves filed a motion for the reconsideration of the said order but the court denied the same
in an Order dated February 29, 1964. Nieves appealed the order to the CA which dismissed the appeal for her
failure to file a record on appeal. Nieves filed a petition for review with this Court docketed as G.R. No. L28363.
More than five years having elapsed without the decision in Civil Case No. 2246 being enforced,
Iluminada filed a complaint docketed as Civil Case No. 4413 in the Court of First Instance of Davao City, for
the revival and execution of the decision of the Municipal Trial Court in Civil Case No. 2246 (the unlawful
detainer case). The plaintiff therein averred that, as Concepcions successor-in-interest, she acquired the right
of action to enforce the decision in Civil Case No. 2246. The defendants, on the other hand, averred
that Iluminada had not yet paid the balance of the purchase price of Lot 59-C-1; hence, she had not acquired
title over the lot and the right to evict the defendant. The deed of absolute sale executed by Concepcionin
favor of the plaintiff was an executory, not an executed deed. On January 26, 1965, the court rendered
judgment in favor of the defendants and dismissed the complaint. The decretal portion reads:

96

IN VIEW OF THE FOREGOING, the Court believes that the plaintiff herein has not been properly and legally
subrogated to the rights and action of deceased Concepcion Palma Gil and, hence, for these reasons the
Court dismisses this case without pronouncement as to costs.
The counterclaim is also hereby ordered dismissed.[9]
On March 16, 1966, Iluminada Pacetes and Agapito Pacetes executed a deed of absolute sale
over Lot 59-C-1 and Lot 59-C-2 in favor of Constancio B. Maglana for P110,000.00, covered by TCT No.
7450.[10] The spouses-vendors undertook to secure title over the lots under the name of the vendee within
ninety days.
On May 15, 1974, this Court denied the petition for certiorari filed by Nieves in G.R. No. L-28363.[11] The
Court, in part, ruled:
But while the issue at bar exclusively involves the timeliness of the appeal of the petitioners to the Court of
Appeals, this Court has nonetheless examined and analyzed the substantive aspects of this case and is
satisfied that the ORDERS of the trial court complained of are morally just.
Accordingly, the instant appeal is dismissed and the resolution of the Court of Appeals dated July 31,
1967 and its resolution dated October 18, 1967 are affirmed.[12]
The decision of the Court became final and executory.
On May 5, 1975, the spouses Agapito and Iluminada Pacetes filed a complaint against Nieves in the
Court of First Instance of Davao City, docketed as Civil Case No. 8836 for the recovery of possession
of Lot 59-C-1 and Lot 59-C-2. The Pacetes spouses claimed that Lot 59-C-2 was included in TCT No. 7450
under the name of Concepcion. The spouses prayed that judgment be rendered in their favor after due
proceedings thus:
PRAYER
PREMISES CONSIDERED, it is most respectfully prayed that:
1. During the pendency of this case, Defendant be ordered:
a. To refrain from collecting rentals from the tenants or occupants of the building erected in
said Lot 59-C-1; in that the tenants be directed to pay their rental to the plaintiff;
b. To demolish her aforesaid building of strong materials and vacate the premises of Lot 59-C-1
and Lot 59-C-2.
2. After hearing, Defendant be ordered to:
a. Pay the Plaintiffs the amount consisting of compensation for the use of the land they have been
depribed (sic) of to receive and enjoy since October 24, 1956 due to the unwarranted and
illegal occupation of the said lots by defendant;
b. Pay Plaintiffs moral and exemplary damages in such amount as the Honorable Court may fix
considering the facts and the law;
c. Pay Plaintiffs such expenses of litigation as may be proven during the trial, and
d. Pay Plaintiffs expenses for services of counsel they had to incurr (sic) in this complaint.

97

3. OTHER RELIEFS consonant with justice and equity are prayed for.[13]
On May 10, 1977, Nieves Villarica executed a lease agreement with Virginia Jorge and Anita Vergara
over Lots 59-C-1 and 59-C-2. The lessees took actual possession of the leased property.
In their Answer to the complaint in Civil Case No. 8836, the defendants averred, by way of defense, that
the complaint was barred by the decision of the CFI in Civil Case No. 4413, which ruled that the Deed of
Absolute Sale executed by Concepcion in favor of Iluminada was merely an executory, but not an executed
contract. After the plaintiffs had rested their case, the defendants filed a motion to dismiss (demurrer to
evidence). On October 29, 1975, the court issued an order dismissing the complaint on the ground that the
action was barred by the decision of the court in Civil Case No. 4413.[14] Thus, Virginia Jorge and Anita
Vergara continued to be in physical possession of the property.
In the meantime, on August 8, 1977, Iluminada consigned with the court in Civil Case No. 1160 the
amount of P11,983.00 only as payment of the purchase price of the property. Iluminada was issued receipts
for the amount.[15] As successor-in-interest of Concepcion, she likewise filed a motion for execution in Civil
Case No. 1160 for the eviction of the defendant Nieves Villarica and all those acting for and in her behalf. The
court issued an order on August 19, 1977 granting the motion. The defendants filed a motion for
reconsideration of the order claiming that Iluminada was not a party to the case which the court denied
on September 2, 1977. The defendant filed another motion for reconsideration which was likewise denied
on September 16, 1977. The defendant filed a petition for certiorari with the Court of Appeals docketed as CAG.R. No. 62957-R, which petition was dismissed on August 26, 1980. The CA ruled that Iluminada Pacetes
was the real party-in-interest as the vendee of the property. The defendant filed a petition with this Court
docketed as G.R. No. L-56399.
In the meantime, Iluminada filed a petition with the RTC docketed as Miscellaneous Case No. 4715 for
the issuance of an owners duplicate of TCT No. 7450. On March 22, 1978, the court granted the petition and
ordered the Register of Deeds to issue an owners duplicate of the said title under the name of Concepcion
Gil. Iluminada presented the said order and the deed of absolute sale executed by Concepcion in her favor.
On May 9, 1978, the Register of Deeds issued TCT No. 61514 over Lot 59-C-1, with an area of 218 square
meters, in the name of Iluminada Pacetes.[16]
On April 21, 1980, TCT No. 73412 was issued by the Register of Deeds of Davao City in favor of
Constancio Maglana over Lot 59-C-1 only.[17] The next day, Constancio Maglana executed a deed of sale not
only over Lot 59-C-1 but also Lot 59-C-2, in favor of Emilio Matulac for the purchase price
of P150,000.00.[18] On the basis of the said deed, the Register of Deeds issued TCT No. 80631 to and under
the name of Emilio Matulac over the two lots.
In the meantime, Angel Villarica had died on April 20, 1974. On July 7, 1981, his heirs, including his
widow Nieves, executed an Extra-Judicial Settlement of Estate of Deceased in which the latter waived, ceded
and transferred to her children Teresita Magpantay, Antero P.G. Villarica, Zenaida V. Alovera, Emperatriz V.
Garcia, Napoleon P.G. Villarica and Rupendo P.G. Villarica her rights and interests over the property covered
by TCT No. 7450.[19]
On January 13, 1982, this Court affirmed the resolution of the Court of Appeals, in CA-G.R. No. 62975-R
and dismissed the petition for certiorari in G.R. No. L-56399, thus, paving the way for the execution of the
decision of the trial court in Civil Case No. 1160, per its Order dated August 19, 1977. Emilio Matulac filed a
motion for the issuance of a writ of execution. The Court granted the motion on February 18, 1982. Nieves
filed a motion for the reconsideration of the order which the court denied in its Order dated March 17, 1982.
Virginia Jorge and Anita Vergara, the lessees, filed a motion for reconsideration but the court denied the
motion. Nonetheless, the lessees were allowed to stay in the property until April 9, 1982. However, the
lessees refused to vacate the property after said date.
On April 10, 1982, Emilio Matulac filed a motion in Civil Case No. 1160 for the issuance of a writ of
execution and an order of demolition. On April 20, 1982, the trial court issued an order granting the motion for
a writ of execution on April 30, 1982. The court also issued a special order for the demolition of the buildings
on the property. The buildings on the property, including the properties owned by Virginia Jorge and Anita
Vergara, were demolished on June 14, 1982. Emilio Matulac thereafter commenced the construction of a
98

building thereon. The defendant Nieves Villarica, in the meantime, filed a motion in Civil Case No. 1160 to
annul the proceedings, including the writ of execution issued by the court, and the issuance of a restraining
order.
For their part, Virginia Jorge and Anita Vergara filed a petition for certiorari with this Court docketed as
G.R. No. L-60690 for the nullification of the aforesaid orders and the writ of demolition issued by the trial court
in Civil Case No. 1160.
Three of the surviving heirs of Concepcion Gil, namely, Perla Palma Gil, Vicente Hizon, Jr. and Angel
Palma Gil, through their first cousin, Atty. Vicente Villarica, one of Nieves Villaricas children, filed on June 17,
1982, a complaint against Emilio Matulac, Constancio Maglana, Agapito Pacetes, and the Register of Deeds,
with the Court of First Instance, docketed as Civil Case No. 15,356 for the cancellation of the deed of sale
executed by Concepcion in favor of Iliminada Pacetes; the deed of sale executed by the latter in favor of
Constancio Maglana; the deed of sale executed by the latter in favor of Emilio Matulac, as well as TCT Nos.
61514, 73412 and 80631 under the respective names of the vendees.
The plaintiffs alleged, inter alia, that the deed of absolute sale executed by Concepcion in favor of
Iluminada over Lots 59-C-1 and 59-C-2 was a contract to sell, an executory contract, as declared by the Court
of First Instance in Civil Cases Nos. 4413 and 8836, and not an executed contract; the defendant spouses
Agapito and Iluminada Pacetes failed to pay the balance of the purchase price of the property during the
lifetime of Concepcion; hence, what was embodied in the said deed was not fulfilled by the vendee.
Consequently, the sale is null and void.
The plaintiffs prayed for the issuance of a temporary restraining order and a writ of preliminary injunction
to enjoin the defendant Emilio Matulac from continuing with the construction of a building on the property. The
plaintiffs likewise prayed that after due proceedings, judgment be rendered in their favor and against the
defendants, thus:
WHEREFORE, in view of the aforecited reasons it is most respectfully prayed that:
1) An order be rendered immediately enjoining defendant Matulac from doing further work in
the construction of the building and enjoining him from entering the premises and the land
subject of this complaint and after trial making the injunction above-mentioned permanent,
ordering the removal of any structure and other construction within the plaintiffs abovedescribed property and thereafter, upon said defendants failure to do so authorizing plaintiffs to
order said removal at defendants expense.
2) Judgment be rendered ordering:
a. Defendant Register of Deeds to cancel TCT No. T-61514, T-73412 and T-80631 and issued
(sic) a new Transfer Certificate of Title in the name of the above-mentioned heirs of the late
Concepcion Palma Gil nullifying the deeds of sale, Annexes B, C, and D hereof;
b. Defendants Pacetes, Maglana and Matulac jointly and solidarily liable to plaintiffs for moral
and exemplary damages as may be granted by this Honorable Court and the amount
of P25,000.00 as attorneys fees; and
c. Litigation expenses and other reliefs as may be justified under this case.[20]
In his answer to the complaint, defendant Emilio Matulac interposed the following special and affirmative
defenses: (a) he is the lawful owner of the property; (b) the action is barred by the Decision of this Court in
G.R. No. L-56399; (c) the plaintiffs are estopped from assailing the sale to him of the property; and (d) he is a
purchaser in good faith.
On November 29, 1982, the court issued an order in Civil Case No. 1160, denying the motion for the
nullification of the proceedings and for a writ of preliminary injunction. Nieves filed a motion for

99

reconsideration of the order. On February 18, 1983, the court issued an order denying the motion. Nieves filed
a petition with the Court of Appeals for the nullification of the same.
In the meantime, Emilio Matulac died intestate and was substituted by his heirs Sonia Matulac,
Josephine Matulac and Gregorio Matulac.[21] A petition was filed with the RTC of Davao City for the settlement
of his estate docketed as SP-No. 2747. The Court appointed Sonia Matulac as administratrix of the estate.
The CA rendered a decision granting the petition and ordering the trial court to conduct further
proceedings to implement the August 19, 1977 Order. Sonia Matulac filed a petition for review on certiorari
with this Court docketed as G.R. No. 85538 for the nullification of the decision of the CA.
On November 24, 1989, this Court rendered a Decision dismissing the petition in G.R. No. L-60690. This
Court said:
When We dismissed on September 16, 1974, the petition for certiorari filed by defendants questioning the
orders, dated December 7, 1961 and December 17, 1964, in effect We had confirmed the sale by plaintiff in
Civil case No. 1160, Concepcion Palma Gil, of Lot 59-C-1 and 59-C-2 to Illuminada Pacetes and affirmed the
ruling of the trial court that defendants had waived the benefit of Our Resolution rendered on August 31,
1961.[22]
Meanwhile, one of the plaintiffs, Perla Palma Gil in Civil Case No. 15,356, was appointed by the court as
administratrix of the estate of Concepcion on December 29, 1989,[23] and filed in the said case a motion to
intervene as plaintiff in her capacity as administratrix in behalf of all the heirs of Concepcion.[24] The heirs of
Emilio Matulac opposed the motion considering that they, and not the estate of Concepcion, owned the
subject property; thus the claim of the plaintiff should be filed in SP-No. 2747. On April 7, 1990, the said
motion was denied by the trial court.[25] The said court declared:
Being already a plaintiff together with the other plaintiffs in thise (sic) case, said intervention by plaintiff Perla
Palma Gil is not absolutely necessary and imperative. It would only delay the early disposition of the case if
allowed.
On January 8, 1990, this Court dismissed the petition in G.R. No. 85538. The petitioners filed a motion
for reconsideration and on July 2, 1992, this Court granted the motion and reversed the decision of the CA.
This Court ruled in the said case as follows:
When Concepcion Palma Gil, plaintiff in Civil Case No. 1160 sold the land in question to Iluminada Pacetes
on October 24, 1956, the latter became the new owner of the property. By virtue of the order of substitution
issued by the court, said new owner (Pacetes) became a formal party---the party plaintiff. As the new party
plaintiff, Pacetes had the right to move for the issuance of a writ of execution, which was correctly granted by
the trial court in the questioned Order dated August 19, 1977.
The subsequent transfers of the property from Pacetes to Maglana, and then from Maglana to herein movant
Matulac, was acquired pendente lite. The latter (Matulac) as the latest owner of the property, was, as aptly put
by the trial court, subrogated to all the rights and obligations of Pacetes. He is thus the party who now has a
substantial interest in the property. Matulac is a real party-in- interest subrogated to all the rights of Iluminada
Pacetes, including the right to the issuance of a writ of execution in his name. Hence, the questioned orders of
the lower court dated November 29, 1982 and February 18, 1983 as well as the Writ of Possession issued
pursuant to the aforementioned orders are valid. They do not in any way run counter to the order of the lower
court dated August 19, 1977, which granted the motion for execution filed by Pacetes, who, as earlier pointed
out, was succeeded in all his rights and interests, by herein petitioner, Matulac.
Although the dispositive portion of the judgment rendered in Civil Case No. 1160 did not award the parties
their respective shares in the property, the power of the court to issue the order of execution cannot be limited
to what is stated in the dispositive portion of the judgment. As held in Paylago vs. Nicolas (189 SCRA 728
[1990]), the body of the decision must be consulted in case of ambiguity in the dispositive portion. Hence, in

100

Jorge vs. Consolacion (supra), we ruled that the execution of the judgment cannot be limited to its dispositive
portion, considering the continued failure of the defendant Nieves Palma Gil-Villarica, to comply with what was
required of her in the judgment. Respondents deprived petitioner Concepcion Palma Gil and her successorsin-interest of their legal right to possess the land.[26](Underscoring supplied)
On June 11, 1993, the trial court rendered judgment in Civil Case No. 15,356 in favor of the defendants.
The trial court ruled that this Court had affirmed, in G.R. No. 85538 and G.R. No. L-60690, the sales of the
property from Concepcion Palma Gil to Iluminada Pacetes, then to Constancio Maglana and to Emilio
Matulac; hence, the trial court was barred by the rulings of this Court. The plaintiffs appealed to the CA with
the following assignment of errors:
I. The trial court erred in not holding that Iluminada Pacetes had no right to sell or transfer the two (2)
parcels of land to Constancio Maglana;
II. That the trial court erred in not declaring the sale of the properties in question from Iluminada
Pacetes to Constancio Maglana, thence, from Constancio Maglana to Emilio Matulac NULL
and VOID;
III. That the trial court erred in dismissing the complaint;
IV. That the trial court erred in not ordering the cancellation of transfer Certificate of Title No. T80631 in the name of Emilio Matulac and the issuance of a new title in the name of
Concepcion Palma Gil;
V. That the trial court erred in not holding the appellees liable for damages to the appellants.[27]
In the meantime, on June 29, 1994, the estate of Emilio Matulac executed a deed of sale of real estate in
which the estate sold Lots 59-C-1 and 59-C-2 and the building thereon to the Prudential Education Plan, Inc.
for P7,000,000.00.[28] On March 19, 1996, the CA rendered a decision affirming the decision assailed therein
and dismissing the appeal. The CA ruled that the deed of absolute sale executed by Concepcion in favor of
Iluminada Pacetes was a deed of absolute sale over Lots 59-C-1 and 59-C-2, under which the ownership over
the property subject thereof was transferred to the vendee. Moreover, the validity of the sales of the subject
lots by Concepcion to Iluminada, by the latter to Constancio Maglana, and by the latter to Emilio Matulac, had
been confirmed by this Court in G.R. No. L-60690 and G.R. No. 85538. Although Iluminada paid the balance
of the purchase price of the property only on August 8, 1977, the payment was still timely, in light of Article
1592 of the New Civil Code. Besides, the property had already been sold to the respondents Constancio
Maglana and Emilio Matulac.
The appellants, now petitioners in this case, assert that private respondents Agapito and Iluminada
Pacetes failed to pay the balance of the purchase price in the amount of P14,100.00.They did consign and
deposit the amount of P11,983.00, but only on August 8, 1977, twenty one years from the execution of the
Deed of Absolute Sale in favor of the said spouses, without the latter instituting an action for the cancellation
of their obligation. According to the petitioners, the consignation made by Iluminada Pacetes of the amount
did not produce any legal effect. Furthermore, private respondents Constancio Maglana and Emilio Matulac
were not purchasers in good faith because at the time they purchased the respective properties, the twostorey building constructed by the spouses Angel and Nieves Villarica on the said property was still
existing. Hence, the decision of the CA should be reversed and set aside.
In their Comment on the petition, private respondents Constancio Maglana and Agapito Pacetes averred
that the action of the petitioners in the court a quo was barred by the Decision of this Court in G.R. No. L60690 on November 24, 1989.

THE RULING OF THE COURT

101

The petition is denied due course.

We note that the petitioners failed to implead all the compulsory heirs of the deceased Concepcion Gil in
their complaint. When she died intestate, Concepcion Gil, a spinster, was survived by her sister Nieves, and
her nephews and nieces, three of whom are the petitioners herein.
Upon Concepcions demise, all her rights and interests over her properties, and the rights and obligations
under the Deed of Absolute Sale executed in favor of Iluminada Pacetes, were transmitted to her sister, and
her nephews and nieces[29] by way of succession, a mode of acquiring the property, rights and obligation of
the decedent to the extent of the value of the inheritance of the heirs. The heirs stepped into the shoes of the
decedent upon the latters death.[30]
In their complaint, the petitioners alleged that:
7. That upon the death of the late Concepcion Palma Gil, her heirs namely: A. Children of the deceased Pilar
Palma Gil Rodriguez; B. Children of the deceased Asuncion Palma Gil Hizon one of whom is plaintiff Vicente
Hizon, Jr.; C. Nieves Palma Gil Villarica; D. David Palma Gil one of whom is plaintiff Angel Palma Gil; E. Perla
Palma Gil; and F. Children of the deceased Jose Palma Gil, ipso facto became co-owners of the said subject
property by operation of law;[31]
When she testified, petitioner Palma Gil stated that:
ATTY. GALLARDO:
With the Courts permission.
Q You said that you are one of the 3 plaintiffs in this case?
A Yes, sir.
Q Now, aside from these 3 plaintiffs who are supposed to be the heirs of the late Concepcion Palma
Gil, there are also other heirs who were not included as plaintiffs in this case?
A Yes, because that time when they demolished the building and I accompanied Atty. Villarica at the
site where they had the demolition, we found out that during the confrontation that we have to
hurry and file the case right away. So we were not able to contact all the heirs and I have
contacted . . .since 3 of us were there during the demolition, so we decided that I will be one,
and Angel Palma Gil was also there and also Vicente Hizon Jr. whom I contacted at the Apo
View Hotel and I contacted also Julian Rodriguez, another cousin thru telephone and he told us
to go ahead and file the case. We cannot get all the heirs. We cannot gather all of them and we
will have a hard time asking them to sign, so we just filed the case.
Q You are telling the court that the other heirs were not included because they were not available to
sign the complaint?
A They were not there during the demolition.
Q When was the case filed?
A June 14, the demolition was on June 14, 1982.
ATTY. QUITAIN:
The best evidence would be the complaint, Your Honor.
ATTY. GALLARDO:
Q It appears in the complaint that it was filed sometime on June 16, 1982?
A We had it on June 14 the demolition, and we filed it right away because we were in a hurry.

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Q Since June 16, 1982 up to the present the other heirs did not do anything to be included in the
complaint?
ATTY. QUITAIN:
The best evidence would be the motion for intervention and it would seem that compaero is
contending that there is a need to include all heirs. Under the civil law on property even one coowner may file a case.[32]
Although the petitioners sought leave from the trial court to amend their complaint to implead the
intestate estate of the deceased Concepcion Gil through her administratrix Perla Palma Gil, as party plaintiff,
the trial court denied the petitioners plea. The petitioners manifested to the trial court that they would assign
the denial of their plea as one of the assigned errors in case of appeal to the CA. They failed to do so. The
petitioners were duty bound to implead all their cousins as parties-plaintiffs; otherwise, the trial court could not
validly grant relief as to the present parties and as to those who were not impleaded.[33]
Being indispensable parties, the absence of the surviving sister, nephews and nieces of the decedent in
the complaint as parties-plaintiffs, and in this case, as parties-petitioners, renders all subsequent actions of
the trial court null and void for want of authority to act, not only as to the absent parties, but even as to those
present. Hence, the petition at bar should be dismissed.[34]
Even if we were to brush aside this procedural lapse and delve into the merits of the case, a denial in due
course is inevitable.
Article 1191[35] in tandem with Article 1592[36] of the New Civil Code are central to the issues at bar.
Under the last paragraph of Article 1169 of the New Civil Code, in reciprocal obligations, neither party incurs
in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent
upon him. From the moment one of the parties fulfills his obligation, delay in the other begins. Thus, reciprocal
obligations are to be performed simultaneously so that the performance of one is conditioned upon the
simultaneous fulfillment of the other.[37] The right of rescission of a party to an obligation under Article 1191 of
the New Civil Code is predicated on a breach of faith by the other party that violates the reciprocity between
them.[38]
That the deed of absolute sale executed by Concepcion Gil in favor of Iluminada Pacetes is an executory
contract and not an executed contract is a settled matter. In a perfected contract of sale of realty, the right to
rescind the said contract depends upon the fulfillment or non-fulfillment of the prescribed condition. We ruled
that the condition pertains in reality to the compliance by one party of an undertaking the fulfillment of which
would give rise to the demandability of the reciprocal obligation pertaining to the other party.[39] The reciprocal
obligation envisaged would normally be, in the case of the vendee, the payment by the vendee of the agreed
purchase price and in the case of the vendor, the fulfillment of certain express warranties.[40]
In another case, we ruled that the non-payment of the purchase price of property constitutes a very good
reason to rescind a sale for it violates the very essence of the contract of sale. In Central Bank of the
Philippines v. Bichara,[41] we held that the non-payment of the purchase price of property is a resolutory
condition for which the remedy is either rescission or specific performance under Article 1191 of the New Civil
Code. This is true for reciprocal obligations where the obligation is a resolutory condition of the other.[42] The
vendee is entitled to retain the purchase price or a part of the purchase price of realty if the vendor fails to
perform any essential obligation of the contract. Such right is premised on the general principles of reciprocal
obligations.[43]
In this case, Concepcion Gil sold Lot 59-C-1 to Iluminada Pacetes for P21,600.00 payable as follows:
1. The purchase price of P21,600.00 shall be paid as follows: P7,500.00, to be paid upon the signing of this
instrument; and the balance of P14,100.00, to be paid upon the delivery of the corresponding Certificate of
Title in the name of the VENDEE.
Concepcion Gil obliged herself to transfer title over the property to and under the name of the vendee
within 120 days from the execution of the deed.

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2. That the VENDOR shall, within the period of ONE HUNDRED TWENTY (120) DAYS, from the signing of
this agreement, undertake and work for the issuance of the corresponding Certificate of Title of the said Lot
No. 59-C-1 in her favor with the proper government office or offices, to the end that the same can be duly
transferred in the name of the herein VENDEE, by virtue thereof.
3. That pending the full and complete payment of the purchase price to the VENDOR, the VENDEE shall
collect and receive any and all rentals and such other income from the land above-described for her own
account and benefit, this right of the VENDEE to begin from December 1, 1956.
That it is further stipulated that this contract shall be binding upon the heirs, executors and administrators of
the respective parties hereof.
And I, CONCEPCION PALMA GIL, with all the personal circumstances above-stated, hereby confirm all the
terms and conditions stipulated in this instrument.[44]
The vendee paid the downpayment of P7,500.00. By the terms of the contract, the obligation of the
vendee to pay the balance of the purchase price ensued only upon the issuance of the certificate of title by
the Register of Deeds over the property sold to and under the name of the vendee, and the delivery thereof by
the vendor Concepcion Gil to the latter. Concepcionfailed to secure a certificate of title over the property.
When she died intestate on August 4, 1959, her obligation to deliver the said title to the vendee devolved
upon her heirs, including the petitioners. The said heirs, including the petitioners failed to do so, despite the
lapse of eighteen years since Concepcions death.
Iluminada was not yet obliged on August 8, 1977 to pay the balance of the purchase price of the
property, but as a sign of good faith, she nevertheless consigned the amount of P11,983.00, part of the
balance of the purchase price of P14,000.00, with the court in Civil Case No. 1160. The court accepted the
consignation and she was issued receipts therefor. Still, the heirs of Concepcion Gil, including the petitioners,
failed to deliver the said title to the vendee. Iluminada was compelled to file, at her expense, a petition with the
RTC docketed as Miscellaneous Case No. 4715 for the issuance of an owners duplicate of TCT No. 7450
covering the property sold which was granted by the court on March 22, 1978. It was only on May 9, 1978 that
Iluminada managed to secure TCT No. 61514 over the property under her name. Upon the failure of the heirs
to comply with the decedents prestation, Iluminada Pacetes was impelled to resort to legal means to protect
her rights and interests.
The petitioners, as successors-in-interest of the vendor, are not the injured parties entitled to a rescission
of the deed of absolute sale. It was Concepcions heirs, including the petitioners, who were obliged to deliver
to the vendee a certificate of title over the property under the latters name, free from all liens and
encumbrances within 120 days from the execution of the deed of absolute sale on October 24, 1956, but had
failed to comply with the obligation.
The consignation by the vendee of the purchase price of the property is sufficient to defeat the right of the
petitioners to demand for a rescission of the said deed of absolute sale.[45]
It bears stressing that when the vendee consigned part of the purchase price with the Court and secured
title over the property in her name, the heirs of Concepcion, including the petitioners, had not yet sent any
notarial demand for the rescission of the deed of absolute sale to the vendee, or filed any action for the
rescission of the said deed with the appropriate court.
Although the vendee consigned with the Court only the amount of P11,983.00, P2,017.00 short of the
purchase price of P14,000.00, it cannot be claimed that Concepcion was an unpaid seller because under the
deed of sale, she was still obligated to transfer the property in the name of the vendee, which she failed to do
so. According to Article 1167 of the New Civil Code:
Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost.

104

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. (1098)
The vendee (Iluminada) had to obtain the owners duplicate of TCT No. 7450 and thereafter secure its
transfer in her name. Pursuant to Article 1167, the expenses incurred by the vendee should be charged
against the amount of P2,617.00 due to the heirs of Concepcion Gil as the vendors successors-in-interest.
In sum, the decision of the CA affirming the decision of the RTC dismissing the complaint of the
petitioners is affirmed.
IN LIGHT OF ALL THE FOREGOING, the petition for review is DENIED for lack of merit.
SO ORDERED.

#19 - [G.R. No. 135528. July 14, 2004]

SPOUSES ORLANDO A. RAYOS and MERCEDES T. RAYOS, petitioners, vs. THE COURT OF APPEALS
and SPOUSES ROGELIO and VENUS MIRANDA, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision[1] of the Court of Appeals[2] in CA-G.R. CV No.
46727 which affirmed the Decision[3] of the Regional Trial Court of Makati, Branch 62, in Civil Case No. 15639
for specific performance and damages, and Civil Case No. 15984 for sum of money and damages.
The two (2) cases stemmed from the following antecedent facts:
On December 24, 1985, petitioner Orlando A. Rayos, a practicing lawyer, and his wife, petitioner
Mercedes T. Rayos, secured a short-term loan from the Philippine Savings Bank (PSB) payable within a
period of one (1) year in quarterly installments of P29,190.28, the first quarterly payment to start on March 24,
1986. The loan was evidenced by a promissory note which the petitioners executed on December 24,
1985.[4] To secure the payment of the loan, the petitioners-spouses executed, on the same date, a Real
Estate Mortgage over their property covered by Transfer Certificate of Title (TCT) No. 100156 located in Las
Pias, Metro Manila.[5]
On December 26, 1985, the petitioners, as vendors, and the respondents, Spouses Miranda, as
vendees, executed a Deed of Sale with Assumption of Mortgage over the subject property for the price
of P214,000.00. However, on January 29, 1986, the petitioners-spouses, likewise, executed a Contract to Sell
the said property in favor of the respondents for P250,000.00 with the following condition:
3. That upon full payment of the consideration hereof, the SELLER shall execute a Deed of Absolute Sale in
favor of the BUYER that the payment of capital gains tax shall be for the account of the SELLER and that
documentary stamps, transfer tax, registration expenses for the transfer of title including the notarization and
preparation of this Contract and subsequent documents if any are to be executed, real estate taxes from
January 1, 1986 and other miscellaneous expenses shall be for the account of the BUYER; the SELLER
hereby represents that all association dues has been paid but that subsequent to the execution of this
Contract the payment of the same shall devolve upon the BUYER.[6]
The petitioners obliged themselves to execute a deed of absolute sale over the property in favor of the
respondents upon the full payment of the purchase price thereof.
Respondent Rogelio Miranda filed an application dated May 4, 1986 with the PSB to secure the approval
of his assumption of the petitioners obligation on the loan, and appended thereto a General Information
sheet.[7] Respondent Rogelio Miranda stated therein that he was the Acting Municipal Treasurer of Las Pias
and had an unpaid account with the Manila Banking Corporation in the amount of P18,777.31. The PSB
105

disapproved his application. Nevertheless, respondent Rogelio Miranda paid the first quarterly installment on
the petitioners loan on March 21, 1986 in the amount of P29,190.28. The said amount was paid for the
account of the petitioners. Respondent Rogelio Miranda, likewise, paid the second quarterly installment in the
amount of P29,459.00 on June 23, 1986, also for the account of the petitioners.[8]
In the meantime, respondent Rogelio Miranda secured the services of petitioner Orlando Rayos as his
counsel in a suit he filed against the Manila Banking Corporation, relative to a loan from the bank in the
amount of P100,000.00. Both parties agreed to the payment of attorneys fees, as follows:
Our agreement is as follows:
1.

You will pay me P700.00 as filing fee and other miscellaneous expenses which I personally
received from you this morning;

2.

Award to you of any amount in terms of moral, exemplary or actual and other forms of
damages shall accrue to you in the amount of 70% thereof;

3.

30% of the award to you in the concept of No. 2 hereof shall pertain to me as my
contingent fee;

4.

All attorneys fees that the court shall award to me or by the management of TMBC if they
agree to extrajudicially settle shall pertain exclusively to me;

5.
6.

Execution of judgment expenses shall be for your account;

Should the case be appealed, my contingent fee shall increase by 10% if the appeal is to
the Intermediate Appellate Court on questions of facts and law, and if appealed from there to
the Supreme Court, then another 10% shall accrue to me.[9]

On May 14, 1986, petitioner Orlando Rayos filed respondent Rogelio Mirandas complaint against the
bank with the Regional Trial Court of Makati, docketed as Civil Case No. 13670. [10]In the meantime, the latter
paid the third quarterly installment on the PSB loan account amounting to P29,215.66, for which the bank
issued a receipt for the account of the petitioners.
The parties executed a Compromise Agreement in Civil Case No. 13670 in which they agreed that each
party shall pay for the respective fees of their respective counsels.[11] The trial court rendered judgment on
October 23, 1986 based on the said compromise agreement.[12] Petitioner Orlando Rayos demanded the
payment of attorneys fees in the amount of P5,631.93, but respondent Rogelio Miranda refused to pay.
On November 12, 1986, petitioner Orlando Rayos wrote to respondent Rogelio Miranda and enclosed a
copy of his motion in Civil Case No. 13670 for the annotation of his attorneys lien at the dorsal portion of the
latters title used as security for the loan with the Manila Banking Corporation.[13] The respondent opposed the
motion, claiming that the petitioner agreed to render professional services on a contingent basis.[14]
Petitioner Orlando Rayos again wrote respondent Rogelio Miranda on November 30, 1986, reminding the
latter of the last quarterly payment of his loan with the PSB. He also advised the respondent to thereafter
request the bank for the cancellation of the mortgage on his property and to receive the owners duplicate of
his title over the same. Petitioner Orlando Rayos also wrote that their dispute over his attorneys fees in Civil
Case No. 13670 should be treated differently.[15]
Petitioner Orlando Rayos then received a Letter dated November 27, 1986 from the PSB, reminding him
that his loan with the bank would mature on December 24, 1986, and that it expected him to pay his loan on
or before the said date.[16] Fearing that the respondents would not be able to pay the amount due, petitioner
Orlando Rayos paid P27,981.41[17] to the bank on December 12, 1986, leaving the balance of P1,048.04. In a
Letter dated December 18, 1986, the petitioner advised the PSB not to turn over to the respondents the

106

owners duplicate of the title over the subject property, even if the latter paid the last quarterly installment on
the loan, as they had not assumed the payment of the same.[18]
On December 24, 1986, respondent Rogelio Miranda arrived at the PSB to pay the last installment on the
petitioners loan in the amount of P29,223.67. He informed the bank that the petitioners had executed a deed
of sale with assumption of mortgage in their favor, and that he was paying the balance of the loan,
conformably to said deed. On the other hand, the bank informed the respondent that it was not bound by said
deed, and showed petitioner Orlando Rayos Letter dated December 18, 1986. The respondent was also
informed that the petitioners had earlier paid the amount of P27,981.41 on the loan. The bank refused
respondent Rogelio Mirandas offer to pay the loan, and confirmed its refusal in a Letter dated December 24,
1986.[19]
On even date, respondent Rogelio Miranda wrote the PSB, tendering the amount of P29,223.67 and
enclosed Interbank Check No. 01193344 payable to PSB.[20] Thereafter, on December 29, 1986, the
petitioners paid the balance of their loan with the bank in the amount of P1,081.39 and were issued a receipt
therefor.[21] On January 2, 1987, the PSB wrote respondent Rogelio Miranda that it was returning his check.[22]
On January 2, 1987, respondent Rogelio Miranda filed a complaint against the petitioners and the PSB
for damages with a prayer for a writ of preliminary attachment with the RTC of Makati. The case was docketed
as Civil Case No. 15639 and raffled to Branch 61 of the court. The respondent alleged inter alia that the
petitioners and the PSB conspired to prevent him from paying the last quarterly payment of the petitioners
loan with the bank, despite the existence of the deed of sale with assumption of mortgage executed by him
and the petitioners, and in refusing to turn over the owners duplicate of TCT No. 100156, thereby preventing
the transfer of the title to the property in his name. Respondent Rogelio Miranda prayed that:
WHEREFORE, it is respectfully prayed that judgment be rendered in favor of plaintiff and against defendants,
ordering the latter, jointly and severally, as follows:
(a) To pay to plaintiff the sum of P267,197.33, with legal interest from date of demand, as actual or
compensatory damages representing the unreturned price of the land;
(b) To pay to plaintiff the sum of P500,000.00 as consequential damages;
(c) To pay to plaintiff the sum of P1,000,000.00 as moral damages;
(d) To pay to plaintiff the sum of P100,000.00 as exemplary damages by way of example or
correction for the public good;
(e) To pay to plaintiff the sum of P100,000.00 for and as attorneys fees;
(f) To pay for the costs of suit; and
(g) That a Writ of Attachment be issued against the properties of defendant Rayos spouses as
security for the satisfaction of any judgment that may be recovered.
PLAINTIFF FURTHER PRAYS for such other remedies and relief as are just or equitable in the premises.[23]
The trial court granted the respondents plea for a writ of preliminary attachment on a bond
of P260,000.00. After posting the requisite bond, the respondent also filed a criminal complaint against
petitioner Orlando Rayos for estafa with the Office of the Provincial Prosecutor of Makati, docketed as I.S. No.
87-150. He, likewise, filed a complaint for disbarment in this Court against petitioner Orlando Rayos, docketed
as Administrative Case No. 2974. Unaware of the said complaint, the petitioner wrote the respondent on
January 3, 1986 that as soon as his payment to the PSB of P29,223.67 was refunded, the owners duplicate of
the title would be released to him.[24] On January 5, 1986, petitioner Orlando Rayos wrote respondent Rogelio

107

Miranda, reiterating that he would release the title in exchange for his cash settlement of P29,421.41.[25] The
respondent failed to respond.
In the meantime, the PSB executed on January 8, 1987 a Release of Real Estate Mortgage in favor of
the petitioners,[26] and released the owners duplicate of title of TCT No. 100156.[27] On January 17, 1987,
petitioner Orlando Rayos wrote respondent Rogelio Miranda, reiterating his stance in his Letters of January 3
and 5, 1987.
In the meantime, the petitioners received the complaint in Civil Case No. 15639 and filed their Answer
with Counterclaim in which they alleged that:
14. That plaintiff has no cause of action against defendants Rayos, the latter are willing to deliver the title
sought by plaintiff under the terms set out in their letters dated January 3, 5, 17, and 20, hereto marked as
Annexes 1, 1-A, 1-B and 1-C;[28]
Petitioner Orlando Rayos filed a complaint on February 1, 1987 against respondent Rogelio Miranda with
the Regional Trial Court of Makati, docketed as Civil Case No. 15984 for Specific Performance with Damages
for the collection of the amount of P29,223.67 which he had paid to the PSB on December 12 and 19, 1986,
and his attorneys fees in Civil Case No. 13670. The trial court consolidated the cases in Branch 62 of the
RTC.
Respondent Rogelio Miranda filed an Amended Complaint in Civil Case No. 15639 for specific
performance with damages, impleading the officers of the PSB as parties-defendants. He alleged that of the
purchase price of the property of P214,000.00, he had paid the entirety thereof to the petitioners, and that
petitioner Orlando Rayos acted unethically in trying to collect P5,631.93 from him as his attorneys fees in Civil
Case No. 13670, and in having such claim annotated at the dorsal portion of his title over the property he
mortgaged to the Manila Banking Corporation.
Respondent Rogelio Miranda prayed that, after due proceedings, judgment be rendered in his favor,
thus:
WHEREFORE, it is respectfully prayed that judgment be rendered in favor of plaintiff and against defendants,
as follows:
(a) Ordering defendants spouses Orlando A. Rayos and Mercedes T. Rayos to deliver forthwith to plaintiff the
Owners Duplicate of Transfer Certificate of Title No. 100156, Registry of Deeds for Pasay City;
(b) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P1,000,000.00 as moral damages;
(c) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P867,197.33 as exemplary
damages by way of example or correction for the public good;
(d) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P100,000.00 for and as attorneys
fees;
(e) Ordering defendants, jointly, to pay the costs of suit; and
(f) Ordering the issuance of a Writ of Attachment against the properties of defendants Rayos spouses as
security for the satisfaction of any judgment that may be recovered.
PLAINTIFF further prays for such other remedies and relief as are just or equitable in the premises.[29]
In the meantime, petitioner Orlando Rayos filed an Amended Complaint in Civil Case No. 15984
impleading his wife and that of respondent Rogelio Miranda as parties to the case. On March 4, 1987, the trial
court issued an Order granting the petitioners motion in Civil Case No. 15639 for the discharge of the

108

attachment on their property.[30] The court also denied the respondents motion for reconsideration of the
Order of the court. The respondents, thereafter, filed a petition for review with the Court of Appeals for the
nullification of the said Order.
On July 9, 1987, the public prosecutor dismissed the charge of estafa against petitioner Orlando
Rayos.[31] The respondents appealed the resolution to the Department of Justice.
On May 26, 1987, the PSB and its officers filed their Answer in Civil Case No. 15639, and alleged the
following by way of special and/or affirmative defenses, thus:
27. The application for the plaintiff to assume the mortgage loan of the defendants Spouses Rayos was not
approved, and it was NOT even recommended by the Marketing Group of defendant PSBank for approval by
its Top Management, because the credit standing of the plaintiff was found out to be not good;
28. The acceptance of the payments made by the plaintiff for three (3) amortizations on the loan of
defendants Spouses Rayos was merely allowed upon the insistence of the plaintiff, which payments were duly
and accordingly receipted, and said acceptance was in accordance with the terms of the Real Estate
Mortgage executed by the defendants Spouses Rayos in favor of the defendant PSBank and is also allowed
by law;[32]
The parties in Civil Case No. 15639 agreed to submit the case for the trial courts decision on the basis of
their pleadings and their respective affidavits. In a Resolution dated July 26, 1988, then Undersecretary of
Justice Silvestre Bello III affirmed the Public Prosecutors resolution in I.S. No. 87-150.[33]
On January 30, 1989, the petitioners sold the property to Spouses Mario and Enriqueta Ercia
for P144,000.00. The said spouses were not impleaded as parties-defendants in Civil Case No. 15639. On
May 18, 1989, the petitioners filed an amended complaint in Civil Case No. 15984, appending thereto a copy
of the Contract to Sell in favor of the respondents. The trial court admitted the said complaint.
On November 15, 1989, this Court rendered its Decision dismissing the complaint for disbarment against
Rayos.[34]
On January 29, 1993, the trial court rendered judgment, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered, as follows:
I. (a) In Civil Case No. 15639, this Court orders plaintiff Rogelio Miranda to refund to spouses Orlando and
Mercedes T. Rayos the total sum of P29,069.45, Rayos paid to PS Bank as the last amortization and as
release of mortgage fee, without any interest; and upon receipt of the sum of P29,069.45 from Rogelio
Miranda, Spouses Orlando and Mercedes T. Rayos shall deliver to Rogelio Miranda Transfer Certificate of
Title No. 100156 of the Registry of Deeds of Pasay City; and, deliver to Rogelio Miranda the possession of the
parcel of land described in the said title;
(b) Dismissing the complaint for damages of Plaintiff Rogelio Miranda against Spouses Orlando and
Remedios (sic) T. Rayos, Philippine Savings Bank, Jose Araullo, Cesar I. Valenzuela, Dionisio Hernandez,
Nestor E. Valenzuela, Raul T. Totanes, and Belinda Lim, for insufficiency of evidence; while the counterclaims
of PS Bank, Jose Araullo, Cesar Valenzuela, Dionisio Hernandez, Nestor E. Valenzuela, Raul Totanes, and
Belinda Lim, are likewise dismissed for insufficiency of evidence.
(c) The counterclaims of Spouses Orlando and Mercedes T. Rayos will be treated in Civil Case No. 15984;
II. In Civil Case No. 15984, this Court orders Defendant Rogelio Miranda to pay to Plaintiff Orlando Rayos the
sum of P4,133.19 at 12% interest per annum, from the date of the filing of the complaint on Feb. 11, 1987
until fully paid.
No costs in both cases.

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SO ORDERED.[35]
The petitioners appealed the decision to the Court of Appeals contending that:
I. THE COURT A QUO COMMITTED A GRAVE ERROR IN NOT FINDING THAT ROGELIO A.
MIRANDA COMMITTED A BREACH OF CONTRACT IN NOT PAYING THE FULL
CONTINGENT FEE OF 30% IN WRITING IN THE MANILABANK CASE AND BECAUSE OF
THAT BREACH, HE CANNOT NOW DEMAND SPECIFIC PERFORMANCE AND THE
COURT A QUOSHOULD HAVE LEFT THE PARTIES AS THEY ARE;
II. THE COURT A QUO SIMILARLY COMMITTED AN ERROR IN NOT FINDING THAT THE
DECISION IN SEVA VS. ALFREDO BERWIN & CO. & MEDEL IS APPLICABLE FOUR SQUARE
WHEREBY HE WHO BREACHES HIS CONTRACT IS NOT ENTITLED TO SPECIFIC
PERFORMANCE;[36]
On July 27, 1998, the Court of Appeals rendered judgment affirming with modification the decision of the
RTC, thus:
WHEREFORE, premises considered, the appealed decision of the Regional Trial Court of Makati City, is
hereby AFFIRMED, with the modification abovestated.[37]
The petitioners filed the instant petition, and ascribed the following errors on the appellate court:
I. THE COURT OF APPEALS (CA) COMMITTED AN ERROR IN NOT FINDING THAT THE
PRIVATE RESPONDENT MIRANDA COMMITTED THE FIRST BREACH FOR FAILURE TO
ASSUME THE LOAN THUS HE FAILED TO SURROGATE (sic) HIMSELF TO PSB.
II. THE CA COMMITTED AN ERROR IN FINDING THAT PETITIONERS PRE-EMPTED PRIVATE
RESPONDENT MIRANDA IN DEPOSITING THE LAST AMORTIZATION WHEN MIRANDA HAD
NO LEGAL STANDING WITH PSB DUE TO THE LATTERS NON-APPROVAL OF THE
ASSUMPTION OF THE LOAN.
III. THE CA COMMITTED AN ERROR IN FINDING BOTH PARTIES GUILTY OF FIRST VIOLATING
THE OBLIGATIONS INCUMBENT UPON THEM EVEN INFERRING THAT PETITIONERS
COMMITTED THE BREACH FIRST BUT LATER CONCLUDING THAT THE BREACH WAS
COMMITTED BY BOTH PARTIES. IT DID NOT MAKE A CORRECT ASSESSMENT OF WHO
ACTUALLY COMMITTED THE FIRST BREACH.
IV. THE CA COMMITTED AN ERROR IN NOT ALLOWING THE OFFSET IF ITS DECISION
STOOD OF THE AMOUNT OF P4,133.19 PLUS 12% INT. P.A. FROM THE FILING OF THE
COMPLAINT (CV 15984), THUS, ENTIRELY DISREGARDING THE DECISION OF THE TRIAL
COURT IN SAID CASE ALLOWING ONLY THE DECISION IN CV 15639.
V. THE CA COMMITTED AN ERROR IN NOT APPLYING THE DECSION (sic) LAID DOWN IN
SEVA VS. ALFRED BERWIN & CO. AND MEDEL THAT A PERSON HIMSELF AT FAULT
CANNOT ENFORCE SPECIFIC PERFORMANCE.[38]
The petitioners assert that the Court of Appeals erred in not finding that the respondents first committed a
breach of their contract to sell upon their failure to pay the amount due for the last quarterly installment of their
loan from the PSB. The petitioners fault the Court of Appeals for not relying on the resolution of
Undersecretary Silvestre Bello III affirming the dismissal of the criminal complaint for estafa in I.S. No. 87-150,
as cited by this Court in its decision in Miranda v. Rayos,[39] where it was also held that petitioner Orlando
Rayos paid the last quarterly installment because he thought that the respondents would not be able to pay
the same. The petitioners argue that they had no other alternative but to pay the last quarterly installment due
on their loan with the PSB, considering that they received a demand letter from the bank on November 28,
1986, coupled by its denial of the respondents request to assume the payment of the loan. They insist that
they did not block the respondents payment of the balance of the loan with the bank. The petitioners contend

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that even if the parties committed a breach of their respective obligations under the contract to sell, it
behooved the Court of Appeals to apply Article 1192 of the Civil Code in the instant case, which reads:
The power to rescind obligation is implied in reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.
The petition has no merit.
The assailed ruling of the Court of Appeals reads:
After due study, the Court finds that there was no basis in fact and law for the appellants to usurp the payment
of the last amortization on the mortgage upon the parcel of land it had conveyed to the Mirandas.Even if the
appellants wanted to keep their good credit standing, they should not have preempted Miranda in paying the
final amortization. There is no sufficient showing that Miranda was in danger of defaulting on the said
payment. In fact, it appears that he approached the bank to tender payment, but he was refused by the bank,
because he was beaten to the draw, so to speak, by the appellants. Appellants were able to do so because,
for some reasons, the Mirandas assumption of the mortgage has not been approved by the bank. In doing so,
the appellants had unilaterally cancelled the deed of sale with assumption of mortgage, without the consent of
the Mirandas. This conduct by the appellants is, to say the least, injudicious as under Article 1308 of the Civil
Code, contracts must bind both contracting parties and their validity or compliance cannot be left to the will of
one of them.
Just as nobody can be forced to enter into a contract, in the same manner, once a contract is entered into, no
party can renounce it unilaterally or without the consent of the other. It is a general principle of law that no one
may be permitted to change his mind or disavow and go back upon his own acts, or to proceed contrary
thereto, to the prejudice of the other party. In a regime of law and order, repudiation of an agreement validly
entered into cannot be made without any ground or reason in law or in fact for such repudiation.
In the same way that the Rayos spouses must respect their contract with the Mirandas for the sale of real
property and assumption of mortgage, Rogelio Miranda has to recognize his obligations under his agreement
to pay contingent attorneys fees to Orlando Rayos.[40]
The Court of Appeals erred in so ruling.
The findings and disquisitions of the Court of Appeals cannot prevail over our findings in Miranda v.
Rayos,[41] a case which involves the same parties, and where we held that the petitioners cannot be faulted
for paying the amortization due for the last quarterly installment on their loan with the PSB:
It is difficult to imagine that complainant would be so nave as to be totally unaware of the provisions of the
original contract between the PSB and the spouses Rayos. He is a degree holder (A.B. Pre-Law and B.S.C.)
and Acting Municipal Treasurer of Las Pias. In short, he is not an ordinary layman. As a buyer with a
knowledge of law, it was unnatural for him to read the provisions of the real estate mortgage wherein it is
provided, among others, that the sale of the property covered by the mortgage does not in any manner relieve
the mortgagor of his obligation but that on the contrary, both the vendor and the vendee, or the party in whose
favor the alienation or encumbrance is made shall be, jointly and severally, liable for said mortgage

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obligations. There is every reason to believe that it was pursuant to the said provision in the real estate
mortgage that complainant tried to assume the loan obligation of the Rayoses by filling up and submitted the
loan application (page 30, records) sent by Orland Rayos. By signing the loan application and the general
information sheet (page 31, records) in connection with said application, complainant showed that he knew
that there was a need to formally apply to the bank in order for him to assume the mortgage.
We find respondent spouses version that when complainants application to assume the mortgage loan was
disapproved he begged that he be allowed to pay the quarterly amortization credible, owing to the fact that
complainant made the payments for the account of the Rayoses. Hence, complainant knew that since his
application to the PSB was not approved, there was no substitution of parties and so he had to pay for the
account of respondent spouses as shown by the receipts issued by the PSB.
As for the charge that Rayos paid the last installment to block complainant from getting the title and
transferring the same to his name, respondents version is more satisfactory and convincing. Respondent
Orland Rayos paid the last amortization when it became apparent that complainant would not be able to give
the payment on the due date as he was still trying to sell his Lancer car. Even if complainant was able to pay
the last installment of the mortgage loan, the title would not be released to him as he knew very well that his
application to assume the mortgage was disapproved and he had no personality as far as PSB was
concerned.[42]
Contrary to the ruling of the Court of Appeals, the petitioners did not unilaterally cancel their contract to
sell with the respondents when they paid the total amount of P29,062.80 to the PSB in December 1986.[43] In
fact, the petitioners wrote the respondents on January 3, 5 and 17, 1987, that they were ready to execute the
deed of absolute sale and turn over the owners duplicate of TCT No. 100156 upon the respondents
remittance of the amount of P29,223.67. The petitioners reiterated the same stance in their Answer with
Counterclaim in Civil Case No. 15639. The petitioners cannot, likewise, be faulted for refusing to execute a
deed of absolute sale over the property in favor of the respondents, and in refusing to turn over the owners
duplicate of TCT No. 100156 unless the respondents refunded the said amount. The respondents were
obliged under the contract to sell to pay the said amount to the PSB as part of the purchase price of the
property. On the other hand, it cannot be argued by the petitioners that the respondents committed a breach
of their obligation when they refused to refund the said amount.
It bears stressing that the petitioners and the respondents executed two interrelated contracts, viz: the
Deed of Sale with Assumption of Mortgage dated December 26, 1985, and the Contract to Sell dated January
29, 1986. To determine the intention of the parties, the two contracts must be read and interpreted
together.[44] Under the two contracts, the petitioners bound and obliged themselves to execute a deed of
absolute sale over the property and transfer title thereon to the respondents after the payment of the full
purchase price of the property, inclusive of the quarterly installments due on the petitioners loan with the PSB:
3. That upon full payment of the consideration hereof, the SELLER shall execute a Deed of Absolute Sale in
favor of the BUYER that the payment of capital gains tax shall be for the account of the SELLER and that
documentary stamps, transfer tax, registration expenses for the transfer of title including the notarization and
preparation of this Contract and subsequent documents if any are to be executed, real estate taxes from
January 1, 1986 and other miscellaneous expenses shall be for the account of the BUYER; the SELLER
hereby represents that all association dues has been paid but that subsequent to the execution of this
Contract the payment of the same shall devolve upon the BUYER.[45]
Construing the contracts together, it is evident that the parties executed a contract to sell and not a
contract of sale. The petitioners retained ownership without further remedies by the respondents[46] until the
payment of the purchase price of the property in full. Such payment is a positive suspensive condition, failure
of which is not really a breach, serious or otherwise, but an event that prevents the obligation of the
petitioners to convey title from arising, in accordance with Article 1184 of the Civil Code.[47] In Lacanilao v.
Court of Appeals,[48] we held that:

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It is well established that where the seller promised to execute a deed of absolute sale upon completion of
payment of the purchase price by the buyer, the agreement is a contract to sell. In contracts to sell, where
ownership is retained by the seller until payment of the price in full, such payment is a positive suspensive
condition, failure of which is not really a breach but an event that prevents the obligation of the vendor to
convey title in accordance with Article 1184 of the Civil Code.
The non-fulfillment by the respondent of his obligation to pay, which is a suspensive condition to the
obligation of the petitioners to sell and deliver the title to the property, rendered the contract to sell ineffective
and without force and effect.[49] The parties stand as if the conditional obligation had never existed. Article
1191 of the New Civil Code will not apply because it presupposes an obligation already extant. [50] There can
be no rescission of an obligation that is still non-existing, the suspensive condition not having happened.[51]
However, the respondents may reinstate the contract to sell by paying the P29,223.67, and the
petitioners may agree thereto and accept the respondents late payment.[52] In this case, the petitioners had
decided before and after the respondents filed this complaint in Civil Case No. 15639 to accept the payment
of P29,223.67, to execute the deed of absolute sale over the property and cause the transfer of the title of the
subject property to the respondents. The petitioners even filed its amended complaint in Civil Case No. 15984
for the collection of the said amount. The Court of Appeals cannot, thus, be faulted for affirming the decision
of the trial court and ordering the petitioners to convey the property to the respondents upon the latters
payment of the amount of P29,223.67, provided that the property has not been sold to a third-party who acted
in good faith.
IN VIEW OF ALL THE FOREGOING, the petition is DENIED DUE COURSE. The Decision of the Court
of Appeals in CA-G.R. CV No. 46727 is AFFIRMED, except as to the factual finding that the petitioners
usurped the payment of the last amortization on the mortgage upon the parcel of land. Costs against the
petitioners.
SO ORDERED.
#20 - G.R. No. L-13246

March 30, 1960

FEDERICO CALERO, plaintiff-appellant, vs.

EMILIA CARRION Y SANTA MARINA, ET AL., defendants-appellees.
Ramirez and Ortigas for appellant.
Carlos, Laurea and Associates for appellees.
BARRERA, J.:
From the order of the Court of First Instance of Manila (in Civil Case No. 31409) dismissing his complaint, on
the ground of prescription, plaintiff Federico Calero interposed this appeal directly to this Court on questions
purely of law.
On December 20, 1956, plaintiff filed with the abovementioned court a complaint which, in part, reads:
xxx

xxx

xxx

3. Que a principios del ao de l937, el demandante propuso a don Enrique Carrion, padre de las
demandadas, el siguiente negocio: adquirir entre los dos una finca en la Plaza Santa Cruz, por al
precio de P250,000.00, de los cuales se pagarian P25,000.00 al contado y el resto a plazos, en diez
aos; en el bien entendido de que para pagar la suma de P25,000.00, don Enrique Carrion aportaria
P15,000.00 y el demandante aportaria los P10,000.00 restantes.

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4. Que despues de examinar la finca, don Enrique Carrion acepto la proposicion del demandante, y le
autoriza cerrar la transaccion, a nombre de sus hijas, es decir, de las dos (2) demandadas principales
en este asunto.
5. Que en el entretanto, don Enrique Carrion se ausento de Filipinas, continuando las negociaciones
su apoderado y administrador, don Santiago Carrion quien tambien era el apoderado y administrador
de las demandadas.
6. Que cuarido se fue a preparar la escritura de compra, don Santiago Carrion, como apoderado de
las demandadas, explico al demandante que era muy complicado constituir una communidad de
bienes en esa finca, pues habria necesidad de rendir cuentas mensuales, y consultarse en caso de
reparaciones, mejoras, etc.
7. Que para evitar estas dificultades, don Santiago Carrion propuso comprar la finca a nombre
exclusive de las demandadas, con la obligacion de pagar al demandante el veinte por ciento (20%) de
los beneficios, cuando se vendiera la finca.
8. Que el demandante acepto esa proposicion, en el bien enteridido de que la finca seria vendida tan
pronto como se encontrara un comprador por una cantidad no menor de P300,000.00.
9. Que debido a la confianza que existia entre las partes, el demandante acepto esa proposicion,
como ya se ha dicho, y las partes otorgaron el dia 28 de mayo de 1937, un contrato formal, en el cual
se hizo constar el ultimo convenio celebrado por las partes, es decir, quea a la venta de la finca
situada en la Plaza Santa Cruz, las demandadas pagarian al demandante,
una cantidad equivalente un VEINTE POR CIENTO (20%) de cualquier cantidad que se obtenga de la
venta de los mencionados edificios y terrenos, despues de descontar el importe total pagado por
dichas demandadas.
12. Que la verdadera intension de las partes al otorgar el contrato exhibito "A" era dar al demandante
una participacion del veinte por ciento (20%), en todos los beneficios, rentas y utilidades de la finca
descrita en ese contrato.
13. Que desde el ao 1937 el demandante ha hecho varias ofertas a las demandadas CARRION,
para vender esa finca al precio ofrecido por los compradores.
14. Que ahora el demandante tiene un comprador de dicha finca por la suma de P1,455,900.00, pero
las demandadas CARRION Continuan negandose a vender dicha linea por ese precio, a pesar de la
enorme ganancia que representa esa transaccion.
15. Que durante todo el tiempo transcurrido desde el ao 1937 hasta la fecha, las demandadas
CARRION se han lucrado con las rentas de esa finca, sin dar ninguna participacion al demandante,
quien hasta la fecha no ha recibido un centime de dicha finca por ningun concepto.
16. Que debido a los actos de las demandadas CARRION, el demandante ha sufrido y sigue
sufriendo daos y perjuicios en una cantidad inestimable con certeza, pero que. por lo menos, debe
ser el veinte por ciento (20%) de los beneficios liquidos obtenidos de es finca por las demandadas
CARRION.
17. Que el demandante ha requerido a las demandadas CARRION a rendir cuentas de la
Administracion de esa finca, a lo cual tambien se han negado.

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18. Que si vende esa finca ahora en la cantidad de P1,455,900.00, las demandadas CARRION
tendrian un beneficio liquido de P1,205,900.00, o sea, la diferencia entre el precio de venta antes
mencionado y los P250,000.00 pagados por dicha finca; y por consiguiente, el demandante tenria
derecho a percibir la suma de P241,180.00, o sea, el veinte por ciento (20%) de los beneficios
obtenidos, de conformalidad exhibito "A" de esta demanda.
19. Que las demandadas CARRION se han negado a rendir cuentas de los beneficios obtenidos de
disha finca y a pagar la participacion del demandante, a pesar de los repetidos requeriment de dicho
demandante.
xxx

xxx

xxx

POR TANTO, el demandante ruega al Hon. Juzgado se sirva dictar sentencia:

(A) Ordenando a las demandadas CARRION que rindan cuenta completa y detallada de los ingresos
y gastas de la finca mencionada en el exhibit "A" desde el dia 28 de mayo de 1937 hasta fecha de la
venta, entregando al demandante un veinte por ciento (20%) del producto liquido de dichas cuentas,
en pago de los daos y perjuicios ya sufridos hasta la fecha;
(B) Ordenando a las demandadas que vendan esa finca descrita en el exhibito "A"', por un precio no
menor de P1,455,900.00 en el plazo de tres (3) meses, o de lo contrario paguen al demandante la
cantidad de P241,180.00, que representa el veinte por ciento (20%) de los beneficios obtenidos, con
sus intereses legales desde esta fecha hasta su completo pago.
On February 2, 1957, defendants Emilia Carrion, Maria Carrion, Jose Falco, and Manuel Perez Guzman (the
last two as husbands, respectively, of the first two), filed a motion to dismiss, on the grounds that (1) the
complaint states no cause of action, and (2) the plaintiff's cause of action, if any, is barred by the Statute of
Limitations (Sec. 1[e], Rule 8, Rules of Court). To this motion, plaintiff filed an opposition on March 16, 1957.
On June 1, 1957, the court required plaintiff to amend his complaint, in an order which, in part, reads:
. . . inasmuch as plaintiff concedes in his answer (opposition) to the motion to dismiss that ". . . por
tratarse de una obligaicion sin plazo fijo, este debe ser determinado por el Hon. Juzgado", it is
plaintiff's duty to amend his complaint to this effect, because there is nothing either in its allegations or
in its prayer asking that this Court fix a reasonable period for the sale of the said property with a view
to having defendants comply with their obligations under the parties' aforesaid agreement.
. . . defendants' obligation has not even become demandable in view of the suspensive condition
found in the parties' agreement.
WHEREFORE, it is ordered that plaintiff amend his complaint within twenty (20) days from notice
hereof, failing which the same will be dismissed.
Complying with the above order of the court, plaintiff, on June 15, 1957, filed an amended complaint which is
identical to the original complaint, except that it contained the following new Paragraph 15 and a new prayer,
to wit:
15. Que el contrato exhibito "A" no establece un plazo determinado para la venta de la finca descrita
en el mismo contrato, aunque la intencion de que hubiera un plazo es evidente de la naturaleza,
circunstancias y condiciones del mismo contrato; y el Hon. Juzgado debe sealar dicho plazo, de
acuerdo con el articulo 1197 del nuevo Codigo Civil.
POR TANTO, el demandante ruega al Hon. Juzgado se sirva dictar sentencia:

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(A) Sealando un plazo de tres (3) meses para que las demandadas CARRION vendan la finca
decrita en el exhibito "A" al precio mas alto en el mercado, pero no menos de la oferta actual de
P1,455,99.00;
(B) Ordenando a las demandadas CARRION que paguen al demandante el viente por ciento (20%)
de los beneficios obtenidos en la venta de dicha finca; . . . .
On July 18,1957, defendant renewed their motion to dismiss, on the grounds that (1) the amended complaint
states no cause of action (2) the plaintiff's cause of action, if any, is barred by the Statute of Limitations (Sec.
1[e], Rule 8, Rule of Court), and (3) the plaintiff's original complaint being without cause of action, it cannot be
amended and/or cured by said amended complaint which changes plaintiff's theory of the case. In connection
with the second ground mentioned, defendants stated:
Plaintiff's right of action accrued in the year 1937 when the first of plaintiffs alleged various offers to
defendants to sell the property at price offered by buyers was refused by defendants (Pars. 13 and 14
of Complaint). It is patent, therefore, that is, ten (10) years from the year 1937. Considering that
plaintiff's complaint was filed on December 21, 1956, plaintiff's cause of action if any, is obviously
unenforceable and barred by the Statue of Limitations.
To this motion, plaintiff filed his opposition on August 2, 1957, to which defendants filed a rejoinder on August
8, 1957. To this rejoinder, plaintiff filed a counter-reply on August 12, 1957.
On August 21, 1957, the court issued an order denying defendant's motion to dismiss. From this order,
defendants filed a motion for reconsideration on August 27, 1957, which was duly opposed by plaintiff on
September 7, 1957. On September 16, 1957, defendants filed a rejoinder to said opposition.
On October 1, 1957, the court issued an order dismissing plaintiff's complaint on the ground of prescription, as
follows:
ORDER
This Court has before it (1) defendants's MOTION FOR RECONSIDERATION of the order of this
Court dated August 21, 1957, (2) CONTESTACION DEL DEMANDANTE A LA MOCION DE
RECONSIDERACION, and (3) defendants' REJOINDER TO COTESTACION DEL DEMANDANTE A
LA MOCION DE RECONSIDERACION.
It is true that heretofore this Court did not entertain defendants' motion to dismiss plaintiff's original
complaint; that on June 1, 1957, plaintiff was given twenty (20) days to amend his complaint; that on
June 15, 1957, the amended complaint was filed; that on July 22, 1957, defendants again put in a
motion to dismiss the said amended complaint, and that on August 21, 1957, this Court also denied
this latter motion to dismiss. Defendants, however, have filed a motion for reconsideration of the order
just mentioned of the ground that plaintiff's action under his amended complaint has already
prescribed, and this Court has to pass upon the said motion for reconsideration.
Concretely, defendants now contend that plaintiff's action asking this Court to fix the period for the
fulfillment of defendants' obligation, which is the subject matter of his amended complaint, has already
prescribed under the law and the applicable authorities. While this Court in conscience believes that
defendants have such obligation to plaintiff under the express terms and conditions of the parties'
agreement Exhibit A, nevertheless it cannot ignore defendants' aforesaid contention that plaintiff's
action asking this Court to fix a period for the fulfillment of the said obligation has in fact already
prescribed. For one thing, this action which may be brought under Article 1197 of the New Civil Code
cannot be said to be imprescriptible. For another, as pointed out by defendants, in the case of
Gonzales vs. Jose, 66 Phil., 369, among others, it was pertinently held that "The action to ask the

116

court to fix the period has already prescribed in accordance with section 43(1) of the Code of Civil
Procedure. This period of prescription is ten years, which has already elapsed from the execution of
the promissory notes until the filing of the action on June 1, 1934." Inasmuch as in the instance case,
the parties agreement Exhibit A was executed on May 28, 1937, plaintiff's action to fix the period for
the fulfillment of defendants' obligation thereunder should have been filed within ten (10) years from
the date just mentioned, following the said decision based on Section 43 (1) of the Code of Civil
Procedure, in relation to Article 1116 of the New Civil Code. It is plain to see therefore that plaintiff's
present action commenced only on December 21, 1956, is already long barred by prescription.
At page 2 of plaintiff's CONTESTACION DEL DEMANDANTE A LA MOCION DE
RECONSIDERACION, the position is taken that En este asunto el plazo de prescripcion comienza
cuando nace el derecho de accion. Plaintiff's cause of action in the present case is to have this Court
fix the period which the parties had left to conjecture in their agreement Exhibit A, and the said cause
of action arose right after the execution of said agreement on May 28, 1937, and lapsed ten (10) years
after said date. Plaintiff further state that "ademas, en nuestro asunto actual este Hon. Juzgado ya ha
resuelto que el derecho de accion ni siquiera habla comenzado". What this Court really said on this
point in its order of June 1, 1957 is the following: "As just intimated, defendants' obligation has not
even become demandable in view of the suspensive condition found in the parties' agreement".
Reference therefore is clearly made to defendants' obligation to plaintiff under Exhibit A, and not to
plaintiff's right to ask for the fixing of the period contemplated by the parties in the said agreement.
Plaintiff finally submits that "para que se acepte una mocion de sobreseimiento, el fundaments debe
ser indubitable, (Seccion 3, Regla 8 del Reglamento de los Tribunates.)" and that "El hecho de que
este Hon. Juzgado haya denegado ya dos mociones de sobresiemientos, es la mejor prueba de que
su fundamento es por lo menos muy dudoso". It may be gathered from the record of this case that
this Court has all along been inclined to try it on the merits with a view to getting at the truth and
rendering judgment accordingly. However, it now finds itself faced with a defense, namely,
prescription, so clear and unanswerable that, to overlook the same, would be to disregard legal as
well judical precepts.
Finding defendants' MOTION FOR RECONSIDERATION of the order of this Court dated August 21,
1957 to be meritorious, the said reconsideration is hereby granted, and plaintiff's amended complaint
is hereby dismissed, with costs against him.
SO ORDERED.
From the above-quoted order, plaintiff filed a motion for reconsideration on October 3, 1957, which was duly
opposed by defendants on October 18, 1957. On October 23, 1957, the court denied said motion. Hence, this
appeal.
Plaintiff claims that the lower court erred in dismissing his complaint, contending that (a) the agreement
Exhibit A attached to the amended complaint and made an integral part thereof, created "un fideicomiso
implicito" or an implied trust, which is not subject to prescription, and (b) that even admitting the obligation is
subject to a suspensive undetermined period (not condition), the action to have such period fixed by the court
has not yet prescribed. In support of his submission that the agreement created an implied trust, plaintiffappellant cites the provisions of Articles 1452 and 1453 of the new Civil Code which read as follows:
ART. 1452. If two or more persons agree to purchase property and by common consent the legal title
is taken in the name of one of them for the benefit of all, a trust is created by force of law in favor of
the others in proportion to the interest of each.
ART. 1453. When property is conveyed to a person in reliance upon his declared intention to hold it
for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose benefit
is contemplated.

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The contention is without merit, Article 1452 abovequoted is inapplicable to this case for the reason that there
is absolutely no stipulation in the contract, Exhibit A, that there would be a joint purchase of the property and
that the legal title thereto was to be placed in the name of the defendants for the benefit of themselves and
herein plaintiff. The recitals in the contracts preceding the paragraph containing the obligation assumed by the
defendants, merely refer to the services rendered by the plaintiff as broker who negotiated the sale of the
property to the defendants and which the defendants agreed to compensate. Nothing contained therein would
indicate that the property was being purchased for the benefit of the plaintiff and the defendants. The
obligation assumed by the defendants is clear and unequivocal in that:
por y en consideracion, a los trabajos, sugestiones, concejos y ayuda hasta ahora prestados por Don
Federico Calero en relacion con la compra de los bienes vedidos a las Sras. EMILIA CARRION Y STA.
MARINA Y MARIA DE LAS MERCEDES CARRION Y SANTA MARINA los trabajos y concejos que dicho
seorpromete seguir dando a los apoderados de las mismas en relacion con la venta, arriendo,
administracion y mejoramiente de los mencionados bienes, por lapresente, libre y volunta riamente, Don
Santiago Carrion, en su capacidad de apoderado de las mencionadas Da. EMILIA CARRION Y STA.
MARINA y Da. MARIA DE LAS MERCEDES CARRION Y SANTA MARINA y de la manera mas solemne
como sea necessario y eficaz en derecho, promete pagar a don Federico Calero sus sucesores y
cesionarios, una cantidad equivalente a UN VEINTE POR CIENTO (20%) de cualquer cantidad que se
obtenga de la venta de los mencionados edificios y terrenos, despues de degcontar el importe total pagado
por Ias Sras. EMILIA CARRION Y STA. MARINA Y MARIA DE LAS MERCEDES CARRION Y SANTA
MARINA a la due a de los mismos El Hogar Filipino, entendiendose ademas que este veinte por ciento sera
tomado de la ganancia liquida que les represents a las nuevas dueas ta venta de los bienes mencionmados
ya sea por mediacion del Sr. Calero o sin ella. (par. 5 of Exh. A). (Emphasis supplied.).
The terms of the contract admit no doubt that the 20% to be paid the plaintiff is of any amount which may be
obtained by the sale of the property after deducting the purchase price thereof, which shall be taken from the
liquidated benefit obtained by the owners out of the sale of the said property.
Neither is Article 1453 applicable, because there is absolutely nothing in the agreement which even remotely
indicates that the property was conveyed to the defendants in reliance upon their declared intention to hold it
for, or transfer it to, another or the grantor.
Even the very allegations of plaintiff's complaint clearly reflect the true nature of the agreement. It appears
therefrom that although the original parties to purchase the property tribute P10,000.00 and the defendants to
put up P15,000.00 on account of the down payment of P25,000.00), the same was abandoned and the parties
subsequently agreed that the defendants would buy the property exclusively in their name and for their own
account because "era muy complicado constituir una comunidad de bienes en esa finca, pues abria
necesidad de rendir cuentas mensuales, y consultares en caso de reparaciones, mejoras, etc." and that the
plaintiff "acepto esa proposicion, en el bien entendido de que la finca seria vendida tan pronto como se
encontrara un comprador por una cantidad no menor de P300,000.00" "con la obligacion (on the part of the
defendants) de pagar al demandante el veinte por ciento (20%) de los beneficios, cuando se vendiera la
finca", and that, lastly, "el demandado acepto esa proposicion, como ya se ha dicho, y las partes otorgaron el
dia 28 de marzo de 1937, un contrato formal en el cual se hizo constar el ultimo convenio celebrado por las
partes, es decir, que a la venta de la finca situada en la Plaza Santa Cruz, las demandadas pagarian al
demandante,
una cantidad equivalente a un Veinte Por Ciento (20%) de cualquier cantidad que se obtenga de la
venta de los mencionados edificios y terrenos, despues de descontar el importe total pagado por
dichas demandadas. (See paragraphs 3, 6, 7, 8 and 9 of the amended complaint.)
Plaintiff-appellant next contends that the lower court also erred in dismissing his complaint on the finding that
plaintiff's right of action to have the period fixed for the sale of the property had already prescribed. It is urged
that the time for enforcing their right of action to have the period judicially determined did not begin to run until
the defendants had been formally demanded and they refused to sell the property. It was only then, it is

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argued, that the period of prescription started to run. This seems to be illogical. Before the period is fixed, the
defendants' obligation to sell is suspended and they, therefore, cannot be compelled to act. For this reason, a
complaint to enforce immediately the principal obligation subject to the suspensive period before this is fixed,
will not prosper. But this is not to say that the plaintiff has no cause of action. His cause of action under the
agreement is to have the court fix the period and after the expiration of that period, to compel the performance
of the principal obligation to sell. And this right to have the period judicially fixed is born from the date of the
agreement itself which contains the undetermined period. Extrajudicial demand is not essential for the
creation of this cause of action to have the period fixed.1 It exists by operation of law from the moment such
an agreement subject to an undetermined period is entered into, whether the period depends upon the will of
the debtor alone, or of the parties themselves, or where from the nature and the circumstances of the
obligation it can be inferred that a period was intended.
This is the clear intendment of Article 1197 of the New Civil Code as well as Article 1128 of the Spanish Civil
Code and the applicable doctrine laid down by this Court.2 And since the agreement was executed on May 28,
1937 and the complaint to have the period fixed was filed on December 21, 1956 or after almost 20 years,
plaintiff's action is clearly and indisputably barred under the Statute of Limitations.
Wherefore, finding no reversible error in the order appealed from, the same is hereby affirmed, with costs
against the plaintiff-appellant. So ordered.
#21 - G.R. No. L-78412 September 26, 1989
TRADERS ROYAL BANK, petitioner, vs.
THE HONORABLE COURT OF APPEALS, HON. BALTAZAR M. DIZON, Presiding Judge, Regional Trial
Court, Branch 113, Pasay City and ALFREDO CHING, respondents.
San Juan, Africa, Gonzalez and San Agustin for petitioner.
Balgos and Perez for respondents.

GRINO-AQUINO, J.:
This petition for certiorari assails the Court of Appeals' decision dated April 29, 1987 in CA-G.R. SP No.
03593, entitled "Alfredo Ching vs. Hon. Baltazar M. Dizon and Traders Royal Bank" nullifying the Regional
Trial Court's orders dated August 15,1983 and May 24,1984 and prohibiting it from further proceeding in Civil
Case No. 1028-P.
On March 30,1982, the Philippine Blooming Mills, Inc. (PBM) and Alfredo Ching jointly submitted to the
Securities and Exchange Commission a petition for suspension of payments (SEC No. 2250) where Alfredo
Ching was joined as co-petitioner because under the law, he was allegedly entitled, as surety, to avail of the
defenses of PBM and he was expected to raise most of the stockholders' equity of Pl00 million being required
under the plan for the rehabilitation of PBM. Traders Royal Bank was included among PBM's creditors named
in Schedule A accompanying PBM's petition for suspension of payments.
On May 13, 1983, the petitioner bank filed Civil Case No. 1028-P in the Regional Trial Court, Branch CXIII in
Pasay City, against PBM and Alfredo Ching, to collect P22,227,794.05 exclusive of interests, penalties and
other bank charges representing PBM's outstanding obligation to the bank. Alfredo Ching, a stockholder of
PBM, was impleaded as co-defendant for having signed as a surety for PBM's obligations to the extent of ten
million pesos (Pl0,000,000) under a Deed of Suretyship dated July 21, 1977.

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In its en banc decision in SEC-EB No. 018 (Chung Ka Bio, et al. vs. Hon. Antonio R. Manabat, et al.), the SEC
declared that it had assumed jurisdiction over petitioner Alfredo Ching pursuant to Section 6, Rule 3 of the
new Rules of Procedure of the SEC providing that "parties in interest without whom no final determination can
be had of an action shall be joined either as complainant, petitioner or respondent" to prevent multiplicity of
suits.
On July 9, 1982, the SEC issued an Order placing PBM's business, including its assets and liabilities, under
rehabilitation receivership, and ordered that "all actions for claims listed in Schedule A of the petition pending
before any court or tribunal are hereby suspended in whatever stage the same may be, until further orders
from the Commission" (p. 22, Rollo). As directed by the SEC, said order was published once a week for three
consecutive weeks in the Bulletin Today, Philippine Daily Express and Times Journal at the expense of PBM
and Alfredo Ching.
PBM and Ching jointly filed a motion to dismiss Civil Case No. 1028-P in the RTC, Pasay City, invoking the
pendency in the SEC of PBM's application for suspension of payments (which Ching co-signed) and over
which the SEC had already assumed jurisdiction.
Before the motion to dismiss could be resolved, the court dropped PBM from the complaint, on motion of the
plaintiff bank, for the reason that the SEC had already placed PBM under rehabilitation receivership.
On August 15, 1983, the trial court denied Ching's motion to dismiss the complaint against himself. The court
pointed out that "P.D. 1758 is only concerned with the activities of corporations, partnerships and
associations. Never was it intended to regulate and/or control activities of individuals" (p.11, Rollo). Ching's
motion for reconsideration of that order was denied on May 24,1984. Respondent Judge argued that under P '
D. 902-A, as amended, the SEC may not validly acquire jurisdiction over an individual, like Ching (p. 62,
Rollo).
Ching filed a petition for certiorari and prohibition in the Court of Appeals (CA-G.R. SP No. 03593) to annul
the orders of respondent Judge and to prohibit him from further proceeding in the civil case.
The main issue raised in the petition was whether the court a quo could acquire jurisdiction over Ching in his
personal and individual capacity as a surety of PBM in the collection suit filed by the bank, despite the fact
that PBM's obligation to the bank had been placed under receivership by the SEC.
On April 29, 1987, the Court of Appeals granted the writs prayed for. It nullified the questioned orders of
respondent Judge and prohibited him from further proceeding in Civil Case No. 1028-P, except to enter an
order dismissing the case. The pertinent ruling of the Court of Appeals reads:
In sum, since the SEC had assumed jurisdiction over petitioner in SEC Case No. 2250 and
reiterating the propriety of such assumption in SEC-EB No. 018; and since under PD 902-A,
as amended by PD 1758, ... upon appointment of a ... rehabilitation receiver... pursuant to this
Decree, all actions for claims against corporation ... under management or receivership
pending before any court, tribunal, board or body shall be suspended accordingly ...
respondent judge clearly acted without jurisdiction in taking cognizance of the civil case in the
court a quo brought by respondent bank to enforce the surety agreement against petitioner for
the purpose of collecting payment of PBM's outstanding obligations. Respondent bank should
have questioned the SEC's assumption of jurisdiction over petitioner in an appellate forum and
not in the court a quo, a tribunal with which the SEC enjoys a co-equal and coordinate rank.
(p. 27, Rollo.)
The Bank assails that decision in this petition for review alleging that the appellate court erred;

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1. in holding that jurisdiction over respondent Alfredo Ching was assumed by the SEC
because he was a co-signer or surety of PBM and that the lower court may not assume
jurisdiction over him so as to avoid multiplicity of suits; and
2. in holding that the jurisdiction assumed by the SEC over Ching was to the exclusion of
courts or tribunals of coordinate rank.
The petition for review is meritorious.
Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of PBM, the SEC could not assume
jurisdiction over his person and properties. The Securities and Exchange Commission was empowered, as
rehabilitation receiver, to take custody and control of the assets and properties of PBM only, for the SEC has
jurisdiction over corporations only not over private individuals, except stockholders in an intra-corporate
dispute (Sec. 5, P.D. 902-A and Sec. 2 of P.D. 1758). Being a nominal party in SEC Case No. 2250, Ching's
properties were not included in the rehabilitation receivership that the SEC constituted to take custody of
PBM's assets. Therefore, the petitioner bank was not barred from filing a suit against Ching, as a surety for
PBM. An anomalous situation would arise if individual sureties for debtor corporations may escape liability by
simply co- filing with the corporation a petition for suspension of payments in the SEC whose jurisdiction is
limited only to corporations and their corporate assets.
The term "parties-in-interest" in Section 6, Rule 3 of the SEC's New Rules of Procedure contemplates only
private individuals sued or suing as stockholders, directors, or officers of a corporation.
Ching can be sued separately to enforce his liability as surety for PBM, as expressly provided by Article 1216
of the New Civil Code:
ART. 1216. The creditor may proceed against any of the solidary debtors 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, as long as the debt has not been fully
collected.
It is elementary that a corporation has a personality distinct and separate from its individual stockholders or
members. Being an officer or stockholder of a corporation does not make one's property the property also of
the corporation, for they are separate entities (Adelio Cruz vs. Quiterio Dalisay, 152 SCRA 482).
Ching's act of joining as a co-petitioner with PBM in SEC Case No. 2250 did not vest in the SEC jurisdiction
over his person or property, for jurisdiction does not depend on the consent or acts of the parties but upon
express provision of law (Tolentino vs. Social Security System, 138 SCRA 428; Lee vs. Municipal Trial Court
of Legaspi City, Br. I, 145 SCRA 408).
WHEREFORE, the petition for review is granted. The decision of the Court of Appeals in CA-G.R. SP No.
03593 is set aside. Respondent Judge of the Regional Trial Court in Pasay City is ordered to reinstate Civil
Case No. 1028-P and to proceed therein against the private respondent Alfredo Ching. Costs against the
private respondent.
SO ORDERED.

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#22 - G.R. No. 142381

October 15, 2003

PHILIPPINE BLOOMING MILLS, INC., and ALFREDO CHING, petitioners, vs.

COURT OF APPEALS and TRADERS ROYAL BANK, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari1 to annul the Decision2 dated 16 July 1999 of the Court of Appeals in
CA-G.R. CV No. 39690, as well as its Resolution dated 17 February 2000 denying the motion for
reconsideration. The Court of Appeals affirmed with modification the Decision3 dated 31 August 1992
rendered by Branch 113 of the Regional Trial Court of Pasay City ("trial court"). The trial courts Decision
declared petitioner Alfredo Ching ("Ching") liable to respondent Traders Royal Bank ("TRB") for the payment
of the credit accommodations extended to Philippine Blooming Mills, Inc. ("PBM").
Antecedent Facts
This case stems from an action to compel Ching to pay TRB the following amounts:
1. P959,611.96 under Letter of Credit No. 479 AD covered by Trust Receipt No. 106;4
2. P1,191,137.13 under Letter of Credit No. 563 AD covered by Trust Receipt No. 113;5 and
3. P3,500,000 under the trust loan covered by a notarized Promissory Note.6
Ching was the Senior Vice President of PBM. In his personal capacity and not as a corporate officer,
Ching signed a Deed of Suretyship dated 21 July 1977 binding himself as follows:
xxx as primary obligor(s) and not as mere guarantor(s), hereby warrant to the TRADERS ROYAL
BANK, its successors and assigns, the due and punctual payment by the following individuals and/or
companies/firms, hereinafter called the DEBTOR(S), of such amounts whether due or not, as
indicated opposite their respective names, to wit:
NAME OF DEBTOR(S)

AMOUNT OF OBLIGATION

PHIL. BLOOMING MILLS CORP. TEN MILLION PESOS

(P 10,000,000.00)

owing to said TRADERS ROYAL BANK, hereafter called the CREDITOR, as evidenced by all notes,
drafts, overdrafts and other credit obligations of every kind and nature contracted/incurred by said
DEBTOR(S) in favor of said CREDITOR.
In case of default by any and/or all of the DEBTOR(S) to pay the whole or part of said indebtedness
herein secured at maturity, I/We, jointly and severally, agree and engage to the CREDITOR, its
successors and assigns, the prompt payment, without demand or notice from said CREDITOR, of
such notes, drafts, overdrafts and other credit obligations on which the DEBTOR(S) may now be
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indebted or may hereafter become indebted to the CREDITOR, together with all interests, penalty and
other bank charges as may accrue thereon and all expenses which may be incurred by the latter in
collecting any or all such instruments.
I/WE further warrant the due and faithful performance by the DEBTOR(S) of all the obligations to be
performed under any contracts, evidencing indebtedness/obligations and any supplements,
amendments, charges or modifications made thereto, including but not limited to, the due and
punctual payment by the said DEBTOR(S).
I/WE hereby expressly waive notice of acceptance of this suretyship, and also presentment, demand,
protest and notice of dishonor of any and all such instruments, loans, advances, credits, or other
indebtedness or obligations hereinbefore referred to.
MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and not contingent
upon the pursuit by the CREDITOR, its successors or assigns, of whatever remedies it or they may
have against the DEBTOR(S) or the securities or liens it or they may possess; and I/WE hereby agree
to be and remain bound upon this suretyship, irrespective of the existence, value or condition of any
collateral, and notwithstanding also that all obligations of the DEBTOR(S) to you outstanding and
unpaid at any time may exceed the aggregate principal sum herein above stated.
In the event of judicial proceedings, I/WE hereby expressly agree to pay the creditor for and as
attorneys fees a sum equivalent to TEN PER CENTUM (10%) of the total indebtedness (principal and
interest) then unpaid, exclusive of all costs or expenses for collection allowed by law.7 (Emphasis
supplied)
On 24 March and 6 August 1980, TRB granted PBM letters of credit on application of Ching in his
capacity as Senior Vice President of PBM. Ching later accomplished and delivered to TRB trust
receipts, which acknowledged receipt in trust for TRB of the merchandise subject of the letters of
credit. Under the trust receipts, PBM had the right to sell the merchandise for cash with the obligation
to turn over the entire proceeds of the sale to TRB as payment of PBMs indebtedness. Letter of
Credit No. 479 AD, covered by Trust Receipt No. 106, has a face value of US$591,043, while Letter of
Credit No. 563 AD, covered by Trust Receipt No. 113, has a face value of US$155,460.34.
Ching further executed an Undertaking for each trust receipt, which uniformly provided that:
xxx
6. All obligations of the undersigned under the agreement of trusts shall bear interest at the rate of __
per centum ( __%) per annum from the date due until paid.
7. [I]n consideration of the Trust Receipt, the undersigned hereby jointly and severally undertake and
agree to pay on demand on the said BANK, all sums and amounts of money which said BANK may
call upon them to pay arising out of, pertaining to, and/or in any manner connected with this receipt. In
case it is necessary to collect the draft covered by the Trust Receipt by or through an attorney-at-law,
the undersigned hereby further agree(s) to pay an additional of 10% of the total amount due on the
draft as attorneys fees, exclusive of all costs, fees and other expenses of collection but shall in no
case be less than P200.00"8(Emphasis supplied)
On 27 April 1981, PBM obtained a P3,500,000 trust loan from TRB. Ching signed as co-maker in the
notarized Promissory Note evidencing this trust loan. The Promissory Note reads:
FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We, jointly and severally, promise to pay the
TRADERS ROYAL BANK or order, at its Office in 4th Floor, Kanlaon Towers Bldg., Roxas Blvd., Pasay City,

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the sum of Pesos: THREE MILLION FIVE HUNDRED THOUSAND ONLY (P3,500,000.00), Philippine
Currency, with the interest rate of Eighteen Percent (18%) per annum until fully paid.
In case of non-payment of this note at maturity, I/We, jointly and severally, agree to pay an additional
amount equivalent to two per cent (2%) of the principal sum per annum, as penalty and collection
charges in the form of liquidated damages until fully paid, and the further sum of ten percent (10%)
thereof in full, without any deduction, as and for attorneys fees whether actually incurred or not, exclusive of
costs and other judicial/extrajudicial expenses; moreover, I/We jointly and severally, further empower and
authorize the TRADERS ROYAL BANK at its option, and without notice to set off or to apply to the payment of
this note any and all funds, which may be in its hands on deposit or otherwise belonging to anyone or all of
us, and to hold as security therefor any real or personal property which may be in its possession or control by
virtue of any other contract.9 (Emphasis supplied)
PBM defaulted in its payment of Trust Receipt No. 106 (Letter of Credit No. 479 AD) for P959,611.96, and of
Trust Receipt No. 113 (Letter of Credit No. 563 AD) for P1,191,137.13. PBM also defaulted on its P3,500,000
trust loan.
On 1 April 1982, PBM and Ching filed a petition for suspension of payments with the Securities and Exchange
Commission ("SEC"), docketed as SEC Case No. 2250.10 The petition sought to suspend payment of PBMs
obligations and prayed that the SEC allow PBM to continue its normal business operations free from the
interference of its creditors. One of the listed creditors of PBM was TRB.11
On 9 July 1982, the SEC placed all of PBMs assets, liabilities, and obligations under the rehabilitation
receivership of Kalaw, Escaler and Associates.12
On 13 May 1983, ten months after the SEC placed PBM under rehabilitation receivership, TRB filed with the
trial court a complaint for collection against PBM and Ching. TRB asked the trial court to order defendants to
pay solidarily the following amounts:
(1) P6,612,132.74 exclusive of interests, penalties, and bank charges [representing its indebtedness
arising from the letters of credit issued to its various suppliers];
(2) P4,831,361.11, exclusive of interests, penalties, and other bank charges [due and owing from the
trust loan of 27 April 1981 evidenced by a promissory note];
(3) P783,300.00 exclusive of interests, penalties, and other bank charges [due and owing from the
money market loan of 1 April 1981 evidenced by a promissory note];
(4) To order defendant Ching to pay P10,000,000.00 under the Deed of Suretyship in the event
plaintiff can not recover the full amount of PBMs indebtedness from the latter;
(5) The sum equivalent to 10% of the total sum due as and for attorneys fees;
(6) Such other amounts that may be proven by the plaintiff during the trial, by way of damages and
expenses for litigation.13
On 25 May 1983, TRB moved to withdraw the complaint against PBM on the ground that the SEC had already
placed PBM under receivership.14 The trial court thus dismissed the complaint against PBM.15
On 23 June 1983, PBM and Ching also moved to dismiss the complaint on the ground that the trial court had
no jurisdiction over the subject matter of the case. PBM and Ching invoked the assumption of jurisdiction by
the SEC over all of PBMs assets and liabilities.16

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TRB filed an opposition to the Motion to Dismiss. TRB argued that (1) Ching is being sued in his personal
capacity as a surety for PBM; (2) the SEC decision declaring PBM in suspension of payments is not binding
on TRB; and (3) Presidential Decree No. 1758 ("PD No. 1758"),17 which Ching relied on to support his
assertion that all claims against PBM are suspended, does not apply to Ching as the decree regulates
corporate activities only.18
In its order dated 15 August 1983,19 the trial court denied the motion to dismiss with respect to Ching and
affirmed its dismissal of the case with respect to PBM. The trial court stressed that TRB was holding Ching
liable under the Deed of Suretyship. As Chings obligation was solidary, the trial court ruled that TRB could
proceed against Ching as surety upon default of the principal debtor PBM. The trial court also held that PD
No. 1758 applied only to corporations, partnerships and associations and not to individuals.
Upon the trial courts denial of his Motion for Reconsideration, Ching filed a Petition for Certiorari and
Prohibition20 before the Court of Appeals. The appellate court granted Chings petition and ordered the
dismissal of the case. The appellate court ruled that the SEC assumed jurisdiction over Ching and PBM to the
exclusion of courts or tribunals of coordinate rank.
TRB assailed the Court of Appeals Decision21 before this Court. In Traders Royal Bank v. Court of
Appeals,22this Court upheld TRB and ruled that Ching was merely a nominal party in SEC Case No. 2250.
Creditors may sue individual sureties of debtor corporations, like Ching, in a separate proceeding before
regular courts despite the pendency of a case before the SEC involving the debtor corporation.
In his Answer dated 6 November 1989, Ching denied liability as surety and accommodation co-maker of PBM.
He claimed that the SEC had already issued a decision23 approving a revised rehabilitation plan for PBMs
creditors, and that PBM obtained the credit accommodations for corporate purposes that did not redound to
his personal benefit. He further claimed that even as a surety, he has the right to the defenses personal to
PBM. Thus, his liability as surety would attach only if, after the implementation of payments scheduled under
the rehabilitation plan, there would remain a balance of PBMs debt to TRB.24 Although Ching admitted PBMs
availment of the credit accommodations, he did not show any proof of payment by PBM or by him.
TRB admitted certain partial payments on the PBM account made by PBM itself and by the SEC-appointed
receiver.25 Thus, the trial court had to resolve the following remaining issues:
1. How much exactly is the corporate defendants outstanding obligation to the plaintiff?
2. Is defendant Alfredo Ching personally answerable, and for exactly how much?26
TRB presented Mr. Lauro Francisco, loan officer of the Remedial Management Department of TRB, and Ms.
Carla Pecson, manager of the International Department of TRB, as witnesses. Both witnesses testified to the
following:
1. The existence of a Deed of Suretyship dated 21 July 1977 executed by Ching for PBMs liabilities to
TRB up to P10,000,000;27
2. The application of PBM and grant by TRB on 13 March 1980 of Letter of Credit No. 479 AD for
US$591,043, and the actual availment by PBM of the full proceeds of the credit accommodation;28
3. The application of PBM and grant by TRB on 6 August 1980 of Letter of Credit No. 563 AD for
US$156,000, and the actual availment by PBM of the full proceeds of the credit accommodation;29 and
4. The existence of a trust loan of P3,500,000 evidenced by a notarized Promissory Note dated 27
April 1981 wherein Ching bound himself solidarily with PBM;30 and

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5. Per TRBs computation, Ching is liable for P19,333,558.16 as of 31 October 1991.31

Ching presented Atty. Vicente Aranda, corporate secretary and First Vice President of the Human Resources
Department of TRB, as witness. Ching sought to establish that TRBs Board of Directors adopted a resolution
fixing the PBM account at an amount lower than what TRB wanted to collect from Ching. The trial court
allowed Atty. Aranda to testify over TRBs manifestation that the Answer failed to plead the subject matter of
his testimony. Atty. Aranda produced TRB Board Resolution No. 5935, series of 1990, which contained the
minutes of the special meeting of TRBs Board of Directors held on 8 June 1990.32 In the resolution, the Board
of Directors advised TRBs Management "not to release Alfredo Ching from his JSS liability to the
bank."33 The resolution also stated the following:
a) Accept the P1.373 million deposits remitted over a period of 17 years or until 2006 which shall be applied
directly to the account (as remitted per hereto attached schedule). The amount of P1.373 million shall be
considered as full payment of PBMs account. (The receiver is amenable to this alternative)
The initial deposit/remittance which amounts to P150,000.00 shall be remitted upon approval of the above
and conforme to PISCOR and PBM. Subsequent deposits shall start on the 3rd year and annually thereafter
(every June 30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole obligation due and demandable.
b) Write-off immediately P4.278 million. The balance [of] P1.373 million to remain outstanding in the books of
the Bank. Said balance will equal the deposits to be remitted to the Bank for a period of 17 years.34
However, Atty. Aranda himself testified that both items (a) and (b) quoted above were never complied with or
implemented. Not only was there no initial deposit of P150,000 as required in the resolution, TRB also
disapproved the document prepared by the receiver, which would have released Ching from his suretyship.35
The Ruling of the Trial Court
The trial court found Ching liable to TRB for P19,333,558.16 under the Deed of Suretyship. The trial court
explained:
[T]he liability of Ching as a surety attaches independently from his capacity as a stockholder of the Philippine
Blooming Mills. Indisputably, under the Deed of Suretyship defendant Ching unconditionally agreed to
assume PBMs liability to the plaintiff in the event PBM defaulted in the payment of the said obligation in
addition to whatever penalties, expenses and bank charges that may occur by reason of default. Clear
enough, under the Deed of Suretyship (Exh. J), defendant Ching bound himself jointly and severally with PBM
in the payment of the latters obligation to the plaintiff. The obligation being solidary, the plaintiff Bank can hold
Ching liable upon default of the principal debtor. This is explicitly provided in Article 1216 of the New Civil
Code already quoted above.36
The dispositive portion of the trial courts Decision reads:
WHEREFORE, judgment is hereby rendered declaring defendant Alfredo Ching liable to plaintiff bank in the
amount of P19,333,558.16 (NINETEEN MILLION THREE HUNDRED THIRTY THREE THOUSAND FIVE
HUNDRED FIFTY EIGHT & 16/100) as of October 31, 1991, and to pay the legal interest thereon from such
date until it is fully paid. To pay plaintiff 5% of the entire amount by way of attorneys fees.
SO ORDERED.37
The Ruling of the Court of Appeals

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On appeal, Ching stated that as surety and solidary debtor, he should benefit from the changed nature of the
obligation as provided in Article 1222 of the Civil Code, which reads:
Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are
derived from the nature of the obligation and of those which are personal to him, or pertain to his own share.
With respect to those which personally belong to the others, he may avail himself thereof only as regards that
part of the debt for which the latter are responsible.
Ching claimed that his liability should likewise be reduced since the equitable apportionment of PBMs
remaining assets among its creditors under the rehabilitation proceedings would have the effect of reducing
PBMs liability. He also claimed that the amount for which he was being held liable was excessive. He
contended that the outstanding principal balance, as stated in TRB Board Resolution No. 5893-1990, was
only P5,650,749.09.38Ching also contended that he was not liable for interest, as the loan documents did not
stipulate the interest rate, pursuant to Article 1956 of the Civil Code.39 Finally, Ching asserted that the Deed of
Suretyship executed on 21 July 1977 could not guarantee obligations incurred after its execution.40
TRB did not file its appellees brief. Thus, the Court of Appeals resolved to submit the case for decision.41
The Court of Appeals considered the following issues for its determination:
1. Whether the Answer of Ching amounted to an admission of liability.
2. Whether Ching can still be sued as a surety after the SEC placed PBM under rehabilitation
receivership, and if in the affirmative, for how much.42
The Court of Appeals resolved the first two questions in favor of TRB. The appellate court stated:
Ching did not deny under oath the genuineness and due execution of the L/Cs, Trust Receipts, Undertaking,
Deed of Surety, and the 3.5 Million Peso Promissory Note upon which TRBs action rested. He is, therefore,
presumed to be liable unless he presents evidence showing payment, partially or in full, of these obligations
(Investment and Underwriting Corporation of the Philippines v. Comptronics Philippines, Inc. and Gene v.
Tamesis, 192 SCRA 725 [1990]).
As surety of a corporation placed under rehabilitation receivership, Ching can answer separately for the
obligations of debtor PBM (Rizal Banking Corporation v. Court of Appeals, Philippine Blooming Mills, Inc., and
Alfredo Ching, 178 SCRA 738 [1990], and Traders Royal Bank v. Philippine Blooming Mills and Alfredo Ching,
177 SCRA 788 [1989]).
Even a[n] SEC injunctive order cannot suspend payment of the suretys obligation since the rehabilitation
receivers are limited to the existing assets of the corporation.43
The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, the judgment of the lower court is hereby AFFIRMED but modified with respect to the amount
of liability of defendant Alfredo Ching which is lowered from P19,333,558.16 to P15,773,708.78 with legal
interest of 12% per annum until it is fully paid.
SO ORDERED.44
The Court of Appeals denied Chings Motion for Reconsideration for lack of merit.
Hence, this petition.

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Issues
Ching assigns the following as errors of the Court of Appeals:
1. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT PETITIONER
ALFREDO CHING WAS LIABLE FOR OBLIGATIONS CONTRACTED BY PBM LONG AFTER THE
EXECUTION OF THE DEED OF SURETYSHIP.
2. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT THE
PETITIONERS WERE LIABLE FOR THE TRUST RECEIPTS DESPITE THE FACT THAT PRIVATE
RESPONDENT HAD PREVENTED THEIR FULFILLMENT.
3. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT FOUND PETITIONER ALFREDO
CHING LIABLE FOR P15,773,708.78 WITH LEGAL INTEREST AT 12% PER ANNUM UNTIL FULLY
PAID DESPITE THE FACT THAT UNDER THE REHABILITATION PLAN OF PETITIONER PBM,
WHICH WAS APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, PRIVATE
RESPONDENT IS ONLY ENTITLED TO P1,373,415.00.45
Ching asserted that the Deed of Suretyship dated 21 July 1977 could not answer for obligations not yet in
existence at the time of its execution. Specifically, Ching maintained that the Deed of Suretyship could not
answer for debts contracted by PBM in 1980 and 1981. Ching contended that no accessory contract of
suretyship could arise without an existing principal contract of loan. Ching likewise argued that TRB could no
longer claim on the trust receipts because TRB had already taken the properties subject of the trust receipts.
Ching likewise maintained that his obligation as surety could not exceed the P1,373,415 apportioned to PBM
under the SEC-approved rehabilitation plan.
In its Comment, TRB asserted that the first two assigned errors raised factual issues not brought before the
trial court. Furthermore, TRB pointed out that Ching never presented PBMs rehabilitation plan before the trial
court. TRB also stated that the Supreme Court ruling in Traders Royal Bank v. Court of
Appeals46 constitutes res judicata between the parties. Therefore, TRB could proceed against Ching
separately from PBM to enforce in full Chings liability as surety.47
The Ruling of the Court
The petition has no merit.
The case before us is an offshoot of the trial courts denial of Chings motion to have the case dismissed
against him. The petition is a thinly veiled attempt to make this Court reconsider its decision in the prior case
of Traders Royal Bank v. Court of Appeals.48 This Court has already resolved the issue of Chings separate
liability as a surety despite the rehabilitation proceedings before the SEC. We held in Traders Royal Bank
that:
Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of PBM, the SEC could not assume
jurisdiction over his person and properties. The Securities and Exchange Commission was empowered, as
rehabilitation receiver, to take custody and control of the assets and properties of PBM only, for the SEC has
jurisdiction over corporations only [and] not over private individuals, except stockholders in an intra-corporate
dispute (Sec. 5, P.D. 902-A and Sec. 2 of P.D. 1758). Being a nominal party in SEC Case No. 2250, Chings
properties were not included in the rehabilitation receivership that the SEC constituted to take custody of
PBMs assets. Therefore, the petitioner bank was not barred from filing a suit against Ching, as a surety for
PBM. An anomalous situation would arise if individual sureties for debtor corporations may escape liability by
simply co-filing with the corporation a petition for suspension of payments in the SEC whose jurisdiction is
limited only to corporations and their corporate assets.

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xxx
Ching can be sued separately to enforce his liability as surety for PBM, as expressly provided by
Article 1216 of the New Civil Code.
xxx
It is elementary that a corporation has a personality distinct and separate from its individual stockholders and
members. Being an officer or stockholder of a corporation does not make ones property the property also of
the corporation, for they are separate entities (Adelio Cruz vs. Quiterio Dalisay, 152 SCRA 482).
Chings act of joining as a co-petitioner with PBM in SEC Case No. 2250 did not vest in the SEC jurisdiction
over his person or property, for jurisdiction does not depend on the consent or acts of the parties but upon
express provision of law (Tolentino vs. Social Security System, 138 SCRA 428; Lee vs. Municipal Trial Court
of Legaspi City, Br. I, 145 SCRA 408). (Emphasis supplied)
Traders Royal Bank has fully resolved the issue regarding Chings liability as a surety of the credit
accommodations TRB extended to PBM. The decision amounts to res judicata49 which bars Ching from
raising the same issue again. Hence, the only question that remains is the amount of Chings liability.
Nevertheless, we shall resolve the issues Ching has raised in his attempt to escape liability under his surety.
Whether Ching is liable for obligations PBM contracted after execution of the Deed of Suretyship
Ching is liable for credit obligations contracted by PBM against TRB before and after the execution of the 21
July 1977 Deed of Suretyship. This is evident from the tenor of the deed itself, referring to amounts PBM "may
now be indebted or may hereafter become indebted" to TRB.
The law expressly allows a suretyship for "future debts". Article 2053 of the Civil Code provides:
A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be
no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured.
(Emphasis supplied)
Furthermore, this Court has ruled in Dio v. Court of Appeals50 that:
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not be
known at the time the guaranty is executed. This is the basis for contracts denominated as continuing
guaranty or suretyship. A continuing guaranty is one which is not limited to a single transaction, but which
contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or
until revoked. It is prospective in its operation and is generally intended to provide security with respect to
future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue,
the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which covers all transactions,
including those arising in the future, which are within the description or contemplation of the contract of
guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing when by the
terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from
time to time either indefinitely or until a certain period; especially if the right to recall the guaranty is expressly
reserved. Hence, where the contract states that the guaranty is to secure advances to be made "from time to
time," it will be construed to be a continuing one.
In other jurisdictions, it has been held that the use of particular words and expressions such as payment of
"any debt," "any indebtedness," or "any sum," or the guaranty of "any transaction," or money to be furnished
the principal debtor "at any time," or "on such time" that the principal debtor may require, have been construed
to indicate a continuing guaranty.

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Whether Chings liability is limited to the amount stated in PBMs rehabilitation plan
Ching would like this Court to rule that his liability is limited, at most, to the amount stated in PBMs
rehabilitation plan. In claiming this reduced liability, Ching invokes Article 1222 of the Civil Code which reads:
Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are
derived from the nature of the obligation and of those which are personal to him, or pertain to his own share.
With respect to those which personally belong to the others, he may avail himself thereof only as regards that
part of the debt for which the latter are responsible.
In granting the loan to PBM, TRB required Chings surety precisely to insure full recovery of the loan in case
PBM becomes insolvent or fails to pay in full. This was the very purpose of the surety. Thus, Ching cannot
use PBMs failure to pay in full as justification for his own reduced liability to TRB. As surety, Ching agreed to
pay in full PBMs loan in case PBM fails to pay in full for any reason, including its insolvency.
TRB, as creditor, has the right under the surety to proceed against Ching for the entire amount of PBMs loan.
This is clear from Article 1216 of the Civil Code:
ART. 1216. The 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. (Emphasis
supplied)
Ching further claims a reduced liability under TRB Board Resolution No. 5935. This resolution states that
PBMs outstanding loans may be reduced to P1.373 million subject to certain conditions like the payment
of P150,000 initial payment.51 The resolution also states that TRB should not release Chings solidary liability
under his surety. The resolution even directs TRBs management to study Chings criminal liability under the
trust documents.52
Chings own witness testified that Resolution No. 5935 was never implemented. For one, PBM or its receiver
never paid the P150,000 initial payment to TRB. TRB also rejected the document that PBMs receiver
presented which would have released Ching from his suretyship. Clearly, Ching cannot rely on Resolution No.
5935 to escape liability under his suretyship.
Chings attempts to have this Court review the factual issues of the case are improper. It is not a function of
the Supreme Court to assess and evaluate again the evidence, testimonial and evidentiary, adduced by the
parties particularly where the findings of both the trial court and the appellate court coincide on the matter.53
Whether Ching is liable for the trust receipts
Ching is still liable for the amounts stated in the letters of credit covered by the trust receipts. Other than his
bare allegations, Ching has not shown proof of payment or settlement with TRB. Atty. Vicente Aranda, TRBs
corporate secretary and First Vice President of its Human Resource Management Department, testified that
the conditions in the TRB board resolution presented by Ching were not met or implemented, thus:
ATTY. AZURA
Q Going into the resolution itself. A certain stipulation ha[s] been outlined, and may I refer you to
condition or step No. 1, which reads: "a) Accept the P1.373 million deposits remitted over a period of
17 years or until 2006 which shall be applied directly to the account (as remitted per hereto attached
schedule). The amount of P1.373 million shall be considered as full payment of PBMs account. (The
receiver is amenable to this alternative.) The initial deposit/remittance which amounts to P150,000.00
shall be remitted upon approval of the above and conforme of PISCOR [xxx] and PBM. Subsequent

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deposits shall start on the 3rd year and annually thereafter (every June 30th of the year) until June 30,
2006.
Failure to pay one annual installment shall make the whole obligation due and demandable. Now Mr.
Witness, would you be in a position to inform [the court] if these conditions listed in item (a) in
Resolution No. 5935, series of 1990, were implemented or met?
A Yes. I know for a fact that the conditions, more particularly the initial deposit/remittance in the
amount of P150,000.00 which have to be done with approval was not remitted or met.
Q Will you clarify your answer. Would you be in a position to inform the court if those conditions were
met? Because your initial answer was yes.
A Yes sir, I am in a position to state that these conditions were not met.
Q Let me refer you to the condition listed as item (b) of the same resolution which I read and quote:
"Write off immediately P4.278 million. The balance of P1.373 million to remain outstanding in the
books of the bank. Said balance will be remitted to the Bank for a period of 17 years." Mr. Witness,
would you be in a position to inform the court if the bank implemented that particular condition?
A In the implementation of this settlement the receiver prepared a document for approval and
conformity of the bank. The said document would in effect release the suretyship of Alfredo Ching and
for that reason the bank refused or denied fixing its conformity and approval with the court.
xxx
ATTY. ATIENZA ON REDIRECT EXAMINATION
Q Mr. Witness you stated that the reason why the plaintiff bank did not implement these
conditionalities [sic] was because the former defendant corporation requested that the suretyship of
Alfredo Ching be released, is that correct?
A I did not say that. I said that in effect the document prepared by the lawyer of the receiver xxx the
bank would release the suretyship of Alfredo Ching, that is why the bank is not amenable to such a
document.
Q Despite this approved resolution the bank, because of said requirement or conformity did not seek
to implement these conditionalities [sic]?
A Yes sir because the conditions imposed by the board is not being followed in that document
because it was the condition of the board that the suretyship should not be released but the document
being presented to the bank for signature and conformity in effect if signed would release the
suretyship. So it would be a violation with the approval of the board so the bank did not sign the
conformity.54
Ching also claims that TRB prevented PBM from fulfilling its obligations under the trust receipts when TRB,
together with other creditor banks, took hold of PBMs inventories, including the goods covered by the trust
receipts. Ching asserts that this act of TRB released him from liability under the suretyship. Ching forgets that
he executed, on behalf of PBM, separate Undertakings for each trust receipt expressly granting to TRB the
right to take possession of the goods at any time to protect TRBs interests. TRB may exercise such right
without waiving its right to collect the full amount of the loan to PBM. The Undertakings also provide that any
suspension of payment or any assignment by PBM for the benefit of creditors renders the loan due and
demandable. Thus, the separate Undertakings uniformly provide:

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2. That the said BANK may at any time cancel the foregoing trust and take possession of said
merchandise with the right to sell and dispose of the same under such terms and conditions it may
deem best, or of the proceeds of such of the same as may then have been sold, wherever the said
merchandise or proceeds may then be found and all the provisions of the Trust Receipt shall apply to and be
deemed to include said above-mentioned merchandise if the same shall have been made up or used in the
manufacture of any other goods, or merchandise, and the said BANK shall have the same rights and
remedies against the said merchandise in its manufactured state, or the product of said manufacture as it
would have had in the event that such merchandise had remained [in] its original state and irrespective of the
fact that other and different merchandise is used in completing such manufacture. In the event of any
suspension, or failure or assignment for the benefit of creditors on the part of the undersigned or of
the non-fulfillment of any obligation, or of the non-payment at maturity of any acceptance made under
said credit, or any other credit issued by the said BANK on account of the undersigned or of the nonpayment of any indebtedness on the part of the undersigned to the said BANK, all obligations,
acceptances, indebtedness and liabilities whatsoever shall thereupon without notice mature and
become due and payable and the BANK may avail of the remedies provided herein.55 (Emphasis
supplied)
Presidential Decree No. 115 ("PD No. 115"), otherwise known as the Trust Receipts Law, expressly allows
TRB to take possession of the goods covered by the trust receipts. Thus, Section of 7 of PD No. 115 states:
SECTION 7. Rights of the entruster. The entruster shall be entitled to the proceeds from the sale of the
goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount
owing to the entruster or as appears in the trust receipt, or to the return of the goods, documents or
instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt
provided such are not contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession of the goods, documents or instruments
subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the
entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement
between the entruster and the entrustee, and the entruster in possession of the goods, documents or
instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than
five days after serving or sending of such notice, sell the goods, documents or instruments at public or private
sale, and the entruster may, at a public sale, become a purchaser. The proceeds of any such sale, whether
public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the
expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the
satisfaction of the entrustees indebtedness to the entruster. The entrustee shall receive any surplus
but shall be liable to the entruster for any deficiency. Notice of sale shall be deemed sufficiently given if in
writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustees last
known business address. (Emphasis supplied)
Thus, even though TRB took possession of the goods covered by the trust receipts, PBM and Ching remained
liable for the entire amount of the loans covered by the trust receipts.
Absent proof of payment or settlement of PBM and Chings credit obligations with TRB, Chings liability is
what the Deed of Suretyship stipulates, plus the applicable interest and penalties. The trust receipts, as well
as the Letter of Undertaking dated 16 April 198056 executed by PBM, stipulate in writing the payment of
interest without specifying the rate. In such a case, the applicable interest rate shall be the legal rate, which is
now 12% per annum.57 This is in accordance with Central Bank Circular No. 416, which states:
By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise known as the
"Usury Law," the 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 per cent (12%) per annum. (Emphasis
supplied)

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On the other hand, the Promissory Note evidencing the P3,500,000 trust loan provides for 18% interest per
annum plus 2% penalty interest per annum in case of default. This stipulated interest should continue to run
until full payment of the P3,500,000 trust loan. In addition, the accrued interest on all the credit
accommodations should earn legal interest from the date of filing of the complaint pursuant to Article 2212 of
the Civil Code.
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation
may be silent upon this point.
The trial court found and the appellate court affirmed that the outstanding principal amounts as of the filing of
the complaint with the trial court on 13 May 1983 were P959,611.96 under Trust Receipt No.
106, P1,191,137.13 under Trust Receipt No. 113, and P3,500,000 for the trust loan. As extracted from TRBs
Statement of Account as of 31 October 1991,58 the accrued interest on the trust receipts and the trust loan as
of the filing of the complaint on 13 May 1983 were P311,387.5159 under Trust Receipt No.
106, P338,739.8160 under Trust Receipt No. 113, and P1,287,616.4461 under the trust loan. The penalty
interest on the trust loan amounted to P137,315.07.62Ching did not rebut this Statement of Account which TRB
presented during trial.
Thus, the following is the summary of Chings liability under the suretyship as of 13 May 1983, the date of
filing of TRBs complaint with the trial court:
1. On Trust Receipt No. 106 (Letter of Credit No. 479 AD)
Outstanding Principal P 959,611.96
Accrued Interest (12% per annum) 311,387.51
2. On Trust Receipt No. 113 (Letter of Credit No. 563 AD)
Outstanding Principal P 1,191,137.13
Accrued Interest (12% per annum) 338,739.82
3. On the Trust Loan (Promissory Note)
Outstanding Principal P 3,500,000.00
Accrued Interest (18% per annum) 1,287,616.44
Accrued Penalty Interest (2% per annum) 137,315.07
WHEREFORE, we AFFIRM the decision of the Court of Appeals with MODIFICATION. Petitioner Alfredo
Ching shall pay respondent Traders Royal Bank the following (1) on the credit accommodations under the
trust receipts, the total principal amount of P2,150,749.09 with legal interest at 12% per annum from 14 May
1983 until full payment; (2) on the trust loan evidenced by the Promissory Note, the principal sum
of P3,500,000 with 20% interest per annum from 14 May 1983 until full payment; (3) on the total accrued
interest as of 13 May 1983, P2,075,058.84 with 12% interest per annum from 14 May 1983 until full payment.
Petitioner Alfredo Ching shall also pay attorneys fees to respondent Traders Royal Bank equivalent to 5% of
the total principal and interest.
SO ORDERED.

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#23 - G.R. No. 85161 September 9, 1991

COUNTRY BANKERS INSURANCE CORPORATION and ENRIQUE SY, petitioners, vs.
COURT OF APPEALS and OSCAR VENTANILLA ENTERPRISES CORPORATION, respondents.
Esteban C. Manuel for petitioners.
Augusta Gatmaytan for OVEC.

MEDIALDEA, J.:p
Petitioners seek a review on certiorari of the decision of the Court of Appeals in CA-G.R. CV No. 09504
"Enrique Sy and Country Bankers Insurance Corporation v. Oscar Ventanilla Enterprises Corporation"
affirming in toto the decision of the Regional Trial Court, Cabanatuan City, Branch XXV, to wit:
WHEREFORE, the complaint of the plaintiff Enrique F. Sy is dismissed, and on the
counterclaim of the defendant O. Ventanilla Enterprises Corporation, judgment is hereby
rendered:
1. Declaring as lawful, the cancellation and termination of the Lease Agreement (Exh. A) and
the defendant's re-entry and repossession of the Avenue, Broadway and Capitol theaters
under lease on February 11, 1980;
2. Declaring as lawful, the forfeiture clause under paragraph 12 of the Id Lease Agreement,
and confirming the forfeiture of the plaintiffs remaining cash deposit of P290,000.00 in favor of
the defendant thereunder, as of February 11, 1980;
3. Ordering the plaintiff to pay the defendant the sum of P289,534.78, representing arrears in
rentals, unremitted amounts for amusement tax delinquency and accrued interest thereon,
with further interest on said amounts at the rate of 12% per annum (per lease agreement) from
December 1, 1980 until the same is fully paid;
4. Ordering the plaintiff to pay the defendant the amount of P100,000.00, representing the
P10,000.00 portion of the monthly lease rental which were not deducted from the cash deposit
of the plaintiff from February to November, 1980, after the forfeiture of the said cash deposit
on February 11, 1980, with interest thereon at the rate of 12% per annum on each of the said
monthly amounts of P10,000.00 from the time the same became due until it is paid;
5. Ordering the plaintiff to pay the defendant through the injunction bond, the sum of
P100,000.00, representing the P10,000.00 monthly increase in rentals which the defendant
failed to realize from February to November 1980 result from the injunction, with legal interest
thereon from the finality of this decision until fully paid;
6. Ordering the plaintiff to pay to the defendant the sum equivalent to ten per centum (10%) of
the above-mentioned amounts of P289,534.78, P100,000.00 and P100,000.00, as and for
attorney's fees; and
7. Ordering the plaintiff to pay the costs. (pp. 94-95, Rollo)
The antecedent facts of the case are as follows:

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Respondent Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and the petitioner Enrique F. Sy, as
lessee, entered into a lease agreement over the Avenue, Broadway and Capitol Theaters and the land on
which they are situated in Cabanatuan City, including their air-conditioning systems, projectors and
accessories needed for showing the films or motion pictures. The term of the lease was for six (6) years
commencing from June 13, 1977 and ending June 12,1983. After more than two (2) years of operation of the
Avenue, Broadway and Capitol Theaters, the lessor OVEC made demands for the repossession of the said
leased properties in view of the Sy's arrears in monthly rentals and non-payment of amusement taxes. On
August 8,1979, OVEC and Sy had a conference and by reason of Sy's request for reconsideration of OVECs
demand for repossession of the three (3) theaters, the former was allowed to continue operating the leased
premises upon his conformity to certain conditions imposed by the latter in a supplemental agreement dated
August 13, 1979.
In pursuance of their latter agreement, Sy's arrears in rental in the amount of P125,455.76 (as of July 31,
1979) was reduced to P71,028.91 as of December 31, 1979. However, the accrued amusement tax liability of
the three (3) theaters to the City Government of Cabanatuan City had accumulated to P84,000.00 despite the
fact that Sy had been deducting the amount of P4,000.00 from his monthly rental with the obligation to remit
the said deductions to the city government. Hence, letters of demand dated January 7, 1980 and February 3,
1980 were sent to Sy demanding payment of the arrears in rentals and amusement tax delinquency. The
latter demand was with warning that OVEC will re-enter and repossess the Avenue, Broadway and Capital
Theaters on February 11, 1980 in pursuance of the pertinent provisions of their lease contract of June 11,
1977 and their supplemental letter-agreement of August 13, 1979. But notwithstanding the said demands and
warnings SY failed to pay the above-mentioned amounts in full Consequently, OVEC padlocked the gates of
the three theaters under lease and took possession thereof in the morning of February 11, 1980 by posting its
men around the premises of the Id movie houses and preventing the lessee's employees from entering the
same.
Sy, through his counsel, filed the present action for reformation of the lease agreement, damages and
injunction late in the afternoon of the same day. And by virtue of a restraining order dated February 12, 1980
followed by an order directing the issuance of a writ of preliminary injunction issued in said case, Sy regained
possession and operation of the Avenue, Broadway and Capital theaters.
As first cause of action, Sy alleged that the amount of deposit P600,000.00 as agreed upon, P300,000.00
of which was to be paid on June 13, 1977 and the balance on December 13, 1977 was too big; and that
OVEC had assured him that said forfeiture will not come to pass. By way of second cause of action, Sy
sought to recover from OVEC the sums of P100,000.00 which Sy allegedly spent in making "major repairs" on
Broadway Theater and the application of which to Sy's due rentals; (2) P48,000.00 covering the cost of
electrical current allegedly used by OVEC in its alleged "illegal connection" to Capitol Theater and (3)
P31,000.00 also for the cost of electrical current allegedly used by OVEC for its alleged "illegal connection" to
Broadway Theater and for damages suffered by Sy as a result of such connection. Under the third cause of
action, it is alleged in the complaint that on February 11, 1980, OVEC had the three theaters padlocked with
the use of force, and that as a result, Sy suffered damages at the rate of P5,000.00 a day, in view of his
failure to go thru the contracts he had entered into with movie and booking companies for the showing of
movies at ABC. As fourth cause of action, Sy prayed for the issuance of a restraining order/preliminary
injunction to enjoin OVEC and all persons employed by it from entering and taking possession of the three
theaters, conditioned upon Sy's filing of a P500,000.00 bond supplied by Country Bankers Insurance
Corporation (CBISCO).
OVEC on the other hand, alleged in its answer by way of counterclaims, that by reason of Sy's violation of the
terms of the subject lease agreement, OVEC became authorized to enter and possess the three theaters in
question and to terminate said agreement and the balance of the deposits given by Sy to OVEC had thus
become forfeited; that OVEC would be losing P50,000.00 for every month that the possession and operation
of said three theaters remain with Sy and that OVEC incurred P500,000.00 for attorney's service.

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The trial court arrived at the conclusions that Sy is not entitled to the reformation of the lease agreement; that
the repossession of the leased premises by OVEC after the cancellation and termination of the lease was in
accordance with the stipulation of the parties in the said agreement and the law applicable thereto and that
the consequent forfeiture of Sy's cash deposit in favor of OVEC was clearly agreed upon by them in the lease
agreement. The trial court further concluded that Sy was not entitled to the writ of preliminary injunction issued
in his favor after the commencement of the action and that the injunction bond filed by Sy is liable for
whatever damages OVEC may have suffered by reason of the injunction.
On the counterclaim of OVEC the trial court found that the said lessor was deprived of the possession and
enjoyment of the leased premises and also suffered damages as a result of the filing of the case by Sy and
his violation of the terms and conditions of the lease agreement. Hence, it held that OVEC is entitled to
recover the said damages in addition to the arrears in rentals and amusement tax delinquency of Sy and the
accrued interest thereon. From the evidence presented, it found that as of the end of November, 1980, when
OVEC finally regained the possession of the three (3) theaters under lease, Sy's unpaid rentals and
amusement tax liability amounted to P289,534.78. In addition, it held that Sy was under obligation to pay
P10,000.00 every month from February to November, 1980 or the total amount of P100,000.00 with interest
on each amount of P10,000.00 from the time the same became due. This P10,000.00 portion of the monthly
lease rental was supposed to come from the remaining cash deposit of Sy but with the consequent forfeiture
of the remaining cash deposit of P290,000.00, there was no more cash deposit from which said amount could
be deducted. Further, it adjudged Sy to pay attorney's fees equivalent to 10% of the amounts abovementioned.
Finally, the trial court held Sy through the injunction bond liable to pay the sum of P10,000.00 every month
from February to November, 1980. The amount represents the supposed increase in rental from P50,000.00
to P60,000.00 in view of the offer of one RTG Productions, Inc. to lease the three theaters involved for
P60,000.00 a month.
From this decision of the trial court, Sy and (CBISCO) appealed the decision in toto while OVEC appealed
insofar as the decision failed to hold the injunction bond liable for an damages awarded by the trial court.
The respondent Court of Appeals found no ambiguity in the provisions of the lease agreement. It held that the
provisions are fair and reasonable and therefore, should be respected and enforced as the law between the
parties. It held that the cancellation or termination of the agreement prior to its expiration period is justified as
it was brought about by Sy's own default in his compliance with the terms of the agreement and not
"motivated by fraud or greed." It also affirmed the award to OVEC of the amount of P100,000.00 chargeable
against the injunction bond posted by CBISCO which was soundly and amply justified by the trial court.
The respondent Court likewise found no merit in OVECS appeal and held that the trial court did not err in not
charging and holding the injunction bond posted by Sy liable for all the awards as the undertaking of CBISCO
under the bond referred only to damages which OVEC may suffer as a result of the injunction.
From this decision, CBISCO and Sy filed this instant petition on the following grounds:
A
PRIVATE RESPONDENT SHOULD NOT BE ALLOWED TO UNJUSTLY ENRICH OR BE
BENEFITTED AT THE EXPENSE OF THE PETITIONERS.
B
RESPONDENT COURT OF APPEALS CO D SERIOUS ERROR OF LAW AND GRAVE
ABUSE OF DISCRETION IN NOT SETTING OFF THE P100,000.00 SUPPOSED DAMAGE

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RESULTING FROM THE INJUNCTION AGAINST THE P290,000.00 REMAINING CASH

DEPOSIT OF PETITIONER ENRIQUE SY.
C
RESPONDENT COURT OF APPEALS FURTHER COMMITTED SERIOUS ERROR OF LAW
AND GRAVE ABUSE OF DISCRETION IN NOT DISMISSING PRIVATE RESPONDENTS
COUNTER-CLAIM FOR FAILURE TO PAY THE NECESSARY DOCKET FEE. (p. 10, Rollo)
We find no merit in petitioners' argument that the forfeiture clause stipulated in the lease agreement would
unjustly enrich the respondent OVEC at the expense of Sy and CBISCO contrary to law, morals, good
customs, public order or public policy. A provision which calls for the forfeiture of the remaining deposit still in
the possession of the lessor, without prejudice to any other obligation still owing, in the event of the
termination or cancellation of the agreement by reason of the lessee's violation of any of the terms and
conditions of the agreement is a penal clause that may be validly entered into. A penal clause is an accessory
obligation which the parties attach to a principal obligation for the purpose of insuring the performance thereof
by imposing on the debtor a special presentation (generally consisting in the payment of a sum of money) in
case the obligation is not fulfilled or is irregularly or inadequately fulfilled. (Eduardo P. Caguioa, Comments
and Cases on Civil Law, Vol. IV, First Edition, pp. 199-200) As a general rule, in obligations with a penal
clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance. This is specifically provided for in Article 1226, par. 1, New Civil Code. In such case, proof of
actual damages suffered by the creditor is not necessary in order that the penalty may be demanded (Article
1228, New Civil Code). However, there are exceptions to the rule that the penalty shall substitute the
indemnity for damages and the payment of interests in case of non-compliance with the principal obligation.
They are first, when there is a stipulation to the contrary; second, when the obligor is sued for refusal to pay
the agreed penalty; and third, when the obligor is guilty of fraud (Article 1226, par. 1, New Civil Code). It is
evident that in all said cases, the purpose of the penalty is to punish the obligor. Therefore, the obligee can
recover from the obligor not only the penalty but also the damages resulting from the non-fulfillment or
defective performance of the principal obligation.
In the case at bar, inasmuch as the forfeiture clause provides that the deposit shall be deemed forfeited,
without prejudice to any other obligation still owing by the lessee to the lessor, the penalty cannot substitute
for the P100,000.00 supposed damage resulting from the issuance of the injunction against the P290,000.00
remaining cash deposit. This supposed damage suffered by OVEC was the alleged P10,000.00 a month
increase in rental from P50,000.00 to P60,000,00), which OVEC failed to realize for ten months from February
to November, 1980 in the total sum of P100,000.00. This opportunity cost which was duly proven before the
trial court, was correctly made chargeable by the said court against the injunction bond posted by CBISCO.
The undertaking assumed by CBISCO under subject injunction refers to "all such damages as such party may
sustain by reason of the injunction if the Court should finally decide that the Plaintiff was/were not entitled
thereto." (Rollo, p. 101) Thus, the respondent Court correctly sustained the trial court in holding that the bond
shall and may answer only for damages which OVEC may suffer as a result of the injunction. The arrears in
rental, the unmeritted amounts of the amusement tax delinquency, the amount of P100,000.00 (P10,000.00
portions of each monthly rental which were not deducted from plaintiffs cash deposit from February to
November, 1980 after the forfeiture of said cash deposit on February 11, 1980) and attorney's fees which
were all charged against Sy were correctly considered by the respondent Court as damages which OVEC
sustained not as a result of the injunction.
There is likewise no merit to the claim of petitioners that respondent Court committed serious error of law and
grave abuse of discretion in not dismissing private respondent's counterclaim for failure to pay the necessary
docket fee, which is an issue raised for the first time in this petition. Petitioners rely on the rule in Manchester
Development Corporation v. Court of Appeals, G.R. No. 75919, May 7, 1987, 149 SCRA 562 to the effect that
all the proceedings held in connection with a case where the correct docket fees are not paid should be
peremptorily be considered null and void because, for all legal purposes, the trial court never acquired
jurisdiction over the case. It should be remembered however, that in Davao Light and Power Co., Inc. v.

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Dinopol, G.R. 75195, August 19, 1988, 164 SCRA 748, this Court took note of the fact that the assailed order
of the trial court was issued prior to the resolution in the Manchester case and held that its strict application to
the case at bar would therefore be unduly harsh. Thus, We allowed the amendment of the complaint by
specifying the amount of damages within a non-extendible period of five (5) days from notice and the reassessment of the filing fees. Then, in Sun Insurance Office, Ltd. v. Asuncion, G.R. 79937-38, February 3,
1989, 170 SCRA 274, We held that where the filing of the initiatory pleading is not accompanied by payment
of the docket fee, the court may allow payment of the fee within a reasonable time but in no case beyond the
applicable prescriptive or reglementary period.
Nevertheless, OVEC's counterclaims are compulsory so no docket fees are required as the following
circumstances are present: (a) they arise out of or are necessarily connected with the transaction or
occurrence that is subject matter of the opposing party's claim; (b) they do not require for their adjudication
the presence of third parties of whom the court cannot acquire jurisdiction; and (c) the court has jurisdiction to
entertain the claim (see Javier v. Intermediate Appellate Court, G.R. 75379, March 31, 1989, 171 SCRA 605).
Whether the respective claims asserted by the parties arise out of the same contract or transaction within the
limitation on counterclaims imposed by the statutes depends on a consideration of all the facts brought forth
by the parties and on a determination of whether there is some legal or equitable relationship between the
ground of recovery alleged in the counterclaim and the matters alleged as the cause of action by the plaintiff
(80 C.J.S. 48). As the counterclaims of OVEC arise from or are necessarily connected with the facts alleged
in the complaint for reformation of instrument of Sy, it is clear that said counterclaims are compulsory.
ACCORDINGLY, finding no merit in the grounds relied upon by petitioners in their petition, the same is hereby
DENIED and the decision dated June 15, 1988 and the resolution dated September 21, 1988, both of the
respondent Court of Appeals are AFFIRMED.
SO ORDERED.
#24 - G.R. No. 78315 January 2, 1989
COMMERCIAL CREDIT CORPORATION CAGAYAN DE ORO, petitioner, vs.
THE COURT OF APPEALS and THE CAGAYAN DE ORO COLISEUM, INC., respondents.

GANCAYCO, J.:
In this petition for review of a decision of the Court of Appeals in CA G.R. SP No. 10888 1 the issue is whether
or not a compromise judgment which was found by the Court of Appeals to be lawful may be modified by the same
court.

Sometime in 1978 private respondent Cagayan De Oro Coliseum, Inc. executed a promissory note in the
amount of P329,852.54 in favor of petitioner Commercial Credit Corporation of Cagayan de Oro, payable in
36 monthly installments. The note is secured by a real estate mortgage duly executed by private respondent
in favor of petitioner. As said respondent defaulted in the payment of the monthly installments due, petitioner
proceeded with the extrajudicial foreclosure of the real estate mortgage in September, 1979.
Five minority stockholders of private respondent then instituted Special Civil Action No. 68111 in the then
Court of First Instance (CFI) of Misamis Oriental questioning the power of the private respondent to execute
the real estate mortgage without the consent of its stockholders. In due course a compromise agreement was
entered into by the parties on the basis of which a compromise judgment was rendered by the trial court on
March 11, 1980 which reads as follows:
JUDGMENT

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The parties in the above-entitled case assisted by their respective counsel, submitted for the
approval of the Court the following Compromise Agreement, to wit:
COMES NOW, Parties, Petitioners and Respondents, represented by their respective
counsels, unto this Honorable Court, most respectfully submit for approval the following
Compromise Agreement:
1. That, Petitioners herein hereby state that they ratified and approved the loan and real estate
mortgage entered into and assigned by the Cagayan de Oro Coliseum, Inc. to the Commercial
Credit Corporation of Cagayan de Oro and as such therefore, the issue raised by the herein
petitioners in the above entitled case has become moot and academic;
2. That, by virtue of the aforementioned, the Cagayan de Oro Coliseum, Inc. thru its Board of
Directors and represented by its President, Mr. Johnny Wilson, hereby admits its total
outstanding obligation to herein Respondent Commercial Credit Corporation of Cagayan de
Oro in the amount of TWO HUNDRED FORTY NINE THOUSAND TWO HUNDRED SIXTY
THREE & 23/100 PESOS (P 249,263.23), as of February 15, 1980, including therein the sum
of P 10,000.00 representing attorney's fees for Respondent Commercial Credit Corporation of
Cagayan de Oro;
3. That the Cagayan de Oro Coliseum, Inc. has agreed to pay the above obligation plus
interest on diminishing balance computed yearly at sixteen (16) percent per annum, thus:
Total Account.................... P 249,263.23
Total Interest...................... P 76,138.60
Total Payable ...................... P 325,401.83
4. That, the Cagayan de Oro Coliseum, Inc. hereby agrees to pay the aforegoing obligation in
paragraph (3) hereof in equal monthly installments of P11,000.00, the first installment shall be
payable in February, 1980 and every month thereafter until the whole account payable as
aforementioned is fully paid;
5. That, failure on the part of Respondent Cagayan de Oro Coliseum, Inc. to pay any of the
installments as they shall become due, the whole amount then outstanding and unpaid shall
immediately become due and payable in its entirety and shall render the judgment herein to be
immediately final, unappealable and executory; and the overdue and unpaid installments shall
earn a three (3%) per cent per month penalty charge until fully paid, plus five percent (5%) of
the outstanding balance as additional attorney's fee;
6. That, Respondent Commercial Credit Corporation of Cagayan de Oro hereby agrees to
withdraw its application with Respondent City Sheriff of Cagayan de Oro for the extrajudicial
foreclosure of the real estate mortgage subject of this complaint;
7. That, the Parties herein waive in favor of each other any and all forms of damage arising out
of, connected with and/or as a result of this action.
WHEREFORE, the Parties respectfully pray of this Honorable Court that judgment in
accordance with the Compromise Agreement be rendered. (Pages 25-27, Rollo)
However as private respondent failed to comply with the terms of the judgment for failure to pay several
installments in the amount of P70,152.65 which matured on July 13, 1982, petitioner filed an ex-parte motion

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for the issuance of a writ of execution on March 4, 1983. The Court granted the said motion in an order dated
March 10, 1983. A notice of auction sale was issued on March 11, 1983. Private respondent filed a motion for
reconsideration of said order alleging that it had paid its obligation. The execution of the writ was suspended
pending consideration of said motion. An opposition thereto was filed by petitioner to which a reply was filed
by the private respondent and, in turn, the comment of the petitioner was also submitted. On November 26,
1986, the trial court denied said motion for reconsideration and, accordingly, a writ of execution was issued on
December 4, 1986. The Deputy Provincial Sheriff set the auction sale for January 23, 1987. However, said
auction sale did not take place as scheduled due to some internal problems in the office of sheriff.
Private respondent then filed a special civil action in the Court of Appeals to annul said compromisejudgment, alleging that the trial court acted in serious violation of law and/or in grave abuse of discretion. In
due course, a decision was rendered by said appellate court on February 13, 1987, the dispositive part of
which reads as follows:
WHEREFORE, the present petition is DENIED due course and is hereby DISMISSED.
Effective March 16, 1983, the overdue and unpaid installments shall earn one half per cent
(1/2%) per month penalty charge until fully paid, plus two per cent (2%) of the outstanding
balance as additional attorney's fees. (Page 33, Rollo)
A motion for reconsideration of the decision was filed by petitioner. On March 23, 1987 a resolution denying
the motion was issued by the respondent appellate court.
On the other hand, private respondent also filed a motion for reconsideration and comment on the petitioner's
motion for reconsideration. On May 19, 1987, respondent Court issued a resolution, the dispositive part of
which reads as follows:
Acting on the said first part of the petitioner's motion for reconsideration as well as the private
respondent's comment thereon, the aforestated grounds for said motion having been already
taken up by this Court in reaching the said February 13, 1987 decision, and finding no reason
to disturb the same, the said motion as to its said first part, is DENIED for lack of merit.
As to the said second part of petitioner's motion for reconsideration, for clarity, the dispositive portion of the
February 13, 1987 decision is re-worded to read as follows:
WHEREFORE, the present petition is GRANTED in the sense that effective March 16, 1983,
the overdue and unpaid installments shall earn one half per cent (1/2%) per month penalty
charge until fully paid, plus two per cent (2%) of the outstanding balance as additional
attorney's fees.
And in view of such disposition.
1) THE JUDGMENT DATED MARCH 11, 1980 AND THE ORDER DATED NOVEMBER 26,
1986 OF RESPONDENT DENT COURT ARE HEREBY DECLARED MODIFIED
CONFORMABLY WITH THE FEBRUARY 13, 1987 DECISION OF THIS COURT; and
2) THE WRIT OF EXECUTION ISSUED BY RESPONDENT DENT CLERK OF COURT, AND
THE SHERIFF'S NOTICE OF SALE, THE PUBLIC AUCTION SALE AND THE CERTIFICATE
OF SALE ARE DECLARED NULL AND VOID IN SO FAR AS THEY ARE NOT IN
ACCORDANCE WITH AND IN EXCESS OF THE NOW MODIFIED JUDGMENT AND
MODIFIED ORDER OF THE RESPONDENT COURT DATED MARCH 11, 1980 AND
NOVEMBER 26, 1986, RESPECTIVELY
(Page 148, Rollo)

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Hence, the herein petition for review on certiorari wherein petitioner alleges the following reasons as
warranting the grant of the petition:
a) THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR IN EXCESS OF JURISDICTION WHEN IT
MODIFIED THE TRIAL COURT'S COMPROMISE JUDGMENT AFTER IT DENIED DUE
COURSE AND DISMISSED THE PETITION FOR ANNULMENT OF RESPONDENT
COLISEUM.
b) THE HONORABLE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE
ERROR IN APPLYING ARTICLE 1229 OF THE CIVIL CODE IN THE CASE AT BAR.
c) THE HONORABLE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE
ERROR WHEN IT MODIFIED THE EFFECT'S OF THE 3% PENALTY INTEREST AND
ATTORNEY'S FEES, AFTER IT UPHELD THE LEGALITY OF THE COMPROMISE
JUDGMENT OF THE TRIAL COURT." (Page 14, Rollo)
The petition is impressed with merit. It is axiomatic that a compromise judgment is final and immediately
executory. Once a judgment becomes final and executory, the prevailing party can have it executed as a
matter of right and the execution becomes a ministerial duty on the part of the court . 2 A judicial compromise
has the force and effect of res judicata. 3

Such a final and executory judgment cannot be modified or amended. If an amendment is to be made, it may
consist only of supplying an omission, striking out a superfluity or interpreting an ambiguous phrase therein in
relation to the body of the decision which gives it life . 4 A compromise judgment should not be disturbed except
for vices in consent or forgery. 5

In the present case, the compromise agreement was voluntarily entered into by the parties assisted by their
respective counsel and was duly approved by the trial court. Indeed, it was confirmed by the respondent
appellate court to be lawful. There was, therefore, no cogent basis for the respondent appellate court to
modify said compromise agreement by reducing the penalty and attorney's fees provided for therein.
In spite of the protestation of private respondent that the penalty and interests provided in the compromise
agreement was violative of the Usury Law, the respondent appellate court, applying the provisions of Central
Bank Circular No. 721, found no violation thereof as in fact the imposition of the penalty is sanctioned by
Article 1226 of the Civil Code. The respondent court cited the De Venecia vs. Del Rosario 6 where this Court
held that in the absence of a stipulation to the contrary, recovery of both the penalty and the interest until full
payment of the debt is allowed under existing laws.

The modification of said compromise judgment by the respondent appellate court is predicated on the
provision of Article 1229 of the Civil Code which provides as follows:
ART. 1229. The Judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no performance,
the penalty may also be reduced by the courts if it is iniquitous or unconscionable.
The foregoing provision of the law applies only to obligations or contract, subject of a litigation, the condition
being that the same has been partly or irregularly complied with by the debtor. The provision also applies
even if there has been no performance, as long as the penalty is iniquituous or unconscionable. It cannot
apply to a final and executory judgment.
When the parties entered into the said compromise agreement and submitted the same for the approval of the
trial court, its terms and conditions must be the primordial consideration why the parties voluntarily entered

141

into the same. The trial court approved it because it is lawful, and is not against public policy or morals. Even
the respondent Court of Appeals upheld the validity of the said compromise agreement. Hence, the
respondent court has no authority to reduce the penalty and attorney's fees therein stipulated which is the law
between the parties and is res judicata.
WHEREFORE, the petition is GRANTED. The decision of the respondent Court of Appeals dated February
13, 1987 and its resolutions dated March 23, 1987 and May 19, 1987 are hereby SET ASIDE and another
judgment is hereby rendered affirming in toto the compromise judgment of the trial court dated March 11,
1980, with costs against private respondent. This decision is immediately executory.
SO ORDERED.
#25 - G.R. No. 157480

May 6, 2005

PRYCE CORPORATION (formerly PRYCE PROPERTIES CORPORATION), petitioners, vs.

PHILIPPINE AMUSEMENT AND GAMING CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
In legal contemplation, the termination of a contract is not equivalent to its rescission. When an agreement is
terminated, it is deemed valid at inception. Prior to termination, the contract binds the parties, who are thus
obliged to observe its provisions. However, when it is rescinded, it is deemed inexistent, and the parties are
returned to their status quo ante. Hence, there is mutual restitution of benefits received. The consequences of
termination may be anticipated and provided for by the contract. As long as the terms of the contract are not
contrary to law, morals, good customs, public order or public policy, they shall be respected by courts. The
judiciary is not authorized to make or modify contracts; neither may it rescue parties from disadvantageous
stipulations. Courts, however, are empowered to reduce iniquitous or unconscionable liquidated damages,
indemnities and penalties agreed upon by the parties.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the May 22, 2002
Decision2 of the Court of Appeals (CA) in CA-GR CV No. 51629 and its March 4, 2003 Resolution3 denying
petitioners Motion for Reconsideration. The assailed Decision disposed thus:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: (1) In Civil Case No.
93-68266, the appealed decision[,] is AFFIRMED with MODIFICATION[,] ordering [Respondent]
Philippine Amusement and Gaming Corporation to pay [Petitioner] Pryce Properties Corporation the
total amount of P687,289.50 as actual damages representing the accrued rentals for the quarter
September to November 1993 with interest and penalty at the rate of two percent (2%) per month from
date of filing of the complaint until the amount shall have been fully paid, and the sum of P50,000.00
as attorneys fees; (2) In Civil Case No. 93-68337, the appealed decision is REVERSED and SET
ASIDE and a new judgment is rendered ordering [Petitioner] Pryce Properties Corporation to
reimburse [Respondent] Philippine Amusement and Gaming Corporation the amount of P687,289.50
representing the advanced rental deposits, which amount may be compensated by [Petitioner] Pryce
Properties Corporation with its award in Civil Case No. 93-68266 in the equal amount
of P687,289.50."4
The Facts
According to the CA, the facts are as follows:

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"Sometime in the first half of 1992, representatives from Pryce Properties Corporation (PPC for
brevity) made representations with the Philippine Amusement and Gaming Corporation (PAGCOR) on
the possibility of setting up a casino in Pryce Plaza Hotel in Cagayan de Oro City. [A] series of
negotiations followed. PAGCOR representatives went to Cagayan de Oro City to determine the pulse
of the people whether the presence of a casino would be welcomed by the residents. Some local
government officials showed keen interest in the casino operation and expressed the view that
possible problems were surmountable. Their negotiations culminated with PPCs counter-letter
proposal dated October 14, 1992.
"On November 11, 1992, the parties executed a Contract of Lease x x x involving the ballroom of the
Hotel for a period of three (3) years starting December 1, 1992 and until November 30, 1995. On
November 13, 1992, they executed an addendum to the contract x x x which included a lease of an
additional 1000 square meters of the hotel grounds as living quarters and playground of the casino
personnel. PAGCOR advertised the start of their casino operations on December 18, 1992.
"Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro City passed Resolution No.
2295 x x x dated November 19, 1990 declaring as a matter of policy to prohibit and/or not to allow the
establishment of a gambling casino in Cagayan de Oro City. Resolution No. 2673 x x x dated October
19, 1992 (or a month before the contract of lease was executed) was subsequently passed reiterating
with vigor and vehemence the policy of the City under Resolution No. 2295, series of 1990, banning
casinos in Cagayan de Oro City. On December 7, 1992, the Sangguniang Panlungsod of Cagayan de
Oro City enacted Ordinance No. 3353 x x x prohibiting the issuance of business permits and canceling
existing business permits to any establishment for using, or allowing to be used, its premises or any
portion thereof for the operation of a casino.
"In the afternoon of December 18, 1992 and just hours before the actual formal opening of casino
operations, a public rally in front of the hotel was staged by some local officials, residents and religious
leaders. Barricades were placed [which] prevented some casino personnel and hotel guests from
entering and exiting from the Hotel. PAGCOR was constrained to suspend casino operations because
of the rally. An agreement between PPC and PAGCOR, on one hand, and representatives of the
rallyists, on the other, eventually ended the rally on the 20th of December, 1992.
"On January 4, 1993, Ordinance No. 3375-93 x x x was passed by the Sangguniang Panlungsod of
Cagayan de Oro City, prohibiting the operation of casinos and providing for penalty for violation
thereof. On January 7, 1993, PPC filed a Petition for Prohibition with Preliminary Injunction x x x
against then public respondent Cagayan de Oro City and/or Mayor Pablo P. Magtajas x x x before the
Court of Appeals, docketed as CA G.R. SP No. 29851 praying inter alia, for the declaration of
unconstitutionality of Ordinance No. 3353. PAGCOR intervened in said petition and further assailed
Ordinance No. 4475-93 as being violative of the non-impairment of contracts and equal protection
clauses. On March 31, 1993, the Court of Appeals promulgated its decision x x x, the dispositive
portion of which reads:
IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and Ordinance No. 3375-93 are
hereby DECLARED UNCONSTITUTIONAL and VOID and the respondents and all other
persons acting under their authority and in their behalf are PERMANENTLY ENJOINED from
enforcing those ordinances.
SO ORDERED.
"Aggrieved by the decision, then public respondents Cagayan de Oro City, et al. elevated the case to
the Supreme Court in G.R. No. 111097, where, in an En Banc Decision dated July 20, 1994 x x x, the
Supreme Court denied the petition and affirmed the decision of the Court of Appeals.

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"In the meantime, PAGCOR resumed casino operations on July 15, 1993, against which, however,
another public rally was held. Casino operations continued for some time, but were later on indefinitely
suspended due to the incessant demonstrations. Per verbal advice x x x from the Office of the
President of the Philippines, PAGCOR decided to stop its casino operations in Cagayan de Oro City.
PAGCOR stopped its casino operations in the hotel prior to September, 1993. In two Statements of
Account dated September 1, 1993 x x x, PPC apprised PAGCOR of its outstanding account for the
quarter September 1 to November 30, 1993. PPC sent PAGCOR another Letter dated September 3,
1993 x x x as a follow-up to the parties earlier conference. PPC sent PAGCOR another Letter dated
September 15, 1993 x x x stating its Board of Directors decision to collect the full rentals in case of
pre-termination of the lease.
"PAGCOR sent PPC a letter dated September 20, 1993 x x x [stating] that it was not amenable to the
payment of the full rentals citing as reasons unforeseen legal and other circumstances which
prevented it from complying with its obligations. PAGCOR further stated that it had no other alternative
but to pre-terminate the lease agreement due to the relentless and vehement opposition to their
casino operations. In a letter dated October 12, 1993 x x x, PAGCOR asked PPC to refund the total
of P1,437,582.25 representing the reimbursable rental deposits and expenses for the permanent
improvement of the Hotels parking lot. In a letter dated November 5, 1993 x x x, PAGCOR formally
demanded from PPC the payment of its claim for reimbursement.
"On November 15, 1993 x x x, PPC filed a case for sum of money in the Regional Trial Court of
Manila docketed as Civil Case No. 93-68266. On November 19, 1993, PAGCOR also filed a case for
sum of money in the Regional Trial Court of Manila docketed as Civil Case No. 93-68337.
"In a letter dated November 25, 1993, PPC informed PAGCOR that it was terminating the contract of
lease due to PAGCORs continuing breach of the contract and further stated that it was exercising its
rights under the contract of lease pursuant to Article 20 (a) and (c) thereof.
"On February 2, 1994, PPC filed a supplemental complaint x x x in Civil Case No. 93-68266, which the
trial court admitted in an Order dated February 11, 1994. In an Order dated April 27, 1994, Civil Case
No. 93-68377 was ordered consolidated with Civil Case No. 93-68266. These cases were jointly tried
by the court a quo. On August 17, 1995, the court a quo promulgated its decision. Both parties
appealed."5
In its appeal, PPC faulted the trial court for the following reasons: 1) failure of the court to award actual and
moral damages; 2) the 50 percent reduction of the amount PPC was claiming; and 3) the courts ruling that
the 2 percent penalty was to be imposed from the date of the promulgation of the Decision, not from the date
stipulated in the Contract.
On the other hand, PAGCOR criticized the trial court for the latters failure to rule that the Contract of Lease
had already been terminated as early as September 21, 1993, or at the latest, on October 14, 1993, when
PPC received PAGCORs letter dated October 12, 1993. The gaming corporation added that the trial court
erred in 1) failing to consider that PPC was entitled to avail itself of the provisions of Article XX only when
PPC was the party terminating the Contract; 2) not finding that there were valid, justifiable and good reasons
for terminating the Contract; and 3) dismissing the Complaint of PAGCOR in Civil Case No. 93-68337 for lack
of merit, and not finding PPC liable for the reimbursement of PAGCORS cash deposits and of the value of
improvements.
Ruling of the Court of Appeals
First, on the appeal of PAGCOR, the CA ruled that the PAGCORS pretermination of the Contract of Lease
was unjustified. The appellate court explained that public demonstrations and rallies could not be considered
as fortuitous events that would exempt the gaming corporation from complying with the latters contractual

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obligations. Therefore, the Contract continued to be effective until PPC elected to terminate it on November
25, 1993.
Regarding the contentions of PPC, the CA held that under Article 1659 of the Civil Code, PPC had the right to
ask for (1) rescission of the Contract and indemnification for damages; or (2) only indemnification plus the
continuation of the Contract. These two remedies were alternative, not cumulative, ruled the CA.
As PAGCOR had admitted its failure to pay the rentals for September to November 1993, PPC correctly
exercised the option to terminate the lease agreement. Previously, the Contract remained effective, and PPC
could collect the accrued rentals. However, from the time it terminated the Contract on November 25, 1993,
PPC could no longer demand payment of the remaining rentals as part of actual damages, the CA added.
Denying the claim for moral damages, the CA pointed out the failure of PPC to show that PAGCOR had acted
in gross or evident bad faith in failing to pay the rentals from September to November 1993. Such failure was
shown especially by the fact that PPC still had in hand three (3) months advance rental deposits of PAGCOR.
The former could have simply applied this deposit to the unpaid rentals, as provided in the Contract. Neither
did PPC adequately show that its reputation had been besmirched or the hotels goodwill eroded by the
establishment of the casino and the public protests.
Finally, as to the claimed reimbursement for parking lot improvement, the CA held that PAGCOR had not
presented official receipts to prove the latters alleged expenses. The appellate court, however, upheld the
trial courts award to PPC of P50,000 attorneys fees.
Hence this Petition.6
Issues
In their Memorandum, petitioner raised the following issues:
"MAIN ISSUE:
"Did the Honorable Court of Appeals commit x x x grave and reversible error by holding that Pryce
was not entitled to future rentals or lease payments for the unexpired period of the Contract of Lease
between Pryce and PAGCOR?
"Sub-Issues:
"1. Were the provisions of Sections 20(a) and 20(c) of the Contract of Lease relative to the right of
PRYCE to terminate the Contract for cause and to moreover collect rentals from PAGCOR
corresponding to the remaining term of the lease valid and binding?
"2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and 20(c) of the Contract, PRYCE
having rescinded the Contract of Lease?
"3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al. and the other cases cited by
PAGCOR support its position that PRYCE was not entitled to future rentals?
"4. Would the collection by PRYCE of future rentals not give rise to unjust enrichment?
"5. Could we not have harmonized Article 1659 of the Civil Code and Article 20 of the Contract of
Lease?

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"6. Is it not a basic rule that the law, i.e. Article 1659, is deemed written in contracts, particularly in the
PRYCE-PAGCOR Contract of Lease?"7
The Courts Ruling
The Petition is partly meritorious.
Main Issue:
Collection of Remaining Rentals
PPC anchors its right to collect future rentals upon the provisions of the Contract. Likewise, it argues
that termination, as defined under the Contract, is different from the remedy of rescission prescribed under
Article 1659 of the Civil Code. On the other hand, PAGCOR contends, as the CA ruled, that Article 1659 of
the Civil Code governs; hence, PPC is allegedly no longer entitled to future rentals, because it chose
to rescind the Contract.
Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that "obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith."8 In deference to the rights of the parties,
the law9allows them to enter into stipulations, clauses, terms and conditions they may deem convenient; that
is, as long as these are not contrary to law, morals, good customs, public order or public policy. Likewise, it is
settled that if the terms of the contract clearly express the intention of the contracting parties, the literal
meaning of the stipulations would be controlling.10
In this case, Article XX of the parties Contract of Lease provides in part as follows:
"XX. BREACH OR DEFAULT
"a) The LESSEE agrees that all the terms, conditions and/or covenants herein contained shall be
deemed essential conditions of this contract, and in the event of default or breach of any of such
terms, conditions and/or covenants, or should the LESSEE become bankrupt, or insolvent, or
compounds with his creditors, the LESSOR shall have the right to terminate and cancel this
contract by giving them fifteen (15 days) prior notice delivered at the leased premises or posted on the
main door thereof. Upon such termination or cancellation, the LESSOR may forthwith lock the
premises and exclude the LESSEE therefrom, forcefully or otherwise, without incurring any civil or
criminal liability. During the fifteen (15) days notice, the LESSEE may prevent the termination of lease
by curing the events or causes of termination or cancellation of the lease.
"b) x x x x x x x x x
"c) Moreover, the LESSEE shall be fully liable to the LESSOR for the rentals corresponding to the
remaining term of the lease as well as for any and all damages, actual or consequential resulting from
such default and termination of this contract.
"d) x x x x x x x x x." (Italics supplied)
The above provisions leave no doubt that the parties have covenanted 1) to give PPC the right to terminate
and cancel the Contract in the event of a default or breach by the lessee; and 2) to make PAGCOR fully liable
for rentals for the remaining term of the lease, despite the exercise of such right to terminate. Plainly, the
parties have voluntarily bound themselves to require strict compliance with the provisions of the Contract by

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stipulating that a default or breach, among others, shall give the lessee the termination option, coupled with
the lessors liability for rentals for the remaining term of the lease.
For sure, these stipulations are valid and are not contrary to law, morals, good customs, public order or public
policy. Neither is there anything objectionable about the inclusion in the Contract of mandatory provisions
concerning the rights and obligations of the parties.11 Being the primary law between the parties, it 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.12 It is well to recall that courts, be they
trial or appellate, have no power to make or modify contracts.13 Neither can they save parties from
disadvantageous provisions.
Termination or Rescission?
Well-taken is petitioners insistence that it had the right to ask for "termination plus the full payment of future
rentals" under the provisions of the Contract, rather than just rescission under Article 1659 of the Civil Code.
This Court is not unmindful of the fact that termination and rescission are terms that have been used loosely
and interchangeably in the past. But distinctions ought to be made, especially in this controversy, in which the
terms mean differently and lead to equally different consequences.
The term "rescission" is found in 1) Article 119114 of the Civil Code, the general provision on rescission of
reciprocal obligations; 2) Article 1659,15 which authorizes rescission as an alternative remedy, insofar as the
rights and obligations of the lessor and the lessee in contracts of lease are concerned; and 3) Article
138016 with regard to the rescission of contracts.
In his Concurring Opinion in Universal Food Corporation v. CA,17 Justice J. B. L. Reyes differentiated
rescission under Article 1191 from that under Article 1381 et seq. as follows:
"x x x. The rescission on account of breach of stipulations is not predicated on injury to economic
interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity
between the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing
anywhere that the action for rescission thereunder is subordinated to anything other than the culpable
breach of his obligations to the defendant. This rescission is a principal action retaliatory in character,
it being unjust that a party be held bound to fulfill his promises when the other violates his. As
expressed in the old Latin aphorism: Non servanti fidem, non est fides servanda. Hence, the
reparation of damages for the breach is purely secondary.
"On the contrary, in rescission by reason of lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison detre as well as the measure
of the right to rescind. x x x."18
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).19
Now, as to the distinction between termination (or cancellation) and rescission (more
properly, resolution), Huibonhoa v. CA20 held that, where the action prayed for the payment of rental
arrearages, the aggrieved party actually sought the partial enforcement of a lease contract. Thus, the remedy
was not rescission, but termination or cancellation, of the contract. The Court explained:
"x x x. By the allegations of the complaint, the Gojoccos aim was to cancel or terminate the contract
because they sought its partial enforcement in praying for rental arrearages. There is a distinction in
law between cancellation of a contract and its rescission. 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 release

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parties from further obligations to each other but to abrogate it from the beginning and restore the
parties to relative positions which they would have occupied had no contract ever been made.
"x x x. The termination or cancellation of a contract would necessarily entail enforcement of its terms
prior to the declaration of its cancellation in the same way that before a lessee is ejected under a
lease contract, he has to fulfill his obligations thereunder that had accrued prior to his ejectment.
However, termination of a contract need not undergo judicial intervention. x x x."21 (Italics supplied)
Rescission has likewise been defined as the "unmaking of a contract, or its undoing from the beginning, and
not merely its termination." Rescission may be effected by both parties by mutual agreement; or unilaterally by
one of them declaring a rescission of contract without the consent of the other, if a legally sufficient ground
exists or if a decree of rescission is applied for before the courts.22 On the other hand, termination refers to an
"end in time or existence; a close, cessation or conclusion." With respect to a lease or contract, it means an
ending, usually before the end of the anticipated term of such lease or contract, that may be effected by
mutual agreement or by one party exercising one of its remedies as a consequence of the default of the
other.23
Thus, mutual restitution is required in a rescission (or resolution), in order to bring back the parties to their
original situation prior to the inception of the contract.24 Applying this principle to this case, it means that PPC
would re-acquire possession of the leased premises, and PAGCOR would get back the rentals it paid the
former for the use of the hotel space.
In contrast, the parties in a case of termination are not restored to their original situation; neither is the
contract treated as if it never existed. Prior to its termination, the parties are obliged to comply with their
contractual obligations. Only after the contract has been cancelled will they be released from their obligations.
In this case, the actions and pleadings of petitioner show that it never intended to rescind the Lease Contract
from the beginning. This fact was evident when it first sought to collect the accrued rentals from September to
November 1993 because, as previously stated, it actually demanded the enforcement of the Lease Contract
prior to termination. Any intent to rescind was not shown, even when it abrogated the Contract on November
25, 1993, because such abrogation was not the rescission provided for under Article 1659.
Future Rentals
As to the remaining sub-issue of future rentals, Rios v. Jacinto25 is inapplicable, because the remedy resorted
to by the lessors in that case was rescission, not termination. The rights and obligations of the parties
in Rios were governed by Article 1659 of the Civil Code; hence, the Court held that the damages to which the
lessor was entitled could not have extended to the lessees liability for future rentals.
Upon the other hand, future rentals cannot be claimed as compensation for the use or enjoyment of anothers
property after the termination of a contract. We stress that by abrogating the Contract in the present case,
PPC released PAGCOR from the latters future obligations, which included the payment of rentals. To grant
that right to the former is to unjustly enrich it at the latters expense.
However, it appears that Section XX (c) was intended to be a penalty clause. That fact is manifest from a
reading of the mandatory provision under subparagraph (a) in conjunction with subparagraph (c) of the
Contract. A penal clause is "an accessory obligation which the parties attach to a principal obligation for the
purpose of insuring the performance thereof by imposing on the debtor a special prestation (generally
consisting in the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or
inadequately fulfilled."26
Quite common in lease contracts, this clause functions to strengthen the coercive force of the obligation and
to provide, in effect, for what could be the liquidated damages resulting from a breach.27 There is nothing

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immoral or illegal in such indemnity/penalty clause, absent any showing that it was forced upon or fraudulently
foisted on the obligor.28
In obligations with a penal clause, the general rule is that the penalty serves as a substitute for the indemnity
for damages and the payment of interests in case of noncompliance; that is, if there is no stipulation to the
contrary,29 in which case proof of actual damages is not necessary for the penalty to be demanded.30 There
are exceptions to the aforementioned rule, however, as enumerated in paragraph 1 of Article 1226 of the Civil
Code: 1) when there is a stipulation to the contrary, 2) when the obligor is sued for refusal to pay the agreed
penalty, and 3) when the obligor is guilty of fraud. In these cases, the purpose of the penalty is obviously to
punish the obligor for the breach. Hence, the obligee can recover from the former not only the penalty, but
also other damages resulting from the nonfulfillment of the principal obligation. 31
In the present case, the first exception applies because Article XX (c) provides that, aside from the payment of
the rentals corresponding to the remaining term of the lease, the lessee shall also be liable "for any and all
damages, actual or consequential, resulting from such default and termination of this contract." Having
entered into the Contract voluntarily and with full knowledge of its provisions, PAGCOR must be held bound to
its obligations. It cannot evade further liability for liquidated damages.
Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be equitably reduced by the courts.32 This power is
explicitly sanctioned by Articles 1229 and 2227 of the Civil Code, which we quote:
"Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly
or irregularly complied with by the debtor. Even if there has been no performance, the penalty may
also be reduced by the courts if it is iniquitous or unconscionable."
"Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable."
The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of the
courts. To be considered in fixing the amount of penalty are factors such as -- but not limited to -- the type,
extent and purpose of the penalty; the nature of the obligation; the mode of the breach and its consequences;
the supervening realities; the standing and relationship of the parties; and the like.33
In this case, PAGCORs breach was occasioned by events that, although not fortuitous in law, were in fact
real and pressing. From the CAs factual findings, which are not contested by either party, we find that
PAGCOR conducted a series of negotiations and consultations before entering into the Contract. It did so not
only with the PPC, but also with local government officials, who assured it that the problems were
surmountable. Likewise, PAGCOR took pains to contest the ordinances34 before the courts, which
consequently declared them unconstitutional. On top of these developments, the gaming corporation was
advised by the Office of the President to stop the games in Cagayan de Oro City, prompting the former to
cease operations prior to September 1993.
Also worth mentioning is the CAs finding that PAGCORs casino operations had to be suspended for days on
end since their start in December 1992; and indefinitely from July 15, 1993, upon the advice of the Office of
President, until the formal cessation of operations in September 1993. Needless to say, these interruptions
and stoppages meant that PAGCOR suffered a tremendous loss of expected revenues, not to mention the
fact that it had fully operated under the Contract only for a limited time.
While petitioners right to a stipulated penalty is affirmed, we consider the claim for future rentals to the tune
of P7,037,835.40 to be highly iniquitous. The amount should be equitably reduced. Under the circumstances,
the advanced rental deposits in the sum of P687,289.50 should be sufficient penalty for respondents breach.

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WHEREFORE, the Petition is GRANTED in part. The assailed Decision and Resolution are
hereby MODIFIED to include the payment of penalty. Accordingly, respondent is ordered to pay petitioner the
additional amount of P687,289.50 as penalty, which may be set off or applied against the formers advanced
rental deposits. Meanwhile, the CAs award to petitioner of actual damages representing the accrued rentals
for September to November 1993 -- with interest and penalty at the rate of two percent (2%) per month, from
the date of filing of the Complaint until the amount shall have been fully paid -- as well as the P50,000 award
for attorneys fees, is AFFIRMED. No costs.
SO ORDERED.
#26 - G.R. No. 130759

June 20, 2003

ASIATRUST DEVELOPMENT BANK, Petitioner, vs.

CONCEPTS TRADING CORPORATION, Respondent.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals and its Resolution in CA-G.R.
CV No. 44211 affirming on appeal with modification the Decision2 of the Regional Trial Court of Makati,
Branch 68, in Civil Case No. 89-3789.
As culled from the records, the facts of the case are as follows:
In March 1996, respondent Concepts Trading Corporation obtained from petitioner Asiatrust Development
Corporation a credit accommodation in the amount of P2,000,000 covered by a loan agreement3 and secured
by real and chattel mortgages.4 The amount was drawn from an Industrial Guarantee Loan Fund (IGLF)
account opened by the petitioner in favor of the respondent. On March 4, 1986, the respondent executed
Promissory Note (PN) No. 35745 in favor of the petitioner. Under the promissory note, the principal amount
of P2,000,000 would be charged an interest of 23% per annum, inclusive of 1% service fee. Attached to and
made part of the promissory note was the schedule of amortization agreed upon by the parties.6 As set forth in
the schedule, the payment of the loan was to be amortized quarterly over a period of ten years with a twoyear grace period on the principal payment. The first payment fell due on May 15, 1986 and the subsequent
installments were to be paid every three months thereafter.
In the event that the respondent defaulted in the payment of any installment or interest thereof, paragraph 4 of
the promissory note provided that:
... the entire amount outstanding under this Note shall immediately, without need for any notice, demand,
presentment, protest, or of any other act or deed, the right to all of which is hereby waived by the
undersigned: (i) become due, payable and defaulted; (ii) be subject to a penalty equivalent to thirty-six percent
(36%) per annum thereof; (iii) together with said penalty, commence to earn interest as [sic] the rate of
twenty-three percent (23%) per annum counted from the date of default until full payment thereof.
The respondent failed to pay the amortizations due on August 15 and November 15, 1987, prompting the
petitioner to enforce the aforementioned acceleration clause. On January 25, 1988, the petitioner sent a
letter7 to the respondent demanding payment of its outstanding loan obligation, amounting to P3,203,049
under PN No. 3574 and PN No. 4132.8
In its Letter to the petitioner dated February 3, 1988, the respondent expressed its willingness to settle its
obligation and, due to its tight financial situation, negotiated for a modified payment scheme.9 Thereafter, on

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March 30, 1988, the parties entered into a Memorandum of Agreement (MOA), the pertinent provisions of
which read:
WHEREAS, CONCEPTS hereby acknowledges and affirms that it has applied and was granted by the Bank a
credit accommodation consisting of an Industrial Guarantee Loan Fund ("IGLF") Account in the amount of
P2.0 Million dated 4 March 1986 (hereinafter, the "LOAN OBLIGATION") which, to date, is already overdue
and demandable in its entirety including all interests, penalties, service and other miscellaneous charges.
...
1. CONCEPTS hereby promises and undertakes to pay the BANK the LOAN OBLIGATION in the following
manner, to wit:
a) On 5 May 1988, the amount of P159,259.14, to be covered by a post-dated check for the same
amount to be issued by CONCEPTS; and
b) On 5 June 1988 and every 5th of every succeeding month, P150,000.00 until the LOAN
OBLIGATION shall have been fully paid. CONCEPTS hereby undertakes to cover the abovementioned payments by post-dated checks, by first delivering to the BANK five (5) checks covering
the first five (5) month period, without prejudice to the BANKs right to demand the delivery of another
set of five (5) checks covering the subsequent five (5) month period, 15 days prior to the due date of
the last check in the BANKs possession, and so on and so forth, until the LOAN OBLIGATION shall
have been fully paid.
It is likewise understood that upon payment of ten (10) monthly amortizations as above-indicated or upon
updating of payments of the LOAN OBLIGATION, CONCEPTS shall have the right to re-negotiate with the
Bank the reinstatement of the original terms of payment under Promissory Note No. 3574.

3. The BANK and CONCEPTS hereby further agree that all other provisions and stipulations in the existing
Promissory Notes and other documents evidencing the LOAN OBLIGATION shall remain in force and effect,
except those which are inconsistent with the above-mentioned Mode of Payment.
4. CONCEPTS hereby waives notice of dishonor and/or default of its LOAN OBLIGATION: provided,
however, that the BANK reserves the right to grant a grace period of (15) days for settlement of the obligation;
provided, further, that such grant of a grace period shall not constitute waiver of any right of the BANK. It shall
also be understood that CONCEPTS default in this mode of payment shall likewise automatically accelerate
the entire LOAN OBLIGATION.
5. It shall likewise be understood that this mode of payment arises out of the BANKs liberality and is without
prejudice and without waiver of the BANKs accrued rights under the existing chattel and real estate
mortgages as well as the Continuing Suretyship Agreement pertinent to the LOAN OBLIGATION, all of which
mortgages and Agreement are hereby expressly continued to be in force and effect.10
In compliance with its undertaking under the MOA, the respondent delivered the first check dated May 5, 1988
in the amount of P159,259.14 and four other checks in the sum of P150,000 each or for the total amount
of P759,259.14. This was followed by another batch of five checks covering the months of October 1988 to
February 1989, also in the amount of P150,000 each or for a total amount of P750,000.
On March 30, 1989, the petitioner wrote to the respondent requesting for the delivery of the "last checks to
completely rehabilitate" its account in accordance with the MOA. When the respondent failed to make the said

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payments, the petitioner on April 25, 1989 sent a final demand on the respondent to pay its entire obligation
under the IGLF in the amount of P2,361,970.10 within five days from receipt thereof.11
The respondent thereafter filed with the Regional Trial Court of Makati City, Branch 149, a petition for
declaratory relief. The respondent alleged that it is up to date in the payment of its loan obligation and,
according to its record, the remaining balance amounted to only P316,550.48. The respondent prayed for the
trial court to determine the rights and duties of the parties under the MOA to avoid the miscomputation of the
loan obligation and any breach thereof.
In its answer, the petitioner averred that as of February 15, 1988, the outstanding obligation of the respondent
amounted to P2,833,867.04. According to the petitioner, the monthly amortizations paid by the respondent
covered only the penalties accruing on the loan. Further, declaratory relief as a remedy sought by the
respondent was allegedly improper as it already committed a breach of its obligations. The respondent filed
the action a quo merely to defer or avoid payment of its legally contracted loan obligation with the petitioner.
By way of compulsory counterclaim, the petitioner prayed for damages and attorneys fees.
The respondent then filed an amended complaint alleging that as of August 1989, it had already paid the
petitioner the total amount of P2,259,259 and that there was an overpayment of P100,000. The respondent
prayed that the petitioner be ordered to refund the amount overpaid, as well as to release the mortgages and
to pay damages and attorneys fees.
After due trial, the trial court rendered judgment, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered:
a) ordering the subject complaint DISMISSED for lack of merit:
b) ordering the plaintiff to pay to the defendant the amount of P395,210.30 to earn interest at 22% per
annum from the date of this decision;
c) declaring the Real Estate Mortgage and the Chattel Mortgage as valid and subsisting which may be
foreclosed by the defendant in case of non-payment of the aforestated obligation after demand;
d) ordering the plaintiff to pay to the defendant the amount of P10,000.00 as attorneys fees and
litigation expenses.
So ordered.12
On appeal by the petitioner, the Court of Appeals (CA) affirmed with modification the decision of the trial court.
The CA found that the respondents outstanding obligation to the petitioner amounted only to P309,298.58.
The CA likewise reduced the penalty accruing thereon from 36% to 3% per annum. The dispositive portion of
the assailed decision reads:
WHEREFORE, IN VIEW OF THE FOREGOING, the Decision of the lower court dated December 14, 1992 is
AFFIRMED with the modification that the outstanding balance of plaintiff-appellee as of September 5, 1989
is P309,298.58 subject to a penalty of 3% per annum, and together with said penalty, the whole amount is
subject to an interest of 23% per annum inclusive of service charges, until the entire amount has been fully
paid. No pronouncement as to costs.
SO ORDERED.13
Aggrieved, the petitioner now comes to this Court alleging that:

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A.
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A MANNER NOT IN
ACCORD WITH LAW AND SUPREME COURT DECISIONS IN RULING THAT ASIATRUST WAIVED
COLLECTION OF ACCRUED PENALTIES AND CHARGES DUE FROM CONCEPTS UNDER PN
3574 BY EXECUTING THE MOA, BECAUSE THE MOA DID NOT EXPRESSLY PROVIDE FOR
SUCH WAIVER, AND STIPULATED THAT, UNLESS INCONSISTENT WITH THE MOA MODE OF
PAYMENT, "ALL OTHER EXISTING PROVISIONS AND STIPULATIONS IN THE EXISTING
PROMISSORY NOTES X X X SHALL REMAIN IN FORCE AND EFFECT."
B.
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A MANNER NOT IN
ACCORD WITH 20 OF RULE 132 OF THE RULES OF COURT IN FINDING WITNESS REBECCA
DE LA CRUZ UNREBUTTED IDENTIFICATION OF ASIATRUSTS EXHIBIT "7" AS A STATEMENT
OF ACCOUNT, AND HER UNREBUTTED IDENTIFICATION OF THE SIGNATURE OF THE
EXHIBIT, AS INSUFFICIENT AUTHENTICATION OF THAT EXHIBIT, AND IN RELYING ON
TESTIMONY READ FROM A LEDGER NEITHER IDENTIFIED NOR OFFERED IN EVIDENCE.14
The petition is bereft of merit.
The petitioner maintains that the CA erred in holding that the petitioner waived collection of accrued penalties
and miscellaneous charges under PN 3574 by entering into the MOA. No such waiver was expressed in the
MOA and, in fact, paragraph 3 thereof expressly provides that "all other provisions and stipulations in the
existing promissory notes and other documents evidencing the LOAN OBLIGATION shall remain in force and
effect, except those which are inconsistent with the above-mentioned mode of payment." Further, the
petitioners consistent application of the payments respondent made to the penalties, charges and interests is
a plain manifestation of its contractual intent, and is properly cognizable as evidence of that intent under
Article 1371 of the Civil Code which provides:
Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent
acts shall be principally considered.
The petitioner likewise avers that the CA erred in not according probative value to the statement of account
which the petitioner offered in evidence. The petitioner contends that, contrary to the holding of the CA, the
statement of account was properly identified by its witness, Rebecca de la Cruz.
The Court does not agree with the petitioner.
It is a time-honored rule of evidence that when the terms of an agreement are reduced to writing, it is deemed
to contain all the terms agreed upon and no evidence of such terms can be admitted other than the contents
of the agreement itself.15 This rule allows exceptions, in that a party may present parole evidence to modify,
explain or add to the terms of the written agreement if he puts in issue in his pleadings:
a) An intrinsic ambiguity, mistake or imperfection in the written agreement;
b) The failure of the written agreement to express the true intent and agreement of the parties thereto;
c) The validity of the written agreement; or
d) The existence of other terms agreed to by the parties or their successors-in-interest after the
execution of the written agreement.16

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A careful perusal of the MOA reveals that it fixed the respondents loan obligation to the petitioner
at P2,000,000 which was already due and demandable in its entirety, including "all interests, penalties,
service and other miscellaneous charges." Further, Paragraph 1 thereof set forth the manner by which the
loan obligation was to be paid, to wit:
1. CONCEPTS hereby promises and undertakes to pay the BANK the LOAN OBLIGATION in the following
manner, to wit:
a) On 5 May 1988, the amount of P159,259.14, to be covered by a post-dated check for the same
amount to be issued by CONCEPTS; and
b) On 5 June 1988 and every 5th of every succeeding month, P150,000.00 until the LOAN
OBLIGATION shall have been fully paid. CONCEPTS hereby undertakes to cover the abovementioned payments by post-dated checks, by first delivering to the BANK five (5) checks covering
the first five (5) month period, without prejudice to the BANKs right to demand the delivery of another
set of five (5) checks covering the subsequent five (5) month period, 15 days prior to the due date of
the last check in the BANKs possession, and so on and so forth, until the LOAN OBLIGATION shall
have been fully paid.
It is likewise understood that upon payment of ten (10) monthly amortizations as above-indicated or upon
updating of payments of the LOAN OBLIGATION, CONCEPTS shall have the right to re-negotiate with the
Bank the reinstatement of the original terms of payment under Promissory Note No. 3574.17
However, the MOA failed to state the exact amounts of interests, service charges and penalties accruing on
the loan obligation. To determine the same, the CA relied on the testimony of the petitioners comptroller,
Rebecca de la Cruz, who testified thereon as follows:
Atty. Ortiz:
Q: Now, as of the date January 25, 1988 what was the total obligation of the plaintiff to the defendant?
COURT: (to the witness)
According to your ledger it could be any date closer to January 25, 1988?
WITNESS:
A: The date which is closer to January 25, 1988 is April 28, 1988. It says here if you still have a 2 MILLION
PESO principal balance. We have here an interest of P24,000.00 and still we have service charges.
COURT:
Service charges of how much?
WITNESS:
A: P123,000.00 and still we have unpaid penalties of P76,000.00, Your Honor.18
Based on the foregoing, the CA correctly fixed the respondents outstanding balance to the petitioner as of the
execution of the MOA at P2,223,000 consisting of the principal obligation of P2,000,000, penalties of P76,000,
service charges of P123,000 and interests of P24,000:

154

After a thorough review of the MOA, We are convinced that plaintiff-appellees obligation consists of its
original P2 million loan under PN No. 3574 including interests and service fees but excluding penalty and
other miscellaneous charges.
Thus, the MOA itself provides:
"1. CONCEPTS hereby promises and undertakes to pay the BANK the LOAN OBLIGATION in the following
manner, to wit:"
(p. 2, MOA; Exhs. "B" and "10," pp. 5 and 45, Folder of Exhibits)
In the MOAs first whereas clause, the term "loan obligation" was referred to as "the amount of P2 Million,
which to date, is already overdue and demandable in its entirety including all interests, penalties, service and
other miscellaneous charges." (p. 1, MOA; pp. 4 and 44, ibid.). The MOA, therefore, acknowledged that
plaintiff-appellee, having failed to pay several amortizations under the PN, was liable for the entire amount
of P2 million plus interest in arrears, penalties and other charges in accordance with the acceleration clause
of the PN.
However, due to the banks liberality, it waived the demandability of the entire loan by entering into the MOA,
allowing plaintiff-appellee to continue paying its amortization, this time on a monthly basis. By such waiver,
plaintiff-appellee has effectively not been rendered in default thereby waiving likewise the penalty imposable
on the loan in the event of default.
Accordingly, under the MOA, plaintiff-appellee continues to be liable for its obligation under the note, i.e.,
principal amount of P2 million plus interests and service fees, as if it was not yet in default. The first
installment under the MOA in the amount of P159,259.14 including several of the monthly installments
of P150,000 were applicable to interest and service fees in arrears while the remaining monthly amortizations
covered the principal and interest falling due thereon.19
The petitioner nonetheless assails the above figures, insisting that the CA erred in holding that:
However, due to the banks liberality, it waived the demandability of the entire loan by entering into the MOA,
allowing plaintiff-appellee to continue paying its amortization, this time on a monthly basis. By such waiver,
plaintiff-appellee has effectively not been rendered in default thereby waiving likewise the penalty imposable
on the loan in event of default.20
The petitioner asserts that the respondent continued to be liable for penalty charges as provided under the
promissory note notwithstanding the execution of the MOA. This contention is untenable. Under the schedule
of amortization contained in the promissory note, the respondent obliged to pay the principal obligation in
quarterly amortizations over a period of ten years and that in case of default, the entire amount shall be due
and demandable in its entirety. On the other hand, under the MOA, a new mode of payment was agreed
upon, i.e., the payment by the respondent of the initial amount of P159,259.14 and subsequent payments
of P150,000 every month until full payment of the loan obligation. The MOA, in effect, rendered the loan no
longer due and demandable in its entirety at the time of its execution, precisely because it allowed the
respondent under the new schedule of payments to pay the same by monthly installments. It bears stressing
that the MOA provided that the mode of payment arose "out of the BANKs liberality." To allow the petitioner to
collect penalty charges as if the respondent were in default, notwithstanding the existence of a new payment
schedule, would be inconsistent with the aforesaid agreement.
It must be stressed, however, that the foregoing should not be construed as to mean that the respondent
could no longer be held in default and that the petitioner completely waived collection of penalty charges in
case of default. Non-payment by the respondent of any of the monthly installments as provided under the
MOA would render it in default and the petitioner could collect the penalty charges therefor. As will be shown

155

later, the CA did in fact determine the exact time when the respondent defaulted on its obligation under the
MOA and accordingly reckoned therefrom the penalty charges due the petitioner.
The records show that the respondent, in accordance with the MOA, made the initial payment of P159,259.16
on May 5, 1988. Thereafter, the respondent made payments in the amount of P150,000 every month up to
September 1989. The CA then tabulated these payments21 as follows:
Principal

Interest

Service

Charge

Penalty

Subtotal

Payment

Total

4/28/88 P2,000,000.00 P24,000.00 P123,000.00 P76,000.00 P2,063,740.86 P159,259.14 P2,063,740.86

1.

2,063,740.90

37,835.25

1,719.78

2,103,295.90

150,000.00

1,953,295.90

2.

1,953,295.90

35,810.42

1,627.75

1,990,734.00

150,000.00

1,840,734.00

3.

1,840,734.00

33,746.79

1,533.94

1,876,014.70

150,000.00

1,726,014.70

4.

1,726,014.70

31,643.60

1,438.34

1,759,096.60

150,000.00

1,609,096.60

5.

1,609,096.60

29,500.10

1,340.91

1,639,937.60

150,000.00

1,489,937.60

6.

1,489,937.60

27,315.52

1,241.61

1,518,494.70

150,000.00

1,368,494.70

7.

1,368,494.70

25,089.07

1,140.41

1,394,724.10

150,000.00

1,244,724.10

8.

1,244,724.10

22,819.94

1,037.27

1,268,581.30

150,000.00

1,118,581.30

9.

1,118,581.30

20,507.32

932.15

1,140,020.70

150,000.00

990,020.70

10.

990,020.70

18,150.38

825.02

1,008,996.00

150,000.00

858,996.00

11.

858,996.00

15,748.28

715.83

875,460.11

150,000.00

725,460.11

12.

725,460.11

13,300.10

604.55

739,364.76

150,000.00

589,364.76

13.

589,364.76

10,805.02

491.14

600,660.91

150,000.00

450,660.91

14.

450,660.91

8,262.12

375.55

459,298.58

150,000.00

309,298.58

As noted by the CA, after the last payment of P150,000 on September 1989, the respondent still owed the
petitioner the sum of P309,298.58. The respondents non-payment of the amortizations due after the said date
rendered the balance due and demandable in its entirety, in accordance with the acceleration clause under
the MOA. Further, since the respondent defaulted in its monthly payments after September 1989, it was only
then that it could be rightfully imposed the penalty charges in accordance with the promissory note. Thus,
contrary to the petitioners contention, the CA did not rule that the MOA operated as a waiver by the petitioner
of its right to collect penalty charges.

156

The petitioner faults the CA for reducing the penalty charges from 36% to 3% per annum on its finding that the
former rate was too excessive, considering that the petitioner had already charged an interest rate of 23% per
annum and that the principal obligation had been partly complied with.
This Court does not agree with the petitioner. Article 1229 of the Civil Code states:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable.
Indeed, this Court had equitably reduced the penalty in not a few cases. In the recent case of Ligutan v.
Court of Appeals,22 the Court affirmed the reduction of the penalty charges by the CA upon its finding that the
debtors therein had partially complied with their obligation. In Rizal Commercial Banking Corp. v. Court of
Appeals,23 the Court tempered the penalty charges after taking into account the debtors pitiful situation and its
offer to settle the entire obligation with the creditor bank. In Insular Bank of Asia and America v. Spouses
Salazar,24 the Court reduced the penalty charge on a loan of P42,050, considering that the debtor spouses
paid a total of P68,676.75 which the creditor bank applied to satisfy the penalty and interest charges.
1wphi 1

Given the peculiar circumstances in this case, particularly that the principal obligation had been partially
complied with by the respondent, the Court sees no justifiable reason to modify the reduction by the CA of the
penalty charges made by the CA.
Anent the second issue, the petitioner insists that the CA should have relied on the petitioners statement of
account25 to determine the amount owed by the respondent. According to the said statement, the respondent
still owed the petitioner P5,665,906 as of June 29, 1990, since previous payments made were applied only to
the penalties and service charges. The Court does not agree. The MOA clearly provides that the loan
obligation of P2,000,000 shall be paid by the respondent by issuing the post-dated checks in the amount
of P150,000 every month beginning June 5, 1998 until the same shall have been fully paid. Thus, the monthly
payments made by the respondent were for the satisfaction of the principal loan obligation, not merely as
payments of the penalties and service charges.
Further, as correctly pointed out by the CA, the petitioners statement of account could not be given any
probative value because it was belied for the most part by its key witness, comptroller Rebecca de la Cruz.
Even the trial court gave scant consideration to this statement of account, upon its finding that certain entries
therein were inconsistent with the terms of the promissory note. The Court thus finds no cogent reason to
deviate from the trial courts and the CAs assessment of the probative value of the same. After all, it is not
this Courts function under Rule 45 of the Rules of Court, as amended, to review, examine, and evaluate or
weigh the probative value of the evidence presented.26
WHEREFORE, the petition is hereby DENIED for lack of merit. The assailed Decision dated July 18, 1997
and Resolution dated September 12, 1997 of the Court of Appeals in CA-G.R. CV No. 44211 are AFFIRMED
in toto.
SO ORDERED.
#27 - G.R. No. L-45349 August 15, 1988
NEWTON JISON and SALVACION I. JOSUE petitioners, vs.
COURT OF APPEALS and ROBERT 0. PHILLIPS & SONS, INC., respondents.
The instant petition for review of the decision of the Court of Appeals poses the issue of the validity of the
rescission of a contract to sell a subdivision lot due to the failure of the lot buyer to pay monthly installments
on their due dates and the forfeiture of the amounts already paid.

157

The case is not one of first impression, and neither is it exceptional. On the contrary, it unambiguous. the
common plight of countless subdivision lot buyers.
Petitioners, the spouses Newton and Salvacion Jison, entered into a Contract to Sell with private respondent,
Robert O. Phillips & Sons, Inc., whereby the latter agreed to sell to the former a lot at the Victoria Valley
Subdivision in Antipolo, Rizal for the agreed price of P55,000.00, with interest at 8,1965 per annum, payable
on an installment basis.
Pursuant to the contract, petitioners paid private respondents a down payment of P11,000.00 on October 20,
1961 and from October 27, 1961; to May 8, 1965 a monthly installment of P533.85.
Thereafter, due to the failure of petitioners to build a house as provided in the contract, the stipulated penalty
of P5.00 per square meter was imposed to the effect that the monthly amortization was increased to P707.24.
On January 1, 1966, February 1, 1966 and March 1, 1966, petitioners failed to pay the monthly installments
due on said dates although petitioners subsequently paid the amounts due and these were accepted by
private respondent.
Again on October 1, 1966, November 1, 1966, December 1, 1966 and January 1, 1967, petitioners failed to
pay. On January 11, 1967, private respondent sent a letter (Exh. "3") to petitioners calling their attention to the
fact that their account was four months overdue. This letter was followed up by another letter dated February
27, 1967 (Exh. "3") where private respondent reminded petitioner of the automatic rescission clause of the
contract. Petitioners eventually paid on March 1, 1967.
Petitioners again failed to pay the monthly installments due on February 1, 1967, March 1, 1967 and April 1,
1967. Thus, in a letter dated April 6, 1967 (Exh. "D"), private respondent returned petitioners' check and
informed them that the contract was cancelled when on April 1, 1987 petitioners failed to pay the monthly
installment due, thereby making their account delinquent for three months.
On April 19, 1967, petitioners tendered payment for all the installments already due but the tender was
refused. Thus, petitioners countered by filing a complaint for specific performance with the Court of First
Instance of Rizal on May 4, 1967 and consigning the monthly installments due with the court.
Following the hearing of the case, wherein the parties entered into a stipulation of facts, the trial court on
January 9, 1969 rendered judgment in favor of private respondent, dismissing the complaint and declaring the
contract cancelled and all payments already made by petitioner franchise. ordering petitioners to pay
P1,000.00 as and for attorney's fees; and declaring the consignation and tender of payment made by
petitioners as not amounting to payment of the corresponding monthly installments.
Not satisfied with the decision of the trial court, petitioners appealed to the Court of Appeals. Agreeing with
the findings and conclusions of the trial court, the Court of Appeals on November 4, 1976 affirmed the
former's decision.
Thus, the instant petition for review.
In assailing the decision of the Court of Appeals, petitioners attributed the following errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONERS HAVE
SUBSTANTIALLY, COMPLIED WITH THE TERMS OF THEIR AGREEMENT WITH PRIVATE
RESPONDENTS.

158

II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE CONTRACT TO SELL MAY BE
AUTOMATICALLY RESCINDED AND PRIVATE RESPONDENT MAY UNILATERALLY RESCINDED SAID
CONTRACT AND REJECT THE CONSIGNATION OF PAYMENTS MADE BY PETITIONERS, WHICH
ACTIONS OF PRIVATE RESPONDENT ARE HIGHLY INIQUITOUS AND UNCONSCIONABLE.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PRIVATE RESPONDENT'S
ACT OF FORFEITING ALL PREVIOUS PAYMENTS MADE BY PETITIONERS IS CONTRARY TO LAW,
HIGHLY INIQUITOUS AND UNCONSCIONABLE. [Petitioners' Brief, pp. 13-27.]
As stated at the outset, the principal issue in this case is the legality of the rescission of the contract and the
forfeiture of the payments already made by petitioners.
To support the rescission and forfeiture private respondent falls back on paragraph 3 of the contract which
reads:
This contract shall be considered automatically rescinded and cancelled and of no further
force and effect, upon the failure of the Vendee to pay when due Three (3) or more
consecutive monthly installments mentioned in Paragraph 2 of this Contract, or to comply with
any of the terms and conditions hereof, in which case the Vendor shall have the right to resell
the said parcel of land to any Vendee and any amount derived from the sale on account
hereof shall be forfeited in favor of the Vendor as liquidated damages for the breach of the
Contract by the Vendee, the latter hereby renouncing and reconveying absolutely and forever
in favor of the Vendor all rights and claims to and for all the amount paid by the Vendee on
account of the Contract, as well as to and for all compensation of any kind, hereby also
agreeing in this connection, to forthwith vacate the said property or properties peacefully
without further advise of any kind.
Since the contract was executed and cancelled prior to the effectivity of Republic Act No. 65856, (the Realty
Installment Buyers', Protection Act) and Presidential Decree No. 957 (the Subdivision and Condominium
Buyers' Protective Decree), it becomes necessary to resort to jurisprudence and the general provisions of law
to resolve the controversy.
The decision in the recent case of Palay, Inc. v. Clave [G.R. No. L-56076, September 21, 1983, 124 SCRA
7,1969, factions the resolution of the controversy. In deciding whether the rescission of the contract to sell a
subdivision lot after the lot buyer has failed to pay several installments was valid, the Court said:
Well settled is the rule, as held in previous k.- [Torralba v. De los Angeles, 96 SCRA 69, Luzon
Brokerage Co., Inc. v. Maritime Building Co., 43 SCRA 93 and 86 SCRA 305; Lopez v.
Commissioner of Customs, 37 SCRA 327; U.P. v. De los Angeles, 35 SCRA 102; Ponce
Enrile v. CA, 29 SCRA 504; Froilan v. Pan Oriental Shipping Co., 12 SCRA 276; Taylor v. Uy
Tieng Piao; 43 Phil. 896, that judicial action for the rescission of a contract is not necessary
where the contract provides that it may be cancelled for violation of any of its terms and
conditions. However, even in the cited cases, there was at least a written notice sent to the
degeneration, informing him of the rescission. As stressed in University of the Philippines v.
Walfrido de los Angeles [35 SCRA 102] the act of a party in treating a contract as cancelled
should be made known to the other....
xxx xxx xxx

159

In other words, resolution of reciprocal contracts may be made extrajudicially unless

successfully impugned in Court. If the debtor impugns the declaration it shall be subject to
judicial determination.
In this case, private respondent has denied that rescission is justified and has resorted to
judicial action. It is now for the Court to determine whether resolution of the contract by
petitioner was warranted.
We hold that resolution by petitioners of the contract was ineffective and inoperative against
private respondent for lack of notice of resolution, as held in the U.P. v. Angeles case, supra.
xxx xxx xxx
The indispensability of notice of cancellation to the buyer was to be later underscored in
Republic Act No. 65856, entitled "An Act to Provide Protection to Buyers of Real Estate on
Installment Payments." which took effect on September 14-15). when it specifically provided:
Sec. 3 (b) ... the actual cataract, of the contract shall take place thirty days from receipt by the
buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act
and upon full payment of the cash surrender value to the buyer.
There is no denying that in the instant case the resolution or rescission of the Contract to Sell was valid.
Neither can it be said that the cancellation of the contract was ineffective for failure of private respondents to
give petitioners notice thereof as petitioners were informed cancelled private respondent that the contract was
cancelled in the letter dated April 6, 1967 (Exh. "D"). As R.A. No. 65856, was not yet effective, the notice of
cancellation need not be by notarial act, private respondent's letter being sufficient compliance with the legal
requirement.
The facts of 'fee instant case should be distinguished from those in the Palay Inc. case, as such distinction will
explain why the Court in said case invalidated the resolution of the contract. In said case, the subdivision
developer, without informing the buyer of the cancellation of the contract, resold the lot to another person. The
lot buyer in said case was only informed of the resolution of the contract some six years later after the
developer, rejected his request for authority to assign his rights under the contract. Such a situation does not
obtain illness: the instant case. In fact, petitioners were informed of the cancellation of their contract in April
1967, when private respondent wrote them the letter dated April 6, 1967 (Exh. "D"), and within a month they
were able to file a complaint against Private respondent.
While the resolution of the contract and the forfeiture of the amounts already paid are valid and binding upon
petitioners, the Court is convinced that the forfeiture of the amount of P5.00 although it includes the
accumulated fines for petitioners' failure to construct a house as required by the contract, is clearly iniquitous
considering that the contract price is only P6,173.15 The forfeiture of fifty percent (50%) of the amount already
paid, or P3,283.75 appears to be a fair settlement. In arriving at this amount the Court gives weight to the fact
that although petitioners have been delinquent in paying their amortizations several times to the prejudice of
private respondent, with the cancellation of the contract the possession of the lot review.... to private
respondent who is free to resell it to another party. Also, had R.A. No. 65856, been applicable to the instant
case, the same percentage of the amount already paid would have been forfeited [Torralba 3(b).]
The Court's decision to reduce the amount forfeited finds support in the Civil Code. As stated in paragraph 3
of the contract, in case the contract is cancelled, the amounts already paid shall be forfeited in favor of the
vendor as liquidated damages. The Code provides that liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable [Art. 2227.]

160

Further, in obligations with a penal clause, the judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor [Art. 1229; Hodges v. Javellana, G.R. No.
L-17247, April 28, 1962, 4 SCRA 1228]. In this connection, the Court said:
It follows that, in any case wherein there has been a partial or irregular compliance with the
provisions in a contract for special indemnification in the event of failure to comply with its
terms, courts will rigidly apply the doctrine of strict construction and against the enforcement in
its entirety of the industry.' where it is clear from the terms of the contract that the amount or
character of the indemnity is fixed without regard to the probable damages which might be
anticipated as a result of a breach of the terms of the contract; or, in other words, where the
indemnity provided for is essentially a mere penalty having for its principal object the
enforcement of compliance with the corporations; (Laureano v. Kilayco, 32 Phil. 194 (1943).
This principle was reiterated in Makati Development Corp. v. Empire Insurance Co. [G.R. No. L-21780, June
30, 1967, 20 SCRA 557] where the Court affirmed the judgment of the Court of First Instance reducing the
subdivision lot buyer's liability from the stipulated P12,000.00 to Plaintiffs after finding that he had partially
performed his obligation to complete at least fifty percent (50%) of his house within two (2) years from March
31, 1961, fifty percent (50%) of the house having been completed by the end of April 1961.
WHEREFORE, the Decision of the Court of Appeals is hereby MODIFIED as to the amount forfeited which is
reduced to fifty percent (50%) of the amount already paid or P23,656.32 and AFFIRMED as to all other
respects.
Private respondent is ordered to refund to petitioners the excess of P23,656.32 within thirty (30) days from the
date of finality of this judgment.
SO ORDERED.
#28 - G.R. No. 149420

October 8, 2003

SONNY LO, petitioner, vs.

KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent.
DECISION
YNARES-SANTIAGO, J.:
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in the sale of steel
scaffoldings, while petitioner Sonny L. Lo, doing business under the name and style Sans Enterprises, is a
building contractor. On February 22, 1990, petitioner ordered scaffolding equipments from respondent worth
P540,425.80.1 He paid a downpayment in the amount of P150,000.00. The balance was made payable in ten
monthly installments.
Respondent delivered the scaffoldings to petitioner.2 Petitioner was able to pay the first two monthly
installments. His business, however, encountered financial difficulties and he was unable to settle his
obligation to respondent despite oral and written demands made against him.3
1a\^/phi 1.net

On October 11, 1990, petitioner and respondent executed a Deed of Assignment,4 whereby petitioner
assigned to respondent his receivables in the amount of P335,462.14 from Jomero Realty Corporation.
Pertinent portions of the Deed provide:
WHEREAS, the ASSIGNOR is the contractor for the construction of a residential house located at
Greenmeadow Avenue, Quezon City owned by Jomero Realty Corporation;

161

WHEREAS, in the construction of the aforementioned residential house, the ASSIGNOR purchased on
account scaffolding equipments from the ASSIGNEE payable to the latter;
WHEREAS, up to the present the ASSIGNOR has an obligation to the ASSIGNEE for the purchase of the
aforementioned scaffoldings now in the amount of Three Hundred Thirty Five Thousand Four Hundred Sixty
Two and 14/100 Pesos (P335,462.14);
NOW, THEREFORE, for and in consideration of the sum of Three Hundred Thirty Five Thousand Four
Hundred Sixty Two and 14/100 Pesos (P335,462.14), Philippine Currency which represents part of the
ASSIGNORs collectible from Jomero Realty Corp., said ASSIGNOR hereby assigns, transfers and sets over
unto the ASSIGNEE all collectibles amounting to the said amount of P335, 462.14;
And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and assigns, the full power and
authority to demand, collect, receive, compound, compromise and give acquittance for the same or any part
thereof, and in the name and stead of the said ASSIGNOR;
And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE, its successors and assigns
that said debt is justly owing and due to the ASSIGNOR for Jomero Realty Corporation and that said
ASSIGNOR has not done and will not cause anything to be done to diminish or discharge said debt, or delay
or to prevent the ASSIGNEE, its successors or assigns, from collecting the same;
And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs, executors,
administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE, its successors
or assigns, at his cost and expense, execute and do all such further acts and deeds as shall be reasonably
necessary to effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in
accordance with the true intent and meaning of these presents. xxx5 (Italics supplied)
However, when respondent tried to collect the said credit from Jomero Realty Corporation, the latter refused
to honor the Deed of Assignment because it claimed that petitioner was also indebted to it.6 On November 26,
1990, respondent sent a letter7 to petitioner demanding payment of his obligation, but petitioner refused to pay
claiming that his obligation had been extinguished when they executed the Deed of Assignment.
Consequently, on January 10, 1991, respondent filed an action for recovery of a sum of money against the
petitioner before the Regional Trial Court of Makati, Branch 147, which was docketed as Civil Case No. 91074.8
During the trial, petitioner argued that his obligation was extinguished with the execution of the Deed of
Assignment of credit. Respondent, for its part, presented the testimony of its employee, Almeda Baaga, who
testified that Jomero Realty refused to honor the assignment of credit because it claimed that petitioner had
an outstanding indebtedness to it.
On August 25, 1994, the trial court rendered a decision9 dismissing the complaint on the ground that the
assignment of credit extinguished the obligation. The decretal portion thereof provides:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the defendant and
against the plaintiff, dismissing the complaint and ordering the plaintiff to pay the defendant attorneys fees in
the amount of P25,000.00.
1a\^/phi 1.net

Respondent appealed the decision to the Court of Appeals. On April 19, 2001, the appellate court rendered a
decision,10 the dispositive portion of which reads:
WHEREFORE, finding merit in this appeal, the court REVERSES the appealed Decision and enters judgment
ordering defendant-appellee Sonny Lo to pay the plaintiff-appellant KJS ECO-FORMWORK SYSTEM

162

PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four Hundred Sixty-Two and 14/100 (P335,462.14)
with legal interest of 6% per annum from January 10, 1991 (filing of the Complaint) until fully paid and
attorneys fees equivalent to 10% of the amount due and costs of the suit.
SO ORDERED.11
In finding that the Deed of Assignment did not extinguish the obligation of the petitioner to the respondent, the
Court of Appeals held that (1) petitioner failed to comply with his warranty under the Deed; (2) the object of
the Deed did not exist at the time of the transaction, rendering it void pursuant to Article 1409 of the Civil
Code; and (3) petitioner violated the terms of the Deed of Assignment when he failed to execute and do all
acts and deeds as shall be necessary to effectually enable the respondent to recover the collectibles.12
Petitioner filed a motion for reconsideration of the said decision, which was denied by the Court of Appeals.13
In this petition for review, petitioner assigns the following errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN DECLARING THE DEED OF
ASSIGNMENT (EXH. "4") AS NULL AND VOID FOR LACK OF OBJECT ON THE BASIS OF A MERE
HEARSAY CLAIM.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF ASSIGNMENT (EXH.
"4") DID NOT EXTINGUISH PETITIONERS OBLIGATION ON THE WRONG NOTION THAT PETITIONER
FAILED TO COMPLY WITH HIS WARRANTY THEREUNDER.
III
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE TRIAL COURT
AND IN ORDERING PAYMENT OF INTERESTS AND ATTORNEYS FEES.14
The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a
legal cause, such as sale, dacion en pago, exchange or donation, and without the consent of the debtor,
transfers his credit and accessory rights to another, known as the assignee, who acquires the power to
enforce it to the same extent as the assignor could enforce it against the debtor.15
Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an outstanding debt.16 In order that there be a
valid dation in payment, the following are the requisites: (1) There must be the performance of the prestation
in lieu of payment (animo solvendi) which may consist in the delivery of a corporeal thing or a real right or a
credit against the third person; (2) There must be some difference between the prestation due and that which
is given in substitution (aliud pro alio); (3) There must be an agreement between the creditor and debtor that
the obligation is immediately extinguished by reason of the performance of a prestation different from that
due.17 The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying
the thing or property of the debtor, payment for which is to be charged against the debtors debt. As such, the
vendor in good faith shall be responsible, for the existence and legality of the credit at the time of the sale but
not for the solvency of the debtor, in specified circumstances.18

163

Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal
property,19produced the effects of a dation in payment which may extinguish the obligation.20 However, as in
any other contract of sale, the vendor or assignor is bound by certain warranties. More specifically, the first
paragraph of Article 1628 of the Civil Code provides:
The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale,
unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so
expressly stipulated or unless the insolvency was prior to the sale and of common knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to warrant the existence and legality of
the credit at the time of the sale or assignment. When Jomero claimed that it was no longer indebted to
petitioner since the latter also had an unpaid obligation to it, it essentially meant that its obligation to petitioner
has been extinguished by compensation.21 In other words, respondent alleged the non-existence of the credit
and asserted its claim to petitioners warranty under the assignment. Therefore, it behooved on petitioner to
make good its warranty and paid the obligation.
Furthermore, we find that petitioner breached his obligation under the Deed of Assignment, to wit:
And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs, executors,
administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE, its successors
or assigns, at his cost and expense, execute and do all such further acts and deeds as shall be reasonably
necessary to effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in
accordance with the true intent and meaning of these presents.22 (underscoring ours)
Indeed, by warranting the existence of the credit, petitioner should be deemed to have ensured the
performance thereof in case the same is later found to be inexistent. He should be held liable to pay to
respondent the amount of his indebtedness.
Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay respondent the sum of
P335,462.14 with legal interest thereon. However, we find that the award by the Court of Appeals of attorneys
fees is without factual basis. No evidence or testimony was presented to substantiate this claim. Attorneys
fees, being in the nature of actual damages, must be duly substantiated by competent proof.
WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals dated April 19, 2001 in CA-G.R.
CV No. 47713, ordering petitioner to pay respondent the sum of P335,462.14 with legal interest of 6% per
annum from January 10, 1991 until fully paid is AFFIRMED with MODIFICATION. Upon finality of this
Decision, the rate of legal interest shall be 12% per annum, inasmuch as the obligation shall thereafter
become equivalent to a forbearance of credit.23 The award of attorneys fees is DELETED for lack of
evidentiary basis.
SO ORDERED.
#29 - G.R. No. L-46658

May 13, 1991

PHILIPPINE NATIONAL BANK, petitioner, vs.

HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of the Court of First Instance of Rizal,
Branch XXI and TAYABAS CEMENT COMPANY, INC., respondents.
In this petition for certiorari, petitioner Philippine National Bank (PNB) seeks to annul and set aside the orders
dated March 4, 1977 and May 31, 1977 rendered in Civil Case No. 24422 1 of the Court of First Instance of
Rizal, Branch XXI, respectively granting private respondent Tayabas Cement Company, Inc.'s application for
a writ of preliminary injunction to enjoin the foreclosure sale of certain properties in Quezon City and Negros
Occidental and denying petitioner's motion for reconsideration thereof.

164

In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo Spouses), obtained a loan of
P580,000.00 from petitioner bank to purchase 60% of the subscribed capital stock, and thereby acquire the
controlling interest of private respondent Tayabas Cement Company, Inc. (TCC). 2 As security for said loan,
the spouses Arroyo executed a real estate mortgage over a parcel of land covered by Transfer Certificate of
Title No. 55323 of the Register of Deeds of Quezon City known as the La Vista property.
Thereafter, TCC filed with petitioner bank an application and agreement for the establishment of an eight (8)
year deferred letter of credit (L/C) for $7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to
cover the importation of a cement plant machinery and equipment.
Upon approval of said application and opening of an L/C by PNB in favor of Toyo Menka Kaisha, Ltd. for the
account of TCC, the Arroyo spouses executed the following documents to secure this loan accommodation:
Surety Agreement dated August 5, 1964 3 and Covenant dated August 6, 1964. 4
The imported cement plant machinery and equipment arrived from Japan and were released to TCC under a
trust receipt agreement. Subsequently, Toyo Menka Kaisha, Ltd. made the corresponding drawings against
the L/C as scheduled. TCC, however, failed to remit and/or pay the corresponding amount covered by the
drawings. Thus, on May 19, 1968, pursuant to the trust receipt agreement, PNB notified TCC of its intention to
repossess, as it later did, the imported machinery and equipment for failure of TCC to settle its obligations
under the L/C. 5
In the meantime, the personal accounts of the spouses Arroyo, which included another loan of P160,000.00
secured by a real estate mortgage over parcels of agricultural land known as Hacienda Bacon located in
Isabela, Negros Occidental, had likewise become due. The spouses Arroyo having failed to satisfy their
obligations with PNB, the latter decided to foreclose the real estate mortgages executed by the spouses
Arroyo in its favor.
On July 18, 1975, PNB filed with the City Sheriff of Quezon City a petition for extra-judicial foreclosure under
Act 3138, as amended by Act 4118 and under Presidential Decree No. 385 of the real estate mortgage over
the properties known as the La Vista property covered by TCT No. 55323. 6 PNB likewise filed a similar
petition with the City Sheriff of Bacolod, Negros Occidental with respect to the mortgaged properties located
at Isabela, Negros Occidental and covered by OCT No. RT 1615.
The foreclosure sale of the La Vista property was scheduled on August 11, 1975. At the auction sale, PNB
was the highest bidder with a bid price of P1,000,001.00. However, when said property was about to be
awarded to PNB, the representative of the mortgagor-spouses objected and demanded from the PNB the
difference between the bid price of P1,000,001.00 and the indebtedness of P499,060.25 of the Arroyo
spouses on their personal account. It was the contention of the spouses Arroyo's representative that the
foreclosure proceedings referred only to the personal account of the mortgagor spouses without reference to
the account of TCC.
To remedy the situation, PNB filed a supplemental petition on August 13, 1975 requesting the Sheriff's Office
to proceed with the sale of the subject real properties to satisfy not only the amount of P499,060.25 owed by
the spouses Arroyos on their personal account but also the amount of P35,019,901.49 exclusive of interest,
commission charges and other expenses owed by said spouses as sureties of TCC. 7 Said petition was
opposed by the spouses Arroyo and the other bidder, Jose L. Araneta.
On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff Diana L. Dungca issued a resolution
finding that the questions raised by the parties required the reception and evaluation of evidence, hence,
proper for adjudication by the courts of law. Since said questions were prejudicial to the holding of the
foreclosure sale, she ruled that her "Office, therefore, cannot properly proceed with the foreclosure sale
unless and until there be a court ruling on the aforementioned issues." 8

165

Thus, in May, 1976, PNB filed with the Court of First Instance of Quezon City, Branch V a petition
for mandamus 9against said Diana Dungca in her capacity as City Sheriff of Quezon City to compel her to
proceed with the foreclosure sale of the mortgaged properties covered by TCT No. 55323 in order to satisfy
both the personal obligation of the spouses Arroyo as well as their liabilities as sureties of TCC. 10
On September 6, 1976, the petition was granted and Dungca was directed to proceed with the foreclosure
sale of the mortgaged properties covered by TCT No. 55323 pursuant to Act No. 3135 and to issue the
corresponding Sheriff's Certificate of Sale. 11
Before the decision could attain finality, TCC filed on September 14, 1976 before the Court of First Instance of
Rizal, Pasig, Branch XXI a complaint 12 against PNB, Dungca, and the Provincial Sheriff of Negros Occidental
and Ex-Officio Sheriff of Bacolod City seeking, inter alia, the issuance of a writ of preliminary injunction to
restrain the foreclosure of the mortgages over the La Vista property and Hacienda Bacon as well as a
declaration that its obligation with PNB had been fully paid by reason of the latter's repossession of the
imported machinery and equipment. 13
On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda, issued a restraining order 14 and on
March 4, 1977, granted a writ of preliminary injunction. 15 PNB's motion for reconsideration was denied, hence
this petition.
Petitioner PNB advances four grounds for the setting aside of the writ of preliminary injunction, namely: a) that
it contravenes P.D. No. 385 which prohibits the issuance of a restraining order against a government financial
institution in any action taken by such institution in compliance with the mandatory foreclosure provided in
Section 1 thereof; b) that the writ countermands a final decision of a co-equal and coordinate court; c) that the
writ seeks to prohibit the performance of acts beyond the court's territorial jurisdiction; and, d) private
respondent TCC has not shown any clear legal right or necessity to the relief of preliminary injunction.
Private respondent TCC counters with the argument that P.D. No. 385 does not apply to the case at bar,
firstly because no foreclosure proceedings have been instituted against it by PNB and secondly, because its
account under the L/C has been fully satisfied with the repossession of the imported machinery and
equipment by PNB.
The resolution of the instant controversy lies primarily on the question of whether or not TCC's liability has
been extinguished by the repossession of PNB of the imported cement plant machinery and equipment.
We rule for the petitioner PNB. It must be remembered that PNB took possession of the imported cement
plant machinery and equipment pursuant to the trust receipt agreement executed by and between PNB and
TCC giving the former the unqualified right to the possession and disposal of all property shipped under the
Letter of Credit until such time as all the liabilities and obligations under said letter had been discharged. 16 In
the case of Vintola vs. Insular Bank of Asia and America 17 wherein the same argument was advanced by the
Vintolas as entrustees of imported seashells under a trust receipt transaction, we said:
Further, the VINTOLAS take the position that their obligation to IBAA has been extinguished inasmuch
as, through no fault of their own, they were unable to dispose of the seashells, and that they have
relinquished possession thereof to the IBAA, as owner of the goods, by depositing them with the
Court.
The foregoing submission overlooks the nature and mercantile usage of the transaction involved. A
letter of credit-trust receipt arrangement is endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a loan covered by the Letter of Credit, with the trust
receipt as a security for the loan. In other words, the transaction involves a loan feature represented
by the letter of credit, and a security feature which is in the covering trust receipt.

166

xxx

xxx

xxx

A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security
interest" in the goods. It secures an indebtedness and there can be no such thing as security interest
that secures no obligation. As defined in our laws:
1wphi1

(h) "Security interest" means a property interest in goods, documents or instruments to secure
performance of some obligations of the entrustee or of some third persons to the entruster and
includes title, whether or not expressed to be absolute, whenever such title is in substance
taken or retained for security only.
xxx

xxx

xxx

Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It was
merely the holder of a security title for the advances it had made to the VINTOLAS. The goods the
VINTOLAS had purchased through IBAA financing remain their own property and they hold it at their
own risk. The trust receipt arrangement did not convert the IBAA into an investor; the latter remained a
lender and creditor.
xxx

xxx

xxx

Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that
because they have surrendered the goods to IBAA and subsequently deposited them in the custody of
the court, they are absolutely relieved of their obligation to pay their loan because of their inability to
dispose of the goods. The fact that they were unable to sell the seashells in question does not affect
IBAA's right to recover the advances it had made under the Letter of Credit.
PNB's possession of the subject machinery and equipment being precisely as a form of security for the
advances given to TCC under the Letter of Credit, said possession by itself cannot be considered payment of
the loan secured thereby. Payment would legally result only after PNB had foreclosed on said securities, sold
the same and applied the proceeds thereof to TCC's loan obligation. Mere possession does not amount to
foreclosure for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the
mortgagor on the property and includes the sale itself. 18
Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is
alienated to the creditor in satisfaction of a debt in money and the same is governed by sales. 19 Dation in
payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation. 20 As aforesaid, the repossession of the machinery and
equipment in question was merely to secure the payment of TCC's loan obligation and not for the purpose of
transferring ownership thereof to PNB in satisfaction of said loan. Thus, no dacion en pago was ever
accomplished.
Proceeding from this finding, PNB has the right to foreclose the mortgages executed by the spouses Arroyo
as sureties of TCC. A surety is considered in law as being the same party as the debtor in relation to whatever
is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. 21 As
sureties, the Arroyo spouses are primarily liable as original promissors and are bound immediately to pay the
creditor the amount outstanding. 22
Under Presidential Decree No. 385 which took effect on January 31, 1974, government financial institutions
like herein petitioner PNB are required to foreclose on the collaterals and/or securities for any loan, credit or
accommodation whenever the arrearages on such account amount to at least twenty percent (20%) of the
total outstanding obligations, including interests and charges, as appearing in the books of account of the
financial institution concerned. 23 It is further provided therein that "no restraining order, temporary or

167

permanent injunction shall be issued by the court against any government financial institution in any action
taken by such institution in compliance with the mandatory foreclosure provided in Section 1 hereof, whether
such restraining order, temporary or permanent injunction is sought by the borrower(s) or any third party or
parties . . ." 24
It is not disputed that the foreclosure proceedings instituted by PNB against the Arroyo spouses were in
compliance with the mandate of P.D. 385. This being the case, the respondent judge acted in excess of his
jurisdiction in issuing the injunction specifically proscribed under said decree.
Another reason for striking down the writ of preliminary injunction complained of is that it interfered with the
order of a co-equal and coordinate court. Since Branch V of the CFI of Rizal had already acquired jurisdiction
over the question of foreclosure of mortgage over the La Vista property and rendered judgment in relation
thereto, then it retained jurisdiction to the exclusion of all other coordinate courts over its judgment, including
all incidents relative to the control and conduct of its ministerial officers, namely the sheriff thereof. 25 The
foreclosure sale having been ordered by Branch V of the CFI of Rizal, TCC should not have filed injunction
proceedings with Branch XXI of the same CFI, but instead should have first sought relief by proper motion
and application from the former court which had exclusive jurisdiction over the foreclosure proceeding. 26
This doctrine of non-interference is premised on the principle that a judgment of a court of competent
jurisdiction may not be opened, modified or vacated by any court of concurrent jurisdiction. 27
Furthermore, we find the issuance of the preliminary injunction directed against the Provincial Sheriff of
Negros Occidental and ex-officio Sheriff of Bacolod City a jurisdictional faux pas as the Courts of First
Instance, now Regional Trial Courts, can only enforce their writs of injunction within their respective
designated territories. 28
WHEREFORE, the instant petition is hereby granted. The assailed orders are hereby set aside. Costs against
private respondent.
#30 - G.R. No. 121989

January 31, 2006

PHILIPPINE COMMERCIAL INTERNATIONAL BANK, Petitioner, vs.

COURT OF APPEALS, ATLAS CONSOLIDATED MINING & DEVELOPMENT
CORPORATION, Respondents.
DECISION
TINGA, J.:
In this Petition for Review on Certiorari, Philippine Commercial International Bank (PCIB) impugns the
Decision1 of the Court of Appeals dated 21 June 1995 finding it liable to Atlas Consolidated Mining and
Development Corporation (Atlas), as well as the Resolution2 dated 12 September 1995 denying its Motion for
Reconsideration.3
The antecedents follow.
PCIB and, Manila Banking Corporation (MBC) were joint bidders in a foreclosure sale held on 20 December
1975 of assorted mining machinery and equipment previously mortgaged to them by the Philippine Iron
Mines, Inc. (PIM).
Four (4) years later, Atlas agreed to purchase some of these properties owned jointly at that time by PCIB and
MBC. The sale was evidenced by a Deed of Sale dated 8 February 1979, with the parties agreeing therein to
an initial downpayment of P12,000,000.00 and the balance of P18,000,000.00 payable in six (6) monthly
168

installments. It was also stipulated that the total purchase price would be finally adjusted to exclude items to
be retained by the Bureau of Mines. The contract contained provisions expressly warranting the following: (1)
full and sufficient title to the properties, (2) freeing the properties from all liens and encumbrances, (3) freeing
Atlas from all claims and incidental actions of the National Mines and Allied Workers Union (NAMAWU), and
(4) full rights and capacity of the seller to convey title to and effect peaceful delivery of the properties to Atlas.4
The NAMAWU claim stemmed from a labor dispute docketed as RB-VI-3322-75 of the National Labor
Relations Commission (NLRC), where it obtained a favorable judgment against PIM in the amount
of P4,298,307.77. This award was affirmed by the Court.5 After the judgment became final and executory, a
writ of execution was duly issued.
In compliance with the contract, on 12 February 1979, Atlas issued Hongkong and Shanghai Bank Check No.
003842 in the amount of P12,000,000.00 as downpayment, payable to both PCIB and MBC.
In a letter-agreement6 dated 7 March 1979 between PCIB and MBC bearing the conformity of Atlas that was
made a supplement to the Deed of Sale, the final purchase price was adjusted to P29,630,000.00.
On the following day, PCIB and MBC wrote Atlas requesting that subsequent installment payments of the
balance be made in the following proportions: PCIB 63.1579% and MBC - 36.8421%. The request was
expressed through a letter7 signed by Ruben G. Asedillo and Porfirio Q. Cabalu, Vice Presidents respectively
of MBC and PCIB.
On 18 April 1979, Atlas paid to NAMAWU the amount of P4,298,307.77. This payment was made in
compliance with the writ of garnishment issued on the same date against Atlas to satisfy the final judgment in
favor of NAMAWU and against PIM.
PCIB and MBC filed on 23 April 1979 a petition for certiorari with this Court, seeking to annul and set aside
the order of garnishment and to enjoin Atlas from complying with it. The Court, in G.R. No. L-50402,
dismissed the petition and sustained Atlass rights as follows:
. . . Atlas had the right to receive the properties free from any lien and encumbrance, and when the
garnishment was served on it, it was perfectly in the right in slashing the P4,298,307.77 from the P30M it had
to pay petitioners (PCIB, MBC) in order to satisfy the long existing and vested right of the laborers of
financially moribund PIM, without any liability to petitioners for reimbursement thereof."8
In the meantime, Atlas had made six (6) monthly payments in 1979 totaling P13,696,692.22, of
which P8,650,543.18 or 63.1579% was received by PCIB.
According to Atlas, apart from the downpayment of P12,000,000.00 and installment payments
of P13,696,692.22, it should be credited with its payment of P4,298,307.77 to NAMAWU as a consequence of
the garnishment with which the latter had secured together with corresponding P5,000.00 sheriffs fee. Thus,
Atlas claims to have paid a total of P30,000,000.00, of which P370,000.00 was an overpayment. Following the
payment allocations between PCIB and MBI, Atlas claimed that PCIB should reimburse it to the tune
of P233,684.23. When PCIB refused to pay, Atlas sued PCIB to obtain reimbursement of the alleged
overpayment.
On the other hand, PCIB contended that Atlas still owed it a total of P908,398.75. It also alleged that even
before the writ of garnishment was served on Atlas, the judgment in favor of NAMAWU had already been
partially satisfied in the amount of P601,260.00. On account of this earlier payment, PCIB argued that the total
payments NAMAWU had received exceeded what it was entitled to by reason of the final judgment and,
therefore, Atlas could not credit the full amount received by NAMAWU in satisfaction of the Atlas obligation to
PCIB.

169

The trial court, in a Decision9 dated 29 November 1990, upheld PCIBs position and ordered Atlas to
pay P908,398.75, plus interest at the legal rate from the time of demand until payment of said amount.10 It
ruled:
After a thorough analysis and evaluation of the evidence thus far adduced and remaining unrebutted, the
Court is convinced that defendant only received the amount of P6,819,766.10, as its share out of
the P12,000,000.00 downpayment, provided in the Deed of Sale, not P7,578,948.00 as claimed by plaintiff.
The Court is furthermore convinced that plaintiff erroneously paid the amount of P4,298,307.77 to NAMAWU
which payment was made pursuant to the writ of garnishment in NLRC Case No. RB-VI-3322-75. Before the
service of the writ of garnishment on April 18, 1979, the judgment in NLRC Case had already been satisfied in
the amount of P601,260.00 on account of several execution sales held on February 28, 1976 and October 20,
1976 and the remaining balance thereto at the time of the service of the writ of garnishment on plaintiff was
only P3,697,[047].77. Certainly, this is the only amount which can be credited to plaintiff by defendant
because 63.1579% of P3,697,047.77 is P2,334,977.74, according to letter-request of defendant PCIB and
MBC to plaintiff dated March 8, 1979. Instead of paying NAMAWU the amount of P3,697,047.77 which is the
correct amount, plaintiff paid the amount of P4,298,307.77.
The Court of Appeals reversed the lower court by ordering PCIB to pay Atlas the sum of P233,654.23, plus
interest at the legal rate from the date of the first demand on 3 September 1984, until fully paid, as well as the
sum of P20,000.00 as attorneys fees and costs of suit. The appellate court disposed of the case as follows:
A careful examination of the evidences presented in the case, though, evidently show that appellee PCIB has
no cause to blame appellant Atlas for its failure to receive what it maintains was a shortchange in the share
of P12 Million downpayment. It must be emphasized that at the time the downpayment check was paid, the
Deed of Sale did not mention any proportionate sharing of the proceeds thereof between PCIB and MBC
implying a 50-50 sharing between the two (2) sellers. The 63.1579% for PCIB and 36.8421% was only made
known and relayed to Atlas in a letter dated March 8, 1979 after the downpayment check of P12 Million had
already been paid on February 12, 1979. Furthermore, the initial check was paid and received by Porfirio O.
Cabalu, Jr., Vice-President of defendant-appellee PCIB. Apparently, after the check was deposited in the
account of MBC, the latter issued its MBC Check No. 1652661 in the amount of P6,819,766.10 to PCIB,
properly receipted under Official Receipt No. 466652 of PCIB. In other words, what the appellee herein
receipted was the share given to it by Manilabank. Whether the same was short of what is legally entitled
becomes an internal matter between MBC and PCIB, with Atlas having nothing to do with it. Legally, Atlas had
effectively paid the P12 Million downpayment to both PCIB and MBC.
As regard the second item, the propriety of the P4,298,307.77 paid by Atlas to NAMAWU and incidental
amount of P5,000.00 to the Sheriff by virtue of the Notice of Garnishment in the labor dispute NLRC Case No.
RB-VI-331-75, had already been judicially settled in the case of "PCIB and MBC versus NAMAWU-IMF, L50402, August 1982, 115 SCRA 873." Said case is a Petition for Certiorari praying, inter-alia that the High
Court orders [sic] the NLRC to stop delivery of the check of P4,298,307.77 (same check in this case) of
private respondent Atlas and/or to stop payment to NAMAWU.
....
Rightfully so, with the above discussion and the conceded fact that Atlas made a P370,000.00 overpayment
to PCIB and MBC, said amount should be ordered returned. And since mathematically, 63.1579%
of P370,000.00 is P233,684.23, appellee PCIB should be ordered to pay back Atlas said amount with interest
at the legal rate, being a forbearance of money, from the first demand until fully paid. Reasonable attorneys
[fees] of P20,000.00 is likewise award[ed] to appellant Atlas for having been forced to litigate after its several
prior lawful demands to collect from PCIB the overpayment, were obstinately and unjustly
refused.11 (Emphasis not ours.)
PCIB moved for a reconsideration of the decision but the same was denied by the Court of Appeals in a
Resolution dated 12 September 1995.

170

PCIB is now before us. The instant petition is anchored on two grounds, namely: (1) the Court of Appeals
erred in reversing the trial court by disturbing the latters factual findings and conclusions despite the absence
of strong and cogent reasons: and (2) the Court of Appeals erred in finding that Atlas had complied with its
obligation to PCIB.12
Prefatorily, findings of facts of the Court of Appeals are final and conclusive and cannot be reviewed on
appeal to this Court.13 A deviation from this rule, however, is justified where the findings of fact of the Court of
Appeals contradict those of the trial court.14 In the case at bar, the contradictory findings of the courts below
necessitate our review of the factual issues.
The controversy boils down into whether Atlas overpaid or underpaid PCIB. To resolve the conflicting claims,
we must dispose of two issues: whether PCIB should settle for only P6,819,766.10 which it received out of
the P12,000,000.00 downpayment or it is entitled to more than that, specifically 63.1579% of the
downpayment; and whether Atlas should be fully credited for the amount of P4,298,307.77 it had paid to
NAMAWU.
Let us briefly recall the pertinent antecedents to appreciate the issues in a better light. There is no dispute that
the total purchase price of the properties bought by Atlas was P29,630,000.00. Of this amount, PCIB claims
that it is entitled to receive from Atlas the total of P18,713,685.77 or 63.1579% of the purchase price, pursuant
to the letter dated 7 March 1979 of the P12,000,000.00 down payment made by Atlas to PCIB and MBC, and
PCIB acknowledged that it had received P6,819,766.10. PCIB also admitted having received P8,650,543.18
as its share from the subsequent installment payments made by Atlas.
On the first issue, the Court of Appeals rejected PCIBs claim that it should received 63.1579% of the
downpayment. It ruled in essence that PCIB cannot demand from Atlas more than what it got from MBC out of
the downpayment remitted by Atlas to both PCIB and MBC.
We uphold the appellate court on this issue.
This case concerns a joint obligation, which is defined as an obligation where there is a concurrence of
several creditors, or of several debtors, or of several debtors, or of several creditors and debtors, by virtue of
which each of the creditors has a right to demand, and each of the debtors is bound to render, compliance
with his proportionate part of the prestation which constitutes the object of the
obligation.15 Article 120816 of the Civil Code mandates the equal sharing of creditors in the payment of debt in
the absence of any law or stipulation to the contrary.
PCIB is adamant in claiming that it only received P6,819,766.10 as its share in the downpayment. To prove its
allegation, PCIB presented its own receipt17 wherein it was clearly stated that PCIB received from Atlas the
amount of P6,819,766.10.
It is beyond dispute that Atlas issued Hongkong Shanghai Bank Check No. 003842 in the sum
of P12,000,000.00 with PCIB and MBC as joint payees as downpayment of the purchase price on 12
February 1979. The check was received by Porfirio Cabalu, Jr., a PCIB Vice-President. As admitted by the
parties during trial, the check was afterwards deposited in the account of MBC.18 Therefore, it is reasonable to
conclude that the amount received by PCIB, as evidenced by the receipt, was given to it by MBC. The
appellate court arrived at the same conclusion, to wit:
Apparently, after the check was deposited in the account of MBC, the latter issued its MBC Check No.
1652661 in the amount of P6,819,766.10 to PCIB, properly receipted under Official Receipt No. 466652 of
PCIB. In other words, what the appellee herein receipted was the share given to it by Manilabank.

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Undeniably, there was yet no agreement as of that date concerning the corresponding share of each creditor.
It was only on 8 March 1979 when PCIB communicated to Atlas the percentage of payments to be remitted to
PCIB and MBC. Before said date, Atlas could be secure in the thought that the matter of sharing was best left
to the creditors to decide.
Thus, we agree with the appellate courts conclusion that whatever deficiency PCIB is entitled from
the P12,000,000.00 down payment had become an internal matter between it and MBC.19 The obligation was
deemed fulfilled to the extent of P12,000,000.00 on the part of Atlas when the check was received by a
representative of PCIB and eventually deposited in the account of MBC.
On the second issue, PCIB posits that Atlas cannot be credited with the payment of the full amount
of P4,298,307.77 because the remaining outstanding balance with respect to the NAMAWU judgment claim at
the time of the service of the writ of garnishment on Atlas was only P3,697,047.77. Atlas, on the other hand,
insists that the creditable payment to NAMAWU was P4,298,307.77, as upheld by the Supreme Court in
NAMAWU v. PCIB. Accordingly, it is this amount which should be the basis in extracting the 63.1579% share
of PCIB, which amounts to P2,714,720.92 and not P2,334,977.74 as erroneously asserted by PCIB.20
The appellate court upheld the position of Atlas on the second issue. We reverse the appellate court.
While the original amount sought to be garnished was P4,298,307.77, the partial payment of P601,260.00
naturally reduced it to P3,697,047.77. Clearly, Atlas overpaid NAMAWU. It will be recalled that upon receipt of
the writ of garnishment, Atlas immediately paid NAMAWU, without making any investigation or consultation
with PCIB.
Article 1236 of the Civil Code applies in this instance. It provides that whoever pays for another may demand
from the debtor what he has paid, except that if he paid without the knowledge or against the will of the
debtor, he can recover only insofar as the payment has been beneficial to the debtor.
PCIB is the debtor in this case, it having purchased along with MBC legally garnished properties, while Atlas
is the third person who paid the obligation of the debtor without the latters knowledge and consent. Since
Atlas readily paid NAMAWU without the knowledge and consent of PCIB, Atlas may only recover from PCIB
or, more precisely charge to PCIB, only the amount of payment which has benefited the latter.
Generally, the third person who paid anothers debt is entitled to recover the full amount he had paid. The law,
however, limits his recovery to the amount by which the debtor has been benefited, if the debtor has no
knowledge of, or has expressed his opposition to such payment. Where the defenses that could have been
set up by the debtor against the creditor were existing and perfected, a payment by a third person without the
knowledge of the debtor cannot obligate the
debtor to such third person to an amount more than what he could have been compelled by the creditor to
pay. Thus, if the debt has been remitted, paid, compensated or prescribed, a payment by a third person would
constitute a payment of what is not due; his remedy would be against the person who received the payment
under such conditions, and not against the debtor who did not benefit from the payment.21
The trial court correctly ruled that the overpayment amounting to P601,260.00 should be recovered from
NAMAWU. The remedy of Atlas in this case would be to proceed, not against PCIB, but against NAMAWU
who was paid in excess, applying the principle that no person can unjustly enrich himself at the expense of
another.22
Having established that there has been partial satisfaction of the judgment in the amount of P601,260.00, the
remaining obligation of PCIB in the judgment account stood at P2,334,977.74. Consequently, this is the only
amount which must be credited to Atlas.

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As it stands, the total payments by Atlas amounted to only P29,398,739.99. Therefore, Atlas must
settle P231,260.00, the balance of the purchase price, of which PCIB is entitled to receive P146,058.96 as its
proportionate share.
WHEREFORE, based on the foregoing, the petition is GRANTED in PART. The Decision of the Court of
Appeals is REVERSED and SET ASIDE and in lieu thereof Atlas is ORDERED to pay PCIB the sum
of P146,058.96, with legal interest commencing from the time of first demand on 22 August 1985.
No costs.
SO ORDERED.
#31 - [G.R. No. 125862. April 15, 2004]
FRANCISCO CULABA and DEMETRIA CULABA, doing business under the name and style Culaba
Store, petitioners, vs. COURT OF APPEALS and SAN MIGUEL CORPORATION, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review under Rule 45 of the Revised Rules of Civil Procedure of the Decision [1] of the
Court of Appeals in CA-G.R. CV No. 19836 affirming in toto the Decision[2] of the Regional Trial Court of
Makati, Branch 138, in Civil Case No. 1033 for collection of sum of money, and the Resolution [3] denying the
motion for reconsideration of the said decision.

The Undisputed Facts

The spouses Francisco and Demetria Culaba were the owners and proprietors of the Culaba Store and
were engaged in the sale and distribution of San Miguel Corporations (SMC) beer products. SMC sold beer
products on credit to the Culaba spouses in the amount of P28,650.00, as evidenced by Temporary Credit
Invoice No. 42943.[4] Thereafter, the Culaba spouses made a partial payment of P3,740.00, leaving an unpaid
balance of P24,910.00. As they failed to pay despite repeated demands, SMC filed an action for collection of
a sum of money against them before the RTC of Makati, Branch 138.
The defendant-spouses denied any liability, claiming that they had already paid the plaintiff in full on four
separate occasions. To substantiate this claim, the defendants presented four (4) Temporary Charge Sales
(TCS) Liquidation Receipts, as follows:
April 19, 1983 Receipt No. 27331 for P8,000[5]
April 22, 1983 Receipt No. 27318 for P9,000[6]
April 27, 1983 Receipt No. 27339 for P4,500[7]
April 30, 1983 Receipt No. 27346 for P3,410[8]
Defendant Francisco Culaba testified that he made the foregoing payments to an SMC supervisor who
came in an SMC van. He was then showed a list of customers accountabilities which included his account.
The defendant, in good faith, then paid to the said supervisor, and he was, in turn, issued genuine SMC
liquidation receipts.
For its part, SMC submitted a publishers affidavit[9] to prove that the entire booklet of TCSL Receipts
bearing Nos. 27301-27350 were reported lost by it, and that it caused the publication of the notice of loss in
the July 9, 1983 issue of the Daily Express, as follows:

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NOTICE OF LOSS
OUR CUSTOMERS ARE HEREBY INFORMED THAT TEMPORARY CHARGE SALES LIQUIDATION
RECEIPTS WITH SERIAL NOS. 27301-27350 HAVE BEEN LOST.
ANY TRANSACTION, THEREFORE, ENTERED INTO WITH THE USE OF THE ABOVE RECEIPTS WILL
NOT BE HONORED.
SAN MIGUEL CORPORATION
BEER DIVISION
Makati Beer Region[10]

The Trial Courts Ruling

After trial on the merits, the trial court rendered judgment in favor of SMC, and held the Culaba spouses
liable on the balance of its obligation, thus:
Wherefore, judgment is hereby rendered in favor of the plaintiff, as follows:
1. Ordering defendants to pay the amount of P24,910.00 plus legal interest of 6% per annum from April 12,
1983 until the whole amount is fully paid;
2. Ordering defendants to pay 20% of the amount due to plaintiff as and for attorneys fees plus costs.
SO ORDERED.[11]
According to the trial court, it was unusual that defendant Francisco Culaba forgot the name of the
collector to whom he made the payments and that he did not require the said collector to print his name on
the receipts. The court also noted that although they were part of a single booklet, the TCS Liquidation
Receipts submitted by the defendants did not appear to have been issued in their natural sequence.
Furthermore, they were part of the lost booklet receipts, which the public was duly warned of through the
Notice of Loss the plaintiff caused to be published in a daily newspaper. This confirmed the plaintiffs claim
that the receipts presented by the defendants were spurious ones.

The Case on Appeal

On appeal, the appellants interposed the following assignment of errors:
I
THE TRIAL COURT ERRED IN FINDING THAT THE RECEIPTS PRESENTED BY DEFENDANTS
EVIDENCING HIS PAYMENTS TO PLAINTIFF SAN MIGUEL CORPORATION, ARE SPURIOUS.
II
THE TRIAL COURT ERRED IN CONCLUDING THAT PLAINTIFF-APPELLEE HAS SUFFICIENTLY
PROVED ITS CAUSE OF ACTION AGAINST THE DEFENDANTS.
III

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THE TRIAL COURT ERRED IN ORDERING DEFENDANTS TO PAY 20% OF THE AMOUNT DUE TO
PLAINTIFF AS ATTORNEYS FEES.[12]
The appellants asserted that while the trial courts observations were true, it was the usual business
practice in previous transactions between them and SMC. The SMC previously honored receipts not bearing
the salesmans name. According to appellant Francisco Culaba, he even lost some of the receipts, but did not
encounter any problems.
According to appellant Francisco, he could not be faulted for paying the SMC collector who came in a
van and was in uniform, and that any regular customer would, without any apprehension, transact with such
an SMC employee. Furthermore, the respective receipts issued to him at the time he paid on the four
occasions mentioned had not yet then been declared lost. Thus, the subsequent publication in a daily
newspaper declaring the booklets lost did not affect the validity and legality of the payments
made. Accordingly, by its actuations, the SMC was estopped from questioning the legality of the payments
and had no cause of action against the appellants.
Anent the issue of attorneys fees, the order of the trial court for payment thereof is without basis.
According to the appellant, the provision for attorneys fees is a contingent fee, already provided for in the
SMCs contract with the law firm. To further order them to pay 20% of the amount due as attorneys fees is
double payment, tantamount to undue enrichment and therefore improper.[13]
The appellee, for its part, contended that the primary issue in the case at bar revolved around the basic
and fundamental principles of agency.[14] It was incumbent upon the defendants-appellants to exercise
ordinary prudence and reasonable diligence to verify and identify the extent of the alleged agents authority. It
was their burden to establish the true identity of the assumed agent, and this could not be established by
mere representation, rumor or general reputation. As they utterly failed in this regard, the appellants must
suffer the consequences.
The Court of Appeals affirmed the decision of the trial court, thus:
In the face of the somewhat tenuous evidence presented by the appellants, we cannot fault the lower court for
giving more weight to appellees testimonial and documentary evidence, all of which establish with some
degree of preponderance the existence of the account sued upon.
ALL CONSIDERED, we cannot find any justification to reject the factual findings of the lower court to which
we must accord respect, for which reason, the judgment appealed from is hereby AFFIRMED in all respects.
SO ORDERED.[15]
Hence, the instant petition.
The petitioners pose the following issues for the Courts resolution:
I. WHETHER OR NOT THE RESPONDENT HAD PROVEN BY PREPONDERANT EVIDENCE THAT IT HAD
PROPERLY AND TIMELY NOTIFIED PETITIONER OF LOST BOOKLET OF RECEIPTS
II. WHETHER OR NOT RESPONDENT HAD PROVEN BY PREPONDERANT EVIDENCE THAT
PETITIONER WAS REMISS IN THE PAYMENT OF HIS ACCOUNTS TO ITS AGENT.[16]
According to the petitioners, receiving receipts from the private respondents agents instead of its
salesmen was a usual occurrence, as they had been operating the store since 1979. Thus, on four occasions
in April 1983, when an agent of the respondent came to the store wearing an SMC uniform and driving an
SMC van, petitioner Francisco Culaba, without question, paid his accounts. He received the receipts without
fear, as they were similar to what he used to receive before. Furthermore, the petitioners assert that, common
experience will attest that unless the attention of the customers is called for, they would not take note of the
serial number of the receipts.

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The petitioners contend that the private respondent advertised its warning to the public only after the
damage was done, or on July 9, 1993. Its belated notice showed its glaring lack of interest or concern for its
customers welfare, and, in sum, its negligence.
Anent the second issue, petitioner Francisco Culaba avers that the agent to whom the accounts were
paid had all the physical and material attributes or indications of a representative of the private respondent,
leaving no doubt that he was duly authorized by the latter. Petitioner Francisco Culabas testimony that he
does not necessarily check the contents of the receipts issued to him except for the amount indicated if [the]
same accurately reflects his actual payment is a common attitude of customers. He could, thus, not be faulted
for paying the private respondents agent on four occasions. Petitioner Francisco Culaba asserts that he made
the payment in good faith, to an agent who issued SMC receipts which appeared to be genuine. Thus,
according to the petitioners, they had duly paid their obligation in accordance with Articles 1240 and 1242 of
the New Civil Code.
The private respondent, for its part, avers that the burden of proving payment is with the debtor, in
consonance with the express provision of Article 1233 of the New Civil Code. The petitioners miserably failed
to prove the self-serving allegation that they already paid their liability to the private respondent. Furthermore,
under normal circumstances, an obligor would not just pay a substantial amount to someone whom he saw for
the first time, without even asking for the latters name.

The Ruling of the Court

The petition is dismissed.
The petitioners question the findings of the Court of Appeals as to whether the payment of the petitioners
obligation to the private respondent was properly made, thus, extinguishing the same. This is clearly a factual
issue, and beyond the purview of the Court to delve into. This is in consonance with the well-settled rule that
findings of fact of the trial court, especially when affirmed by the Court of Appeals, are accorded the highest
degree of respect, and generally will not be disturbed on appeal. Such findings are binding and conclusive on
the Court.[17]Furthermore, it is not the Courts function under Rule 45 of the Rules of Court, as amended, to
review, examine and evaluate or weigh the probative value of the evidence presented.[18]
To reiterate, the issue being raised by the petitioners does not involve a question of law, but a question of
fact, not cognizable by this Court in a petition for review under Rule 45. The jurisdiction of the Court in such a
case is limited to reviewing only errors of law, unless the factual findings being assailed are not supported by
evidence on record or the impugned judgment is based on a misapprehension of facts.[19]
A careful study of the records of the case reveal that the appellate court affirmed the trial courts factual
findings as follows:
First. Receipts Nos. 27331, 27318, 27339 and 27346 were included in the private respondents lost
booklet, which loss was duly advertised in a newspaper of general circulation; thus, the private respondent
could not have officially issued them to the petitioners to cover the alleged payments on the dates appearing
thereon.
Second. There was something amiss in the way the receipts were issued to the petitioners, as one
receipt bearing a higher serial number was issued ahead of another receipt bearing a lower serial number,
supposedly covering a later payment. The petitioners failed to explain the apparent mix-up in these receipts,
and no attempt was made in this regard.
Third. The fact that the salesmans name was invariably left blank in the four receipts and that the
petitioners could not even remember the name of the supposed impostor who received the said payments
strongly argue against the veracity of the petitioners claim.
We find no cogent reason to reverse the said findings.
The dismissal of the petition is inevitable even upon close perusal of the merits of the case.

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Payment is a mode of extinguishing an obligation.[20] Article 1240 of the Civil Code provides that payment
shall be made to the person in whose favor the obligation has been constituted, or his successor-in-interest,
or any person authorized to receive it.[21] In this case, the payments were purportedly made to a supervisor of
the private respondent, who was clad in an SMC uniform and drove an SMC van. He appeared to be
authorized to accept payments as he showed a list of customers accountabilities and even issued SMC
liquidation receipts which looked genuine. Unfortunately for petitioner Francisco Culaba, he did not ascertain
the identity and authority of the said supervisor, nor did he ask to be shown any identification to prove that the
latter was, indeed, an SMC supervisor. The petitioners relied solely on the mans representation that he was
collecting payments for SMC. Thus, the payments the petitioners claimed they made were not the payments
that discharged their obligation to the private respondent.
The basis of agency is representation.[22] A person dealing with an agent is put upon inquiry and must
discover upon his peril the authority of the agent.[23] In the instant case, the petitioners loss could have been
avoided if they had simply exercised due diligence in ascertaining the identity of the person to whom they
allegedly made the payments. The fact that they were parting with valuable consideration should have made
them more circumspect in handling their business transactions. Persons dealing with an assumed agent are
bound at their peril to ascertain not only the fact of agency but also the nature and extent of authority, and in
case either is controverted, the burden of proof is upon them to establish it.[24] The petitioners in this case
failed to discharge this burden, considering that the private respondent vehemently denied that the payments
were accepted by it and were made to its authorized representative.
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.[25] In the case at bar, the most prudent thing the petitioners should have
done was to ascertain the identity and authority of the person who collected their payments. Failing this, the
petitioners cannot claim that they acted in good faith when they made such payments. Their claim therefor is
negated by their negligence, and they are bound by its consequences. Being negligent in this regard, the
petitioners cannot seek relief on the basis of a supposed agency.[26]
WHEREFORE, the instant petition is hereby DENIED. The assailed Decision dated April 16, 1996, and
the Resolution dated July 19, 1996 of the Court of Appeals are AFFIRMED. Costs against the petitioners.
SO ORDERED.

177