451 SCRA 103
equitable mortgage.There is no single conclusive test to determine whether a deed
THIRD DIVISION
G.R. No. 149756. February 11, 2005.
MYRNA RAMOS, petitioner, vs. SUSANA S. SARAO and JONAS RAMOS,
respondents.
Civil Law; Contracts; Sales; Pacto de Retro; Mortgages; Equitable Mortgage; Pacto de
retro distinguished from equitable mortgage; Essential requisites of an equitable
mortgage.In a pacto de retro, ownership of the property sold is immediately
transferred to the vendee a retro, subject only to the repurchase by the vendor a retro
within the stipulated period. The vendor a retros failure to exercise the right of
repurchase within the agreed time vests upon the vendee a retro, by operation of law,
absolute title to the property. Such title is not impaired even if the vendee a retro fails
to consolidate title under Article 1607 of the Civil Code. On the other hand, an
equitable mortgage is a contract thatalthough lacking the formality, the form or
words, or other requisites demanded by a statutenevertheless reveals the intention
of the parties to burden a piece or pieces of real property as security for a debt. The
essential requisites of such a contract are as follows: (1) the parties enter into what
appears to be a contract of sale, but (2) their intention is to secure an existing debt by
way of a mortgage. The nonpayment of the debt when due gives the mortgagee the
right to foreclose the mortgage, sell the property, and apply the proceeds of the sale to
the satisfaction of the loan obligation.
Same; Same; Same; Same; The nomenclature used by the contracting parties to
describe a contract does not determine its nature.This Court has consistently decreed
that the nomenclature used by the contracting parties to describe a contract does not
determine its nature. The decisive factor is their intentionas shown by their
conduct, words, actions and deedsprior to, during, and after executing the
agreement.
Same; Same; Same; Same; Even if a contract is denominated as a pacto de retro, the
owner of the property may still disprove it by means of parol evidence.Even if a
contract is denominated as a pacto de retro, the owner of the property may still
disprove it by means of parol evidence, provided that the nature of the agreement is
placed in issue by the pleadings filed with the trial court.
Same; Same; Same; Same; Instances that show when a contract is presumed to be an
absolute on its face is really a simple loan accommodation secured by a mortgage.
However, the law enumerates several instances that show when a contract is
presumed to be an equitable mortgage, as follows: Article 1602. The contract shall be
presumed to be an equitable mortgage, in any of the following cases: (1) When the
price of a sale with right to repurchase is unusually inadequate; (2) When the vendor
remains in possession as lessee or otherwise; (3) When upon or after the expiration of
the right to repurchase another instrument extending the period of redemption or
granting a new period is executed; (4) When the purchaser retains for himself a part of
the purchase price; (5) When the vendor binds himself to pay the taxes on the thing
sold; (6) In any other case where it may be fairly inferred that the real intention of the
parties is that the transaction shall secure the payment of a debt or the performance
of any other obligation. In any of the foregoing cases, any money, fruits, or other
benefit to be received by the vendee as rent or otherwise shall be considered as
interest which shall be subject to the usury laws.
Same; Same; Same; Same; A contract purporting to be a pacto de retro is construed as
an equitable mortgage when the terms of the document and the surrounding
circumstances so require.A contract purporting to be a pacto de retro is construed as
an equitable mortgage when the terms of the document and the surrounding
circumstances so require. The law discourages the use of a pacto de retro, because this
scheme is frequently used to circumvent a contract known as a pactum commissorium.
The Court has frequently noted that a pacto de retro is used to conceal a contract of
loan secured by a mortgage. Such construction is consistent with the doctrine that the
law favors the least transmission of rights.
Same; Same; Same; Same; The presence of even just one of the circumstances set forth
in Article 1602 suffices to convert a contract to an equitable mortgage.Jurisprudence
has consistently declared that the presence of even just one of the circumstances set
forth in the forgoing Civil Code provision suffices to convert a contract to an equitable
mortgage. Article 1602 specifically states that the equitable presumption applies to
any of the cases therein enumerated.
Same; Obligations; Tender of Payment; Consignation; Tender of payment is the
manifestation by debtors of their desire to comply with or to pay their obligation;
Consignation is made by depositing the proper amount to the judicial authority, before
whom the tender of payment and the announcement of the consignation shall be
proved.Tender of payment is the manifestation by debtors of their desire to comply
with or to pay their obligation. If the creditor refuses the tender of payment without
just cause, the debtors are discharged from the obligation by the consignation of the
sum due. Consignation is made by depositing the proper amount to the judicial
authority, before whom the tender of payment and the announcement of the
consignation shall be proved. All interested parties are to be notified of the
consignation. Compliance with these requisites is mandatory.
Same; Same; Same; Same; Consignation has a retroactive effect and the payment is
deemed to have been made at the time of the deposit of the thing in court or when it was
placed at the disposal of the judicial authority.Because petitioners consignation of
the amount of P1,633,034.20 was valid, it produced the effect of payment. The
consignation, however, has a retroactive effect, and the payment is deemed to have
been made at the time of the deposit of the thing in court or when it was placed at the
disposal of the judicial authority. The rationale for consignation is to avoid making
the performance of an obligation more onerous to the debtor by reason of causes not
imputable to him.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Tito Abuda Oneza for petitioner.
M. A. Aguinaldo & Associates for respondent Sarao.
The Law Office of Dante S. David for respondent Jonas Ramos.
PANGANIBAN, J.:
Although the parties in the instant case denominated their contract as a "DEED OF
SALE UNDER PACTO DE RETRO," the "sellers" have continued to possess and to
reside at the subject house and lot up to the present. This evident factual
circumstance was plainly overlooked by the trial and the appellate courts, thereby
justifying a review of this case. This overlooked fact clearly shows that the petitioner
intended merely to secure a loan, not to sell the property. Thus, the contract should be
deemed an equitable mortgage.
The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, assailing the
August 31, 2001 Decision2 of the Court of Appeals (CA) in CA-GR CV No. 50095, which
disposed as follows:
"WHEREFORE, the instant appeal is DISMISSED for lack of merit. The decision
dated January 19, 1995 of the Regional Trial Court, Branch 145, Makati City
is AFFIRMED in toto."3
The Facts
On February 21, 1991, Spouses Jonas Ramos and Myrna Ramos executed a contract
over their conjugal house and lot in favor of Susana S. Sarao for and in consideration
of P1,310,430.4 Entitled "DEED OF SALE UNDER PACTO DE RETRO," the
contract, inter alia, granted the Ramos spouses the option to repurchase the property
within six months from February 21, 1991, for P1,310,430 plus an interest of 4.5
percent a month.5 It was further agreed that should the spouses fail to pay the
monthly interest or to exercise the right to repurchase within the stipulated period,
the conveyance would be deemed an absolute sale.6
On July 30, 1991, Myrna Ramos tendered to Sarao the amount of P1,633,034.20 in the
form of two managers checks, which the latter refused to accept for being allegedly
insufficient.7 On August 8, 1991, Myrna filed a Complaint for the redemption of the
property and moral damages plus attorneys fees.8 The suit was docketed as Civil Case
No. 91-2188 and raffled to Branch 145 of the Regional Trial Court (RTC) of Makati
City. On August 13, 1991, she deposited with the RTC two checks that Sarao refused
to accept.9
On December 21, 1991, Sarao filed against the Ramos spouses a Petition "for
consolidation of ownership in pacto de retro sale" docketed as Civil Case No. 91-3434
and raffled to Branch 61 of the RTC of Makati City. 10 Civil Case Nos. 91-2188 and 91-
3434 were later consolidated and jointly tried before Branch 145 of the said Makati
RTC.11
The two lower courts narrated the trial in this manner:
"x x x Myrna [Ramos] testified as follows: On February 21, 1991, she and her husband
borrowed from Sarao the amount of P1,234,000.00, payable within six (6) months, with
an interest thereon at 4.5% compounded monthly from said date until August 21,
1991, in order for them to pay [the] mortgage on their house. For and in consideration
of the said amount, they executed a deed of sale under a [pacto de retro] in favor of
Sarao over their conjugal house and lot registered under TCT No. 151784 of the
Registry of Deeds of Makati (Exhibit A). She further claimed that Sarao will keep the
torrens title until the lapse of the 6-month period, in which case she will redeem [the]
subject property and the torrens title covering it. When asked why it was the amount
of P1,310,430 instead of the aforestated amount which appeared in the deed, she
explained that upon signing of the deed in question, the sum of P20,000.00
representing attorneys fees was added, and its total amount was multiplied with 4.5%
interest rate, so that they could pay in advance the compounded interest. She also
stated that although the market value of the subject property as of February 1991
[was] calculated to [be] more or less P10 million, it was offered [for] only P1,310,430.00
for the reason that they intended nothing but to redeem the same. In May 1991, she
wrote a letter to Atty. Mario Aguinaldo requesting him to give a computation of the
loan obligation, and [expressed] her intention to redeem the subject property, but she
received no reply to her letter. Instead, she, through her husband, secured directly
from Sarao a handwritten computation of their loan obligation, the total of which
amount[ed] to P1,562,712.14. Later, she sent several letters to Sarao, [furnishing]
Atty. Aguinaldo with copies, asking them for the updated computation of their loan
obligation as of July 1991, but [no reply was again received]. During the hearing of
February 17, 1992, she admitted receiving a letter dated July 23, 1991 from Atty.
Aguinaldo which show[ed] the computation of their loan obligation [totaling]
to P2,911,579.22 (Exhs. 6, 6-A). On July 30, 1991, she claimed that she offered the
redemption price in the form of two (2) managers checks amounting to P1,633,034.20
(Exhs. H-1 & H-2) to Atty. Aguinaldo, but the latter refused to accept them because
they [were] not enough to pay the loan obligation. Having refused acceptance of the
said checks covering the redemption price, on August 13, 1991 she came to Court to
consign the checks (Exhs. L-4 and L-5). Subsequently, she proceeded to the Register of
Deeds to cause the annotation of lis pendens on TCT No. 151784 (Exh. B-1-A). Hence,
she filed the x x x civil case against Sarao.
"On the other hand, Sarao testified as follows: On February 21, 1991, spouses Ramos
together with a certain Linda Tolentino and her husband, Nestor Tolentino
approached her and offered transaction involv[ing a] sale of property[. S]he consulted
her lawyer, Atty. Aguinaldo, and on the same date a corresponding deed of sale
underpacto de retro was executed and signed (Exh. 1 ). Later on, she sent, through her
lawyer, a demand letter dated June 10, 1991 (Exh. 6) in view of Myrnas failure to pay
the monthly interest of 4.5% as agreed upon under the deed[. O]n June 14, 1991 Jonas
replied to said demand letter (Exh. 8); in the reply Jonas admitted that he no longer
ha[d] the capacity to redeem the property and to pay the interest. In view of the said
reply of Jonas, [Sarao] filed the corresponding consolidation proceedings. She [further
claimed] that before filing said action she incurred expenses including payment of real
estate taxes in arrears, x x x transfer tax and capital [gains] tax, and [expenses] for
[the] consolidated proceedings, for which these expenses were accordingly receipted
(Exhs. 6, 6-1 to 6-0). She also presented a modified computation of the expenses she
had incurred in connection with the execution of the subject deed (Exh. 9). She also
testified that Myrna did not tender payment of the correct and sufficient price for said
real property within the 6-month period as stipulated in the contract, despite her
having been shown the computation of the loan obligation, inclusive of capital gains
tax, real estate tax, transfer tax and other expenses. She admitted though that Myrna
has tendered payment amounting to P1,633,034.20 in the form of two managers
checks, but these were refused acceptance for being insufficient. She also claimed that
several letters (Exhs. 2, 4 and 5) were sent to Myrna and her lawyer, informing them
of the computation of the loan obligation inclusive of said expenses. Finally, she denied
the allegations made in the complaint that she allied herself with Jonas, and claimed
that she ha[d] no knowledge about said allegation."12
After trial, the RTC dismissed the Complaint and granted the prayer of Sarao to
consolidate the title of the property in her favor. 13 Aggrieved, Myrna elevated the case
to the CA.
Ruling of the Court of Appeals
The appellate court sustained the RTCs finding that the disputed contract was a
bonafide pacto de retro sale, not a mortgage to secure a loan. 14 It ruled that Myrna
Ramos had failed to exercise the right of repurchase, as the consignation of the two
managers checks was deemed invalid. She allegedly failed (1) to deposit the correct
repurchase price and (2) to comply with the required notice of consignation.15
Hence, this Petition.16
The Issues
Petitioner raises the following issues for our consideration:
"1. Whether or not the honorable appellate court erred in ruling the subject Deed of
Sale under Pacto de Retro was, and is in reality and under the law an equitable
mortgage;
"2. Whether or not the honorable appellate court erred in affirming the ruling of the
court a quo that there was no valid tender of payment of the redemption price neither
[sic] a valid consignation in the instant case; and
"3. Whether or not [the] honorable appellate court erred in affirming the ruling of the
court a quo denying the claim of petitioner for damages and attorneys fees." 17
The Courts Ruling
The Petition is meritorious in regard to Issues 1 and 2.
First Issue:
A Pacto de Retro Sale
or an Equitable Mortgage?
Respondent Sarao avers that the herein Petition should have been dismissed outright,
because petitioner (1) failed to show proof that she had served a copy of it to the Court
of Appeals and (2) raised questions of fact that were not proper issues in a petition
under Rule 45 of the Rules of Court. 18 This Court, however, disregarded the first
ground; otherwise, substantial injustice would have been inflicted on petitioner. Since
the Court of Appeals is not a party here, failure to serve it a copy of the Petition would
not violate any right of respondent. Service to the CA is indeed mentioned in the
Rules, but only to inform it of the pendency of the appeal before this Court.
As regards Item 2, there are exceptions to the general rule barring a review of
questions of fact.19 The Court reviewed the factual findings in the present case,
because the CA had manifestly overlooked certain relevant and undisputed facts
which, after being considered, justified a different conclusion.20
Pacto de Retro Sale Distinguished
from Equitable Mortgage
The pivotal issue in the instant case is whether the parties intended the contract to be
a bona fide pacto de retrosale or an equitable mortgage.
In a pacto de retro, ownership of the property sold is immediately transferred to the
vendee a retro, subject only to the repurchase by the vendor a retro within the
stipulated period.21 The vendor a retros failure to exercise the right of repurchase
within the agreed time vests upon the vendee a retro, by operation of law, absolute
title to the property.22 Such title is not impaired even if the vendee a retro fails to
consolidate title under Article 1607 of the Civil Code.23
On the other hand, an equitable mortgage is a contract that -- although lacking the
formality, the form or words, or other requisites demanded by a statute -- nevertheless
reveals the intention of the parties to burden a piece or pieces of real property as
security for a debt.24 The essential requisites of such a contract are as follows: (1) the
parties enter into what appears to be a contract of sale, but (2) their intention is to
secure an existing debt by way of a mortgage.25 The nonpayment of the debt when due
gives the mortgagee the right to foreclose the mortgage, sell the property, and apply
the proceeds of the sale to the satisfaction of the loan obligation.26
This Court has consistently decreed that the nomenclature used by the contracting
parties to describe a contract does not determine its nature. 27 The decisive factor is
their intention -- as shown by their conduct, words, actions and deeds -- prior to,
during, and after executing the agreement.28 This juristic principle is supported by the
following provision of law:
Article 1371. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered.29
Even if a contract is denominated as a pacto de retro, the owner of the property may
still disprove it by means of parol evidence, 30 provided that the nature of the
agreement is placed in issue by the pleadings filed with the trial court.31
There is no single conclusive test to determine whether a deed absolute on its face is
really a simple loan accommodation secured by a mortgage. 32 However, the law
enumerates several instances that show when a contract is presumed to be an
equitable mortgage, as follows:
Article 1602. The contract shall be presumed to be an equitable mortgage, in any of
the following cases:
(1) When the price of a sale with right to repurchase is unusually inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention of the
parties is that the transaction shall secure the payment of a debt or the performance
of any other obligation.
In any of the foregoing cases, any money, fruits, or other benefit to be received by the
vendee as rent or otherwise shall be considered as interest which shall be subject to
the usury laws. 33
Furthermore, a contract purporting to be a pacto de retro is construed as an equitable
mortgage when the terms of the document and the surrounding circumstances so
require.34 The law discourages the use of a pacto de retro, because this scheme is
frequently used to circumvent a contract known as a pactum commissorium. The
Court has frequently noted that a pacto de retro is used to conceal a contract of loan
secured by a mortgage.35Such construction is consistent with the doctrine that the law
favors the least transmission of rights.36
Equitable Mortgage Presumed
to be Favored by Law
Jurisprudence has consistently declared that the presence of even just one of the
circumstances set forth in the forgoing Civil Code provision suffices to convert a
contract to an equitable mortgage. 37 Article 1602 specifically states that the equitable
presumption applies to any of the cases therein enumerated.
In the present factual milieu, the vendor retained possession of the property allegedly
sold.38 Petitioner and her children continued to use it as their residence, even after
Jonas Ramos had abandoned them.39 In fact, it remained as her address for the
service of court orders and copies of Respondent Saraos pleadings.40
The presumption of equitable mortgage imposes a burden on Sarao to present clear
evidence to rebut it. Corollary to this principle, the favored party need not introduce
proof to establish such presumption; the party challenging it must overthrow it, lest it
persist.41 To overturn that prima facie fact that operated against her, Sarao needed to
adduce substantial and credible evidence to prove that the contract was a bona
fide pacto de retro. This evidentiary burden she miserably failed to discharge.
Contrary to Saraos bare assertions, a meticulous review of the evidence reveals that
the alleged contract was executed merely as security for a loan.
The July 23, 1991 letter of Respondent Saraos lawyer had required petitioner to pay a
computed amount -- under the heading "House and Lot Loan"42 -- to enable the latter
to repurchase the property. In effect, respondent would resell the property to
petitioner, once the latters loan obligation would have been paid. This explicit
requirement was a clear indication that the property was to be used as security for a
loan.
The loan obligation was clear from Saraos evidence as found by the trial court, which
we quote:
"x x x [Sarao] also testified that Myrna did not tender payment of the correct and
sufficient price for said real property within the 6-month period as stipulated in the
contract, despite her having been shown the computation of the loan obligation,
inclusive of capital gains tax, real estate tax, transfer tax and other expenses. She
admitted though that Myrna has tendered payment amounting to P1,633,034.20 in
the form of two managers checks, but these were refused acceptance for being
insufficient. She also claimed that several letters (Exhs. 2, 4 and 5) were sent to
Myrna and her lawyer, informing them of the computation of the loan
obligation inclusive of said expenses. x x x." 43
Respondent herself stressed that the pacto de retro had been entered into on the very
same day that the property was to be foreclosed by a commercial bank. 44 Such
circumstance proves that the spouses direly needed funds to avert a foreclosure sale.
Had they intended to sell the property just to realize some profit, as Sarao
suggests, they would not have retained possession of the house and continued to live
45
there. Clearly, the spouses had entered into the alleged pacto de retro sale to secure a
loan obligation, not to transfer ownership of the property.
Sarao contends that Jonas Ramos admitted in his June 14, 1991 letter to her lawyer
that the contract was a pacto de retro.46 That letter, however, cannot override the
finding that the pacto de retro was executed merely as security for a loan obligation.
Moreover, on May 17, 1991, prior to the transmittal of the letter, petitioner had
already sent a letter to Saraos lawyer expressing the formers desire to settle the
mortgage on the property.47Considering that she had already denominated the
transaction with Sarao as a mortgage, petitioner cannot be prejudiced by her
husbands alleged admission, especially at a time when they were already estranged. 48
Inasmuch as the contract between the parties was an equitable mortgage, Respondent
Saraos remedy was to recover the loan amount from petitioner by filing an action for
the amount due or by foreclosing the property.49
Second Issue:
Propriety of Tender of
Payment and Consignation
Tender of payment is the manifestation by debtors of their desire to comply with or to
pay their obligation. If the creditor refuses the tender of payment without just cause,
50
the debtors are discharged from the obligation by the consignation of the sum
due.51 Consignation is made by depositing the proper amount to the judicial authority,
before whom the tender of payment and the announcement of the consignation shall
be proved.52 All interested parties are to be notified of the consignation.53 Compliance
with these requisites is mandatory.54
The trial and the appellate courts held that there was no valid consignation, because
petitioner had failed to offer the correct amount and to provide ample consignation
notice to Sarao. This conclusion is incorrect.
55
Note that the principal loan was P1,310,430 plus 4.5 per cent monthly interest
compounded for six months. Expressing her desire to pay in the fifth month, petitioner
averred that the total amount due was P1,633,034.19, based on the computation of
Sarao herself.56 The amount of P2,911,579.22 that the latter demanded from her to
settle the loan obligation was plainly exorbitant, since this sum included other items
not covered by the agreement. The property had been used solely as secure ty for
the P1,310,430 loan; it was therefore improper to include in that amount payments for
gasoline and miscellaneous expenses, taxes, attorneys fees, and other alleged loans.
When Sarao unjustly refused the tender of payment in the amount of P1,633,034.20,
petitioner correctly filed suit and consigned the amount in order to be released from
the latters obligation.
The two lower courts cited Article 1257 of the Civil Code to justify their ruling that
petitioner had failed to notify Respondent Sarao of the consignation. This provision of
law states that the obligor may be released, provided the consignation is first
announced to the parties interested in the fulfillment of the obligation.
The facts show that the notice requirement was complied with. In her August 1, 1991
letter, petitioner said that should the respondent fail to accept payment, the former
would consign the amount.57 This statement was an unequivocal announcement of
consignation. Concededly, sending to the creditor a tender of payment and notice of
consignation -- which was precisely what petitioner did -- may be done in the same
act.58
Because petitioners consignation of the amount of P1,633,034.20 was valid, it
produced the effect of payment.59"The consignation, however, has a retroactive effect,
and the payment is deemed to have been made at the time of the deposit of the thing
in court or when it was placed at the disposal of the judicial authority." 60 "The
rationale for consignation is to avoid making the performance of an obligation more
onerous to the debtor by reason of causes not imputable to him."61
Third Issue:
Moral Damages and Attorneys Fees
Petitioner seeks moral damages in the amount of P500,000 for alleged sleepless nights
and anxiety over being homeless.62 Her bare assertions are insufficient to prove the
legal basis for granting any award under Article 2219 of the Civil Code.63 Verily, an
award of moral damages is uncalled for, considering that it was Respondent Saraos
accommodation that settled the earlier obligation of the spouses with the commercial
bank and allowed them to retain ownership of the property.
Neither have attorneys fees been shown to be proper. 64 As a general rule, in the WHEREFORE, the Petition is partly GRANTED and the assailed Decision SET
absence of a contractual or statutory liability therefor, sound public policy frowns on ASIDE. Judgment is hereby rendered:
penalizing the right to litigate. This policy applies especially to the present case,
65

because there is a need to determine whether the disputed contract was a pacto de
retro sale or an equitable mortgage.
Other Matters
In a belated Manifestation filed on October 19, 2004, Sarao declared that she was the
"owner of the one-half share of Jonas Ramos in the conjugal property," because of his
alleged failure to file a timely appeal with the CA. Such declaration of ownership has
66
(1) DECLARING (a) the disputed contract as an equitable mortgage, (b) petitioners
loan to Respondent Sarao to be in the amount of P1,633,034.19 as of July 30, 1991;
and (c) the mortgage on the property -- covered by TCT No. 151784 in the name of the
Ramos spouses and issued by the Register of Deeds of Makati City --as discharged
(2) ORDERING the RTC to release to Sarao the consigned amount of P1,633,034.19

no basis in law, considering that the present suit being pursued by petitioner pertains (3) COMMANDING Respondent Sarao to return to petitioner the owners copy of TCT
to a mortgage covering the whole property. No. 151784 in the name of the Ramos spouses and issued by the Register of Deeds of
Makati City
Besides, it is basic that defenses and issues not raised below cannot be considered on
appeal.67 (4) DIRECTING the Register of Deeds of Makati City to cancel Entry No. 24057, the
annotation appearing on TCT No. 151784
The Court, however, observes that Respondent Sarao paid real property taxes
amounting to P67,567.10 to halt the auction sale scheduled for October 8, 2004, by the (5) ORDERING petitioner to pay Sarao in the amount of P67,567.10 as
City of Muntinlupa.68 Her payment was made in good faith and benefited petitioner. reimbursement for real property taxes
Accordingly, Sarao should be reimbursed; otherwise, petitioner would be unjustly
enriched,69 under Article 2175 of the Civil Code which provides: No pronouncement as to costs.

Art. 2175. Any person who is constrained to pay the taxes of another shall be entitled SO ORDERED.
to reimbursement from the latter.
Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.

Petition granted, assailed decision set aside.

470 SCRA 260
SECOND DIVISION
G.R. No. 138980. September 20, 2005.
FILINVEST LAND, INC., petitioner, vs. HON. COURT OF APPEALS, PHILIPPINE
AMERICAN GENERAL INSURANCE COMPANY, and PACIFIC EQUIPMENT
CORPORATION, respondents.
Appeals; Pleadings and Practice; By assigning only one legal issue before the Supreme
Court, a party has effectively cordoned off any discussion into the factual issue raised
before the Court of Appeals.It should be stressed that as only the issue of liquidated
damages has been elevated to this Court, petitioner Filinvest is deemed to have
acquiesced to the other matters taken up by the courts below. Section 1, Rule 45 of the
1997 Rules of Court states in no uncertain terms that this Courts jurisdiction in
petitions for review on certiorari is limited to questions of law which must be
distinctly set forth. By assigning only one legal issue, Filinvest has effectively
cordoned off any discussion into the factual issue raised before the Court of Appeals.
In effect, Filinvest has yielded to the decision of the Court of Appeals, affirming that of
the trial court, in deferring to the factual findings of the commissioner assigned to the
parties case. Besides, as a general rule, factual matters cannot be raised in a petition
for review on certiorari. This Court at this stage is limited to reviewing errors of law
that may have been committed by the lower courts. We do not perceive here any of the
exceptions to this rule; hence, we are restrained from conducting further scrutiny of
the findings of fact made by the trial court which have been affirmed by the Court of
Appeals. Verily, factual findings of the trial court, especially when affirmed by the
Court of Appeals, are binding and conclusive on the Supreme Court.
Obligations and Contracts; Penal Clause; Functions; Words and Phrases; A penal
clause is an accessory undertaking to assume greater liability in case of breach.There
is no question that the penalty of P15,000.00 per day of delay was mutually agreed
upon by the parties and that the same is sanctioned by law. A penal clause is an
accessory undertaking to assume greater liability in case of breach. It is attached to
an obligation in order to insure performance and has a double function: (1) to provide
for liquidated damages, and (2) to strengthen the coercive force of the obligation by the
threat of greater responsibility in the event of breach.
Same; Same; While as a general rule, courts are not liberty to ignore the freedom of the
parties to agree on such terms and conditions as they see fit as long as they are not
contrary to law, morals, good customs, public order or public policy, the courts may
equitable reduce a stipulated penalty under two instances, namely, (1) if the principal
obligation has been partly or irregularly complied, and (2) even if there has been no
compliance if the penalty is iniquitous or unconscionable in accordance with Article
1229 of the Civil Code. As a general rule, courts are not at liberty to ignore the
freedom of the parties to agree on such terms and conditions as they see fit as long as
they are not contrary to law, morals, good customs, public order or public policy.
Nevertheless, courts may equitably reduce a stipulated penalty in the contract in two
instances: (1) if the principal obligation has been partly or irregularly complied; and
(2) even if there has been no compliance if the penalty is iniquitous or unconscionable
in accordance with Article 1229 of the Civil Code which provides: 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.
Same; Same; Words and Phrases; A distinction between a penalty clause imposed
essentially as penalty in case of breach and a penalty clause imposed as indemnity for
damages should be made in cases where there has been neither partial nor irregular
compliance with the terms of contract, but where there has been partial or irregular
compliance, there will be no substantial difference between a penalty and liquidated
damages insofar as legal results are concerned.Unfortunately for Filinvest, the
above-quoted doctrine is inapplicable to herein case. The Supreme Court in Laureano
instructed that a distinction between a penalty clause imposed essentially as penalty
in case of breach and a penalty clause imposed as indemnity for damages should be
made in cases where there has been neither partial nor irregular compliance with the
terms of the contract. In cases where there has been partial or irregular compliance,
as in this case, there will be no substantial difference between a penalty and
liquidated damages insofar as legal results are concerned. The distinction is thus
more apparent than real especially in the light of certain provisions of the Civil Code
of the Philippines which provides in Articles 2226 and Article 2227 thereof: Art. 2226.
Liquidated damages are those agreed upon by the parties to a contract to be paid in
case of breach thereof. Art. 2227. Liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable. Thus, we lamented in one case that (t)here is no justification for the
Civil Code to make an apparent distinction between a penalty and liquidated damages
because the settled rule is that there is no difference between penalty and liquidated
damages insofar as legal results are concerned and that either may be recovered
without the necessity of proving actual damages and both may be reduced when
proper.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Buag, Kapunan, Migallos & Perez for petitioner.
Reloj Law Office for respondent Phil. American General Insurance Co.
Arturo D. Vallar for Pacific Equipment Corp.
Antonio E. Pesigan collaborating counsel for Pacific Equipment Corp.
CHICO-NAZARIO, J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals dated
27 May 1999 affirming the dismissal by the Regional Trial Court of Makati, Branch
65,2 of the complaint for damages filed by Filinvest Land, Inc. (Filinvest) against
herein private respondents Pacific Equipment Corporation (Pecorp) and Philippine
American General Insurance Company.
The essential facts of the case, as recounted by the trial court, are as follows:
On 26 April 1978, Filinvest Land, Inc. ("FILINVEST", for brevity), a corporation
engaged in the development and sale of residential subdivisions, awarded to defendant
Pacific Equipment Corporation ("PACIFIC", for brevity) the development of its
residential subdivisions consisting of two (2) parcels of land located at Payatas,
Quezon City, the terms and conditions of which are contained in an "Agreement".
(Annex A, Complaint). To guarantee its faithful compliance and pursuant to the
agreement, defendant Pacific posted two (2) Surety Bonds in favor of plaintiff which
were issued by defendant Philippine American General Insurance ("PHILAMGEN",
for brevity). (Annexes B and C, Complaint).
Notwithstanding three extensions granted by plaintiff to defendant Pacific, the latter
failed to finish the contracted works. (Annexes G, I and K, Complaint). On 16 October
1979, plaintiff wrote defendant Pacific advising the latter of its intention to takeover
the project and to hold said defendant liable for all damages which it had incurred and
will incur to finish the project. (Annex "L", Complaint).
On 26 October 1979, plaintiff submitted its claim against defendant Philamgen under
its performance and guarantee bond (Annex M, Complaint) but Philamgen refused to
acknowledge its liability for the simple reason that its principal, defendant Pacific,
refused to acknowledge liability therefore. Hence, this action.
In defense, defendant Pacific claims that its failure to finish the contracted work was
due to inclement weather and the fact that several items of finished work and change
order which plaintiff refused to accept and pay for caused the disruption of work. Since
the contractual relation between plaintiff and defendant Pacific created a reciprocal
obligation, the failure of the plaintiff to pay its progressing bills estops it from
demanding fulfillment of what is incumbent upon defendant Pacific. The acquiescence
by plaintiff in granting three extensions to defendant Pacific is likewise a waiver of the
formers right to claim any damages for the delay. Further, the unilateral and
voluntary action of plaintiff in preventing defendant Pacific from completing the work
has relieved the latter from the obligation of completing the same.
On the other hand, Philamgen contends that the various amendments made on the
principal contract and the deviations in the implementation thereof which were
resorted to by plaintiff and co-defendant Pacific without its (defendant Philamgens)
written consent thereto, have automatically released the latter from any or all liability
within the purview and contemplation of the coverage of the surety bonds it has
issued. Upon agreement of the parties to appoint a commissioner to assist the court in
resolving the issues confronting the parties, on 7 July 1981, an order was issued by
then Presiding Judge Segundo M. Zosa naming Architect Antonio Dimalanta as Court
Commissioner from among the nominees submitted by the parties to conduct an
ocular inspection and to determine the amount of work accomplished by the defendant
Pacific and the amount of work done by plaintiff to complete the project.
On 28 November 1984, the Court received the findings made by the Court
Commissioner. In arriving at his findings, the Commissioner used the construction
documents pertaining to the project as basis. According to him, no better basis in the
work done or undone could be made other than the contract billings and payments
made by both parties as there was no proper procedure followed in terminating the
contract, lack of inventory of work accomplished, absence of appropriate record of work
progress (logbook) and inadequate documentation and system of construction
management.
Based on the billings of defendant Pacific and the payments made by plaintiff, the
work accomplished by the former amounted to P11,788,282.40 with the exception of
the last billing (which was not acted upon or processed by plaintiff) in the amount
of P844,396.42. The total amount of work left to be accomplished by plaintiff was
based on the original contract amount less value of work accomplished by defendant
Pacific in the amount ofP681,717.58 (12,470,000-11,788,282.42).
As regards the alleged repairs made by plaintiff on the construction deficiencies, the
Court Commissioner found no sufficient basis to justify the same. On the other hand,
he found the additional work done by defendant Pacific in the amount of P477,000.00
to be in order.
On 01 April 1985, plaintiff filed its objections to the Commissioners Resolution on the
following grounds:
a) Failure of the commissioner to conduct a joint survey which according to the latter
is indispensable to arrive at an equitable and fair resolution of the issues between the
parties;
b) The cost estimates of the commissioner were based on pure conjectures and
contrary to the evidence; and,
c) The commissioner made conclusions of law which were beyond his assignment or
capabilities.
In its comment, defendant Pacific alleged that the failure to conduct joint survey was
due to plaintiffs refusal to cooperate. In fact, it was defendant Pacific who initiated
the idea of conducting a joint survey and inventory dating back 27 November 1983.
And even assuming that a joint survey were conducted, it would have been an exercise
in futility because all physical traces of the actual conditions then obtaining at the
time relevant to the case had already been obliterated by plaintiff.
On 15 August 1990, a Motion for Judgment Based on the Commissioners Resolution
was filed by defendant Pacific.
On 11 October 1990, plaintiff filed its opposition thereto which was but a rehash of
objections to the commissioners report earlier filed by said plaintiff.3
On the basis of the commissioners report, the trial court dismissed Filinvests
complaint as well as Pecorps counterclaim. It held:
In resolving this case, the court observes that the appointment of a Commissioner was
a joint undertaking among the parties. The findings of facts of the Commissioner
should therefore not only be conclusive but final among the parties. The court
therefore agrees with the commissioners findings with respect to
1. Cost to repair deficiency or defect P532,324.02
2. Unpaid balance of work done by defendant - P1,939,191.67
3. Additional work/change order (due to defendant) P475,000.00
The unpaid balance due defendant therefore is P1,939,191.67. To this amount should
be added additional work performed by defendant at plaintiffs instance in the sum
of P475,000.00. And from this total of P2,414,191.67 should be deducted the sum
of P532,324.01 which is the cost to repair the deficiency or defect in the work done by
defendant. The commissioner arrived at the figure of P532,324.01 by getting the
average between plaintiffs claim of P758,080.37 and defendants allegation
of P306,567.67. The amount due to defendant per the commissioners report is
therefore P1,881,867.66.
Although the said amount of P1,881,867.66 would be owing to defendant Pacific, the
fact remains that said defendant was in delay since April 25, 1979. The third
extension agreement of September 15, 1979 is very clear in this regard. The pertinent
paragraphs read:
a) You will complete all the unfinished works not later than Oct. 15, 1979. It is agreed
and understood that this date shall DEFINITELY be the LAST and FINAL extension
& there will be no further extension for any cause whatsoever.
b) We are willing to waive all penalties for delay which have accrued since April 25,
1979 provided that you are able to finish all the items of the contracted works as per
revised CPM; otherwise you shall continue to be liable to pay the penalty up to the
time that all the contracted works shall have been actually finished, in addition to
other damages which we may suffer by reason of the delays incurred.
Defendant Pacific therefore became liable for delay when it did not finish the project
on the date agreed on October 15, 1979. The court however, finds the claim
of P3,990,000.00 in the form of penalty by reason of delay (P15,000.00/day from April
25, 1979 to Jan. 15, 1980) to be excessive. A forfeiture of the amount due defendant
from plaintiff appears to be a reasonable penalty for the delay in finishing the project
considering the amount of work already performed and the fact that plaintiff
consented to three prior extensions.
The foregoing considered, this case is dismissed. The counterclaim is likewise
dismissed.
No Costs.4
The Court of Appeals, finding no reversible error in the appealed decision, affirmed
the same.
Hence, the instant petition grounded solely on the issue of whether or not the
liquidated damages agreed upon by the parties should be reduced considering that: (a)
time is of the essence of the contract; (b) the liquidated damages was fixed by the
parties to serve not only as penalty in case Pecorp fails to fulfill its obligation on time,
but also as indemnity for actual and anticipated damages which Filinvest may suffer
by reason of such failure; and (c) the total liquidated damages sought is only 32% of
the total contract price, and the same was freely and voluntarily agreed upon by the
parties.
At the outset, it should be stressed that as only the issue of liquidated damages has
been elevated to this Court, petitioner Filinvest is deemed to have acquiesced to the
other matters taken up by the courts below. Section 1, Rule 45 of the 1997 Rules of
Court states in no uncertain terms that this Courts jurisdiction in petitions for review
on certiorari is limited to "questions of law which must be distinctly set forth."5 By
assigning only one legal issue, Filinvest has effectively cordoned off any discussion into
the factual issue raised before the Court of Appeals. 6 In effect, Filinvest has yielded to
the decision of the Court of Appeals, affirming that of the trial court, in deferring to
the factual findings of the commissioner assigned to the parties case. Besides, as a
general rule, factual matters cannot be raised in a petition for review on certiorari.
This Court at this stage is limited to reviewing errors of law that may have been
committed by the lower courts.7 We do not perceive here any of the exceptions to this
rule; hence, we are restrained from conducting further scrutiny of the findings of fact
made by the trial court which have been affirmed by the Court of Appeals. Verily,
factual findings of the trial court, especially when affirmed by the Court of Appeals,
are binding and conclusive on the Supreme Court.8 Thus, it is settled that:
(a) Based on Pecorps billings and the payments made by Filinvest, the balance of work
to be accomplished by Pecorp amounts to P681,717.58 representing 5.47% of the
contract work. This means to say that Pecorp, at the time of the termination of its
contract, accomplished 94.53% of the contract work;
(b) The unpaid balance of work done by Pecorp amounts to P1,939,191.67;
(c) The additional work/change order due Pecorp amounts to P475,000.00;
(d) The cost to repair deficiency or defect, which is for the account of Pecorp,
is P532,324.02; and
(e) The total amount due Pecorp is P1,881,867.66.
Coming now to the main matter, Filinvest argues that the penalty in its entirety
should be respected as it was a product of mutual agreement and it represents only
32% of the P12,470,000.00 contract price, thus, not shocking and unconscionable
under the circumstances. Moreover, the penalty was fixed to provide for actual or
anticipated liquidated damages and not simply to ensure compliance with the terms of
the contract; hence, pursuant to Laureano v. Kilayco,9 courts should be slow in
exercising the authority conferred by Art. 1229 of the Civil Code.
We are not swayed.
There is no question that the penalty of P15,000.00 per day of delay was mutually
agreed upon by the parties and that the same is sanctioned by law. A penal clause is
an accessory undertaking to assume greater liability in case of breach. 10 It is attached
to an obligation in order to insure performance11 and has a double function: (1) to
provide for liquidated damages, and (2) to strengthen the coercive force of the
obligation by the threat of greater responsibility in the event of breach. 12 Article 1226
of the Civil Code states:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of noncompliance, if there
is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor
refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.
As a general rule, courts are not at liberty to ignore the freedom of the parties to
agree on such terms and conditions as they see fit as long as they are not contrary to
law, morals, good customs, public order or public policy. 13 Nevertheless, courts may
equitably reduce a stipulated penalty in the contract in two instances: (1) if the
principal obligation has been partly or irregularly complied; and (2) even if there has
been no compliance if the penalty is iniquitous or unconscionable in accordance with
Article 1229 of the Civil Code which provides:
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.
In herein case, the trial court ruled that the penalty charge for delay pegged
at P15,000.00 per day of delay in the aggregate amount of P3,990,000.00 -- was
excessive and accordingly reduced it to P1,881,867.66 "considering the amount of work
already performed and the fact that [Filinvest] consented to three (3) prior
extensions." The Court of Appeals affirmed the ruling but added as well that the
penalty was unconscionable "as the construction was already not far from completion."
Said the Court of Appeals:
Turning now to plaintiffs appeal, We likewise agree with the trial court that a penalty
interest of P15,000.00 per day of delay as liquidated damages or P3,990,000.00
(representing 32% penalty of the P12,470,000.00 contract price) is unconscionable
considering that the construction was already not far from completion. Penalty
interests are in the nature of liquidated damages and may be equitably reduced by the
courts if they are iniquitous or unconscionable (Garcia v. Court of Appeals, 167 SCRA
815, Lambert v. Fox, 26 Phil. 588). 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. 1229, New Civil Code). Moreover, plaintiffs
right to indemnity due to defendants delay has been cancelled by its obligations to the
latter consisting of unpaid works.
This Court finds no fault in the cost estimates of the court-appointed commissioner as
to the cost to repair deficiency or defect in the works which was based on the average
between plaintiffs claim of P758,080.37 and defendants P306,567.67 considering the
following factors: that "plaintiff did not follow the standard practice of joint survey
upon take over to establish work already accomplished, balance of work per contract
still to be done, and estimate and inventory of repair" (Exhibit "H"). As for the cost to
finish the remaining works, plaintiffs estimates were brushed aside by the
commissioner on the reasoned observation that "plaintiffs cost estimate for work (to
be) done by the plaintiff to complete the project is based on a contract awarded to
another contractor (JPT), the nature and magnitude of which appears to be
inconsistent with the basic contract between defendant PECORP and plaintiff
FILINVEST."14
We are hamstrung to reverse the Court of Appeals as it is rudimentary that the
application of Article 1229 is essentially addressed to the sound discretion of the
court.15 As it is settled that the project was already 94.53% complete and that Filinvest
did agree to extend the period for completion of the project, which extensions Filinvest
included in computing the amount of the penalty, the reduction thereof is clearly
warranted.
Filinvest, however, hammers on the case of Laureano v. Kilayco,16 decided in 1915,
which cautions courts to distinguish between two kinds of penalty clauses in order to
better apply their authority in reducing the amount recoverable. We held therein that:
. . . [I]n 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
against the enforcement in its entirety of the indemnification, 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 contract. But the courts will be slow in
exercising the jurisdiction conferred upon them in article 1154 17 so as to
modify the terms of an agreed upon indemnification where it appears that in fixing
such indemnification the parties had in mind a fair and reasonable compensation for
actual damages anticipated as a result of a breach of the contract, or, in other words,
where the principal purpose of the indemnification agreed upon appears to have been
to provide for the payment of actual anticipated and liquidated damages rather than
the penalization of a breach of the contract. (Emphases supplied)
Filinvest contends that the subject penalty clause falls under the second type, i.e., the
principal purpose for its inclusion was to provide for payment of actual anticipated
and liquidated damages rather than the penalization of a breach of the contract. Thus,
Filinvest argues that had Pecorp completed the project on time, it (Filinvest) could
have sold the lots sooner and earned its projected income that would have been used
for its other projects.
Unfortunately for Filinvest, the above-quoted doctrine is inapplicable to herein case.
The Supreme Court inLaureano instructed that a distinction between a penalty clause
imposed essentially as penalty in case of breach and a penalty clause imposed as
indemnity for damages should be made in cases where there has been neither partial
nor irregular compliance with the terms of the contract. In cases where there has been
partial or irregular compliance, as in this case, there will be no substantial difference
between a penalty and liquidated damages insofar as legal results are
concerned.18 The distinction is thus more apparent than real especially in the light of
certain provisions of the Civil Code of the Philippines which provides in Articles 2226
and Article 2227 thereof:
Art. 2226. Liquidated damages are those agreed upon by the parties to a contract to
be paid in case of breach thereof.
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall
be equitably reduced if they are iniquitous or unconscionable.
Thus, we lamented in one case that "(t)here is no justification for the Civil Code to
make an apparent distinction between a penalty and liquidated damages because the
settled rule is that there is no difference between penalty and liquidated damages
insofar as legal results are concerned and that either may be recovered without the
necessity of proving actual damages and both may be reduced when proper."19
Finally, Filinvest advances the argument that while it may be true that courts may
mitigate the amount of liquidated damages agreed upon by the parties on the basis of
the extent of the work done, this contemplates a situation where the full amount of
damages is payable in case of total breach of contract. In the instant case, as the
penalty clause was agreed upon to answer for delay in the completion of the project
considering that time is of the essence, "the parties thus clearly contemplated the
payment of accumulated liquidated damages despite, and precisely because of, partial
performance."20 In effect, it is Filinvests position that the first part of Article 1229 on
partial performance should not apply precisely because, in all likelihood, the penalty
clause would kick in in situations where Pecorp had already begun work but could not
finish it on time, thus, it is being penalized for delay in its completion.
The above argument, albeit sound, is insufficient to reverse the ruling of the Court of
21
Appeals. It must be remembered that the Court of Appeals not only held that the
penalty should be reduced because there was partial compliance but categorically
stated as well that the penalty was unconscionable. Otherwise stated, the Court of
Appeals affirmed the reduction of the penalty not simply because there was partial
compliance per se on the part of Pecorp with what was incumbent upon it but, more
fundamentally, because it deemed the penalty unconscionable in the light of Pecorps
94.53% completion rate.
In Ligutan v. Court of Appeals, we pointed out that the question of whether a penalty
22
is reasonable or iniquitous can be partly subjective and partly objective as its
"resolution would depend on such factors as, but not necessarily confined to, the type,
extent and purpose of the penalty, the nature of the obligation, the mode of breach and
its consequences, the supervening realities, the standing and relationship of the
parties, and the like, the application of which, by and large, is addressed to the sound
discretion of the court."23
In herein case, there has been substantial compliance in good faith on the part of
Pecorp which renders unconscionable the application of the full force of the penalty
especially if we consider that in 1979 the amount ofP15,000.00 as penalty for delay per
day was quite steep indeed. Nothing in the records suggests that Pecorps delay in the
performance of 5.47% of the contract was due to it having acted negligently or in bad
faith. Finally, we factor in the fact that Filinvest is not free of blame either as it
likewise failed to do that which was incumbent upon it, i.e., it failed to pay Pecorp for
work actually performed by the latter in the total amount of P1,881,867.66. Thus, all
things considered, we find no reversible error in the Court of Appeals exercise of
discretion in the instant case.
Before we write finis to this legal contest that had spanned across two and a half
decades, we take note of Pecorps own grievance. From its Comment and
Memorandum, Pecorp, likewise, seeks affirmative relief from this Court by praying
that not only should the instant case be dismissed for lack of merit, but that Filinvest
should likewise be made to pay "what the Court Commissioner found was due
defendant" in the "total amount ofP2,976,663.65 plus 12% interest from 1979 until full
payment thereof plus attorneys fees."24 Pecorp, however, cannot recover that which it
seeks as we had already denied, in a Resolution dated 21 June 2000, its own petition
for review of the 27 May 1999 decision of the Court of Appeals. Thus, as far as Pecorp
is concerned, the ruling of the Court of Appeals has already attained finality and can
no longer be disturbed.
WHEREFORE, premises considered, the Decision of the Court of Appeals dated 27
May 1999 is AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Puno (Chairman), Austria-Martinez, Callejo, Sr. and Tinga, JJ., concur.
Judgment affirmed.
371 SCRA 348
SECOND DIVISION
G.R. No. 121940. December 4, 2001.
JESUS SAN AGUSTIN, petitioner, vs. HON. COURT OF APPEALS and MAXIMO Same; Same; Under Republic Act. No. 26, reconstitution is validly made only in case
MENEZ, JR., respondents. the original copy of the certificate of title with the Register of Deeds is lost or destroyed.
Under Republic Act No. 26, reconstitution is validly made only in case the original
Land Titles; Reconstitution of Title; Parties; In a petition for reconstitution of a
copy of the certificate of title with the Register of Deeds is lost or destroyed. And if no
duplicate certificate of title lost or destroyed, it is sufficient that the notice under
notice of the date of hearing of a reconstitution case is served on a possessor or one
Section 109 of P.D. 1529 (Property Registration Decree) is sent to the Register of Deeds
having interest in the property involved, he is deprived of his day in court and the
and to those persons who are known to have, or appear to have, an interest in the
order of reconstitution is null and void. The case at bar is not for reconstitution, but
property as shown in the Memorandum of encumbrances at the back of the original or
merely for replacement of lost duplicate certificate.
transfer certificate of title on file in the office of the Register of Deeds.In Office of
Court Administrator vs. Matas, A.M. No. RTJ-92-836, 247 SCRA 9, 16-17 (1995), we Same; Homesteads; The proscription under Com. Act No. 141 on sale within the 5-year
held: In the case at bar, the respective certificate of title of the properties in question restrictive period refers to homestead lands only.We find petitioners contention less
on file with the Register of Deeds are existing, and it is the owners copy of the than meritorious. We agree with respondent court that the proscription under Com.
certificate of title that was alleged to have been lost or destroyed. Thus, it is Section Act No. 141 on sale within the 5-year restrictive period refers to homestead lands only.
109 of P.D. 1529 which was approved on June 11, 1978 that becomes effective and is Here the lot in dispute is not a homestead land, as found by the trial and appellate
applicable, a reading of which shows that it is practically the same as Section 109 of courts. Said lot is owned by GSIS, under TCT No. 10028 in its proprietary capacity.
Act No. 496, governing reconstitution of a duplicate certificate of title lost or
Same; Contracts; Succession; Heirs are bound by contracts entered into by their
destroyed. Consequently, it is sufficient that the notice under Section 109 is sent to the
predecessors-in-interest.In this case, the GSIS has not filed any action for the
Register of Deeds and to those persons who are known to have, or appear to have, an
annulment of Exhibit D, nor for the forfeiture of the lot in question. In our view, the
interest in the property as shown in the Memorandum of encumbrances at the back of
contract of sale remains valid between the parties, unless and until annulled in the
the original or transfer certificate of title on file in the office of the Register of Deeds.
proper suit filed by the rightful party, the GSIS. For now, the said contract of sale is
From a legal standpoint, there are no other interested parties who should be notified,
binding upon the heirs of Macaria Vda. de Caiquep, including petitioner who alleges
except those abovementioned since they are the only ones who may be deemed to have
to be one of her heirs, in line with the rule that heirs are bound by contracts entered
a claim to the property involved. A person dealing with registered property is not
into by their predecessors-in-interest.
charged with notice of encumbrances not annotated on the back of the title.

Same; Same; Pari Delicto; Estoppel; Where both parties are equally guilty, neither is
Same; Same; Same; Publication of the petition for reconstitution in a newspaper of
entitled to complain against the otherhaving entered into the transaction with open
general circulation is sufficient notice to the public at large. Here, petitioner does not
eyes, and having benefit from it, said parties should be held in estoppel to assail and
appear to have an interest in the property based on the memorandum of
annul their own deliberate acts. More in point, however, is the fact that, following
encumbrances annotated at the back of the title. His claim that he is an heir (nephew)
Sarmiento v. Salud, Even if the transaction between the original awardee and herein
of the original owner of the lot covered by the disputed lot and the present occupant
petitioner were wrongful, still, as between themselves, the purchaser and the seller
thereof is not annotated in the said memorandum of encumbrances. Neither was his
were both in part delicto, being participes criminis as it were. As in Sarmiento, in
claim entered on the Certificate of Titles in the name of their original/former owners
this case both were aware of the existence of the stipulated condition in favor of the
on file with the Register of Deeds at the time of the filing or pendency of LRC Case No.
original seller, GSIS, yet both entered into an agreement violating said condition and
R-4659. Clearly, petitioner is not entitled to notice. Noteworthy is the fact that there
nullifying its effects. Similarly, as Acting Chief Justice JBL Reyes concluded in
was compliance by private respondent of the RTCs order of publication of the petition
Sarmiento, Both parties being equally guilty, neither is entitled to complain against
in a newspaper of general circulation. This is sufficient notice of the petition to the
the other. Having entered into the transaction with open eyes, and having benefited
public at large.
from it, said parties should be held in estoppel to assail and annul their own five (5) years from the dates final and absolute ownership thereof becomes
deliberate acts. vested in the vendee, except in cases of hereditary succession or resale in favor
of the vendor:
PETITION for review on certiorari of a decision of the Court of Appeals.

x x x (emphasis supplied).3
The facts are stated in the opinion of the Court.

R.R. Mendez & Associates for petitioner. A day after We issuance of TCT No. 436465, or on February 20, 1974, Macaria Vda. de
Caiquep sold the subject lot to private respondent, Maximo Menez, Jr., as evidenced
Fernando P. Perito for private respondent. by a Deed of Absolute Sale (Exhibit "D").4 This deed was notarized but was not
registered immediately upon its execution in 1974 because GSIS prohibited him from
QUISUMBING, J.:
registering the same in view of the five-year prohibition to sell during the period
ending in 1979.
This petition for review on certiorari seeks the reversal of the decision 1 of the Court
of Appeals dated May 19, 1995, affirming that of the Regional Trial Court in LRC
Sometime in 1979, for being suspected as a subversive, an Arrest, Search and Seizure
Case No. R-4659.
Order (ASSO) was issued against private respondent. Military men ransacked his
house in Cainta, Rizal. Upon learning that he was wanted by the military, he
The relevant facts, as summarized by the CA, are as follows:
voluntarily surrendered and was detained for two (2) years. When released, another
order for his re-arrest was issued so he hid in Mindanao for another four (4) years or
On February 11, 1974, the Government Service Insurance System (GSIS) sold to a
until March 1984. In December of 1990, he discovered that the subject TCT was
certain Macaria Vda. de Caiquep, a parcel of residential land with an area of 168
missing. He consulted a lawyer but the latter did not act immediately on the matter.
square meters located in Rosario, Pasig City and denominated as Lot 13, Block 7, Pcs-
Upon consulting a new counsel, an Affidavit of Loss 5 was filed with the Register of
5816 of the Government Service and Insurance System Low Cost Housing Project
Deeds of Pasig and a certified copy6 of TCT No. 436465 was issued. Private respondent
(GSIS-LCHP). The sale is evidenced by a Deed of Absolute Sale. 2 On February 19,
also declared the property for tax purposes and obtained a certification thereof from
1974, the Register of Deeds of Rizal issued in the name of Macaria Vda. de Caiquep.
the Assessor's Office.7
Transfer Certificate of Title (TCT) No. 436465 with the following encumbrance
annotated at the back of the title:
Private respondent sent notices to the registered owner at her address appearing in
the title and in the Deed of Sale. And, with his counsel, he searched for the ,registered
This Deed of Absolute Sale is subject to the conditions enumerated below
owner in Metro Manila and Rizal and as far as Samar, Leyte, Calbayog City, Tacloban
which shall be permanent encumbrances on the property, the violation of any
City, and in Eastern and Northern Samar. However, their search proved futile.
of which shall entitle the vendor to cancel x x x. this Deed of Absolute Sale and
reenter the property;
On July 8, 1992 private respondent filed a petition docketed as LRC Case No. R-4659
with the RTC, Branch 154, Pasig, Metro Manila for the issuance of owner's duplicate
The purpose of the sale be to aid the vendee in acquiring a lot for
copy of TCT No. 436465 to replace the lost one. To show he was the owner of the
himself/themselves and not to provide him/them with a means for speculation
contested lot, he showed the Deed of Absolute Sale, Exhibit "D". The petition was set
or profit by a future assignment of his/their right herein acquired or the
for hearing and the court's order dated July 10, 1992 was published once in Malaya, a
resale of the lot through rent, lease or subletting to others of the lot and
nationally circulated newspaper in the Philippines.8
subject of this deed, and therefore, the vendee shall not sell, convey, lease or
sublease, or otherwise encumber the property in favor of any other party within
During the hearing on September 3, 1992, only Menez and his counsel appeared. The
Register of Deeds who was not served notice, and the Office of the Solicitor General
and the Provincial Prosecutor who were notified did not attend.
On September 18, 1992, there being no opposition, Menez presented his evidence ex-
parte. The trial court granted his petition in its decision dated September 30, 1992,
9
the dispositive portion of which reads:
WHEREFORE, the petition is hereby GRANTED and the Registry of Deeds
of Pasig, Metro Manila, is hereby directed to issue a new Owner's Duplicate
Copy of Transfer Certificate of Title No. 436465 based on the original thereon
filed in his office which shall contain the memorandum of encumbrance and
an additional memorandum of the fact that it was issued in place of the lost
duplicate and which shall, in all respect, be entitled to like faith and credit as
the original duplicate, for all legal intents and purposes.
Issuance of new owner's duplicate copy shall be made only after this decision
shall have become final and executory. The said lost owner's duplicate is
hereby declared null and void.
Petitioner shall pay all legal fees in connection with the issuance of the new
owner's copy.
Let copies of this Order be furnished the petitioner, the registered owner of
his given address in the title, in the deed of sale, and in the tax declaration;
the Registry of Deeds of Pasig, the Office of the Solicitor General; and the
Provincial Fiscal of Pasig, Metro Manila.
SO ORDERED. 10
On October 13, 1992, herein petitioner, Jesus San Agustin, received a copy of the
abovecited decision. He-claimed this was the first time he became aware of the case of
her aunt, Macaria Vda. de Caiquep who, according to him, died sometime in 1974.
Claiming that he was the present occupant of the property and the heir of Macaria, he
filed his "Motion to Reopen Reconstitution Proceedings'' 11 on October 27, 1992. On
December 3, 1992, RTC issued an order denying said motion.12
Petitioner filed an appeal with the Court of Appeals, which, as earlier stated, was
denied in its decision of May 19, 1995. Petitioner moved for a reconsideration, but it
was denied in a resolution dated September 11, 1995.13
Thus, the present petition, attributing the following errors to the court a quo:
A.
THE RESPONDENT COURT GRAVELY ERRED IN HOLDING THAT LRC CASE
NO. R-4659 BEING ONLY A PETITION FOR THE ISSUANCE OF A NEW OWNER'S
DUPLICATE OF TITLE, THERE IS NO NEED OF PERSONAL NOTICE TO THE
PETITIONER, THE ACTUAL POSSESSOR [WHO HAS] AND ACTUALLY BEEN
PAYING THE REAL ESTATE TAX, DESPITE PRIVATE RESPONDENT'S
KNOWLEDGE OF ACTUAL POSSESSION OF AND INTEREST OVER THE
PROPERTY COVERED BY TCT NO. 436465.14
B.
RESPONDENT COURT GRAVELY ERRED IN HOLDING THAT THE SALE
BETWEEN THE PRIVATE RESPONDENT AND MACARIA VDA. DE CAIQUEP IS
NOT NULL AND VOID AND UNDER ARTICLE 1409 OF THE CIVIL CODE
SPECIFICALLY PARAGRAPH (7) THEREOF WHICH REFERS TO CONTRACTS
EXPRESSLY PROHIBITED OR DECLARED VOID BY LAW.15
Considering the above assignment of errors, let us resolve the corresponding issues
raised by petitioner.
The first issue involves private respondent's alleged failure to send notice to petitioner
who is the actual possessor of the disputed lot. Stated briefly, is petitioner entitled to
notice? Our finding is in the negative.
Presidential Decree No. 1529, otherwise known as the "Property Registration Decree"
is decisive. It provides:
Sec. 109. Notice and replacement of lost duplicate certificate. In case of loss
or theft of an owner's duplicate certificate of title, due notice under oath shall
be sent by the owner or by someone in his behalf to the Register of Deeds of
 the province or city where the land lies as soon as the loss or theft is
discovered. If a duplicate certificate is lost or destroyed, or cannot be produced
by a person applying for the entry of a new certificate to him or for :the
registration of any instrument, a sworn statement of the fact of such loss or
destruction may be filed by the registered owner or other person it interest
and registered.
Upon the petition of the registered owner or other person in interest, the
court may, after notice and due hearing, direct the issuance of a new
duplicate certificate, which shall contain a memorandum of the fact that it is
issued in place of the lost duplicate certificate, but shall in all respects be
entitled to like faith and credit as the original duplicate, and shall thereafter
be regarded as such for all purposes of this decree.
In Office of Court Administrator vs. Matas, A.M. No. RTJ-92-836, 247 SCRA 9, 16-17
(1995), we held:
In the case at bar, the respective certificate of title of the properties in
question on file with the Register of Deeds are existing, and it is the owner's
copy of the certificate of title that was alleged to have been lost or destroyed.
Thus, it is Section 109 of P.D. 1529 which was approved on June 11, 1978 that
becomes effective and is applicable, a reading of which shows that it is
practically the same as Section 109 of Act No. 496, governing reconstitution of
a duplicate certificate of title lost or destroyed. Consequently, it is sufficient
that the notice under Section 109 is sent to the Register of Deeds and to those
persons who are known to have, or appear to have, an interest in the
property as shown in the Memorandum of encumbrances at the back of the
original or transfer certificate of title on file in the office of the Register of
Deeds. From a legal standpoint, there are no other interested parties who
should be notified, except those abovementioned since they are the only ones
who may be deemed to have a claim to the property involved. A person dealing
with registered is not charged with notice of encumbrances not annotated on
the back of the title. (Emphasis supplied.)
Here, petitioner does not appear to have an interest in the property based on the
memorandum of encumbrances annotated at the back of the title. His claim, that he is
an heir (nephew) of the original owner of the lot covered by the disputed lot and the
present occupant thereof is not annotated in the said memorandum of encumbrances.
Neither was his claim entered on the Certificate of Titles in the name of their
original/former owners on file with the Register of Deeds at the time of the filing or
pendency of LRC Case No. R-4659. Clearly, petitioner is not entitled to notice.
Noteworthy is the fact that there was compliance by private respondent of the RTC's
order of publication of the petition in a newspaper of general circulation. This is
sufficient notice of the petition to the public at large.
Petitioner contends that as possessor or actual occupant of the lot in controversy, he is
entitled under the law to be notified. He relies on Alabang Development Corporation
vs. Valenzuela, G.R. No. L-54094, 116 SCRA 261, 277 (1982)) which held that in
reconstitution proceedings, courts must make sure that indispensable parties, i.e.. the
actual owners and possessors of the lands involved, are duly served with actual and
personal notice of the petition. As pointed out by the appellate court, his reliance
on Alabang is misplaced because the cause of action in that case is based on Republic
Act i No. 26, entitled "An Act Providing A Special Procedure for the Reconstitution of
Torrens Certificate of Title Lost or Destroyed," while the present case is based on
Section 109 of P.D. 1529 as above explained.
Under Republic Act No. 26, reconstitution is validly made only in case
the original copy of the certificate of title with the Register of Deeds is lost or
destroyed. And if no notice of the date of hearing of a reconstitution case is served on a
possessor or one having interest in the property involved, he is deprived of his day in
court and the order of reconstitution is null and void. 16 The case at bar is not for
reconstitution, but merely for replacement of lost duplicate certificate.
On the second assigned error, petitioner contends that Exhibit "D" is null and void
under Article 1409 of the Civil Code, specifically paragraph (7), 17 because the deed of
sale was executed within the five-year prohibitory period under Commonwealth Act
No. 141, as amended, otherwise known as "The Public Land Act."18
We find petitioner's contention less than meritorious. We agree with respondent court
that the proscription under Com. Act No. 141 on sale within the 5-year restrictive
period refers to homestead lands only. Here the lot in dispute is not a homestead land,
as found by the trial and appellate courts. Said lot is owned by GSIS, under TCT No.
10028 in its proprietary capacity.
Moreover, as far as the violation of the 5-year restrictive condition imposed by GSIS in
its contract with petitioner's predecessor-in-interest is concerned, it is the GSIS and
not petitioner who had a cause of action against private respondent. Vide the
instructive case of Sarmiento vs. Salud:
The condition that the appellees Sarmiento spouses could not resell the
property except to the People's Homesite and Housing Corporation (PHHC for
short) within the next 25 years after appellees' purchasing the lot is
manifestly a condition in favor of the PHHC, and not one in favor of the
Sarmiento spouses. The condition conferred no actionable right on appellees
herein, since it operated as a restriction upon their jus disponendi of the
property they bought, and thus limited their right of ownership. It follows
that on the assumption that the mortgage to appellee Salud and the
foreclosure sale violated the condition in the Sarmiento contract, only the
PHHC was entitled to invoke the condition aforementioned, and not the
Sarmientos. The validity or invalidity of the sheriff's foreclosure sale to
appellant Salud thus violative of its right of exclusive reacquisition; but it
(PHHC) also could waive the condition and treat the sale as good, in which
event, the sale can not be assailed for breach of the condition aforestated.
In this case, the GSIS has not filed any action for the annulment of Exhibit "D", nor
for the forfeiture of the lot in question. In our view, the contract of sale remains valid
between the parties, unless and until annulled in the proper suit filed by the rightful
party, the GSIS. For now, the said contract of sale is binding upon the heirs of Macaria
Vda. de Caiquep, including petitioner who alleges to be one of her heirs, in line with
the rule that heirs are bound by contracts entered into by their predecessors-in-
interest. 20
We are not unmindful of the social justice policy of R.A. 8291 otherwise known as
"Government Service Insurance Act of 1997" in granting housing assistance to the
less-privileged GSIS members and their dependents payable at an affordable payment
scheme. This is the same policy which the 5-year restrictive clause in the contract
21
seeks to implement by stating in the encumbrance itself annotated at the back of TCT
No. 436465 that, "The purpose of the sale is to aid the vendee in acquiring a lot for
himself/themselves and not to provide him/them with a means for speculation or profit
by a future assignment of his/their right herein acquired or the resale of the lot
through rent, lease or subletting to others of the lot and subject of this deed, . . .
within five (5) years from the date final and absolute ownership thereof becomes
vested in the vendee, except in cases of hereditary succession or resale in favor of the
vendor."22 However, absent the proper action taken by the GSIS as the original vendor
referred to, the contract between petitioner's predecessor-in-interest and private
respondent deserves to be upheld. For as pointed out by said private respondent, it is
protected by the Constitution under Section 10, Article III, of the Bill of Rights stating
that, "No law impairing the obligation of contracts shall be passed." Much as we would
like to see a salutary policy triumph, that provision of the Constitution duly calls for
compliance.
More in point, however, is the fact that, following Sarmiento v. Salud,23 "Even if the
transaction between the original awardee and herein petitioner were wrongful, still, as
between themselves, the purchaser and the seller were both in pari delicto,
being participes criminis as it were." As in Sarmiento, in this case both were aware of
19
the existence of the stipulated condition in favor of the original seller, GSIS, yet both
entered into an agreement violating said condition and nullifying its effects. Similarly,
as Acting Chief Justice JBL Reyes concluded in Sarmiento, "Both parties being
equally guilty, neither is entitled to complain against the other. Having entered into
the transaction with open eyes, and having benefited from it, said parties should be
held in estoppel to assail and annul their own deliberate acts."
WHEREFORE, the appeal is DENIED, and the decision of the respondent court is
AFFIRMED.
SO ORDERED.
Bellosillo, Mendoza, and De Leon, Jr., JJ., concur.
Buena, J., on official leave.
Appeal denied, judgment affirmed.
399 SCRA 207
FIRST DIVISION
G.R. No. 150843. March 14, 2003.
CATHAY PACIFIC AIRWAYS, LTD., petitioner, vs. SPOUSES DANIEL VAZQUEZ
and MARIA LUISA MADRIGAL VAZQUEZ, respondents.
Common Carriers; Air Transportation; Contracts; Requisites; Words and Phrases; A
contract is a meeting of minds between two persons whereby one agrees to give
something or render some service to another for a consideration.A contract is a
meeting of minds between two persons whereby one agrees to give something or
render some service to another for a consideration. There is no contract unless the
following requisites concur: (1) consent of the contracting parties; (2) an object certain
which is the subject of the contract; and (3) the cause of the obligation which is
established. Undoubtedly, a contract of carriage existed between Cathay and the
Vazquezes. They voluntarily and freely gave their consent to an agreement whose
object was the transportation of the Vazquezes from Manila to HongKong and back to
Manila, with seat: in the Business Class Section of the aircraft, and whose cause or
consideration was the fare paid by the Vazquezes to Cathay.
Same; Same; Same; Words and Phrases; Breach of Contract is defined as the failure
without legal reason to comply with the terms of a contract, or the failure, without
legal excuse, to perform any promise which forms the whole or part of the contract.
The only problem is the legal effect of the upgrading of the seat accommodation of the
Vazquezes. Did it constitute a breach of contract? Breach of contract is defined as the
failure without legal reason to comply with the terms of a contract. It is also defined
as the [f]ailure, without legal excuse, to perform any promise which forms the whole
or part of the contract. In previous cases, the breach of contract of carriage consisted
in either the bumping off of a passenger with confirmed reservation or the
downgrading of a passengers seat accommodation from one class to a lower class. In
this case, what happened was the reverse. The contract between the parties was for
Cathay to transport the Vazquezes to Manila on a Business Class accommodation in
Flight CX-905. After checking-in their luggage at the Kai Tak Airport in Hong Kong,
the Vazquezes were given boarding cards indicating their seat assignments in the
Business Class Section. However, during the boarding time, when the Vazquezes
presented their boarding passes, they were informed that they had a seat change from
Business Class to First Class. It turned out that the Business Class was overbooked in
that there were more passengers than the number of seats. Thus, the seat
assignments of the Vazquezes were given to waitlisted passengers, and the Vazquezes,
being members of the Marco Polo Club, were upgraded from Business Class to First
Class.
Same; Same; Same; Upgrading; Airline passengers have every right to decline an
upgrade and insist on the accommodation they had booked, and if an airline insists on
the upgrade, it breaches its contract of carriage with the passengers.We note that in
all their pleadings, the Vazquezes never denied that they were members of Cathays
Marco Polo Club. They knew that as members of the Club, they had priority for
upgrading of their seat accommodation at no extra cost when an opportunity arises.
But, just like other privileges, such priority could be waived. The Vazquezes should
have been consulted first whether they wanted to avail themselves of the privilege or
would consent to a change of seat accommodation before their seat assignments were
given to other passengers. Normally, one would appreciate and accept an upgrading,
for it would mean a better accommodation. But, whatever their reason was and
however odd it might be, the Vazquezes had every right to decline the upgrade and
insist on the Business Class accommodation they had booked for and which was
designated in their boarding passes. They clearly waived their priority or preference
when they asked that other passengers be given the upgrade. It should not have been
imposed on them over their vehement objection. By insisting on the upgrade, Cathay
breached its contract of carriage with the Vazquezes.
Same; Same; Same; Same; Words and Phrases; Bad Faith and Fraud, Explained;
Bad faith and fraud are allegations of fact that demand clear and convincing proof.
We are not, however, convinced that the upgrading or the breach of contract was
attended by fraud or bad faith. Thus, we resolve the second issue in the negative. Bad
faith and fraud are allegations of fact that demand clear and convincing proof. They
are serious accusations that can be so conveniently and casually invoked, and that is
why they are never presumed. They amount to mere slogans or mudslinging unless
convincingly substantiated by whoever is alleging them. Fraud has been defined to
include an inducement through insidious machination. Insidious machination refers to
a deceitful scheme or plot with an evil or devious purpose. Deceit exists where the
party, with intent to deceive, conceals or omits to state material facts and, by reason of
such omission or concealment, the other party was induced to give consent that would
not otherwise have been given. Bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral obliquity and conscious
doing of a wrong, a breach of a known duty through some motive or interest or ill will
that partakes of the nature of fraud.
Same; Same; Same; Same; An upgrading is for the better condition and, definitely for
the benefit of the passenger.Neither was the transfer of the Vazquezes effected for
some evil or devious purpose. As testified to by Mr. Robson, the First Class Section is
better than the Business Class Section in terms of comfort, quality of food, and service
from the cabin crew; thus, the difference in fare between the First Class and Business
Class at that time was $250. Needless to state, an upgrading is for the better condition
and, definitely, for the benefit of the passenger.
Same; Same; Same; Overbooking; It is clear from Sec. 3 of Economic Regulation No. 7
of the Civil Aeronautics Board, as amended, that an overbooking that does not exceed
ten percent is not considered deliberate and therefore does not amount to bad faith.
We are not persuaded by the Vazquezes argument that the overbooking of the
Business Class Section constituted bad faith on the part of Cathay. Section 3 of the
Economic Regulation No. 7 of the Civil Aeronautics Board, as amended, provides: Sec.
3. Scope.This regulation shall apply to every Philippine and foreign air carrier with
respect to its operation of flights or portions of flights originating from or terminating
at, or serving a point within the territory of the Republic of the Philippines insofar as
it denies boarding to a passenger on a flight, or portion of a flight inside or outside the
Philippines, for which he holds confirmed reserved space. Furthermore, this
Regulation is designed to cover only honest mistakes on the part of the carriers and
excludes deliberate and willful acts of non-accommodation. Provided, however, that
overbooking not exceeding 10% of the seating capacity of the aircraft shall not be
considered as a deliberate and willful act of non-accommodation. It is clear from this
section that an overbooking that does not exceed ten percent is not considered
deliberate and therefore does not amount to bad faith. Here, while there was
admittedly an overbooking of the Business Class, there was no evidence of overbooking
of the plane beyond ten percent, and no passenger was ever bumped off or was refused
to board the aircraft.
Same; Same; Same; Damages; Requisites for Award of Moral Damages.Moral
damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar
injury. Although incapable of pecuniary computation, moral damages may be
recovered if they are the proximate result of the defendants wrongful act or omission.
Thus, case law establishes the following requisites for the award of moral damages: (1)
there must be an injury clearly sustained by the claimant, whether physical, mental or
psychological; (2) there must be a culpable act or omission factually established; (3)
the wrongful act or omission of the defendant is the proximate cause of the injury
sustained by the claimant; and (4) the award for damages is predicated on any of the
cases stated in Article 2219 of the Civil Code.
Same; Same; Same; Same; Moral damages predicated upon a breach of contract of
carriage may only be recoverable in instances where the carrier is guilty of fraud or bad
faith or where the mishap resulted in the death of a passenger. Moral damages
predicated upon a breach of contract of carriage may only be recoverable in instances
where the carrier is guilty of fraud or bad faith or where the mishap resulted in the
death of a passenger. Where in breaching the contract of carriage the airline is not
shown to have acted fraudulently or in bad faith, liability for damages is limited to the
natural and probable consequences of the breach of the obligation which the parties
had foreseen or could have reasonably foreseen. In such a case the liability does not
include moral and exemplary damages.
Same; Same; Same; Same; Attorneys Fees; It is a requisite in the grant of exemplary
damages that the act of the offender must be accompanied by bad faith or done in
wanton, fraudulent or malevolent manner; Where the awards for moral and exemplary
damages are eliminated, so must the award for attorneys fees.The deletion of the
award for exemplary damages by the Court of Appeals is correct. It is a requisite in
the grant of exemplary damages that the act of the offender must be accompanied by
bad faith or done in wanton, fraudulent or malevolent manner. Such requisite is
absent in this case. Moreover, to be entitled thereto the claimant must first establish
his right to moral, temperate, or compensatory damages. Since the Vazquezes are not
entitled to any of these damages, the award for exemplary damages has no legal basis.
And where the awards for moral and exemplary damages are eliminated, so must the
award for attorneys fees.
Same; Same; Same; Same; The amount of damages awarded should not be palpably
and scandalously excessive as to indicate that it was the result of prejudice or
corruption on the part of the trial court; Passengers must not prey on international
airlines for damages awards, like trophies in a safari, after all neither the social
standing nor prestige of the passenger should determine the extent to which he would
suffer because of a wrong done, since the dignity affronted in the individual is a
quality inherent in him and not conferred by these social indicators.Before writing
finis to this decision, we find it well-worth to quote the apt observation of the Court of
Appeals regarding the awards adjudged by the trial court: We are not amused but
alarmed at the lower courts unbelievable alacrity, bordering on the scandalous, to
award excessive amounts as damages. In their complaint, appellees asked for P1
million as moral damages but the lower court awarded P4 million; they asked for
P500,000.00 as exemplary damages but the lower court cavalierly awarded a whooping
P10 million; they asked for P250,000.00 as attorneys fees but were awarded P2
million; they did not ask for nominal damages but were awarded P200,000.00. It is as
if the lower court went on a rampage, and why it acted that way is beyond all tests of
reason. In fact the excessiveness of the total award invites the suspicion that it was
the result of prejudice or corruption on the part of the trial court. The presiding
judge of the lower court is enjoined to hearken to the Supreme Courts admonition in
Singson vs. CA (282 SCRA 149 [1997]), where it said: The well-entrenched principle is
that the grant of moral damages depends upon the discretion of the court based on the
circumstances of each case. This discretion is limited by the principle that the amount
awarded should not be palpably and scandalously excessive as to indicate that it was
the result of prejudice or corruption on the part of the trial court. . . . and in Alitalia
Airways vs. CA (187 SCRA 763 [1990]), where it was held: Nonetheless, we agree with
the injunction expressed by the Court of Appeals that passengers must not prey on
international airlines for damage awards, like trophies in a safari. After all neither
the social standing nor prestige of the passenger should determine the extent to which
he would suffer because of a wrong done, since the dignity affronted in the individual
is a quality inherent in him and not conferred by these social indicators.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Quasha, Ancheta, Pea, Nolasco for petitioner.
Candelaria, Candelaria & Candelaria Law Firm for private respondents.
Bello, Gozon, Elma, Parel, Asuncion & Lucila co-counsel for private respondents.
DAVIDE, JR., C.J.:
Is an involuntary upgrading of an airline passengers accommodation from one class to
a more superior class at no extra cost a breach of contract of carriage that would
entitle the passenger to an award of damages? This is a novel question that has to be
resolved in this case.
The facts in this case, as found by the Court of Appeals and adopted by petitioner
Cathay Pacific Airways, Ltd., (hereinafter Cathay) are as follows:
Cathay is a common carrier engaged in the business of transporting passengers and
goods by air. Among the many routes it services is the Manila-Hongkong-Manila
course. As part of its marketing strategy, Cathay accords its frequent flyers
membership in its Marco Polo Club. The members enjoy several privileges, such as
priority forupgrading of booking without any extra charge whenever an opportunity
arises. Thus, a frequent flyer booked in the Business Class has priority for upgrading
to First Class if the Business Class Section is fully booked.
Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa Madrigal
Vazquez are frequent flyers of Cathay and are Gold Card members of its Marco Polo
Club. On 24 September 1996, the Vazquezes, together with their maid and two friends
Pacita Cruz and Josefina Vergel de Dios, went to Hongkong for pleasure and business.
For their return flight to Manila on 28 September 1996, they were booked on Cathays
Flight CX-905, with departure time at 9:20 p.m. Two hours before their time of
departure, the Vazquezes and their companions checked in their luggage at Cathays
check-in counter at Kai Tak Airport and were given their respective boarding passes,
to wit, Business Class boarding passes for the Vazquezes and their two friends, and
Economy Class for their maid. They then proceeded to the Business Class passenger
lounge.
When boarding time was announced, the Vazquezes and their two friends went to
Departure Gate No. 28, which was designated for Business Class passengers. Dr.
Vazquez presented his boarding pass to the ground stewardess, who in turn inserted it
into an electronic machine reader or computer at the gate. The ground stewardess was
assisted by a ground attendant by the name of Clara Lai Han Chiu. When Ms. Chiu
glanced at the computer monitor, she saw a message that there was a "seat change"
from Business Class to First Class for the Vazquezes.
Ms. Chiu approached Dr. Vazquez and told him that the Vazquezes accommodations
were upgraded to First Class. Dr. Vazquez refused the upgrade, reasoning that it
would not look nice for them as hosts to travel in First Class and their guests, in the
Business Class; and moreover, they were going to discuss business matters during the
flight. He also told Ms. Chiu that she could have other passengers instead transferred
to the First Class Section. Taken aback by the refusal for upgrading, Ms. Chiu
consulted her supervisor, who told her to handle the situation and convince the
Vazquezes to accept the upgrading. Ms. Chiu informed the latter that the Business
Class was fully booked, and that since they were Marco Polo Club members they had
the priority to be upgraded to the First Class. Dr. Vazquez continued to refuse, so Ms.
Chiu told them that if they would not avail themselves of the privilege, they would not
be allowed to take the flight. Eventually, after talking to his two friends, Dr. Vazquez
gave in. He and Mrs. Vazquez then proceeded to the First Class Cabin.
Upon their return to Manila, the Vazquezes, in a letter of 2 October 1996 addressed to
Cathays Country Manager, demanded that they be indemnified in the amount of
P1million for the "humiliation and embarrassment" caused by its employees. They also
demanded "a written apology from the management of Cathay, preferably a
responsible person with a rank of no less than the Country Manager, as well as the
apology from Ms. Chiu" within fifteen days from receipt of the letter.
In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to Cathays Country
Manager Argus Guy Robson, informed the Vazquezes that Cathay would investigate
the incident and get back to them within a weeks time.
On 8 November 1996, after Cathays failure to give them any feedback within its self-
imposed deadline, the Vazquezes instituted before the Regional Trial Court of Makati
City an action for damages against Cathay, praying for the payment to each of them
the amounts of P250,000 as temperate damages; P500,000 as moral damages;
P500,000 as exemplary or corrective damages; and P250,000 as attorneys fees.
In their complaint, the Vazquezes alleged that when they informed Ms. Chiu that they
preferred to stay in Business Class, Ms. Chiu "obstinately, uncompromisingly and in a
loud, discourteous and harsh voice threatened" that they could not board and leave
with the flight unless they go to First Class, since the Business Class was overbooked.
Ms. Chius loud and stringent shouting annoyed, embarrassed, and humiliated them
because the incident was witnessed by all the other passengers waiting for boarding.
They also claimed that they were unjustifiably delayed to board the plane, and when
they were finally permitted to get into the aircraft, the forward storage compartment
was already full. A flight stewardess instructed Dr. Vazquez to put his roll-on luggage
in the overhead storage compartment. Because he was not assisted by any of the crew
in putting up his luggage, his bilateral carpal tunnel syndrome was aggravated,
causing him extreme pain on his arm and wrist. The Vazquezes also averred that they
"belong to the uppermost and absolutely top elite of both Philippine Society and the
Philippine financial community, [and that] they were among the wealthiest persons in
the Philippine[s]."
In its answer, Cathay alleged that it is a practice among commercial airlines to
upgrade passengers to the next better class of accommodation, whenever an
opportunity arises, such as when a certain section is fully booked. Priority in
upgrading is given to its frequent flyers, who are considered favored passengers like
the Vazquezes. Thus, when the Business Class Section of Flight CX-905 was fully
booked, Cathays computer sorted out the names of favored passengers for involuntary
upgrading to First Class. When Ms. Chiu informed the Vazquezes that they were
upgraded to First Class, Dr. Vazquez refused. He then stood at the entrance of the
boarding apron, blocking the queue of passengers from boarding the plane, which
inconvenienced other passengers. He shouted that it was impossible for him and his
wife to be upgraded without his two friends who were traveling with them. Because of
Dr. Vazquezs outburst, Ms. Chiu thought of upgrading the traveling companions of
the Vazquezes. But when she checked the computer, she learned that the Vazquezes
companions did not have priority for upgrading. She then tried to book the Vazquezes
again to their original seats. However, since the Business Class Section was already
fully booked, she politely informed Dr. Vazquez of such fact and explained that the
upgrading was in recognition of their status as Cathays valued passengers. Finally,
after talking to their guests, the Vazquezes eventually decided to take the First Class
accommodation.
Cathay also asserted that its employees at the Hong Kong airport acted in good faith
in dealing with the Vazquezes; none of them shouted, humiliated, embarrassed, or
committed any act of disrespect against them (the Vazquezes). Assuming that there
was indeed a breach of contractual obligation, Cathay acted in good faith, which
negates any basis for their claim for temperate, moral, and exemplary damages and
attorneys fees. Hence, it prayed for the dismissal of the complaint and for payment of
P100,000 for exemplary damages and P300,000 as attorneys fees and litigation
expenses.
During the trial, Dr. Vazquez testified to support the allegations in the complaint. His
testimony was corroborated by his two friends who were with him at the time of the
incident, namely, Pacita G. Cruz and Josefina Vergel de Dios.
For its part, Cathay presented documentary evidence and the testimonies of Mr. Yuen;
Ms. Chiu; Norma Barrientos, Comptroller of its retained counsel; and Mr. Robson.
Yuen and Robson testified on Cathays policy of upgrading the seat accommodation of
its Marco Polo Club members when an opportunity arises. The upgrading of the
Vazquezes to First Class was done in good faith; in fact, the First Class Section is
definitely much better than the Business Class in terms of comfort, quality of food,
and service from the cabin crew. They also testified that overbooking is a widely
accepted practice in the airline industry and is in accordance with the International
Air Transport Association (IATA) regulations. Airlines overbook because a lot of
passengers do not show up for their flight. With respect to Flight CX-905, there was no
overall overbooking to a degree that a passenger was bumped off or downgraded. Yuen
and Robson also stated that the demand letter of the Vazquezes was immediately
acted upon. Reports were gathered from their office in Hong Kong and immediately
forwarded to their counsel Atty. Remollo for legal advice. However, Atty. Remollo
begged off because his services were likewise retained by the Vazquezes; nonetheless,
he undertook to solve the problem in behalf of Cathay. But nothing happened until
Cathay received a copy of the complaint in this case. For her part, Ms. Chiu denied
that she shouted or used foul or impolite language against the Vazquezes. Ms.
Barrientos testified on the amount of attorneys fees and other litigation expenses,
such as those for the taking of the depositions of Yuen and Chiu.
In its decision1 of 19 October 1998, the trial court found for the Vazquezes and decreed
as follows:
WHEREFORE, finding preponderance of evidence to sustain the instant
complaint, judgment is hereby rendered in favor of plaintiffs Vazquez spouses
and against defendant Cathay Pacific Airways, Ltd., ordering the latter to pay
each plaintiff the following:
a) Nominal damages in the amount of P100,000.00 for each plaintiff;
b) Moral damages in the amount of P2,000,000.00 for each plaintiff;
c) Exemplary damages in the amount of P5,000,000.00 for each
plaintiff;
d) Attorneys fees and expenses of litigation in the amount of
P1,000,000.00 for each plaintiff; and
e) Costs of suit.
SO ORDERED.
According to the trial court, Cathay offers various classes of seats from which
passengers are allowed to choose regardless of their reasons or motives, whether it be
due to budgetary constraints or whim. The choice imposes a clear obligation on Cathay
to transport the passengers in the class chosen by them. The carrier cannot, without
exposing itself to liability, force a passenger to involuntarily change his choice. The
upgrading of the Vazquezes accommodation over and above their vehement objections
was due to the overbooking of the Business Class. It was a pretext to pack as many
passengers as possible into the plane to maximize Cathays revenues. Cathays
actuations in this case displayed deceit, gross negligence, and bad faith, which entitled
the Vazquezes to awards for damages.
On appeal by the petitioners, the Court of Appeals, in its decision of 24 July
2001,2 deleted the award for exemplary damages; and it reduced the awards for moral
and nominal damages for each of the Vazquezes to P250,000 and P50,000, respectively,
and the attorneys fees and litigation expenses to P50,000 for both of them.
The Court of Appeals ratiocinated that by upgrading the Vazquezes to First Class,
Cathay novated the contract of carriage without the formers consent. There was a
breach of contract not because Cathay overbooked the Business Class Section of Flight
CX-905 but because the latter pushed through with the upgrading despite the
objections of the Vazquezes.
However, the Court of Appeals was not convinced that Ms. Chiu shouted at, or meant
to be discourteous to, Dr. Vazquez, although it might seemed that way to the latter,
who was a member of the elite in Philippine society and was not therefore used to
being harangued by anybody. Ms. Chiu was a Hong Kong Chinese whose fractured
Chinese was difficult to understand and whose manner of speaking might sound harsh
or shrill to Filipinos because of cultural differences. But the Court of Appeals did not
find her to have acted with deliberate malice, deceit, gross negligence, or bad faith. If
at all, she was negligent in not offering the First Class accommodations to other
passengers. Neither can the flight stewardess in the First Class Cabin be said to have
been in bad faith when she failed to assist Dr. Vazquez in lifting his baggage into the
overhead storage bin. There is no proof that he asked for help and was refused even
after saying that he was suffering from "bilateral carpal tunnel syndrome." Anent the
delay of Yuen in responding to the demand letter of the Vazquezes, the Court of
Appeals found it to have been sufficiently explained.
The Vazquezes and Cathay separately filed motions for a reconsideration of the
decision, both of which were denied by the Court of Appeals.
Cathay seasonably filed with us this petition in this case. Cathay maintains that the
award for moral damages has no basis, since the Court of Appeals found that there
was no "wanton, fraudulent, reckless and oppressive" display of manners on the part
of its personnel; and that the breach of contract was not attended by fraud, malice, or
bad faith. If any damage had been suffered by the Vazquezes, it was damnum absque
injuria, which is damage without injury, damage or injury inflicted without injustice,
loss or damage without violation of a legal right, or a wrong done to a man for which
the law provides no remedy. Cathay also invokes our decision in United Airlines, Inc.
v. Court of Appeals3 where we recognized that, in accordance with the Civil
Aeronautics Boards Economic Regulation No. 7, as amended, an overbooking that
does not exceed ten percent cannot be considered deliberate and done in bad faith. We
thus deleted in that case the awards for moral and exemplary damages, as well as
attorneys fees, for lack of proof of overbooking exceeding ten percent or of bad faith on
the part of the airline carrier.
On the other hand, the Vazquezes assert that the Court of Appeals was correct in
granting awards for moral and nominal damages and attorneys fees in view of the
breach of contract committed by Cathay for transferring them from the Business Class
to First Class Section without prior notice or consent and over their vigorous objection.
They likewise argue that the issuance of passenger tickets more than the seating
capacity of each section of the plane is in itself fraudulent, malicious and tainted with
bad faith.
The key issues for our consideration are whether (1) by upgrading the seat
accommodation of the Vazquezes from Business Class to First Class Cathay breached
its contract of carriage with the Vazquezes; (2) the upgrading was tainted with fraud
or bad faith; and (3) the Vazquezes are entitled to damages.
We resolve the first issue in the affirmative.
A contract is a meeting of minds between two persons whereby one agrees to give
something or render some service to another for a consideration. There is no contract
unless the following requisites concur: (1) consent of the contracting parties; (2) an
object certain which is the subject of the contract; and (3) the cause of the obligation
which is established.4 Undoubtedly, a contract of carriage existed between Cathay and
the Vazquezes. They voluntarily and freely gave their consent to an agreement whose
object was the transportation of the Vazquezes from Manila to Hong Kong and back to
Manila, with seats in the Business Class Section of the aircraft, and whose cause or
consideration was the fare paid by the Vazquezes to Cathay.
The only problem is the legal effect of the upgrading of the seat accommodation of the
Vazquezes. Did it constitute a breach of contract?
Breach of contract is defined as the "failure without legal reason to comply with the
terms of a contract."5 It is also defined as the "[f]ailure, without legal excuse, to
perform any promise which forms the whole or part of the contract."6
In previous cases, the breach of contract of carriage consisted in either the bumping off
of a passenger with confirmed reservation or the downgrading of a passengers seat
accommodation from one class to a lower class. In this case, what happened was the
reverse. The contract between the parties was for Cathay to transport the Vazquezes
to Manila on a Business Class accommodation in Flight CX-905. After checking-in
their luggage at the Kai Tak Airport in Hong Kong, the Vazquezes were given
boarding cards indicating their seat assignments in the Business Class Section.
However, during the boarding time, when the Vazquezes presented their boarding
passes, they were informed that they had a seat change from Business Class to First
Class. It turned out that the Business Class was overbooked in that there were more
passengers than the number of seats. Thus, the seat assignments of the Vazquezes
were given to waitlisted passengers, and the Vazquezes, being members of the Marco
Polo Club, were upgraded from Business Class to First Class.
We note that in all their pleadings, the Vazquezes never denied that they were
members of Cathays Marco Polo Club. They knew that as members of the Club, they
had priority for upgrading of their seat accommodation at no extra cost when an
opportunity arises. But, just like other privileges, such priority could be waived. The
Vazquezes should have been consulted first whether they wanted to avail themselves
of the privilege or would consent to a change of seat accommodation before their seat
assignments were given to other passengers. Normally, one would appreciate and
accept an upgrading, for it would mean a better accommodation. But, whatever their
reason was and however odd it might be, the Vazquezes had every right to decline the
upgrade and insist on the Business Class accommodation they had booked for and
which was designated in their boarding passes. They clearly waived their priority or
preference when they asked that other passengers be given the upgrade. It should not
have been imposed on them over their vehement objection. By insisting on the
upgrade, Cathay breached its contract of carriage with the Vazquezes.
We are not, however, convinced that the upgrading or the breach of contract was
attended by fraud or bad faith. Thus, we resolve the second issue in the negative.
Bad faith and fraud are allegations of fact that demand clear and convincing proof.
They are serious accusations that can be so conveniently and casually invoked, and
that is why they are never presumed. They amount to mere slogans or mudslinging
unless convincingly substantiated by whoever is alleging them.
Fraud has been defined to include an inducement through insidious machination.
Insidious machination refers to a deceitful scheme or plot with an evil or devious
purpose. Deceit exists where the party, with intent to deceive, conceals or omits to
state material facts and, by reason of such omission or concealment, the other party
was induced to give consent that would not otherwise have been given.7
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of a wrong, a breach of a known
duty through some motive or interest or ill will that partakes of the nature of fraud.8
We find no persuasive proof of fraud or bad faith in this case. The Vazquezes were not
induced to agree to the upgrading through insidious words or deceitful machination or
through willful concealment of material facts. Upon boarding, Ms. Chiu told the
Vazquezes that their accommodations were upgraded to First Class in view of their
being Gold Card members of Cathays Marco Polo Club. She was honest in telling
them that their seats were already given to other passengers and the Business Class
Section was fully booked. Ms. Chiu might have failed to consider the remedy of
offering the First Class seats to other passengers. But, we find no bad faith in her
failure to do so, even if that amounted to an exercise of poor judgment.
Neither was the transfer of the Vazquezes effected for some evil or devious purpose. As
testified to by Mr. Robson, the First Class Section is better than the Business Class
Section in terms of comfort, quality of food, and service from the cabin crew; thus, the
difference in fare between the First Class and Business Class at that time was
$250.9 Needless to state, an upgrading is for the better condition and, definitely, for
the benefit of the passenger.
We are not persuaded by the Vazquezes argument that the overbooking of the
Business Class Section constituted bad faith on the part of Cathay. Section 3 of the
Economic Regulation No. 7 of the Civil Aeronautics Board, as amended, provides:
Sec 3. Scope. This regulation shall apply to every Philippine and foreign air
carrier with respect to its operation of flights or portions of flights originating
from or terminating at, or serving a point within the territory of the Republic
of the Philippines insofar as it denies boarding to a passenger on a flight, or
portion of a flight inside or outside the Philippines, for which he holds
confirmed reserved space. Furthermore, this Regulation is designed to cover
only honest mistakes on the part of the carriers and excludes deliberate and
willful acts of non-accommodation. Provided, however, that overbooking not
exceeding 10% of the seating capacity of the aircraft shall not be considered
as a deliberate and willful act of non-accommodation.
It is clear from this section that an overbooking that does not exceed ten percent is not
considered deliberate and therefore does not amount to bad faith. 10 Here, while there
was admittedly an overbooking of the Business Class, there was no evidence of
overbooking of the plane beyond ten percent, and no passenger was ever bumped off or
was refused to board the aircraft.
Now we come to the third issue on damages.
The Court of Appeals awarded each of the Vazquezes moral damages in the amount of
P250,000. Article 2220 of the Civil Code provides:
Article 2220. Willful injury to property may be a legal ground for awarding
moral damages if the court should find that, under the circumstances, such
damages are justly due. The same rule applies to breaches of contract where
the defendant acted fraudulently or in bad faith.
Moral damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar
injury. Although incapable of pecuniary computation, moral damages may be
recovered if they are the proximate result of the defendants wrongful act or
omission. Thus, case law establishes the following requisites for the award of moral
11
damages: (1) there must be an injury clearly sustained by the claimant, whether
physical, mental or psychological; (2) there must be a culpable act or omission
factually established; (3) the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) the award for
damages is predicated on any of the cases stated in Article 2219 of the Civil Code. 12
Moral damages predicated upon a breach of contract of carriage may only be
recoverable in instances where the carrier is guilty of fraud or bad faith or where the
mishap resulted in the death of a passenger. 13 Where in breaching the contract of
carriage the airline is not shown to have acted fraudulently or in bad faith, liability for
damages is limited to the natural and probable consequences of the breach of the
obligation which the parties had foreseen or could have reasonably foreseen. In such a
case the liability does not include moral and exemplary damages. 14
In this case, we have ruled that the breach of contract of carriage, which consisted in
the involuntary upgrading of the Vazquezes seat accommodation, was not attended by
fraud or bad faith. The Court of Appeals award of moral damages has, therefore, no
leg to stand on.
The deletion of the award for exemplary damages by the Court of Appeals is correct. It
is a requisite in the grant of exemplary damages that the act of the offender must be
accompanied by bad faith or done in wanton, fraudulent or malevolent manner. 15 Such
requisite is absent in this case. Moreover, to be entitled thereto the claimant must first
establish his right to moral, temperate, or compensatory damages. Since the 16
Vazquezes are not entitled to any of these damages, the award for exemplary damages
has no legal basis. And where the awards for moral and exemplary damages are
eliminated, so must the award for attorneys fees.17
The most that can be adjudged in favor of the Vazquezes for Cathays breach of
contract is an award for nominal damages under Article 2221 of the Civil Code, which
reads as follows:
Article 2221 of the Civil Code provides:
Article 2221. Nominal damages are adjudicated in order that a right of the
plaintiff, which has been violated or invaded by the defendant, may be
vindicated or recognized, and not for the purpose of indemnifying the plaintiff
for any loss suffered by him.
Worth noting is the fact that in Cathays Memorandum filed with this Court, it prayed
only for the deletion of the award for moral damages. It deferred to the Court of
Appeals discretion in awarding nominal damages; thus:
As far as the award of nominal damages is concerned, petitioner respectfully
defers to the Honorable Court of Appeals discretion. Aware as it is that
somehow, due to the resistance of respondents-spouses to the normally-
appreciated gesture of petitioner to upgrade their accommodations, petitioner
may have disturbed the respondents-spouses wish to be with their
companions (who traveled to Hong Kong with them) at the Business Class on
their flight to Manila. Petitioner regrets that in its desire to provide the
respondents-spouses with additional amenities for the one and one-half (1
1/2) hour flight to Manila, unintended tension ensued.18
Nonetheless, considering that the breach was intended to give more benefit and
advantage to the Vazquezes by upgrading their Business Class accommodation to
First Class because of their valued status as Marco Polo members, we reduce the
award for nominal damages to P5,000.
Before writing finis to this decision, we find it well-worth to quote the apt observation
of the Court of Appeals regarding the awards adjudged by the trial court:
We are not amused but alarmed at the lower courts unbelievable alacrity, bordering
on the scandalous, to award excessive amounts as damages. In their complaint,
appellees asked for P1 million as moral damages but the lower court awarded P4
million; they asked for P500,000.00 as exemplary damages but the lower court
cavalierly awarded a whooping P10 million; they asked for P250,000.00 as attorneys
fees but were awarded P2 million; they did not ask for nominal damages but were
awarded P200,000.00. It is as if the lower court went on a rampage, and why it acted
that way is beyond all tests of reason. In fact the excessiveness of the total award
invites the suspicion that it was the result of "prejudice or corruption on the part of
the trial court."
The presiding judge of the lower court is enjoined to hearken to the Supreme
Courts admonition in Singson vs. CA (282 SCRA 149 [1997]), where it said:
The well-entrenched principle is that the grant of moral damages
depends upon the discretion of the court based on the circumstances
of each case. This discretion is limited by the principle that the
amount awarded should not be palpably and scandalously excessive
as to indicate that it was the result of prejudice or corruption on the
part of the trial court.
and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was held:
Nonetheless, we agree with the injunction expressed by the Court of
Appeals that passengers must not prey on international airlines for
damage awards, like "trophies in a safari." After all neither the social
standing nor prestige of the passenger should determine the extent
to which he would suffer because of a wrong done, since the dignity
affronted in the individual is a quality inherent in him and not
conferred by these social indicators. 19
We adopt as our own this observation of the Court of Appeals.
WHEREFORE, the instant petition is hereby partly GRANTED. The Decision of the
Court of Appeals of 24 July 2001 in CA-G.R. CV No. 63339 is hereby MODIFIED, and
as modified, the awards for moral damages and attorneys fees are set aside and
deleted, and the award for nominal damages is reduced to P5,000.
No pronouncement on costs.
SO ORDERED.
Vitug, Carpio, and Azcuna, JJ., concur.
Ynares-Santiago, J., on leave.
Petition granted, judgment modified.
359 SCRA 438
SECOND DIVISION
G.R. No. 116710. June 25, 2001.
DANILO D. MENDOZA, also doing business under the name and style of ATLANTIC
EXCHANGE PHILIPPINES, petitioner, vs. COURT OF APPEALS, PHILIPPINE
NATIONAL BANK, FERNANDO MARAMAG, JR., RICARDO G. DECEPIDA and
BAYANI A. BAUTISTA, respondents.
Civil Law; Contracts; Only an absolute and unqualified acceptance of a definite offer
manifests the consent necessary to perfect a contract.Nowhere in those letters is there
a categorical statement that respondent PNB had approved the petitioners proposed
five-year restructuring plan. It is stretching the imagination to construe them as
evidence that his proposed five-year restructuring plan has been approved by the
respondent PNB which is admittedly a banking corporation. Only an absolute and
unqualified acceptance of a definite offer manifests the consent necessary to perfect a
contract. If anything, those correspondences only prove that the parties had not gone
beyond the preparation stage, which is the period from the start of the negotiations
until the moment just before the agreement of the parties.
Same; Same; Estoppel; Essential elements to establish promissory estoppel.The
doctrine of promissory estoppel is an exception to the general rule that a promise of
future conduct does not constitute an estoppel. In some jurisdictions, in order to make
out a claim of promissory estoppel, a party bears the burden of establishing the
following elements: (1) a promise reasonably expected to induce action or
forebearance; (2) such promise did in fact induce such action or forebearance; and (3)
the party suffered detriment as a result.
Same; Same; Same; A cause of action for promissory estoppel does not lie where an
alleged oral promise was conditional, so that reliance upon it was not reasonable.For
petitioner to claim that respondent PNB is estopped to deny the five-year
restructuring plan, he must first prove that respondent PNB had promised to approve
the plan in exchange for the submission of the proposal. As discussed earlier, no such
promise was proven, therefore, the doctrine does not apply to the case at bar. A cause
of action for promissory estoppel does not lie where an alleged oral promise was
conditional, so that reliance upon it was not reasonable. It does not operate to create
liability where it does not otherwise exist.
Same; Same; Interest; The unilateral determination and imposition of increased
interest rates by respondent bank is violative of the principle of mutuality of contracts.
It appears that respondent bank increased the interest rates on the two (2) subject
Promissory Notes Nos. 127/82 and 128/82 without the prior consent of the petitioner.
The petitioner did not agree to the increase in the stipulated interest rate of 21% per
annum on Promissory Note No. 127/82 and 18% per annum on Promissory Note No.
128/82. As held in several cases, the unilateral determination and imposition of
increased interest rates by respondent bank is violative of the principle of mutuality of
contracts ordained in Article 1308 of the Civil Code.
Same; Same; Same; No one receiving a proposal to change a contract to which he is a
party is obliged to answer the proposal, and his silence per se cannot be construed as
an acceptance.It has been held that no one receiving a proposal to change a contract
to which he is a party is obliged to answer the proposal, and his silence per se cannot
be construed as an acceptance. Estoppel will not lie against the petitioner regarding
the increase in the stipulated interest on the subject Promissory Notes Nos. 127/82
and 128/82 inasmuch as he was not even informed beforehand by respondent bank of
the change in the stipulated interest rates.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Law Firm of Tanjuatco & Partners for petitioner.
The Chief Legal Counsel for respondent PNB.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision1 dated August 8, 1994 of
the respondent Court of Appeals (Tenth Division) in CA-G.R. CV No. 38036 reversing
the judgment2 of the Regional Trial Court (RTC) and dismissing the complaint
therein.
Petitioner Danilo D. Mendoza is engaged in the domestic and international trading of
raw materials and chemicals. He operates under the business name Atlantic Exchange
Philippines (Atlantic), a single proprietorship registered with the Department of
Trade and Industry (DTI). Sometime in 1978 he was granted by respondent Philippine
National Bank (PNB) a Five Hundred Thousand Pesos (P500,000.00) credit line and a
One Million Pesos (P1,000,000.00) Letter of Credit/Trust Receipt (LC/TR) line.
As security for the credit accommodations and for those which may thereinafter be
granted, petitioner mortgaged to respondent PNB the following: 1) three (3) parcels of
land3 with improvements in F. Pasco Avenue, Santolan, Pasig; 2) his house and lot in
Quezon City; and 3) several pieces of machinery and equipment in his Pasig coco-
chemical plant.
The real estate mortgage provided the following escalation clause:
4
(f) The rate of interest charged on the obligation secured by this mortgage as
well as the interest on the amount which may have been advanced by the
Mortgagee in accordance with paragraph (d) of the conditions herein
stipulated shall be subject during the life of this contract to such increase
within the rates allowed by law, as the Board of Directors of the Mortgagee
may prescribe for its debtors.
Petitioner executed in favor of respondent PNB three (3) promissory notes covering the
Five Hundred Thousand Pesos (P500,000.00) credit line, one dated March 8, 1979 for
Three Hundred Ten Thousand Pesos (P310,000.00); another dated March 30, 1979 for
Forty Thousand Pesos (P40,000.00); and the last dated September 27, 1979 for One
Hundred Fifty Thousand Pesos (P150,000.00). The said 1979 promissory notes
uniformly stipulated: "with interest thereon at the rate of 12% per annum, until paid,
which interest rate the Bank may, at any time, without notice, raise within the limits
allowed by law xxx." 5
Petitioner made use of his LC/TR line to purchase raw materials from foreign
importers. He signed a total of eleven (11) documents denominated as "Application
and Agreement for Commercial Letter of Credit," 6 on various dates from February 8 to
September 11, 1979, which uniformly contained the following clause: "Interest shall be
at the rate of 9% per annum from the date(s) of the draft(s) to the date(s) of arrival of
payment therefor in New York. The Bank, however, reserves the right to raise the
interest charges at any time depending on whatever policy it may follow in the
future."7
In a letter dated January 3, 1980 and signed by Branch Manager Fil S. Carreon Jr.,
respondent PNB advised petitioner Mendoza that effective December 1, 1979, the
bank raised its interest rates to 14% per annum, in line with Central Bank's
Monetary Board Resolution No. 2126 dated November 29, 1979.
On March 9, 1981, he wrote a letter to respondent PNB requesting for the
restructuring of his past due accounts into a five-year term loan and for an additional
LC/TR line of Two Million Pesos (P2,000,000.00).8 According to the letter, because of
the shut-down of his end-user companies and the huge amount spent for the
expansion of his business, petitioner failed to pay to respondent bank his LC/TR
accounts as they became due and demandable.
Ceferino D. Cura, Branch Manager of PNB Mandaluyong replied on behalf of the
respondent bank and required petitioner to submit the following documents before the
bank would act on his request: 1) Audited Financial Statements for 1979 and 1980; 2)
Projected cash flow (cash in - cash out) for five (5) years detailed yearly; and 3) List of
additional machinery and equipment and proof of ownership thereof. Cura also
suggested that petitioner reduce his total loan obligations to Three Million Pesos
(P3,000,000.00) "to give us more justification in recommending a plan of payment or
restructuring of your accounts to higher authorities of the Bank."9
On September 25, 1981, petitioner sent another letter addressed to PNB Vice-
President Jose Salvador, regarding his request for restructuring of his loans. He
offered respondent PNB the following proposals: 1) the disposal of some of the
mortgaged properties, more particularly, his house and lot and a vacant lot in order to
pay the overdue trust receipts; 2) capitalization and conversion of the balance into a 5-
year term loan payable semi-annually or on annual installments; 3) a new Two Million
Pesos (P2,000,000.00) LC/TR line in order to enable Atlantic Exchange Philippines to
operate at full capacity; 4) assignment of all his receivables to PNB from all domestic
and export sales generated by the LC/TR line; and 5) maintenance of the existing Five
Hundred Thousand Pesos (P500,000.00) credit line.
The petitioner testified that respondent PNB Mandaluyong Branch found his proposal
favorable and recommended the implementation of the agreement. However, Fernando
Maramag, PNB Executive Vice-President, disapproved the proposed release of the
mortgaged properties and reduced the proposed new LC/TR line to One Million Pesos
(P1,000,000.00).10 Petitioner claimed he was forced to agree to these changes and that
he was required to submit a new formal proposal and to sign two (2) blank promissory
notes.
In a letter dated July 2, 1982, petitioner offered the following revised proposals to
respondent bank: 1) the restructuring of past due accounts including interests and
penalties into a 5-year term loan, payable semi-annually with one year grace period on
the principal; 2) payment of Four Hundred Thousand Pesos (P400,000.00) upon the
approval of the proposal; 3) reduction of penalty from 3% to 1%; 4) capitalization of the
interest component with interest rate at 16% per annum; 5) establishment of a One
Million Pesos (P1,000,000.00) LC/TR line against the mortgaged properties; 6)
assignment of all his export proceeds to respondent bank to guarantee payment of his
loans.
According to petitioner, respondent PNB approved his proposal. He further claimed
that he and his wife were asked to sign two (2) blank promissory note forms.
According to petitioner, they were made to believe that the blank promissory notes
were to be filled out by respondent PNB to conform with the 5-year restructuring plan
allegedly agreed upon. The first Promissory Note, No. 127/82, covered the principal
11
while the second Promissory Note, No. 128/82, represented the accrued interest.
12
Petitioner testified that respondent PNB allegedly contravened their verbal agreement
by 1) affixing dates on the two (2) subject promissory notes to make them mature in
two (2) years instead of five (5) years as supposedly agreed upon; 2) inserting in the
first Promissory Note No. 127/82 an interest rate of 21% instead of 18%; 3) inserting in
the second Promissory Note No. 128/82, the amount stated therein representing the
accrued interest as One Million Five Hundred Thirty Six Thousand Four Hundred
Ninety Eight Pesos and Seventy Three Centavos (P1,536,498.73) when it should only
be Seven Hundred Sixty Thousand Three Hundred Ninety Eight Pesos and Twenty
Three Centavos (P760,398.23) and pegging the interest rate thereon at 18% instead of
12%.
The subject Promissory Notes Nos. 127/82 and 128/82 both dated December 29, 1982
in the principal amounts of Two Million Six Hundred Fifty One Thousand One
Hundred Eighteen Pesos and Eighty Six Centavos (P2,651,118.86) and One Million
Five Hundred Thirty Six Thousand Seven Hundred Ninety Eight and Seventy Three
Centavos (P1,536,798.73) respectively and marked Exhibits "BB" and "CC"
respectively, were payable on equal semi-annual amortization and contained the
following escalation clause:
x x x which interest rate the BANK may increase within the limits allowed by
law at any time depending on whatever policy it may adopt in the future;
Provided, that, the interest rate on this note shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced
by law or by the Monetary Board. In either case, the adjustment in the
interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in the maximum interest rate. x x x
It appears from the record that the subject Promissory Notes Nos. 127/82 and 128/82
superseded and novated the three (3) 1979 promissory notes and the eleven (11) 1979
"Application and Agreement for Commercial Letter of Credit" which the petitioner
executed in favor of respondent PNB.
According to the petitioner, sometime in June 1983 the new PNB Mandaluyong
Branch Manager Bayani A. Bautista suggested that he sell the coco-chemical plant so
that he could keep up with the semi-annual amortizations. On three (3) occasions,
Bautista even showed up at the plant with some unidentified persons who claimed
that they were interested in buying the plant.
Petitioner testified that when he confronted the PNB management about the two (2)
Promissory Notes Nos. 127/82 and 128/82 (marked Exhibits "BB" and "CC"
respectively) which he claimed were improperly filled out, Bautista and Maramag
assured him that the five-year restructuring agreement would be implemented on the
condition that he assigns 10% of his export earnings to the Bank. 13 In a letter dated
August 22, 1983, petitioner Mendoza consented to assign 10% of the net export
proceeds of a Letter of Credit covering goods amounting to One Hundred Fourteen
Thousand Dollars ($114,000.00).14 However, petitioner claimed that respondent PNB
subsequently debited 14% instead of 10% from his export proceeds.15
Pursuant to the escalation clauses of the subject two (2) promissory notes, the interest
rate on the principal amount in Promissory Note No. 127/82 was increased from 21%
to 29% on May 28, 1984, and to 32% on July 3, 1984 while the interest rate on the
accrued interest per Promissory Note No. 128/82 was increased from 18% to 29% on
May 28, 1984, and to 32% on July 3, 1984.
Petitioner failed to pay the subject two (2) Promissory Notes Nos. 127/82 and 128/82
(Exhibits "BB" and "CC") as they fell due. Respondent PNB extra-judicially foreclosed
the real and chattel mortgages, and the mortgaged properties were sold at public
auction to respondent PNB, as highest bidder, for a total of Three Million Seven
Hundred Ninety Eight Thousand Seven Hundred Nineteen Pesos and Fifty Centavos
(P3,798,719.50).
The petitioner filed in the RTC in Pasig, Rizal a complaint for specific performance,
nullification of the extra-judicial foreclosure and damages against respondents PNB,
Fernando Maramag Jr., Ricardo C. Decepida, Vice-President for Metropolitan
Branches, and Bayani A. Bautista. He alleged that the Extrajudicial Foreclosure Sale
of the mortgaged properties was null and void since his loans were restructured to a
five-year term loan; hence, it was not yet due and demandable; that the escalation
clauses in the subject two (2) Promissory Notes Nos. 127/82 and 128/82 were null and
void, that the total amount presented by PNB as basis of the foreclosure sale did not
reflect the actual loan obligations of the plaintiff to PNB; that Bautista purposely
delayed payments on his exports and caused delays in the shipment of materials; that
PNB withheld certain personal properties not covered by the chattel mortgage; and
that the foreclosure of his mortgages was premature so that he was unable to service
his foreign clients, resulting in actual damages amounting to Two Million Four
Thousand Four Hundred Sixty One Pesos (P 2,004,461.00).
On March 16, 1992, the trial court rendered judgment in favor of the petitioner and
ordered the nullification of the extrajudicial foreclosure of the real estate mortgage,
the Sheriffs sale of the mortgaged real properties by virtue of consolidation thereof
and the cancellation of the new titles issued to PNB; that PNB vacate the subject
premises in Pasig and turn the same over to the petitioner; and also the nullification
of the extrajudicial foreclosure and sheriff's sale of the mortgaged chattels, and that
the chattels be returned to petitioner Mendoza if they were removed from his Pasig
premises or be paid for if they were lost or rendered unserviceable.
The trial court also ordered respondent PNB to restructure to five-years petitioner's
principal loan of Two Million Six Hundred Fifty One Thousand One Hundred
Eighteen Pesos and Eighty Six Centavos (P2,651,118.86) and the accumulated
capitalized interest on the same in the amount of Seven Hundred Sixty Thousand
Three Hundred Eighty Nine Pesos and Twenty Three Centavos (P760,389.23) as of
December 1982, and that respondent PNB should compute the additional interest
from January 1983 up to October 15, 1984 only when respondent PNB took possession
of the said properties, at the rate of 12% and 9% respectively.
The trial court also ordered respondent PNB to grant petitioner Mendoza an
additional Two Million Pesos (P2,000,000.00) loan in order for him to have the
necessary capital to resume operation. It also ordered respondents PNB, Bayani A.
Bautista and Ricardo C. Decepida to pay to petitioner actual damages in the amount
of Two Million One Hundred Thirteen Thousand Nine Hundred Sixty One Pesos
(P2,113,961.00) and the peso equivalent of Six Thousand Two Hundred Fifteen Dollars
($6,215.00) at the prevailing foreign exchange rate on October 11, 1983; and
exemplary damages in the amount of Two Hundred Thousand Pesos (P200,000.00).
Respondent PNB appealed this decision of the trial court to the Court of Appeals. And
the Court of Appeals reversed the decision of the trial court and dismissed the
complaint. Hence, this petition.
It is the petitioners contention that the PNB management restructured his existing
loan obligations to a five-year term loan and granted him another Two Million Pesos
(P2,000,000.00) LC/TR line; that the Promissory Notes Nos. 127/82 and 128/82
evidencing a 2-year restructuring period or with the due maturity date "December 29,
1984" were filled out fraudulently by respondent PNB, and contrary to his verbal
agreement with respondent PNB; hence, his indebtedness to respondent PNB was not
yet due and the extrajudicial foreclosure of his real estate and chattel mortgages was
premature. On the other hand, respondent PNB denies that petitioner's loan
obligations were restructured to five (5) years and maintains that the subject two (2)
Promissory Notes Nos. 127/82 and 128/82 were filled out regularly and became due as
of December 29, 1984 as shown on the face thereof.
Respondent Court of Appeals held that there is no evidence of a promise from
respondent PNB, admittedly a banking corporation, that it had accepted the proposals
of the petitioner to have a five-year restructuring of his overdue loan obligations. It
found and held, on the basis of the evidence adduced, that "appellee's (Mendoza)
communications were mere proposals while the bank's responses were not categorical
that the appellee's request had been favorably accepted by the bank."
Contending that respondent PNB had allegedly approved his proposed five-year
restructuring plan, petitioner presented three (3) documents executed by respondent
PNB officials. The first document is a letter dated March 16, 1981 addressed to the
petitioner and signed by Ceferino D. Cura, Branch Manager of PNB Mandaluyong,
which states:
x x x In order to study intelligently the feasibility of your above request,
please submit the following documents/papers within thirty (30) days from
the date thereof, viz:
1. Audited Financial Statements for 1979 and 1980;
2. Projected cash flow (cash in - cash out) for five years detailed
yearly; and
3. List of additional machinery and equipment and proof of
ownership thereof.
We would strongly suggest, however, that you reduce your total obligations to
at least P3 million (principal and interest and other charges) to give us more
justification in recommending a plan of payment or restructuring of your
accounts to higher authorities of this bank.
The second document is a letter dated May 11, 1981 addressed to Mr. S. Pe Benito, Jr.,
Managing Director of the Technological Resources Center and signed by said PNB
Branch Manager, Ceferino D. Cura. According to petitioner, this letter showed that
respondent PNB seriously considered the restructuring of his loan obligations to a
five-year term loan, to wit:
xxx
At the request of our client, we would like to furnish you with the following
information pertinent to his accounts with us:
xxx
We are currently evaluating the proposal of the client to re-structure
his accounts with us into a five-year plan.
We hope that the above information will guide you in evaluating the
proposals of Mr. Danilo Mendoza.
xxx
The third document is a letter dated July 8, 1981 addressed to petitioner and signed
by PNB Assistant Vice-President Apolonio B. Francisco.
xxx
Considering that your accounts/accommodations were granted and carried in
the books of our Mandaluyong Branch, we would suggest that your requests
and proposals be directed to Ceferino Cura, Manager of our said Branch.
We feel certain that Mr. Cura will be pleased to discuss matters of mutual
interest with you.
xxx
Petitioner also presented a letter which he addressed to Mr. Jose Salvador, Vice-
President of the Metropolitan Branches of PNB, dated September 24, 1981, which
reads:
Re: Restructuring of our Account into a 5-year Term Loan and Request for
the Establishment of a P2.0 Million LC/TR Line
Dear Sir:
In compliance with our discussion last September 17, we would like to
formalize our proposal to support our above requested assistance from the
Philippine National Bank.
xxx
Again we wish to express our sincere appreciation for your open-minded
approach towards the solution of this problem which we know and will be
 beneficial and to the best interest of the bank and mutually advantageous to
your client.
xxx
Petitioner argues that he submitted the requirements according to the instructions
given to him and that upon submission thereof, his proposed five-year restructuring
plan was deemed automatically approved by respondent PNB.
We disagree.
Nowhere in those letters is there a categorical statement that respondent PNB had
approved the petitioners proposed five-year restructuring plan. It is stretching the
imagination to construe them as evidence that his proposed five-year restructuring
plan has been approved by the respondent PNB which is admittedly a banking
corporation. Only an absolute and unqualified acceptance of a definite offer manifests
the consent necessary to perfect a contract. If anything, those correspondences only
16
prove that the parties had not gone beyond the preparation stage, which is the period
from the start of the negotiations until the moment just before the agreement of the
parties.17
There is nothing in the record that even suggests that respondent PNB assented to
the alleged five-year restructure of petitioners overdue loan obligations to PNB.
However, the trial court ruled in favor of petitioner Mendoza, holding that since
petitioner has complied with the conditions of the alleged oral contract, the latter may
not renege on its obligation to honor the five-year restructuring period, under the rule
of promissory estoppel. Citing Ramos v. Central Bank,18 the trial court said:
The broad general rule to the effect that a promise to do or not to do
something in the future does not work an estoppel must be qualified, since
there are numerous cases in which an estoppel has been predicated on
promises or assurances as to future conduct. The doctrine of promissory
estoppel is by no means new, although the name has been adopted only in
comparatively recent years. According to that doctrine, an estoppel may arise
from the making of a promise, even though without consideration, if it was
intended that the promise should be relied upon and in fact it was relied
upon, and if a refusal to enforce it would be virtually to sanction the
perpetration of fraud or would result in other injustice. In this respect, the
reliance by the promisee is generally evidenced by action or forbearance on
his part, and the idea has been expressed that such action or forbearance
would reasonably have been expected by the promissor. xxx
The doctrine of promissory estoppel is an exception to the general rule that a promise
of future conduct does not constitute an estoppel. In some jurisdictions, in order to
make out a claim of promissory estoppel, a party bears the burden of establishing the
following elements: (1) a promise reasonably expected to induce action or
forebearance; (2) such promise did in fact induce such action or forebearance, and (3)
the party suffered detriment as a result.19
It is clear from the forgoing that the doctrine of promissory estoppel presupposes the
existence of a promise on the part of one against whom estoppel is claimed. The
promise must be plain and unambiguous and sufficiently specific so that the Judiciary
can understand the obligation assumed and enforce the promise according to its
terms.20 For petitioner to claim that respondent PNB is estopped to deny the five-year
restructuring plan, he must first prove that respondent PNB had promised to approve
the plan in exchange for the submission of the proposal. As discussed earlier, no such
promise was proven, therefore, the doctrine does not apply to the case at bar. A cause
of action for promissory estoppel does not lie where an alleged oral promise was
conditional, so that reliance upon it was not reasonable. 21 It does not operate to create
liability where it does not otherwise exist.22
Since there is no basis to rule that petitioner's overdue loan obligations were
restructured to mature in a period of five (5) years, we see no other option but to
respect the two-year period as contained in the two (2) subject Promissory Notes Nos.
127/82 and 128/82, marked as Exhibits "BB" and "CC" respectively which superseded
and novated all prior loan documents signed by petitioner in favor of respondent PNB.
Petitioner argues, in his memorandum, that "respondent Court of Appeals had no
basis in saying that the acceptance of the five-year restructuring is totally absent from
the record."23 On the contrary, the subject Promissory Notes Nos. 127/82 and 128/82
are clear on their face that they were due on December 29, 1984 or two (2) years from
the date of the signing of the said notes on December 29, 1982.
Petitioner claims that the two (2) subject Promissory Notes Nos. 127/82 and 128/82
were signed by him in blank with the understanding that they were to be
subsequently filled out to conform with his alleged oral agreements with PNB officials,
among which is that they were to become due only after five (5) years. If petitioner
were to be believed, the PNB officials concerned committed a fraudulent act in filling
out the subject two (2) promissory notes in question. Private transactions are
presumed to be fair and regular. 24 The burden of presenting evidence to overcome this
presumption falls upon petitioner. Considering that petitioner imputes a serious act of
fraud on respondent PNB, which is a banking corporation, this court will not be
satisfied with anything but the most convincing evidence. However, apart from
petitioner's self-serving verbal declarations, we find no sufficient proof that the subject
two (2) Promissory Notes Nos. 127/82 and 128/82 were completed irregularly.
Therefore, we rule that the presumption has not been rebutted.
Besides, it could be gleaned from the record that the petitioner is an astute
businessman who took care to reduce in writing his business proposals to the
respondent bank. It is unthinkable that the same person would commit the careless
mistake of leaving his subject two (2) promissory notes in blank in the hands of other
persons. As the respondent Court of Appeals correctly pointed out:
Surely, plaintiff-appellee who is a C.P.A and a Tax Consultant (p. 3 TSN,
January 9, 1990) will insist that the details of the two promissory notes he
and his wife executed in 1982 should be specific to enable them to make the
precise computation in the event of default as in the case at bench. In fact, his
alleged omission as a C.P.A. and a Tax Consultant to insist that the two
promissory notes be filled up on important details like the rates of interest is
inconsistent with the legal presumption of a person who takes ordinary care
of his concerns (Section 3 (c), Rule 131, Revised Rules on Evidence).
As pointed out by the Court of Appeals, Orlando Montecillo, Chief, Loans and
Discounts, PNB Mandaluyong Branch, testified that the said Promissory Notes Nos.
127/82 and 128/82 were completely filled out when Danilo Mendoza signed them
(Rollo, p. 14).
In a last-ditch effort to save his five-year loan restructuring theory, petitioner
contends that respondent PNB's action of withholding 10% from his export proceeds is
proof that his proposal had been accepted and the contract had been partially
executed. He claims that he would not have consented to the additional burden if there
were no corresponding benefit. This contention is not well taken. There is no credible
proof that the 10% assignment of his export proceeds was not part of the conditions of
the two-year restructuring deal. Considering that the resulting amount obtained from
this assignment of export proceeds was not even enough to cover the interest for the
corresponding month,25 we are hard-pressed to construe it as the required proof that
respondent PNB allegedly approved the proposed five-year restructuring of
petitioners overdue loan obligations.
It is interesting to note that in his Complaint, petitioner made no mention that the
assignment of his export proceeds was a condition for the alleged approval of his
proposed five-year loan restructuring plan. The Complaint merely alleged that
"plaintiff in a sincere effort to make payments on his obligations agreed to assign 10%
of his export proceeds to defendant PNB." This curious omission leads the court to
believe that the alleged link between the petitioners assignment of export proceeds
and the alleged five-year restructuring of his overdue loans was more contrived than
real.
It appears that respondent bank increased the interest rates on the two (2) subject
Promissory Notes Nos. 127/82 and 128/82 without the prior consent of the petitioner.
The petitioner did not agree to the increase in the stipulated interest rate of 21% per
annum on Promissory Note No. 127/82 and 18% per annum on Promissory Note No.
128/82. As held in several cases, the unilateral determination and imposition of
increased interest rates by respondent bank is violative of the principle of mutuality of
contracts ordained in Article 1308 of the Civil Code.26As held in one case:27
It is basic that there can be no contract in the true sense in the absence of the
element of agreement, or of mutual assent of the parties. If this assent is
wanting on the part of one who contracts, his act has no more efficacy than if
it had been done under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the proposed
modification, especially when it affects an important aspect of the agreement.
In the case of loan contracts, it cannot be gainsaid that the rate of interest is
always a vital component, for it can make or break a capital venture.
It has been held that no one receiving a proposal to change a contract to which he is a
party is obliged to answer the proposal, and his silence per se cannot be construed as
an acceptance.28 Estoppel will not lie against the petitioner regarding the increase in
the stipulated interest on the subject Promissory Notes Nos. 127/82 and 128/82
inasmuch as he was not even informed beforehand by respondent bank of the change
in the stipulated interest rates. However, we also note that the said two (2) subject
Promissory Notes Nos. 127/82 and 128/82 expressly provide for a penalty charge of 3%
per annum to be imposed on any unpaid amount when due.
Petitioner prays for the release of some of his movables 29 being withheld by respondent
PNB, alleging that they were not included among the chattels he mortgaged to
respondent bank. However, petitioner did not present any proof as to when he
acquired the subject movables and hence, we are not disposed to believe that the same
were "after-acquired" chattels not covered by the chattel and real estate mortgages.
In asserting its rights over the subject movables, respondent PNB relies on a common
provision in the two (2) subject Promissory Notes Nos. 127/82 and 128/82 which states:
In the event that this note is not paid at maturity or when the same becomes
due under any of the provisions hereof, we hereby authorized the BANK at its
option and without notice, to apply to the payment of this note, any and all
moneys, securities and things of value which may be in its hands on deposit
or otherwise belonging to me/us and for this purpose. We hereby, jointly and
severally, irrevocably constitute and appoint the BANK to be our true
Attorney-in-Fact with full power and authority for us in our name and behalf
and without prior notice to negotiate, sell and transfer any moneys securities
and things of value which it may hold, by public or private sale and apply the
proceeds thereof to the payment of this note.
It is clear, however, from the above-quoted provision of the said promissory notes that
respondent bank is authorized, in case of default, to sell "things of value" belonging to
the mortgagor "which may be on its hands for deposit or otherwise belonging to me/us
and for this purpose." Besides the petitioner executed not only a chattel mortgage but
also a real estate mortgage to secure his loan obligations to respondent bank.
A stipulation in the mortgage, extending its scope and effect to after-acquired property
is valid and binding where the after-acquired property is in renewal of, or in
substitution for, goods on hand when the mortgage was executed, or is purchased with
the proceeds of the sale of such goods. 30 As earlier pointed out, the petitioner did not
present any proof as to when the subject movables were acquired.
More importantly, respondent bank makes a valid argument for the retention of the
subject movables. Respondent PNB asserts that those movables were in fact
"immovables by destination" under Art. 415 (5) of the Civil Code. 31 It is an established
rule that a mortgage constituted on an immovable includes not only the land but also
the buildings, machinery and accessories installed at the time the mortgage was
constituted as well as the buildings, machinery and accessories belonging to the
mortgagor, installed after the constitution thereof.32
Petitioner also contends that respondent PNBs bid prices for this foreclosed
properties in the total amount of Three Million Seven Hundred Ninety Eight
Thousand Seven Hundred Nineteen Pesos and Fifty Centavos (P3,798,719.50), were
allegedly "unconscionable and shocking to the conscience of men". He claims that the
fair market appraisal of his foreclosed plant site together with the improvements
thereon located in Pasig, Metro Manila amounted to Five Million Four Hundred Forty
One Thousand Six Hundred Fifty Pesos (P5,441,650.00) while that of his house and lot
in Quezon City amounted to Seven Hundred Twenty Two Thousand Pesos
(P722,000.00) per the appraisal report dated September 20, 1990 of Cuervo
Appraisers, Inc.33 That contention is not well taken considering that:
1. The total of the principal amounts alone of petitioners subject Promissory
Notes Nos. 127/82 and 128/82 which are both overdue amounted to Four
Million One Hundred Eighty Seven Thousand Nine Hundred Seventeen Pesos
and Fifty Nine Centavos (P 4,187,917.59).
2. While the appraisal of Cuervo Appraisers, Inc. was undertaken in
September 1990, the extrajudicial foreclosure of petitioners real estate and
chattel mortgages have been effected way back on October 15, 1984, October
23, 1984 and December 21, 1984.34 Common experience shows that real estate
values especially in Metro Manila tend to go upward due to developments in
the locality.1wphi1.nt
 3. In the public auction/foreclosure sales, respondent PNB, as mortgagee, was
not obliged to bid more than its claims or more than the amount of
petitioners loan obligations which are all overdue. The foreclosed real estate
and chattel mortgages which petitioner earlier executed are accessory
contracts covering the collaterals or security of his loans with respondent
PNB. The principal contracts are the Promissory Notes Nos. 127/82 and
128/82 which superseded and novated the 1979 promissory notes and the
1979 eleven (11) Applications and Agreements for Commercial Letter of
Credit.
Finally, the record shows that petitioner did not even attempt to tender any
redemption price to respondent PNB, as highest bidder of the said foreclosed real
estate properties, during the one-year redemption period.
In view of all the foregoing, it is our view and we hold that the extrajudicial
foreclosure of petitioners real estate and chattel mortgages was not premature and
that it was in fact legal and valid.
WHEREFORE, the petition is hereby DENIED. The challenged Decision of the Court
of Appeals in CA-G.R. CV No. 38036 is AFFIRMED with modification that the
increase in the stipulated interest rates of 21% per annum and 18% per annum
appearing on Promissory Notes Nos. 127/82 and 128/82 respectively is hereby declared
null and void.
SO ORDERED.
Bellosillo, Mendoza, Quisumbing, Buena, JJ., concur.
Petition denied, judgment affirmed with modification.
372 SCRA 338
SECOND DIVISION
G.R. No. 131086. December 14, 2001.
BPI EXPRESS CARD CORPORATION, petitioner, vs. EDDIE C. OLALIA,
respondent.
Civil Law; Contracts; Contracts regarding credit cards are contracts of adhesion, so-
called because their terms are prepared by only one party while the other merely
affixes his signature signifying his adhesion thereto.We have previously held that
contracts of this nature are contracts of adhesion, so-called because their terms are
prepared by only one party while the other merely affixes his signature signifying his
adhesion thereto. As such, their terms are construed strictly against the party who
drafted it. In this case, it was BECC who made the foregoing stipulation, thus, they
are now tasked to show vigilance for its compliance.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Lopez & Rempillo for petitioner.
Reloj Law Office for private respondent.
QUISUMBING, J.:
This petition for review seeks to annul the decision of the Court of Appeals in CA-
1 questioned purchases were made. She was dropped as defendant by the trial court, in
G.R. CV No. 49618, reversing the order of the Regional Trial Court, Branch 145, of
2 an Order dated September 29, 1995.5
Makati City which held Eddie C. Olalia liable to BPI Express Card Corporation
(BECC) in the amount of P136,290.97. The CA found only the amount of P13,883.27 to
be due and owing to BECC. Petitioners motion for reconsideration was denied
through a resolution,3 also before us on review.
The factual antecedents of this case are as follows:
Petitioner operates a credit card system under the name of BPI Express Card
Corporation (BECC) through which it extends credit accommodations to its
cardholders for the purchase of goods and other services from member establishments
of petitioner to be reimbursed later on by the cardholder upon proper billing.
Respondent Eddie C. Olalia applied4 for and was granted membership and credit
accommodation with BECC. BECC Card No. 020100-3-00-0281667 was issued in his
name with a credit limit of P5,000.
In January 1991, Olalias card expired and a renewal card was issued. BECC also
issued Card No. 020100-2-01-0281667 in the name of Cristina G. Olalia, respondents
ex-wife. This second card was an extension of Olalias credit card. BECC alleges that
the extension card was delivered and received by Olalia at the same time as the
renewal card. However, Olalia denies ever having applied for, much less receiving, the
extension card.
As evidenced by charge slips presented and identified in court, it was found that the
extension card in the name of Cristina G. Olalia was used for purchases made from
March to April 1991, particularly in the province of Iloilo and the City of Bacolod.
Total unpaid charges from the use of this card amounted to P101,844.54.1wphi1.nt
BECC sent a demand letter to Olalia, to which the latter denied liability saying that
said purchases were not made under his own credit card and that he did not apply for
nor receive the extension card in the name of his wife. He has likewise not used or
allowed anybody in his family to receive or use the extension card. Moreover, his wife,
from whom he was already divorced, left for the States in 1986 and has since resided
there. In addition, neither he nor Cristina was in Bacolod or Iloilo at the time the
A case for collection was filed by BECC before the RTC but Olalia only admits
responsibility for the amount of P13,883.27, representing purchases made under his
own credit card. After trial on the merits, a decision was rendered as follows:
WHEREFORE, judgment is rendered ordering defendant Eddie C. Olalia to
pay plaintiff the sum of Thirteen Thousand Eight Hundred Eighty-Three
Pesos and Twenty-seven Centavos (P13,883.27), Philippine Currency with
interest thereon at the legal rate from June 18, 1991, until fully paid; and to
pay the costs.
 SO ORDERED.6
From the aforesaid decision, a Motion for Reconsideration was filed, alleging that
Olalia should also be held liable for the purchases arising from the use of the
extension card since he allegedly received the same, as evidenced by his signature
appearing in the Renewal Card Acknowledgement Receipt and by the express
7
provision of paragraph 2 of the terms and conditions governing the use and issuance
of a BPI Express Card, making the cardholder and his extension jointly and severally
liable for all purchases and availments made through the use of the card.
On April 28, 1995, the Motion for Reconsideration was granted and an Order was
issued, stating:
Defendant Eddie C. Olalia has not filed any reaction paper up to the present
relative to plaintiffs MOTION FOR RECONSIDERATION dated December
20, 1994.
Finding the allegations in said motion to be meritorious, the same is hereby
granted.
WHEREFORE, the dispositive portion of the decision dated November 25,
1994, is reconsidered and accordingly amended/corrected to read as follows:
WHEREFORE, judgment is rendered ordering defendant Eddie C.
Olalia to pay plaintiff the sum of One Hundred Thirty Six Thousand
Two Hundred Ninety Pesos and Ninety-seven Centavos
(P136,290.97) Philippine Currency, as of October 27, 1991.
SO ORDERED.8
Olalia appealed to the Court of Appeals and was there sustained in a decision dated
November 28, 1996. The CA ruled as follows:
THE FOREGOING CONSIDERED, the contested Decision, while affirmed, is
hereby modified by limiting appellants liability only to P13,883.27, but with
interest at 3% per month in addition to penalty fee of 3% of the amount due
every month, until full payment.9
BECC filed a Motion for Reconsideration but the CA denied the same through a
Resolution dated October 17, 1997.
Hence, this petition wherein BECC contends, as its lone assignment of error, 10 that
the Court of Appeals erred in limiting the liability of respondent to only P13,883.27
exclusive of interest and penalty fee notwithstanding receipt and availment of the
extension card.
More precisely, the issues are: 1) Whether or not an extension card in the name of
Cristina G. Olalia was validly issued and in fact received by respondent Eddie C.
Olalia; and 2) Whether or not Eddie C. Olalia can be held liable for the purchases
made using the extension card.
We discuss the issues jointly.
Under stipulation No. 10 of the terms and conditions governing the issuance and use
of the BPI Express Credit Card, the following is stated:
10. EXTENSIONS/SUPPLEMENTARY CARDS Extension of the CARD
issued to the Cardholder may be given to the latters spouse or children upon
payment of the necessary fee thereof, and the submission of an application for
the purpose; and the use of such CARD, as well as the extensions, thereof,
shall be governed by this Agreement, and secured by the Surety Undertaking
hereto. Any reference to the CARD issued to the Cardholder hereafter shall
also apply to extensions and/or renewals. Should a CARD be issued to the
spouse/children of a Cardholder upon the Cardholders request, the
Cardholder shall be responsible for all charges including all fees, interest and
other charges made through the CARD. In the event of separation, legal or
otherwise, the Cardholder shall continue to be responsible for all such
charges to be made through the extension CARD unless Cardholder request
in writing that the privileges of such extension Cardholder under this
Agreement be terminated, provided all charges incurred shall have been fully
paid and satisfied. (Emphasis ours)11
From the foregoing stipulation, it is clear that there are two requirements before an
extension/supplementary card is issued. They are: 1) payment of the necessary fee,
and 2) submission of an application for the purpose. None of these requirements were
shown to have been complied with by Olalia. Both the trial and appellate courts have
found that in Olalias applications for the original as well as the renewal card, he
never applied for an extension card in the name of his wife. BECC also failed to show
any receipt for any fee given in payment for the purpose of securing an extension card.
BECC supports its allegation that Eddie C. Olalia received the extension card in the
name of his wife, by presenting the Renewal Card Acknowledgement Receipt wherein
Olalia affixed his signature. Such will not suffice to prove to this Court that the
requirements for the issuance of the extension card have been complied with,
especially in the face of respondents firm denial.
We have previously held that contracts of this nature are contracts of adhesion, so-
called because their terms are prepared by only one party while the other merely
affixes his signature signifying his adhesion thereto. As such, their terms are
12
construed strictly against the party who drafted it. 13 In this case, it was BECC who
made the foregoing stipulation, thus, they are now tasked to show vigilance for its
compliance.
BECC failed to explain who a card was issued without accomplishment of the
requirements. Moreover, BECC did not even secure the specimen signature of the
purported extension cardholder, such that it cannot now counter Eddie C. Olalias
contention that the signatures appearing on the charge slips of the questioned
transactions were not that of his former wife, Cristina G. Olalia.
We note too that respondent Eddie C. Olalia did not indicate nor declare that he had a
spouse when he applied for a credit card with BECC. In fact, at the time the extension
card was issued and allegedly received by respondent, Cristina had long left the
Philippines.
BECCs negligence absolves respondent Olalia from liability.
In sum, we agree with the Court of Appeals that respondent Olalia should not be held
liable for the purchases made under the so-called extension card irregularly issued by
petitioner and used for purchases made by an unauthorized party for whose actions
the respondent could not be legally made answerable. This being the case, respondent
Olalia could only be held liable for P13,883.27 representing purchases made under his
own credit card, exclusive of interest and penalty thereon, if any.1wphi1.nt
WHEREFORE, the instant petition is DENIED, and the decision of the Court of
Appeals is hereby AFFIRMED.
SO ORDERED.
Bellosillo, Mendoza, De Leon, Jr., JJ., concur.
Buena, J., on official leave.
Petition denied, judgment affirmed.
470 SCRA 33
SECOND DIVISION
G.R. No. 130982. September 16, 2005.
SPOUSES DOMINGO and LOURDES PAGUYO, petitioners, vs. PIERRE ASTORGA
and ST. ANDREW REALTY, INC., respondents.
Actions; Obligations and Contracts; Rescission; In case one of the obligors should not
comply with what is incumbent upon him, the injured party has the choice between
rescission or the fulfillment of the obligation, with payment of damages in either case.
The right to rescind a contract involving reciprocal obligations is provided for in
Article 1191 of the Civil Code. Article 1191 states: The power to rescind obligations is
implied in reciprocal ones, in case one of the obligors should not comply with what is
incumbent upon him. The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should become
impossible. The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period. This is understood to be without prejudice to the
rights of third persons who have acquired the thing, in accordance with Articles 1385
and 1388 and the Mortgage Law. The law speaks of the right of the injured party to
choose between rescission or fulfillment of the obligation, with the payment of
damages in either case.
Same; Same; Courts; Courts operate not because one person has been defeated or
overcome by another, but because he has been defeated or overcome illegallymen may
do foolish things, make ridiculous contracts, use miserable judgment, and lose money
by them, but not for that alone can the law intervene and restore.In Sps.
Buenaventura v. Court of Appeals, 416 SCRA 263, the Court was unequivocal: Courts
cannot follow one every step of his life and extricate him from bad bargains, protect
him from unwise investments, relieve him from one-sided contracts, or annul the
effects of foolish acts. Courts cannot constitute themselves guardians of persons who
are not legally incompetent. Courts operate not because one person has been defeated
or overcome by another, but because he has been defeated or overcome illegally. Men
may do foolish things, make ridiculous contracts, use miserable judgment, and lose
money by themindeed, all they have in the world; but not for that alone can the law
intervene and restore. There must be, in addition, a violation of the law, the
commission of what the law knows as an actionable wrong, before the courts are
authorized to lay hold of the situation and remedy it.
Same; Same; Same; The validity and/or enforceability of impugned contracts will have
to be determined by the peculiar circumstances obtaining in each case and the situation
of the parties concerned; A party who is not only cultured but a person with great
business acumen as well, cannot claim to be the weaker or disadvantaged party in the
subject contract so as to call for a strict interpretation against the other party.Neither
does the fact that the subject contracts have been prepared by respondents ipso facto
entail that their validity and legality be strictly interpreted against them. Petitioner
Lourdes Paguyos insinuation that she was disadvantaged will not hold. True, Article
24 of the New Civil Code provides that (i)n all contractual, property or other
relations, when one of the parties is at a disadvantage on account of his moral
dependence, ignorance, indigence, mental weakness, tender age or other handicap, the
courts must be vigilant for his protection. Thus, the validity and/or enforceability of
the impugned contracts will have to be determined by the peculiar circumstances
obtaining in each case and the situation of the parties concerned. Here, petitioner
Lourdes Paguyo, being not only cultured but a person with great business acumen as
well, cannot claim to be the weaker or disadvantaged party in the subject contract so
as to call for a strict interpretation against respondents. More importantly, the parties
herein went through a series of negotiations before the documents were signed and
executed.
Same; Same; A party should not, after its opportunity to enjoy the benefits of an
agreement, be allowed to later disown the arrangement when the terms thereof
ultimately would prove to operate against its hopeful expectations.In the case at bar,
petitioners pray for rescission of the Deed of Sale of the building and offer to repay the
purchase price after their liquidity position would have improved and after
respondents would have refurbished the building, updated the real property taxes,
and turned the building into a profitable business venture. This Court, however, will
not allow itself to be an instrument to the dissolution of contract validly entered into.
A party should not, after its opportunity to enjoy the benefits of an agreement, be
allowed to later disown the arrangement when the terms thereof ultimately would
prove to operate against its hopeful expectations.
Same; Same; Damages; Damages are not intended for a litigants enrichmentjudicial
discretion granted to the courts in the assessment of damages must always be
exercised with balanced restraint and measured objectivity.While it has been
sufficiently proven that the respondents are entitled to damages, the actual amounts
awarded by the lower court must be reduced because damages are not intended for a
litigants enrichment, at the expense of the petitioners. Judicial discretion granted to
the courts in the assessment of damages must always be exercised with balanced
restraint and measured objectivity.
Herein petitioners, Spouses Domingo Paguyo and Lourdes Paguyo, were the owners of
a small five-storey building known as the Paguyo Building located at Makati Avenue,
corner Valdez Street, Makati City. With one (1) unit per floor, the building has an
average area of 100 square meters per floor and is constructed on a land belonging to
the Armas family.5

PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Quasha, Ancheta, Pena & Nolasco for petitioners.
P.C. Jose & Associates for private respondents.
This lot on which the Paguyo Building stands was the subject of Civil Case No. 5715
entitled, Armas, et al., v. Paguyo, et al., wherein the RTC of Makati City, Branch 57,
rendered a decision on 20 January 1988 approving a Compromise Agreement made
between the Armases and the petitioners. The compromise agreement provided that in
consideration of the total sum of One Million Seven Hundred Thousand Pesos
(P1,700,000.00), the Armases committed to execute in favor of petitioners a deed of
sale and/or conveyance assigning and transferring unto said petitioners all their rights
and interests over the parcel of land containing an area of 299 square meters.6

In order for the petitioners to complete their title and ownership over the lot in
question, there was an urgent need to make complete payment to the Armases, which
at that time stood at P917,470.00 considering that petitioners had previously made
CHICO-NAZARIO, J.:
partial payments to the Armases.

. . . Men may do foolish things, make ridiculous contracts, use miserable judgment,
On 29 November 1988, in order to raise the much needed amount, petitioner Lourdes
and lose money by them indeed, all they have in the world; but not for that alone can
Paguyo entered into an agreement captioned as Receipt of Earnest Money with
the law intervene and restore. There must be, in addition, a violation of the law, the
respondent Pierre Astorga, for the sale of the formers property consisting of the lot
commission of what the law knows as an actionable wrong, before the courts are
which was to be purchased from the Armases, together with the improvements
authorized to lay hold of the situation and remedy it.1
thereon, particularly, the existing building known as the Paguyo Building, under the
following terms and conditions as stated in the document, to wit:
The case at bar demonstrates a long drawn-out litigation between parties who already
entered into a valid contract that has subsisted for almost twenty (20) years but one of
RECEIVED from MR. PIERRE M. ASTORGA the sum of FIFTY THOUSAND
them later balks from being bound by it, alleging fraud, gross inadequacy of
(P50,000.00) PESOS (U.C.P.B. Managers Check No. 013085 dated November 29, 1988)
consideration, mistake, and undue influence.
as earnest money for the sale of our property consisting of a parcel of land designated
as Lot 12 located at Makati Avenue, Makati, Metro Manila, covered by and described
This is a petition for review on certiorari where petitioner Spouses Domingo and
in T.C.T. No. 154806 together with the improvements thereon particularly the existing
Lourdes Paguyo seek the reversal of the Decision 2 and the Resolution,3 dated 30 April
building known as the Paguyo Bldg. under the following terms and conditions:
1997 and 12 September 1997, respectively, of the Court of Appeals in CA-G.R. CV No.
47034, affirming in toto the Decision4 dated 21 April 1994 of the Regional Trial Court
1. The earnest money (Exh. "D") shall be good for fifteen (15) days from date of this
(RTC), Branch 142 of Makati City.
document during which period the owner is bound to sell the property to the buyer;

The Antecedents
2. Should the buyer decide not to buy the subject property within the earnest/option
period, the seller has the right to forfeit Fifteen Thousand (P15,000.00) pesos, and
The undisputed facts, per summary of the Court of Appeals, follow.
return the difference to the buyer;
3. The agreed total purchase price is seven million (P7,000,000.00) pesos Philippine
Currency;
4. Within fifteen (15) days from execution of this document, the buyer shall pay Fifty
(50%) percent of the total purchase price less the aforesaid earnest money, upon
payment of which the following documents shall be executed or caused to be executed
as the case may be, namely:
a. Deed of Absolute Sale of the Paguyo Bldg., in favor of the buyer.
b. Deed of Absolute Sale to be executed by the Armases who still appear as the
registered owners of the lot in favor of the buyer.
c. Deed of Real Estate Mortgage of the same subject lot and Bldg. to secure the 50%
balance of the total purchase price to be executed by the buyer in favor of the herein
seller.
5. The Deed of Real Estate Mortgage shall contain the following provisions, namely:
a. payment of the 50% balance of the purchase price shall be payable within fifteen
(15) days from actual vacating of the Armases from the subject lot.
b. During the period commencing from the execution of the documents mentioned
under paragraph 4 (which should be done simultaneously) the buyer is entitled to one-
half (1/2) of the rental due and actually received from the tenants of the Paguyo Bldg.
plus the use of the penthouse while the seller shall retain possession and use of the
basement free of rent until the balance of the purchase price is fully paid in
accordance with the herein terms and conditions. The one-half (1/2) of the tenants
deposits shall be credited in favor of the buyer.7
However, contrary to their express representation with respect to the subject lot,
petitioners failed to comply with their obligation to acquire the lot from the Armas
family despite the full financial support of respondents. Nevertheless, the parties
maintained their business relationship under the terms and conditions of the above-
mentioned Receipt of Earnest Money.8
On 12 December 1988, petitioners asked for and were given by respondents an
additional P50,000.00 to meet the formers urgent need for money in connection with
their construction business. Due also to the urgent necessity of obtaining money to
finance their construction business, petitioner Lourdes Paguyo, who was also the
attorney-in-fact of her husband, proposed to the respondents the separate sale of the
building in question while she continued to work on the acquisition of the lot from the
Armas family, assuring the respondents that she would succeed in doing so.9
Aware of the risk of buying an improvement on the lot of a third party who appeared
ambivalent on whether to dispose their property in favor of the respondents,
respondents took a big business gamble and, relying on the assurance of petitioners
that they would eventually acquire the lot and transfer the same to respondents in
accordance with their undertaking in the Receipt of Earnest Money, respondents
agreed to petitioner Lourdes Paguyos proposal to buy the building first. Thus, on 5
January 1989, the parties executed the four documents in question namely, the Deed
of Absolute Sale of the Paguyo Building, the Mutual Undertaking, the Deed of Real
Estate Mortgage, and the Deed of Assignment of Rights and
Interest.10 Simultaneously with the signing of the four documents, respondents paid
petitioners the additional amount of P500,000.00.11 Thereafter, the respondents
renamed the Paguyo Building into GINZA Bldg. and registered the same in the name
of respondent St. Andrew Realty, Inc. at the Makati Assessors Office after paying
accrued real estate taxes in the total amount ofP169,174.95. Since 1990, respondents
paid the real estate taxes on subject building as registered owners thereof. Further,
respondents obtained fire insurance and applied for the conversion of Paguyo Building
into a condominium. All of these acts of ownership exercised by respondents over the
building were with the express knowledge and consent of the petitioners.12
Pursuant to their agreement contained in the aforecited documents, particularly in
the Mutual Undertaking,13respondent company filed an ejectment case and obtained a
favorable decision against petitioners in the Metropolitan Trial Court (MeTC) of
Makati in Civil Case No. 40050. The case reached this Court which affirmed the
decision of the MeTC in favor of respondent company. This decision had already been
executed and the respondent company is now in possession of the building.
Accordingly, respondents continued to exercise acts of full ownership, possession and
use over the building.14
On 06 October 1989, petitioners filed a Complaint for the rescission of the Receipt of
Earnest Money15 with the undertaking to return the sum of P763,890.50. They also
sought the rescission of the Deed of Real Estate Mortgage,16 the Mutual
Undertaking, the Deed of Absolute Sale of Building,17 and the Deed of
Assignment of Rights and Interest.18
In their complaint, petitioners alleged that respondents Astorga and St. Andrew
Realty, Inc., led them to believe that they would advance the P917,470.00, which was
needed by petitioners to complete payment with the Armases, with the understanding
that said amount would simply be deducted from the P7 Million total consideration
due them for the sale of the lot and the building as agreed upon in their Receipt of
Earnest Money. The same, however, did not materialize because instead of making
available the check for the said amount, respondents did not produce the amount and
even ordered the "stop payment" of the same before it could be deposited in court.19
Respondents, in their Answer, however, interjected that as gleaned from the Receipt
of Earnest Money, theMutual Undertaking, the Deed of Assignment of Rights
and Interest, their original intention was to purchase the Paguyo Building and the
lot on which it stands simultaneously. Respondents interposed that at the time the
decision on the compromise agreement between petitioners and Armases was
rendered, petitioners were badly in need of money because they were financing their
construction business and, with the balance payable to the Armases, the former were
in a huff to produce an amount sufficient to cover both transactions. Thus, petitioners
prevailed upon respondents to purchase the Paguyo Building first with the lot to follow
after petitioners have successfully acquired it from the Armas family.
Respondents, likewise, stated in their Answer that sometime in July of 1989,
petitioners asked respondent corporation to execute a check in the amount
of P917,470.0020 for the final execution of the Deed of Conveyance of the lot, saying
that they were finally able to negotiate the purchase of the lot owned by the Armases.
To settle the transaction, respondent corporation again complied. After investigation,
however, respondents learned that petitioners were not in the position to deliver the
land, all the rights and interest thereof having allegedly been transferred already to
spouses Rodolfo and Aurora Bacani. They were able to confirm this after obtaining a
copy of a letter dated 22 September 1989 of petitioners counsel (same counsel
representing them presently) to the Register of Deeds of Makati a month prior to the
filing of the instant case. The letter stated:
Ms. Mila Flores
Register of Deeds
Makati, Metro Manila
Dear Ms. Flores:
We represent the spouses Rodolfo and Aurora Bacani, who happen to be the assignees
of all the rights and interests that the couple Domingo and Lourdes Paguyo have over
that parcel of land located along Makati Avenue, the particulars and description of
which are indicated on TCT No. 154806 which, for reasons we perceive to be not
legitimate, was cancelled.
...
(SGD.) HECTOR B. ALMEYDA
For the Firm21
(Emphasis supplied.)
Respondents further explained in their Answer that because of this development, they
were constrained to order "stop payment" of the P917,470.00 check, which was duly
communicated to petitioners in a letter dated 14 July 1989, to wit:
I am very sorry to inform you that I have to stop payment on Philtrust Check No.
006759 because I was just reliably informed that you are no longer in a position to
deliver the lot subject of our agreement. While the financier had already advanced
half million pesos which was already placed in my account, I discouraged her from
putting another million pesos to cover my check with you. I therefore find myself with
no alternative but to order stop payment on my check to protect my rights and
interests.22
The Ruling of the Trial Court
After trial, the RTC ruled in favor of respondents in a Decision 23 dated 21 April 1994,
the dispositive portion of which reads:
Judgment is hereby rendered dismissing the complaint for lack of cause of action, the
petition for preliminary injunction is hereby denied, judgment is rendered in favor of
the defendants and ordering the plaintiff spouses Domingo and Lourdes Paguyo to pay
the defendants Pierre Astorga and St. Andrew Realty, Inc. on their counterclaim.
1. P400,000.00 for moral damages;
2. P200,000.00 as exemplary damages;
3. P100,00.00 for attorneys fees and litigation expenses and pay the cost of suit.24
The Ruling of the Court of Appeals
On appeal, the Court of Appeals promulgated its Decision 25 dated 30 April 1997 in CA-
G.R. CV No. 47034 affirming the decision of the trial court, the dispositive portion of
which reads as follows:
WHEREFORE, We find the lower courts decision in full accord with the facts and the
law. Judgment is hereby rendered affirming the assailed decision dated April 21,
1994 in toto.26
Aggrieved by the ruling, petitioners elevated the matter to us via the instant petition,
contending that the Court of Appeals erred:
1. In concluding that the supposed acts of ownership and possession of respondents
preclude petitioners from seeking rescission and declaration of nullity of documents
signed and executed under mistaken premises that were not all true and accurate;
2. IN FAILING to find that fraud, mistake and undue influence had been exerted on
petitioner Lourdes Paguyo to make her a party to the assailed documents;
3. In reading the documents involved without regard to the contemporaneous acts of
the parties prior, during and immediately after the signing process;
4. In affirming the dismissal of the complaint; and
5. In awarding damages and attorneys fees in favor of the respondents.27
The questions the Court is now tasked to answer are: (1) Did the Court of Appeals err
in upholding the trial courts decision denying petitioners complaint for rescission? (2)
Was the award of damages and attorneys fees to respondents proper?
On the first issue, petitioners claim that the 05 January 1989 documents, particularly
the Deed of Absolute Sale of Building, Mutual Undertaking, Real Estate Mortgage,
and Assignment of Rights and Interests read together with the 29 November 1988
Receipt of Earnest Money, were all designed, per the respondents representations, to
secure their exposure in the total sum of P763,890.50 which constituted their outlay in
the projected purchase of the Paguyo lot and building.
Respondents dispute petitioners' line of reasoning. They say that the Deed of Absolute
Sale over the building was absolute and unconditional.
Our Ruling
Petitioners contentions lack merit.
The right to rescind a contract involving reciprocal obligations is provided for in
Article 1191 of the Civil Code. Article 1191 states: M
The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
The law speaks of the right of the "injured party" to choose between rescission or
fulfillment of the obligation, with the payment of damages in either case.28
Here, petitioners claim to be the injured party and consequently seek the rescission of
the Deed of Absolute Sale of the Building and the other documents in question.
Petitioners aver that they are entitled to cancel the Deed of Sale altogether in view of
fraud, gross inadequacy of price, mistake, and undue influence.
To boost their claim that the Deed of Absolute Sale was intended merely to document
the cash outlays of respondents, petitioners say that the P600,000.00 consideration as
contained in the Deed of Absolute Sale of the 5-storey Paguyo building is a far cry
from the P3 Million valuation attached to it by respondent Astorga himself and the
buildings fair market value of P2,848,000.00 assessed by the Cuervo Appraisers, Inc.
We find no such inadequacy of consideration in the case at bar. For one, on top of
the P600,000.00 which petitioners received, respondents had to shoulder the accrued
real estate taxes of P169,174.95. For another, respondent Pierre Astorga explained
that said price was what St. Andrew Realty, Inc., believed as value for their money
inasmuch as the building stands on the lot owned by another and there were separate
owners of the land, who appear reluctant to sell it. For a third, said amount was
arrived at considering the depreciated value of the building and in view of the
economic and political uncertainties in the country at that time, marked by a series of
coup detat, which caused real estate prices to plummet. Respondent Astorga was
explicit on this score
ATTY. JOSE
Q: There was statement here by Mrs. Paguyo that this document entitled the deed of
absolute sale of a building marked Exhibit "9" was not expressive of the intention of
the parties meaning to say that she did not intend to sell the said building and one of
the reasons she tried to raise was the fact that the building was only sold for
P500,000.00, what can you say to that?
A: Well, the P500,000.00 amount that she would want to impress to be an inadequate
amount is what we in St. Andrews end believed as value for money for the reason
that the building stands on the lot she does not own and there were separate
owners and apparent conflict between them even the seeming impossibility
of getting the lot
Q: By the way, before the plaintiffs decided to dispose the building or sell the building
by virtue of this deed of sale marked Exhibit "98" was your company ever interested in
acquiring the said building?
A: The building alone, no. In fact, on December 21 when we had the problem as to
acquiring the lot, we did not part with any payment to Mrs. Paguyo demonstrating
that we had really and truly intended a simultaneous buy of the building and the lot
to acquire the property simultaneously the building and as well as the lot.
Q: Now, you mentioned that you are a realtor, I will ask you the same question, which
Atty. Almeyda asked me when I was on the witness stand, as a realtor will you please
tell the court what would be your appraisal of the value of the building?
ATTY. COLOMA
- Objection, your Honor. May we know if the witness is going to express an opinion or
is he testifying now as an expert realtor?
COURT
- As an opinion but it would not bind the Court.
WITNESS
- I can explain to you.
ATTY. JOSE
- Yes, please explain.
WITNESS
A: Okay, appraisal can take many forms if its appraised value based on the
construction cost it could be different from appraising per se the building. That is now
existing in that address also appraisal will depend on where the building is and there
is only one owner of the building and the lot. As the case here is, the building in a
manner of speaking stands on thin air. That is so including depreciation and timing
that we were doing in this transaction which was 1989, my appraisal will be in the
range of a Million may be.
Q: You made mentioned the word timing in 1989, why did you mention that?
A: Well, 89 was not the best real estate year. In fact, we have a boom in 1988 but
prices were already deep during this year such that it is in 1988 when it could have
been another price. But this transaction happened or entered into in 1989, there were
no interested buyers during that time, sir.
Q: Why?
A: coup de etat was one, and many other issue on hand that causes value to take deep.
Q: You mentioned that word depreciation, will you please explain to us what that
depreciation has got to do with that building?
A: In appraisal terms the building is in an economic line in every year of which a
certain value is allocated as depreciation for wear and tear for breakdowns and all
that is depreciation. This is deductible from the amount of the building (sic).
Q: Before you went into this agreement with the plaintiff Paguyo have you inspected
the building?
A: Yes, sir. Thoroughly, sir.
Q: Will you please explain to the court the size of the building and the description of
the building?
A: That building is five (5) storey it has only one (1) unit per floor, sir. There is a
narrow stairway that leads up to the penthouse. It is, I would say, in an advance
deteriorating stage, it needed some renovations here and there.29(Emphasis supplied.)
Moreover, Articles 1355 and 1470 of the Civil Code state:
Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not
invalidate a contract, unless there has been fraud, mistake or undue influence.
(Emphasis supplied)
Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as
may indicate a defect in the consent, or that the parties really intended a donation or
some other act or contract. (Emphasis supplied)
Petitioners herein failed to prove any of the instances mentioned in Articles 1355 and
1470 of the Civil Code, which would invalidate, or even affect, the Deed of Sale of the
Building and the related documents. Indeed, there is no requirement that the price be
equal to the exact value of the subject matter of sale.30
In Sps. Buenaventura v. Court of Appeals,31 the Court was unequivocal:
Courts cannot follow one every step of his life and extricate him from bad bargains,
protect him from unwise investments, relieve him from one-sided contracts, or annul
the effects of foolish acts. Courts cannot constitute themselves guardians of persons
who are not legally incompetent. Courts operate not because one person has been
defeated or overcome by another, but because he has been defeated or
overcome illegally. Men may do foolish things, make ridiculous contracts, use
miserable judgment, and lose money by them indeed, all they have in the world; but
not for that alone can the law intervene and restore. There must be, in addition,
a violation of the law, the commission of what the law knows as an actionable wrong,
before the courts are authorized to lay hold of the situation and remedy it. (Emphases
in the original)
What is more, petitioners would wish to convince this Court that petitioner Lourdes
Paguyo was nave enough to accept at face value the assurance of respondent Astorga
that the Deed of Sale was merely to document respondents cash outlay.
Far from being the nave and easy to fleece lady that she wants this Court to perceive
her to be, evidence on record reveals that petitioner Lourdes Paguyo is in reality an
astute businesswoman, having insured that legal minds would be available at her
disposal at the time she entered into the transactions she now impugns. As she herself
admitted in her testimony before the trial court, during her receipt of the earnest
money and during the transactions subject of the instant case, her lawyers, one Atty.
Lalin and a certain Atty. Cario, assisted her. She testified as follows:
ATTY. JOSE
Wait, wait, your Honor. I have one question. Now, madam witness, you mentioned that
you were accompanied by a certain Atty. Molina when you executed the receipt of the
earnest money with me. Now, during the transaction of this subject matter, you will
also recall that at times you were represented in dealing with me as counsel for
defendant corporation by Atty. Lalin and Atty. Carino?
A Yes, sir.32
Neither does the fact that the subject contracts have been prepared by
respondents ipso facto entail that their validity and legality be strictly interpreted
against them. Petitioner Lourdes Paguyos insinuation that she was disadvantaged
will not hold. True, Article 24 of the New Civil Code provides that "(i)n all contractual,
property or other relations, when one of the parties is at a disadvantage on account of
his moral dependence, ignorance, indigence, mental weakness, tender age or other
handicap, the courts must be vigilant for his protection." 33 Thus, the validity and/or
enforceability of the impugned contracts will have to be determined by the peculiar
circumstances obtaining in each case and the situation of the parties concerned.
Here, petitioner Lourdes Paguyo, being not only cultured but a person with great
business acumen as well, cannot claim to be the weaker or disadvantaged party in the
subject contract so as to call for a strict interpretation against respondents. More
importantly, the parties herein went through a series of negotiations before the
documents were signed and executed.34
Further, we find the stipulations in the subject documents plain and unambiguous.
For instance, the Deed of Sale provides in no uncertain terms-
WHEREAS, the VENDOR is the true and absolute owner, free from any lien or
encumbrance, of a concrete building presently known as the Paguyo Building,
constructed on Lot 12, Blk. 4 (described in T.C.T No. 154806-Makati) located at No.
7856 Makati Ave. corner Valdez St., Makati, Metro Manila, covered by and described
in Tax Declaration No. 93762 for the year 1984, and more particularly described as
follows:
WHEREAS, the VENDOR is desirous of selling and the VENDEE is willing to buy the
aforedescribed building;
NOW THEREFORE, for and in consideration of the foregoing premises and of the sum
of SIX HUNDRED THOUSAND (P600,000.00) PESOS, Philippine currency, the
receipt of which is hereby acknowledged, the VENDOR hereby cedes, transfers, and
conveys, by way of absolute sale, unto and in favor of the VENDEE, his successors and
assigns, the aforementioned building with all the improvements therein.
The Municipal Assessor of Makati is therefore hereby authorized to register this sale
in the new Tax Declaration in the name of the VENDEE.
IN WITNESS WHEREOF, the VENDOR hereby affixed his signature by his wife and
attorney-in-fact, LOURDES S. Paguyo, this 5th day of January, 1989, in Pasay City.35
Inasmuch as the stipulations in the aforesaid contract and in the other contracts being
questioned leave no room for interpretation, there was no cause for applying Article 24
of the New Civil Code.
In sum, in the case at bar, petitioners pray for rescission of the Deed of Sale of the
building and offer to repay the purchase price after their liquidity position would have
improved and after respondents would have refurbished the building, updated the real
property taxes, and turned the building into a profitable business venture. This Court,
however, will not allow itself to be an instrument to the dissolution of contract validly
entered into. A party should not, after its opportunity to enjoy the benefits of an
agreement, be allowed to later disown the arrangement when the terms thereof
ultimately would prove to operate against its hopeful expectations.36
On the matter of damages, the Court of Appeals affirmed the trial courts award of
damages and attorneys fees to respondents, namely P400,000 as moral
damages, P200,000 as exemplary damages, P100,000 as attorneys fees and the costs
of suit.
We have held that moral damages may be recovered in cases where one willfully
causes injury to property, or in cases of breach of contract where the other party acts
fraudulently or in bad faith.37 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.38 Exemplary damages, on the other hand, are imposed
by way of example or correction for the public good, when the party to a contract acts
in a wanton, fraudulent, oppressive or malevolent manner.39 Attorneys fees are
allowed when exemplary damages are awarded and when the party to a suit is
compelled to incur expenses to protect his interest.40
While it has been sufficiently proven that the respondents are entitled to damages, the
actual amounts awarded by the lower court must be reduced because damages are not
intended for a litigants enrichment, at the expense of the petitioners. 41 Judicial
discretion granted to the courts in the assessment of damages must always be
exercised with balanced restraint and measured objectivity.42
Thus, the amount of moral damages should be set at only P30,000.00, and the award
of exemplary damages at only P20,000.00. The award of attorneys fees should also be
reduced to P20,000.00 which, under the circumstances of this case, appears justified
and reasonable.
All told, we find no reason to reverse the assailed decision of respondent court. The
factual findings of the appellate court are conclusive on the parties and carry greater
weight when they coincide with the factual findings of the trial court. 43 This Court will
not weigh the evidence anew lest there is a showing that the findings of the lower
court are totally devoid of support or are clearly erroneous so as to constitute serious
abuse of discretion. In the instant case, the trial court found that the documents,
which petitioners seek to rescind, were entered into as a result of an arms-length
transaction. These are factual findings that are now conclusive upon us.44
WHEREFORE, the Decision and the Resolution dated 30 April 1997 and 12
September 1997, respectively, of the Court of Appeals in CA-G.R. CV No. 47034, are
hereby AFFIRMED with MODIFICATION as to the amount of damages and
attorneys fees recoverable, as follows: (1) moral
damages is reduced to P30,000.00, (2) exemplary damages is reduced to P20,000.00,
and (3) attorneys fees is reduced to P20,000.00. Costs against petitioners.
SO ORDERED.
Puno (Chairman), Austria-Martinez, Callejo, Sr. and Tinga, JJ., concur.
Judgment and resolution affirmed with modification.
457 SCRA 465
SECOND DIVISION
G.R. No. 149252. April 28, 2005.
DONALD KWOK, petitioner, vs. PHILIPPINE CARPET MANUFACTURING
CORPORATION, respondent.
Actions; Appeals; Pleadings and Practice; Under Rule 45 of the Rules of Court, only
questions of law may be raised under a petition for review on certiorari.Under Rule
45 of the Rules of Court, only questions of law may be raised under a petition for
review on certiorari. The Court, not being a trier of facts, is not wont to reexamine and
reevaluate the evidence of the parties, whether testimonial or documentary. Moreover,
the findings of facts of the CA on appeal from the NLRC are, more often than not,
given conclusive effect by the Court. The Court may delve into and resolve factual
issues only in exceptional circumstances, such as when the findings of facts of the
Labor Arbiter, on one hand, and those of the NLRC and the CA, on the other, are
capricious and arbitrary; or when the CA has reached an erroneous conclusion based
on arbitrary findings of fact; and when substantial justice so requires. In this case,
however, the petitioner failed to convince the Court that the factual findings of the CA
which affirmed the findings of the NLRC on appeal, as well as its conclusions based on
the said findings, are capricious and arbitrary.
Labor Law; Corporation Law; Obligations and Contracts; Corporate policies need not
be in writing; Contracts entered into by a corporate officer or obligations or prestations
assumed by such officer for and in behalf of such corporation are binding on the said
corporation only if such officer acted within the scope of his authority or if such officer
exceeded the limits of his authority, the corporation has ratified such contracts or
obligations.We agree with the petitioners contention that for a contract to be
binding on the parties thereto, it need not be in writing unless the law requires that
such contract be in some form in order that it may be valid or enforceable or that it be
executed in a certain way, in which case that requirement is absolute and
independent. Indeed, corporate policies need not be in writing. Contracts entered into
by a corporate officer or obligations or prestations assumed by such officer for and in
behalf of such corporation are binding on the said corporation only if such officer acted
within the scope of his authority or if such officer exceeded the limits of his authority,
the corporation has ratified such contracts or obligations.
Same; Same; While the Court agrees that those who belong to the upper corporate
echelons would have more privileges, it cannot presume the existence of such privileges
or benefitshe who claims the same is burdened to prove not only the existence of such
benefits but also that he is entitled to the same.In the present case, the petitioner
relied principally on his testimony to prove that Lim made a verbal promise to give
him vacation and sick leave credits, as well as the privilege of converting the same
into cash upon retirement. The Court agrees that those who belong to the upper
corporate echelons would have more privileges. However, the Court cannot presume
the existence of such privileges or benefits. The petitioner was burdened to prove not
only the existence of such benefits but also that he is entitled to the same, especially
considering that such privileges are not inherent to the positions occupied by the
petitioner in the respondent corporation, son-in-law of its president or not.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Poncevic M. Ceballos for petitioner.
Abello, Concepcion, Regala & Cruz for private respondent.
CALLEJO, SR., J.:
This is a petition for review of the Decision 1 of the Court of Appeals (CA) in CA-G.R.
SP No. 60232 dismissing Donald Kwoks petition for review on certiorari and affirming
the majority Decision of the National Labor Relations Commission (NLRC), as well as
its resolution in NLRC NCR Case No. 00-12-07454-96 dismissing the motion for
reconsideration of the said decision.
The Antecedents
In 1965, petitioner Donald Kwok and his father-in-law Patricio L. Lim, along with
some other stockholders, established a corporation, the respondent Philippine Carpet
Manufacturing Corporation (PCMC). The petitioner became its general manager,
executive vice-president and chief operations officer. Lim, on the other hand, was its
president and chairman of the board of directors. When the petitioner retired 36 years
later or on October 31, 1996, he was receiving a monthly salary of P160,000.00.2 He
demanded the cash equivalent of what he believed to be his accumulated vacation and It was further pointed out that as per the Memorandum dated November 6, 1981, only
sick leave credits during the entire length of his service with the respondent regular employees and managerial and confidential employees falling under Category
corporation, i.e., from November 16, 1965 to October 31, 1996, in the total amount I were entitled to vacation and sick leave credits. The petitioner, whose position did
of P7,080,546.00 plus interest.3 However, the respondent corporation refused to accede not fall under Category I, was, thus, not entitled to the benefits under the said
to the petitioners demands, claiming that the latter was not entitled thereto. 4
memorandum. The respondent corporation alleged that this was admitted by the
petitioner himself and affirmed by Raoul Rodrigo, its incumbent executive vice-
The petitioner filed a complaint against the respondent corporation for the payment of president and general manager.
his accumulated vacation and sick leave credits before the NLRC. He claimed that
Lim made a verbal promise to give him unlimited sick leave and vacation leave In a Decision8 dated November 27, 1998, the Labor Arbiter ruled in favor of the
benefits and its cash conversion upon his retirement or resignation without the need petitioner. The fallo of the decision reads:
for any application therefor. In addition, Lim also promised to grant him other
benefits, such as golf and country club membership; the privilege to charge the WHEREFORE, all the foregoing premises being considered, judgment is hereby
respondent corporations account; 6% profit-sharing in the net income of the rendered ordering the respondent company to pay complainant the sum
respondent corporation (while Lim got 4%); and other corporate perquisites. According of P7,080,546.00, plus ten percent (10%) thereof as and for attorneys fees.
to the petitioner, all of these promises were complied with, except for the grant of the
cash equivalent of his accumulated vacation and sick leave credits upon his SO ORDERED.9
retirement.5
Undaunted, the respondent corporation appealed the decision to the NLRC, alleging
The respondent corporation denied all these, claiming that upon the petitioners that:
retirement, he received the amount of P6,902,387.19 representing all the benefits due
him. Despite this, the petitioner again demandedP7,080,546.00, which demand was I. THE LABOR ARBITER ERRED IN CONCLUDING THAT KWOK WAS COVERED

without factual and legal basis. The respondent corporation asserted that the BY THE NOVEMBER 6, 1981 MEMORANDUM ON VACATION AND SICK LEAVE

chairman of its board of directors and its president/vice-president had unlimited CREDITS.10

discretion in the use of their time, and had never been required to file applications for
II. THE LABOR ARBITER ERRED IN CONCLUDING THAT IT WAS
vacation and sick leaves; as such, the said officers were not entitled to vacation and
DISCRIMINATORY NOT TO GRANT KWOK THESE BENEFITS. 11
sick leave benefits. The respondent corporation, likewise, pointed out that even if the
petitioner was entitled to the said additional benefits, his claim had already
III. KWOKS CLAIMS ARE BASELESS.12
prescribed. It further averred that it had no policy to grant vacation and sick leave
credits to the petitioner.6
IV. KWOKS CLAIMS FOR BENEFITS ACCRUING FROM 1966 ARE BARRED BY
PRESCRIPTION.13
In his Affidavit7 dated May 19, 1998, Lim denied making any such verbal promise to
his son-in-law on the grant of unlimited vacation and sick leave credits and the cash
V. THERE IS NO BASIS FOR THE AWARD OF P7,080,546.00.14
conversion thereof. Lim averred that the petitioner had received vacation and sick
leave benefits from 1994 to 1996. Moreover, assuming that he did make such promise
The respondent corporation averred that based on the petitioners memorandum, his
to the petitioner, the same had not been confirmed or approved via resolution of the
admissions and the contract of employment, the petitioner was not entitled to the cash
respondent corporations board of directors.
conversion of his sick and vacation leave credits. While the respondent corporation
conceded that the petitioner may have been entitled to unlimited sick and vacation
leave benefits during his employment, it maintained that no such promise was made
by Lim to convert the same; even assuming that such verbal promise was made, the
respondent corporation was not bound thereby since the petitioner failed to adduce the
written conformity of its board of directors. The respondent corporation insisted that
the claims of the petitioner were barred under Article 291 of the Labor Code.
For his part, the petitioner made the following averments in his memorandum:
The non-performance by PCMC of this particular promise to convert in cash all of his
unused cash (sic) and sick leave credits was precipitated by the falling out of the
marriage between Mr. Kwok and his wife, the daughter of Mr. Lim. In fact, even while
Mr. Kwok was still the Executive Vice-President and General Manager of PCMC,
when the falling out of the said marriage became apparent, the other benefits or
perquisites which Mr. Kwok used to enjoy were immediately curtailed by Mr. Lim to
the prejudice of Mr. Kwok.15
On November 29, 1999, the NLRC, by majority vote, rendered judgment granting the
appeal, reversing and setting aside the decision of the Labor Arbiter. The NLRC
16
ordered the dismissal of the complaint. Commissioner Angelita A. Gacutan filed a
dissenting opinion. 17
Aggrieved, the petitioner filed a petition for review with the CA, on the following
grounds:
I JURISDICTION WHEN IT RULED THAT THE MEMORANDUM DATED APRIL 26,
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT DECLARED THAT THE VERBAL PROMISE OF MR.
LIM TO PETITIONER WAS UNENFORCEABLE.
II
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT RULED THAT THE VERBAL PROMISE BY MR. LIM TO
PETITIONER WAS NOT BINDING AS IT WAS NOT APPROVED BY THE BOARD
OF DIRECTORS.
III
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT IGNORED STRONG EVIDENCE THAT PCMC
CLOTHED MR. LIM WITH AWESOME POWERS TO GRANT BENEFITS TO ITS
EMPLOYEES INCLUDING PETITIONER AND RATIFIED THE SAME BY ITS
SILENCE AND WHEN IT IGNORED TOO EXISTING JURISPRUDENCE ON THE
MATTER.
IV
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT IGNORED STRONG AND CLEAR EVIDENCE THAT IN
PCMC THE GIVING OF BENEFITS TO PETITIONER, THOUGH NOT IN
WRITING, WAS A PREVALENT PRACTICE.
V
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
1997 APPLICABLE TO MR. RAOUL RODRIGO WAS ALSO APPLICABLE TO
PETITIONER.18
On February 28, 2001, the CA rendered judgment affirming the decision of the NLRC
and dismissing the petition.19 The petitioners motion for reconsideration thereof was
denied by the appellate court, per its Resolution20 dated July 17, 2001.
The petitioner, thus, filed the instant petition for review on certiorari with this Court,
assailing the decision and resolution of the CA on the following claims:
I
The Hon. Court of Appeals, contrary to law, gravely erred and disregarded established
jurisprudence in ruling that petitioner has not adduced sufficient evidence to support
his claim that he was, indeed, promised the cash conversion of his unused vacation
and sick leave credits upon retirement.21
II
The Hon. Court of Appeals gravely erred in ruling that even if private respondents
(sic) Mr. Lim did make him such promise, the same cannot be enforced.22
III
The Hon. Court of Appeals gravely erred and disregarded clear jurisprudence on the
matter when it ruled that there is no showing that private respondent, thru its board
of directors either recognized, approved or ratified the promise made by Mr. Lim to
petitioner.23
As gleaned from his Memorandum, the petitioner posits that he had adduced
substantial evidence to prove that Lim, as president and chairman of the respondent
corporations board of directors, made a verbal promise to give him the cash
conversion of his accumulated vacation and sick leave credits upon his retirement
(that is, benefits at par with the number of days to which the officer next in rank to
him was entitled). According to the petitioner, his claim is fortified by the fact that his
successor, Raoul Rodrigo, has unlimited vacation and sick leave credits. The petitioner
further asserts that he would not have accepted the positions in the respondent
corporation without such benefit, especially since his subordinates were also enjoying
the same. He posits that he was entitled to the said privilege because of his rank. He,
likewise, claims that, in contrast to the evidence he has presented, the respondent
corporation failed to adduce proof of its affirmative allegations.
The petitioner further argues that his complaint was not time-barred since he filed it
on December 5, 1996. Even if this were so, he is, nevertheless, entitled to the cash
value of his vacation and sick leave credits for three years before his retirement.
Moreover, the evidence on record shows that officers belonging to Category I had been
granted the cash conversion of their earned leave credits after the lapse of three years.
The respondent corporation, for its part, asserts that the petitioner failed to adduce
substantial evidence to the claims in his complaint. Even if Lim had made such verbal
promise to the petitioner, the same is not binding on the respondent corporation
absent its conformity through board resolution. Moreover, the petitioner is not covered
by the Memorandum dated November 6, 1981 because he had unlimited leave credits;
hence, it cannot be gainsaid that he still had unused leave credits to be converted.
According to the respondent corporation, the petitioner himself admitted that he was
not included in the Memorandum dated November 6, 1981; and even assuming that he
was covered by the said memorandum, the fact that his complaint was filed only in
1996 precludes him from claiming the cash conversion of such leave credits for the
years 1966 to 1993.
The Courts Ruling
The petition has no merit.
The threshold issue in this case is factual whether or not the petitioner is entitled,
based on the documentary and testimonial evidence on record, to the cash value of his
vacation and sick leave credits in the total amount ofP7,080,546.00. The resolution of
the issue is riveted to our resolution of whether the petitioners mainly testimonial
evidence of an alleged verbal promise made by a corporate officer to grant him the
privilege of converting accumulated vacation and sick leave credits after retirement or
separation from employment is entitled to probative weight.
Under Rule 45 of the Rules of Court, only questions of law may be raised under a
petition for review on certiorari. The Court, not being a trier of facts, is not wont to
reexamine and reevaluate the evidence of the parties, whether testimonial or
documentary. Moreover, the findings of facts of the CA on appeal from the NLRC are,
more often than not, given conclusive effect by the Court. The Court may delve into
and resolve factual issues only in exceptional circumstances, such as when the
findings of facts of the Labor Arbiter, on one hand, and those of the NLRC and the CA,
on the other, are capricious and arbitrary; or when the CA has reached an erroneous
conclusion based on arbitrary findings of fact; and when substantial justice so
requires. In this case, however, the petitioner failed to convince the Court that the
factual findings of the CA which affirmed the findings of the NLRC on appeal, as well
as its conclusions based on the said findings, are capricious and arbitrary.
While the petitioner was unequivocal in claiming that the respondent corporation,
through its president and chairman of the board of directors, obliged itself, as a
matter of policy, to grant him the cash value of his vacation and sick leave credits
upon his retirement, he was burdened to prove his claim by substantial
evidence. The petitioner failed to discharge this burden.
24
We agree with the petitioners contention that for a contract to be binding on the
parties thereto, it need not be in writing unless the law requires that such contract be
in some form in order that it may be valid or enforceable or that it be executed in a
certain way, in which case that requirement is absolute and independent. Indeed,
25
corporate policies need not be in writing. Contracts entered into by a corporate officer
or obligations or prestations assumed by such officer for and in behalf of such
corporation are binding on the said corporation only if such officer acted within the
scope of his authority or if such officer exceeded the limits of his authority, the
corporation has ratified such contracts or obligations.
In the present case, the petitioner relied principally on his testimony to prove that
Lim made a verbal promise to give him vacation and sick leave credits, as well as the
privilege of converting the same into cash upon retirement. The Court agrees that
those who belong to the upper corporate echelons would have more privileges.
However, the Court cannot presume the existence of such privileges or benefits. The
petitioner was burdened to prove not only the existence of such benefits but also that
he is entitled to the same, especially considering that such privileges are not inherent
to the positions occupied by the petitioner in the respondent corporation, son-in-law of
its president or not.
In dismissing the petition before it, the CA disbelieved the petitioners testimony and
gave credence and probative weight to the collective testimonies of the respondent
corporations witnesses, who were its employees and officers, including Lim, whom the
petitioner presented as a hostile witness. We agree with the appellate courts
encompassing synthesis and analysis of the evidence on record:
Except for his bare assertions, petitioner has not adduced sufficient evidence to
support his claim that he was, indeed, promised the cash conversion of his unused
vacation and sick leaves upon retirement. Petitioner harps on what he calls the
prevalent practice in PCMC of giving him benefits, such as the use of golf and country
club facilities, salary increases, the use of the company vehicle and driver, and sharing
in PCMCs annual net income, without either a written contract or a Board resolution
to back it up. Respondent PCMC denies all these, however. According to respondent,
petitioners share in the income of the company is actually part of the consultancy fee
which PCMC pays DK Management Services, Inc., a firm owned by petitioners
company. PCMC adds that the yearly salary increases of corporate officers were always
with the prior approval of the Board.
Nevertheless, assuming that petitioner was, indeed, given the benefits which he so
claimed, it does not necessarily follow that among those is the cash conversion of his
accumulated leaves. It is a basic rule in evidence that each party must prove his
affirmative allegation. Since the burden of proof lies with the party who asserts an
affirmative allegation, the plaintiff or complainant has to prove his affirmative
allegations in the complaint and the defendant or respondent has to prove the
affirmative allegations in his affirmative defenses and counterclaim. Petitioner, in the
case at bar, has failed to discharge this burden.26
The CA made short shift of the claim of the petitioner that per Memorandum dated
November 6, 1981, he was not entitled to the benefits of the company policy of
commutation of leave credits. Indeed, the company policy of conversion into equivalent
cash of unused vacation and sick leave credits applied only to its regular employees.
The petitioner failed to offer evidence to rebut the testimony of Nel Gopez, Chief
Accountant of the respondent, that the petitioner was not among the regular
employees covered by the policy for the simple reason that he had unlimited vacation
leave benefits. As stated by the CA, the petitioner no less corroborated the testimony
of Gopez, thus:
ATTY. PIMENTEL
And, so you mention[ed] earlier that the policy on vacation leave benefits apply for
category one employee(s) and rank-and-file employee(s)?
WITNESS (Mr. Nel Gopez)
Yes.
ATTY. PIMENTEL
And who are considered category one employee(s)? Mr. Witness, you occupied the position of Executive Vice-President and General
Manager. You agree with me that this position or this office of Executive Vice-
WITNESS President and General Manager are not covered by this policy.

Category One employees are from the rank and of Senior Vice-President and Assistant WITNESS (Donald Kwok)
General Manager and below, up to the level of department managers.
Yes, it is not covered by this policy.
ATTY. PIMENTEL

How about the complainant, Mr. Kwok, does he falling (sic) to the category one?
ATTY. PIMENTEL
WITNESS
So this policy applies to persons below you and your father-in-law?
As far as I can remember, he is (sic) not belong to category one employee.
WITNESS
ATTY. PIMENTEL
Yes, right.
Therefore, he is not entitled to the lump sum benefit?
ATTY. PIMENTEL
WITNESS
And this policy does not apply to you?
Yes, Maam.
WITNESS
ATTY. PIMENTEL
As far as Im concerned, it does not apply for (sic) me.
And would you know, Mr. Witness, why he is (sic) not given the conversion of the
vacation leave benefits at the time category one employees sectors (sic) are given? In all respects, therefore, petitioner, by virtue of his position as Executive Vice-
President, is not covered by the November 6, 1981 Memorandum granting PCMC
WITNESS employees the conversion of their unused vacation and sick leaves into cash.27

Because he has, as far as I can remember, he has unlimited vacation leave." We have reviewed the records and found no evidence to controvert the following
findings of the CA and its ratiocinations on its resolution of the petitioners
This was corroborated by petitioner himself when he testified in this wise: submissions:

ATTY. PIMENTEL Second, even assuming that petitioner is included among the "regular employees" of
PCMC referred to in said memorandum, there is no evidence that he complied with
the cut-off dates for the filing of the cash conversion of vacation and sick leaves. This
being so, we find merit in respondents argument that petitioners money claims have
already been barred by the three-year prescriptive period under Article 291 of the
Labor Code, as amended.
Third, and this is of primordial importance, there is no proof that petitioner has filed
vacation and sick leaves with PCMCs personnel department. Without a record of
petitioners absences, there is no way to determine the actual number of leave credits
he is entitled to. The P7,080,546.00 figure arrived at by petitioner supposedly
representing the cash equivalent of his earned sick and vacation leaves is thus totally
baseless.
And, fourth, even assuming that PCMC President Patricio Lim did promise petitioner
the cash conversion of his leaves, we agree with respondent that this cannot bind the
company in the absence of any Board resolution to that effect. We must stress that the
personal act of the company president cannot bind the corporation. As explicitly stated
by the Supreme Court in Peoples Aircargo and Warehousing Co., Inc. v. Court of
Appeals:
"The general rule is that, in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation. A corporation is a juridical
person, separate and distinct from its stockholders and members, having xxx powers,
attributes and properties expressly authorized by law or incident to its existence.
" the power and the responsibility to decide whether the corporation should enter
into a contract that will bind the corporation is lodged in the board, subject to the
articles of incorporation, by-laws, or relevant provisions of law."
Anent the third assigned error, petitioner maintains that the PCMC Board of
Directors has granted its President, Patricio Lim, awesome powers to grant benefits to
its employees, adding that the Board has always given its consent to the way Lim ran
the affairs of the company especially on matters relating to the benefits that its
corporate officers enjoyed.
True, jurisprudence holds that the president of a corporation possesses the power to
enter into a contract for the corporation when "the conduct on the part of both the
president and corporation [shows] that he had been in the habit of acting in similar
matters on behalf of the company and that the company had authorized him so to act
and had recognized, approved and ratified his former and similar actions."
In the case at bar, however, there is no showing that PCMC had either recognized,
approved or ratified the cash conversion of petitioners leave credits as purportedly
promised to him by Lim. On the contrary, PCMC has steadfastly maintained that "the
Company, through the Board, has long adopted the policy of granting its earlier
mentioned corporate officers unlimited leave benefits denying them the privilege of
converting their unused vacation or sick leave benefits into their cash equivalent."
As to the last assigned error, petitioner faults the NLRC for holding as applicable to
petitioner, the April 26, 1997 Memorandum issued by PCMC to Raoul Rodrigo, Donald
Kwoks successor as company executive vice-president. The said memo granted
Rodrigo unlimited sick and vacation leave credits but disallowed the cash conversion
thereof. Before he became executive vice-president, Rodrigo was senior vice-president
and enjoyed the commutation of his unused vacation and sick leaves.
We note that the April 26, 1997 memo was issued to Rodrigo when petitioner was
already retired from PCMC. While said memorandum was particularly directed to
Rodrigo, however, this does not necessarily mean that petitioner, as former executive
vice-president, was then not prohibited from converting his earned vacation and sick
leaves into cash since he was not issued a similar memo. On the contrary, the memo
simply affirms the long-standing company practice of excluding PCMCs top two
positions, that of president and executive vice-president, from the commutation of
leaves. As heretofore discussed, among the perks of those occupying these posts is the
privilege of having unlimited leaves, which is totally incompatible with the concept of
converting unused leave credits into their cash equivalents.28
We are not convinced by the petitioners claim that Lim capriciously deprived him of
his entitlement to the cash conversion of his accumulated vacation and sick leave
credits simply because of his estrangement from his wife, who happens to be Lims
daughter. The petitioner did not adduce any evidence to show that he appealed to the
respondent corporations board of directors for the implementation of the said
privilege which was allegedly granted to him. Even if Lim was the president and
chairman of the respondent corporations board of directors, the rest of the
membership of the board could have overruled him and granted to the petitioner his
claim if, indeed, the latter was entitled thereto. Indeed, even the petitioner admitted
that, after his retirement, the board of directors granted to him salary increase for two SO ORDERED.
years prior to his retirement. If the claim of the petitioner had been approved by the
board of directors, for sure, it would have approved the same despite his falling out Puno, (Chairman), Austria-Martinez, Tinga, and Chico-Nazario, JJ., concur.
with the daughter of Lim.
Petition dismissed.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit.
Costs against the petitioner.