Civrev PDF

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 167519 January 14, 2015
THE WELLEX GROUP, INC., Petitioner,

vs.
U-LAND AIRLINES, CO., LTD., Respondent.
DECISION
LEONEN, J.:
This is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court. The
Wellex Group, Inc. (Wellex) prays that the Decision2 dated July 30, 2004 of the Court of
Appeals in CA-GR. CV No. 74850 be reversed and set aside.3
The Court of Appeals affirmed the Decision4 of the Regional Trial Court, Branch 62 of
Makati City in Civil Case No. 99-1407. The Regional Trial Court rendered judgment in
favor of U-Land Airlines, Co., Ltd. (ULand) and ordered the rescission of the
Memorandum of Agreement5 between Wellex and U-Land.6
Wellex is a corporation established under Philippine law and it maintains airline

operations in the Philippines.7 It owns shares of stock in several corporations including
Air Philippines International Corporation (APIC), Philippine Estates Corporation (PEC),
and Express Savings Bank (ESB).8 Wellex alleges that it owns all shares of stock of Air
Philippines Corporation (APC).9
U-Land Airlines Co. Ltd. (U-Land) "is a corporation duly organized and existing under
the laws of Taiwan, registered to do business . . . in the Philippines." 10 It is engaged in
the business of air transportation in Taiwan and in other Asian countries.11
On May 16, 1998, Wellex and U-Land entered into a Memorandum of Agreement12 (First
Memorandum of Agreement) to expand their respective airline operations in Asia.13
Terms of the First Memorandum of Agreement
The preambular clauses of the First Memorandum of Agreement state:
WHEREAS, U-LAND is engaged in the business of airline transportation in Taiwan,

Philippines and/or in other countries in the Asian region, and desires to expand its
operation and increase its market share by, among others, pursuing a long-term
involvement in the growing Philippine airline industry;
WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines
through its majority-owned subsidiary Air Philippines International Corporation and the
latters subsidiary, Air Philippines Corporation, and in like manner also desires to
expand its operation in the Asian regional markets, a Memorandum of Agreement on
______, a certified copy of which is attached hereto as Annex "A" and is hereby made
an integral part hereof, which sets forth, among others, the basis for WELLEXs present
ownership of shares in Air Philippines International Corporation. WHEREAS, the parties
recognize the opportunity to develop a long-term profitable relationship by combining
such of their respective resources in an expanded airline operation as well as in
property development and in other allied business activities in the Philippines, and
desire to set forth herein the basic premises and their understanding with respect to
their joint cooperation and undertakings.14
In the First Memorandum of Agreement, Wellex and U-Land agreed to develop a long-
term business relationship through the creation of joint interest in airline operations and
property development projects in the Philippines.15 This long-term business relationship
would be implemented through the following transactions, stated in Section 1 of the
First Memorandum of Agreement:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR

PHILIPPINES INTERNATIONAL CORPORATION ("APIC") equivalent
to at least 35% of the outstanding capital stock of APIC, but in any case,
not less than 1,050,000,000 shares . . . [;]
(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE

ESTATES CORPORATION ("PEC") equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares . . . [;]
(c) U-LAND shall enter into a joint development agreement with PEC .
. . [; and]
(d) U-LAND shall be given the option to acquire from WELLEX shares
of stock of EXPRESS SAVINGS BANK ("ESB") up to 40% of the
outstanding capital stock of ESB . . . under terms to be mutually
agreed.16
I. Acquisition of APIC and PEC shares
The First Memorandum of Agreement stated that within 40 days from its execution date,
Wellex and U-Land would execute a share purchase agreement covering U-Lands
acquisition of the shares of stock of both APIC (APIC shares) and PEC (PEC shares).17
In this share purchase agreement, U-Land would purchase from Wellex its APIC shares
and PEC shares.18
Wellex and U-Land agreed to an initial purchase price of P0.30 per share of APIC and
0.65 per share of PEC. However, they likewise agreed that the final price of the shares
of stock would be reflected in the actual share purchase agreement.19
Both parties agreed that the purchase price of APIC shares and PEC shares would be
paid upon the execution of the share purchase agreement and Wellexs delivery of the
stock certificates covering the shares of stock. The transfer of APIC shares and PEC
shares to U-Land was conditioned on the full remittance of the final purchase price as
reflected in the share purchase agreement. Further, the transfer was conditioned on
the approval of the Securities and Exchange Commission of the issuance of the shares
of stock and the approval by the Taiwanese government of U-Lands acquisition of
these shares of stock.20
Thus, Section 2 of the First Memorandum of Agreement reads:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless
extended by mutual agreement), U-LAND and WELLEX shall execute a Share
Purchase Agreement ("SHPA") covering the acquisition by U-LAND of the APIC Shares
and PEC Shares (collectively, the "Subject Shares"). Without prejudice to any
subsequent agreement between the parties, the purchase price for the APIC Shares to
be reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per share and that for
the PEC Shares at SIXTY FIVE CENTAVOS (P0.65) per share.
The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full
upon execution of the SHPA against delivery of the Subject Shares. The parties may
agree on such other terms and conditions governing the acquisition of the Subject
Shares to be provided in a separate instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the
purchase price reflected in the SHPA has been fully paid; (ii) the Philippine Securities
& Exchange Commission (SEC) shall have approved the issuance of the Subject
Shares; and (iii) any required approval by the Taiwanese government of the acquisition
by U-LAND of the Subject Shares shall likewise have been obtained.21
II. Operation and management of APIC/PEC/APC
U-Land was "entitled to a proportionate representation in the Board of Directors of APIC

and PEC in accordance with Philippine law."22 Operational control of APIC and APC
would be exercised jointly by Wellex and U-Land "on the basis of mutual agreement
and consultations."23 The parties intended that U-Land would gain primary control and
responsibility for the international operations of APC.24 Wellex manifested that APC is a
subsidiary of APIC in the second preambular clause of the First Memorandum of
Agreement.25
Section 3 of the First Memorandum of Agreement reads:
3. Operation/Management of APIC/APC. - U-LAND shall be entitled to a proportionate

representation in the Board of Directors of APIC and PEC in accordance with Philippine
law. For this purpose, WELLEX shall cause the resignation of its nominated Directors
in APIC and PEC to accommodate U-LANDs pro rata number of Directors. Subject to
applicable Philippine law and regulations, operational control of APIC and Air
Philippines Corporation ("APC") shall be lodged jointly to WELLEX and U-LAND on the
basis of mutual agreement and consultations. Further, U-LAND may second technical
and other consultants into APIC and/or APC with the view to increasing service,
productivity and efficiency, identifying and implementing profit-service opportunities,
developing technical capability and resources, and installing adequate safety systems
and procedures. In addition, U-LAND shall arrange for the lease by APC of at least
three (3) aircrafts owned by ULAND under such terms as the parties shall mutually
agree upon. It is the intent of the parties that U-LAND shall have primary control and
responsibility for APCs international operations.26
III. Entering into and funding a joint development agreement
Wellex and U-Land also agreed to enter into a joint development agreement
simultaneous with the execution of the share purchase agreement. The joint
development agreement shall cover housing and other real estate development
projects.27
U-Land agreed to remit the sum ofUS$3 million not later than May 22, 1998. This sum
was to serve as initial funding for the development projects that Wellex and U-Land
were to undertake pursuant to the joint development agreement. In exchange for the
US$3 million, Wellex would deliver stock certificates covering 57,000,000 PEC shares
to U-Land.28
The execution of a joint development agreement was also conditioned on the execution
of a share purchase agreement.29
4. Joint Development Agreement with PEC. Simultaneous with the execution of the
SHPA, U-LAND and PEC shall execute a joint development agreement ("JDA") to
pursue property development projects in the Philippines. The JDA shall cover specific
housing and other real estate development projects as the parties shall agree. All profits
derived from the projects covered by the JDA shall be shared equally between ULAND
and PEC. U-LAND shall, not later than May 22, 1998, remit the sum of US$3.0 million
as initial funding for the aforesaid development projects against delivery by WELLEX of
57,000,000 shares of PEC as security for said amount in accordance with Section 9
below.30
In case of conflict between the provisions of the First Memorandum of Agreement and
the provisions of the share purchase agreement or its implementing agreements, the
terms of the First Memorandum of Agreement would prevail, unless the parties
specifically stated otherwise or the context of any agreement between the parties would
reveal a different intent.31 Thus, in Section 6 of the First Memorandum of Agreement:
6. Primacy of Agreement. It is agreed that in case of conflict between the provisions

of this Agreement and those of the SHPA and the implementing agreements of the
SHPA, the provisions of this Agreement shall prevail, unless the parties specifically
state otherwise, or the context clearly reveal a contrary intent.32
Finally, Wellex and U-Land agreed that if they were unable to agree on the terms of the
share purchase agreement and the joint development agreement within 40 days from
signing, then the First Memorandum of Agreement would cease to be effective.33
In case no agreements were executed, the parties would be released from their
respective undertakings, except that Wellex would be required to refund within three
(3) days the US$3 million given as initial funding by U-Land for the development
projects. If Wellex was unable to refund the US$3 million to U-Land, U-Land would have
the right to recover on the 57,000,000 PEC shares that would be delivered to it.34 Section
9 of the First Memorandum of Agreement reads:
9. Validity. - In the event the parties are unable to agree on the terms of the SHPA
and/or the JDA within forty (40) days from date hereof (or such period as the parties
shall mutually agree), this Memorandum of Agreement shall cease to be effective and
the parties released from their respective undertakings herein, except that WELLEX
shall refund the US$3.0 million provided under Section 4 within three (3) days
therefrom, otherwise U-LAND shall have the right to recover on the 57,000,000 PEC
shares delivered to U-LAND under Section 4.35
The First Memorandum of Agreement was signed by Wellex Chairman and President
William T. Gatchalian (Mr. Gatchalian) and U-Land Chairman Ker Gee Wang (Mr.
Wang) on May 16, 1998.36
Annex "A" or the Second Memorandum of Agreement
Attached and made an integral part of the First Memorandum of Agreement was Annex
"A," as stated in the second preambular clause. It is a document denoted as a
"Memorandum of Agreement" entered into by Wellex, APIC, and APC.37
The Second Memorandum of Agreement states:
This Memorandum of Agreement, made and executed this ___th day of ______ at
Makati City, by and between:
THE WELLEX GROUP, INC., a corporation duly organized and existing under the laws
of the Philippines, with offices at 22F Citibank Tower, 8741 Paseo de Roxas, Makati
City (hereinafter referred to as "TWGI"),
AIR PHILIPPINES INTERNATIONAL CORPORATION (formerly FORUM PACIFIC,

INC.), likewise a corporation duly organized and existing under the laws of the
Philippines, with offices at 8F Rufino Towers, Ayala Avenue, Makati City (hereinafter
referred to as "APIC"),
- and
AIR PHILIPPINES CORPORATION, corporation duly organized and existing under the
laws of the Philippines, with offices at Multinational Building, Ayala Avenue, Makati City
(hereinafter referred to as "APC").
W I T N E S S E T H: That -
WHEREAS, TWGI is the registered and beneficial owner, or has otherwise acquired
_____ (illegible in rollo) rights to the entire issued and outstanding capital stock (the
"APC SHARES") of AIR PHILIPPINES CORPORATION ("APC") and has made
stockholder advances to APC for the _____ (illegible in rollo) of aircraft, equipment and
for working capital used in the latters operations (the "_____ (illegible in rollo)
ADVANCES").
WHEREAS, APIC desires to obtain full ownership and control of APC, including all of
_____ (illegible in rollo) assets, franchise, goodwill and operations, and for this purpose
has offered to acquire the _____ (illegible in rollo) 302SHARES of TWGI in APC,
including the APC ADVANCES due to TWGI from APC, with _____ (illegible in rollo) of
acquiring all the assets, franchise, goodwill and operations of APC; and TWGI has
_____ (illegible in rollo) to the same in consideration of the conveyance by APIC to
TWGI of certain investments, _____ (illegible in rollo) issuance of TWGI of shares of
stock of APIC in exchange for said APC SHARES and the _____ (illegible in rollo)
ADVANCES, as more particularly described hereunder.
NOW, THEREFORE, the parties agree as follows:
1. TWGI agrees to transfer the APC ADVANCES in APIC in

exchange for the _____ (illegible in rollo) by APIC to TWGI of
investment shares of APIC in Express Bank, Petro Chemical
_____ (illegible in rollo) of Asia Pacific, Republic Resources &
Development Corporation and Philippine _____ (illegible in
rollo) Corporation (the "APIC INVESTMENTS").
2. TWGI likewise agrees to transfer the APC SHARES to APIC

in exchange solely _____ (illegible in rollo) the issuance by
APIC of One Billion Seven Hundred Ninety-Seven Million Eight
Hundred Fifty Seven Thousand Three Hundred Sixty Four
(1,797,857,364) shares of its capital stock of a _____ (illegible
in rollo) value of 1.00 per share (the "APIC SHARES"), taken
from the currently authorized but _____ (illegible in rollo) shares
of the capital stock of APIC, as well as from the increase in the
authorized capital _____ (illegible in rollo) of APIC from 2.0
billion to 3.5 billion.
3. It is the basic understanding of the parties hereto that the

transfer of the APC _____ (illegible in rollo) as well as the APC
ADVANCES to APIC shall be intended to enable APIC to obtain
_____ (illegible in rollo) and control of APC, including all of
APCs assets, franchise, goodwill and _____ (illegible in rollo).
4. Unless the parties agree otherwise, the effectivity of this

Agreement and transfers _____ (illegible in rollo) APC
ADVANCES in exchange for the APIC INVESTMENTS, and the
transfer of the _____ (illegible in rollo) SHARES in exchange for
the issuance of new APIC SHARES, shall be subject to _____
(illegible in rollo) due diligence as the parties shall see fit, and
the condition subsequent that the _____ (illegible in rollo) for
increase in the authorized capital stock of the APIC from 2.0
billion to 3.5 _____ (illegible in rollo) shall have been approved
by the Securities and Exchange Commission.
IN WITNESS WHEREOF, the parties have caused these

presents to be signed on the date _____ (illegible in rollo) first
above written.38 (Emphasis supplied)
This Second Memorandum of Agreement was allegedly incorporated into the First
Memorandum of Agreement as a "disclosure to [U-Land] [that] . . . [Wellex] was still in
the process of acquiring and consolidating its title to shares of stock of APIC."39 It
"included the terms of a share swap whereby [Wellex] agreed to transfer to APIC its
shareholdings and advances to APC in exchange for the issuance by APIC of shares
of stock to [Wellex]."40
The Second Memorandum of Agreement was signed by Mr. Gatchalian, APIC

President Salud,41 and APC President Augustus C. Paiso.42 It was not dated, and no
place was indicated as the place of signing.43 It was not notarized either, and no other
witnesses signed the document.44
The 40-day period lapsed on June 25, 1998.45 Wellex and U-Land were not able to enter
into any share purchase agreement although drafts were exchanged between the two.
Despite the absence of a share purchase agreement, U-Land remitted to Wellex a total
of US$7,499,945.00.46 These were made in varying amounts and through the issuance
of post-dated checks.47 The dates of remittances were the following:
Date Amount (in US$)

June 30, 990,000.00
1998
July 2, 990,000.00
1998
20,000.00
July 30, 990,000.00
1998
490,000.00
490,000.00
August 1, 990,000.00
1998
490,000.00
490,000.00
August 3, 990,000.00
1998
70,000.00
September 399,972.50
25, 1998
99, 972.50
Total US$7,499,945.0048
Wellex acknowledged the receipt of these remittances in a confirmation letter

addressed to U-Land dated September 30, 1998.49
According to Wellex, the parties agreed to enter into a security arrangement. If the sale
of the shares of stock failed to push through, the partial payments or remittances U-
Land made were to be secured by these shares of stock and parcels of land.50 This
meant that U-Land could recover the amount it paid to Wellex by selling these shares
of stock and land titles or using them to generate income.
Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land stock

certificates representing 60,770,000 PEC shares and 72,601,000 APIC shares.51 These
were delivered to U-Land on July 1, 1998, September 1, 1998, and October 1, 1998.52
In addition, Wellex delivered to U-Land Transfer Certificates of Title (TCT) Nos. T-

216769, T-216771, T-228231, T-228227, T-211250, and T-216775 covering properties
owned by Westland Pacific Properties Corporation in Bulacan; and TCT Nos. T-107306,
T-115667, T-105910, T-120250, T-1114398, and T-120772 covering properties owned
by Rexlon Realty Group, Inc.53 On October 1, 1998,54 U-Land received a letter from
Wellex, indicating a list of stock certificates that the latter was giving to the former by
way of "security."55
Despite these transactions, Wellex and U-Land still failed to enter into the share
purchase agreement and the joint development agreement.
In the letter56 dated July 22, 1999, 10 months57 after the last formal communication
between the two parties, U-Land, through counsel, demanded the return of the
US$7,499,945.00.58 This letter was sent 14 months after the signing of the First
Memorandum of Agreement.
Counsel for U-Land claimed that "[Wellex] ha[d] unjustifiably refused to enter into the. .
. Share Purchase Agreement."59 As far as U-Land was concerned, the First
Memorandum of Agreement was no longer in effect, pursuant to Section 9.60 As such,
U-Land offered to return all the stock certificates covering APIC shares and PEC shares
as well as the titles to real property given by Wellex as security for the amount remitted
by U-Land.61
Wellex sent U-Land a letter62 dated August 2, 1999, which refuted U-Lands claims.
Counsel for Wellex stated that the two parties carried out several negotiations that
included finalizing the terms of the share purchase agreement and the terms of the joint
development agreement. Wellex asserted that under the joint development agreement,
U-Land agreed to remit the sum of US$3 million by May 22,1998 as initial funding for
the development projects.63
Wellex further asserted that it conducted extended discussions with U-Land in the hope
of arriving at the final terms of the agreement despite the failure of the remittance of the
US$3 million on May 22, 1998.64 That remittance pursuant to the joint development
agreement "would have demonstrated [U-Lands] good faith in finalizing the
agreements."65
Wellex averred that, "[s]ave for a few items, [Wellex and U-Land] virtually agreed on
the terms of both [the share purchase agreement and the joint development
agreement.]"66 Wellex believed that the parties had already "gone beyond the intent
stage of the [First Memorandum of Agreement] and [had already] effected partial
implementation of an over-all agreement."67 U-Land even delivered a total of 12 post-
dated checks to Wellex as payment for the APIC shares and PEC shares.68 "[Wellex]
on the other hand, had [already] delivered to[U-Land] certificates of stock of APEC [sic]
and PEC as well as various land titles to cover actual remittances."69 Wellex alleged that
the agreements were not finalized because U-Land was "forced to suspend operations
because of financial problems spawned by the regional economic turmoil."70
Thus, Wellex maintained that "the inability of the parties to execute the [share purchase
agreement] and the [joint development agreement] principally arose from problems at
[U-Lands] side, and not due to [Wellexs] unjustified refusal to enter into [the] [share
purchase agreement][.]"71
On July 30, 1999, U-Land filed a Complaint72 praying for rescission of the First
Memorandum of Agreement and damages against Wellex and for the issuance of a
Writ of Preliminary Attachment.73 From U-Lands point of view, its primary reason for
purchasing APIC shares from Wellex was APICs majority ownership of shares of stock
in APC (APC shares).74 After verification with the Securities and Exchange Commission,
U-Land discovered that "APIC did not own a single share of stock in APC."75 U-Land
alleged that it repeatedly requested that the parties enter into the share purchase
agreement.76 U-Land attached the demand letter dated July 22, 1999 to the Complaint.77
However, the 40-day period lapsed, and no share purchase agreement was finalized.78
U-Land alleged that, as of the date of filing of the Complaint, Wellex still refused to
return the amount of US$7,499,945.00 while refusing to enter into the share purchase
agreement.79 U-Land stated that it was induced by Wellex to enter into and execute the
First Memorandum of Agreement, as well as release the amount of US$7,499,945.00.80
In its Answer with Compulsory Counterclaim,81 Wellex countered that U-Land had no
cause of action.82 Wellex maintained that under the First Memorandum of Agreement,
the parties agreed to enter into a share purchase agreement and a joint development
agreement.83 Wellex alleged that to bring the share purchase agreement to fruition, it
would have to acquire the corresponding shares in APIC.84 It claimed that U-Land was
fully aware that the former "still ha[d] to consolidate its title over these shares."85 This
was the reason for Wellexs attachment of the Second Memorandum of Agreement to
the First Memorandum of Agreement. Wellex attached the Second Memorandum of
Agreement as evidence to refute U-Lands claim of misrepresentation.86
Wellex further alleged that U-Land breached the First Memorandum of Agreement since
the payment for the shares was to begin during the 40-day period, which began on May
16, 1998.87 In addition, U-Land failed to remit the US$3 million by May 22, 1998 that
would serve as initial funding for the development projects.88 Wellex claimed that the
remittance of the US$3 million on May 22, 1998 was a mandatory obligation on the part
of U-Land.89 Wellex averred that it presented draft versions of the share purchase
agreement, which were never finalized.90 Thus, it believed that there was an implied
extension of the 40-day period within which to enter into the share purchase agreement
and the joint development agreement since U-Land began remitting sums of money in
partial payment for the purchase of the shares of stock.91
In its counterclaim against U-Land, Wellex alleged that it had already set in motion
building and development of real estate projects on four (4) major sites in Cavite, Iloilo,
and Davao. It started initial construction on the basis of its agreement with U-Land to
pursue real estate development projects.92
Wellex claims that, had the development projects pushed through, the parties would
have shared equally in the profits of these projects.93 These projects would have yielded
an income of 2,404,948,000.00, as per the study Wellex conducted, which was duly
recognized by U-Land.94 Half of that amount, 1,202,474,000.00, would have
redounded to Wellex.95 Wellex, thus, prayed for the rescission of the First Memorandum
of Agreement and the payment of 1,202,474,000 in damages for loss of profit.96 It
prayed for the payment of moral damages, exemplary damages, attorneys fees, and
costs of suit.97
In its Reply,98 U-Land denied that there was an extension of the 40-day period within
which to enter into the share purchase agreement and the joint development
agreement. It also denied requesting for an extension of the 40-day period. It further
raised that there was no provision in the First Memorandum of Agreement that required
it to remit payments for Wellexs shares of stock in APIC and PEC within the 40-day
period. Rather, the remittances were supposed to begin upon the execution of the share
purchase agreement.99
As for the remittance of the US$3 million, U-Land stated that the issuance of this amount
on May 22, 1998 was supposed to be simultaneously made with Wellexs delivery of
the stock certificates for 57,000,000 PEC shares. These stock certificates were not
delivered on that date.100
With regard to the drafting of the share purchase agreement, U-Land denied that it was
Wellex that presented versions of the agreement. U-Land averred that it was its own
counsel who drafted versions of the share purchase agreement and the joint
development agreement, which Wellex refused to sign.101
U-Land specifically denied that it had any knowledge prior to or during the execution of
the First Memorandum of Agreement that Wellex still had to "consolidate its title over"
its shares in APIC. U-Land averred that it relied on Wellexs representation that it was
a majority owner of APIC shares and that APIC owned a majority of APC shares.102
Moreover, U-Land denied any knowledge of the initial steps that Wellex undertook to
pursue the development projects and denied any awareness of a study conducted by
Wellex regarding the potential profit of these projects.103
The case proceeded to trial.
U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief Executive
Officer, as its sole witness.104 Mr. Tseng testified that "[s]ometime in 1997, Mr. William
Gatchalian who was in Taiwan invited [U-Land] to join in the operation of his airline
company[.]"105 U-Land did not accept the offer at that time.106 During the first quarter of
1998, Mr. Gatchalian "went to Taiwan and invited [U-Land] to invest in Air
Philippines[.]"107 This time, U-Land alleged that subsequent meetings were held where
Mr. Gatchalian, representing Wellex, "claimed ownership of a majority of the shares of
APIC and ownership by APIC of a majority of the shares of [APC,] a domestic carrier in
the Philippines."108 Wellex, through Mr. Gatchalian, offered to sell to U-Land PEC shares
as well.109
According to Mr. Tseng, the parties agreed to enter into the First Memorandum of
Agreement after their second meeting.110 Mr. Tseng testified that under this
memorandum of agreement, the parties would enter into a share purchase agreement
"within forty (40) days from its execution which [would] put into effect the sale of the
shares [of stock] of APIC and PEC[.]"111 However, the "[s]hare [p]urchase [a]greement
was not executed within the forty-day period despite the draft . . . given [by U-Land to
Wellex]."112
Mr. Tseng further testified that it was only after the lapse of the 40-day period that U-
Land discovered that Wellex needed money for the transfer of APC shares to APIC.
This allegedly shocked U-Land since under the First Memorandum of Agreement, APIC
was supposed to own a majority of APC shares. Thus, U-Land remitted to Wellex a total
of US$7,499,945.00 because of its intent to become involved in the aviation business
in the Philippines. These remittances were confirmed by Wellex through a confirmation
letter. Despite the remittance of this amount, no share purchase agreement was
entered into by the parties.113
Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice President of Wellex.
She admitted her knowledge of the First Memorandum of Agreement as she was
involved in its drafting. She testified that the First Memorandum of Agreement made
reference, under its second preambular clause, to the Second Memorandum of
Agreement entered into by Wellex, APIC, and APC. She testified that under the First
Memorandum of Agreement, U-Lands purchase of APIC shares and PEC shares from
Wellex would take place within 40 days, with the execution of a share purchase
agreement.114
According to Ms. Ting, after the 40-day period lapsed, U-Land Chairman Mr. Wang
requested sometime in June of 1998 for an extension for the execution of the share
purchase agreement and the remittance of the US$3 million. As proof that Mr. Wang
made this request, Ms. Ting testified that Mr. Wang sent several post-dated checks to
cover the payment of the APIC shares and PEC shares and the initial funding of US$3
million for the joint development agreement. She testified that Mr. Wang presented a
draft of the share purchase agreement, which Wellex rejected. Wellex drafted a new
version of the share purchase agreement.115 However, the share purchase agreement
was not executed because during the period of negotiation, Wellex learned from other
sources that U-Land "encountered difficulties starting October of 1998."116 Ms. Ting
admitted that U-Land made the remittances to Wellex in the amount of
US$7,499,945.00.117
Ms. Ting testified that U-Land was supposed to make an initial payment of US$19
million under the First Memorandum of Agreement. However, U-Land only paid
US$7,499,945.00. The total payments should have amounted to US$41 million.118
Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a meeting to thresh
out the problems of the First Memorandum of Agreement, but U-Land did not reply.
Instead, Wellex only received communication from U-Land regarding their subsequent
negotiations through the latters demand letter dated July 22, 1999. In response, Wellex
wrote to U-Land requesting another meeting to discuss the demands. However, U-Land
already filed the Complaint for rescission and caused the attachment against the
properties of Wellex, causing embarrassment to Wellex.119
In the Decision dated April 10, 2001, the Regional Trial Court of Makati City held that
rescission of the First Memorandum of Agreement was proper:
The first issue must be resolved in the negative. Preponderance of evidence leans in
favor of plaintiff that it is entitled to the issuance of the writ of preliminary attachment.
Plaintiffs evidence establishes the facts that it is engaged in the airline business in
Taiwan, was approached by defendant, through its Chairman William Gatchalian, and
was invited by the latter to invest in an airline business in the Philippines, Air Philippines
Corporation (APC); that plaintiff became interested in the invitation of defendant; that
during the negotiations between plaintiff and defendant, defendant induced plaintiff to
buy shares in Air Philippines International Corporation (APIC) since it owns majority of
the shares of APC; that defendant also induced plaintiff to buy shares of APIC in
Philippine Estates Corporation (PEC); that the negotiations between plaintiff and
defendant culminated into the parties executing a MOA (Exhs. "C" to "C-3", also Exh.
"1"); that in the second "Whereas" clause of the MOA, defendant represented that it
has a current airline operation through its majority-owned subsidiary APIC, that under
the MOA, the parties were supposed to enter into a Share Purchase Agreement (SPA)
within forty (40) days from May 16, 1998, the date the MOA in order to effect the transfer
of APIC and PEC shares of defendant to plaintiff; that plaintiff learned from defendant
that APIC does not actually own a single share in APC; that plaintiff verified with the
Securities and Exchange Commission (SEC), by obtaining a General Information Sheet
therefrom (Exh. "C-Attachment"); that APIC does not in fact own APC; that defendant
induced plaintiff to still remit its investment to defendant, which plaintiff did as admitted
by defendant per its Confirmation Letter (Exh. "D") in order that APC shares could be
transferred to APIC; that plaintiff remitted a total of US$7,499,945.00 to defendant; and
that during the forty-day period stipulated in the MOA and even after the lapse of the
said period, defendant has not entered into the SPA, nor has defendant caused the
transfer of APC shares to APIC.
In the second "Whereas" clause of the MOA (Exh. "C"), defendants misrepresentation
that APIC owns APC is made clear, as follows:
"WHEREAS, WELLEX, on the other hand, has current airline operation in the
Philippines through its majority-owned subsidiary Air Philippines International
Corporation (Exh. "C") and the latters subsidiary, Air Philippines Corporation, and in
like manner also desires to expand its operation in the Asian regional markets; x x x"
(Second Whereas of Exh. "C")
On the other hand, defendants evidence failed to disprove plaintiffs evidence. The
testimony of defendants sole witness Elvira Ting, that plaintiff knew at the time of the
signing of the MOA that APIC does not own a majority of the shares of APC because
another Memorandum of Agreement was attached to the MOA (Exh "1") pertaining to
the purchase of APC shares by APIC is unavailing. The second "Whereas" clause of
the MOA leaves no room for interpretation. . . . The second MOA purportedly attached
as Annex "A" of this MOA merely enlightens the parties on the manner by which APIC
acquired the shares of APC. Besides, . . . the second MOA was not a certified copy and
did not contain a marking that it is an Annex "A" when it was supposed to be an Annex
"A" and a certified copy per the MOA between plaintiff and defendant. As can be also
gathered from her testimony, Ms. Ting does not have personal knowledge that plaintiff
was not informed that APIC did not own shares of APC during the negotiations as she
was not present during the negotiations between plaintiff and defendants William
Gatchalian. Her participation in the agreement between the parties [was] merely limited
to the preparation of the documents to be signed. Ms. Ting testified, as follows:
"Q During the negotiation, you did not know anything about that?"
A I was not involved in the negotiation, sir.
Q And you are just making your statement that U-Land knew about the intended transfer
of shares from APC to APIC because of this WHEREAS CLAUSE and the Annex to
this Memorandum of Agreement?
A Yes, it was part of the contract."
(TSN, Elvira Ting, June 6, 2000, pp. 8-10)
Defendants fraud in the performance of its obligation under the MOA is further revealed
when Ms. Ting testified on cross-examination that notwithstanding the remittances
made by plaintiff in the total amountn [sic] of US$7,499, 945.00 to partially defray the
cost of transferring APC shares to APIC even as of the year 2000, as follows:
"Q Ms. Ting, can you please tell the Court if you know who owns shares of Air
Philippines Corporation at this time?
A Air Philippines Corporation right now is own [sic] by Wellex Group and certain
individual.
Q How much shares of Air Philippines Corporation is owned by Wellex Group?
A Around twenty...at this moment around twenty five percent (25%).
Q Can you tell us if you know who are the other owners of the shares of Air Philippines?
A There are several individual owners, I cannot recall the names.
Q Could [sic] you know if Air Philippines Intl. Corporation is one of the owners?
A As of this moment, no sir."
(lbid, p. 16)
That defendant represented to plaintiff that it needed the remittances of plaintiff, even
if no SPA was executed yet between the parties, to effect the transfer of APC shares to
APIC is admitted by its same witness also in this wise:
"Q You said that remittances were made to the Wellex Group, Incorporated by plaintiff
for the period from June 1998 to September 1998[,] is that correct?
A Yes, Sir.
Q During all these times, that remittances were made in the total amount of more than
seven million dollars, did you ever know if plaintiff asked for evidence from your
company that AIR PHILIPPINES INTERNATIONAL CORPORATION has already
acquired shares of AIR PHILIPPINES CORPORATION?
A There were queries on the matter.
Q And what was your answer to those queries, Madam Witness?
A We informed them that the decision was still in the process.
Q Even up to the time that plaintiff U-Land stopped the remittances sometime in
September 1998 you have not effected the transfer of shares of AIR PHILIPPINES
CORPORATION to AIR PHILIPPINES INTERNATIONCAL [sic] CORPORATION[,] am
I correct?
A APC to APIC, well at that time its still in the process.
Q In fact, Madam Witness, is it not correct for me to say that one of the reasons why U-
Land Incorporated was convinced to remit the amounts of money totalling seven million
dollars plus,
was that your company said that it needed funds to effect these transfers, is that
correct?
A Yes, sir."
(lbid, pp. 25-29)
As the evidence adduced by the parties stand, plaintiff has established the fact that it
had made remittances in the total amount of US$7,499,945.00 to defendant in order
that defendant will make good its representation that APC is a subsidiary of APIC. The
said remittances are admitted by defendant.
Notwithstanding the said remittances, APIC does not own a single share of APC. On
the other hand, defendant could not even satisfactorily substantiate its claim that at
least it had the intention to cause the transfer of APC shares to APIC. [D]efendant
obviously did not enter into the stipulated SPA because it did not have the shares of
APC transferred to APIC despite its representations. Under the circumstances, it is
clear that defendant fraudulently violated the provisions of the MOA.120 (Emphasis
supplied)
On appeal, the Court of Appeals affirmed the ruling of the Regional Trial Court. 121 In its
July 30, 2004 Decision, the Court of Appeals held that the Regional Trial Court did not
err in granting the rescission:
Records show that in the answer filed by defendant-appellant, the latter itself asked for
the rescission of the MOA. Thus, in effect, it prays for the return of what has been given
or paid under the MOA, as the law creates said obligation to return the things which
were the object of the contract, and the same could be carried out only when he who
demands rescission can return whatever he may be obliged to restore. The law says:
"Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be
carried out only when he who demands rescission can return whatever he may be
obliged to restore."
Appellant, therefore, cannot ask for rescission of the MOA and yet refuse to return what
has been paid to it. Further, appellants claim that the lower court erred in ruling for the
rescission of the MOA is absurd and ridiculous because rescission thereof is prayed for
by the former. . . . This Court agrees with the lower court that appellee is the injured
party in this case, and therefore is entitled to rescission, because the rescission referred
to here is predicated on the breach of faith by the appellant which breach is violative of
the reciprocity between the parties. It is noted that appellee has partly complied with its
own obligation, while the appellant has not. It is, therefore, the right of the injured party
to ask for rescission because the guilty party cannot ask for rescission.
The lower court . . . correctly ruled that:
". . . This Court agrees with plaintiff that defendants misrepresentations regarding
APICs not owning shares in APC vitiates its consent to the MOA. Defendants
continued misrepresentation that it will cause the transfer of APC shares in APIC
inducing plaintiff to remit money despite the lapse of the stipulated forty day period,
further establishes plaintiffs right to have the MOA rescinded.
Section 9 of the MOA itself provides that in the event of the non-execution of an SPA
within the 40 day period, or within the extensions thereof, the payments made by
plaintiff shall be returned to it, to wit:
"9 Validity.- In the event that the parties are unable to agree on the terms of the SHPA
and/or JDA within forty (40) days from the date hereof (or such period as the parties
shall refund the US$3.0 million under Section 4 within three (3) days therefrom,
otherwise U-LAND shall have the right to recover the 57,000,000 PEC shares delivered
to ULAND under Section 4."
Clearly, the parties were not able to agree on the terms of the SPA within and even
after the lapse of the stipulated 40 day period. There being no SPA entered into by and
between the plaintiff and defendant, defendants return of the remittances [of] plaintiff
in the total amount of US$7,499,945 is only proper, in the same vein, plaintiff should
return to defendant the titles and certificates of stock given to it by defendant.122
(Citations omitted)
Hence, this Petition was filed.
Petitioners Arguments
Petitioner Wellex argues that contrary to the finding of the Court of Appeals, respondent
U-Land was not entitled to rescission because the latter itself violated the First
Memorandum of Agreement. Petitioner Wellex states that respondent U-Land was
actually bound to pay US$17.5 million for all of APIC shares and PEC shares under the
First Memorandum of Agreement and the US$3 million to pursue the development
projects under the joint development agreement. In sum, respondent U-Land was liable
to petitioner Wellex for the total amount of US$20.5 million. Neither the Court of Appeals
nor the Regional Trial Court made any mention of the legal effect of respondent U-
Lands failure to pay the full purchase price.123
On the share purchase agreement, petitioner Wellex asserts that its obligation to deliver
the totality of the shares of stock would become demandable only upon remittance of
the full purchase price of US$17.5 million.124 The full remittance of the purchase price of
the shares of stock was a suspensive condition for the execution of the share purchase
agreement and delivery of the shares of stock. Petitioner Wellex argues that the use of
the term "upon" in Section 2 of the First Memorandum of Agreement clearly provides
that the full payment of the purchase price must be given "simultaneously" or
"concurrent" with the execution of the share purchase agreement.125
Petitioner Wellex raises that the Court of Appeals erred in saying that the rescission of
the First Memorandum of Agreement was proper because petitioner Wellex itself asked
for this in its Answer before the trial court.126 It asserts that "there can be no rescission
of a non-existent obligation, such as [one] whose suspensive condition has not yet
happened[,]"127 as held in Padilla v. Spouses Paredes.128 Citing Villaflor v. Court of
Appeals129 and Spouses Agustin v. Court of Appeals,130 it argues that "the vendor. . . has
no obligation to deliver the thing sold. . . if the buyer. . . fails to fully pay the price as
required by the contract."131 In this case, petitioner Wellex maintains that respondent U-
Lands remittance of US$7,499,945.00 constituted mere partial performance of a
reciprocal obligation.132 Thus, respondent U-Land was not entitled to rescission. The
nature of this reciprocal obligation requires both parties simultaneous fulfillment of the
totality of their reciprocal obligations and not only partial performance on the part of the
allegedly injured party.
As to the finding of misrepresentations, petitioner Wellex raises that a seller may sell a
thing not yet belonging to him at the time of the transaction, provided that he will become
the owner at the time of delivery so that he can transfer ownership to the buyer. Contrary
to the finding of the lower courts, petitioner Wellex was obliged to be the owner of the
shares only when the time came to deliver these to respondent U-Land and not during
the perfection of the contract itself.133
Finally, petitioner Wellex argues that respondent U-Land could have recovered through
the securities given to the latter.134 Petitioner Wellex invokes Suria v. Intermediate
Appellate Court,135 which held that an "action for rescission is not a principal action that
is retaliatory in character [under Article 1191 of the Civil Code, but] a subsidiary one
which. . . is available only in the absence of any other legal remedy [under Article 1384
of the Civil Code]."136 Respondents Arguments
Respondent U-Land argues that it was the execution of the share purchase agreement
that would result in its purchase of the APIC shares and PEC shares.137 It was not the
full remittance of the purchase price of the shares of stock as indicated in the First
Memorandum of Agreement, as alleged by petitioner Wellex.138 Respondent U-Land
asserts that the First Memorandum of Agreement provides that the exact number of
APIC shares and PEC shares to be purchased under the share purchase agreement
and the final price of these shares were not yet determined by the parties.139
Respondent U-Land reiterates that it was petitioner Wellex that requested for the
remittances amounting to US$7,499,945.00 to facilitate APICs purchase of APC
shares.140 Thus, it was petitioner Wellexs refusal to enter into the share purchase
agreement that led to respondent U-Land demanding rescission of the First
Memorandum of Agreement and the return of the US$7,499,945.00.141 Respondent U-
Land further argues before this court that petitioner Wellex failed to present evidence
as to how the money was spent, stating that Ms. Ting admitted that the Second
Memorandum of Agreement "was not consummated at any time."142 Respondent U-
Land raises that petitioner Wellex was guilty of fraud by making it appear that APC was
a subsidiary of APIC.143 It reiterates that, as an airline company, its primary reason for
entering into the First Memorandum of Agreement was to acquire management of APC,
another airline company.144 Under Article 1191 of the Civil Code, respondent U-Land,
as the injured party, was entitled to rescission due to the fatal misrepresentations
committed by petitioner Wellex.145
Respondent U-Land further asserts that the "shareholdings in APIC and APC were
never in question."146 Rather, it was petitioner Wellexs misrepresentation that APIC was
a majority shareholder of APC that compelled it to enter into the agreement.147
As for Suria, respondent U-land avers that this case was inapplicable because the
pertinent provision in Suria was not Article 1191 but rescission under Article 1383 of
the Civil Code.148 The "rescission" referred to in Article 1191 referred to "resolution" of a
contract due to a breach of a mutual obligation, while Article 1384 spoke of "rescission"
because of lesion and damage.149 Thus, the rescission that is relevant to the present
case is that of Article 1191, which involves breach in a reciprocal obligation. It is, in fact,
resolution, and not rescission as a result of fraud or lesion, as found in Articles 1381,
1383, and 1384 of the Civil Code.150
The Issue
The question presented in this case is whether the Court of Appeals erred in affirming
the Decision of the Regional Trial Court that granted the rescission of the First
Memorandum of Agreement prayed for by U-Land.
The Petition must be denied.
I
The requirement of a share
purchase agreement
The Civil Code provisions on the interpretation of contracts are controlling to this case,
particularly Article 1370, which reads:
ART. 1370. If the terms of a contract are clear and leave no doubt upon the intention of
the contracting parties, the literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention of the parties, the latter shall
prevail over the former.
In Norton Resources and Development Corporation v. All Asia Bank Corporation:151
The cardinal rule in the interpretation of contracts is embodied in the first paragraph of
Article 1370 of the Civil Code: "[i]f the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal meaning of its stipulations shall
control." This provision is akin to the "plain meaning rule" applied by Pennsylvania
courts, which assumes that the intent of the parties to an instrument is "embodied in
the writing itself, and when the words are clear and unambiguous the intent is to be
discovered only from the express language of the agreement." It also resembles the
"four corners" rule, a principle which allows courts in some cases to search beneath the
semantic surface for clues to meaning. A court's purpose in examining a contract is to
interpret the intent of the contracting parties, as objectively manifested by them. The
process of interpreting a contract requires the court to make a preliminary inquiry as to
whether the contract before it is ambiguous. A contract provision is ambiguous if it is
susceptible of two reasonable alternative interpretations. Where the written terms of the
contract are not ambiguous and can only be read one way, the court will interpret the
contract as a matter of law. If the contract is determined to be ambiguous, then the
interpretation of the contract is left to the court, to resolve the ambiguity in the light of
the intrinsic evidence.152 (Emphasis supplied)
As held in Norton, this court must first determine whether a provision or stipulation
contained in a contract is ambiguous. Absent any ambiguity, the provision on its face
will be read as it is written and treated as the binding law of the parties to the contract.
The parties have differing interpretations of the terms of the First Memorandum of
Agreement. Petitioner Wellex even admits that "the facts of the case are fairly
undisputed [and that] [i]t is only the parties respective [understanding] of these facts
that are not in harmony."153
The second preambular clause of the First Memorandum of Agreement reads:
WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines
through its majority-owned subsidiary Air Philippines International Corporation and the
latters subsidiary, Air Philippines Corporation, and in like manner also desires to
expand its operation in the Asian regional markets; a Memorandum of Agreement on
______, a certified copy of which is attached hereto as Annex "A" and is hereby made
an integral part hereof, which sets forth, among others, the basis for WELLEXs present
ownership of shares in Air Philippines International Corporation.154 (Emphasis supplied)
I. Basic Agreement. - The parties agree to develop a long-term business relationship

initially through the creation of joint interest in airline operations as well as in property
development projects in the Philippines to be implemented as follows:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR
PHILIPPINES INTERNATIONAL CORPORATION ("APIC") equivalent
to at least 35% of the outstanding capital stock of APIC, but in any case,
not less than 1,050,000,000 shares (the "APIC Shares").
(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE

ESTATES CORPORATION ("PEC") equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares (the "PEC Shares").
(c) U-LAND shall enter into a joint development agreement with PEC to
jointly pursue property development projects in the Philippines.
(d) U-LAND shall be given the option to acquire from WELLEX shares
of stock of EXPRESS SAVINGS BANK ("ESB") up to 40% of the
outstanding capital stock of ESB (the "ESB Shares") under terms to be
mutually agreed.155
The First Memorandum of Agreement contained the following stipulations regarding the
share purchase agreement:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless
extended by mutual agreement), U-LAND and WELLEX shall execute a Share
Purchase Agreement ("SHPA") covering the acquisition by U-LAND of the APIC Shares
and PEC Shares (collectively, the "Subject Shares"). Without prejudice to any
be reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per share and that for
the PEC Shares at SIXTY FIVE CENTAVOS (P0.65) per share.
The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full
upon execution of the SHPA against delivery of the Subject Shares. The parties may
agree on such other terms and conditions governing the acquisition of the Subject
Shares to be provided in a separate instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the
purchase price reflected in the SHPA has been fully paid; (ii) the Philippine Securities
& Exchange Commission (SEC) shall have approved the issuance of the Subject
Shares; and (iii) any required approval by the Taiwanese government of the acquisition
by U-LAND of the Subject Shares shall likewise have been obtained.156 (Emphasis
supplied)
As for the joint development agreement, the First Memorandum of Agreement

contained the following stipulation:
4. Joint Development Agreement with PEC. Simultaneous with the execution of the
SHPA, U-LAND and PEC shall execute a joint development agreement ("JDA") to
pursue property development projects in the Philippines. The JDA shall cover specific
housing and other real estate development projects as the parties shall agree. All profits
derived from the projects covered by the JDA shall be shared equally between ULAND
and PEC. U-LAND shall, not later than May 22, 1998, remit the sum of US$3.0 million
as initial funding for the aforesaid development projects against delivery by WELLEX of
57,000,000 shares of PEC as security for said amount in accordance with Section 9
below.157 (Emphasis provided)
Finally, the parties included the following stipulation in case of a failure to agree on the
terms of the share purchase agreement or the joint development agreement:
9. Validity. - In the event the parties are unable to agree on the terms of the SHPA
and/or the JDA within forty (40) days from date hereof (or such period as the parties
shall refund the US$3.0 million provided under Section 4 within three (3) days
therefrom, otherwise U-LAND shall have the right to recover on the 57,000,000 PEC
shares delivered to U-LAND under Section 4.158
Section 2 of the First Memorandum of Agreement clearly provides that the execution of
a share purchase agreement containing mutually agreeable terms and conditions must
first be accomplished by the parties before respondent U-Land purchases any of the
shares owned by petitioner Wellex. A perusal of the stipulation on its face allows for no
other interpretation.
The need for a share purchase agreement to be entered into before payment of the full
purchase price can further be discerned from the other stipulations of the First
In Section 1, the parties agreed to enter into a joint business venture, through entering
into two (2) agreements: a share purchase agreement and a joint development
agreement. However, Section 1 provides that in the share purchase agreement, "U-
LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES
INTERNATIONAL CORPORATION (APIC) equivalent to at least 35% of the
outstanding capital stock of APIC, but in any case, not less than 1,050,000,000 shares
(the APIC Shares)."159
As for the PEC shares, Section 1 provides that respondent U-Land shall purchase from
petitioner Wellex "shares of stock of PHILIPPINE ESTATES CORPORATION (PEC)
equivalent to at least 35% of the outstanding capital stock of PEC, but in any case, not
less than 490,000,000 shares(the PEC Shares)."160
The use of the terms "at least 35% of the outstanding capital stock of APIC, but in any
case, not less than 1,050,000,000 shares" and "at least 35% of the outstanding capital
stock of PEC, but in any case, not less than 490,000,000 shares" means that the parties
had yet to agree on the number of shares of stock to be purchased.
The need to execute a share purchase agreement before payment of the purchase
price of the shares is further shown by the clause, "[w]ithout prejudice to any
be reflected in the [share purchase agreement] shall be... P0.30 per share and that for
the PEC Shares at... P0.65 per share."161 This phrase clearly shows that the final price
of the shares of stock was to be reflected in the share purchase agreement. There being
no share purchase agreement executed, respondent U-Land was under no obligation
to begin payment or remittance of the purchase price of the shares of stock.
Petitioner Wellex argues that the use of "upon" in Section 2162 of the First Memorandum
of Agreement means that respondent U-Land must pay the purchase price of the shares
of stock in its entirety when they are transferred. This argument has no merit.
Article 1373 of the Civil Code provides:
ART. 1373. If some stipulation of any contract should admit of several meanings, it shall
be understood as bearing that import which is most adequate to render it effectual.
It is necessary for the parties to first agree on the final purchase price and the number
of shares of stock to be purchased before respondent U-Land is obligated to pay or
remit the entirety of the purchase price. Thus, petitioner Wellexs argument cannot be
sustained since the parties to the First Memorandum of Agreement were clearly unable
to agree on all the terms concerning the share purchase agreement. It would be absurd
for petitioner Wellex to expect payment when respondent U-Land did not yet agree to
the final amount to be paid for the totality of an indeterminate number of shares of stock.
The third paragraph of Section 2163 provides that the "transfer of the Subject Shares"
shall take place upon the fulfillment of certain conditions, such as full payment of the
purchase price "as reflected in the [share purchase agreement]." The transfer of the
shares of stock is different from the execution of the share purchase agreement. The
transfer of the shares of stock requires full payment of the final purchase price.
However, that final purchase price must be reflected in the share purchase agreement.
The execution of the share purchase agreement will require the existence of a final
agreement.
In its Answer with counterclaim before the trial court, petitioner Wellex argued that the
payment of the shares of stock was to begin within the 40-day period. Petitioner
Wellexs claim is not in any of the stipulations of the contract. Its subsequent claim that
respondent U-Land was actually required to remit a total of US$20.5 million is likewise
bereft of basis since there was no final purchase price of the shares of stock that was
agreed upon, due to the failure of the parties to execute a share purchase agreement.
In addition, the parties had yet to agree on the final number of APIC shares and PEC
shares that respondent U-Land would acquire from petitioner Wellex.
Therefore, the understanding of the parties captured in the First Memorandum of

Agreement was to continue their negotiation to determine the price and number of the
shares to be purchased. Had it been otherwise, the specific number or percentage of
shares and its price should already have been provided clearly and unambiguously.
Thus, they agreed to a 40-day period of negotiation.
Section 9 of the First Memorandum of Agreement explicitly provides that:
In the event the parties are unable to agree on the terms of the SHPA and/or the JDA
within forty (40)days from date hereof (or such period as the parties shall mutually
agree), this Memorandum of Agreement shall cease to be effective and the parties
released from their respective undertakings herein . . .164
The First Memorandum of Agreement was, thus, an agreement to enter into a share
purchase agreement. The share purchase agreement should have been executed by
the parties within 40 days from May 16, 1998, the date of the signing of the First
When the 40-day period provided for in Section 9 lapsed, the efficacy of the First
Memorandum of Agreement ceased. The parties were "released from their respective
undertakings." Thus, from June 25, 1998, the date when the 40-day period lapsed, the
parties were no longer obliged to negotiate with each other in order to enter into a share
purchase agreement.
However, Section 9 provides for another period within which the parties could still be
required to negotiate. The clause "or such period as the parties shall mutually agree"
means that the parties should agree on a period within which to continue negotiations
for the execution of an agreement. This means that after the 40-day period, the parties
were still allowed to negotiate, provided that they could mutually agree on a new period
of negotiation.
Based on the records and the findings of the lower courts, the parties were never able
to arrive at a specific period within which they would bind themselves to enter into an
agreement. There being no other period specified, the parties were no longer under any
obligation to negotiate and enter into a share purchase agreement. Section 9 clearly
freed them from this undertaking.
II
There was no express or implied

novation of the First Memorandum
of Agreement
The subsequent acts of the parties after the 40-day period were, therefore, independent
of the First Memorandum of Agreement.
In its Appellants Brief before the Court of Appeals, petitioner Wellex mentioned that
there was an "implied partial objective or real novation"165 of the First Memorandum of
Agreement. Petititoner did not raise this argument of novation before this court. In
Gayos v. Gayos,166 this court held that "it is a cherished rule of procedure that a court
should always strive to settle the entire controversy in a single proceeding leaving no
root or branch to bear the seeds of future litigation[.]"167
Articles 1291 and 1292 of the Civil Code provides how obligations may be modified:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
Article 1292. In order that an obligation may be extinguished by another which

substitute the same, it is imperative that it be so declared in unequivocal terms, or that
the old and the new obligations be on every point incompatible with each other.
In Arco Pulp and Paper Co. v. Lim,168 this court discussed the concept of novation:
Novation extinguishes an obligation between two parties when there is a substitution of

objects or debtors or when there is subrogation of the creditor. It occurs only when the
new contract declares so "in unequivocal terms" or that "the old and the new obligations
be on every point incompatible with each other."
....
For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new obligation declares
in unequivocal terms that the old obligation is extinguished. It is implied when the new
obligation is incompatible with the old one on every point. The test of incompatibility is
whether the two obligations can stand together, each one with its own independent
existence. (Emphasis from the original omitted)
Because novation requires that it be clear and unequivocal, it is never presumed, thus:
In the civil law setting, novatiois literally construed as to make new. So it is deeply
rooted in the Roman Law jurisprudence, the principle novatio non praesumitur that
novation is never presumed. At bottom, for novation to be a jural reality, its animus must
be ever present, debitum pro debito basically extinguishing the old obligation for the
new one.169 (Emphasis from the original omitted, citations omitted)
Applying Arco, it is clear that there was no novation of the original obligation.
After the 40-day period, the parties did not enter into any subsequent written agreement
that was couched in unequivocal terms. The transaction of the First Memorandum of
Agreement involved large amounts of money from both parties. The parties sought to
participate in the air travel industry, which has always been highly regulated and subject
to the strictest commercial scrutiny. Both parties admitted that their counsels
participated in the crafting and execution of the First Memorandum of Agreement as
well as in the efforts to enter into the share purchase agreement. Any subsequent
agreement would be expected to be clearly agreed upon with their counsels assistance
and in writing, as well.
Given these circumstances, there was no express novation.
There was also no implied novation of the original obligation. In Quinto v. People:170
[N]o specific form is required for an implied novation, and all that is prescribed by law
would be an incompatibility between the two contracts. While there is really no hard and
fast rule to determine what might constitute to be a sufficient change that can bring
about novation, the touchstone for contrariety, however, would be an irreconcilable
incompatibility between the old and the new obligations.
....
. . . The test of incompatibility is whether or not the two obligations can stand together,
each one having its independent existence. If they cannot, they are incompatible and
the latter obligation novates the first. Corollarily, changes that breed incompatibility
must be essential in nature and not merely accidental. The incompatibility must take
place in any of the essential elements of the obligation, such as its object, cause or
principal conditions thereof; otherwise, the change would be merely modificatory in
nature and insufficient to extinguish the original obligation.171 (Citations omitted)
There was no incompatibility between the original terms of the First Memorandum of
Agreement and the remittances made by respondent U-Land for the shares of stock.
These remittances were actually made with the view that both parties would
subsequently enter into a share purchase agreement. It is clear that there was no
subsequent agreement inconsistent with the provisions of the First Memorandum of
Agreement.
Thus, no implied novation took place. In previous cases,172 this court has consistently
ruled that presumed novation or implied novation is not deemed favorable. In United
Pulp and Paper Co., Inc. v. Acropolis Central Guaranty Corporation:173
Neither can novation be presumed in this case. As explained in Dugo v. Lopena:

"Novation by presumption has never been favored. To be sustained, it need be
established that the old and new contracts are incompatible in all points, or that the will
to novate appears by express agreement of the parties or in acts of similar import."174
(Emphasis supplied)
There being no novation of the First Memorandum of Agreement, respondent U-Land

is entitled to the return of the amount it remitted to petitioner Wellex. Petitioner Wellex
is likewise entitled to the return of the certificates of shares of stock and titles of land it
delivered to respondent U-Land. This is simply an enforcement of Section 9 of the First
Memorandum of Agreement. Pursuant to Section 9, only the execution of a final share
purchase agreement within either of the periods contemplated by this stipulation will
justify the parties retention of what they received or would receive from each other.
III
Applying Article 1185 of the Civil

Code, the parties are obligated to
return to each other all they have
received
Article 1185 of the Civil Code provides that:
ART. 1185. The condition that some event will not happen at a determinate time shall
render the obligation effective from the moment the time indicated has elapsed, or if it
has become evident that the event cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such time as may
have probably been contemplated, bearing in mind the nature of the obligation.
Article 1185 provides that if an obligation is conditioned on the nonoccurrence of a

particular event at a determinate time, that obligation arises (a) at the lapse of the
indicated time, or(b) if it has become evident that the event cannot occur.
Petitioner Wellex and respondent U-Land bound themselves to negotiate with each
other within a 40-day period to enter into a share purchase agreement. If no share
purchase agreement was entered into, both parties would be freed from their respective
undertakings.
It is the non-occurrence or non-execution of the share purchase agreement that would

give rise to the obligation to both parties to free each other from their respective
undertakings. This includes returning to each other all that they received in pursuit of
entering into the share purchase agreement.
At the lapse of the 40-day period, the parties failed to enter into a share purchase
agreement. This lapse is the first circumstance provided for in Article 1185 that gives
rise to the obligation. Applying Article 1185, the parties were then obligated to return to
each other all that they had received in order to be freed from their respective
undertakings.
However, the parties continued their negotiations after the lapse of the 40-day period.
They made subsequent transactions with the intention to enter into the share purchase
agreement. Despite that, they still failed to enter into a share purchase agreement.
Communication between the parties ceased, and no further transactions took place.
It became evident that, once again, the parties would not enter into the share purchase
agreement. This is the second circumstance provided for in Article 1185. Thus, the
obligation to free each other from their respective undertakings remained.
As such, petitioner Wellex is obligated to return the remittances made by respondent

U-Land, in the same way that respondent U-Land is obligated to return the certificates
of shares of stock and the land titles to petitioner Wellex.
IV
Respondent U-Land is praying for

rescission or resolution under
Article 1191, and not rescission
under Article 1381
The arguments of the parties generally rest on the propriety of the rescission of the First
Memorandum of Agreement. This requires a clarification of rescission under Article
1191, and rescission under Article 1381 of the Civil Code.
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
Articles 1380 and 1381, on the other hand, provide an enumeration of rescissible
contracts: ART. 1380. Contracts validly agreed upon may be rescinded in the cases
established by law. ART. 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards
whom they represent suffer lesion by more than one-fourth of the value
of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer

the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any
other manner collect the claims due them;
(4) Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the
litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to

rescission.
Article 1383 expressly provides for the subsidiary nature of rescission:
ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when
the party suffering damage has no other legal means to obtain reparation for the same.
Rescission itself, however, is defined by Article 1385:
ART. 1385. Rescission creates the obligation to return the things which were the object
of the contract, together with their fruits, and the price with its interest; consequently, it
can be carried out only when he who demands rescission can return whatever he may
be obliged to restore. Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons who did not act in
bad faith.
In this case, indemnity for damages may be demanded from the person causing the
loss. Gotesco Properties v. Fajardo175 categorically stated that Article 1385 is
applicable to Article 1191:
At this juncture, it is noteworthy to point out that rescission does not merely terminate
the contract and release the parties from further obligations to each other, but abrogates
the contract from its inception and restores the parties to their original positions as if no
contract has been made. Consequently, mutual restitution, which entails the return of
the benefits that each party may have received as a result of the contract, is thus
required. To be sure, it has been settled that the effects of rescission as provided for in
Article 1385 of the Code are equally applicable to cases under Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving rescission under Article 1191. This
means bringing the parties back to their original status prior to the inception of the
contract. Article 1385 of the Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the things which were the object
of the contract, together with their fruits, and the price with its interest; consequently, it
can be carried out only when he who demands rescission can return whatever he may
be obligated to restore. Neither shall rescission take place when the things which are
the object of the contract are legally in the possession of third persons who did not act
in bad faith.
In this case, indemnity for damages may be demanded from the person causing the
loss.
This Court has consistently ruled that this provision applies to rescission under Article
1191: [S]ince Article 1385 of the Civil Code expressly and clearly states that "rescission
creates the obligation to return the things which were the object of the contract, together
with their fruits, and the price with its interest," the Court finds no justification to sustain
petitioners position that said Article 1385 does not apply to rescission under Article
1191. x x x176 (Emphasis from the original, citations omitted)
Rescission, as defined by Article 1385, mandates that the parties must return to each
other everything that they may have received as a result of the contract. This pertains
to rescission or resolution under Article 1191, as well as the provisions governing all
forms of rescissible contracts.
For Article 1191 to be applicable, however, there must be reciprocal prestations as

distinguished from mutual obligations between or among the parties. A prestation is the
object of an obligation, and it is the conduct required by the parties to do or not to do,
or to give.177 Parties may be mutually obligated to each other, but the prestations of
these obligations are not necessarily reciprocal. The reciprocal prestations must
necessarily emanate from the same cause that gave rise to the existence of the
contract. This distinction is best illustrated by an established authority in civil law, the
late Arturo Tolentino:
This article applies only to reciprocal obligations. It has no application to every case
where two persons are mutually debtor and creditor of each other. There must be
reciprocity between them. Both relations must arise from the same cause, such that
one obligation is correlative to the other. Thus, a person may be the debtor of another
by reason of an agency, and his creditor by reason of a loan. They are mutually
obligated, but the obligations are not reciprocal. Reciprocity arises from identity of
cause, and necessarily the two obligations are created at the same time.178 (Citation
omitted)
Ang Yu Asuncion v. Court of Appeals179 provides a clear necessity of the cause in

perfecting the existence of an obligation:
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code).

The obligation is constituted upon the concurrence of the essential elements thereof,
viz: (a) The vinculum juris or juridical tie which is the efficient cause established by the
various sources of obligations (law, contracts, quasi-contracts, delicts and quasi-
delicts); (b) the object which is the prestation or conduct, required to be observed (to
give, to do or not to do); and (c) the subject-persons who, viewed from the demandability
of the obligation, are the active (obligee) and the passive (obligor) subjects.180
The cause is the vinculum juris or juridical tie that essentially binds the parties to the
obligation. This linkage between the parties is a binding relation that is the result of their
bilateral actions, which gave rise to the existence of the contract.
The failure of one of the parties to comply with its reciprocal prestation allows the
wronged party to seek the remedy of Article 1191. The wronged party is entitled to
rescission or resolution under Article 1191, and even the payment of damages. It is a
principal action precisely because it is a violation of the original reciprocal prestation.
Article 1381 and Article 1383, on the other hand, pertain to rescission where creditors
or even third persons not privy to the contract can file an action due to lesion or damage
as a result of the contract. In Ong v. Court of Appeals,181 this court defined rescission:
Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a

remedy granted by law to the contracting parties and even to third persons, to secure
the reparation of damages caused to them by a contract, even if this should be valid,
by restoration of things to their condition at the moment prior to the celebration of the
contract. It implies a contract, which even if initially valid, produces a lesion or a
pecuniary damage to someone.182 (Citations omitted)
Ong elaborated on the confusion between "rescission" or resolution under Article 1191
and rescission under Article 1381:
On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to
reciprocal obligations. Reciprocal obligations are those which arise from the same
cause, and in which each party is a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the other. They are to be
performed simultaneously such that the performance of one is conditioned upon the
simultaneous fulfillment of the other. Rescission of reciprocal obligations under Article
1191 of the New Civil Code should be distinguished from rescission of contracts under
Article 1383. Although both presuppose contracts validly entered into and subsisting
and both require mutual restitution when proper, they are not entirely identical.
While Article 1191 uses the term "rescission," the original term which was used in the
old Civil Code, from which the article was based, was "resolution." Resolution is a
principal action which is based on breach of a party, while rescission under Article 1383
is a subsidiary action limited to cases of rescissionfor lesion under Article 1381 of the
New Civil Code, which expressly enumerates the following rescissible contracts:
1. Those which are entered into by guardians whenever the wards

whom they represent suffer lesion by more than one fourth of the value
of the things which are the object thereof;
2. Those agreed upon in representation of absentees, if the latter suffer

the lesion stated in the preceding number;
3. Those undertaken in fraud of creditors when the latter cannot in any

manner collect the claims due them;
4. Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the
litigants or of competent judicial authority; [and]
5. All other contracts specially declared by law to be subject to

rescission.183 (Citations omitted)
When a party seeks the relief of rescission as provided in Article 1381, there is no need
for reciprocal prestations to exist between or among the parties. All that is required is
that the contract should be among those enumerated in Article 1381 for the contract to
be considered rescissible. Unlike Article 1191, rescission under Article 1381 must be a
subsidiary action because of Article 1383.
Contrary to petitioner Wellexs argument, this is not rescission under Article 1381 of the
Civil Code. This case does not involve prejudicial transactions affecting guardians,
absentees, or fraud of creditors. Article 1381(3) pertains in particular to a series of
fraudulent actions on the part of the debtor who is in the process of transferring or
alienating property that can be used to satisfy the obligation of the debtor to the creditor.
There is no allegation of fraud for purposes of evading obligations to other creditors.
The actions of the parties involving the terms of the First Memorandum of Agreement
do not fall under any of the enumerated contracts that may be subject of rescission.
Further, respondent U-Land is pursuing rescission or resolution under Article 1191,

which is a principal action. Justice J.B.L. Reyes concurring opinion in the landmark
case of Universal Food Corporation v. Court of Appeals184 gave a definitive explanation
on the principal character of resolution under Article 1191 and the subsidiary nature of
actions under Article 1381:
The rescission on account of breach of stipulations is not predicated on injury to

economic interests of the party plaintiff but on the breach of faith by the defendant, that
violates the reciprocity between the parties. It is not a subsidiary action, and Article
1191 may be scanned without disclosing anywhere that the action for rescission
thereunder is subordinated to anything other than the culpable breach of his obligations
by the defendant. This rescission is a principal action retaliatory in character, it being
unjust that a party be held bound to fulfill his promises when the other violates his. As
expressed in the old Latin aphorism: "Non servanti fidem, non est fides servanda."
Hence, the reparation of damages for the breach is purely secondary.
On the contrary, in the rescission by reason of lesion or economic prejudice, the cause
of action is subordinated to the existence of that prejudice, because it is the raison detre
as well as the measure of the right to rescind. Hence, where the defendant makes good
the damages caused, the action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation of these two articles is limited to
the cases of rescission for lesin enumerated in Article 1381 of the Civil Code of the
Philippines, and does not apply to cases under Article 1191.185
Rescission or resolution under Article 1191, therefore, is a principal action that is

immediately available to the party at the time that the reciprocal prestation was
breached. Article 1383 mandating that rescission be deemed a subsidiary action cannot
be applicable to rescission or resolution under Article 1191. Thus, respondent U-Land
correctly sought the principal relief of rescission or resolution under Article 1191.
The obligations of the parties gave rise to reciprocal prestations, which arose from the
same cause: the desire of both parties to enter into a share purchase agreement that
would allow both parties to expand their respective airline operations in the Philippines
and other neighboring countries.
The jurisprudence relied upon by

petitioner Wellex is not applicable
The cases that petitioner Wellex cited to advance its arguments against respondent U-
Lands right to rescission are not in point.
Suria v. Intermediate Appellate Court is not applicable. In that case, this court
specifically stated that the parties entered into a contract of sale, and their reciprocal
obligations had already been fulfilled:186
There is no dispute that the parties entered into a contract of sale as distinguished from
a contract to sell.
By the contract of sale, the vendor obligates himself to transfer the ownership of and to
deliver a determinate thing to the buyer, who in turn, is obligated to pay a price certain
in money or its equivalent (Art. 1458, Civil Code). From the respondents own
arguments, we note that they have fully complied with their part of the reciprocal
obligation. As a matter of fact, they have already parted with the title as evidenced by
the transfer certificate of title in the petitioners name as of June 27, 1975.
The buyer, in turn, fulfilled his end of the bargain when he executed the deed of
mortgage. The payments on an installment basis secured by the execution of a
mortgage took the place of a cash payment. In other words, the relationship between
the parties is no longer one of buyer and seller because the contract of sale has been
perfected and consummated. It is already one of a mortgagor and a mortgagee. In
consideration of the petitioners promise to pay on installment basis the sum they owe
the respondents, the latter have accepted the mortgage as security for the obligation.
The situation in this case is, therefore, different from that envisioned in the cited opinion
of Justice J.B.L. Reyes. The petitioners breach of obligations is not with respect to the
perfected contract of sale but in the obligations created by the mortgage contract. The
remedy of rescission is not a principal action retaliatory in character but becomes a
subsidiary one which by law is available only in the absence of any other legal remedy.
(Art. 1384, Civil Code). Foreclosure here is not only a remedy accorded by law but, as
earlier stated, is a specific provision found in the contract between the parties.187
(Emphasis supplied)
In Suria, this court clearly applied rescission under Article 1384 and not rescission or
resolution under Article 1191. In addition, the First Memorandum of Agreement is not a
contract to sell shares of stock. It is an agreement to negotiate with the view of entering
into a share purchase agreement.
Villaflor v. Court of Appealsis not applicable either. In Villaflor, this court held that non-
payment of consideration of contracts only gave rise to the right to sue for collection,
but this non-payment cannot serve as proof of a simulated contract.188 The case did not
rule that the vendor has no obligation to deliver the thing sold if the buyer fails to fully
pay the price required by the contract. In Villaflor:
Petitioner insists that nonpayment of the consideration in the contracts proves their
simulation. We disagree. Nonpayment, at most, gives him only the right to sue for
collection. Generally, in a contract of sale, payment of the price is a resolutory condition
and the remedy of the seller is to exact fulfillment or, in case of a substantial breach, to
rescind the contract under Article 1191 of the Civil Code. However, failure to pay is not
even a breach, but merely an event which prevents the vendors obligation to convey
title from acquiring binding force.189 (Citations omitted) This courts statement in Villaflor
regarding rescission under Article 1191 was a mere obiter dictum. In Land Bank of the
Philippines v. Suntay,190 this court discussed the nature of an obiter dictum:
An obiter dictum has been defined as an opinion expressed by a court upon some
question of law that is not necessary in the determination of the case before the court.
It is a remark made, or opinion expressed, by a judge, in his decision upon a cause by
the way, that is, incidentally or collaterally, and not directly upon the question before
him, or upon a point not necessarily involved in the determination of the cause, or
introduced by way of illustration, or analogy or argument. It does not embody the
resolution or determination of the court, and is made without argument, or full
consideration of the point. It lacks the force of an adjudication, being a mere expression
of an opinion with no binding force for purposes of res judicata.191 (Citations omitted)
Petitioner Wellexs reliance on Padilla v. Spouses Paredes and Spouses Agustin v.

Court of Appeals is also misplaced. In these cases, this court held that there can be no
rescission for an obligation that is nonexistent, considering that the suspensive
condition that will give rise to the obligation has not yet happened. This is based on an
allegation that the contract involved is a contract to sell. In a contract to sell, the failure
of the buyer to pay renders the contract without effect. A suspensive condition is one
whose non-fulfillment prevents the existence of the obligation.192 Payment of the
purchase price, therefore, constitutes a suspensive condition in a contract to sell. Thus,
this court held that non-remittance of the full price allowed the seller to withhold the
transfer of the thing to be sold.
In this case, the First Memorandum of Agreement is not a contract to sell. Entering into
the share purchase agreement or the joint development agreement remained a
stipulation that the parties themselves agreed to pursue in the First Memorandum of
Agreement.
Based on the First Memorandum of Agreement, the execution of the share purchase
agreement was necessary to put into effect respondent U-Lands purchase of the
shares of stock. This is the stipulation indicated in this memorandum of agreement.
There was no suspensive condition of full payment of the purchase price needed to
execute either the share purchase agreement or the joint development agreement.
Upon the execution of the share purchase, the obligation of petitioner Wellex to transfer
the shares of stock and of respondent U-Land to pay the price of these shares would
have arisen.
Enforcement of Section 9 of the First Memorandum of Agreement has the same effect
as rescission or resolution under Article 1191 of the Civil Code. The parties are
obligated to return to each other all that they may have received as a result of the breach
by petitioner Wellex of the reciprocal obligation. Therefore, the Court of Appeals did not
err in affirming the rescission granted by the trial court.
VI
Petitioner Wellex was not guilty of

fraud but of violating Article 1159
of the Civil Code
In the issuance of the Writ of Preliminary Attachment, the lower court found that
petitioner Wellex committed fraud by inducing respondent U-Land to purchase APIC
shares and PEC shares and by leading the latter to believe that APC was a subsidiary
of APIC.
Determining the existence of fraud is not necessary in an action for rescission or

resolution under Article 1191. The existence of fraud must be established if the
rescission prayed for is the rescission under Article 1381.
However, the existence of fraud is a question that the parties have raised before this
court. To settle this question with finality, this court will examine the established facts
and determine whether petitioner Wellex indeed defrauded respondent U-Land.
In Tankeh v. Development Bank of the Philippines,193 this court enumerated the relevant
provisions of the Civil Code on fraud:
Fraud is defined in Article 1338 of the Civil Code as:
x x x fraud when, through insidious words or machinations of one of the contracting

parties, the other is induced to enter into a contract which, without them, he would not
have agreed to.
This is followed by the articles which provide legal examples and illustrations of fraud.
....
Art. 1340. The usual exaggerations in trade, when the other party had an opportunity
to know the facts, are not in themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an
expert and the other party has relied on the formers special knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual. (n)
Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute
error. (n) The distinction between fraud as a ground for rendering a contract voidable
or as basis for an award of damages is provided in Article 1344:
In order that fraud may make a contract voidable, it should be serious and should not
have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages. (1270)194
Tankeh further discussed the degree of evidence needed to prove the existence of
fraud:
[T]he standard of proof required is clear and convincing evidence. This standard of
proof is derived from American common law. It is less than proof beyond reasonable
doubt (for criminal cases) but greater than preponderance of evidence (for civil cases).
The degree of believability is higher than that of an ordinary civil case. Civil cases only
require a preponderance of evidence to meet the required burden of proof. However,
when fraud is alleged in an ordinary civil case involving contractual relations, an entirely
different standard of proof needs to be satisfied. The imputation of fraud in a civil case
requires the presentation of clear and convincing evidence. Mere allegations will not
suffice to sustain the existence of fraud. The burden of evidence rests on the part of the
plaintiff or the party alleging fraud. The quantum of evidence is such that fraud must be
clearly and convincingly shown.195
To support its allegation of fraud, Mr. Tseng, respondent U-Lands witness before the
trial court, testified that Mr. Gatchalian approached respondent U-Land on two (2)
separate meetings to propose entering into an agreement for joint airline operations in
the Philippines. Thus, the parties entered into the First Memorandum of Agreement.
Respondent U-Land primarily anchors its allegation of fraud against petitioner Wellex
on the existence of the second preambular clause of the First Memorandum of
Agreement.
In its Appellants Brief before the Court of Appeals, petitioner Wellex admitted that "[t]he
amount of US$7,499,945.00 was remitted for the purchase of APIC and PEC shares."196
In that brief, it argued that the parties were already in the process of partially executing
the First Memorandum of Agreement.
As held in Tankeh, there must be clear and convincing evidence of fraud. Based on the
established facts, respondent U-Land was unable to clearly convince this court of the
existence of fraud.
Respondent U-Land had every reasonable opportunity to ascertain whether APC was
indeed a subsidiary of APIC. This is a multimillion dollar transaction, and both parties
admitted that the share purchase agreement underwent several draft creations. Both
parties admitted the participation of their respective counsels in the drafting of the First
Memorandum of Agreement. Respondent U-Land had every opportunity to ascertain
the ownership of the shares of stock. Respondent U-Land itself admitted that it was not
contesting petitioner Wellexs ownership of the APIC shares or APC shares; hence, it
was not contesting the existence of the Second Memorandum of Agreement. Upon
becoming aware of petitioner Wellexs representations concerning APICs ownership
or control of APC as a subsidiary, respondent U-Land continued to make remittances
totalling the amount sought to be rescinded. It had the option to opt out of negotiations
after the lapse of the 40-day period. However, it proceeded to make the remittances to
petitioner Wellex and proceed with negotiations.
Respondent U-Land was not defrauded by petitioner Wellex to agree to the First
Memorandum of Agreement. To constitute fraud under Article 1338, the words and
1aw p++i1
machinations must have been so insidious or deceptive that the party induced to enter
into the contract would not have agreed to be bound by its terms if that party had an
opportunity to be aware of the truth.197 Respondent U-Land was already aware that APC
was not a subsidiary of APIC after the 40-day period. Still, it agreed to be bound by the
First Memorandum of Agreement by making the remittances from June 30 to
September 25, 1998.198 Thus, petitioner Wellexs failure to inform respondent U-Land
that APC was not a subsidiary of APIC when the First Memorandum of Agreement was
being executed did not constitute fraud.
However, the absence of fraud does not mean that petitioner Wellex is free of
culpability. By failing to inform respondent U-Land that APC was not yet a subsidiary of
APIC at the time of the execution of the First Memorandum of Agreement, petitioner
Wellex violated Article 1159 of the Civil Code. Article 1159 reads:
ART. 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
In Ochoa v. Apeta,199 this court defined good faith:
Good faith is an intangible and abstract quality with no technical meaning or statutory
definition, and it encompasses, among other things, an honest belief, the absence of
malice and the absence of design to defraud or to seek an unconscionable advantage.
It implies honesty of intention, and freedom from knowledge of circumstances which
ought to put the holder upon inquiry. The essence of good faith lies in an honest belief
in the validity of ones right, ignorance of a superior claim and absence of intention to
overreach another.200 (Citations omitted)
It was incumbent upon petitioner Wellex to negotiate the terms of the pending share
purchase agreement in good faith. This duty included providing a full disclosure of the
nature of the ownership of APIC in APC. Unilaterally compelling respondent U-Land to
remit money to finalize the transactions indicated in the Second Memorandum of
Agreement cannot constitute good faith.
The absence of fraud in a transaction does not mean that rescission under Article 1191
is not proper. This case is not an action to declare the First Memorandum of Agreement
null and void due to fraud at the inception of the contract or dolo causante. This case is
not an action for fraud based on Article 1381 of the Civil Code. Rescission or resolution
under Article 1191 is predicated on the failure of one of the parties in a reciprocal
obligation to fulfill the prestation as required by that obligation. It is not based on vitiation
of consent through fraudulent misrepresentations.
VII
Respondent U-Land was not bound

to pay the US$3 million under the
joint development agreement
The alleged failure of respondent U-Land to pay the amount of US$3 million to petitioner
Wellex does not justify the actions of the latter in refusing to return the
US$7,499,945.00.
Article 1374 of the Civil Code provides that:
ART. 1374. The various stipulations of a contract shall be interpreted together,

attributing to the doubtful ones that sense which may result from all of them taken jointly.
The execution of the joint development agreement was contingent on the execution of
the share purchase agreement. This is provided for in Section 4 of the First
1wphi1
Memorandum of Agreement, which stated that the execution of the two agreements is
"[s]imultaneous."201 Thus, the failure of the share purchase agreements execution would
necessarily mean the failure of the joint development agreements execution.
Section 9 of the First Memorandum of Agreement provides that should the parties fail
to execute the agreement, they would be released from their mutual obligations. Had
respondent U-Land paid the US$3 million and petitioner Wellex delivered the
57,000,000 PEC shares for the purpose of the joint development agreement, they would
have been obligated to return these to each other.
Section 4 and Section 9 of the First Memorandum of Agreement must be interpreted

together. Since the parties were unable to agree on a final share purchase agreement
and there was no exchange of money or shares of stock due to the continuing
negotiations, respondent U-Land was no longer obliged to provide the money for the
real estate development projects. The payment of the US$3 million was for pursuing
the real estate development projects under the joint development agreement. There
being no joint development agreement, the obligation to deliver the US$3 million and
the delivery of the PEC shares for that purpose were no longer incumbent upon the
parties.
VIII
Respondent U-Land was not

obligated to exhaust the "securities"
given by petitioner Wellex
Contrary to petitioner Wellexs assertion, there is no obligation on the part of respondent

U-Land to exhaust the "securities" given by petitioner Wellex. No such meeting of the
minds to create a guarantee or surety or any other form of security exists. The principal
obligation is not a loan or an obligation subject to the conditions of sureties or
guarantors under the Civil Code. Thus, there is no need to exhaust the securities given
to respondent U-Land, and there is no need for a legal condition where respondent U-
Land should pursue other remedies.
Neither petitioner Wellex nor respondent U-Land stated that there was already a
transfer of ownership of the shares of stock or the land titles. Respondent U-Land itself
maintained that the delivery of the shares of stock and the land titles were not in the
nature of a pledge or mortgage.202 It received the certificates of shares of stock and the
land titles with an understanding that the parties would subsequently enter a share
purchase agreement. There being no share purchase agreement, respondent U-Land
is obligated to return the certificates of shares of stock and the land titles to petitioner
Wellex.
The parties are bound by the 40-day period provided for in the First Memorandum of
Agreement. Adherence by the parties to Section 9 of the First Memorandum of
Agreement has the same effect as the rescission or resolution prayed for and granted
by the trial court.
Informal acts are prone to ambiguous legal interpretation. This will be based on the say-
so of each party and is a fragile setting for good business transactions. It will contribute
to the unpredictability of the market as it would provide courts with extraordinary
expectations to determine the business actor's intentions. The parties appear to be
responsible businessmen who know that their expectations and obligations should be
clearly articulated between them. They have the resources to engage legal
representation. Indeed, they have reduced their agreement in writing.
Petitioner Wellex now wants this court to define obligations that do not appear in these
instruments. We cannot do so. This court cannot interfere in the bargains, good or bad,
entered into by the parties. Our duty is to affirm legal expectations, not to guarantee
good business judgments.
WHEREFORE, the petition is DENIED. The Decision of the Regional Trial Court in Civil
Case No. 99-1407 and the Decision of the Court of Appeals in CA-G.R. CV No. 74850
are AFFIRMED. Costs against petitioner The Wellex Group, Inc.
SO ORDERED.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-50242 May 2l, 1988
E. RAZON, INC., petitioner,

vs.
THE COURT OF APPEALS and PIONEER INSURANCE & SURETY CORPORATION, respondents.
Cruz, Durian & Academia Law Office for petitioner.
Inocencio R. Serranilla for private respondent.
GUTIERREZ, JR., J.:
This is a petition to review by certiorari the decision of the -court of Appeals in CA-G.R. No. 56751-R, affirming in toto the decision of the Court of First Instance of
Manila in Civil Case No. 81460, entitled "Pioneer Insurance and Surety Corporation v. Northern Lines, Inc. and/or E. Razon, Inc. The dispositive portion of the
decision reads:
WHEREFORE, judgment is hereby rendered ordering defendant E. Razon, Inc. to pay plaintiff
the sum of P10,899.28 with legal interest from date of filing of the complaint, November 13,
1970, until fully paid, and costs.
The complaint is dismissed as against defendant Northern Lines, Inc. (Rollo, p. 13)
Civil Case No. 81460 was filed by respondent Pioneer Insurance as insurer-subrogee, to recover from either or both
defendants, jointly and severally, the sum of P21,937.75 representing the invoice value, freight costs and other
importation expenses of three (3) cases of radio and phonograph parts short-delivered from a total of eighty-six (86)
cases of said articles from Kobe, Japan, shipped aboard the SS "Don Jacinto II" of the defendant Northern Lines, Inc.,
for delivery to the consignee MGM Importers Corporation at Manila. The total shipment was insured by Pioneer.
On November 14, 1969, the shipment was discharged from the carrying vessel into the custody of E. Razon, Inc., one
of the arrastre operators in the Port of Manila, charged with the obligation of handling, custody and delivery of all cargo
discharged at the government piers of Manila. The shipment was delivered to its consignee, MGM Importers with
losses and damages valued at P 21,937.75.
On December 12, 1969, E. Razon certified that out of 86 cases of radio parts loaded on board the SS 'DON JACINTO
II" under Bill of Lading No. KM-18, only 83 cases had been delivered to the consignee.
Formal claims were thus filed by MGM Importers with Northern Lines and E. Razon, as well as the Pioneer Insurance
Company. The latter indemnified the assured in the sum of P 21,937.75 covering the full value of the lost cargo.
In its Answer, E. Razon denied ability on the grounds that (a) the whole cargo was not received from the carrying
vessel and (b) the shipment was delivered to the consignee in the same quantity and condition that E. Razon, Inc.
received the same from the vessel. However, it alleged that in the remote possibility it is held liable, its liability must
be limited to the amount fixed under the provisions of the Revised Management Contract, that is, P2,000 per package.
On the other hand, Northern Lines alleged that the shipment had been completely unloaded and received by E. Razon,
Inc.; that it exercised extraordinary diligence; and that the complaint has no cause of action.
Thereafter, the parties entered into a stipulation of fact, under which the defendants Northern Lines and E. Razon,
Inc. admitted, among others, that (a) the entire shipment of 86 radio parts were unloaded from the vessel "DON
JACINTO II" unto the custody of E. Razon as shown by the Statement of Deliveries and the cargo receipts; (b) E.
Razon certified that out of 86 cases only 83 cases had been delivered to the consignee; (e) on November 25,1969,
the consignee, MGM Importers, filed a formal claim for the missing cases; and (d) Plaintiff Pioneer indemnified the
consignee in the sum of P 21,937.75.
On July 24, 1972, after filing their respective memoranda, defendant Northern Lines, Inc. filed a Motion to Dismiss on
the ground that under the Stipulation of Facts, E. Razon admitted that it received from the vessel the complete
shipment as follows:
III. Plaintiff and defendant E. Razon admit that the entire shipment of 86 cases radio parts
were unloaded from the vessel 'Don Jacinto II or unto the custody of E. Razon as shown by
the summary of deliveries (Statement of deliveries) a copy of which being herewith attached
and Exh. 'I' (Northern Lines) and under the cargo receipts stated herein which are likewise
attached herewith and marked as Exh. '2' to Exhibit `2-V' (Northern Lines" (Rollo, p. 25)
After hearing, the Court of First Instance of Manila rendered its decision ordering defendant E. Razon to indemnify
plaintiff Pioneer the sum of P 10,899.28 with legal interest and dismissing the case against defendant Northern Lines,
leaving the controversy against E. Razon, Inc. alone.
On December 18, 1974, E. Razon, Inc. filed its appeal with the Court of Appeals which rendered its decision on
January 4, 1978, affirming in toto the trial court's decision. On March 9, 1979, the Court of Appeals denied the
petitioner's motion for reconsideration. Hence, this petition.
The sole issue raised by the petitioner is the general limitation of its liability to P 2,000 per case lost or destroyed as
provided in Paragraph or Clause XX of the Revised Management Contract it had entered into with the Bureau of
Customs which reads:
The CONTRACTOR shall at its own expense handle all merchandise upon or over said piers,
wharves, and other designated places and at its own expense perform all work undertaken by
it hereunder diligently and in a skillful workman like and efficient manner; that the contractor
shall be solely responsible as an independent CONTRACTOR, and hereby agrees to accept
liability and to promptly pay to the steamship company, consignee consignor, or other
interested party or parties for the loss, damage, or non-delivery of cargoes to the extent of the
actual invoice value of each package which in no case shall be more than Two Thousand
Pesos (P 2,000.00) for each package unless the value of the importation is otherwise specified
or communicated in writing together with the invoice value and supported by a certified packing
list to the CONTRACTOR by the interested party or parties before the arrival of the goods, as
well as all damages that may be suffered on account of loss, damage or destruction of any
merchandise while in custody or under the control of the CONTRACTOR upon any pier, wharf
or other designated place under the supervision of the Bureau, but said CONTRACTOR shall
not be respoxisible for the condition of any package received nor for the weight, nor for any
loss, injury or damage to the said cargo before or while the goods are being received or remain
on the piers or wharves, or if the loss, injury or damage is caused by force majeure, or other
causes beyond the CONTRACTOR's control, or capacity to prevent or remedy. (Rollo, P. 26)
It is the petitioner's contention that the unequivocal text of the aforequoted provision of the Revised Management
Contract denotes a clear rule in the limited liability of E. Razon, Inc., that is, it should not exceed P 2,000 per package
, except only in case the value of the importation is specified, manifested or communicated in writing together with the
certified packing list to the contractor before the arrival of the goods. Petitioner reads the same to mean notification
before arrival of the vessel. Thus, not having been notified prior to the docking of the SS "Don Jacinto II," E. Razon
denies its liability to MGM Importers or to its subrogee Pioneer Insurance.
The respondent maintains otherwise. It argues that "Under the provisions of the Tariff and Customs Code, for purposes
of clearing cargo from the Bureau of Customs, the Invoice, Packing List, Bill of Lading and other documents must be
submitted for processing and computation of customs duties, arrastre charges," satisfying the condition of exception
to the P2,000 limitation of liability of the arrastre operator.
We rule in favor of the respondents.
It is unrebutted that MGM Importers, upon arrival of the shipment , declared the same for tax purposes, as well as for
the assessment of arrastre charges and other fees (Plaintiff 's Memorandum), Civil Case No. 81460, page 26. CA,
Record on Appeal of E. Razon, Inc.). For the purpose, the invoice, packing list and other shipping documents were
presented to the Bureau of Customs as well as to petitioner E. Razon for the proper assessment of the arrastre
charges and other fees. Such manifestation satisfies the condition of declaration of the actual invoices of the value of
the goods before arrival of the goods, to overcome the limitation of liability of the arrastre operator.
Indeed, the provision in the management contract regarding the declaration of the actual invoice value "before the
arrival of the goods" must be understood to mean a declaration before the arrival of the goods in the custody of the
arrastre operator, whether it be done long before the landing of the shipment at port, or immediately before turn-over
thereof to the arrastre operator's custody. What is essential is knowledge beforehand of the extent of the risk to be
undertaken by the arrastre operator, as determined by the value of the property committed to its care that it may define
its responsibility for loss or damage to such cargo and to ascertain compensation commensurate to such risk assumed
(Northern Motors, Inc. v. Prince Lines, 107 Phil. 253). Having been duly informed of the actual invoice value of the
<re|| an1w>
merchandise under its custody and having received payment of arrastre charges based thereon, E. Razon, Inc., as
arrastre operator, cannot in justice insist on a limitation of its liability, under the contract, to less than the value of each
undelivered case or package consigned to MGM Importers, Inc. The lower courts judgment finding the petitioner liable
for the full declared value of the three (3) undelivered cases in question must be upheld.
The petitioner further contends that only two (2) cases of radio parts were missing, the third case having been
delivered with some shortages, thus reducing its liability. There is nothing on record to sufficiently sustain such
allegation. The petitioner's own certification of delivery refutes its claim. Exhibit "E" (p. 8 Folder of Exhibits) shows that
out of the manifested quantity of Eighty-Six (86) cases of radio parts, speaker parts and phonograph parts, only (83)
cases were delivered by E. Razon as of said date, in accordance with its records. No further deliveries were made to
the consignee MGM Importers, Inc.
Finally, we reiterate the Court of Appeals pronouncements regarding the petitioner's obligation as arrastre operator.
The petitioner avers that:
... The reason for the requirement of advance notice in writing before the arrival of the goods
is to put the defendant-appellant arrastre operator on the alert about the arrival of the goods
so that they could exert extraordinary care and supervision in seeing that the goods should be
taken care of and ultimately delivered to the consignee ...
Reacting thereto, the respondent court held:
... under appellant's interpretation, the Contractor would only exercise care and caution in the
handling of goods announced to it beforehand to be of sizeable value. Appellant, in other
words, spurns the public service nature of its business. What difference, in care and
consideration, should there be between a package containing goods worth, say, one hundred
pesos and one containing goods worth one thousand pesos, for as long as the charges are
duly paid? Why should appellant require consignors/consignees to undergo extra time and
expenses to advise/warn him beforehand to handle his cargo 'with care' because it is worth
more than P2,000.00? Would failure to so notify the Contractor give the latter the liscence to
treat the cargo with less than the attention ordinarily expected of it?. . . (Rollo, pp. 29-30)
Rightly so.
The stipulation requiring a consignee to inform the contractor or arrastre operator and give the advance notice of the
actual invoice value of the goods to be put in its custody is for the purpose of determining its liability, that it may obtain
compensation commensurable to the risk it assumes, not for the purpose of determining the degree of care or diligence
it must exercise as a depository or warehouseman (Lua Kian v. Manila Railroad, Co., et al., 19 SCRA 5). Article 1163,
vis-a-vis Article 1972 of the Civil Code on obligations of the depository provides:
Every person obliged to give something is also obliged to take care of it with the proper
diligence of a good father of a family, unless the law or stipulation of the parties requires
another standard of care.
With its further responsibility as a public service operator, the obligation of the petitioner to exercise care and diligence
can be no less.
WHEREFORE, in view of the foregoing, the petition is hereby DISMISSED. The judgment appealed from ordering the
petitioner to pay the respondent Pioneer Insurance and Surety Corporation "the sum of P10,899.28 with legal interest
from the date of filing of the complaint, November 13, 1970, until fully paid and costs" is hereby AFFIRMED.
SO ORDERED.

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 170202 July 14, 2008
OPTIMUM MOTOR CENTER CORPORATION, Petitioner,

vs.
ANNIE TAN, doing business under the name & style "AJ & T Trading," Respondent.
DECISION
TINGA, J.:
This Petition for Review1 seeks to reverse the Decision2 and Resolution3 of the Court of Appeals in CA-G.R. CV No.
63985. The decision affirmed with modification the judgment4 of the Regional Trial Court (RTC) of Manila, Branch 19
in Civil Case No. 94-71847.
The case originated from a Complaint5 for recovery of possession filed by Annie Tan (respondent) against Optimum
Motor Center Corporation (Optimum) and Cesar Pea (Pea) with the RTC of Manila. Respondent is doing business
under the name and style, "AJ & T Trading" which is engaged in transportation of cargoes. 6 AJ & T Trading is the
registered owner7 of an Isuzu cargo truck with Plate No. NWM 418, the subject of this complaint. Optimum is a
domestic corporation which owned and operated an auto repair shop located at 120 Del Monte Avenue, Quezon City.8
Respondents version of the facts is as follows.
On 14 January 1994, she brought the subject truck to Optimum for body repair and painting. Pea introduced himself
as the owner and manager of Optimum. Respondent verbally contracted with Pea for the repair of the damaged
portions of the truck, repainting and upholstery replacement. It was then agreed that the work would take thirty (30)
days to complete and would thus be finished on 15 February 1994.9 Leopoldo Daza, a security guard assigned to
Optimum, received the truck and prepared a checklist10 of the items found therein. On 20 January 1994, an estimate11
detailing the description and price rates for the repair was sent to respondent. To bring down the repair costs, the
parties agreed that respondent would supply the necessari materials such as windshield glasses for the front and
back of the truck, rubber strip and quartered glass panel.12
On 15 February 1994, respondent went to Optimum but was told to come back in March as the repair was not yet
finished.13 On several occasions, respondent tried to claim her truck from Optimum 14 to no avail. On 4 March 1994,
she again went to Optimums repair shop and was surprised to see that the trade name "AJ & T Trading" painted in
the middle and side doors of the truck had been scraped off. She also noticed that the 100-meter skyline rope, oil stick
gauge and right side mirror were missing.15 On 22 April 1994, she found her truck abandoned and unrepaired at
Optimums compound. On 16 May 1994, she discovered that Optimum had already vacated its shop in Del Monte and
that her truck was nowhere to be found.16 Later, she learned that Optimum had transferred to a new location but her
still unrepaired truck was found in Valenzuela City.
This prompted respondent to file the instant complaint with the trial court on 5 October 1994. 17 She prayed for the
recovery of possession of the truck or, in the alternative, the payment of the value thereof. She also sought the award
of attorneys fees, moral damages and costs of suit.18 At the trial of the case, two witnesses, Maximo Merigildo19 and
Bel Eduardo Nitafan,20 testified on the dilapidated condition of the truck when they saw it on separate occasions.
On 20 October 1994, the trial court issued an order directing the seizure of the vehicle upon respondents filing of a
bond in the amount of 1,200,000.00.21 Respondent posted the required bond.22 Optimum posted a counterbond to
lift said order.23
Optimum controverted the allegations of respondent. In its own account of the facts, it denied guaranteeing that the
repair work would be completed within 30 days from 15 January 1994. It claimed that the repairs were completed only
on 8 May 1994 due to delay in
respondents delivery of the parts.24 It presented as its witnesses the employees who had undertaken the tinsmithing25
painting26 and electrical works27 on the truck.
Optimum also explained that by virtue of a writ of execution28 issued against it by the Metropolitan Trial Court of
Quezon City, it was forced to vacate its repair shop and to transfer all its equipment, tools and all the vehicles in its
possession and custody, including respondents truck, to the IIC Compound in Sitio Malinis, Bagbaguin, Valenzuela
City. It claimed that it tried to get in touch with respondent to ask her to claim the truck but she was not available.
Optimum claimed its right to retain possession of the truck, by virtue of Article 1731 of the Civil Code, until the cost of
repairs is paid. By way of counterclaim, it asked for the payment of 79,370.00 as the unpaid cost of repairs and
25,000.00 as attorneys fees.29
On 31 May 1999, the trial court rendered a decision in favor of respondent, thus:
WHEREFORE, premises considered, judgment is hereby rendered ordering defendants Optimum Motor Center
Corporation and/or any person acting for and in its behalf, to surrender in good running condition the Isuzu Cargo
Truck, subject matter of this complaint and if this is not feasible, to jointly and severally pay the sum of 600,000.00
with legal interest from the date (October 5, 1994) the complaint was filed, until fully satisfied, moral damages of
50,000.00 and litigation expenses of 30,000.00 plus 25% of the amount awarded from defendants as and for
attorneys fees. The counterclaim of defendants is hereby DISMISSED for lack of merit.
SO ORDERED.30
Of the two opposing contentions, the trial court accepted the version of respondent that the repairs on her truck had
not been accomplished. It observed:
x x x Plaintiff claimed that even after the thirty (30) day period for the completion of the repair on the truck, the same
remained unrepaired. This was supported by the testimonies of the Courts personnel, namely: Maximo Merigildo of
the RTC, Branch 31, Quezon City, who served on April 25, 1994 the Writ of Execution in the Ejectment case against
defendants and implemented the same on May 14, 1994. He observed that the three (3) tires were not installed and
there were no left side mirror and door. Eduardo Bel Nitafan, Process Server, declared in open court that the Isuzu
Cargo Truck was now parked at the I.I.C. Compound in Valenzuela, Metro Manila. The truck was surrounded with
piles of lumber, about eight (8) feet in height. Missing were the two (2) batteries, one spare tire, front side glass,
skyline rope and the light on top of the cowl. The electrical wirings were not in order. The interior portion appeared to
be newly-painted but the outer portion looked rusty. He could not categorically tell if the truck was in good running
condition, because the batteries and ignition key were missing. The testimonies of these witnesses were not rebutted
by the defendants. They are independent witnesses whose testimonies deserve full faith and credit being neutral
parties to the case. Even defendant Cesar Pea admitted that the repair was not completed after thirty (30) days from
receipt of the Cargo Truck.31
Furthermore, the trial court held Optimum liable for damages for its failure to execute its part of the contract on time,
pursuant to Article 1170 of the Civil Code.32
Optimum filed a Notice of Appeal,33 whereas respondent moved for reconsideration on the ground that the trial court
failed to award actual damages and that Oriental Assurance Corporation, the bonding company of Optimum, should
have been adjudged liable for damages payable by the latter.34 On 5 August 1999, the trial court issued an order
denying the motion for reconsideration on the ground that it has already lost jurisdiction over the case.35 Thus,
respondent filed her Notice of Appeal36 on 25 August 1999.
On 28 June 2005, the Court of Appeals promulgated its Decision affirming with modification the ruling of the RTC, to
wit:
WHEREFORE, the appealed Decision is hereby AFFIRMED with the following MODIFICATIONS:
1. Appellant Optimum is ordered to return the cargo truck or to reimburse its value in the amount of
600,000.00 plus legal interest from the time of the commencement of the action until fully satisfied;
2. Temperate or moderate damages in the amount of Thirty Thousand Pesos (30,000.00) is awarded;
3. Twenty percent (20%) of the total award is hereby given to appellee/appellant Tan for both attorneys
fees and litigation expenses; and
4. The award of moral damages is deleted.
SO ORDERED.37
The Court of Appeals adhered to the trial courts findings that the repairs on the truck had not been completed and
that Optimum is liable for damages. It likewise ordered the return of the truck to respondent. It noted:
The trial court, in giving credence to the claim of appellee/appellant Tan that the repair of the cargo truck was not in
accordance with her agreement with appellant Optimum, found the testimonies of a court personnel and a process
server to be deserving of full faith and credit, being neutral parties. These witnesses categorically declared in favor of
appellee/appellant Tan that the cargo truck was not yet repaired as of April 25, 1994 and May 14, 1994, respectively.
Thus, even if We admit appellant Optimums defense that the repair was delayed by the late delivery on May 7, 1994
of the quarter glass panel and the rubber strips, the fact remains that even after the said delivery on May 7, 1994, no
such repair was yet done. The trial court found the defense of late delivery to be even toppled by a rebuttal witness
for appellee/appellant Tan who testified that the said glass need not even be repaired or that it was not necessary for
the complete repair of the cargo truck since they were not damaged at the time he had inspected the cargo truck prior
to its delivery for repair to appellant Optimum.
Necessarily then, appellant Optimum was already liable to appellee/appellant Tan for damages from the time the latter
demanded delivery of the cargo truck and the latter could not as yet deliver the same despite the lapse of the agreed
period. The trial court rightly concluded that appellant Optimum was already remiss in the performance of its part of
the contract for repair from the time of such demand. Hence, its liability accrues by virtue of Article 1170 of the Civil
Code that states: Those who in the performance of their obligation are guilty of fraud, negligence or delay and those
who in any manner contravene the tenor thereof are liable for damages. Thus, appellant Optimum may be compelled
to deliver the cargo truck to appellee/appellant Tan despite that the agreed repair was not totally made or to reimburse
the value thereof in the claimed amount of Six Hundred Thousand Pesos (600,000.00), plus the legal interest of six
percent (6%) thereof from the filing of the complaint for recovery.38
Both parties moved for reconsideration. For her part, respondent reiterated that her claim for compensatory damages
is supported by statement of accounts showing the earnings of the truck before it was brought to Optimum for repair.
She likewise expressed disinterest in the return of the truck as it was no longer in good condition. Instead, she sought
merely the reimbursement of its value at 600,000.00 with interest. Both motions were denied in a Resolution dated
17 October 2005. The appellate court however made the following clarifications:
Nonetheless, this Court wishes to clarify that the order for the return of the cargo truck must be qualified by the phrase
"if feasible" AND that the payment of legal interest applies in both circumstances, i.e., whether there would be the
return of such truck OR there would be mere reimbursement of its value pegged at Six Hundred Thousand Pesos
(600,000.00), with the same amount being the basis of the computation of legal interest.39
Unfazed by the unfavorable judgment, Optimum now comes to this Court via a petition for review.
In refusing to abide by the appellate courts ruling, Optimum reiterates its claim for mechanics lien to justify its retention
of the truck. It advances the view that by virtue of the repairs it has actually performed on respondents truck, it has
the right under Article 1731 of the Civil Code40 to enforce the mechanics lien. It maintains that the lien applies and
can be availed of whether or not the repair work was completely executed. Accordingly, it prays for the payment of
the cost of repairs amounting to 69,145.00 in exchange for the return of the subject truck, as well as for the award
of temperate damages in the sum of 30,000.00 and attorneys fees.41
Respondent counters that Optimum cannot avail of the mechanics lien because it was found by the lower courts that
the repairs on the truck had not been accomplished.
Respondent prevails.
The concept of a mechanics lien is articulated in Article 1731 of the Civil Code, which provides:
ARTICLE 1731. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid.
The mechanics lien is akin to a contractors or warehousemans lien in that by way of pledge, the repairman has the
right to retain possession of the movable until he is paid. However, the right of retention is conditioned upon the
execution of work upon the movable. The creation of a mechanic's lien does not depend upon the owner's
nonpayment. Rather, the contractor "creates" his or her own lien by performing the work or furnishing the materials.42
In Bachrach Motor Co. v. Mendoza,43 the Court had the occasion to rule that a person who has made repairs upon an
automobile at the request of the owner is entitled to retain it until he has been paid the price of the work executed.44
Optimums invocation of the mechanics lien is apparently based on the repairs it executed on the truck. However, 1awphil
the lower courts had already come up with a categorical finding based on testimonies of independent witnesses that
the repairs had not been accomplished in accordance with the agreement of the parties. We have to sustain these
factual findings, for basic is the tenet that the trial court's findings of facts as affirmed by the Court of Appeals are
binding on this Court, unless the lower courts overlooked, misconstrued or misinterpreted facts and circumstances of
substance which, if considered, would change the outcome of the case.45
As a result of the failure to accomplish the repairs on the truck, the right to retain the truck in accordance with Article
1731 did not arise. Optimums continuous possession or detention of the truck turned to be that of a deforciant and
so respondent has every right to recover possession of it.
From another perspective, Optimum is obliged to take care of the truck with the proper diligence of a good father to a
family while the same is in its possession.46 Records show that the subject truck had already deteriorated while in the
possession of Optimum. Taking into consideration the last known condition of the truck in tandem with the fact that
the court proceedings have spanned almost a decade, it can be readily inferred that the truck has become wholly
useless. Since restitution is no longer feasible, Optimum is bound to pay the value of the truck.
The value of the truck should be based on the fair market value that the property would command at the time it was
entrusted to Optimum. Such recoverable value is fair and reasonable considering that the value of a motor vehicle
depreciates. This value may be recovered without prejudice to such other damages a claimant is entitled to under
applicable laws.47
In this case, however, respondent did not appeal the appellate courts denial of compensatory damages. Hence, the
issue has obtained finality and this Court need not pass upon the same.
Nevertheless, temperate damages have been properly imposed by the appellate court. Under Article 2224 of the Civil
Code, temperate damages may be recovered when the court finds that some pecuniary loss has been suffered but
its amount cannot, from the nature of the case, be proved with certainty.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated 28 June 2005 is AFFIRMED.
SO ORDERED.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-51806 November 8, 1988
CIVIL AERONAUTICS ADMINISTRATION, petitioner,

vs.
COURT OF APPEALS and ERNEST E. SIMKE, respondents.
The Solicitor General for petitioner.
Ledesma, Guytingco, Veleasco & Associates for respondent Ernest E. Simke.
CORTES, J.:
Assailed in this petition for review on certiorari is the decision of the Court of Appeals affirming the trial court decision
which reads as follows:
WHEREFORE, judgment is hereby rendered ordering defendant to pay plaintiff the amount of
P15,589.55 as full reimbursement of his actual medical and hospital expenses, with interest at
the legal rate from the commencement of the suit; the amount of P20,200.00 as consequential
damages; the amount of P30,000.00 as moral damages; the amount of P40,000.00 as
exemplary damages; the further amount of P20,000.00 as attorney's fees and the costs [Rollo,
p. 24].
The facts of the case are as follows:
Private respondent is a naturalized Filipino citizen and at the time of the incident was the Honorary Consul Geileral of
Israel in the Philippines.
In the afternoon of December 13, 1968, private respondent with several other persons went to the Manila International
Airport to meet his future son-in-law. In order to get a better view of the incoming passengers, he and his group
proceeded to the viewing deck or terrace of the airport.
While walking on the terrace, then filled with other people, private respondent slipped over an elevation about four (4)
inches high at the far end of the terrace. As a result, private respondent fell on his back and broke his thigh bone.
The next day, December 14, 1968, private respondent was operated on for about three hours.
Private respondent then filed an action for damages based on quasi-delict with the Court of First Instance of Rizal,
Branch VII against petitioner Civil Aeronautics Administration or CAA as the entity empowered "to administer, operate,
manage, control, maintain and develop the Manila International Airport ... ." [Sec. 32 (24), R.A. 776].
Said claim for damages included, aside from the medical and hospital bills, consequential damages for the expenses
of two lawyers who had to go abroad in private respondent's stead to finalize certain business transactions and for
the publication of notices announcing the postponement of private respondent's daughter's wedding which had to be
cancelled because of his accident [Record on Appeal, p. 5].
Judgment was rendered in private respondent's favor prompting petitioner to appeal to the Court of Appeals. The
latter affirmed the trial court's decision. Petitioner then filed with the same court a Motion for, Reconsideration but this
was denied.
Petitioner now comes before this Court raising the following assignment of errors:
1. The Court of Appeals gravely erred in not holding that the present the CAA is really a suit
against the Republic of the Philippines which cannot be sued without its consent, which was
not given in this case.
2. The Court of Appeals gravely erred in finding that the injuries of respondent Ernest E. Simke
were due to petitioner's negligence although there was no substantial evidence to support
such finding; and that the inference that the hump or elevation the surface of the floor area of
the terrace of the fold) MIA building is dangerous just because said respondent tripped over it
is manifestly mistaken circumstances that justify a review by this Honorable Court of the
said finding of fact of respondent appellate court (Garcia v. Court of Appeals, 33 SCRA 622;
Ramos v. CA, 63 SCRA 331.)
3. The Court of Appeals gravely erred in ordering petitioner to pay actual, consequential, moral
and exemplary damages, as well as attorney's fees to respondent Simke although there
was no substantial and competent proof to support said awards I Rollo, pp. 93-94 1.
Invoking the rule that the State cannot be sued without its consent, petitioner contends that being an agency of the
government, it cannot be made a party-defendant in this case.
This Court has already held otherwise in the case of National Airports Corporation v. Teodoro, Sr. [91 Phil. 203 (1952)].
Petitioner contends that the said ruling does not apply in this case because: First, in the Teodoro case, the CAA was
sued only in a substituted capacity, the National Airports Corporation being the original party. Second, in the Teodoro
case, the cause of action was contractual in nature while here, the cause of action is based on a quasi-delict. Third,
there is no specific provision in Republic Act No. 776, the law governing the CAA, which would justify the conclusion
that petitioner was organized for business and not for governmental purposes. [Rollo, pp. 94-97].
Such arguments are untenable.
First, the Teodoro case, far from stressing the point that the CAA was only substituted for the National Airports
Corporation, in fact treated the CAA as the real party in interest when it stated that:
xxx xxx xxx
... To all legal intents and practical purposes, the National Airports Corporation is dead and
the Civil Aeronautics Administration is its heir or legal representative, acting by the law of its
creation upon its own rights and in its own name. The better practice there should have been
to make the Civil Aeronautics Administration the third party defendant instead of the National
Airports Corporation. [National Airports Corp. v. Teodoro, supra, p. 208.]
xxx xxx xxx

Second, the Teodoro case did not make any qualification or limitation as to whether or not the CAA's power to sue
and be sued applies only to contractual obligations. The Court in the Teodoro case ruled that Sections 3 and 4 of
Executive Order 365 confer upon the CAA, without any qualification, the power to sue and be sued, albeit only by
implication. Accordingly, this Court's pronouncement that where such power to sue and be sued has been granted
without any qualification, it can include a claim based on tort or quasi-delict [Rayo v. Court of First Instance of Bulacan,
G.R. Nos. 55273-83, December 19,1981, 1 1 0 SCRA 4561 finds relevance and applicability to the present case.
Third, it has already been settled in the Teodoro case that the CAA as an agency is not immune from suit, it being
engaged in functions pertaining to a private entity.
xxx xxx xxx
The Civil Aeronautics Administration comes under the category of a private entity. Although
not a body corporate it was created, like the National Airports Corporation, not to maintain a
necessary function of government, but to run what is essentially a business, even if revenues
be not its prime objective but rather the promotion of travel and the convenience of the
travelling public. It is engaged in an enterprise which, far from being the exclusive prerogative
of state, may, more than the construction of public roads, be undertaken by private concerns.
[National Airports Corp. v. Teodoro, supra, p. 207.]
xxx xxx xxx
True, the law prevailing in 1952 when the Teodoro case was promulgated was Exec. Order 365 (Reorganizing the
Civil Aeronautics Administration and Abolishing the National Airports Corporation). Republic Act No. 776 (Civil
Aeronautics Act of the Philippines), subsequently enacted on June 20, 1952, did not alter the character of the CAA's
objectives under Exec, Order 365. The pertinent provisions cited in the Teodoro case, particularly Secs. 3 and 4 of
Exec. Order 365, which led the Court to consider the CAA in the category of a private entity were retained substantially
in Republic Act 776, Sec. 32 (24) and (25). Said Act provides:
<re|| an 1w>
Sec. 32. Powers and Duties of the Administrator. Subject to the general control and
supervision of the Department Head, the Administrator shall have among others, the following
powers and duties:
xxx xxx xxx
(24) To administer, operate, manage, control, maintain and develop the Manila International
Airport and all government-owned aerodromes except those controlled or operated by the
Armed Forces of the Philippines including such powers and duties as: (a) to plan, design,
construct, equip, expand, improve, repair or alter aerodromes or such structures, improvement
or air navigation facilities; (b) to enter into, make and execute contracts of any kind with any
person, firm, or public or private corporation or entity; ... .
(25) To determine, fix, impose, collect and receive landing fees, parking space fees, royalties
on sales or deliveries, direct or indirect, to any aircraft for its use of aviation gasoline, oil and
lubricants, spare parts, accessories and supplies, tools, other royalties, fees or rentals for the
use of any of the property under its management and control.
xxx xxx xxx
From the foregoing, it can be seen that the CAA is tasked with private or non-governmental functions which operate
to remove it from the purview of the rule on State immunity from suit. For the correct rule as set forth in the Tedoro
case states:
xxx xxx xxx

Not all government entities, whether corporate or non-corporate, are immune from suits.
Immunity functions suits is determined by the character of the objects for which the entity was
organized. The rule is thus stated in Corpus Juris:
Suits against State agencies with relation to matters in which they have
assumed to act in private or non-governmental capacity, and various suits
against certain corporations created by the state for public purposes, but to
engage in matters partaking more of the nature of ordinary business rather
than functions of a governmental or political character, are not regarded as
suits against the state. The latter is true, although the state may own stock or
property of such a corporation for by engaging in business operations through
a corporation, the state divests itself so far of its sovereign character, and by
implication consents to suits against the corporation. (59 C.J., 313) [National
Airport Corporation v. Teodoro, supra, pp. 206-207; Emphasis supplied.]
This doctrine has been reaffirmed in the recent case of Malong v. Philippine National Railways [G.R. No. L-49930,
August 7, 1985, 138 SCRA 631, where it was held that the Philippine National Railways, although owned and operated
by the government, was not immune from suit as it does not exercise sovereign but purely proprietary and business
functions. Accordingly, as the CAA was created to undertake the management of airport operations which primarily
involve proprietary functions, it cannot avail of the immunity from suit accorded to government agencies performing
strictly governmental functions.
II
Petitioner tries to escape liability on the ground that there was no basis for a finding of negligence. There can be no
negligence on its part, it alleged, because the elevation in question "had a legitimate purpose for being on the terrace
and was never intended to trip down people and injure them. It was there for no other purpose but to drain water on
the floor area of the terrace" [Rollo, P. 99].
To determine whether or not the construction of the elevation was done in a negligent manner, the trial court conducted
an ocular inspection of the premises.
xxx xxx xxx
... This Court after its ocular inspection found the elevation shown in Exhs. A or 6-A where
plaintiff slipped to be a step, a dangerous sliding step, and the proximate cause of plaintiffs
injury...
xxx xxx xxx
This Court during its ocular inspection also observed the dangerous and defective condition of
the open terrace which has remained unrepaired through the years. It has observed the lack
of maintenance and upkeep of the MIA terrace, typical of many government buildings and
offices. Aside from the litter allowed to accumulate in the terrace, pot holes cause by missing
tiles remained unrepaired and unattented. The several elevations shown in the exhibits
presented were verified by this Court during the ocular inspection it undertook. Among these
elevations is the one (Exh. A) where plaintiff slipped. This Court also observed the other
hazard, the slanting or sliding step (Exh. B) as one passes the entrance door leading to the
terrace [Record on Appeal, U.S., pp. 56 and 59; Emphasis supplied.]
The Court of Appeals further noted that:
The inclination itself is an architectural anomaly for as stated by the said witness, it is neither
a ramp because a ramp is an inclined surface in such a way that it will prevent people or
pedestrians from sliding. But if, it is a step then it will not serve its purpose, for pedestrian
purposes. (tsn, p. 35, Id.) [rollo, p. 29.]
These factual findings are binding and conclusive upon this Court. Hence, the CAA cannot disclaim its liability for the
negligent construction of the elevation since under Republic Act No. 776, it was charged with the duty of planning,
designing, constructing, equipping, expanding, improving, repairing or altering aerodromes or such structures,
improvements or air navigation facilities [Section 32, supra, R.A. 776]. In the discharge of this obligation, the CAA is
duty-bound to exercise due diligence in overseeing the construction and maintenance of the viewing deck or terrace
of the airport.
It must be borne in mind that pursuant to Article 1173 of the Civil Code, "(t)he fault or negligence of the obligor consists
in the omission of that diligence which is required by the nature of the obligation and corresponds with the
circumstances of the person, of the time and of the place." Here, the obligation of the CAA in maintaining the viewing
deck, a facility open to the public, requires that CAA insure the safety of the viewers using it. As these people come
to the viewing deck to watch the planes and passengers, their tendency would be to look to where the planes and the
incoming passengers are and not to look down on the floor or pavement of the viewing deck. The CAA should have
thus made sure that no dangerous obstructions or elevations exist on the floor of the deck to prevent any undue harm
to the public.
The legal foundation of CAA's liability for quasi-delict can be found in Article 2176 of the Civil Code which provides
that "(w)hoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for
the damage done... As the CAA knew of the existence of the dangerous elevation which it claims though, was made
precisely in accordance with the plans and specifications of the building for proper drainage of the open terrace [See
Record on Appeal, pp. 13 and 57; Rollo, p. 391, its failure to have it repaired or altered in order to eliminate the existing
hazard constitutes such negligence as to warrant a finding of liability based on quasi-delict upon CAA.
The Court finds the contention that private respondent was, at the very least, guilty of contributory negligence, thus
reducing the damages that plaintiff may recover, unmeritorious. Contributory negligence under Article 2179 of the Civil
Code contemplates a negligent act or omission on the part of the plaintiff, which although not the proximate cause of
his injury, contributed to his own damage, the proximate cause of the plaintiffs own injury being the defendant's lack
of due care. In the instant case, no contributory negligence can be imputed to the private respondent, considering the
following test formulated in the early case of Picart v. Smith, 37 Phil. 809 (1918):
The test by which to determine the existence of negligence in a particular case may be stated
as follows: Did the defendant in doing the alleged negligent act use that reasonable care and
caution which an ordinarily prudent man would have used in the same situation? If not, then
he is guilty of negligence. The law here in effect adopts the standard supposed to be supplied
by the imaginary conduct of the discreet paterfamilias of the Roman law. The existence of the
negligence in a given case is not determined by reference to the personal judgment of the
actor in the situation before him. The law considers what would be reckless, blameworthy, or
negligent in the man of ordinary intelligence and prudence and determines liability by that.
The question as to what would constitute the conduct of a prudent man in a given situation
must of course be always determined in the light of human experience and in view of the facts
involved in the particular case. Abstract speculations cannot be here of much value but this
much can be profitably said: Reasonable men-overn their conduct by the circumstances which
are before them or known to them. They are not, and are not supposed to be omniscient of
the future. Hence they can be expected to take care only when there is something before them
to suggest or warn of danger. Could a prudent man, in the case under consideration, foresee
harm as a result of the course actually pursued' If so, it was the duty of the actor to take
precautions to guard against that harm. Reasonable foresight of harm, followed by the ignoring
of the suggestion born of this prevision, is always necessary before negligence can be held to
exist.... [Picart v. Smith, supra, p. 813; Emphasis supplied.]
The private respondent, who was the plaintiff in the case before the lower court, could not have reasonably foreseen
the harm that would befall him, considering the attendant factual circumstances. Even if the private respondent had
been looking where he was going, the step in question could not easily be noticed because of its construction. As the
trial court found:
In connection with the incident testified to, a sketch, Exhibit O, shows a section of the floorings
oil which plaintiff had tripped, This sketch reveals two pavements adjoining each other, one
being elevated by four and one-fourth inches than the other. From the architectural standpoint
the higher, pavement is a step. However, unlike a step commonly seen around, the edge of
the elevated pavement slanted outward as one walks to one interior of the terrace. The length
of the inclination between the edges of the two pavements is three inches. Obviously, plaintiff
had stepped on the inclination because had his foot landed on the lower pavement he would
not have lost his balance. The same sketch shows that both pavements including the inclined
portion are tiled in red cement, and as shown by the photograph Exhibit A, the lines of the
tilings are continuous. It would therefore be difficult for a pedestrian to see the inclination
especially where there are plenty of persons in the terrace as was the situation when plaintiff
fell down. There was no warning sign to direct one's attention to the change in the elevation of
the floorings. [Rollo, pp. 2829.]
III
Finally, petitioner appeals to this Court the award of damages to private respondent. The liability of CAA to answer for
damages, whether actual, moral or exemplary, cannot be seriously doubted in view of one conferment of the power
to sue and be sued upon it, which, as held in the case of Rayo v. Court of First Instance, supra, includes liability on a
claim for quasi-dilict. In the aforestated case, the liability of the National Power Corporation to answer for damages
resulting from its act of sudden, precipitate and simultaneous opening of the Angat Dam, which caused the death of
several residents of the area and the destruction of properties, was upheld since the o,rant of the power to sue and
be sued upon it necessarily implies that it can be held answerable for its tortious acts or any wrongful act for that
matter.
With respect to actual or compensatory damages, the law mandates that the same be proven.
Art. 2199. Except as provided by law or by stipulation, one are entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly proved. Such
compensation is referred to as actual on compensatory damages [New Civil Code].
Private respondent claims P15,589.55 representing medical and hospitalization bills. This Court finds the same to
have been duly proven through the testimony of Dr. Ambrosio Tangco, the physician who attended to private
respondent (Rollo, p. 26) and who Identified Exh. "H" which was his bill for professional services [Rollo, p. 31].
Concerning the P20,200.00 alleged to have been spent for other expenses such as the transportation of the two
lawyers who had to represent private respondent abroad and the publication of the postponement notices of the
wedding, the Court holds that the same had also been duly proven. Private respondent had adequately shown the
existence of such losses and the amount thereof in the testimonies before the trial court [CA decision, p. 81. At any
rate, the findings of the Court of Appeals with respect to this are findings of facts [One Heart Sporting Club, Inc. v.
Court of Appeals, G.R. Nos. 5379053972, Oct. 23, 1981, 108 SCRA 4161 which, as had been held time and again,
are, as a general rule, conclusive before this Court [Sese v. Intermediate Appellate Court, G.R. No. 66186, July 31,
1987,152 SCRA 585].
With respect to the P30,000.00 awarded as moral damages, the Court holds private respondent entitled thereto
because of the physical suffering and physical injuries caused by the negligence of the CAA [Arts. 2217 and 2219 (2),
New Civil Code].
With respect to the award of exemplary damages, the Civil Code explicitly, states:
Art. 2229. Exemplary or corrective damages, are imposed, by way of example or correction
for the public good, in addition to the moral, liquidated or compensatory
Art. 2231. In quasi-delicts, exemplary damages may be granted if the defendant acted with
gross negligence.
Gross negligence which, according to the Court, is equivalent to the term "notorious negligence" and consists in the
failure to exercise even slight care [Caunan v. Compania General de Tabacos, 56 Phil. 542 (1932)] can be attributed
to the CAA for its failure to remedy the dangerous condition of the questioned elevation or to even post a warning sign
directing the attention of the viewers to the change in the elevation of the floorings notwithstanding its knowledge of
the hazard posed by such elevation [Rollo, pp. 28-29; Record oil Appeal, p. 57]. The wanton disregard by the CAA of
the safety of the people using the viewing deck, who are charged an admission fee, including the petitioner who paid
the entrance fees to get inside the vantage place [CA decision, p. 2; Rollo, p. 25] and are, therefore, entitled to expect
a facility that is properly and safely maintained justifies the award of exemplary damages against the CAA, as a
deterrent and by way of example or correction for the public good. The award of P40,000.00 by the trial court as
exemplary damages appropriately underscores the point that as an entity changed with providing service to the public,
the CAA. like all other entities serving the public. has the obligation to provide the public with reasonably safe service.
Finally, the award of attorney's fees is also upheld considering that under Art. 2208 (1) of the Civil Code, the same
may be awarded whenever exemplary damages are awarded, as in this case, and,at any rate, under Art. 2208 (11),
the Court has the discretion to grant the same when it is just and equitable.
However, since the Manila International Airport Authority (MIAA) has taken over the management and operations of
the Manila International Airport [renamed Ninoy Aquino International Airport under Republic Act No. 6639] pursuant
to Executive Order No. 778 as amended by executive Orders Nos. 903 (1983), 909 (1983) and 298 (1987) and under
Section 24 of the said Exec. Order 778, the MIAA has assumed all the debts, liabilities and obligations of the now
defunct Civil Aeronautics Administration (CAA), the liabilities of the CAA have now been transferred to the MIAA.
WHEREFORE, finding no reversible error, the Petition for review on certiorari is DENIED and the decision of the Court
of Appeals in CA-G.R. No. 51172-R is AFFIRMED.
SO ORDERED.
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 182399 March 12, 2014
CS GARMENT, INC.,* Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
SERENO, CJ:
Before the Court is a Rule 45 petition for review on certiorari, assailing the respective Decision1 and Resolution2
of the Court of Tax. Appeals (CTA) en bane in EB Case No. 287. These judgments in turn affirmed the Decision3
and the Resolution4 of the CTA Second Division, which ordered the cancellation of certain items in the 1998 tax
assessments against petitioner CS Garment, Inc. (CS Garment or petitioner). Accordingly, petitioner was
directed to pay the Bureau of Internal Revenue (BIR) the remaining portion of the tax assessments. This portion
was comprised of the outstanding deficiency value-added tax (VAT) on CS Garments undeclared local sales
and on the incidental sale of a motor vehicle; deficiency documentary stamp tax (DST) on a lease agreement;
and deficiency income tax as a result of the disallowed expenses and undeclared local sales. However, while
the present case was pending before this Court, CS Garment filed a Manifestation and Motion stating that the
latter had availed itself of the governments tax amnesty program under Republic Act No. (R.A.) 9480, or the
2007 Tax Amnesty Law.
FACTS
We reproduce the narration of facts culled by the CTA en banc5 as follows:

Petitioner [CS Garment] is a domestic corporation duly organized and existing under and by virtue of the laws
of the Philippines with principal office at Road A, Cavite Ecozone, Rosario, Cavite. On the other hand,
respondent is the duly appointed Commissioner of Internal Revenue of the Philippines authorized under law to
perform the duties of said office, including, inter alia, the power to assess taxpayers for [alleged] deficiency
internal revenue tax liabilities and to act upon administrative protests or requests for
reconsideration/reinvestigation of such assessments.
Petitioner is registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration
No. 89-064, duly approved on December 18, 1989. As such, it is engaged in the business of manufacturing
garments for sale abroad.
On November 24, 1999, petitioner [CS Garment] received from respondent [CIR] Letter of Authority No.
00012641 dated November 10, 1999, authorizing the examination of petitioners books of accounts and other
accounting records for all internal revenue taxes covering the period January 1, 1998 to December 31, 1998.
On October 23, 2001, petitioner received five (5) formal demand letters with accompanying Assessment Notices
from respondent, through the Office of the Revenue Director of Revenue Region No. 9, San Pablo City, requiring
it to pay the alleged deficiency VAT, Income, DST and withholding tax assessments for taxable year 1998 in
the aggregate amount of 2,046,580.10 broken down as follows:
Deficiency VAT
Basic tax due P 314,194.00

Add: Surcharge 157,097.00
Interest 188,516.00
Total Amount Payable 659,807.00
Deficiency Income Tax (at Normal Rate of 34%)
Basic tax due 78,639.00

Interest 43,251.00
Deficiency Income Tax (at Normal Rate of 34%)

Interest 43,251.00
Deficiency DST
Basic tax due P 806.00

Add: Surcharge 403.00
Interest 484.00
Deficiency EWT

Interest 13,680.00
GRAND TOTAL 2,046,580.10
On November 20, 2001, or within the 30-day period prescribed under Section 228 of the Tax Code, as amended,
petitioner filed a formal written protest with the respondent assailing the above assessments.
On January 11, 2002, or within the sixty-day period after the filing of the protest, petitioner submitted to the
Assessment Division of Revenue Region No. 9, San Pablo City, additional documents in support of its protest.
Respondent failed to act with finality on the protest filed by petitioner within the period of one hundred eighty
(180) days from January 11, 2002 or until July 10, 2002. Hence, petitioner appealed before [the CTA] via a
Petition for Review filed on August 6, 2002 or within thirty (30) days from the last day of the aforesaid 180-day
period.
The case was raffled to the Second Division of [the CTA] for decision. After trial on the merits, the Second
Division rendered the Assailed Decision on January 4, 2007 upon which the Second Division cancelled
respondents assessment against CS Garments for deficiency expanded withholding taxes for CY 1998
amounting to 47,880.00, and partially cancelled the deficiency DST assessment amounting to 1,963.00.
However, the Second Division upheld the validity of the deficiency income tax assessments by subjecting the
disallowed expenses in the amount of 14,851,478.83 and a portion of the undeclared local sales
1,541,936.60 (amounting to 1,500,000.00) to income tax at the special rate of 5%. The remainder of
undeclared local sales of 1,541,936.06 (amounting to 41,936.60) was subjected to income tax at the rate of
34%. The Second Division found that total tax liability of CS Garments amounted to 2,029,570.12, plus 20%
delinquency interest pursuant to Section 249(C)(3), and computed the same as follows:
Income Tax
Deficiency Tax VAT DST at 5% at 34% TOTAL

Basic Tax Due P 314,194.00 P 145.00 P 817,573.94 P 1,789.44
25%
78,548.50 36.25 204,393.49 447.36
Surcharge
20% Interest 188,516.00 102.02 422,898.52 925.6
P 581,258.50 P 283.27 P 1,444,865.95 P 3,162.40 P 2,029,570.12

============= ============= ============= ============= =============
On January 29, 2007, CS Garments filed its "Motion for Partial Reconsideration" of the said decision. On May
25, 2007, in a resolution, the Second Division denied CS Garments motion for lack of merit. (Citations omitted)
Petitioner appealed the case to the CTA en banc and alleged the following: (1) the Formal Assessment Notices
(FAN) issued by the Commissioner of Internal Revenue (CIR) did not comply with the requirements of the law;
(2) the income generated by CS Garment from its participation in the Cavite Export Processing Zones trade
fairs and from its sales to employees were not subject to 10% VAT; (3) the sale of the company vehicle to its
general manager was not subject to 10% VAT; (4) it had no undeclared local sales in the amount of
1,541,936.60; and (5) Rule XX, Section 2 of the PEZA Rules and Regulations allowed deductions from the
expenses it had incurred in connection with advertising and representation; clinic and office supplies;
commissions and professional fees; transportation, freight and handling, and export fees; and licenses and
other taxes.
The CTA en banc affirmed the Decision and Resolution of the CTA Second Division. As regards the first issue,
the banc ruled that the CIR had duly apprised CS Garment of the factual and legal bases for assessing the
latters liability for deficiency income tax, as shown in the attached Schedule of Discrepancies provided to
petitioner; and in the subsequent reference of the CIR to Rule XX, Section 2 of the Rules and Regulations of
R.A. 7916. With respect to the second issue, the CTA pronounced that the income generated by CS Garment
from the trade fairs was subject to internal revenue taxes, as those transactions were considered "domestic
sales" under R.A. 7916, otherwise known as the Special Economic Zone Act. With respect to the third issue,
the CTA en banc declared that the sale of the motor vehicle by CS Garment to the latters general manager in
the amount of 1.6 million was subject to VAT, since the sale was considered an incidental transaction within
the meaning of Section 105 of the NIRC. On the fourth issue, the CTA found that CS Garment had failed to
declare the latters total local sales in the amount of 1,541,936.60 in its 1998 income tax return. The tax court
then calculated the income tax liability of petitioner by subjecting 1.5 million of that liability to the preferential
income tax rate of 5%. This amount represented the extent of the authority of CS Garment, as a PEZA-
registered enterprise, to sell in the local market. The normal income tax rate of 34% was then charged for the
excess amount of 41,936.60. Finally, as regards the fifth issue, the CTA ruled that Section 2, Rule XX of the
PEZA Rules which enumerates the specific deductions for ECOZONE Export Enterprises does not mention
certain claims of petitioner as allowable deductions.
Aggrieved, CS Garment filed the present Petition for Review assailing the Decision of the CTA en banc.
However, on 26 September 2008, while the instant case was pending before this Court, petitioner filed a
Manifestation and Motion stating that it had availed itself of the governments tax amnesty program under the
2007 Tax Amnesty Law. It thus prays that we take note of its availment of the tax amnesty and confirm that it
is entitled to all the immunities and privileges under the law. It has submitted to this Court the following
documents, which have allegedly been filed with Equitable PCI BankCavite EPZA Branch, a supposed
authorized agent-bank of the BIR:6
1. Notice of Availment of Tax Amnesty under R.A. 9480
2. Statement of Assets, Liabilities, and Net worth (SALN)
3. Tax Amnesty Return (BIR Form No. 2116)
4. Tax Amnesty Payment Form (Acceptance of Payment Form or BIR Form No. 0617)
5. Equitable PCI Banks BIR Payment Form indicating that CS Garment deposited the amount
of 250,000 to the account of the Bureau of TreasuryBIR
On 26 January 2009, the Office of the Solicitor General (OSG) filed its Comment objecting to the Manifestation
and Motion of CS Garment.7
The OSG asserts that the filing of an application for tax amnesty does not by itself entitle petitioner to the
benefits of the law, as the BIR must still assess whether petitioner was eligible for these benefits and whether
all the conditions for the availment of tax amnesty had been satisfied. Next, the OSG claims that the BIR is
given a one-year period to contest the correctness of the SALN filed by CS Garment, thus making petitioners
motion premature. Finally, the OSG contends that pursuant to BIR Revenue Memorandum Circular No. (RMC)
19-2008, petitioner is disqualified from enjoying the benefits of the Tax Amnesty Law, since a judgment was
already rendered in favor of the BIR prior to the tax amnesty availment. The OSG points out that CS Garment
submitted its application for tax amnesty only on 6 March 2008, which was almost two months after the CTA
en banc issued its 14 January 2008 Decision and more than one year after the CTA Second Division issued its
4 January 2007 Decision.
On 8 February 2010, the Court required both parties to prepare and file their respective memoranda within 30
days from notice.8 After this Court granted the motions for extension filed by the parties, the OSG eventually
filed its Memorandum on 18 May 2010, and CS Garment on 7 June 2010. It is worthy to note that in its
Memorandum, the OSG did not raise any argument with respect to petitioners availment of the tax amnesty
program. Neither did the OSG deny the authenticity of the documents submitted by CS Garments or mention
that a case had been filed against the latter for availing itself of the tax amnesty program, taking into account
the considerable lapse of time from the moment petitioner filed its Tax Amnesty Return and Statement of Assets,
Liabilities, and Net Worth in 2008.
On 17 July 2013, the parties were ordered9 to "move in the premises"10 by informing the Court of the status of
the tax amnesty availment of petitioner CS Garment, including any supervening event that may be of help to
the Court in its immediate disposition of the present case. Furthermore, the parties were directed to indicate
inter alia (a) whether CS Garment had complied with the requirements of the 2007 Tax Amnesty Law, taking
note of the aforementioned documents submitted; (b) whether a case had been initiated against petitioner, with
respect to its availment of the tax amnesty program; and (c) whether respondent CIR was still interested in
pursuing the case. Petitioner eventually filed its Compliance11 on 27 August 2013, and the OSG on 29 November
2013.12
According to the OSG,13 CS Garment had already complied with all documentary requirements of the 2007 Tax
Amnesty Law. It also stated that the BIR Litigation Division had not initiated any case against petitioner relative
to the latters tax amnesty application. However, the OSG reiterated that the CIR was still interested in pursuing
the case.
ISSUE
The threshold question before this Court is whether or not CS Garment is already immune from paying the
deficiency taxes stated in the 1998 tax assessments of the CIR, as modified by the CTA.
DISCUSSION
Tax amnesty refers to the articulation of the absolute waiver by a sovereign of its right to collect taxes and
power to impose penalties on persons or entities guilty of violating a tax law.14 Tax amnesty aims to grant a
general reprieve to tax evaders who wish to come clean by giving them an opportunity to straighten out their
records.15 In 2007, Congress enacted R.A. 9480, which granted a tax amnesty covering "all national internal
revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefor, that
have remained unpaid as of December 31, 2005."16 These national internal revenue taxes include (a) income
tax; (b) VAT; (c) estate tax; (d) excise tax; (e) donors tax; (f) documentary stamp tax; (g) capital gains tax; and
(h) other percentage taxes.17 Pursuant to Section 6 of the 2007 Tax Amnesty Law, those who availed themselves
of the benefits of the law became "immune from the payment of taxes, as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of 1997, as
amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior
years."
Amnesty taxpayers may immediately enjoy the privileges and immunities under the 2007 Tax Amnesty Law, as
soon as they fulfill the suspensive conditions imposed therein
A careful scrutiny of the 2007 Tax Amnesty Law would tell us that the law contains two types of conditions
one suspensive, the other resolutory. Borrowing from the concepts under our Civil Code, a condition may be
classified as suspensive when the fulfillment of the condition results in the acquisition of rights. On the other
hand, a condition may be considered resolutory when the fulfillment of the condition results in the
extinguishment of rights. In the context of tax amnesty, the rights referred to are those arising out of the
privileges and immunities granted under the applicable tax amnesty law.
The imposition of a suspensive condition under the 2007 Tax Amnesty Law is evident from the following
provisions of the law:
2007 Tax Amnesty Law Republic Act No. 9480
SECTION 2. Availment of the Amnesty. Any person, natural or juridical, who wishes to avail himself of the
tax amnesty authorized and granted under this Act shall file with the Bureau of Internal Revenue (BIR) a notice
and Tax Amnesty Return accompanied by a Statement of Assets, Liabilities and Networth (SALN) as of
December 31, 2005, in such form as may be prescribed in the implementing rules and regulations (IRR) of this
Act, and pay the applicable amnesty tax within six months from the effectivity of the IRR.
SECTION 4. Presumption of Correctness of the SALN. The SALN as of December 31, 2005 shall be
considered as true and correct except where the amount of declared networth is understated to the extent of
thirty percent (30%) or more as may be established in proceedings initiated by, or at the instance of, parties
other than the BIR or its agents: Provided, That such proceedings must be initiated within one year following
the date of the filing of the tax amnesty return and the SALN. Findings of or admission in congressional hearings,
other administrative agencies of government, and/or courts shall be admissible to prove a thirty percent (30%)
under-declaration.
SECTION 6. Immunities and Privileges. Those who availed themselves of the tax amnesty under Section 5
hereof, and have fully complied with all its conditions shall be entitled to the following immunities and privileges:
(a) The taxpayer shall be immune from the payment of taxes, as well as additions thereto, and
the appurtenant civil, criminal or administrative penalties under the National Internal Revenue
Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for
taxable year 2005 and prior years.
(b) The taxpayers Tax Amnesty Return and the SALN as of December 31, 2005 shall not be
admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years,
insofar as such proceedings relate to internal revenue taxes, before judicial, quasi-judicial or
administrative bodies in which he is a defendant or respondent, and except for the purpose of
ascertaining the networth beginning January 1, 2006, the same shall not be examined, inquired
or looked into by any person or government office. However, the taxpayer may use this as a
defense, whenever appropriate, in cases brought against him.
(c) The books of accounts and other records of the taxpayer for the years covered by the tax
amnesty availed of shall not be examined: Provided, That the Commissioner of Internal
Revenue may authorize in writing the examination of the said books of accounts and other
records to verify the validity or correctness of a claim for any tax refund, tax credit (other than
refund or credit of taxes withheld on wages), tax incentives, and/or exemptions under existing
laws.
All these immunities and privileges shall not apply where the person failed to file a SALN and the Tax Amnesty
Return, or where the amount of networth as of December 31, 2005 is proven to be understated to the extent of
thirty percent (30%) or more, in accordance with the provisions of Section 3 hereof.
SECTION 7. When and Where to File and Pay. The filing of the Tax Amnesty Return and the payment of the
amnesty tax for those availing themselves of the tax amnesty shall be made within six months starting from the
effectivity of the IRR. It shall be filed at the office of the Revenue District Officer which has jurisdiction over the
legal residence or principal place of business of the filer. The Revenue District Officer shall issue an acceptance
of payment form authorizing an authorized agent bank, or in the absence thereof, the collection agent or
municipal treasurer concerned, to accept the amnesty tax payment.
Department of Finance Order No. 29-07: Rules and Regulations to Implement R.A. 9480
SECTION 6. Method of Availment of Tax Amnesty.
xxxx
3. Payment of Amnesty Tax and Full Compliance. Upon filing of the Tax Amnesty Return in accordance with
Sec. 6 (2) hereof, the taxpayer shall pay the amnesty tax to the authorized agent bank or in the absence thereof,
the Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal
residence or principal place of business.
The RDO shall issue sufficient Acceptance of Payment Forms, as may be prescribed by the BIR for the use of
or to be accomplished by the bank, the collection agent or the Treasurer, showing the acceptance of the
amnesty tax payment. In case of the authorized agent bank, the branch manager or the assistant branch
manager shall sign the acceptance of payment form.
The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax Amnesty Return shall be
submitted to the RDO, which shall be received only after complete payment. The completion of these
requirements shall be deemed full compliance with the provisions of R.A. 9480. (Emphases supplied)
In availing themselves of the benefits of the tax amnesty program, taxpayers must first accomplish the following
forms and prepare them for submission: (1) Notice of Availment of Tax Amnesty Form; (2) Tax Amnesty Return
Form (BIR Form No. 2116); (3) Statement of Assets, Liabilities and Net worth (SALN) as of December 31, 2005;
and (4) Tax Amnesty Payment Form (Acceptance of Payment Form or BIR Form No. 0617).18
The taxpayers must then compute the amnesty tax due in accordance with the rates provided in Section 5 of
the law,19 using as tax base their net worth as of 31 December 2005 as declared in their SALNs. At their option,
the revenue district office (RDO) of the BIR may assist them in accomplishing the forms and computing the
taxable base and the amnesty tax due.20 The RDO, however, is disallowed from looking into, questioning or
examining the veracity of the entries contained in the Tax Amnesty Return, SALN, and other documents they
have submitted.21 Using the Tax Amnesty Payment Form, the taxpayers must make a complete payment of the
computed amount to an authorized agent bank, a collection agent, or a duly authorized treasurer of the city or
municipality.22
Thereafter, the taxpayers must file with the RDO or an authorized agent bank the (1) Notice of Availment of Tax
Amnesty Form; (2) Tax Amnesty Return Form (BIR Form No. 2116); (3) SALN; and (4) Tax Amnesty Payment
Form.23 The RDO shall only receive these documents after complete payment is made, as shown in the Tax
Amnesty Payment Form.24 It must be noted that the completion of these requirements "shall be deemed full
compliance with the provisions of R.A. 9480."25 In our considered view, this rule means that amnesty taxpayers
may immediately enjoy the privileges and immunities under the 2007 Tax Amnesty Law as soon as the
aforementioned documents are duly received.
The OSG has already confirmed26 to this Court that CS Garment has complied with all of the documentary
requirements of the law. Consequently, and contrary to the assertion of the OSG, no further assessment by the
BIR is necessary. CS Garment is now entitled to invoke the immunities and privileges under Section 6 of the
law.
Similarly, we reject the contention of OSG that the BIR was given a one-year period to contest the correctness
of the SALN filed by CS Garment, thus making petitioners motion premature. Neither the 2007 Tax Amnesty
Law nor Department of Finance (DOF) Order No. 29-07 (Tax Amnesty Law IRR) imposes a waiting period of
one year before the applicant can enjoy the benefits of the Tax Amnesty Law. It can be surmised from the cited
provisions that the law intended the immediate enjoyment of the immunities and privileges of tax amnesty upon
fulfilment of the requirements. Further, a reading of Sections 4 and 6 of the 2007 Tax Amnesty Law shows that
Congress has adopted a "no questions asked" policy, so long as all the requirements of the law and the rules
are satisfied. The one-year period referred to in the law should thus be considered only as a prescriptive period
within which third parties, meaning "parties other than the BIR or its agents," can question the SALN not as a
waiting period during which the BIR may contest the SALN and the taxpayer prevented from enjoying the
immunities and privileges under the law.
This clarification, however, does not mean that the amnesty taxpayers would go scot-free in case they
substantially understate the amounts of their net worth in their SALN. The 2007 Tax Amnesty Law imposes a
resolutory condition insofar as the enjoyment of immunities and privileges under the law is concerned. Pursuant
to Section 4 of the law, third parties may initiate proceedings contesting the declared amount of net worth of
the amnesty taxpayer within one year following the date of the filing of the tax amnesty return and the SALN.
Section 6 then states that "All these immunities and privileges shall not apply x x x where the amount of networth
as of December 31, 2005 is proven to be understated to the extent of thirty percent (30%) or more, in
accordance with the provisions of Section 3 hereof." Accordingly, Section 10 provides that amnesty taxpayers
who willfully understate their net worth shall be (a) liable for perjury under the Revised Penal Code; and (b)
subject to immediate tax fraud investigation in order to collect all taxes due and to criminally prosecute those
found to have willfully evaded lawful taxes due.
Nevertheless, in this case we note that the OSG has already Indicated27 that the CIR had not filed a case relative
to the tax amnesty application of CS Garment, from the time the documents were filed in March 2008. Neither
did the OSG mention that a third party had initiated proceedings challenging the declared amount of net worth
of the amnesty taxpayer within the one-year period.
Taxpayers with pending tax cases are still qualified to avail themselves of the tax amnesty program.
With respect to its last assertion, the OSG quotes the following guidelines under BIR RMC 19-2008 to establish
that CS Garment is disqualified from availing itself of the tax amnesty program:28
A BASIC GUIDE ON THE TAX AMNESTY ACT OF 2007
The following is a basic guide for taxpayers who wish to avail of tax amnesty pursuant of Republic Act No. 9480
(Tax Amnesty Act of 2007).
Who may avail of the amnesty?
xxxx
EXCEPT:
[x] Withholding agents with respect to their withholding tax liabilities
[x] Those with pending cases:
Under the jurisdiction of the PCGG

Involving violations of the Anti-Graft and Corrupt Practices Act
Involving violations of the Anti-Money Laundering Law

For tax evasion and other criminal offenses under the NIRC and/or the RPC
[x] Issues and cases which were ruled by any court (even without finality) in favor
of the BIR prior to amnesty availment of the taxpayer.(e.g. Taxpayers who have
failed to observe or follow BOI and/or PEZA rules on entitlement to Income Tax Holiday
Incentives and other incentives)
[x] Cases involving issues ruled with finality by the Supreme Court prior to the effectivity
of R.A. 9480 (e.g. DST on Special Savings Account)
[x] Taxes passed-on and collected from customers for remittance to the BIR
[x] Delinquent Accounts/Accounts Receivable considered as assets of the
BIR/Government, including self-assessed tax (Emphasis supplied)
To resolve the matter, we refer to the basic text of the Tax Amnesty Law and its implementing rules and
regulations, viz:
Republic Act No. 9480
SECTION 8. Exceptions. The tax amnesty provided in Section 5 hereof shall not extend to the following
persons or cases existing as of the effectivity of this Act:
xxxx
(f) Tax cases subject of final and executory judgment by the courts.
DOF Order No. 29-07: Rules and Regulations to Implement R.A. 9480
SECTION 5. Exceptions. The tax amnesty shall not extend to the following persons or cases existing as of
the effectivity of R.A. 9480:
xxxx
7. Tax cases subject of final and executory judgment by the courts. (Emphases supplied)
We cull from the aforementioned provisions that neither the law nor the implementing rules state that a court
ruling that has not attained finality would preclude the availment of the benefits of the Tax Amnesty Law. Both
R.A. 9480 and DOF Order No. 29-07 are quite precise in declaring that
"[t]ax cases subject of final and executory judgment by the courts" are the ones excepted from the benefits of
the law. In fact, we have already pointed out the erroneous interpretation of the law in Philippine Banking
Corporation (Now: Global Business Bank, Inc.) v. Commissioner of Internal Revenue, viz:
The BIRs inclusion of "issues and cases which were ruled by any court (even without finality) in favor of the
BIR prior to amnesty availment of the taxpayer" as one of the exceptions in RMC 19-2008 is misplaced. RA
9480 is specifically clear that the exceptions to the tax amnesty program include "tax cases subject of final and
executory judgment by the courts." The present case has not become final and executory when Metrobank
availed of the tax amnesty program.29 (Emphasis supplied)
While tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in
favor of the taxing authority,30 it is also a well-settled doctrine31 that the rule-making power of administrative
agencies cannot be extended to amend or expand statutory requirements or to embrace matters not originally
encompassed by the law. Administrative regulations should always be in accord with the provisions of the
1wphi1
statute they seek to carry into effect, and any resulting inconsistency shall be resolved in favor of the basic law.
We thus definitively declare that the exception "[i]ssues and cases which were ruled by any court (even without
finality) in favor of the BIR prior to amnesty availment of the taxpayer" under BIR RMC 19-2008 is invalid, as
the exception goes beyond the scope of the provisions of the 2007 Tax Amnesty Law.32
Considering the completion of the aforementioned requirements, we find that petitioner has successfully availed
itself of the tax amnesty benefits granted under the Tax Amnesty Law. Therefore, we no longer see any need
to further discuss the issue of the deficiency tax assessments. CS Garment is now deemed to have been
absolved of its obligations and is already immune from the payment of taxes including the assessed deficiency
in the payment of VAT, DST, and income tax as affirmed by the CTA en banc as well as of the additions
thereto (e.g., interests and surcharges). Furthermore, the tax amnesty benefits include immunity from "the
appurtenant civil, criminal, or administrative penalties under the NIRC of 1997, as amended, arising from the
failure to pay any and all internal revenue taxes for taxable year 2005 and prior years."33
WHEREFORE, the instant Petition for Review is GRANTED. The 14 January 2008 Decision and 2 April 2008
Resolution of the Court of Tax Appeals en banc in CTA EB Case No. 287 is hereby SET ASIDE, and the
remaining assessments for deficiency taxes for taxable year 1998 are hereby CANCELLED solely in the light
of the availment by CS Garment, Inc. of the tax amnesty program under Republic Act No. 9480.
SO ORDERED

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 119777 March 26, 1998
THE HEIRS OF PEDRO ESCANLAR, FRANCISCO HOLGADO and the SPOUSES DR. EDWIN A. JAYME and
ELISA TAN-JAYME, petitioners,
vs.
THE HON. COURT OF APPEALS, GENEROSA MARTINEZ, CARMEN CARI-AN, RODOLFO CARI-AN, NELLY
CHUA CARI-AN, for herself and as guardian ad litem of her minor son, LEONELL C. CARI-AN, FREDISMINDA
CARI-AN, the SPOUSES PAQUITO CHUA and NEY SARROSA-CHUA and THE REGISTER OF DEEDS OF
NEGROS OCCIDENTAL, respondents.
G.R. No. 120690 March 26, 1998
FRANCISCO HOLGADO and HRS. OF PEDRO ESCANLAR, namely BERNARDO, FELY, SONIA, LILY,
DYESEBEL and NOEMI all surnamed ESCANLAR, petitioners,
vs.
HON. COURT OF APPEALS, GENEROSA MARTINEZ, CARMEN CARI-AN, RODOLFO CARI-AN, NELLY CHUA
CARI-AN, for herself and as guardian ad litem of her minor son, LEONELL C. CARI-AN and FREDISMINDA
CARI-AN, and SP. PAQUITO CHUA and NEY SARROSA CHUA and REGISTER OF DEEDS OF NEGROS
OCCIDENTAL, respondents.
RESOLUTION
ROMERO, J.:
Before this Court are the following motions: (a) [First] Motion1 dated November 29, 1997, filed by petitioners heirs of
Pedro Escanlar and Francisco Holgado; (b) Motion for Leave to File Second Motion for Partial Reconsideration and
Clarification2 dated February 9, 1998; and (c) Second Motion for Partial Reconsideration and Clarification3 of even
date, the latter two motions having been filed by petitioners Edwin and Elisa Jayme (the "Jaymes"). These motions all
pertain to this Court's decision4 promulgated on October 23, 1997, the decretal portion of which states:
WHEREFORE, the petitions are hereby GRANTED. The decision of the Court of Appeals
under review is hereby REVERSED AND SET ASIDE. The case is REMANDED to the
Regional Trial Court of Negros Occidental, Branch 61 for petitioners and private respondents
Cari-an or their successors-in-interest to determine exactly which 1/2 portion of Lot Nos. 1616
and 1617 will be owned by each party, at the option of petitioners. The trial court is DIRECTED
to order the issuance of the corresponding certificates of title in the name of the respective
parties and to resolve the matter of rental payments of the land not delivered to the Chua
spouses subject to the rates specified above with legal interest from date of demand.
wherein we ruled, inter alia, that the first sale to petitioners Francisco Holgado and the late Pedro
Escanlar by the Cari-an heirs (the "Cari-ans") of the one-half portions of Lots 1616 and 1617 pertaining
to the share in the conjugal estate of their predecessor Victoriana Cari-an was valid while the
subsequent conveyance of the same to respondents Paquito Chua and Ney Sarrosa-Chua (the
"Chuas") was not.
In particular, petitioners are seeking clarification of that part of the decision which states:
5. Recapitulating, we have held that the September 15, 1978 deed of sale of rights, interests
and participations is valid and that the sellers-private respondents Cari-an were fully paid the
contract price. However, it must be emphasized that what was sold was only the Cari-an's
hereditary shares in Lot Nos. 1616 and 1617 being held pro indiviso by them and is thus a
valid conveyance only of said ideal shares. Specific or designated portions of land were not
involved.
Consequently, the subsequent sale of 8 parcels of land, including Lot Nos. 1616 and 1617, to
the spouses Chua is valid except to the extent of what was sold to petitioners in the September
15, 1978 conveyance. It must be noted, however, that the probate court in Special Proceeding
No. 7-7279 desisted from awarding the individual shares of each heir because all the
properties belonging to the estate had already been sold. Thus it is not certain how much
private respondents Cari-an were entitled to with respect to the two lots, or if they were even
going to be awarded shares in said lots.
The proceedings surrounding the estate of Nombre and Cari-an having attained finality for
nearly a decade now, the same cannot be re-opened. The protracted proceedings which have
undoubtedly left the property under a cloud and the parties involved in a state of uncertainty
compels us to resolve it definitively.
The decision of the probate court declares private respondents Cari-an as the sole heirs by
representation of Victoriana Cari-an who was indisputably entitled to half of the estate. There
being no exact apportionment of the shares of each heir and no competent proof that the heirs
received unequal shares in the disposition of the estate, it can be assumed that the heirs of
Victoriana Cari-an collectively are entitled to half of each property in the estate. More
particularly, private respondents Cari-an are entitled to half of Lot Nos. 1616 and 1617, i.e.
14,675 square meters of Lot No. 1616 and 230,474 square meters of Lot No. 1617.
Consequently, petitioners, as their successors-in-interest, own said half of the subject lots and
ought to deliver the possession of the other half, as well as pay rents thereon, to the private
respondents Ney Sarrosa Chua and Paquito Chua but only if the former (petitioners) remained
in possession thereof .
The rate of rental payments to be made were given in evidence by Ney Sarrosa Chua in her
unrebutted testimony on July 24, 1989: For the fishpond (Lot No. 1617) From 1982 up to
1986, rental payment of P3,000.00 per hectare; from 1986-1989 (and succeeding years),
rental payment of P10,000.00 per hectare. For the riceland (Lot No. 1616) - 15 cavans per
hectare per year; from 1982-1986, P125.00 per cavan, 1987 -1988, P175.00 per cavan; and
1989 and succeeding years, P200.00 per cavan. (Emphasis supplied).
Petitioners would have this Court take a second look at its supposed automatic award to the Chuas of the other halves
representing the late Guillermo Nombre's shares in Lot Nos. 1616 and 1617 on the grounds that: (a) these other
halves have never been the subject of the present litigation or the double sale complained of by petitioners; and (b)
there are certain undivided interests in these other halves which have been conveyed by some Nombre heirs to
Escanlar who in turn sold the same to the Jaymes. In other words, the Jaymes, according to petitioners, are actually
entitled to the one-half portions of Lot Nos. 1616 and 1617 previously sold by the Cari-ans to Escanlar and Holgado
and the validity of which have been upheld by this Court plus certain portions of the other halves of the same lots sold
this time by some Nombre heirs to Escanlar. For these reasons, petitioners argue that there is no basis at all in fact
and in law for the Court to award the entire one-half portions of the said lots to the Chuas, as well as to charge the
Jaymes rental payments thereon.
Upon closer scrutiny and re-examination of the records, the Court is convinced that there is merit in the above
contentions. It is a fact that the other ideal one-half shares of the late Guillermo Nombre in Lot Mos. 1616 and 1617
have never been entirely sold to the Chuas because some of the Nombre heirs who are composed of the descendants
of Guillermo Nombre's brothers and
sisters5 likewise sold their undivided shares to Escanlar who in turn conveyed them to the Jaymes. All these
transactions are duly evidenced by several deeds of sale6 and a Memorandum of Agreement7 dated August 31, 1984,
whose validity and authenticity have not been impugned by any party. As a matter of fact, there were also
some shares which were not conveyed at all to either Chuas or Jaymes. In any event, these sales by the
Nombre heirs to Escanlar whose interests were eventually acquired by the Jaymes had the effect of
increasing the latter's ownership beyond the one-half portions of the subject lots originally sold by the Cari-
ans. Correspondingly, the Chuas are entitled only to those portions as have been conveyed to them which
actually amount to less than the one-half participation of Guillermo Nombre in each of said lots. Mole
particularly, these are the ideal shares which they have acquired from Lazaro Nombre, Victorio Madalag,
Domingo Campillanos, and Sofronio Campillanos by virtue of the September 21, 1982 deed of sale, as well as
from Felicidad Nombre, Potencia Brillas, and Enrique Campillanos, through instruments other than said deed.
In view of the foregoing findings, it necessarily follows that there is no justification for the Jaymes to be
compelled to turn over one-half of Lot No. 1616 and one-half of Lot No. 1617, and be held liable to pay the
Chuas rentals with respect to those portions. On the contrary, we find it equitable instead to hold the Chuas
answerable for reasonable rentals to the extent of their possession of portions of Lot Nos. 1616 and 1617
which now properly belong to the Jaymes by virtue of the above findings.
ACCORDINGLY, the Court hereby resolves to GRANT the above motions of petitioners heirs of Pedro
Escanlar and Francisco Holgado, as well as that of the spouses Edwin A. Jayme and Elisa T. Jayme. The
decision of this Court dated October 23, 1997, insofar as it awarded one-half of Lot No. 1616 and one-half of
Lot No. 1617 to the spouses Paquito and Ney Sarrosa-Chua, and which made the spouses Jayme liable for
rental payments thereon, is VACATED and SET ASIDE. In lieu thereof, a new one is entered to read as follows:
WHEREFORE, the petitions are hereby GRANTED. The decision of the Court of Appeals
under review is hereby REVERSED AND SET ASIDE. The case is REMANDED to the
Regional Trial Court of Negros Occidental, Branch 61, for petitioners and private
respondents or their successors-in-interest to determine exactly the portions which will
be owned by each party in accordance with the foregoing resolution, at the option of
petitioners. The trial court is likewise DIRECTED to order the issuance of the
corresponding certificates of title in the name of the respective parties and to determine
how much rentals the Chuas have to pay the Jaymes from the time the former
possessed, if they did at all, the portions pertaining to the latter up to the time the same
are restored.
SO ORDERED.

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-30736 April 14, 1975
LIRAG TEXTILE MILLS, INC. and FELIX K. LIRAG, petitioners,

vs.
COURT OF APPEALS and CRISTAN ALCANTARA, respondents.
A. O. Benitez for petitioners.

Rosauro Alvarez for private respondent.
ESGUERRA, J.: + . wph!1
Petitioners Lirag Textile Mills, Inc. and Felix K. Lirag seek a review by certiorari of the decision of the respondent Court
of Appeals in its C. A. G.R. No. 33116-R, entitled "Cristan Alcantara, plaintiff-appellee vs. Lirag Textile Mills, Inc. and
Felix Lirag, defendants-appellants", which affirmed with costs against the appellants the decision dated September
19, 1963, of the Court of First Instance of Rizal (Branch VI) in its Civil Case No. 6884, in favor of respondent Cristan
Alcantara (plaintiff in Civil Case No. 6884 and appellee in C. A. G.R. No. 33116-R), which provides as follows: t.hqw
However, as he (respondent Cristan Alcantara) was dismissed without cause in violation of

the contract of employment, and as he was at the time earning P500.00 monthly, the Court
finds, and so adjudges, that he is entitled to recover from defendants as actual damages the
sum of P12,500.00 representing his salaries for 25 months ending September 22, 1963, plus
the sum of P500.00 monthly thereafter until the whole amounts due him are fully paid and
settled by defendants. As to moral damages claimed, the Court finds that, considering the
circumstances of the case and there being no justification and/or cause for his removal or
dismissal, he is entitled to recover from defendants moral damages in the sum of P5,000.00
plus attorney's fees in the sum of P3,000.00.
In view of the foregoing, judgment is hereby rendered sentencing defendants, jointly and
severally, to pay plaintiff the amounts above set forth, plus the costs of this suit. It is so ordered.
During the trial of Civil Case No. 6884 in the Court of First Instance of Rizal (Branch VI), petitioners and private
respondent Alcantara entered into a stipulation of facts, as follows: t.hqw
1. That on May 11, 1960 and for sometime prior and subsequent thereto, defendant Felix Lirag
was a member of the Board of Directors of the Philippine Chamber of Industries;
2. That for about two months, more or less, prior to May 11, 1960, plaintiff worked in a
temporary capacity with defendant Lirag Textile Mills, Inc.;
3. That during this same period of time, defendant Felix Lirag was a director and Chairman of
the Board of Directors of defendant Lirag Textile Mills, Inc.;
4. That on May 9, 1960, defendant Lirag Textile Mills, Inc. wrote a letter to plaintiff (Alcantara)
advising him that, effective May 11, 1960, his temporary designation as Technical Assistant to
the Administrative Officer was made permanent, the said letter marked Exhibit "A", being
attached herewith and made a part hereof;
5. That as Assistant to the Administrative Officer of the Lirag Textile Mills, Inc. as of May 11,
1960 plaintiff received a salary of P400.00 and allowance of P100.00 per month;
6. That plaintiff's tenure of employment, per defendant Lirag Textile Mills, Inc.'s above letter of
May 9, 1960 was to be 'for an indefinite period, unless sooner terminated by reason of
voluntary resignation or by virtue of a valid cause or causes' (Emphasis supplied)
7. That on March 4, 1960, per letter of defendant Lirag Textile Mills, Inc. of that date, signed
by its Executive Vice President and General Manager, plaintiff was advised that effective
November 15, 1960 he (Alcantara) was promoted to the position of Assistant Administrative
Officer, the said letter, marked Exhibit "B", being attached herewith and made a part hereof;
8. That on July 22, 1961, defendant Lirag Textile Mills, Inc. wrote plaintiff (Alcantara) a letter
advising him that because the company 'has suffered some serious reverses, both in terms of
pecuniary loss and in market opportunities,' the company was terminating his services and
effecting his separation from defendant corporation effective at the close of working hours of
August 22, 1961, the said letter, marked Exhibit "C", being attached herewith and made a part
thereof; (Emphasis supplied)
9. That defendant Lirag Textile Mills Inc.'s original capital of P5,000,000.00 was, on May 2,
1961, increased to P15,000,000.00 per certification issued by the Security and Exchange
Commission, a copy of which marked Exhibit "D" is herewith attached and made a part hereof;
10. That the financial position of defendant Lirag Textile Mills, Inc. in the years 1960 and 1961
is reflected in the financial statements for the said years to be marked Exhibits "E" and "E-I",
respectively, hereafter to be submitted by the parties and to be considered incorporated
herewith and made a part hereof;
11. That plaintiff, through counsel, wrote a letter of demand to defendants, copies whereof
marked Exhibits "F" and "F-1" with their respective registry receipts and registry return cards
attached, are herewith appended and made a part hereof; and
12. That defendant Lirag Textile Mills, Inc., through counsel, in answer to plaintiff's letter, wrote
the letter marked Exhibit "G" herewith attached and made a part hereof.
Private respondent Cristan Alcantara as plaintiff in Civil Case No. 6884 (C.F.I. of Rizal, Branch VI), through his
counsel, made a written request for admission of certain facts, pursuant to the provision of the Rules of Court,
addressed to petitioners Lirag Textile Mills, Inc. and Felix Lirag (as defendants therein), which was answered by them
as reproduced herein to wit:t.hqw
1. That, per payrolls of the defendant Lirag Textile Mills, Inc., the salaries of:
(a). Mr. Basilio Lirag, President of the Lirag Textile Mills, Inc. was effective
March 1, 1961, raised from P2,500.00 to P5,000.00 monthly;
(b). Mr. Nemesio L. Reyes, executive vice president and general manager of
said corporation, was, effective April 16, 1961, raised from P1,000.00 to
P2,500.00 monthly;
(c). Mr. Danilo Lacerna, corporate secretary of defendant Lirag Textile Mills,
Inc. was effective April 16, 1961, raised from P700.00 to P1,000.00 monthly;
(d). Mr. Winifred Salvacion, assistant of E. V. President, was, effective April

16, 1961 raised from P500.00 to P1,000.00 monthly; and
(e). Mr. Manuel Sison, assistant corporate secretary of the aforementioned

Company was, effective May 15, 1961, raised from P150.00 to P300.00
monthly."
('Defendants admit the matters set forth in sub-paragraphs (a) and (c) of
paragraph 1, but specifically deny sub-paragraphs (b), (d) and (e), the figures
therein being not accurate'.)
2. That the wages of the laborers of defendant Lirag Textile Mills, Inc. was
increased 25 cents a day effective the year 1961.
('Defendants admit paragraph 2, but hereby manifest, however, that the

increases in the salaries of the laborers and of the persons named in paragraph
1 were resolved at the time the corporation was still earning a reasonable
return of its investment'.)
3. That, shortly before and/or after separation of plaintiff (Alcantara) from the
services of defendant Corporation, the latter took in and employed new
personnel among whom were:
(a). a certain Mr. Niguidula with a salary of P800.00 a month;
(b). Mr. Nemesio Joves with a salary of P600.00 a month; and
(c). a general manager's new secretary who was employed and taken in only
one or two days before plaintiff's separation from defendant's services.
('Defendants admit that Mr. Pacifico Niguidula who is a mechanical engineer was employed
on July 6, 1961 with a salary of P800.00 a month, but his services were indispensably needed
by the corporation for the planning of the machinery layout for its integration program. Besides,
the services of a professional mechanical engineer for the size of an industrial plant as that of
Lirag Textile Mills, Inc. is required by law.
`Defendants specifically deny sub-paragraph (b) of paragraph 3; the corporation has not at
any time employed any person by the name of Nemesio Joves.
`Defendants specifically deny sub-paragraph (c) of paragraph 3; it was the General Manager,
not the corporation, who hired a private secretary whose salary was paid out of his personal
funds.') .
Respondent Court of Appeals in its decision promulgated May 16, 1969, in C. A. G.R. No. 33116-R, penned by Hon.
Hermogenes Concepcion, Jr. and concurred in by then Presiding Justice Julio Villamor and then Associate Justice
Angel H. Mojica (deceased), affirmed the decision of the lower court in Civil Case No. 6884 (C.F.I., Branch VI, of
Rizal), principally its conclusion that the trial court did not commit any error in its evaluation of the evidence when it
found that it was not true that petitioner Lirag Textile Mills (then defendant) suffered pecuniary loss and in market
opportunities which it used as a justification to terminate the services of plaintiff Alcantara; that it was not also true
that the latter suffered from lack of skill; that, therefore, there was a violation of the written contract of employment
executed by and between petitioners and private respondent Alcantara; that petitioner (then defendant) Felix Lirag
was responsible for inducing private respondent Alcantara to leave his employment with the Philippine Chamber of
Industries where he was holding a permanent position and to accept employment with petitioner (then defendant)
Lirag Textile Mills; and that appellee Alcantara was correctly awarded moral damages and attorney's fees.
Petitioners are now before Us questioning the respondent Appellate Court's decision and alleging that it erred in
"sentencing the petitioners to pay respondent Cristan Alcantara back salaries from the time of dismissal up to final
judgment for the dismissal without cause of respondent Alcantara as employee of the petitioner Lirag Textile Mills,
Inc".; "in awarding moral damages to the respondent Alcantara by the mere fact alone that the respondent Alcantara
was separated by the petitioner corporation from his employment without just cause in the absence of any finding that
the employer acted with malice or evident bad faith"; and "in allowing respondent Alcantara to recover from the
petitioner company attorney's fees."
The main thrust of petitioners' contention is that an employer's liability for terminating without just cause the
employment of an employee is governed by the provisions of Republic Act 1787, amending Republic Act 1052, which
limits said liability as follows:
t.hqw
Sec. 1. In case of employment without a definite period, in a commercial, industrial, or

agricultural establishment or enterprise, the employer ... may terminate at any time the
employment with just cause, or without just cause ... or in the case of an employer, by serving
such notice to the employee at least one month in advance or one half month for every year
of service of the employee, whichever is longer, ....
The emloyee, upon whom no such notice was served in case of termination of employment
without just cause shall be entitled to compensation from the date of termination of his
employment in an amount equivalent to his salaries or wages corresponding to the required
period of notice. (Republic Act 1787) (Emphasis supplied) .
The fatal defect of petitioner's argument is that the above quoted provision of the law does not and cannot apply to an
employer-employee relationship with an express contract for a period of employment. As could be clearly seen from
the stipulation of facts between the parties in Civil Case No. 6884 and as a fact recognized by both the trial court and
the respondent Appellate Court, the contract of employment was for an indefinite period as it shall continue without
ending, subject to a resolutory period, unless sooner terminated by reason of voluntary resignation or by virtue of a
valid cause or causes (the resolutory period). There is an indefinite period of time for employment agreed upon by
and between petitioners and the private respondent, subject only to the resolutory period agreed upon which may end
the indeterminate period of employment, namely voluntary resignation on the part of private respondent Alcantara
or termination of employment at the option of petitioner Lirag Textile Mills, but for a "valid cause or causes". It
necessarily follows that if the petitioner-employer Lirag Textile Mills terminates the employment without a "valid cause
or causes", as it admittedly did, it committed a breach of the contract of employment executed by and between the
parties. The measure of an employer's liability provided for in Republic Act 1052, as amended by R. A. 1787, is solely
intended for contracts of employment without a stipulated period. It cannot possibly apply as a limitation to an
employer's liability in cases where the employer commits a breach of contract by violating an indefinite period of
employment expressly agreed upon through his wrongful act of terminating said employment without any valid cause
or causes, which act may even amount to bad faith on the employer's part. The law (Art. 1170 of the Civil Code)
governing liability for damages is explicit when it states:t.hqw
Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof, are liable for damages. (Emphasis
supplied).
A "period" has been defined "as a space of time which has an influence on obligation as a result of a juridical act, and
either suspends their demandableness or produces their extinguishment." Obligations with a period are those whose
consequences are subjected in one way or another to the expiration of said period or term. (8 Manresa 158) Art. 1193
of the Civil Code, provides, among others, that "obligations with a resolutory period take effect at once, but terminate
upon arrival of the day certain. A day certain is understood to be that which must necessarily come, although it may
not be known when". In the light of the foregoing provisions We have no doubt that the "indefinite period" of
employment expressly agreed upon by and between the parties in this case is really a resolutory period because the
employment is bound to terminate on a future "day certain" such as the employee's resignation or employer's
termination of employment upon a valid cause or causes, like death of the employee or termination of employer's
corporate existence, although it may not be known when.
A cursory examination of the complaint filed by private Alcantara in the Court of First Instance of Rizal Civil Case No.
6884) immediately discloses that this was originally an action for damages based on petitioner's (then
defendant's)alleged wrongful acts in terminating without just cause his employment with the petitioner (then defendant)
Lirag Textile Mills, thus violating the contract of employment; and that the "clearly unfounded, unwarranted and illegal
act of enticing and instigating him (Alcantara) to leave his first job and dismissing him without a valid cause from the
second" caused him feelings of "mental anguish, besmirched reputation, wounded feelings and moral degradation".
In short, at the very incipiency of the action, private respondent Alcantara already alleged that petitioner's act in
terminating the employment without just cause was tainted with fraud and bad faith.
Evaluating the evidence presented, the trial court found no truth nor basis for petitioner Lirag Textile Mills' contention
that the valid cause for terminating private respondent Alcantara's employment was that the former "has suffered
serious reverses, both in terms of pecuniary loss and in market opportunities. " On the contrary, the trial court found
that petitioner Lirag Textile Mills, Inc.'s original capital of five million pesos was, on May 2, 1961, or just two months
prior to defendants sending the note of separation (Exh. "C"), increased to fifteen million; that the salary of Mr. Basilio
Lirag, president of defendant Lirag Textile Mills, Inc. was, effective March 1, 1961, or just four months before the
notice of separation, raised from P2,500.00 to P5,000.00 monthly, whereas that of Mr. Danilo Lacerna, corporate
secretary of defendant corporation was, three months prior to notice of separation, raised from P700.00 to P1,000.00
monthly; that shortly before and/or after plaintiff's separation from the service of defendant corporation, the latter took
in and employed new personnel among whom was a certain Mr. Niguidula with a starting salary of P800 monthly; that
from the financial statements, Exhs. "E" to "I", presented by defendants themselves and the testimony of their
accountants, it appears that although in 1961 the corporation did not realize as big a profit as in the previous year,
nevertheless, it realized profits in the amount of P1,173,098.00 rather than sustain losses; that reserves for incentive
bonuses were increased to 106,436.50 as compared to P90,744.23 for 1960; and that finally the defendant
corporation's total assets in 1961 was P39,640,153.53 as compared to P26,900,562.63 for 1960, or an increase of
about P13,000,000. The findings of respondent Appellate Court as to petitioner Lirag Textile Mills, Inc's. financial
condition during that period is substantially the same as that of the trial court, to wit: t.hqw
Anent the first ground (serious losses both in terms of pecuniary loss and in market
opportunities that appellant company has suffered), it is enough to point out that of the eight
exhibits (Exhs. 1-8) enumerated by the appelants on pages 10 and 11 of their brief, only Exhibit
1 shows that appelant company suffered a gross loss of P36,826.70 during July, 1961. On the
other hand, the rest of the exhibits (Exhs. 2-8) veritably show that the same company realized
net profits. True enough that the net profits decreased as compared to previous years, but just
the same they are profits in any language, and they are not small ones. So that, it is not true
that the corporation has suffered serious losses during the months immediately prior to
appellee's dismissal. On the contrary, it realized profits, not gigantic in the in the way it wanted
them.
The Appellate Court went further when, on the question raised by petitioner Lirag Textile Mills, Inc. of the alleged lack
of skill of respondent Alcantara as a valid cause to terminate his employment, it ruled: t.hqw
With respect to the second ground (lack of skill on the part of the appellee) suffice it to say that
it is too late for the appellants to allege such lack of skill. Nowhere in appellant's answer did
they plead the defense of lack of skill on the part of the appellee. We can, however, glean from
appellant corporation's letter dated November 14, 1960, congratulating the appellee for his
promotion he fully deserves, that the latter was proficient for the position he was taken in (Exh.
"B"). And if the appellee lacked skills for the position he was originally appointed to on a
temporary basis, he would not have been promoted, and his temporary designation would not
have been made permanent (Exh. "A").
Inasmuch as We see no compelling reason to disturb both the trial court's and the respondent Appellate Court's rulings
that the written contract of employment was violated by petitioner Lirag Textile Mills, Inc. when it terminated the
employment of private respondent Alcantara without a valid cause, what remains to be determined is whether or not
there was fraud or bad faith on the part of petitioner Lirag Textile Mills, Inc. when it committed that breach of contract.
To Our mind, there can be no greater, nor more eloquent manifestation of fraud when petitioner Lirag Textile Mills,
Inc. tried its very best both in the trial court and in the respondent Appellate Court to convince both courts that it
suffered "serious losses both in terms of pecuniary loss and in market opportunities" as a valid cause for the
termination of private respondent Alcantara's employment, said petitioners knowing fully well that such was not the
truth as said allegation was a falsehood. The bad faith consisted of petitioner's knowledge that its allegation was a
falsehood and yet used it as basis for the wrongful act of terminating the contract of employment. Its bad faith in
committing the breach of the contract of employment was compounded when petitioners as appellants in the
respondent Appellate Court tried to raise for the first time the question of private respondent Alcantara's alleged lack
of skill in its desperate effort to find a "valid cause" for that wrongful breach. The very act of petitioners in trying to pull
the wool over the eyes of both the trial court and the respondent Appellate Court as to its true financial condition in its
attempt to establish a false "valid cause" for its wrongful act is not only indicative of fraud and bad faith but likewise
highly reprehensible because it is deliberate distortion of the truth to subvert the ends of justice.
Article 2201 of the Civil Code provides "... In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for all damages which may be reasonably attributed to the non-performance of the obligation", which, in
effect, makes the petitioners in this case liable for all damages which may be reasonably attributed to the non-
performance of its obligation.
In Fernando Lopez et al vs. Pan American Airways, 16 SCRA 431, this Court, held: t.hqw
Bad faith means a breach of a known duty through some motive of interest or ill will. Self-
enrichment or fraternal interest, and not personal ill-will, may have been the motive, but it is
malice nevertheless.
First, moral damages are recoverable in breach of contracts where the defendant acted
fraudulently or in bad faith (Art. 2220, new Civil Code). Second, in addition to moral damages,
exemplary or corrective damages may be imposed by way of example or correction for the
public good, in breach of contract where the defendant acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. (Arts, 2229, 2232, new Civil Code)
On petitioner Felix Lirag's liability, the respondent Appellate Court correctly ruled: t.hqw
In his attempt to escape liability whatsoever for the dismissal of the appellee by appellant
corporation, appellant Felix Lirag claims that he had nothing to do with appellee's appointment.
This is of no moment, for it was appellant Felix Lirag who invited the appellee (Alcantara) to
join appellant corporation. And in doing so, the appellee gave up his employment with the
Philippine Chamber of Industries where he was holding a permanent position as a writer-
statistician. And when the then Executive Secretary Armando Isip of the Philippine Chamber
of Industries was resigning from his post, appellee applied for the position and furnished the
Board of Directors of which Felix Lirag was a member, with his application and curriculum vitae
that, thereafter, Felix Lirag called him over the phone and told him that he (Felix Lirag) wanted
to see him; that because of the phone call, appellee went to see Felix Lirag who was then the
Chairman of the Board of Directors of defendant corporation, and then invited him (appellee)
to join appellant corporation, saying that he (appellee) would have a better job there; that
appellee answered that he would think it over; that after a week, appellant Felix Lirag called
him again to his office; that because of this call, appellee went to see him (Felix Lirag) in the
latter's office; that appellant Felix Lirag asked appellee if he had already reached a decision
as to his proposal to which appellee answered that he could not accept the proposition
because his job in the Philippine Chamber of Industries was permanent while the one offered
by said appellant was just temporary; that then appelant Felix Lirag answered that the problem
could easily be solved ....
The foregoing finding shows without the slightest doubt that it was petitioner Felix Lirag who induced private
respondent Alcantara to resign from his permanent position in the Philippine Chamber of Industries and accept, the
job offered to him by the petitioner Felix Lirag in the petitioner Lirag Textile Mills, Inc. The respondent Appellate Court
was also convinced that private respondent Alcantara did his best to contact petitioner Felix Lirag so he could
remonstrate against his unjust separation from the service, but he was not able to do so; hence the conclusion of the
respondent Court that petitioner Felix Lirag should also be held liable for moral damages.
It is clear that petitioner Lirag Textile Mills, Inc. violated the contract of employment with private respondent Alcantara
when the former terminated his services without a valid cause. The act was attended with bad faith and deceit because
said petitioner made false allegations of a supposed valid cause knowing them to be false, thus making itself liable
for payment of actual, moral and exemplary damages, plus attorneys fees to private respondent Alcantara. Petitioner
Lirag Textile Mills, Inc. cannot with impunity be allowed the absolute and unilateral power to terminate without valid
cause a contract of employment with a definite period it voluntarily entered into merely on the basis of its whim or
caprice and under the false pretense of financial distress. To countenance its wrongful act would be to place its
employees in the disadvantageous position of not being able to protect themselves from the arbitrary, oppressive and
wrongful acts of an economically powerful employer. The laudable ends of social justice would not be served in that
manner, especially in the era of a compassionate society. Petitioner Felix Lirag should also be held liable to private
respondent Alcantara for having induced the latter to leave a permanent position in the Philippine Chamber of
Industries to accept a job in the Lirag Textile Mills, Inc., and when private respondent Alcantara was dismissed without
any valid cause, petitioner Felix Lirag did not do anything to help him although he was in a position to do so by reason
of his eminent position in the petitioner corporation. His responsibility is not only moral but also legal as under Art. 21
of the Civil Code: "Any person who willfully causes loss or injury to another in a manner that is contrary to morals,
good custom or public policy shall compensate the latter for the damage." .
WHEREFORE, the decision of the respondent Court of Appeals is affirmed with costs against petitioners.
SO ORDERED.

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-38059 September 4, 1975
JOSE QUI, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, TRINIDAD AUSTRIA and DOMINGO AUSTRIA, respondents.
Zaida Ruby S. Alberto for petitioner.
Gelasio L. Dimaano for respondents.
ESGUERRA, J.:
Petition for review on certiorari of the decision of the Court of Appeals in its CA-G.R. No. 41413-R, reversing that of
the Court of First Instance of Rizal (Caloocan City Branch) and ordering the ejectment of petitioner from the leased
premises involved herein.
The factual background of the case is as follows:
Private respondents filed an action for unlawful detainer against herein petitioner for failure and refusal of the latter to
pay his rentals for leased premises for the year 1965, particularly the period from February 21, 1965, until the filing of
the complaint on January 7, 1966, in the sum of P1,200.00, and for his failure to bid, erect, construct and maintain a
factory building on the leased premises, all in violation of their Contract of Lease (Exh. "A" and Annex "A" of Petition).
Under the Contract of Lease of February 20, 1960, entered into by and between the parties, private respondents
leased to petitioner their parcel of land in Caloocan City covered by Transfer of Certificate of Title No. 39943 for a
period of twenty (20) years at the rate of P1,200.00 a year payable in two (2) equal installments of P600.00 every six
(6) months; that upon the signing of the lease contract, petitioner (as lessee) paid to private respondents the sum of
P6,00.00 as rentals for the first five (5) years; that petitioner was given the option to renew the lease contract for a like
period and under the same terms and conditions as the original contract of lease; that upon the expiration of the
stipulated period of twenty (20) years, the building to be constructed thereon by the petitioner shall belong to private
respondents, provided that petitioner shall have been in peaceful possession of the leased premises for the full period
stipulated; but upon the termination of the lease contract before the expiration of the stipulated period for any cause
whatsoever, the acquisition by the private respondents of the building to be constructed shall not take place; that in
the event the petitioner (as lessee) shall not exercise the option given him after the expiration of the lease, or should
the lease be terminated for any cause whatsoever, the petitioner was given sufficient to dismantle and remove all his
machineries, implements, appliances and materials from the leased premises.
After paying the private respondents the sum of P6,000.00 as advance rentals for the first five years, petitioner also
extended a loan to them in the sum of P600.00 payable on or before December 1, 1960.
Immediately after the signing of the lease contract, petitioner erected a factory building on the leased premises which
was unfortunately razed to the ground in a fire of undetermined origin sometime in December 1960. In the meantime,
while the factory building was not yet rebuilt or reconstructed, petitioner engaged in a small-scale poultry and piggery
business on the leased premises which became vacant.
The first five years of the contract of lease expired on February 20, 1965, and the petitioner would have to start paying
the annual rental of P1,200.00 in two equal installments of P600.00 each every six months. On the other hand, private
respondents had not yet paid the loan previously extended to them by the petitioner in the amount of P600.00; so
petitioner applied the said amount to the payment of the rentals covering the period of from February 21,1965 to
August 20, 1965.
Private respondents, through counsel, sent a letter of demand to the petitioner on November 15, 1965, requiring the
return of the leased premises due to alleged violation of the lease contract. Petitioner, thru counsel, replied on
December 8, 1965, denying any violation thereof and at the same time remitted to the private respondents the sum of
P600.00 in postal money orders in payment of his rentals for the period from August 21, 1965, to February 20, 1966,
or ten days after the filing of their complaint for unlawful detainer against the petitioner on January 7, 1966.
In his answer to the complaint for unlawful detainer, petitioner denied having committed any violation of the lease
contract since he had paid all rentals due and had constructed a factory building as required in their agreement, but
it was burned down through no fault of his own.
The City Court of Caloocan rendered judgment finding that, while petitioner had not defaulted in the payment of rentals,
there nevertheless was a breach of contract committed by him for failing to rebuild and reconstruct the factory building
that had been destroyed by fire. It declared the lease contract between the parties terminated and required petitioner
to surrender the possession thereof to private respondents.
Petitioner moved for the reconsideration of the aforestated decision. The City Court of Caloocan reconsidered it and
ordered the dismissal of the action for lack of jurisdiction on September 25, 1966.
On appeal to the Court of First Instance of Rizal, the case was submitted for decision on the basis of the parties'
Stipulation of Facts, which reads as follows:
COME NOW the parties, assisted by their respective counsel, and to this Honorable Court,
most respectfully submit the following:
1. The defendant (petitioner herein) admits the averments contained in paragraphs 1 and 2 of
the complaint.
2. The plaintiffs (private respondents herein) admit the exhibits of the defendant in the lower
court and the adoption of similar markings of said exhibits before this Honorable Court; the
defendant, on the other hand, admits the exhibits of the plaintiffs in the lower court and the
adoption of similar markings of said exhibits before this Honorable Court.
3. The parties admit that after the execution of the contract Exh. "A", the defendant constructed
a factory building on the lot in question; however, in December, 1960, the said building was
razed to the ground and the insurance for the burned building has not up to now been collected.
They further stipulate that up to now the factory building has not been reconstructed and the
lot in question is now used as a poultry and piggery yard.
4. The parties stipulate that upon the signing of the contract of lease Exh. "A" in February,
1960, the rental for five (5) years in the sum of P6,000.00 was paid; at the same time a loan
in the sum of P600.00 was given to the plaintiffs by the defendant, payable on or before
December 1960 (Exh. '1') and the said loan has not been paid.
5. The parties stipulate that the defendant sent by registered mail P600.00 in postal money
order (Exhs. 'I'. '1-A') and received by the plaintiffs on January 17, 1966 (Exh. '1-B'; E).
6. The defendants contest the appellate jurisdiction of the Honorable Court.
7. The parties stipulate to adopt their respective memoranda in the lower court in support of
their respective cases.
WHEREFORE, on the basis of the foregoing stipulation of facts, the parties respectfully submit
this case for decision by this Honorable Court. (Pp. 15-17, ROA; p. 58, Rollo).
On January 3, 1968, the Court of First Instance of Rizal, Caloocan City Branch, rendered judgment in favor of
petitioner, the dispositive portion of which reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the defendant and DISMISSES the
complaint for ejectment.
In dismissing the complaint, the Court of First Instance of Rizal found that petitioner had faithfully paid the stipulated
amount of rentals and hence there was no default or violation of the contract. Further, the trial court ruled that there
was no such violation despite the failure of petitioner to erect another factory building to replace the one burned, for
as said by the Court
It is noted that the parties did not stipulate that in case the factory building was lost through
fortuitous event, such as what occurred in this case, the defendant would replace it within a
definite period. (Emphasis supplied).
It is well settled that in the absence of any terms or conditions, the defendant should be given
and afforded a reasonable period of time within which to reconstruct the factory building. The
purpose of the lessee was to derive profits from the operations of the factory building which
he constructed thereon and that the lessor in turn was not merely to obtain the stipulated
monthly rental but more especially to acquire the ownership of the building constructed by the
lessee upon the termination of the lease contract. The plaintiff has a mere inchoate right to the
building upon the expiration of the twenty (20) years period. The defendant has religiously paid
the monthly rentals for five (5) years and one time, even extended loan to the plaintiff to be
applied as rentals in case of failure to pay. Considering that the lease contract is for twenty
(20) years, defendant has still fourteen (14) years to comply with his obligation to reconstruct
the factory building. (Emphasis supplied).
With respect to the conversion of the lot in question into a poultry and piggery yard, it being
temporary in nature, this Court finds that it does not amount to a substantial breach of the
contract nor does it cause deterioration of the land.
In view of the foregoing, it is the opinion of the Court that the plaintiff has no legal right to eject
the defendant from the possession of the lot in question. (Pp. 22-23, ROA; P. 58, Rollo).
Private respondents' motion for reconsideration having been denied, they appealed to the Court of Appeals. On
September 3, 1973, the Court of Appeals rendered judgment reversing that of the lower court and ordering the
ejectment of petitioner from the leased premises.
After denial of petitioner's motion for reconsideration of the aforestated decision, this petition for review by certiorari
was filed.
Petitioner maintains that nowhere in the records of the two lower courts did private respondents ever raise the alleged
failure of petitioner to devote the leased premises to the use stipulated by the parties as basis for his ejectment. What
were only raised and threshed out as grounds for ejectment were (1) his alleged failure and refusal to pay rentals
covering the period from February 21, 1965, up to the filing of the complaint, in the total sum of P1,200.00; and (2) his
alleged failure to comply with the construction and maintenance of a factory building on the leased premises. Petitioner
maintains that for a question or an issue to be properly taken up on appeal, the same must have been raised and
debated by the parties either in the complaint and answer or at any stage during the trial of the case.
He likewise maintains that his failure to rebuild, reconstruct and replace the destroyed factory building was due to his
financial difficulties caused by the non-payment of the proceeds of the insurance policy for the building, and that it
was only during the early part of 1973 that he was able to reconstruct a new building of strong materials (Annex C of
Petition, pp. 4750, Rollo; p. 1, Memorandum For Petitioner). Petitioner argues that a cursory perusal of the contract
of lease shows that there is no fixed period within which he is obliged to build, erect, construct and maintain a factory
building, and this holds true also as regards his obligation to rebuild or reconstruct the building in case of loss or
destruction thereof. But it is clear that a period was intended by them and, therefore, the governing law on the matter
is Article 1197 of the New Civil Code, which provides:
ART. 1197. If the obligation does not fix a period, but from its nature and the circumstances it
can be inferred that a period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the debtor.
In every case, the courts shall determine such period as may under the circumstances have
been probably contemplated by the parties. Once fixed by the courts, the period cannot be
changed by them. (1128a)
Petitioner insists that under the circumstances, the private respondents should have first brought an action to fix the
period within which said petitioner shall comply with his obligation to rebuild and reconstruct the factory building that
was razed to the ground, instead of an unlawful detainer suit. Petitioner also claims that only after such a period shall
have been fixed by the courts and there is failure to observe the same that private respondents may bring an action
for the violation thereof, especially considering the fact that their twenty-year lease contract will expire on February
20, 1980. Furthermore, asserts the petitioner, under the contract he has the option to renew the lease for another
twenty (20) years under the same terms and conditions as the original contract and there is no doubt that he will opt
for renewal in view of its favorable terms and conditions.
On the other hand, private respondents counter that the applicable law to the case is Article 1673 of the New Civil
Code, in relation to Article 1657 thereof, which covers the causes for which a lessor may judicially eject a lessee in
case of non-fulfillment of the obligations of the latter.
Private respondents maintain that petitioner's argument that there is still enough time to rebuild the factory building as
the period of lease has not yet expired is incorrect as the petitioner is obliged under the contract to devote the leased
premises to the use stipulated which is "to build, erect, construct and maintain a building for factory purposes", failing
in which petitioner violated their agreement. As the obligation of the petitioner is not only to build, erect and construct,
but also to maintain a factory building, private respondents reason out that after the destruction of the factory building
by fire there was no more factory building to be maintained, and so the petitioner is under obligation to immediately
rebuild, reconstruct and replace the factory building in order that there may be a building to be maintained in
accordance with their lease contract. Private respondents claim that the Court of Appeals committed no error in finding
petitioner to have violated the lease contract because of his failure to reconstruct and replace the burned factory
building after the lapse of more than 12 years, and for his failure to devote the leased premises to the purpose
stipulated.
Lastly, private respondents contend that the replacement of the burned building anytime within the twenty-year lease
period merits no consideration for this defense was interposed only for the first time in petitioner's motion for
reconsideration of the decision of the respondent Court of Appeals.
The decisive issue in this case is whether or not the failure of a lessee to rebuild, reconstruct or replace a factory
building he had previously constructed on the leased premises, but razed to the ground through no fault of his,
constitutes a violation or breach of contract when there is no fixed period therein for replacing the building and the
courts have not fixed such period.
We have minutely scrutinized the lease contract and found therein no stipulation fixing for a period within which a
factory building is to be constructed by the petitioner-lessee, or replaced in case of its loss or destruction. But by the
nature and circumstances of their agreement it can be inferred that petitioner-lessee and respondents-lessors
intended and contemplated a period within which a building for factory purposes is to be built, erected, constructed
and maintained, as well as the reconstruction and replacement of the building in case of loss or destruction. This being
the case, We cannot but agree with the petitioner that the only recourse left to the private respondents was to institute
a judicial action to fix the period for the reconstruction and replacement of the burned factory building, in accordance
with the provision of Article 1197 of the New Civil Code. Only after the courts shall have fixed that period can there be
a breach or violation of the obligation to do so. The use of the leased premises for poultry and piggery yard in the
meantime that the building is not yet reconstructed does not alter this conclusion (Gregorio Araneta, Inc. vs. The
Philippine Sugar Estates Development Co., Ltd., L-22558, May 31, 1967, 20 SCRA 330). It is, therefore, our opinion
that in the instant case there is no breach or violation of the lease contract entered into by and between the parties
thereto, since the duration of the period of performance of the obligation stipulated therein has not as yet been fixed
by a competent court in a proper action pursuant to the provisions of Article 1197 of the New Civil Code.
WHEREFORE, the decision of the Court of Appeals, dated September 3,1973, in CA-G.R. No. 41413-R, is set aside,
and the decision of the Court of First Instance of Rizal, Caloocan City Branch, in Civil Case No. C-880, dismissing the
complaint for ejectment, is hereby affirmed.
Costs against the private respondents.
SO ORDERED.

SUPREME COURT
Manila
EN BANC
G.R. No. L-22558 May 31, 1967
GREGORIO ARANETA, INC., petitioner,

vs.
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO., LTD., respondent.
Araneta and Araneta for petitioner.

Rosauro Alvarez and Ernani Cruz Pao for respondent.
REYES, J.B.L., J.:
Petition for certiorari to review a judgment of the Court of Appeals, in its CA-G.R. No. 28249-R, affirming with
modification, an amendatory decision of the Court of First Instance of Manila, in its Civil Case No. 36303, entitled
"Philippine Sugar Estates Development Co., Ltd., plaintiff, versus J. M. Tuason & Co., Inc. and Gregorio Araneta, Inc.,
defendants."
As found by the Court of Appeals, the facts of this case are:
J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City, otherwise known as the Sta. Mesa
Heights Subdivision, and covered by a Torrens title in its name. On July 28, 1950, through Gregorio Araneta, Inc., it
(Tuason & Co.) sold a portion thereof with an area of 43,034.4 square meters, more or less, for the sum of
P430,514.00, to Philippine Sugar Estates Development Co., Ltd. The parties stipulated, among in the contract of
purchase and sale with mortgage, that the buyer will
Build on the said parcel land the Sto. Domingo Church and Convent
while the seller for its part will
Construct streets on the NE and NW and SW sides of the land herein sold so that the latter will be a
block surrounded by streets on all four sides; and the street on the NE side shall be named "Sto.
Domingo Avenue;"
The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto. Domingo Church and
Convent, but the seller, Gregorio Araneta, Inc., which began constructing the streets, is unable to finish the
construction of the street in the Northeast side named (Sto. Domingo Avenue) because a certain third-party, by the
name of Manuel Abundo, who has been physically occupying a middle part thereof, refused to vacate the same;
hence, on May 7, 1958, Philippine Sugar Estates Development Co., Lt. filed its complaint against J. M. Tuason & Co.,
Inc., and instance, seeking to compel the latter to comply with their obligation, as stipulated in the above-mentioned
deed of sale, and/or to pay damages in the event they failed or refused to perform said obligation.
Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the latter particularly
setting up the principal defense that the action was premature since its obligation to construct the streets in question
was without a definite period which needs to he fixed first by the court in a proper suit for that purpose before a
complaint for specific performance will prosper.
The issues having been joined, the lower court proceeded with the trial, and upon its termination, it dismissed plaintiff's
complaint (in a decision dated May 31, 1960), upholding the defenses interposed by defendant Gregorio Araneta,
Inc.
1w ph1.t
Plaintiff moved to reconsider and modify the above decision, praying that the court fix a period within which defendants
will comply with their obligation to construct the streets in question.
Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's complaint did not expressly or
impliedly allege and pray for the fixing of a period to comply with its obligation and that the evidence presented at the
trial was insufficient to warrant the fixing of such a period.
On July 16, 1960, the lower court, after finding that "the proven facts precisely warrants the fixing of such a period,"
issued an order granting plaintiff's motion for reconsideration and amending the dispositive portion of the decision of
May 31, 1960, to read as follows:
WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta, Inc., a period of two
(2) years from notice hereof, within which to comply with its obligation under the contract, Annex "A".
Defendant Gregorio Araneta, Inc. presented a motion to reconsider the above quoted order, which motion, plaintiff
opposed.
On August 16, 1960, the lower court denied defendant Gregorio Araneta, Inc's. motion; and the latter perfected its
appeal Court of Appeals.
In said appellate court, defendant-appellant Gregorio Araneta, Inc. contended mainly that the relief granted, i.e., fixing
of a period, under the amendatory decision of July 16, 1960, was not justified by the pleadings and not supported by
the facts submitted at the trial of the case in the court below and that the relief granted in effect allowed a change of
theory after the submission of the case for decision.
Ruling on the above contention, the appellate court declared that the fixing of a period was within the pleadings and
that there was no true change of theory after the submission of the case for decision since defendant-appellant
Gregorio Araneta, Inc. itself squarely placed said issue by alleging in paragraph 7 of the affirmative defenses contained
in its answer which reads
7. Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a reasonable time
within which to comply with its obligations to construct and complete the streets on the NE, NW and
SW sides of the lot in question; that under the circumstances, said reasonable time has not elapsed;
Disposing of the other issues raised by appellant which were ruled as not meritorious and which are not decisive in
the resolution of the legal issues posed in the instant appeal before us, said appellate court rendered its decision
dated December 27, 1963, the dispositive part of which reads
IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant is given two (2)
years from the date of finality of this decision to comply with the obligation to construct streets on the
NE, NW and SW sides of the land sold to plaintiff so that the same would be a block surrounded by
streets on all four sides.
Unsuccessful in having the above decision reconsidered, defendant-appellant Gregorio Araneta, Inc. resorted to a
petition for review by certiorari to this Court. We gave it due course.
We agree with the petitioner that the decision of the Court of Appeals, affirming that of the Court of First Instance is
legally untenable. The fixing of a period by the courts under Article 1197 of the Civil Code of the Philippines is sought
to be justified on the basis that petitioner (defendant below) placed the absence of a period in issue by pleading in its
answer that the contract with respondent Philippine Sugar Estates Development Co., Ltd. gave petitioner Gregorio
Araneta, Inc. "reasonable time within which to comply with its obligation to construct and complete the streets." Neither
of the courts below seems to have noticed that, on the hypothesis stated, what the answer put in issue was not
whether the court should fix the time of performance, but whether or not the parties agreed that the petitioner should
have reasonable time to perform its part of the bargain. If the contract so provided, then there was a period fixed, a
"reasonable time;" and all that the court should have done was to determine if that reasonable time had already
elapsed when suit was filed if it had passed, then the court should declare that petitioner had breached the contract,
as averred in the complaint, and fix the resulting damages. On the other hand, if the reasonable time had not yet
elapsed, the court perforce was bound to dismiss the action for being premature. But in no case can it be logically
held that under the plea above quoted, the intervention of the court to fix the period for performance was warranted,
for Article 1197 is precisely predicated on the absence of any period fixed by the parties.
Even on the assumption that the court should have found that no reasonable time or no period at all had been fixed
(and the trial court's amended decision nowhere declared any such fact) still, the complaint not having sought that the
Court should set a period, the court could not proceed to do so unless the complaint in as first amended; for the
original decision is clear that the complaint proceeded on the theory that the period for performance had already
elapsed, that the contract had been breached and defendant was already answerable in damages.
Granting, however, that it lay within the Court's power to fix the period of performance, still the amended decision is
defective in that no basis is stated to support the conclusion that the period should be set at two years after finality of
the judgment. The list paragraph of Article 1197 is clear that the period can not be set arbitrarily. The law expressly
prescribes that
the Court shall determine such period as may under the circumstances been probably contemplated
by the parties.
All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that "the proven facts
precisely warrant the fixing of such a period," a statement manifestly insufficient to explain how the two period given
to petitioner herein was arrived at.
It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must first determine that
"the obligation does not fix a period" (or that the period is made to depend upon the will of the debtor)," but from the
nature and the circumstances it can be inferred that a period was intended" (Art. 1197, pars. 1 and 2). This preliminary
point settled, the Court must then proceed to the second step, and decide what period was "probably contemplated
by the parties" (Do., par. 3). So that, ultimately, the Court can not fix a period merely because in its opinion it is or
should be reasonable, but must set the time that the parties are shown to have intended. As the record stands, the
trial Court appears to have pulled the two-year period set in its decision out of thin air, since no circumstances are
mentioned to support it. Plainly, this is not warranted by the Civil Code.
In this connection, it is to be borne in mind that the contract shows that the parties were fully aware that the land
described therein was occupied by squatters, because the fact is expressly mentioned therein (Rec. on Appeal,
Petitioner's Appendix B, pp. 12-13). As the parties must have known that they could not take the law into their own
hands, but must resort to legal processes in evicting the squatters, they must have realized that the duration of the
suits to be brought would not be under their control nor could the same be determined in advance. The conclusion is
thus forced that the parties must have intended to defer the performance of the obligations under the contract until
the squatters were duly evicted, as contended by the petitioner Gregorio Araneta, Inc.
The Court of Appeals objected to this conclusion that it would render the date of performance indefinite. Yet, the
circumstances admit no other reasonable view; and this very indefiniteness is what explains why the agreement did
not specify any exact periods or dates of performance.
It follows that there is no justification in law for the setting the date of performance at any other time than that of the
eviction of the squatters occupying the land in question; and in not so holding, both the trial Court and the Court of
Appeals committed reversible error. It is not denied that the case against one of the squatters, Abundo, was still
pending in the Court of Appeals when its decision in this case was rendered.
In view of the foregoing, the decision appealed from is reversed, and the time for the performance of the obligations
of petitioner Gregorio Araneta, Inc. is hereby fixed at the date that all the squatters on affected areas are finally evicted
therefrom.
Costs against respondent Philippine Sugar Estates Development, Co., Ltd. So ordered.
SUPREME COURT
Manila
EN BANC
G.R. No. L-11827 July 31, 1961
FERNANDO A. GAITE, plaintiff-appellee,

vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING CO., INC., SEGUNDINA VIVAS,
FRNACISCO DANTE, PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.
Alejo Mabanag for plaintiff-appellee.

Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First Instance because the claims involved aggregate more than
P200,000.00.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a representative capacity,
of 11 iron lode mineral claims, known as the Dawahan Group, situated in the municipality of Jose Panganiban,
province of Camarines Norte.
By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier constituted and appointed plaintiff-
appellee Fernando A. Gaite as his true and lawful attorney-in-fact to enter into a contract with any individual or juridical
person for the exploration and development of the mining claims aforementioned on a royalty basis of not less than
P0.50 per ton of ore that might be extracted therefrom. On March 19, 1954, Gaite in turn executed a general
assignment (Record on Appeal, pp. 17-19) conveying the development and exploitation of said mining claims into the
Larap Iron Mines, a single proprietorship owned solely by and belonging to him, on the same royalty basis provided
for in Exhibit "3". Thereafter, Gaite embarked upon the development and exploitation of the mining claims in question,
opening and paving roads within and outside their boundaries, making other improvements and installing facilities
therein for use in the development of the mines, and in time extracted therefrom what he claim and estimated to be
approximately 24,000 metric tons of iron ore.
For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to Gaite to exploit and
develop the mining claims in question, and Gaite assented thereto subject to certain conditions. As a result, a
document entitled "Revocation of Power of Attorney and Contract" was executed on December 8, 1954 (Exhibit
"A"),wherein Gaite transferred to Fonacier, for the consideration of P20,000.00, plus 10% of the royalties that Fonacier
would receive from the mining claims, all his rights and interests on all the roads, improvements, and facilities in or
outside said claims, the right to use the business name "Larap Iron Mines" and its goodwill, and all the records and
documents relative to the mines. In the same document, Gaite transferred to Fonacier all his rights and interests over
the "24,000 tons of iron ore, more or less" that the former had already extracted from the mineral claims, in
consideration of the sum of P75,000.00, P10,000.00 of which was paid upon the signing of the agreement, and
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from and out of the first
letter of credit covering the first shipment of iron ores and of the first amount derived from the local
sale of iron ore made by the Larap Mines & Smelting Co. Inc., its assigns, administrators, or
successors in interests.
To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor of Gaite a surety
bond, and pursuant to the promise, Fonacier delivered to Gaite a surety bond dated December 8, 1954 with himself
(Fonacier) as principal and the Larap Mines and Smelting Co. and its stockholders George Krakower, Segundina
Vivas, Pacifico Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, however, that
when this bond was presented to him by Fonacier together with the "Revocation of Power of Attorney and Contract",
Exhibit "A", on December 8, 1954, he refused to sign said Exhibit "A" unless another bond under written by a bonding
company was put up by defendants to secure the payment of the P65,000.00 balance of their price of the iron ore in
the stockpiles in the mining claims. Hence, a second bond, also dated December 8, 1954 (Exhibit "B"),was executed
by the same parties to the first bond Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as additional surety,
but it provided that the liability of the surety company would attach only when there had been an actual sale of iron
ore by the Larap Mines & Smelting Co. for an amount of not less then P65,000.00, and that, furthermore, the liability
of said surety company would automatically expire on December 8, 1955. Both bonds were attached to the
"Revocation of Power of Attorney and Contract", Exhibit "A", and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two executed and signed the
"Revocation of Power of Attorney and Contract", Exhibit "A", Fonacier entered into a "Contract of Mining Operation",
ceding, transferring, and conveying unto the Larap Mines and Smelting Co., Inc. the right to develop, exploit, and
explore the mining claims in question, together with the improvements therein and the use of the name "Larap Iron
Mines" and its good will, in consideration of certain royalties. Fonacier likewise transferred, in the same document,
the complete title to the approximately 24,000 tons of iron ore which he acquired from Gaite, to the Larap & Smelting
Co., in consideration for the signing by the company and its stockholders of the surety bonds delivered by Fonacier
to Gaite (Record on Appeal, pp. 82-94).
Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far Eastern Surety and Insurance
Company, no sale of the approximately 24,000 tons of iron ore had been made by the Larap Mines & Smelting Co.,
Inc., nor had the P65,000.00 balance of the price of said ore been paid to Gaite by Fonacier and his sureties payment
of said amount, on the theory that they had lost right to make use of the period given them when their bond, Exhibit
"B" automatically expired (Exhibits "C" to "C-24"). And when Fonacier and his sureties failed to pay as demanded by
Gaite, the latter filed the present complaint against them in the Court of First Instance of Manila (Civil Case No. 29310)
for the payment of the P65,000.00 balance of the price of the ore, consequential damages, and attorney's fees.
All the defendants except Francisco Dante set up the uniform defense that the obligation sued upon by Gaite was
subject to a condition that the amount of P65,000.00 would be payable out of the first letter of credit covering the first
shipment of iron ore and/or the first amount derived from the local sale of the iron ore by the Larap Mines & Smelting
Co., Inc.; that up to the time of the filing of the complaint, no sale of the iron ore had been made, hence the condition
had not yet been fulfilled; and that consequently, the obligation was not yet due and demandable. Defendant Fonacier
also contended that only 7,573 tons of the estimated 24,000 tons of iron ore sold to him by Gaite was actually
delivered, and counterclaimed for more than P200,000.00 damages.
At the trial of the case, the parties agreed to limit the presentation of evidence to two issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000.00 become due and demandable
when the defendants failed to renew the surety bond underwritten by the Far Eastern Surety and Insurance Co., Inc.
(Exhibit "B"), which expired on December 8, 1955; and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant Fonacier were actually in
existence in the mining claims when these parties executed the "Revocation of Power of Attorney and Contract",
Exhibit "A."
On the first question, the lower court held that the obligation of the defendants to pay plaintiff the P65,000.00 balance
of the price of the approximately 24,000 tons of iron ore was one with a term: i.e., that it would be paid upon the sale
of sufficient iron ore by defendants, such sale to be effected within one year or before December 8, 1955; that the
giving of security was a condition precedent to Gait's giving of credit to defendants; and that as the latter failed to put
up a good and sufficient security in lieu of the Far Eastern Surety bond (Exhibit "B") which expired on December 8,
1955, the obligation became due and demandable under Article 1198 of the New Civil Code.
As to the second question, the lower court found that plaintiff Gaite did have approximately 24,000 tons of iron ore at
the mining claims in question at the time of the execution of the contract Exhibit "A."
Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay him, jointly and severally,
P65,000.00 with interest at 6% per annum from December 9, 1955 until payment, plus costs. From this judgment,
defendants jointly appealed to this Court.
During the pendency of this appeal, several incidental motions were presented for resolution: a motion to declare the
appellants Larap Mines & Smelting Co., Inc. and George Krakower in contempt, filed by appellant Fonacier, and two
motions to dismiss the appeal as having become academic and a motion for new trial and/or to take judicial notice of
certain documents, filed by appellee Gaite. The motion for contempt is unmeritorious because the main allegation
therein that the appellants Larap Mines & Smelting Co., Inc. and Krakower had sold the iron ore here in question,
which allegedly is "property in litigation", has not been substantiated; and even if true, does not make these appellants
guilty of contempt, because what is under litigation in this appeal is appellee Gaite's right to the payment of the balance
of the price of the ore, and not the iron ore itself. As for the several motions presented by appellee Gaite, it is
unnecessary to resolve these motions in view of the results that we have reached in this case, which we shall hereafter
discuss.
The main issues presented by appellants in this appeal are:
(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay appellee Gaite the P65,000.00
(balance of the price of the iron ore in question)is one with a period or term and not one with a suspensive condition,
and that the term expired on December 8, 1955; and
(2) that the lower court erred in not holding that there were only 10,954.5 tons in the stockpiles of iron ore sold by
appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following provision in the contract Exhibit "A":
7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier all his rights and
interests over the 24,000 tons of iron ore, more or less, above-referred to together with all his rights
and interests to operate the mine in consideration of the sum of SEVENTY-FIVE THOUSAND PESOS
(P75,000.00) which the latter binds to pay as follows:
a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of this agreement.
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be paid from and out of the first
letter of credit covering the first shipment of iron ore made by the Larap Mines & Smelting Co., Inc.,
its assigns, administrators, or successors in interest.
We find the court below to be legally correct in holding that the shipment or local sale of the iron ore is not a condition
precedent (or suspensive) to the payment of the balance of P65,000.00, but was only a suspensive period or term.
What characterizes a conditional obligation is the fact that its efficacy or obligatory force (as distinguished from its
demandability) is subordinated to the happening of a future and uncertain event; so that if the suspensive condition
does not take place, the parties would stand as if the conditional obligation had never existed. That the parties to the
contract Exhibit "A" did not intend any such state of things to prevail is supported by several circumstances:
1) The words of the contract express no contingency in the buyer's obligation to pay: "The balance of Sixty-Five
Thousand Pesos (P65,000.00) will be paid out of the first letter of credit covering the first shipment of iron ores . . ."
etc. There is no uncertainty that the payment will have to be made sooner or later; what is undetermined is merely the
exact date at which it will be made. By the very terms of the contract, therefore, the existence of the obligation to pay
is recognized; only its maturity or demandability is deferred.
2) A contract of sale is normally commutative and onerous: not only does each one of the parties assume a correlative
obligation (the seller to deliver and transfer ownership of the thing sold and the buyer to pay the price),but each party
anticipates performance by the other from the very start. While in a sale the obligation of one party can be lawfully
subordinated to an uncertain event, so that the other understands that he assumes the risk of receiving nothing for
what he gives (as in the case of a sale of hopes or expectations, emptio spei), it is not in the usual course of business
to do so; hence, the contingent character of the obligation must clearly appear. Nothing is found in the record to
evidence that Gaite desired or assumed to run the risk of losing his right over the ore without getting paid for it, or that
Fonacier understood that Gaite assumed any such risk. This is proved by the fact that Gaite insisted on a bond a to
guarantee payment of the P65,000.00, an not only upon a bond by Fonacier, the Larap Mines & Smelting Co., and
the company's stockholders, but also on one by a surety company; and the fact that appellants did put up such bonds
indicates that they admitted the definite existence of their obligation to pay the balance of P65,000.00.
3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or shipment of the ore as a condition
precedent, would be tantamount to leaving the payment at the discretion of the debtor, for the sale or shipment could
not be made unless the appellants took steps to sell the ore. Appellants would thus be able to postpone payment
indefinitely. The desireability of avoiding such a construction of the contract Exhibit "A" needs no stressing.
4) Assuming that there could be doubt whether by the wording of the contract the parties indented a suspensive
condition or a suspensive period (dies ad quem) for the payment of the P65,000.00, the rules of interpretation would
incline the scales in favor of "the greater reciprocity of interests", since sale is essentially onerous. The Civil Code of
the Philippines, Article 1378, paragraph 1, in fine, provides:
If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.
and there can be no question that greater reciprocity obtains if the buyer' obligation is deemed to be actually existing,
with only its maturity (due date) postponed or deferred, that if such obligation were viewed as non-existent or not
binding until the ore was sold.
The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit, and not an aleatory
contract where the transferor, Gaite, would assume the risk of not being paid at all; and that the previous sale or
shipment of the ore was not a suspensive condition for the payment of the balance of the agreed price, but was
intended merely to fix the future date of the payment.
This issue settled, the next point of inquiry is whether appellants, Fonacier and his sureties, still have the right to insist
that Gaite should wait for the sale or shipment of the ore before receiving payment; or, in other words, whether or not
they are entitled to take full advantage of the period granted them for making the payment.
We agree with the court below that the appellant have forfeited the right court below that the appellants have forfeited
the right to compel Gaite to wait for the sale of the ore before receiving payment of the balance of P65,000.00, because
of their failure to renew the bond of the Far Eastern Surety Company or else replace it with an equivalent guarantee.
The expiration of the bonding company's undertaking on December 8, 1955 substantially reduced the security of the
vendor's rights as creditor for the unpaid P65,000.00, a security that Gaite considered essential and upon which he
had insisted when he executed the deed of sale of the ore to Fonacier (Exhibit "A"). The case squarely comes under
paragraphs 2 and 3 of Article 1198 of the Civil Code of the Philippines:
"ART. 1198. The debtor shall lose every right to make use of the period:
(1) . . .
(2) When he does not furnish to the creditor the guaranties or securities which he has promised.
(3) When by his own acts he has impaired said guaranties or securities after their establishment, and
when through fortuitous event they disappear, unless he immediately gives new ones equally
satisfactory.
Appellants' failure to renew or extend the surety company's bond upon its expiration plainly impaired the securities
given to the creditor (appellee Gaite), unless immediately renewed or replaced.
There is no merit in appellants' argument that Gaite's acceptance of the surety company's bond with full knowledge
that on its face it would automatically expire within one year was a waiver of its renewal after the expiration date. No
such waiver could have been intended, for Gaite stood to lose and had nothing to gain barely; and if there was any, it
could be rationally explained only if the appellants had agreed to sell the ore and pay Gaite before the surety
company's bond expired on December 8, 1955. But in the latter case the defendants-appellants' obligation to pay
became absolute after one year from the transfer of the ore to Fonacier by virtue of the deed Exhibit "A.".
All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in demanding payment and
instituting this action one year from and after the contract (Exhibit "A") was executed, either because the appellant
debtors had impaired the securities originally given and thereby forfeited any further time within which to pay; or
because the term of payment was originally of no more than one year, and the balance of P65,000.00 became due
and payable thereafter.
Coming now to the second issue in this appeal, which is whether there were really 24,000 tons of iron ore in the
stockpiles sold by appellee Gaite to appellant Fonacier, and whether, if there had been a short-delivery as claimed by
appellants, they are entitled to the payment of damages, we must, at the outset, stress two things: first, that this is a
case of a sale of a specific mass of fungible goods for a single price or a lump sum, the quantity of "24,000 tons of
iron ore, more or less," stated in the contract Exhibit "A," being a mere estimate by the parties of the total tonnage
weight of the mass; and second, that the evidence shows that neither of the parties had actually measured of weighed
the mass, so that they both tried to arrive at the total quantity by making an estimate of the volume thereof in cubic
meters and then multiplying it by the estimated weight per ton of each cubic meter.
The sale between the parties is a sale of a specific mass or iron ore because no provision was made in their contract
for the measuring or weighing of the ore sold in order to complete or perfect the sale, nor was the price of P75,000,00
agreed upon by the parties based upon any such measurement.(see Art. 1480, second par., New Civil Code). The
subject matter of the sale is, therefore, a determinate object, the mass, and not the actual number of units or tons
contained therein, so that all that was required of the seller Gaite was to deliver in good faith to his buyer all of the ore
found in the mass, notwithstanding that the quantity delivered is less than the amount estimated by them (Mobile
Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171 So. 872, applying art. 2459 of the Louisiana Civil
Code). There is no charge in this case that Gaite did not deliver to appellants all the ore found in the stockpiles in the
mining claims in questions; Gaite had, therefore, complied with his promise to deliver, and appellants in turn are bound
to pay the lump price.
But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not a definite mass, but
approximately 24,000 tons of ore, so that any substantial difference in this quantity delivered would entitle the buyers
to recover damages for the short-delivery, was there really a short-delivery in this case?
We think not. As already stated, neither of the parties had actually measured or weighed the whole mass of ore cubic
meter by cubic meter, or ton by ton. Both parties predicate their respective claims only upon an estimated number of
cubic meters of ore multiplied by the average tonnage factor per cubic meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles of ore that he sold to
Fonacier, while appellants contend that by actual measurement, their witness Cirpriano Manlagit found the total
volume of ore in the stockpiles to be only 6.609 cubic meters. As to the average weight in tons per cubic meter, the
parties are again in disagreement, with appellants claiming the correct tonnage factor to be 2.18 tons to a cubic meter,
while appellee Gaite claims that the correct tonnage factor is about 3.7.
In the face of the conflict of evidence, we take as the most reliable estimate of the tonnage factor of iron ore in this
case to be that made by Leopoldo F. Abad, chief of the Mines and Metallurgical Division of the Bureau of Mines, a
government pensionado to the States and a mining engineering graduate of the Universities of Nevada and California,
with almost 22 years of experience in the Bureau of Mines. This witness placed the tonnage factor of every cubic
meter of iron ore at between 3 metric tons as minimum to 5 metric tons as maximum. This estimate, in turn, closely
corresponds to the average tonnage factor of 3.3 adopted in his corrected report (Exhibits "FF" and FF-1") by engineer
Nemesio Gamatero, who was sent by the Bureau of Mines to the mining claims involved at the request of appellant
Krakower, precisely to make an official estimate of the amount of iron ore in Gaite's stockpiles after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made by appellant's witness
Cipriano Manlagit is correct, if we multiply it by the average tonnage factor of 3.3 tons to a cubic meter, the product
is 21,809.7 tons, which is not very far from the estimate of 24,000 tons made by appellee Gaite, considering that
actual weighing of each unit of the mass was practically impossible, so that a reasonable percentage of error should
be allowed anyone making an estimate of the exact quantity in tons found in the mass. It must not be forgotten that
the contract Exhibit "A" expressly stated the amount to be 24,000 tons, more or less. (ch. Pine River Logging &
Improvement Co. vs U.S., 279, 46 L. Ed. 1164).
There was, consequently, no short-delivery in this case as would entitle appellants to the payment of damages, nor
could Gaite have been guilty of any fraud in making any misrepresentation to appellants as to the total quantity of ore
in the stockpiles of the mining claims in question, as charged by appellants, since Gaite's estimate appears to be
substantially correct.
WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same, with costs against
appellants.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 206806 June 25, 2014
ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners,
vs.
DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC PRODUCTS
ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed and may
be implied only if the old and new contracts are incompatible on every point.
Before us is a petition for review on certiorari1 assailing the Court of Appeals decision2 in CA-G.R. CV No. 95709,
which stemmed from a complaint3 filed in the Regional Trial Court of Valenzuela City, Branch 171, for collection of
sum of money.
The facts are as follows:
Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the name Quality
Paper and Plastic Products, Enterprises, to factories engaged in the paper mill business.4 From February 2007 to
March 2007, he delivered scrap papers worth 7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp and
Paper) through its Chief Executive Officer and President, Candida A. Santos.5 The parties allegedly agreed that Arco
Pulp and Paper would either pay Dan T. Lim the value of the raw materials or deliver to him their finished products of
equivalent value.6
Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated check dated
April 18, 20077 in the amount of 1,487,766.68 as partial payment, with the assurance that the check would not bounce.8
When he deposited the check on April 18, 2007, it was dishonored for being drawn against a closed account.9
On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement10 where Arco
Pulp and Paper bound themselves to deliver their finished products to Megapack Container Corporation, owned by
Eric Sy, for his account. According to the memorandum, the raw materials would be supplied by Dan T. Lim, through
his company, Quality Paper and Plastic Products. The memorandum of agreement reads as follows:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric
Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches at the price of 18.50 per kg. to
Megapack Container for Mr. Eric Sys account. Schedule of deliveries are as follows:
....
It has been agreed further that the Local OCC materials to be used for the production of the above Test Liners will be
supplied by Quality Paper & Plastic Products Ent., total of 600 Metric Tons at 6.50 per kg. (price subject to change
per advance notice). Quantity of Local OCC delivery will be based on the quantity of Test Liner delivered to Megapack
Container Corp. based on the above production schedule.11
On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper demanding payment of the amount of 7,220,968.31,
but no payment was made to him.13
Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment with the Regional Trial Court,
Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its answer 15 but failed to have its
representatives attend the pre-trial hearing. Hence, the trial court allowed Dan T. Lim to present his evidence ex
parte.16
On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and dismissed the
complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the memorandum of agreement, novation
took place, which extinguished Arco Pulp and Papers obligation to Dan T. Lim.17
Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him, novation did not take place since
the memorandum of agreement between Arco Pulp and Paper and Eric Sy was an exclusive and private agreement
between them. He argued that if his name was mentioned in the contract, it was only for supplying the parties their
required scrap papers, where his conformity through a separate contract was indispensable.19
On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting aside the judgment dated
September 19, 2008 and ordering Arco Pulp and Paper to jointly and severally pay Dan T. Lim the amount of
7,220,968.31 with interest at 12% per annum from the time of demand; 50,000.00 moral damages; 50,000.00
exemplary damages; and 50,000.00 attorneys fees.22
The appellate court ruled that the facts and circumstances in this case clearly showed the existence of an alternative
obligation.23 It also ruled that Dan T. Lim was entitled to damages and attorneys fees due to the bad faith exhibited by
Arco Pulp and Paper in not honoring its undertaking.24
Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its President and Chief Executive
Officer, Candida A. Santos, bring this petition for review on certiorari.
On one hand, petitioners argue that the execution of the memorandum of agreement constituted a novation of the
original obligation since Eric Sy became the new debtor of respondent. They also argue that there is no legal basis to
hold petitioner Candida A. Santos personally liable for the transaction that petitioner corporation entered into with
respondent. The Court of Appeals, they allege, also erred in awarding moral and exemplary damages and attorneys
fees to respondent who did not show proof that he was entitled to damages.27
Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was no proper
novation in this case. He argues that the Court of Appeals was correct in ordering the payment of 7,220,968.31 with
damages since the debt of petitioners remains unpaid.28 He also argues that the Court of Appeals was correct in
holding petitioners solidarily liable since petitioner Candida A. Santos was "the prime mover for such outstanding
corporate liability."29 In their reply, petitioners reiterate that novation took place since there was nothing in the
memorandum of agreement showing that the obligation was alternative. They also argue that when respondent
allowed them to deliver the finished products to Eric Sy, the original obligation was novated.30
A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No. 99-2-04-SC dated
November 21, 2000.31
The issues to be resolved by this court are as follows:
1. Whether the obligation between the parties was extinguished by novation
2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.
3. Whether moral damages, exemplary damages, and attorneys fees can be awarded
The petition is denied.

The obligation between the
parties was an alternative
obligation
The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states:
Article 1199. A person alternatively bound by different prestations shall completely perform one of them.
The creditor cannot be compelled to receive part of one and part of the other undertaking.
"In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient, determined by the
choice of the debtor who generally has the right of election."32 The right of election is extinguished when the party who
may exercise that option categorically and unequivocally makes his or her choice known.33
The choice of the debtor must also be communicated to the creditor who must receive notice of it since: The object of
this notice is to give the creditor . . . opportunity to express his consent, or to impugn the election made by the debtor,
and only after said notice shall the election take legal effect when consented by the creditor, or if impugned by the
latter, when declared proper by a competent court.34
According to the factual findings of the trial court and the appellate court, the original contract between the parties
was for respondent to deliver scrap papers worth 7,220,968.31 to petitioner Arco Pulp and Paper. The payment for
this delivery became petitioner Arco Pulp and Papers obligation. By agreement, petitioner Arco Pulp and Paper, as
the debtor, had the option to either (1) pay the price or(2) deliver the finished products of equivalent value to
respondent.35
The appellate court, therefore, correctly identified the obligation between the parties as an alternative obligation,
whereby petitioner Arco Pulp and Paper, after receiving the raw materials from respondent, would either pay him the
price of the raw materials or, in the alternative, deliver to him the finished products of equivalent value.
When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the scrap papers, they
exercised their option to pay the price. Respondents receipt of the check and his subsequent act of depositing it
constituted his notice of petitioner Arco Pulp and Papers option to pay.
This choice was also shown by the terms of the memorandum of agreement, which was executed on the same day.
The memorandum declared in clear terms that the delivery of petitioner Arco Pulp and Papers finished products would
be to a third person, thereby extinguishing the option to deliver the finished products of equivalent value to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of the memorandum of agreement constituted a novation of the
contract between the parties. When petitioner Arco Pulp and Paper opted instead to deliver the finished products to a
third person, it did not novate the original obligation between the parties.
The rules on novation are outlined in the Civil Code, thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)

Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative
that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with
each other. (1204)
Article 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new
debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a)
Novation extinguishes an obligation between two parties when there is a substitution of objects or debtors or when
there is subrogation of the creditor. It occurs only when the new contract declares so "in unequivocal terms" or that
"the old and the new obligations be on every point incompatible with each other."36
Novation was extensively discussed by this court in Garcia v. Llamas:37
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a
new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. Article 1293 of the
Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new
debtor gives him rights mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In
expromision, the initiative for the change does not come from and may even be made without the knowledge of
the debtor, since it consists of a third persons assumption of the obligation. As such, it logically requires the consent
of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who
consents to the substitution and assumes the obligation; thus, the consent of these three persons are necessary. Both
modes of substitution by the debtor require the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of
a new one that takes the place of the former. It is merely modificatory when the old obligation subsists to the extent
that it remains compatible with the amendatory agreement. Whether extinctive or modificatory, novation is made either
by changing the object or the principal conditions, referred to as objective or real novation; or by substituting the
person of the debtor or subrogating a third person to the rights of the creditor, an act known as subjective or personal
novation. For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that
the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every point.
The test of incompatibility is whether the two obligations can stand together, each one with its own independent
existence.38 (Emphasis supplied)
Because novation requires that it be clear and unequivocal, it is never presumed, thus:
In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman Law
jurisprudence, the principle novatio non praesumitur that novation is never presumed.At bottom, for novation
tobe a jural reality, its animus must be ever present, debitum pro debito basically extinguishing the old obligation
for the new one.39 (Emphasis supplied) There is nothing in the memorandum of agreement that states that with its
execution, the obligation of petitioner Arco Pulp and Paper to respondent would be extinguished. It also does not state
that Eric Sy somehow substituted petitioner Arco Pulp and Paper as respondents debtor. It merely shows that
petitioner Arco Pulp and Paper opted to deliver the finished products to a third person instead.
The consent of the creditor must also be secured for the novation to be valid:
Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties underscore the
absence of any express disclosure or circumstances with which to deduce a clear and unequivocal intent by the
parties to novate the old agreement.40 (Emphasis supplied)
In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the contract need
not be secured. This is clear from the first line of the memorandum, which states:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric
Sy. . . .41
If the memorandum of agreement was intended to novate the original agreement between the parties, respondent
must have first agreed to the substitution of Eric Sy as his new debtor. The memorandum of agreement must also
state in clear and unequivocal terms that it has replaced the original obligation of petitioner Arco Pulp and Paper to
respondent. Neither of these circumstances is present in this case.
Petitioner Arco Pulp and Papers act of tendering partial payment to respondent also conflicts with their alleged intent
to pass on their obligation to Eric Sy. When respondent sent his letter of demand to petitioner Arco Pulp and Paper,
and not to Eric Sy, it showed that the former neither acknowledged nor consented to the latter as his new debtor.
These acts, when taken together, clearly show that novation did not take place. Since there was no novation, petitioner
Arco Pulp and Papers obligation to respondent remains valid and existing. Petitioner Arco Pulp and Paper, therefore,
must still pay respondent the full amount of 7,220,968.31.
Petitioners are liable for

damages
Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract where the breach
is due to fraud or bad faith:
Art. 2220. Willfull injury to property may be a legal ground for awarding moral damages if the court should find that,
under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the
defendant acted fraudulently or in bad faith. (Emphasis supplied)
Moral damages are not awarded as a matter of right but only after the party claiming it proved that the breach was
due to fraud or bad faith. As this court stated:
Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the
party from whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his contractual obligations.
The breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive.42
Further, the following requisites must be proven for the recovery of moral damages:
An award of moral damages would require certain conditions to be met, to wit: (1)first, there must be an injury, whether
physical, mental or psychological, clearly sustained by the claimant; (2) second, there must be culpable act or omission
factually established; (3) third, the wrongful act or omission of the defendant is the proximate cause of the injury
sustained by the claimant; and (4) fourth, the award of damages is predicated on any of the cases stated in Article
2219 of the Civil Code.43
Here, the injury suffered by respondent is the loss of 7,220,968.31 from his business. This has remained unpaid
since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and Papers act of refusing to pay its
obligations.
When the obligation became due and demandable, petitioner Arco Pulp and Paper not only issued an unfunded check
but also entered into a contract with a third person in an effort to evade its liability. This proves the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be awarded in the following
instances:
Article 2219. Moral damages may be recovered in the following and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not specified within this enumeration. When a party breaches a
contract, he or she goes against Article 19 of the Civil Code, which states: Article 19. Every person must, in the
exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty
and good faith.
Persons who have the right to enter into contractual relations must exercise that right with honesty and good faith.
Failure to do so results in an abuse of that right, which may become the basis of an action for damages. Article 19,
however, cannot be its sole basis:
Article 19 is the general rule which governs the conduct of human relations. By itself, it is not the basis of an actionable
tort. Article 19 describes the degree of care required so that an actionable tort may arise when it is alleged together
with Article 20 or Article 21.44
Article 20 and 21 of the Civil Code are as follows:
Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the
latter for the same.
Article 21.Any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs
or public policy shall compensate the latter for the damage.
To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with lawful acts that are contrary
to morals, good customs, and public policy:
Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the act have been willful
or negligent. Willful may refer to the intention to do the act and the desire to achieve the outcome which is considered
by the plaintiff in tort action as injurious. Negligence may refer to a situation where the act was consciously done but
without intending the result which the plaintiff considers as injurious.
Article 21, on the other hand, concerns injuries that may be caused by acts which are not necessarily proscribed by
law. This article requires that the act be willful, that is, that there was an intention to do the act and a desire to achieve
the outcome. In cases under Article 21, the legal issues revolve around whether such outcome should be considered
a legal injury on the part of the plaintiff or whether the commission of the act was done in violation of the standards of
care required in Article 19.45
When parties act in bad faith and do not faithfully comply with their obligations under contract, they run the risk of
violating Article 1159 of the Civil Code:
Article 1159. Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith.
Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be recovered since it only
specifies, among others, Article 21. When a party reneges on his or her obligations arising from contracts in bad faith,
the act is not only contrary to morals, good customs, and public policy; it is also a violation of Article 1159. Breaches
of contract become the basis of moral damages, not only under Article 2220, but also under Articles 19 and 20 in
relation to Article 1159.
Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220 requires that the
breach be done fraudulently or in bad faith. In Adriano v. Lasala:46
To recover moral damages in an action for breach of contract, the breach must be palpably wanton, reckless and
malicious, in bad faith, oppressive, or abusive. Hence, the person claiming bad faith must prove its existence by clear
and convincing evidence for the law always presumes good faith.
Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity
and conscious doing of a wrong, a breach of known duty through some motive or interest or ill will that partakes of the
nature of fraud. It is, therefore, a question of intention, which can be inferred from ones conduct and/or
contemporaneous statements.47 (Emphasis supplied)
Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination of the
circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to respondent, it was
presumably with the knowledge that it was being drawn against a closed account. Worse, it attempted to shift their
obligations to a third person without the consent of respondent.
Petitioner Arco Pulp and Papers actions clearly show "a dishonest purpose or some moral obliquity and conscious
doing of a wrong, a breach of known duty through some motive or interest or ill will that partakes of the nature of
fraud."48 Moral damages may, therefore, be awarded.
Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in the following
circumstances:
Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a
wanton, fraudulent, reckless, oppressive, or malevolent manner.
Article 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide whether or not they
should be adjudicated.
Article 2234. While the amount of the exemplary damages need not be proven, the plaintiff must show that he is
entitled to moral, temperate or compensatory damages before the court may consider the question of whether or not
exemplary damages should be awarded.
In Tankeh v. Development Bank of the Philippines,49 we stated that:

The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties from the commission
of a similar offense. The case of People v. Ranteciting People v. Dalisay held that:
Also known as punitive or vindictive damages, exemplary or corrective damages are intended to serve as a deterrent
to serious wrong doings, and as a vindication of undue sufferings and wanton invasion of the rights of an injured or a
punishment for those guilty of outrageous conduct. These terms are generally, but not always, used interchangeably.
In common law, there is preference in the use of exemplary damages when the award is to account for injury to
feelings and for the sense of indignity and humiliation suffered by a person as a result of an injury that has been
maliciously and wantonly inflicted, the theory being that there should be compensation for the hurt caused by the
highly reprehensible conduct of the defendantassociated with such circumstances as willfulness, wantonness,
malice, gross negligence or recklessness, oppression, insult or fraud or gross fraudthat intensifies the injury. The
terms punitive or vindictive damages are often used to refer to those species of damages that may be awarded against
a person to punish him for his outrageous conduct. In either case, these damages are intended in good measure to
deter the wrongdoer and others like him from similar conduct in the future.50 (Emphasis supplied; citations omitted)
The requisites for the award of exemplary damages are as follows:
(1) they may be imposed by way of example in addition to compensatory damages, and only after the
claimant's right to them has been established;
(2) that they cannot be recovered as a matter of right, their determination depending upon the amount
of compensatory damages that may be awarded to the claimant; and
(3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or malevolent
manner.51
Business owners must always be forthright in their dealings. They cannot be allowed to renege on their obligations,
considering that these obligations were freely entered into by them. Exemplary damages may also be awarded in this
case to serve as a deterrent to those who use fraudulent means to evade their liabilities.
Since the award of exemplary damages is proper, attorneys fees and cost of the suit may also be recovered.
Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot
be recovered, except:
(1) When exemplary damages are awarded[.]

Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation
Petitioners argue that the finding of solidary liability was erroneous since no evidence was adduced to prove that the
transaction was also a personal undertaking of petitioner Santos. We disagree.
In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that:
Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal personality
separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Following
this principle, obligations incurred by the corporation, acting through its directors, officers and employees, are its sole
liabilities. A director, officer or employee of a corporation is generally not held personally liable for obligations incurred
by the corporation. Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud or
an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse
legitimate issues.
....
Before a director or officer of a corporation can be held personally liable for corporate obligations, however, the
following requisites must concur: (1) the complainant must allege in the complaint that the director or officer assented
to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.
While it is true that the determination of the existence of any of the circumstances that would warrant the piercing of
the veil of corporate fiction is a question of fact which cannot be the subject of a petition for review on certiorari under
Rule 45, this Court can take cognizance of factual issues if the findings of the lower court are not supported by the
evidence on record or are based on a misapprehension of facts.53 (Emphasis supplied)
As a general rule, directors, officers, or employees of a corporation cannot be held personally liable for obligations
incurred by the corporation. However, this veil of corporate fiction may be pierced if complainant is able to prove, as
in this case, that (1) the officer is guilty of negligence or bad faith, and (2) such negligence or bad faith was clearly
and convincingly proven.
Here, petitioner Santos entered into a contract with respondent in her capacity as the President and Chief Executive
Officer of Arco Pulp and Paper. She also issued the check in partial payment of petitioner corporations obligations to
respondent on behalf of petitioner Arco Pulp and Paper. This is clear on the face of the check bearing the account
name, "Arco Pulp & Paper, Co., Inc."54 Any obligation arising from these acts would not, ordinarily, be petitioner Santos
personal undertaking for which she would be solidarily liable with petitioner Arco Pulp and Paper.
We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines:55
Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate
corporate personality of a corporation is abused or used for wrongful purposes. Under the doctrine, the corporate
existence may be disregarded where the entity is formed or used for non-legitimate purposes, such as to evade a just
and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable
considerations, other unjustifiable aims or intentions, in which case, the fiction will be disregarded and the individuals
composing it and the two corporations will be treated as identical.56 (Emphasis supplied)
According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp and Paper, stating
that:
In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused to honor their
undertaking in favor of the [respondent]. After the check in the amount of 1,487,766.68 issued by [petitioner] Santos
was dishonored for being drawn against a closed account, [petitioner] corporation denied any privity with [respondent].
These acts prompted the [respondent] to avail of the remedies provided by law in order to protect his rights.57
We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the corporate veil. When 1w phi 1
petitioner Arco Pulp and Papers obligation to respondent became due and demandable, she not only issued an
unfunded check but also contracted with a third party in an effort to shift petitioner Arco Pulp and Papers liability. She
unjustifiably refused to honor petitioner corporations obligations to respondent. These acts clearly amount to bad
faith. In this instance, the corporate veil may be pierced, and petitioner Santos may be held solidarily liable with
petitioner Arco Pulp and Paper.
The rate of interest due on

the obligation must be
reduced in view of Nacar v.
Gallery Frames58
In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar v. Gallery Frames,59
the rate of interest due on the obligation must be modified from 12% per annum to 6% per annum from the time of
demand.
Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,60 and we have laid down the
following guidelines with regard to the rate of legal interest:
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Linesare accordingly
modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached,
the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code
govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to
a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented applying the rate of interest fixed therein.61 (Emphasis supplied;
citations omitted.)
According to these guidelines, the interest due on the obligation of 7,220,968.31 should now be at 6% per annum,
computed from May 5, 2007, when respondent sent his letter of demand to petitioners. This interest shall continue to
be due from the finality of this decision until its full satisfaction.
WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is AFFIRMED.
Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay respondent Dan
T. Lim the amount of 7,220,968.31 with interest of 6% per annum at the time of demand until finality of judgment and
its full satisfaction, with moral damages in the amount of 50,000.00, exemplary damages in the amount of
50,000.00, and attorney's fees in the amount of 50,000.00.
SO ORDERED.

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 106418 July 11, 1996
DANIEL L. BORBON II AND FRANCISCO L. BORBON, petitioners,

vs.
SERVICEWIDE SPECIALISTS, INC. & HON. COURT OF APPEALS, respondents.
VITUG, J.:p
From the decision of the Court of Appeals in CA-G.R. CV No. 30693 which affirmed that of the Regional
Trial Court, NCJR, Branch 39, Manila, in Civil Case No. 85-29954, confirming the disputed possession
of a motor vehicle in favor of private respondent and ordering the payment to it by petitioners of
liquidated damages and attorney's fees, the instant appeal was interposed.
The appellate court adopted the factual findings of the court a quo, to wit:
The plaintiff's evidence shows among others that on December 7, 1984, defendants Daniel L.
Borbon and Francisco Borbon signed a promissory note (Exh. A) which states among others
as follows:
PROMISSORY NOTE
Acct. No. 115008276

Makati, Metro Manila,
Philippines
December 7, 1984
"P122,856.00
"For value received (installment price of the chattel/s purchased), I/We jointly and severally
promised to pay Pangasinan Auto Mart, Inc. or order, at its office at NMI Bldg., Buendia
Avenue, Makati, MM the sum of One Hundred Twenty Two Thousand Eight Hundred Fifty Six
only (P122,856.00), Philippine Currency, to be payable without need or notice or demand, in
installments of the amounts following and at the dates hereinafter set forth, to wit: P10,238.00
monthly for Twelve (12) months due and payable on the 7th day of each month starting
January, 1985, provided that at a late payment charge of 3% per month shall be added on
each unpaid installment from due date thereof until fully paid.
xxx xxx xxx
"It is further agreed that if upon such default, attorney's services are availed of, an additional
sum, equal to twenty five percent (25%) of the total sum due thereon, which shall not be less
than five hundred pesos, shall be paid to the holder hereof for attorney's fees plus an additional
sum equivalent to twenty five percent (25%) of the total sum due which likewise shall not be
less than five hundred pesos for liquidated damages, aside from expenses of collection and
the legal costs provided for in the Rules of Court.
"It is expressly agreed that all legal actions arising out of this note or in connection with the
chattel(s) subject hereof shall only be brought in or submitted to the jurisdiction of the proper
court either in the City of Manila or in the province, municipality or city where the branch of the
holder hereof is located.
"Acceptance by the holder thereof of payment of any installment or any part hereof of payment
of any installment or any part thereof after due dated (sic) shall not be considered as extending
the time for the payment or any of the conditions hereof. Nor shall the failure of the holder
hereof to exercise any of its right under this note constitute or be deemed as a waiver of such
rights.
"Maker:
(S/t) DANIEL L. BORBON, II
Address: 14 Colt St., Rancho Estate I,

Concepcion Dos, Marikina, MM
(S/t) FRANCISCO BORBON
Address: 73 Sterling Life Home

Pamplona, Las Pias, MM
WITNESSES
(illegible) (illegible)
"PAY TO THE ORDER OF

FILINVEST CREDIT CORPORATION
without recourse, notice, presentment and

demand waived
PANGASINAN AUTO MART, INC.
BY:
(S/T) K.N. DULCE

Dealer"
To secure the Promissory Note, the defendants executed a Chattel mortgage (Exh. B) on
"One (1) Brand new 1984 Isuzu

KCD 20 Crew Cab (Conv.)
Serial No. KCD20D0F 207685
Key No. 5509
(Exhs. A and B, p. 2 tsn, September 10, 1985)
The rights of Pangasinan Auto mart, Inc. was later assigned to Filinvest Credit Corporation on
December 10, 1984, with notice to the defendants (Exh. C, p. 10, Record).
On March 21, 1985, Filinvest Credit Corporation assigned all its rights, interest and title over
the Promissory Note and the chattel mortgage to the plaintiff (Exh. D; p. 3, tsn, Sept. 30, 1985).
The promissory note stipulates that the installment of P10,238.00 monthly should be paid on
the 7th day of each month starting January 1985, but the defendants failed to comply with their
obligation (p. 3, tsn, Sept. 30, 1985).
Because the defendants did not pay their monthly installments, Filinvest demanded from the
defendants the payment of their installments due in January 29, 1985 by telegram (Exh. E; pp.
3-4, tsn, Sept. 30, 1985).
After the accounts were assigned to the plaintiff, the plaintiff attempted to collect by sending a
demand letter to the defendants for them to pay their entire obligation which, as of March 12,
1985, totaled P185,257.80 (Exh. H; pp. 3-4, tsn, Sept. 30, 1985).
For their defense, the defendants claim that what they intended to buy from Pangasinan Auto
mart was a jeepney type Isuzu K. C. Cab. The vehicle they bought was not delivered (pp. 11-
12, tsn, Oct. 17, 1985). Instead, through misinterpretation and machination, the Pangasinan
Motor Inc. delivered an Isuzu crew cab, as this is the unit available at their warehouse. Later
the representative of Pangasinan Auto mart, Inc. (assignor) told the defendants that their
available stock is an Isuzu Cab but minus the rear body, which the defendants agreed to deliver
with the understanding that the Pangasinan Auto Mart, Inc. will refund the defendants the
amount of P10,000.00 to have the rear body completed (pp. 12-34, Exhs. 2 to 3-3A).
Despite communications with the Pangasinan Auto Mart, Inc. the latter was not able to replace
the vehicle until the vehicle delivered was seized by order of this court. the defendants argue
that an asignee stands in the place of an assignor which, to the mind of the court, is correct.
The asignee exercise all the rights of the assignor (Gonzales vs. Rama Plantation Co., C.V.
08630, Dec. 2, 1986).
The defendants further claim that they are not in default of their obligation because the
Pangasinan Auto Mart was first guilty of not fulfilling its obligation in the contract. the
defendants claim that neither party incurs delay if the other does not comply with his obligation.
(citing Art. 1169, N.C.C.)1
In sustaining the decision of the court a quo, the appellate court ruled that the petitioners could avoid
liability under the promissory note and the chattel mortgage that secured it since private respondent
took the note for value and in good faith.
In their appeal to this Court, petitioners merely seek a modification of the decision of the appellate
court insofar as it has upheld the court a quo in the award of liquidated damages and attorney's fees
in favor of private respondent. Petitioners invoke the provisions of Article 1484 of the Civil Code which
reads:
Art. 1484. In a contract of sale of personal property the price of which is payable in installments,
the vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the
vendee's failure to pay cover two or more installments. In this case, he shall have no further
action against the purchaser to recover any unpaid balance of the price. Any agreement to the
contrary shall be void.
The remedies under Article 1484 of the Civil Code are not cumulative but alternative and exclusive,2
which means, as so held in Nonato vs. Intermediate Appellate Court and Investor's Finance
Corporation,3 that
. . . Should the vendee or purchaser of a personal property default in the payment of two or
more of the agreed installments, the vendor or seller has the option to avail of any of these
three remedies either to exact fulfillment by the purchaser of the obligation, or to cancel the
sale, or to foreclose the mortgage on the purchased personal property, if one was constituted.
These remedies have been recognized as alternative, not cumulative, that the exercise of on
e would bar the exercise of the others.4
When the seller assigns his credit to another person, the latter is likewise bound by the same law.
Accordingly, when the assignee forecloses on the mortgage, there can be no further recovery of the
deficiency,5 and the seller-mortgagee is deemed to have renounced any right thereto.6 A contrario, in
the event of the seller-mortgagee first seeks, instead, the enforcement of the additional mortgages,
guarantees or other security arrangements, he must be then be held to have lost by waiver or non-
choice his lien on the chattel mortgage of the personal property sold by and mortgaged back to him,
although, similar to an action for specific performance, he may still levy on it.
In ordinary alternative obligations, a mere choice categorically an unequivocally made and then
communicated by the person entitled to exercise the option concludes the parties. The creditor may
not thereafter exercise any other option, unless the chosen alternative proves to be innefectual or
unavailing due to no fault on his part. This rule, in essence, is the difference between alternative
obligations, on the one hand, and alternative remedies, upon the other hand, where, in the latter case,
the choice generally becomes conclusive only upon the exercise of the remedy. For instance, in one
of the remedies expressed in Article 1484 of the Civil Code, it is only when there has been a foreclosure
of the chattel mortgage that the vendee-mortgagor would be permitted to escape from a deficiency
liability. Thus, if the case is one for specific performance, even when this action is selected after the
vendee has refused to surrender the mortgaged property to permit an extrajudicial foreclosure, that
property may still be levied on execution and an alias writ may be issued if the proceeds thereof are
insufficient to satisfy the judgment
credit.7 So, also, a mere demand to surrender the object which is not heeded by the mortgagor will not
amount to a foreclosure,8 but the repossession thereof by the vendor-mortgagee would have the effect
of a foreclosure.
The parties here concede that the action for replevin has been instituted for the foreclosure of the
vehicle in question (now in the possession of private respondent). The sole issue raised before us in
this appeal is focused on the legal propriety of the affirmance by the appellate court of the awards
made by the court a quo of liquidated damages and attorney's fees to private respondent. Petitioners
hold that under Article 1484 of the Civil Code, aforequoted, the vendor-mortgagee or its assignees
loses any right "to recover any unpaid balance of the price" and any "agreement to the contrary (would
be) void.
The argument is aptly made. In Macondray & Co. vs. Eustaquio,9 we have said that the phrase "any
unpaid balance" can only mean the deficiency judgment to which the mortgagee may be entitled to
when the proceeds from the auction sale are insufficient to cover the "full amount of the secured
obligations which . . . include interest on the principal, attorney's fees, expenses of collection, and the
costs." In sum, we have observed that the legislative intent is not to merely limit the proscription of any
further action to the "unpaid balance of the principal" but, as so later ruled in Luneta Motor Co. vs.
Salvador, 10 to all other claims that may be likewise be called in for in the accompanying promissory
note against the buyer-mortgagor or his guarantor, including costs and attorney's fees.
In Filipinas Investment & Finance Corporation vs. Ridad 11 while we reiterated and expressed our
agreement on the basic philosophy behind Article 1484, we stressed, nevertheless, that the protection
given to the buyer-mortgagor should not be considered to be without circumscription or as being
preclusive of all other laws or legal principles. Hence, borrowing from the examples made in Filipinas
Investment, where the mortgagor unjustifiably refused to surrender the chattel subject of the mortgage
upon failure of two or more installments, or if he concealed the chattel to place it beyond the reach of
the mortgagee, that thereby constrained the latter to seek court relief, the expenses incurred for the
prosecution of the case, such as attorney's fees, could rightly be awarded.
Private respondent bewails the instant petition in that petitioners have failed to specifically raise the
issue on liquidated damages and attorney's fees stipulated in the actionable documents. In several
cases, we have ruled that as long as the questioned items bear relevance and close relation to those
specifically raised, the interest of justice would dictate that they, too, must be considered and resolved
and that the rule that only theories raised in the initial proceedings may be taken up by a party thereto
on appeal should only refer to independent, not concomitant matters, to support or oppose the cause
of action.12
Given the circumstances, we must strike down the award for liquidated damages made by the court a
quo but we uphold the grant of attorney's fees which we, like the appellate court, find it to be
reasonable. Parenthetically, while the promissory note may appear to have been a negotiable
instrument, private respondent, however, clearly cannot claim unawareness of its accompanying
documents so as to thereby gain a right greater than that of the assignor.
WHEREFORE, the appealed decision is MODIFIED by deleting therefrom the award for liquidated damages; in all
other respects, the judgment of the appellate court is AFFIRMED. No costs.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 151168 August 25, 2010
CEBU AUTOMETIC MOTORS, INC. and TIRSO UYTENGSU III, Petitioners,

vs.
GENERAL MILLING CORPORATION, Respondent.
DECISION
BRION, J.:
We resolve the petition filed by Cebu Autometic Motors, Inc. (CAMI) to assail the decision 1 of the Court of Appeals
(CA) in CA-G.R. SP No. 64363. The CA decision:
a) reversed and set aside the decision of the Regional Trial Court of Cebu, Branch 16 (RTC) in Civil
Case No. CEB-25804 dismissing respondent General Milling Corporations (GMC) unlawful detainer
complaint against CAMI;2 and
b) reinstated the decision of the Municipal Trial Court in Cities (MTCC) in Civil Case no. R-419233
ordering: CAMI to vacate the subject property; and CAMI and Tirso Uytengsu III (Uytengsu) to pay
GMC actual damages in the amount of 20,000.00 a month from the date of demand until property
has been vacated, as well as 50,000.00 for attorneys fees.
FACTUAL ANTECEDENTS
GMC, a domestic corporation, is the registered owner of the GMC Plaza Complex, a commercial building on Legaspi
Extension corner McArthur Boulevard, Cebu City. On February 2, 1998, GMC, represented by its General Manager,
Luis Calalang Jr. (Calalang), entered into a contract with CAMI, a domestic corporation, for the lease of a 2,906 square
meter commercial space within GMCs building (leased premises).
The lease contract was for a period of twenty (20) years, with the monthly rental fixed at 10,000.00. The contract
further stipulated that the property shall be used exclusively by CAMI as a garage and repair shop for vehicles, 4 and
imposed upon CAMI the following terms and conditions:
C. The LESSEE shall upon the signing of this contract immediately deposit with the LESSOR the
following amounts:
a. The sum of PESOS: - TEN THOUSAND & 00/100 (10,000.00) inclusive of VAT Philippine
currency, to be applied as rental for the last month;
b. The sum PESOS TEN THOUSAND & 00/100 (10,000.00) as guarantee deposit to
defray the cost of the repairs necessary to keep the leased premises in a good state of repair
and to pay the LESSEES unpaid bills from the various utility services in the leased premises;
that this amount shall be refundable, if upon the termination of this contract, the leased
premises are in good state of repair and the various utility bills have been paid.
xxxx
H. The LESSEE shall not place or install any signboard, billboard, neon lights, or other form of
advertising signs on the leased premises or on any part thereof, except upon the prior written consent
of the LESSOR.
xxxx
M. Finally, the failure on the part of the LESSOR to insist upon a strict performance of any of the terms,
conditions and covenants hereof shall not be deemed a relinquishment or waiver of any right or remedy
that said LESSOR may have, nor shall it be construed as a waiver of any subsequent breach or default
of the terms, conditions and covenants herein contained, unless expressed in writing and signed by
the LESSOR or its duly authorized representative.5
According to GMC, CAMI violated the provisions of the lease contract when: a) CAMI subleased a portion of the
leased premises without securing GMCs prior written consent; b) CAMI introduced improvements to the leased
premises without securing GMCs consent; and c) CAMI did not deliver the required advance rental and deposit to
GMC upon the execution of the lease contract.
On June 11, 1999, GMC sent CAMI a letter informing the latter that it was terminating the lease contract and
demanding that CAMI vacate the premises and settle all its unpaid accounts before the end of that month.
On July 7, 1999, GMC filed a complaint for unlawful detainer with the MTCC against CAMI, asserting that it terminated
the lease contract on June 11, 1999 because CAMI violated the terms of the contract and continued to do so despite
GMCs repeated demands and reminders for compliance; and that CAMI refused to vacate the leased premises. GMC
also impleaded Uytengsu, the General Manager of CAMI, in his official and personal capacities.
In response, CAMI denied that it had subleased any portion of the leased premises. On the improvements allegedly
introduced without GMCs consent, CAMI explained that these were introduced prior to the execution of the present
lease contract; in fact, these improvements were made with GMCs knowledge and were the reason why GMC decided
to enter into the present lease contract with CAMI for 20 years at the low rental of only 10,000.00 a month. On its
alleged failure to deliver the advance rental and deposit, CAMI pointed out that Calalang, GMCs representative, had
verbally waived this requirement. Moreover, CAMI contended that a party is considered in default only if it fails to
comply with the demand to observe the terms and conditions of the contract. Since CAMI immediately deposited the
amount of 20,000.00 with the court as advance rental and deposit after it learned of the unlawful detainer complaint,
it could not be considered in default. Consequently, CAMI posits that it did not violate any of the provisions of the
lease contract, and GMC had no right to terminate the lease contract and to demand CAMIs ejectment from the
leased premises.
On July 5, 2000, the MTCC rendered its decision in favor of GMC. The dispositive portion of its ruling reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff [GMC] and against the defendant [CAMI], to wit:
1. Ordering the defendants and all other person (sic) staying in the premises of the plaintiff to vacate
the property and remove all their temporary structure therein;
2. Ordering the defendants to pay plaintiff compensatory damages in the amount of 20,000.00 a
month from date (sic) demand until defendants vacate plaintiff property;
3. Ordering the defendants to pay plaintiff Attorneys Fees in the amount of 50,000.00;
4. Ordering the defendants to pay the costs.

SO ORDERED.
The RTC reversed the MTCC decision and dismissed GMCs complaint after finding that CAMI had not violated the
terms and conditions of the lease contract. The RTC learned that Calalang had waived payment of the advance rental
and deposit, and had given his consent to the introduction of improvements, signboards and alterations on the leased
premises. The RTC also held that CAMI did not sublease the premises.
GMC sought relief from the RTC decision through a petition for review with the CA. GMC claimed that Calalangs
waiver of the advance rental and deposit was void since it was not in writing. In response, CAMI questioned whether
GMC had complied with the requisites of Section 2, Rule 70 of the Rules of Court prior to the filing of the unlawful
detainer complaint an issue that, according to GMC, was raised for the first time before the CA.
In the assailed September 28, 2001 decision, the CA reversed the RTC decision and held that even though the
advance rental and deposit payments could be waived under the contract, the waiver had to be in writing and signed
by a duly authorized representative of GMC in order to be effective. Since Calalangs waiver was not contained in a
written document, it could not bind GMC.
As to the contention that GMC failed to comply with the jurisdictional requirement found in Section 2, Rule 70 of the
Rules of Court, the CA held that such a belated claim could no longer be entertained at that late stage of the
proceedings. Since CAMI freely litigated on the issues presented by GMC before the lower courts without raising this
issue, it cannot now raise the issue on the basis of estoppel.
THE PETITION
CAMI now comes to this Court via a petition for review on certiorari,6 claiming that the CA committed reversible error
in its September 28, 2001 decision and November 22, 2001 resolution.
First, CAMI contends that the demand letter sent by GMC merely stated that it expected CAMI to vacate the premises
and pay all its unsettled accounts by the end of June 1999; the letter did not demand compliance with the terms of the
contract. Thus, CAMI could not be considered in default and GMC had no cause to terminate the lease contract. The
defective demand letter also failed to comply with the demand required by Section 2, Rule 70 of the Rules of Court;
pursuant to Arquelada v. Philippine Veterans Bank7 which held that the demand from the lessor to pay or to comply
with the conditions of the lease and to vacate the premises must be alleged in the complaint for unlawful detainer for
the MTCC to acquire jurisdiction over the case the MTCC thus failed to acquire jurisdiction over GMCs complaint
against it.
Next, CAMI assails the CA interpretation of paragraph M of the lease contract.8 According to CAMI, paragraph M only
applies when the waiver refers to the right of GMC to take action for any violation of the terms and conditions of the
contract. Where the waiver relates to the performance of the term or condition, such as waiver of the payment of
advance rental and deposit, the waiver does not need to be in writing.
Last, CAMI questions the reinstatement of the MTCC decision, which ordered CAMI and Uytengsu to pay for actual
damages to GMC in the amount of 20,000.00 per month from the time of demand until CAMI actually vacated the
property, and attorneys fees in the amount of 50,000. CAMI assails the award of damages for having no legal or
factual basis.
GMC, on the other hand, contends that CAMI never raised the issue of GMCs lack of demand before either the MTCC
or the RTC as one of its defenses; instead, this issue, as well as the corresponding issue of the MTCCs lack of
jurisdiction, was raised for the first time on appeal before the CA. GMC also reiterates the CAs ruling that any waiver
of the lease contracts terms and conditions must be in writing in order to be effective. Finally, GMC dismisses CAMIs
questions on the inclusion of Uytengsu, as well as the award of actual damages and attorneys fees, for not having
been raised before the lower courts.
THE COURTS RULING
We resolve to grant the petition.

Petition raises factual questions
In petitions for review on certiorari under Rule 45 of the Rules of Civil Procedure, only questions of law may be raised
and passed upon by this Court. As in any general rule, however, certain exceptions may exist. 9 In the present case,
we are asked to either uphold GMCs unlawful detainer complaint or dismiss it outright under a situation where the
findings of facts of the trial court and the appellate court conflict with each other, which is one of the recognized
exceptions to the requirement that Rule 45 petitions deal only with questions of law. If necessary, therefore, we can
examine the evidence on record in this case and determine the truth or falsity of the parties submissions and
allegations.
On the issue of demand
GMC claims that CAMI belatedly raised the issue of lack of demand. On the other hand, CAMI contends in its Motion
to Admit Reply10 that it raised this defense as early as its Answer before the MTCC.
We agree with CAMI. The MTCC decision, which quoted CAMIs Answer extensively, clearly shows that CAMI stated
that it will be in default with respect to the advance rental and deposit only after GMC has made a demand for the
payment. CAMI also stated that it had already deposited the advance rental and deposit with the Clerk of Court of the
MTCC. Lastly, CAMI denied GMCs claim in its complaint that a demand had been made.11 These statements, taken
together, clearly belie GMCs claim that CAMI never raised the lack of demand as an issue before the lower court.
Another issue raised, relating to demand, is whether GMC sent CAMI the required demand letter. Invoking Article
1169 of the Civil Code,12 CAMI principally contends that it could not be considered in default because GMC never sent
a proper demand letter.
CAMI, in invoking Article 1169, apparently overlooked that what is involved is not a mere mora or delay in the
performance of a generic obligation to give or to do that would eventually lead to the remedy of rescission or specific
performance. What is involved in the case is a contract of lease and the twin remedies of rescission and judicial
ejectment after either the failure to pay rent or to comply with the conditions of the lease. This situation calls for the
application, not of Article 1169 of the Civil Code but, of Article 1673 in relation to Section 2, Rule 70 of the Rules of
Court. Article 1673 states:
Article 1673. The lessor may judicially eject the lessee for any of the following causes:
xxxx
(3) Violation of any of the conditions agreed upon in the contract; xxx
Based on this provision, a lessor may judicially eject (and thereby likewise rescind the contract of lease) the lessee if
the latter violates any of the conditions agreed upon in the lease contract. Implemented in accordance with Section 2,
Rule 70, the lessor is not required to first bring an action for rescission, but may ask the court to do so and
simultaneously seek the ejecment of the lessee in a single action for unlawful detainer. 13 Section 2, Rule 70 of the
Rules of Court provides:
Sec. 2. Lessor to proceed against lessee only after demand.
Unless otherwise stipulated, such action by the lessor shall be commenced only after demand to pay or comply
with the conditions of the lease and to vacate is made upon the lessee, or by serving written notice of such
demand upon the person found on the premises, or by posting such notice on the premises if no person be found
thereon, and the lessee fails to comply therewith after fifteen (15) days in the case of land or five (5) days in the case
of buildings. [Emphasis supplied.]
GMC insists that it complied with the required demand when it sent CAMI the following letter:
June 11, 1999

CEBU AUTOMETIC MOTORS, INC.
GMC Plaza Complex
Legaspi Extension cor.
MacArthur Boulevard
Cebu City
ATTENTION: MR. TIRSO UYTENGSU III
Gentlemen:
We are informing you of the termination of the Contract of Lease over our clients, General Milling Corporation premises
at GMC Plaza Complex effective June 30, 1999.
Your repeated violations of the terms of the contract, failure to deposit the required amounts (equivalent to two to
three months rent) the subleasing of a portion of the leased premises without the required prior written consent, the
introduction of improvements and alterations and the installation of a signboard without the prior written consent, leave
us no choice.
It should be mentioned that the latest Contract of Lease was questionably entered by you and Mr. Luis Calalang, Jr.
hurriedly, knowing fully well that the same was completely one-sided in your favor and totally disadvantageous to
GMC. It was as if there was a plot or scheme to take advantage of the situation at the time.
We expect you to vacate the premises, settle all your unpaid accounts on or before the end of June, 1999. [Emphasis
supplied.]
With this demand letter as evidence, we hold it undisputed that GMC did serve a prior demand on CAMI. The question,
however, is whether this is the demand that Section 2, Rule 70 of the Rules of Court contemplates as a jurisdictional
requirement before a lessor can undertake a judicial ejectment pursuant to Article 1673 of the Civil Code.
Section 2, Rule 70, on its face, involves two demands that may be made in the same demand letter, namely, (1) the
demand for payment of the amounts due the lessor, or the compliance with the conditions of the lease, and (2) the
demand to vacate the premises. These demands, of course, are not intended to be complied with at the same time;
otherwise, the provision becomes contradictory as it is pointless to demand payment or compliance if the demand to
vacate is already absolute and must be heeded at the same time as the demand to pay or to comply. It is only after
the demands for payment or compliance are made on the lessee and subsequently rejected or ignored that the basis
for the unlawful detainer action arises.
The twin aspects of the demand letter can best be understood when Section 2, Rule 70 is read and understood as
the specific implementing procedural rule to carry out the results that Article 1673 mandates the rescission of the
contract of lease and the judicial ejectment of the lessee. The judicial rescission of a contract of lease is essentially
governed by Article 1659 of the Civil Code, grounded on the breach of the parties statutory obligations: in the case of
the lessee, for its failure to pay the rent or to use the property under lease for the purpose it was intended. Article
1673, read with Section 2, Rule 70 of the Rules, does away with the need for an independent judicial action to rescind
prior to ejectment by combining these remedies in an unlawful detainer action.
The law of contracts (essentially, Articles 1191 of the Civil Code for judicial rescission and Article 1659 for the judicial
rescission of lease agreements) firmly establishes that the failure to pay or to comply with the contractual term does
not, by itself, give rise to a cause of action for rescission; the cause of action only accrues after the lessee has been
in default for its failure to heed the demand to pay or to comply.14 With the contract judicially rescinded, the demand
to vacate finds full legal basis.
Article 1673, implemented pursuant to Section 2, Rule 70, does away with a separate judicial action for rescission,
and allows under a single complaint the judicial ejectment of the lessee after extrajudicial rescission has taken place.
These combined remedies account for the separate aspects of the demand letter: the demand to pay rentals or to
comply with the terms of the lease, and to vacate. The tenant's refusal to heed the demand to vacate, coming after
the demand to pay or to comply similarly went unheeded, renders unlawful the continued possession of the leased
premises; hence, the unlawful detainer action.15
In Dio v. Concepcion, we ruled that:
Under Article 1673 of the Civil Code, the lessor may judicially eject the lessee for, among other causes: (1) lack of
payment of the price stipulated; or (2) violation of any of the conditions agreed upon in the contract. Previous to the
institution of such action, the lessor must make a demand upon the lessee to pay or comply with the conditions of the
lease and to vacate the premises. It is the owners demand for the tenant to vacate the premises and the tenants
refusal to do so which makes unlawful the withholding of possession.16 Such refusal violates the owners right of
possession giving rise to an action for unlawful detainer. [Emphasis supplied.]
Mr. Justice Jose Vitug further explained the Courts action in this case in his Separate Opinion when he said:
I just would like to add, by way of clarification, that the principal remedies open to an obligee, upon the breach of an
obligation, are generally judicial in nature and must be independently sought in litigation, i.e., an action for performance
(specific, substitute or equivalent) or rescission (resolution) of a reciprocal obligation. The right to rescind (resolve) is
recognized in reciprocal obligations; it is implicit, however, in third paragraph of Article 1191 of the Civil Code that the
rescission there contemplated can only be invoked judicially. Hence, the mere failure of a party to comply with what
is incumbent upon him does not ipso jure produce the rescission (resolution) of the obligation.
Exceptionally, under the law and, to a limited degree, by agreement of the parties, extrajudicial remedies may become
available such as, in the latter case, an option to rescind or terminate a contract upon the violation of a resolutory
facultative condition. In the case of lease agreements, despite the absence of an explicit stipulation, that option has
been reserved by law in favor of a lessee under Article 1673 of the Civil Code by providing that the lessor may judicially
eject the lessee for, among other grounds, a violation of any of the conditions agreed upon in the contract. The
provision, read in conjunction with Section 2, Rule 70, of the 1997 Rules of Civil Procedure, would, absent a contrary
stipulation, merely require a written demand on the lessee to pay or to comply with the conditions of the lease and to
vacate the premises prior to the institution of an action for ejectment. The above provisions, in effect, authorizes the
lessor to terminate extrajudicially the lease (with the same effect as rescission) by simply serving due notice to the
lessee.
In this particular instance, therefore, the only relevant court jurisdiction involved is that of the first level court in the
action for ejectment, an independent judicial action for rescission being unnecessary.
Thus, as further clarified, an extrajudicial rescission gave rise to the demand to vacate that, upon being refused,
rendered the possession illegal and laid the lessee open to ejectment. The rescission, an extrajudicial one, was
triggered by the lessees refusal to pay the rent or to comply with the terms of the lease. The Court put it in plainer
terms in Arquelada v. Philippine Veterans Bank:17 where it said:
As contemplated in Section 2, the demand required is the demand to pay or comply with the conditions of the lease
and not merely a demand to vacate. Consequently, both demands - either to pay rent or adhere to the terms of the
lease and vacate are necessary to make the lessee a deforciant in order that an ejectment suit may be filed. It is the
lessor's demand for the lessee to vacate the premises and the tenant's refusal to do so which makes unlawful the
withholding of the possession. Such refusal violates the lessor's right of possession giving rise to an action for unlawful
detainer. However, prior to the institution of such action, a demand from the lessor to pay or comply with the conditions
of the lease and to vacate the premises is required under the aforequoted rule. Thus, mere failure to pay the rents
due or violation of the terms of the lease does not automatically render a person's possession unlawful. Furthermore,
the giving of such demands must be alleged in the complaint, otherwise the MTC cannot acquire jurisdiction over the
case. [Emphasis supplied.]
A close examination of GMCs letter to CAMI tells us that the letter merely informed recipient CAMI that GMC had
terminated the lease based on the cited violations of the terms of the lease, and on the basis of this termination,
required CAMI to vacate the premises by the end of the month. In other words, the letter did not demand compliance
with the terms of the lease; GMC was past this point as it had rescinded the contract of lease and was already
demanding that the leased premises be vacated and the amounts owing be paid. Thus, whether or not the amounts
due were paid, the lease remained terminated because of the cited violations.
From this perspective, GMC did not fully comply with the requirements of Section 2, Rule 70. Technically, no
1wphi1
extrajudicial rescission effectively took place as a result of the cited violations until the demand to pay or comply was
duly served and was rejected or disregarded by the lessee. This aspect of the demand letter missing in the demand
letter and whose rejection would have triggered the demand to vacate gave GMC no effective cause of action to
judicially demand the lessees ejectment. All these, the appellate court unfortunately failed to appreciate.
Our above conclusion renders unnecessary any further ruling on the merits of the parties positions on the existence
of the substantive grounds for rescission and ejectment.
WHEREFORE, premises considered, we GRANT the petition and REVERSE and SET ASIDE the decision of the
Court of Appeals dated September 28, 2001 in CA-G.R. SP. No. 64363. We accordingly DECLARE General Milling
Corporations complaint for unlawful detainer, Civil Case No. R-41923 before the Municipal Trial Court in Cities of
Cebu City, DISMISSED for lack of cause of action. Costs against the respondent General Milling Corporation.
SO ORDERED.
G.R. No. 155173 November 23, 2004
LAFARGE CEMENT PHILIPPINES, INC., (formerly Lafarge Philippines, Inc.), LUZON CONTINENTAL LAND
CORPORATION, CONTINENTAL OPERATING CORPORATION and PHILIP ROSEBERG, petitioners,
vs.
CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM and ANTHONY A. MARIANO, respondents.
DECISION
PANGANIBAN, J.:
May defendants in civil cases implead in their counterclaims persons who were not parties to the original complaints?
This is the main question to be answered in this controversy.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to nullify the May 22, 2002 2 and the
September 3, 2002 Orders3 of the Regional Trial Court (RTC) of Quezon City (Branch 80) in Civil Case No. Q-00-
41103. The decretal portion of the first assailed Order reads:
"WHEREFORE, in the light of the foregoing as earlier stated, the plaintiff's motion to dismiss claims is
granted. Accordingly, the defendants' claims against Mr. Lim and Mr. Mariano captioned as their
counterclaims are dismissed."4
The second challenged Order denied petitioners' Motion for Reconsideration.
The Facts
Briefly, the origins of the present controversy can be traced to the Letter of Intent (LOI) executed by both parties on
August 11, 1998, whereby Petitioner Lafarge Cement Philippines, Inc. (Lafarge) -- on behalf of its affiliates and other
qualified entities, including Petitioner Luzon Continental Land Corporation (LCLC) -- agreed to purchase the cement
business of Respondent Continental Cement Corporation (CCC). On October 21, 1998, both parties entered into a
Sale and Purchase Agreement (SPA). At the time of the foregoing transactions, petitioners were well aware that CCC
had a case pending with the Supreme Court. The case was docketed as GR No. 119712, entitled Asset Privatization
Trust (APT) v. Court of Appeals and Continental Cement Corporation.
In anticipation of the liability that the High Tribunal might adjudge against CCC, the parties, under Clause 2 (c) of the
SPA, allegedly agreed to retain from the purchase price a portion of the contract price in the amount of
P117,020,846.84 -- the equivalent of US$2,799,140. This amount was to be deposited in an interest-bearing account
in the First National City Bank of New York (Citibank) for payment to APT, the petitioner in GR No. 119712.
However, petitioners allegedly refused to apply the sum to the payment to APT, despite the subsequent finality of the
Decision in GR No. 119712 in favor of the latter and the repeated instructions of Respondent CCC. Fearful that
nonpayment to APT would result in the foreclosure, not just of its properties covered by the SPA with Lafarge but of
several other properties as well, CCC filed before the Regional Trial Court of Quezon City on June 20, 2000, a
"Complaint with Application for Preliminary Attachment" against petitioners. Docketed as Civil Case No. Q-00-41103,
the Complaint prayed, among others, that petitioners be directed to pay the "APT Retained Amount" referred to in
Clause 2 (c) of the SPA.
Petitioners moved to dismiss the Complaint on the ground that it violated the prohibition on forum-shopping.
Respondent CCC had allegedly made the same claim it was raising in Civil Case No. Q-00-41103 in another action,
which involved the same parties and which was filed earlier before the International Chamber of Commerce. After the
trial court denied the Motion to Dismiss in its November 14, 2000 Order, petitioners elevated the matter before the
Court of Appeals in CA-GR SP No. 68688.
In the meantime, to avoid being in default and without prejudice to the outcome of their appeal, petitioners filed their
Answer and Compulsory Counterclaims ad Cautelam before the trial court in Civil Case No. Q-00-41103. In their
Answer, they denied the allegations in the Complaint. They prayed -- by way of compulsory counterclaims against
Respondent CCC, its majority stockholder and president Gregory T. Lim, and its corporate secretary Anthony A.
Mariano -- for the sums of (a) P2,700,000 each as actual damages, (b) P100,000,000 each as exemplary damages,
(c) P100,000,000 each as moral damages, and (d) P5,000,000 each as attorney's fees plus costs of suit.
Petitioners alleged that CCC, through Lim and Mariano, had filed the "baseless" Complaint in Civil Case No. Q-00-
41103 and procured the Writ of Attachment in bad faith. Relying on this Court's pronouncement in Sapugay v. CA, 5
petitioners prayed that both Lim and Mariano be held "jointly and solidarily" liable with Respondent CCC.
On behalf of Lim and Mariano who had yet to file any responsive pleading, CCC moved to dismiss petitioners'
compulsory counterclaims on grounds that essentially constituted the very issues for resolution in the instant Petition.
Ruling of the Trial Court
On May 22, 2002, the Regional Trial Court of Quezon City (Branch 80) dismissed petitioners' counterclaims for several
reasons, among which were the following: a) the counterclaims against Respondents Lim and Mariano were not
compulsory; b) the ruling in Sapugay was not applicable; and c) petitioners' Answer with Counterclaims violated
procedural rules on the proper joinder of causes of action.6
Acting on the Motion for Reconsideration filed by petitioners, the trial court -- in an Amended Order dated September
3, 20027 -- admitted some errors in its May 22, 2002 Order, particularly in its pronouncement that their counterclaim
had been pleaded against Lim and Mariano only. However, the RTC clarified that it was dismissing the counterclaim
insofar as it impleaded Respondents Lim and Mariano, even if it included CCC.
Hence this Petition.8
Issues
In their Memorandum, petitioners raise the following issues for our consideration:
"[a] Whether or not the RTC gravely erred in refusing to rule that Respondent CCC has no personality
to move to dismiss petitioners' compulsory counterclaims on Respondents Lim and Mariano's behalf.
"[b] Whether or not the RTC gravely erred in ruling that (i) petitioners' counterclaims against
Respondents Lim and Mariano are not compulsory; (ii) Sapugay v. Court of Appeals is inapplicable
here; and (iii) petitioners violated the rule on joinder of causes of action."9
For clarity and coherence, the Court will resolve the foregoing in reverse order.
The Court's Ruling
The Petition is meritorious.
First Issue:
Counterclaims and Joinder of Causes of Action.
Petitioners' Counterclaims Compulsory
Counterclaims are defined in Section 6 of Rule 6 of the Rules of Civil Procedure as "any claim which a defending party
may have against an opposing party." They are generally allowed in order to avoid a multiplicity of suits and to facilitate
the disposition of the whole controversy in a single action, such that the defendant's demand may be adjudged by a
counterclaim rather than by an independent suit. The only limitations to this principle are (1) that the court should have
jurisdiction over the subject matter of the counterclaim, and (2) that it could acquire jurisdiction over third parties whose
presence is essential for its adjudication.10
A counterclaim may either be permissive or compulsory. It is permissive "if it does not arise out of or is not necessarily
connected with the subject matter of the opposing party's claim."11 A permissive counterclaim is essentially an
independent claim that may be filed separately in another case.
A counterclaim is compulsory when its object "arises out of or is necessarily connected with the transaction or
occurrence constituting the subject matter of the opposing party's claim and does not require for its adjudication the
presence of third parties of whom the court cannot acquire jurisdiction."12
Unlike permissive counterclaims, compulsory counterclaims should be set up in the same action; otherwise, they
would be barred forever. NAMARCO v. Federation of United Namarco Distributors13 laid down the following criteria to
determine whether a counterclaim is compulsory or permissive: 1) Are issues of fact and law raised by the claim and
by the counterclaim largely the same? 2) Would res judicata bar a subsequent suit on defendant's claim, absent the
compulsory counterclaim rule? 3) Will substantially the same evidence support or refute plaintiff's claim as well as
defendant's counterclaim? 4) Is there any logical relation between the claim and the counterclaim? A positive answer
to all four questions would indicate that the counterclaim is compulsory.
Adopted in Quintanilla v. CA14 and reiterated in Alday v. FGU Insurance Corporation,15 the "compelling test of
compulsoriness" characterizes a counterclaim as compulsory if there should exist a "logical relationship" between the
main claim and the counterclaim. There exists such a relationship when conducting separate trials of the respective
claims of the parties would entail substantial duplication of time and effort by the parties and the court; when the
multiple claims involve the same factual and legal issues; or when the claims are offshoots of the same basic
controversy between the parties.
We shall now examine the nature of petitioners' counterclaims against respondents with the use of the foregoing
parameters.
Petitioners base their counterclaim on the following allegations:
"Gregory T. Lim and Anthony A. Mariano were the persons responsible for making the bad faith
decisions for, and causing plaintiff to file this baseless suit and to procure an unwarranted writ of
attachment, notwithstanding their knowledge that plaintiff has no right to bring it or to secure the writ.
In taking such bad faith actions, Gregory T. Lim was motivated by his personal interests as one of the
owners of plaintiff while Anthony A. Mariano was motivated by his sense of personal loyalty to Gregory
T. Lim, for which reason he disregarded the fact that plaintiff is without any valid cause.
"Consequently, both Gregory T. Lim and Anthony A. Mariano are the plaintiff's co-joint tortfeasors in
the commission of the acts complained of in this answer and in the compulsory counterclaims pleaded
below. As such they should be held jointly and solidarily liable as plaintiff's co-defendants to those
compulsory counterclaims pursuant to the Supreme Court's decision in Sapugay v. Mobil.
xxx xxx xxx
"The plaintiff's, Gregory T. Lim and Anthony A. Mariano's bad faith filing of this baseless case has
compelled the defendants to engage the services of counsel for a fee and to incur costs of litigation,
in amounts to be proved at trial, but in no case less than P5 million for each of them and for which
plaintiff Gregory T. Lim and Anthony A. Mariano should be held jointly and solidarily liable.
"The plaintiff's, Gregory T. Lim's and Anthony A. Mariano's actions have damaged the reputations of
the defendants and they should be held jointly and solidarily liable to them for moral damages of P100
million each.
"In order to serve as an example for the public good and to deter similar baseless, bad faith litigation,
the plaintiff, Gregory T. Lim and Anthony A. Mariano should be held jointly and solidarily liable to the
defendants for exemplary damages of P100 million each." 16
The above allegations show that petitioners' counterclaims for damages were the result of respondents' (Lim and
Mariano) act of filing the Complaint and securing the Writ of Attachment in bad faith. Tiu Po v. Bautista 17 involved the
issue of whether the counterclaim that sought moral, actual and exemplary damages and attorney's fees against
respondents on account of their "malicious and unfounded" complaint was compulsory. In that case, we held as
follows:
"Petitioners' counterclaim for damages fulfills the necessary requisites of a compulsory counterclaim.
They are damages claimed to have been suffered by petitioners as a consequence of the action filed
against them. They have to be pleaded in the same action; otherwise, petitioners would be precluded
by the judgment from invoking the same in an independent action. The pronouncement in Papa vs.
Banaag (17 SCRA 1081) (1966) is in point:
"Compensatory, moral and exemplary damages, allegedly suffered by the creditor in consequence of
the debtor's action, are also compulsory counterclaim barred by the dismissal of the debtor's action.
They cannot be claimed in a subsequent action by the creditor against the debtor."
"Aside from the fact that petitioners' counterclaim for damages cannot be the subject of an independent
action, it is the same evidence that sustains petitioners' counterclaim that will refute private
respondent's own claim for damages. This is an additional factor that characterizes petitioners'
counterclaim as compulsory."18
Moreover, using the "compelling test of compulsoriness," we find that, clearly, the recovery of petitioners'
counterclaims is contingent upon the case filed by respondents; thus, conducting separate trials thereon will result in
a substantial duplication of the time and effort of the court and the parties.
Since the counterclaim for damages is compulsory, it must be set up in the same action; otherwise, it would be barred
forever. If it is filed concurrently with the main action but in a different proceeding, it would be abated on the ground
of litis pendentia; if filed subsequently, it would meet the same fate on the ground of res judicata.19
Sapugay v. Court of Appeals Applicable to the Case at Bar
Sapugay v. Court of Appeals finds application in the present case. In Sapugay, Respondent Mobil Philippines filed
before the trial court of Pasig an action for replevin against Spouses Marino and Lina Joel Sapugay. The Complaint
arose from the supposed failure of the couple to keep their end of their Dealership Agreement. In their Answer with
Counterclaim, petitioners alleged that after incurring expenses in anticipation of the Dealership Agreement, they
requested the plaintiff to allow them to get gas, but that it had refused. It claimed that they still had to post a surety
bond which, initially fixed at P200,000, was later raised to P700,000.
The spouses exerted all efforts to secure a bond, but the bonding companies required a copy of the Dealership
Agreement, which respondent continued to withhold from them. Later, petitioners discovered that respondent and its
manager, Ricardo P. Cardenas, had intended all along to award the dealership to Island Air Product Corporation.
In their Answer, petitioners impleaded in the counterclaim Mobil Philippines and its manager -- Ricardo P. Cardenas
-- as defendants. They prayed that judgment be rendered, holding both jointly and severally liable for pre-operation
expenses, rental, storage, guarding fees, and unrealized profit including damages. After both Mobil and Cardenas
failed to respond to their Answer to the Counterclaim, petitioners filed a "Motion to Declare Plaintiff and its Manager
Ricardo P. Cardenas in Default on Defendant's Counterclaim."
Among the issues raised in Sapugay was whether Cardenas, who was not a party to the original action, might
nevertheless be impleaded in the counterclaim. We disposed of this issue as follows:
"A counterclaim is defined as any claim for money or other relief which a defending party may have
against an opposing party. However, the general rule that a defendant cannot by a counterclaim bring
into the action any claim against persons other than the plaintiff admits of an exception under Section
14, Rule 6 which provides that 'when the presence of parties other than those to the original action is
required for the granting of complete relief in the determination of a counterclaim or cross-claim, the
court shall order them to be brought in as defendants, if jurisdiction over them can be obtained.' The
inclusion, therefore, of Cardenas in petitioners' counterclaim is sanctioned by the rules."20
The prerogative of bringing in new parties to the action at any stage before judgment is intended to accord complete
relief to all of them in a single action and to avert a duplicity and even a multiplicity of suits thereby.
In insisting on the inapplicability of Sapugay, respondents argue that new parties cannot be included in a counterclaim,
except when no complete relief can be had. They add that "[i]n the present case, Messrs. Lim and Mariano are not
necessary for petitioners to obtain complete relief from Respondent CCC as plaintiff in the lower court. This is because
Respondent CCC as a corporation with a separate [legal personality] has the juridical capacity to indemnify petitioners
even without Messrs. Lim and Mariano."21
We disagree. The inclusion of a corporate officer or stockholder -- Cardenas in Sapugay or Lim and Mariano in the
instant case -- is not premised on the assumption that the plaintiff corporation does not have the financial ability to
answer for damages, such that it has to share its liability with individual defendants. Rather, such inclusion is based
on the allegations of fraud and bad faith on the part of the corporate officer or stockholder. These allegations may
warrant the piercing of the veil of corporate fiction, so that the said individual may not seek refuge therein, but may be
held individually and personally liable for his or her actions.
In Tramat Mercantile v. Court of Appeals,22 the Court held that generally, it should only be the corporation that could
properly be held liable. However, circumstances may warrant the inclusion of the personal liability of a corporate
director, trustee, or officer, if the said individual is found guilty of bad faith or gross negligence in directing corporate
affairs.
Remo Jr. v. IAC23 has stressed that while a corporation is an entity separate and distinct from its stockholders, the
corporate fiction may be disregarded if "used to defeat public convenience, justify a wrong, protect fraud, or defend
crime." In these instances, "the law will regard the corporation as an association of persons, or in case of two
corporations, will merge them into one." Thus, there is no debate on whether, in alleging bad faith on the part of Lim
and Mariano the counterclaims had in effect made them "indispensable parties" thereto; based on the alleged facts,
both are clearly parties in interest to the counterclaim.24
Respondents further assert that "Messrs. Lim and Mariano cannot be held personally liable [because their assailed
acts] are within the powers granted to them by the proper board resolutions; therefore, it is not a personal decision
but rather that of the corporation as represented by its board of directors."25 The foregoing assertion, however, is a
matter of defense that should be threshed out during the trial; whether or not "fraud" is extant under the circumstances
is an issue that must be established by convincing evidence.26
Suability and liability are two distinct matters. While the Court does rule that the counterclaims against Respondent
CCC's president and manager may be properly filed, the determination of whether both can in fact be held jointly and
severally liable with respondent corporation is entirely another issue that should be ruled upon by the trial court.
However, while a compulsory counterclaim may implead persons not parties to the original complaint, the general rule
-- a defendant in a compulsory counterclaim need not file any responsive pleading, as it is deemed to have adopted
the allegations in the complaint as its answer -- does not apply. The filing of a responsive pleading is deemed a
voluntary submission to the jurisdiction of the court; a new party impleaded by the plaintiff in a compulsory
counterclaim cannot be considered to have automatically and unknowingly submitted to the jurisdiction of the court.
A contrary ruling would result in mischievous consequences whereby a party may be indiscriminately impleaded as a
defendant in a compulsory counterclaim; and judgment rendered against it without its knowledge, much less
participation in the proceedings, in blatant disregard of rudimentary due process requirements.
The correct procedure in instances such as this is for the trial court, per Section 12 of Rule 6 of the Rules of Court, to
"order [such impleaded parties] to be brought in as defendants, if jurisdiction over them can be obtained," by directing
that summons be served on them. In this manner, they can be properly appraised of and answer the charges against
them. Only upon service of summons can the trial court obtain jurisdiction over them.
In Sapugay, Cardenas was furnished a copy of the Answer with Counterclaim, but he did not file any responsive
pleading to the counterclaim leveled against him. Nevertheless, the Court gave due consideration to certain factual
circumstances, particularly the trial court's treatment of the Complaint as the Answer of Cardenas to the compulsory
counterclaim and of his seeming acquiescence thereto, as evidenced by his failure to make any objection despite his
active participation in the proceedings. It was held thus:
"It is noteworthy that Cardenas did not file a motion to dismiss the counterclaim against him on the
ground of lack of jurisdiction. While it is a settled rule that the issue of jurisdiction may be raised even
for the first time on appeal, this does not obtain in the instant case. Although it was only Mobil which
filed an opposition to the motion to declare in default, the fact that the trial court denied said motion,
both as to Mobil and Cardenas on the ground that Mobil's complaint should be considered as the
answer to petitioners' compulsory counterclaim, leads us to the inescapable conclusion that the trial
court treated the opposition as having been filed in behalf of both Mobil and Cardenas and that the
latter had adopted as his answer the allegations raised in the complaint of Mobil. Obviously, it was this
ratiocination which led the trial court to deny the motion to declare Mobil and Cardenas in default.
Furthermore, Cardenas was not unaware of said incidents and the proceedings therein as he testified
and was present during trial, not to speak of the fact that as manager of Mobil he would necessarily
be interested in the case and could readily have access to the records and the pleadings filed therein.
"By adopting as his answer the allegations in the complaint which seeks affirmative relief, Cardenas
is deemed to have recognized the jurisdiction of the trial court over his person and submitted thereto.
He may not now be heard to repudiate or question that jurisdiction."27
Such factual circumstances are unavailing in the instant case. The records do not show that
Respondents Lim and Mariano are either aware of the counterclaims filed against them, or that they
have actively participated in the proceedings involving them. Further, in dismissing the counterclaims
against the individual respondents, the court a quo -- unlike in Sapugay -- cannot be said to have
treated Respondent CCC's Motion to Dismiss as having been filed on their behalf.
Rules on Permissive Joinder of Causes

of Action or Parties Not Applicable
Respondent CCC contends that petitioners' counterclaims violated the rule on joinder of causes of action. It argues
that while the original Complaint was a suit for specific performance based on a contract, the counterclaim for damages
was based on the tortuous acts of respondents.28 In its Motion to Dismiss, CCC cites Section 5 of Rule 2 and Section
6 of Rule 3 of the Rules of Civil Procedure, which we quote:
"Section 5. Joinder of causes of action. A party may in one pleading assert, in the alternative or
otherwise, as many causes of action as he may have against an opposing party, subject to the
following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of parties; x x x"
Section 6. Permissive joinder of parties. All persons in whom or against whom any right to relief in
respect to or arising out of the same transaction or series of transactions is alleged to exist whether
jointly, severally, or in the alternative, may, except as otherwise provided in these Rules, join as
plaintiffs or be joined as defendants in one complaint, where any question of law or fact common to all
such plaintiffs or to all such defendants may arise in the action; but the court may make such orders
as may be just to prevent any plaintiff or defendant from being embarrassed or put to expense in
connection with any proceedings in which he may have no interest."
The foregoing procedural rules are founded on practicality and convenience. They are meant to discourage duplicity
and multiplicity of suits. This objective is negated by insisting -- as the court a quo has done -- that the compulsory
counterclaim for damages be dismissed, only to have it possibly re-filed in a separate proceeding. More important, as
we have stated earlier, Respondents Lim and Mariano are real parties in interest to the compulsory counterclaim; it is
imperative that they be joined therein. Section 7 of Rule 3 provides:
"Compulsory joinder of indispensable parties. Parties in interest without whom no final determination can be had of
an action shall be joined either as plaintiffs or defendants."
Moreover, in joining Lim and Mariano in the compulsory counterclaim, petitioners are being consistent with the solidary
nature of the liability alleged therein.
Second Issue:
CCC's Personality to Move to Dismiss the Compulsory Counterclaims
Characterizing their counterclaim for damages against Respondents CCC, Lim and Mariano as "joint and solidary,"
petitioners prayed:
"WHEREFORE, it is respectfully prayed that after trial judgment be rendered:
"1. Dismissing the complaint in its entirety;
"2. Ordering the plaintiff, Gregory T. Lim and Anthony A. Mariano jointly and solidarily to pay defendant
actual damages in the sum of at least P2,700,000.00;
"3. Ordering the plaintiff, Gregory T. Lim and Anthony A, Mariano jointly and solidarily to pay the
defendants LPI, LCLC, COC and Roseberg:
"a. Exemplary damages of P100 million each;
"b. Moral damages of P100 million each; and
"c. Attorney's fees and costs of suit of at least P5 million each.
Other reliefs just and equitable are likewise prayed for."29
Obligations may be classified as either joint or solidary. "Joint" or "jointly" or "conjoint" means mancum or
mancomunada or pro rata obligation; on the other hand, "solidary obligations" may be used interchangeably with "joint
and several" or "several." Thus, petitioners' usage of the term "joint and solidary" is confusing and ambiguous.
The ambiguity in petitioners' counterclaims notwithstanding, respondents' liability, if proven, is solidary. This
characterization finds basis in Article 1207 of the Civil Code, which provides that obligations are generally considered
joint, except when otherwise expressly stated or when the law or the nature of the obligation requires solidarity.
However, obligations arising from tort are, by their nature, always solidary. We have assiduously maintained this legal
principle as early as 1912 in Worcester v. Ocampo,30 in which we held:
"x x x The difficulty in the contention of the appellants is that they fail to recognize that the basis of the
present action is tort. They fail to recognize the universal doctrine that each joint tort feasor is not only
individually liable for the tort in which he participates, but is also jointly liable with his tort feasors. x x
x
"It may be stated as a general rule that joint tort feasors are all the persons who command, instigate,
promote, encourage, advise, countenance, cooperate in, aid or abet the commission of a tort, or who
approve of it after it is done, if done for their benefit. They are each liable as principals, to the same
extent and in the same manner as if they had performed the wrongful act themselves. x x x
"Joint tort feasors are jointly and severally liable for the tort which they commit. The persons injured
may sue all of them or any number less than all. Each is liable for the whole damages caused by all,
and all together are jointly liable for the whole damage. It is no defense for one sued alone, that the
others who participated in the wrongful act are not joined with him as defendants; nor is it any excuse
for him that his participation in the tort was insignificant as compared to that of the others. x x x
"Joint tort feasors are not liable pro rata. The damages can not be apportioned among them, except
among themselves. They cannot insist upon an apportionment, for the purpose of each paying an
aliquot part. They are jointly and severally liable for the whole amount. x x x
"A payment in full for the damage done, by one of the joint tort feasors, of course satisfies any claim
which might exist against the others. There can be but satisfaction. The release of one of the joint tort
feasors by agreement generally operates to discharge all. x x x
"Of course the court during trial may find that some of the alleged tort feasors are liable and that others
are not liable. The courts may release some for lack of evidence while condemning others of the
alleged tort feasors. And this is true even though they are charged jointly and severally."
In a "joint" obligation, each obligor answers only for a part of the whole liability; in a "solidary" or "joint and several"
obligation, the relationship between the active and the passive subjects is so close that each of them must comply
with or demand the fulfillment of the whole obligation.31 The fact that the liability sought against the CCC is for specific
performance and tort, while that sought against the individual respondents is based solely on tort does not negate the
solidary nature of their liability for tortuous acts alleged in the counterclaims. Article 1211 of the Civil Code is explicit
on this point:
"Solidarity may exist although the creditors and the debtors may not be bound in the same manner
and by the same periods and conditions."
The solidary character of respondents' alleged liability is precisely why credence cannot be given to petitioners'
assertion. According to such assertion, Respondent CCC cannot move to dismiss the counterclaims on grounds that
pertain solely to its individual co-debtors.32 In cases filed by the creditor, a solidary debtor may invoke defenses arising
from the nature of the obligation, from circumstances personal to it, or even from those personal to its co-debtors.
"A solidary debtor may, in actions filed by the creditor, avail itself of all defenses which are derived
from the nature of the obligation and of those which are personal to him, or pertain to his own share.
With respect to those which personally belong to the others, he may avail himself thereof only as
regards that part of the debt for which the latter are responsible." (Emphasis supplied).
The act of Respondent CCC as a solidary debtor -- that of filing a motion to dismiss the counterclaim on grounds that
pertain only to its individual co-debtors -- is therefore allowed.
However, a perusal of its Motion to Dismiss the counterclaims shows that Respondent CCC filed it on behalf of Co-
respondents Lim and Mariano; it did not pray that the counterclaim against it be dismissed. Be that as it may,
Respondent CCC cannot be declared in default. Jurisprudence teaches that if the issues raised in the compulsory
counterclaim are so intertwined with the allegations in the complaint, such issues are deemed automatically joined.33
Counterclaims that are only for damages and attorney's fees and that arise from the filing of the complaint shall be
considered as special defenses and need not be answered.34
CCC's Motion to Dismiss the Counterclaim on Behalf of Respondents Lim and Mariano Not Allowed
While Respondent CCC can move to dismiss the counterclaims against it by raising grounds that pertain to individual
defendants Lim and Mariano, it cannot file the same Motion on their behalf for the simple reason that it lacks the
requisite authority to do so. A corporation has a legal personality entirely separate and distinct from that of its officers
and cannot act for and on their behalf, without being so authorized. Thus, unless expressly adopted by Lim and
Mariano, the Motion to Dismiss the compulsory counterclaim filed by Respondent CCC has no force and effect as to
them.
In summary, we make the following pronouncements:
1. The counterclaims against Respondents CCC, Gregory T. Lim and Anthony A. Mariano are
compulsory.
2. The counterclaims may properly implead Respondents Gregory T. Lim and Anthony A. Mariano,
even if both were not parties in the original Complaint.
3. Respondent CCC or any of the three solidary debtors (CCC, Lim or Mariano) may include, in a
Motion to Dismiss, defenses available to their co-defendants; nevertheless, the same Motion cannot
be deemed to have been filed on behalf of the said co-defendants.
4. Summons must be served on Respondents Lim and Mariano before the trial court can obtain
jurisdiction over them.
WHEREFORE, the Petition is GRANTED and the assailed Orders REVERSED. The court of origin is hereby
ORDERED to take cognizance of the counterclaims pleaded in petitioners' Answer with Compulsory Counterclaims
and to cause the service of summons on Respondents Gregory T. Lim and Anthony A. Mariano. No costs.
SO ORDERED.
G.R. No. 115838 July 18, 2002
CONSTANTE AMOR DE CASTRO and CORAZON AMOR DE CASTRO, petitioners,

vs.
COURT OF APPEALS and FRANCISCO ARTIGO, respondents.
CARPIO, J.:
The Case
Before us is a Petition for Review on Certiorari1 seeking to annul the Decision of the
Court of Appeals2 dated May 4, 1994 in CA-G.R. CV No. 37996, which affirmed in toto
the decision3 of the Regional Trial Court of Quezon City, Branch 80, in Civil Case No.
Q-89-2631. The trial court disposed as follows:
"WHEREFORE, the Court finds defendants Constante and Corazon

Amor de Castro jointly and solidarily liable to plaintiff the sum of:
a) P303,606.24 representing unpaid commission;
b) P25,000.00 for and by way of moral damages;
c) P45,000.00 for and by way of attorney's fees;
d) To pay the cost of this suit.
Quezon City, Metro Manila, December 20, 1991."

The Antecedent Facts
On May 29, 1989, private respondent Francisco Artigo ("Artigo" for brevity) sued
petitioners Constante A. De Castro ("Constante" for brevity) and Corazon A. De Castro
("Corazon" for brevity) to collect the unpaid balance of his broker's commission from
the De Castros.4 The Court of Appeals summarized the facts in this wise:
"x x x. Appellants5 were co-owners of four (4) lots located at EDSA

corner New York and Denver Streets in Cubao, Quezon City. In a letter
dated January 24, 1984 (Exhibit "A-1, p. 144, Records), appellee6 was
authorized by appellants to act as real estate broker in the sale of these
properties for the amount of P23,000,000.00, five percent (5%) of which
will be given to the agent as commission. It was appellee who first found
Times Transit Corporation, represented by its president Mr. Rondaris,
as prospective buyer which desired to buy two (2) lots only, specifically
lots 14 and 15. Eventually, sometime in May of 1985, the sale of lots 14
and 15 was consummated. Appellee received from appellants
P48,893.76 as commission.
It was then that the rift between the contending parties soon emerged.
Appellee apparently felt short changed because according to him, his
total commission should be P352,500.00 which is five percent (5%) of
the agreed price of P7,050,000.00 paid by Times Transit Corporation to
appellants for the two (2) lots, and that it was he who introduced the
buyer to appellants and unceasingly facilitated the negotiation which
ultimately led to the consummation of the sale. Hence, he sued below
to collect the balance of P303,606.24 after having received P48,893.76
in advance. 1wphi 1.nt
On the other hand, appellants completely traverse appellee's claims

and essentially argue that appellee is selfishly asking for more than
what he truly deserved as commission to the prejudice of other agents
who were more instrumental in the consummation of the sale. Although
appellants readily concede that it was appellee who first introduced
Times Transit Corp. to them, appellee was not designated by them as
their exclusive real estate agent but that in fact there were more or less
eighteen (18) others whose collective efforts in the long run dwarfed
those of appellee's, considering that the first negotiation for the sale
where appellee took active participation failed and it was these other
agents who successfully brokered in the second negotiation. But
despite this and out of appellants' "pure liberality, beneficence and
magnanimity", appellee nevertheless was given the largest cut in the
commission (P48,893.76), although on the principle of quantum meruit
he would have certainly been entitled to less. So appellee should not
have been heard to complain of getting only a pittance when he actually
got the lion's share of the commission and worse, he should not have
been allowed to get the entire commission. Furthermore, the purchase
price for the two lots was only P3.6 million as appearing in the deed of
sale and not P7.05 million as alleged by appellee. Thus, even assuming
that appellee is entitled to the entire commission, he would only be
getting 5% of the P3.6 million, or P180,000.00."
Ruling of the Court of Appeals
The Court of Appeals affirmed in toto the decision of the trial court.
First. The Court of Appeals found that Constante authorized Artigo to act as agent in
the sale of two lots in Cubao, Quezon City. The handwritten authorization letter signed
by Constante clearly established a contract of agency between Constante and Artigo.
Thus, Artigo sought prospective buyers and found Times Transit Corporation ("Times
Transit" for brevity). Artigo facilitated the negotiations which eventually led to the sale
of the two lots. Therefore, the Court of Appeals decided that Artigo is entitled to the 5%
commission on the purchase price as provided in the contract of agency.
Second. The Court of Appeals ruled that Artigo's complaint is not dismissible for failure
to implead as indispensable parties the other co-owners of the two lots. The Court of
Appeals explained that it is not necessary to implead the other co-owners since the
action is exclusively based on a contract of agency between Artigo and Constante.
Third. The Court of Appeals likewise declared that the trial court did not err in admitting
parol evidence to prove the true amount paid by Times Transit to the De Castros for
the two lots. The Court of Appeals ruled that evidence aliunde could be presented to
prove that the actual purchase price was P7.05 million and not P3.6 million as
appearing in the deed of sale. Evidence aliunde is admissible considering that Artigo is
not a party, but a mere witness in the deed of sale between the De Castros and Times
Transit. The Court of Appeals explained that, "the rule that oral evidence is inadmissible
to vary the terms of written instruments is generally applied only in suits between parties
to the instrument and strangers to the contract are not bound by it." Besides, Artigo was
not suing under the deed of sale, but solely under the contract of agency. Thus, the
Court of Appeals upheld the trial court's finding that the purchase price was P7.05
million and not P3.6 million.
Hence, the instant petition.
The Issues
According to petitioners, the Court of Appeals erred in -
I. NOT ORDERING THE DISMISSAL OF THE COMPLAINT FOR

FAILURE TO IMPLEAD INDISPENSABLE PARTIES-IN-INTEREST;
II. NOT ORDERING THE DISMISSAL OF THE COMPLAINT ON THE

GROUND THAT ARTIGO'S CLAIM HAS BEEN EXTINGUISHED BY
FULL PAYMENT, WAIVER, OR ABANDONMENT;
III. CONSIDERING INCOMPETENT EVIDENCE;
IV. GIVING CREDENCE TO PATENTLY PERJURED TESTIMONY;
V. SANCTIONING AN AWARD OF MORAL DAMAGES AND

ATTORNEY'S FEES;
VI. NOT AWARDING THE DE CASTRO'S MORAL AND EXEMPLARY

DAMAGES, AND ATTORNEY'S FEES.
The Court's Ruling
The petition is bereft of merit.
First Issue: whether the complaint merits dismissal for failure to implead other
co-owners as indispensable parties
The De Castros argue that Artigo's complaint should have been dismissed for failure to
implead all the co-owners of the two lots. The De Castros claim that Artigo always knew
that the two lots were co-owned by Constante and Corazon with their other siblings
Jose and Carmela whom Constante merely represented. The De Castros contend that
failure to implead such indispensable parties is fatal to the complaint since Artigo, as
agent of all the four co-owners, would be paid with funds co-owned by the four co-
owners.
The De Castros' contentions are devoid of legal basis.
An indispensable party is one whose interest will be affected by the court's action in the
litigation, and without whom no final determination of the case can be had.7 The joinder
of indispensable parties is mandatory and courts cannot proceed without their
presence.8 Whenever it appears to the court in the course of a proceeding that an
indispensable party has not been joined, it is the duty of the court to stop the trial and
order the inclusion of such party.9
However, the rule on mandatory joinder of indispensable parties is not applicable to the
instant case.
There is no dispute that Constante appointed Artigo in a handwritten note dated

January 24, 1984 to sell the properties of the De Castros for P23 million at a 5 percent
commission. The authority was on a first come, first serve basis. The authority reads in
full:
"24 Jan. 84
To Whom It May Concern:
This is to state that Mr. Francisco Artigo is authorized as our real estate
broker in connection with the sale of our property located at Edsa
Corner New York & Denver, Cubao, Quezon City.
Asking price P 23,000,000.00 with 5% commission as agent's fee.
C.C. de Castro
owner & representing
co-owners
This authority is on a first-come
First serve basis CAC"
Constante signed the note as owner and as representative of the other co-owners.
Under this note, a contract of agency was clearly constituted between Constante and
Artigo. Whether Constante appointed Artigo as agent, in Constante's individual or
representative capacity, or both, the De Castros cannot seek the dismissal of the case
for failure to implead the other co-owners as indispensable parties. The De Castros
admit that the other co-owners are solidarily liable under the contract of agency,10
citing Article 1915 of the Civil Code, which reads:
Art. 1915. If two or more persons have appointed an agent for a

common transaction or undertaking, they shall be solidarily liable to the
agent for all the consequences of the agency.
The solidary liability of the four co-owners, however, militates against the De Castros'
theory that the other co-owners should be impleaded as indispensable parties. A noted
commentator explained Article 1915 thus
"The rule in this article applies even when the appointments were made
by the principals in separate acts, provided that they are for the same
transaction. The solidarity arises from the common interest of the
principals, and not from the act of constituting the agency. By
virtue of this solidarity, the agent can recover from any principal
the whole compensation and indemnity owing to him by the
others. The parties, however, may, by express agreement, negate this
solidary responsibility. The solidarity does not disappear by the mere
partition effected by the principals after the accomplishment of the
agency.
If the undertaking is one in which several are interested, but only some
create the agency, only the latter are solidarily liable, without prejudice
to the effects of negotiorum gestio with respect to the others. And if the
power granted includes various transactions some of which are
common and others are not, only those interested in each transaction
shall be liable for it."11
When the law expressly provides for solidarity of the obligation, as in the liability of co-
principals in a contract of agency, each obligor may be compelled to pay the entire
obligation.12 The agent may recover the whole compensation from any one of the co-
principals, as in this case.
Indeed, Article 1216 of the Civil Code provides that a creditor may sue any of the
solidary debtors. This article reads:
Art. 1216. The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made
against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has
not been fully collected.
Thus, the Court has ruled in Operators Incorporated vs. American Biscuit Co., Inc.13
that
"x x x solidarity does not make a solidary obligor an indispensable

party in a suit filed by the creditor. Article 1216 of the Civil Code says
that the creditor `may proceed against anyone of the solidary debtors
or some or all of them simultaneously'." (Emphasis supplied)
Second Issue: whether Artigo's claim has been extinguished by full payment,
waiver or abandonment
The De Castros claim that Artigo was fully paid on June 14, 1985, that is, Artigo was
given "his proportionate share and no longer entitled to any balance." According to
them, Artigo was just one of the agents involved in the sale and entitled to a
"proportionate share" in the commission. They assert that Artigo did absolutely nothing
during the second negotiation but to sign as a witness in the deed of sale. He did not
even prepare the documents for the transaction as an active real estate broker usually
does.
The De Castros' arguments are flimsy.
A contract of agency which is not contrary to law, public order, public policy, morals or
good custom is a valid contract, and constitutes the law between the parties.14 The
contract of agency entered into by Constante with Artigo is the law between them and
both are bound to comply with its terms and conditions in good faith.
The mere fact that "other agents" intervened in the consummation of the sale and were
paid their respective commissions cannot vary the terms of the contract of agency
granting Artigo a 5 percent commission based on the selling price. These "other agents"
turned out to be employees of Times Transit, the buyer Artigo introduced to the De
Castros. This prompted the trial court to observe:
"The alleged `second group' of agents came into the picture only during
the so-called `second negotiation' and it is amusing to note that these
(sic) second group, prominent among whom are Atty. Del Castillo and
Ms. Prudencio, happened to be employees of Times Transit, the buyer
of the properties. And their efforts were limited to convincing Constante
to 'part away' with the properties because the redemption period of the
foreclosed properties is around the corner, so to speak. (tsn. June 6,
1991).
xxx
To accept Constante's version of the story is to open the floodgates of

fraud and deceit. A seller could always pretend rejection of the offer and
wait for sometime for others to renew it who are much willing to accept
a commission far less than the original broker. The immorality in the
instant case easily presents itself if one has to consider that the
alleged `second group' are the employees of the buyer, Times
Transit and they have not bettered the offer secured by Mr. Artigo
for P7 million.
It is to be noted also that while Constante was too particular about the
unrenewed real estate broker's license of Mr. Artigo, he did not bother
at all to inquire as to the licenses of Prudencio and Castillo. (tsn, April
11, 1991, pp. 39-40)."15 (Emphasis supplied)
In any event, we find that the 5 percent real estate broker's commission is reasonable
and within the standard practice in the real estate industry for transactions of this nature.
The De Castros also contend that Artigo's inaction as well as failure to protest estops
him from recovering more than what was actually paid him. The De Castros cite Article
1235 of the Civil Code which reads:
Art. 1235. When the obligee accepts the performance, knowing its
incompleteness and irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with.
The De Castros' reliance on Article 1235 of the Civil Code is misplaced. Artigo's
acceptance of partial payment of his commission neither amounts to a waiver of the
balance nor puts him in estoppel. This is the import of Article 1235 which was explained
in this wise:
"The word accept, as used in Article 1235 of the Civil Code, means to
take as satisfactory or sufficient, or agree to an incomplete or irregular
performance. Hence, the mere receipt of a partial payment is not
equivalent to the required acceptance of performance as would
extinguish the whole obligation."16 (Emphasis supplied)
There is thus a clear distinction between acceptance and mere receipt. In this case, it
is evident that Artigo merely received the partial payment without waiving the balance.
Thus, there is no estoppel to speak of.
The De Castros further argue that laches should apply because Artigo did not file his
complaint in court until May 29, 1989, or almost four years later. Hence, Artigo's claim
for the balance of his commission is barred by laches.
Laches means the failure or neglect, for an unreasonable and unexplained length of
time, to do that which by exercising due diligence could or should have been done
earlier. It is negligence or omission to assert a right within a reasonable time, warranting
a presumption that the party entitled to assert it either has abandoned it or declined to
assert it.17
Artigo disputes the claim that he neglected to assert his rights. He was appointed as
agent on January 24, 1984. The two lots were finally sold in June 1985. As found by
the trial court, Artigo demanded in April and July of 1985 the payment of his commission
by Constante on the basis of the selling price of P7.05 million but there was no response
from Constante.18 After it became clear that his demands for payment have fallen on
deaf ears, Artigo decided to sue on May 29, 1989.
Actions upon a written contract, such as a contract of agency, must be brought within
ten years from the time the right of action accrues.19 The right of action accrues from
the moment the breach of right or duty occurs. From this moment, the creditor can
institute the action even as the ten-year prescriptive period begins to run.20
The De Castros admit that Artigo's claim was filed within the ten-year prescriptive
period. The De Castros, however, still maintain that Artigo's cause of action is barred
by laches. Laches does not apply because only four years had lapsed from the time of
the sale in June 1985. Artigo made a demand in July 1985 and filed the action in court
on May 29, 1989, well within the ten-year prescriptive period. This does not constitute
an unreasonable delay in asserting one's right. The Court has ruled, "a delay within
the prescriptive period is sanctioned by law and is not considered to be a delay
that would bar relief."21 In explaining that laches applies only in the absence of a
statutory prescriptive period, the Court has stated -
"Laches is recourse in equity. Equity, however, is applied only in the

absence, never in contravention, of statutory law. Thus, laches,
cannot, as a rule, be used to abate a collection suit filed within the
prescriptive period mandated by the Civil Code."22
Clearly, the De Castros' defense of laches finds no support in law, equity or

jurisprudence.
Third issue: whether the determination of the purchase price was made in
violation of the Rules on Evidence
The De Castros want the Court to re-examine the probative value of the evidence
adduced in the trial court to determine whether the actual selling price of the two lots
was P7.05 million and not P3.6 million. The De Castros contend that it is erroneous to
base the 5 percent commission on a purchase price of P7.05 million as ordered by the
trial court and the appellate court. The De Castros insist that the purchase price is P3.6
million as expressly stated in the deed of sale, the due execution and authenticity of
which was admitted during the trial.
The De Castros believe that the trial and appellate courts committed a mistake in
considering incompetent evidence and disregarding the best evidence and parole
evidence rules. They claim that the Court of Appeals erroneously affirmed sub silentio
the trial court's reliance on the various correspondences between Constante and Times
Transit which were mere photocopies that do not satisfy the best evidence rule. Further,
these letters covered only the first negotiations between Constante and Times Transit
which failed; hence, these are immaterial in determining the final purchase price.
The De Castros further argue that if there was an undervaluation, Artigo who signed as
witness benefited therefrom, and being equally guilty, should be left where he presently
stands. They likewise claim that the Court of Appeals erred in relying on evidence which
were not offered for the purpose considered by the trial court. Specifically, Exhibits "B",
"C", "D" and "E" were not offered to prove that the purchase price was P7.05 Million.
Finally, they argue that the courts a quo erred in giving credence to the perjured
testimony of Artigo. They want the entire testimony of Artigo rejected as a falsehood
because he was lying when he claimed at the outset that he was a licensed real estate
broker when he was not.
Whether the actual purchase price was P7.05 Million as found by the trial court and
affirmed by the Court of Appeals, or P3.6 Million as claimed by the De Castros, is a
question of fact and not of law. Inevitably, this calls for an inquiry into the facts and
evidence on record. This we can not do.
It is not the function of this Court to re-examine the evidence submitted by the parties,
or analyze or weigh the evidence again.23 This Court is not the proper venue to consider
a factual issue as it is not a trier of facts. In petitions for review on certiorari as a mode
of appeal under Rule 45, a petitioner can only raise questions of law. Our
pronouncement in the case of Cormero vs. Court of Appeals24 bears reiteration:
"At the outset, it is evident from the errors assigned that the petition is
anchored on a plea to review the factual conclusion reached by the
respondent court. Such task however is foreclosed by the rule that in
petitions for certiorari as a mode of appeal, like this one, only questions
of law distinctly set forth may be raised. These questions have been
defined as those that do not call for any examination of the probative
value of the evidence presented by the parties. (Uniland Resources vs.
Development Bank of the Philippines, 200 SCRA 751 [1991] citing
Goduco vs. Court of appeals, et al., 119 Phil. 531; Hernandez vs. Court
of Appeals, 149 SCRA 67). And when this court is asked to go over the
proof presented by the parties, and analyze, assess and weigh them to
ascertain if the trial court and the appellate court were correct in
according superior credit to this or that piece of evidence and
eventually, to the totality of the evidence of one party or the other, the
court cannot and will not do the same. (Elayda vs. Court of Appeals,
199 SCRA 349 [1991]). Thus, in the absence of any showing that the
findings complained of are totally devoid of support in the record, or that
they are so glaringly erroneous as to constitute serious abuse of
discretion, such findings must stand, for this court is not expected or
required to examine or contrast the oral and documentary evidence
submitted by the parties. (Morales vs. Court of Appeals, 197 SCRA 391
[1991] citing Santa Ana vs. Hernandez, 18 SCRA 973 [1966])."
We find no reason to depart from this principle. The trial and appellate courts are in a
much better position to evaluate properly the evidence. Hence, we find no other
recourse but to affirm their finding on the actual purchase price. 1wphi1.nt
Fourth Issue: whether award of moral damages and attorney's fees is proper
The De Castros claim that Artigo failed to prove that he is entitled to moral damages
and attorney's fees. The De Castros, however, cite no concrete reason except to say
that they are the ones entitled to damages since the case was filed to harass and extort
money from them.
Law and jurisprudence support the award of moral damages and attorney's fees in favor
of Artigo. The award of damages and attorney's fees is left to the sound discretion of
the court, and if such discretion is well exercised, as in this case, it will not be disturbed
on appeal.25 Moral damages may be awarded when in a breach of contract the
defendant acted in bad faith, or in wanton disregard of his contractual obligation.26 On
the other hand, attorney's fees are awarded in instances where "the defendant acted in
gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and
demandable claim."27 There is no reason to disturb the trial court's finding that "the
defendants' lack of good faith and unkind treatment of the plaintiff in refusing to give his
due commission deserve censure." This warrants the award of P25,000.00 in moral
damages and P 45,000.00 in attorney's fees. The amounts are, in our view, fair and
reasonable. Having found a buyer for the two lots, Artigo had already performed his
part of the bargain under the contract of agency. The De Castros should have exercised
fairness and good judgment in dealing with Artigo by fulfilling their own part of the
bargain - paying Artigo his 5 percent broker's commission based on the actual purchase
price of the two lots.
WHEREFORE, the petition is denied for lack of merit. The Decision of the Court of
Appeals dated May 4, 1994 in CA-G.R. CV No. 37996 is AFFIRMED in toto.
SO ORDERED.

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-36413 September 26, 1988
MALAYAN INSURANCE CO., INC., petitioner,

vs.
THE HON. COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY, SAN LEON RICE MILL,
INC. and PANGASINAN TRANSPORTATION CO., INC., respondents.
Freqillana Jr. for petitioner.
B.F. Estrella & Associates for respondent Martin Vallejos.
Vicente Erfe Law Office for respondent Pangasinan Transportation Co., Inc.
Nemesio Callanta for respondent Sio Choy and San Leon Rice Mill, Inc.
PADILLA, J.:
Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No. 47319-R, dated 22 February 1973, which affirmed, with some modifications,
the decision, ** dated 27 April 1970, rendered in Civil Case No. U-2021 of the Court of First Instance of Pangasinan.
The antecedent facts of the case are as follows:

On 29 March 1967, herein petitioner, Malayan Insurance Co., Inc., issued in favor of private respondent Sio Choy
Private Car Comprehensive Policy No. MRO/PV-15753, effective from 18 April 1967 to 18 April 1968, covering a
Willys jeep with Motor No. ET-03023 Serial No. 351672, and Plate No. J-21536, Quezon City, 1967. The insurance
coverage was for "own damage" not to exceed P600.00 and "third-party liability" in the amount of P20,000.00.
During the effectivity of said insurance policy, and more particularly on 19 December 1967, at about 3:30 o'clock in
the afternoon, the insured jeep, while being driven by one Juan P. Campollo an employee of the respondent San Leon
Rice Mill, Inc., collided with a passenger bus belonging to the respondent Pangasinan Transportation Co., Inc.
(PANTRANCO, for short) at the national highway in Barrio San Pedro, Rosales, Pangasinan, causing damage to the
insured vehicle and injuries to the driver, Juan P. Campollo, and the respondent Martin C. Vallejos, who was riding in
the ill-fated jeep.
As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc. and the
PANTRANCO before the Court of First Instance of Pangasinan, which was docketed as Civil Case No. U-2021. He
prayed therein that the defendants be ordered to pay him, jointly and severally, the amount of P15,000.00, as
reimbursement for medical and hospital expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and
compensatory damages; and P5,000.00, for attorney's fees.
Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive speed and bumped
the PANTRANCO bus which had moved to, and stopped at, the shoulder of the highway in order to avoid the jeep;
and that it had observed the diligence of a good father of a family to prevent damage, especially in the selection and
supervision of its employees and in the maintenance of its motor vehicles. It prayed that it be absolved from any and
all liability.
Defendant Sio Choy and the petitioner insurance company, in their answer, also denied liability to the plaintiff, claiming
that the fault in the accident was solely imputable to the PANTRANCO.
Sio Choy, however, later filed a separate answer with a cross-claim against the herein petitioner wherein he alleged
that he had actually paid the plaintiff, Martin C. Vallejos, the amount of P5,000.00 for hospitalization and other
expenses, and, in his cross-claim against the herein petitioner, he alleged that the petitioner had issued in his favor a
private car comprehensive policy wherein the insurance company obligated itself to indemnify Sio Choy, as insured,
for the damage to his motor vehicle, as well as for any liability to third persons arising out of any accident during the
effectivity of such insurance contract, which policy was in full force and effect when the vehicular accident complained
of occurred. He prayed that he be reimbursed by the insurance company for the amount that he may be ordered to
pay.
Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint against the San Leon
Rice Mill, Inc. for the reason that the person driving the jeep of Sio Choy, at the time of the accident, was an employee
of the San Leon Rice Mill, Inc. performing his duties within the scope of his assigned task, and not an employee of
Sio Choy; and that, as the San Leon Rice Mill, Inc. is the employer of the deceased driver, Juan P. Campollo, it should
be liable for the acts of its employee, pursuant to Art. 2180 of the Civil Code. The herein petitioner prayed that judgment
be rendered against the San Leon Rice Mill, Inc., making it liable for the amounts claimed by the plaintiff and/or
ordering said San Leon Rice Mill, Inc. to reimburse and indemnify the petitioner for any sum that it may be ordered to
pay the plaintiff.
After trial, judgment was rendered as follows:
WHEREFORE, in view of the foregoing findings of this Court judgment is hereby rendered in
favor of the plaintiff and against Sio Choy and Malayan Insurance Co., Inc., and third-party
defendant San Leon Rice Mill, Inc., as follows:
(a) P4,103 as actual damages;
(b) P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos for the period
of three (3) years;
(c) P5,000.00 as moral damages;

(d) P2,000.00 as attomey's fees or the total of P29,103.00, plus costs.
The above-named parties against whom this judgment is rendered are hereby held jointly and
severally liable. With respect, however, to Malayan Insurance Co., Inc., its liability will be up to
only P20,000.00.
As no satisfactory proof of cost of damage to its bus was presented by defendant Pantranco,
no award should be made in its favor. Its counter-claim for attorney's fees is also dismissed
for not being proved. 1
On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio Choy, the San Leon Rice
Mill, Inc. and the Malayan Insurance Co., Inc. are jointly and severally liable for the damages awarded to the plaintiff
Martin C. Vallejos. It ruled, however, that the San Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the
petitioner insurance company for whatever amount it has been ordered to pay on its policy, since the San Leon Rice
Mill, Inc. is not a privy to the contract of insurance between Sio Choy and the insurance company. 2
Hence, the present recourse by petitioner insurance company.
The petitioner prays for the reversal of the appellate court's judgment, or, in the alternative, to order the San Leon
Rice Mill, Inc. to reimburse petitioner any amount, in excess of one-half (1/2) of the entire amount of damages,
petitioner may be ordered to pay jointly and severally with Sio Choy.
The Court, acting upon the petition, gave due course to the same, but "only insofar as it concerns the alleged liability
of respondent San Leon Rice Mill, Inc. to petitioner, it being understood that no other aspect of the decision of the
Court of Appeals shall be reviewed, hence, execution may already issue in favor of respondent Martin C. Vallejos
against the respondents, without prejudice to the determination of whether or not petitioner shall be entitled to
reimbursement by respondent San Leon Rice Mill, Inc. for the whole or part of whatever the former may pay on the
P20,000.00 it has been adjudged to pay respondent Vallejos." 3
However, in order to determine the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it is important
to determine first the nature or basis of the liability of petitioner to respondent Vallejos, as compared to that of
respondents Sio Choy and San Leon Rice Mill, Inc.
Therefore, the two (2) principal issues to be resolved are (1) whether the trial court, as upheld by the Court of Appeals,
was correct in holding petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. "solidarily liable" to
respondent Vallejos; and (2) whether petitioner is entitled to be reimbursed by respondent San Leon Rice Mill, Inc. for
whatever amount petitioner has been adjudged to pay respondent Vallejos on its insurance policy.
As to the first issue, it is noted that the trial court found, as affirmed by the appellate court, that petitioner and
respondents Sio Choy and San Leon Rice Mill, Inc. are jointly and severally liable to respondent Vallejos.
We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy and San Leon Rice
Mill, Inc, (to the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for the damages awarded
to Vallejos.
It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys jeep,
pursuant to Article 2184 of the Civil Code which provides:
Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former,
who was in the vehicle, could have, by the use of due diligence, prevented the misfortune it is
disputably presumed that a driver was negligent, if he had been found guilty of reckless driving
or violating traffic regulations at least twice within the next preceding two months.
If the owner was not in the motor vehicle, the provisions of article 2180 are applicable.
On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to plaintiff Vallejos, the
former being the employer of the driver of the Willys jeep at the time of the motor vehicle mishap, is Article 2180 of
the Civil Code which reads:
Art. 2180. The obligation imposed by article 2176 is demandable not only for one's own acts
or omissions, but also for those of persons for whom one is responsible.
xxx xxx xxx
Employers shall be liable for the damages caused by their employees and household helpers
acting within the scope of their assigned tasks, even though the former are not engaged ill any
business or industry.
xxx xxx xxx
The responsibility treated in this article shall cease when the persons herein mentioned proved
that they observed all the diligence of a good father of a family to prevent damage.
It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who are primarily
liable to respondent Vallejos. The law states that the responsibility of two or more persons who are liable for a quasi-
delict is solidarily.4
On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio Choy. If petitioner is
adjudged to pay respondent Vallejos in the amount of not more than P20,000.00, this is on account of its being the
insurer of respondent Sio Choy under the third party liability clause included in the private car comprehensive policy
existing between petitioner and respondent Sio Choy at the time of the complained vehicular accident.
In Guingon vs. Del Monte, 5 a passenger of a jeepney had just alighted therefrom, when he was bumped by another
passenger jeepney. He died as a result thereof. In the damage suit filed by the heirs of said passenger against the
driver and owner of the jeepney at fault as well as against the insurance company which insured the latter jeepney
against third party liability, the trial court, affirmed by this Court, adjudged the owner and the driver of the jeepney at
fault jointly and severally liable to the heirs of the victim in the total amount of P9,572.95 as damages and attorney's
fees; while the insurance company was sentenced to pay the heirs the amount of P5,500.00 which was to be applied
as partial satisfaction of the judgment rendered against said owner and driver of the jeepney. Thus, in said Guingon
case, it was only the owner and the driver of the jeepney at fault, not including the insurance company, who were held
solidarily liable to the heirs of the victim.
While it is true that where the insurance contract provides for indemnity against liability to third persons, such third
persons can directly sue the insurer, 6 however, the direct liability of the insurer under indemnity contracts against third
party liability does not mean that the insurer can be held solidarily liable with the insured and/or the other parties found
at fault. The liability of the insurer is based on contract; that of the insured is based on tort.
In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as incorrectly held
by the trial court, be made "solidarily" liable with the two principal tortfeasors namely respondents Sio Choy and San
Leon Rice Mill, Inc. For if petitioner-insurer were solidarily liable with said two (2) respondents by reason of the
indemnity contract against third party liability-under which an insurer can be directly sued by a third party this will
result in a violation of the principles underlying solidary obligation and insurance contracts.
In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. 7 On the other
hand, insurance is defined as "a contract whereby one undertakes for a consideration to indemnify another against
loss, damage, or liability arising from an unknown or contingent event." 8
In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice Mills Inc.
solidarily liable to respondent Vallejos for a total amount of P29,103.00, with the qualification that petitioner's liability
is only up to P20,000.00. In the context of a solidary obligation, petitioner may be compelled by respondent Vallejos
to pay the entire obligation of P29,013.00, notwithstanding the qualification made by the trial court. But, how can
petitioner be obliged to pay the entire obligation when the amount stated in its insurance policy with respondent Sio
Choy for indemnity against third party liability is only P20,000.00? Moreover, the qualification made in the decision of
the trial court to the effect that petitioner is sentenced to pay up to P20,000.00 only when the obligation to pay
P29,103.00 is made solidary, is an evident breach of the concept of a solidary obligation. Thus, We hold that the trial
court, as upheld by the Court of Appeals, erred in holding petitioner, solidarily liable with respondents Sio Choy and
San Leon Rice Mill, Inc. to respondent Vallejos.
As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled that petitioner is not
entitled to be reimbursed by respondent San Leon Rice Mill, Inc. on the ground that said respondent is not privy to
the contract of insurance existing between petitioner and respondent Sio Choy. We disagree.
The appellate court overlooked the principle of subrogation in insurance contracts. Thus
... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs. Moses, 287
U.S. 530, 77 L. ed. 477). Upon payment of the loss, the insurer is entitled to be subrogated
pro tanto to any right of action which the insured may have against the third person whose
negligence or wrongful act caused the loss (44 Am. Jur. 2nd 745, citing Standard Marine Ins.
Co. vs. Scottish Metropolitan Assurance Co., 283 U.S. 284, 75 L. ed. 1037).
The right of subrogation is of the highest equity. The loss in the first instance is that of the
insured but after reimbursement or compensation, it becomes the loss of the insurer (44 Am.
Jur. 2d, 746, note 16, citing Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382).
Although many policies including policies in the standard form, now provide for subrogation,
and thus determine the rights of the insurer in this respect, the equitable right of subrogation
as the legal effect of payment inures to the insurer without any formal assignment or any
express stipulation to that effect in the policy" (44 Am. Jur. 2nd 746). Stated otherwise, when
the insurance company pays for the loss, such payment operates as an equitable assignment
to the insurer of the property and all remedies which the insured may have for the recovery
thereof. That right is not dependent upon , nor does it grow out of any privity of contract
(emphasis supplied) or upon written assignment of claim, and payment to the insured makes
the insurer assignee in equity (Shambley v. Jobe-Blackley Plumbing and Heating Co., 264
N.C. 456, 142 SE 2d 18). 9
It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of riot exceeding P20,000.00, shall
become the subrogee of the insured, the respondent Sio Choy; as such, it is subrogated to whatever rights the latter
has against respondent San Leon Rice Mill, Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid
the entire obligation the right to be reimbursed by his co-debtors for the share which corresponds to each.
Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or
more solidary debtors offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which corresponds
to each, with the interest for the payment already made. If the payment is made before the
debt is due, no interest for the intervening period may be demanded.
xxx xxx xxx
In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby becoming the subrogee
of solidary debtor Sio Choy, is entitled to reimbursement from respondent San Leon Rice Mill, Inc.
To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to the
respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos may enforce the entire obligation on only one of
said solidary debtors. If Sio Choy as solidary debtor is made to pay for the entire obligation (P29,103.00) and petitioner,
as insurer of Sio Choy, is compelled to pay P20,000.00 of said entire obligation, petitioner would be entitled, as
subrogee of Sio Choy as against San Leon Rice Mills, Inc., to be reimbursed by the latter in the amount of P14,551.50
(which is 1/2 of P29,103.00 )
WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by the Court of Appeals, is hereby
AFFIRMED, with the modification above-mentioned. Without pronouncement as to costs.
SO ORDERED.

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-54551 November 9, 1987
PHILIPPINE NATIONAL BANK, petitioner,

vs.
HON. AUGUSTO AMORES Presiding Judge, Court of First Instance of Manila Branch XXIV, MAXIMO KALAW
INVESTMENT CORPORATION, and AUGUSTO KALAW, respondents.
SARMIENTO, J.:
The instant petition seeks to review on a pure question of law the decision 1 dated July 8, 1980 of the then Court of First Instance of
Manila, Branch XXIV, granting the declaratory relief prayed for in Civil Case No. 124328. 2 The dispositive portion of the decision reads:
PREMISES CONSIDERED, the Court finding the complaint to be meritorious, hereby grants
the same and declares that pursuant to the provisions of Section 80 of Republic Act No. 3844,
as amended by Presidential Decree 251, defendant Philippine National Bank must accept, as
of date of payment, the entire P130,000.00 of Land Bank bonds paid to it by the defendant
Land Bank of the Philippines, in the above-entitled case, at their fun face value and without
any discount. Without pronouncement as to costs.
SO ORDERED. 3
The undisputed facts are stated in the assailed decision of the court a quo, thus:
The plaintiff Maximo Kalaw Investment Corporation, hereinafter referred to as Kalaw

Investment, is the registered owner of Lot 1 of the consolidation-subdivision plan LRC, Psd-
13492, covered by Transfer Certificate of Title No. RT-96 (53532) of the Register of Deeds for
Oriental Mindoro, with the area of 3,132,122 square meters more or less.
The plaintiffs Kalaw Investment and Augusto Kalaw obtained a loan from defendant Philippine
National Bank, hereinafter referred to as PNB, in the amount of 150,000.00, and in order to
secure the said loan the aforesaid property was mortgaged to defendant PNB.
A portion of said property, with an area of 45.186 hectares, was subjected to Operations Land
Transfer in favor of tenants-beneficiaries in accordance with Presidential Decree No. 27 and
the provisions of Republic Act No. 3844 (otherwise known as the Code of Agrarian Reform of
the Philippines), as amended more particularly by Presidential Decree No. 251
As of the date of July 28, 1977 defendant Land Bank of the Philippines, hereinafter referred to
as LBP, paid defendant PNB for the account of the plaintiffs P14,588.50 in cash and Land
Bank Bonds with a total face value of P130,000.00.
Pursuant to PNB Board Resolution No. 627 (Exhibit "1-PNB"), defendant PNB, after crediting
the sum of P 14,588.50 to the account of plaintiff Augusto Kalaw, applied the land Bank bonds
to the payment of the account on a one-to-one basis to the extent of P31,000.00 and on a
discounted basis to the extent of P59,400.00, or a total of P90,400,00.
Contesting the manner of application of Land Bank bonds to the payment of loan obligations
pursuant to Board Resolution No. 627 plaintiffs herein wrote the PNB requesting the
reconsideration or revision of its policy.
Defendant PNB, however, did not find merit in the request of plaintiffs but agreed that the latter
seek judicial ruling to which it would abide.
Defendant LBP has directly taken issue with the co-defendant PNB on the aforementioned
policy.
As a consequence, plaintiffs brought the present action for declaratory relief. 4
xxx xxx xxx
The petitioner Philippine National Bank (PNB) appealed from the decision of the lower court and assigned several
errors. However, there is, in fact, only one question to be resolved here, i.e., whether or not a government lending
institution (like PNB, the petitioner herein) may be compelled to accept land Bank notes at face value in payment of
pre-existing obligations secured be, land partially taken by the Land Bank under Operation Land Transfer pursuant to
the Agrarian Reform Code (RA No. 3844 as amended particularly be Id. No. 251).
The petitioner PNB, relating PD 27 with Section 80 of the Agrarian Reform Code, as amended particularly by PD 251,
affirms that lands not subject to PD 27 are also not subject to Section 80. Necessarily, therefore, when land mortgaged
to PNB is partly subjected to PD 27, only that part also of the corresponding lien is subjected to Section 80, the
unaffected portion being governed by the PNB charter.
The petitioner's interpretation not only unduly stretches the scope of PD 251 but is also antithetical to the objectives
of the land reform program. Analyzing both laws, we see that PD 27 effects emancipation of the tenant-farmer from
the bondage of the soil while Section 80 provides the mode of bankrolling the emancipation measure. As soon as the
tenant-farmer acquires ownership over the land, he is deemed emancipated and the objective of PD 27 is attained.
But the previous owner of the land taken still has to be compensated. This is then the moment when Section 80 comes
into play, i.e., in providing for the mode of determining the value or cost of the acquisition of the land subjected to PD
27. From the above, we see that the only correlation that Section 80 has with PD 27 is to the extent of determining
the cost of the land transferred to the tenant-farmer. The method for effecting the release of the whole encumbered
estate, which naturally includes the portions not subjected to PD 27, if there are any, does not fall within the ambit of
both decrees. This being the case, there is, therefore, no reason to decrease the effective value of the Land Bank
bonds, for that would be the inevitable result if the full application of their face value is pro tanto limited only to that
portion of the land subjected to PD 27 and discounted with respect to those portions which were not taken by the Land
Bank.
At this point, it must be stressed that Land Bank bonds are deemed "contracts and the obligations resulting therefrom
fall within the purview of the non-impairment clause of the constitution and any impairment thereof becomes an
encroachment upon the obligation itself which cannot be permitted." 5
Suffice it to mention that the petitioner is a government lending institution and as such, it has the obligation to support
unequivocably government programs already on stream and not to introduce its own interpretative policies which may
thwart such programs or modify them to nothingness. This is specially compelling with regard to land reform, the great
venture of the government.
The preamble of PD 251 eloquently articulates government intent to implement the state policy of "diverting landlord
capital in agriculture to industrial development" by "mobilizing and harnessing properly all available government
resources for the realization of the desired agrarian reform program." 6 For agrarian reform cannot be fully realized
without the intervention of the government particularly in the payment of just compensation. Surely, the tenant by
himself does not have and can not afford the wherewithal to defray the cost of the land transferred to him. It is only
with the full support and active assistance of the government principally through its financial institutions that payment
of just compensation to the landowner may be realized. The petitioner PNB is one of the government resources
contemplated in the said preamble.
In a country, like ours, which still espouses democratic Ideals, but which Ideals are threatened by extreme and radical
forces, the early and full implementation of the government's land reform program sans complications and
technicalities may yet save the nation and keep democracy alive. The petitioner, a premier government lending
institution must perform its part. In the implementation of the financing portion of this laudable program, the PNB must
not pinch centavos.
Moreover, explicit is the law that a mortgage obligation is one and indivisible. 7 Every portion of the property mortgaged
is answerable for the whole obligation as soon as the latter falls due. The mortgagor cannot opt, much less compel
the mortgagee, to apply any payment made by him on a specific portion of the mortgaged property to effect release.
Neither may the mortgagee apply payments made to it on, and consequently release, a portion of the mortgaged
property and effect foreclosure on the rest. From the foregoing, it is clear that petitioner PNB cannot be allowed to do
precisely what it had done in the case at bar. To illustrate, the computation made by the petitioner is hereby
reproduced:
1. Land Bank remittance . . . . . . . . . . . . . . . . . . . . . . . . . . . P104,988.50
2. Applied to:
a) Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . 18,086.15
b) Service charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,891.41
c) Principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149,977.40
3. Balance of principal debt . . . . . . . . . . . . . . . . . . . . . . . . . . .65,966.46
4. Less:
Cash payments by
respondents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,966.46
5. Balance owed by
respondents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .P30,000.00 8
The land Bank remittance (No. 1 above) was applied by the petitioner in the following manner:
a) Cash Portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .P14,588.50
b) Bonds Taken at Face Value . . . . . . . . . . . . . . . . . . . . . . . 31,000.00
c) Bonds Taken at
Market Value
(Discounted) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P59,400.00 9
The total amount paid by the land Bank in cash and notes amounted to P144,588.50, P130,000.00 of which was the
total face value of the bonds.
The petitioner's method evidently contravenes the principle of indivisibility of mortgage for it applied the Land Bank
bonds as payment on a one-to-one basis pro tanto of the mortgage debt secured by the particular portion acquired by
the Land Bank which had an area of 45.186 hectares, but on a discounted basis with respect to the other portions of
the debt secured by the same mortgage.
Furthermore, and as correctly noted by the trial court, Section 80 of the Agrarian Reform Code does not distinguish
between land wholly subjected to agrarian reform and land only partially affected thereby. Applying the rule on
statutory construction, "Ubi lex non distinguit, nec nos distinguere debemos," 10 this Court must perforce follow the meaning expressed
by the words of the law.
The pertinent legal provision states.
SEC. 80. Modes of Payment. The Bank shall finance the acquisition of farm lots under any
of the following modes of settlement:
1. Cash payment of 10% and balance in 25-year tax-free 6% Land Bank bonds:
xxx xxx xxx
In the event there is an existing lien or encumbrance on the land in favor of any Government
lending institution at the time of acquisition by the Bank, the landowner shall be paid the net
value of the land (i.e., the value of the land determined under Proclamation No. 27 minus the
outstanding balance/s) of the obligations secured by the liens/ or encumbrances), and the
outstanding balance/s of the obligations to the lending institution/s shall be paid by the Land
Bank in Land Bank bonds or other securities, existing charters of those institutions to the
contrary notwithstanding. A similar settlement may be negotiated by the Land Bank in the case
of obligations secured by liens or encumbrances in favor of private parties or institutions.
There is nothing in the above quoted provision of law which authorizes a government lending institution to make a
distinction in its acceptance of land bank bonds as payment. There is also nothing in the said law which can be
construed to mean that when the area actually "land reformed" is just a portion of the property encumbranced, only
that portion of the loan value corresponding to the area actually taken will be paid with Land Bank bonds at their face
value.
The law, in fact, is clear, i.e., that the debt secured by a mortgage constituted on the land taken under the Agrarian
Reform Code shall be paid in land Bank bonds even if the charters of government lending institutions contain
provisions contrary to Section 80. The last sentence of the law in question which provides that "a similar settlement
may be negotiated," applies only to obligations contracted with private parties or institutions but not those contracted
with government lending institutions like the petitioner herein.
From the foregoing, there is no doubt that the petitioner PNB, as a government lending institution, is obliged to accept
payments made to it by the private respondents, through the land Bank, in the form of Land Bank bonds at their par
or face value. The petitioner may not discount said payments but must apply the full face value of the bonds on the
outstanding balance.
WHEREFORE, premises considered, the petition is hereby DENIED. The decision of the trial court dated July 8, 1980
is AFFIRMED.
No costs.

SUPREME COURT
Manila
THIRD DIVISION
G.R. Nos. 82282-83 November 24, 1988

ANTONIO M. GARCIA, DYNETICS, INC., and MATRIX MANAGEMENT CORPORATION, petitioners,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Sycip, Salazar, Hernandez & Gatmaitan for petitioners.
Bengson, Zarraga, Narciso, Cudala, Pecson & Bengson for private respondent.
GUTIERREZ, JR., J.:
In a summary judgment rendered by the Regional Trial Court of Makati in Civil Case No. 10398, the complaint was dismissed for lack of merit and the petitioners
were ordered to pay the private respondent the following: (a) the unpaid principal sum of P15 million remaining unpaid out of Chemark's availment of the P20 million
credit line, plus 18% interest per annum and 36% as penalty per annum for Promissory Note No. DLS/74/540/83 from March 23, 1984 until fully paid; and plus 24%
interest per annum and 36% as penalty per annum for Promissory Note No. DLS/74/1358/83 from August 9, 1983 until fully paid; (b) attorney's fees equivalent to
10% of the total amount of plaintiffs' obligations and (c) costs of suit.
The summary judgment was affirmed by the Court of Appeals. The appellate court's decision and the resolution
denying a motion for reconsideration are now challenged by the petitioners in the instant petition.
The antecedent facts relevant to the instant petition are as follows:
On April 23, 1985 petitioners Dynetics, Inc., Matrix Management and Trading Corporation and Antonio M. Garcia filed
a complaint for declaratory relief and/or injunction with damages against respondent Security Bank and Trust
Company (SBTC). The plaintiffs sought a judicial declaration that they were not liable to the defendant bank under
certain Indemnity Agreements they executed in favor of Chemark Electric Motors, Inc. which had been extended a
credit accommodation of about P20,000,000.00 by the defendant bank. They also prayed for payment of attorney's
fees and costs of suit. Thus, they alleged in their complaint:
xxx xxx xxx
a) There is no valid consideration for the execution of the said instruments;
b) The said instruments had become invalid and ineffective at the time the defendant finally
extended the loan accommodation to Chemark and that the parties to the said instruments did
not intend the said instruments to cover Chemark's obligations to the defendant which were
subsequently granted under separate and independent transactions;
c) Assuming, without conceding, that there is a valid consideration for the execution of the
aforesaid instruments and that the said instruments continued to be valid and effective when
the defendant extended a credit accommodation to Chemark, said instruments are null and
void insofar as Dynetics is concerned as it is ultra vires, being contrary to the purposes of
Dynetics, its powers, licenses and franchise;
d) Assuming, without conceding, that the Indemnity Agreement instruments are valid and
enforceable, the obligations of the plaintiffs thereunder have been extinguished, either by
novation or by the acts and conduct of the defendant, who, under the circumstances, in
refusing the valid and legitimate plea of Chemark for a reasonable restructuring plan of its
obligations has practically rendered it impossible for Chemark to pay its obligations to its
creditors and to the plaintiffs in the event plaintiffs are legally obligated to pay Chemark's
obligations to the defendant;
e) In the light of present economic conditions, in general, and the condition of Chemark in
particular, as well as the financial condition of the plaintiffs, the demand of the defendant for
the plaintiffs to pay the Chemark obligations would constitute an abuse of right as defined in
the New Civil Code;
f) Considering the present adverse economic conditions plaguing the entire country, the terms
and conditions of the credit accommodation and the Indemnity Agreement instruments,
assuming that the latter are valid and enforceable, have become so manifestly difficult as to
be beyond the contemplation of the parties. Under the provisions of Human Relations of the
New Civil Code, as well as the general principles of equity, especially the doctrine of the "rebus
sic stantibus" and "the frustration of the commercial object or frustration of enterprise" and
under Article 1267 of the New Civil Code, when the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the obligor may be released therefrom;
g) In addition to the reasons stated in paragraphs e and f hereof, Chemark, the principal
obligor, is not liable for its obligations under the credit accommodations extended to it by the
defendant because it has been prohibited from complying therewith by a lawful authority.
Under the law on guaranty and surety, the guarantor or the surety, not being a principal debtor,
is not liable for the obligations unless the principal obligor is likewise liable. (Article 2054 of the
New Civil Code; Hospicio de San Jose v. Fidelity and Surety Co., 52 Phil. 926; Uy Isabelo v.
Yandoc, CA-G.R. No. 8801-R, June 20, 1956). The debtor in obligations to do shall also be
released when the prestation becomes legally impossible without the fault of the obligor.
(Article 1266 of the New Civil Code);
h) Assuming, without conceding, that the plaintiffs are liable under the Indemnity Agreement
instruments, they are not liable for the amounts being claimed by the defendant, considering
that the said amounts include the payment of exorbitant interests, excessive penalties and
amounts imputed to be due which are not, in fact, due. (Rollo, pp. 106-107)
On June 11, 1985 the respondent bank filed its Answer and Counterclaim with prayer for preliminary attachment. The
defendant alleged in its counter claim:
ALLEGATIONS COMMON TO ALL DEFENDANTS
21. Sometime in August, 1981, Chemark was granted by plaintiff a credit line of P4.0 million
consisting of an import LC-TR line of P2.0 million and an export loan line of P2.0 million.
22. Said credit line was increased in February, 1982 from P4.0 million to P20.0 million, to wit:
Export loan linefrom P2.0 million to P15.0 million
Import LC-TRfrom P2.0 million to P5.0 million
The terms and conditions of this P20.0 million credit are reflected in the Amended Credit Line
Agreement dated February 8, 1982 attached as Annex "1" hereof,
23. Chemark availed of said credit line and as evidence of said availments, Chemark executed
several promissory notes covering the following amounts drawn against this credit line, viz;
a) The sum of P6,350,750.00 drawn on March 23, 1983 with interest and
penalty at the rate indicated in promissory Note No. DLS/74/540/83 to mature
on June 21, 1983, a copy is attached as Annex "3";
b) The sum of P8,649,250.00 drawn on August 9, 1983 with interest and

penalty at the rate indicated in Promissory Note No. DLS/74/1358/83 to mature
on September 8, 1983, a copy of which is hereto attached as Annex "4".
24. Chemark defaulted in paying its obligations under the aforesaid promissory notes when
these became due. Despite repeated demands, Chemark failed and refused to pay its valid
and just obligations to the defendant which, as of December 11, 1984, amounted to
P13,130,596.93 under Promissory Note No. DLS/74/540/83 and P17,357,117.51 under PN
No. DLS/74/1358/83.
CAUSE OF ACTION AGAINST ANTONIO M. GARCIA
25. Plaintiff Garcia personally bound himself jointly and severally with Chemark, to pay
defendant upon demand and without benefit of excussion of whatever amount or amounts
Chemark may be indebted to defendant under and by virtue of the aforesaid credit line
accommodation, including the substitutions, renewals, extensions, increases and other
amendments of the aforesaid credit accommodations, as well as all other obligations that
Chemark may owe the defendant.
26. Accordingly, plaintiff Garcia executed two (2) Indemnity Agreements, one dated January
20, 1982, a copy of which is attached hereto and made integral part hereof as Annex "E" and
the other, an Indemnity Agreement dated February 8, 1982, as Annex "B" of the Complaint;
27. Under the terms of the foregoing Indemnity Agreements executed by plaintiff Garcia, he
further bound himself solidarily with Chemark in favor of defendant for the faithful compliance
of all the terms and conditions contained in the Amended Credit Line Agreement (Annex "l ").
28. Defendant demanded from plaintiff Garcia the payment of the outstanding obligation of
Chemark in a letter dated October 26, 1984, a copy of which is made Annex "5" to form part
hereof. Defendant reiterated said demand on April 15, 1985.
29. Notwithstanding said demands, plaintiff Garcia failed and refused, as he still fails and
refuses to pay his obligation pursuant to the indemnity agreements he executed.
CAUSES OF ACTION AGAINST MATRIX MANAGEMENT & TRADING CORPORATION
30. Plaintiff Matrix bound itself jointly and severally with Chemark in favor of the defendant for
the payment, upon demand and without benefit of excussion, of whatever amount or amounts
Chemark may be indebted to defendant under and by virtue of the aforesaid credit line
accommodation including the substitutions, renewals, extensions, increases and other
amendments of the aforesaid credit accommodations, as well as of the amount of such other
obligations that Chemark may owe the defendant.
31. Accordingly, Matrix through its duly authorized officers, executed an Indemnity Agreement
dated February 8, 1982, a copy of which is attached hereto as Annex "A" and incorporated
herein by reference.
32. Under the terms of the foregoing indemnity agreement executed by Matrix, it further bound
itself solidarily with Chemark in favor of defendant for the faithful compliance of all the terms
and conditions contained in the Credit Line Agreement (Annex "B"). <re|| an 1w>
33. Defendant demanded from Matrix the payment of the outstanding obligation of Chemark
in a letter dated October 26, 1984, a copy of which is made Annex "5" to form part hereof.
Defendant reiterated said demand on April 25, 1985.
34. Notwithstanding said demands, Matrix failed and refused, as it still fails and refuses, to pay
its obligation pursuant to the indemnity agreement it executed in plaintiffs favor.
CAUSE OF ACTION AGAINST DYNETICS, INC.
35. Plaintiff Dynetics bound itself jointly and severally with Chemark in favor of the defendant
for the payment, upon demand and without benefit of excussion, of whatever amount or
amounts Chemark may be indebted to defendant under and by virtue of the aforesaid credit
line accommodation including the substitutions, renewals, extensions, increases and other
amendments of the aforesaid credit accommodations, as well as of the amount of such
obligations that Chemark may owe the defendant.
36. Dynetics executed an indemnity agreement dated February 8, 1982, copy of which is
attached as annex "A" of the Complaint.
37. Under the terms of the foregoing Indemnity Agreement executed by Dynetics, it further
bound itself solidarily with Chemark in favor of defendant for the faithful compliance of all the
terms and conditions contained in the Amended Credit Line Agreement (Annex "I")
38. Defendant demanded from Dynetics the payment of the outstanding obligation of Chemark
in a letter dated October 26, 1984, a copy of which is made Annex "5", to form part hereof.
Defendant reiterated said demand on April 25, 1985.
39. Notwithstanding said demands, Dynetics failed and refused, as it still fails and refuses to
pay its obligation pursuant to the indemnity agreement it executed in defendant's favor. (Rollo,
pp. 108-111)
On August 21, 1985, the petitioners manifested that ... they are adopting all allegations in their Complaint as their
answer to the respective counterclaim against each of them." (Original Records, p. 229)
On September 18, 1985, the respondent bank filed a motion for summary judgment on the ground that the answer to
the counterclaim "tenders no genuine issue as to any material fact, and consists of mere conclusions of law and fact,
and in paragraph 4 thereof, plaintiffs expressly acknowledged their obligation to defendant and indemnity agreements
dated February 8, 1982 when they admitted "under said instruments, it was basically provided that for and in
consideration of the credit accommodation in the total amount of Twenty Million (20,000,000.00) Pesos, granted by
defendant in favor of Chemark Electric Motors, Inc., a corporation duly organized and existing under the laws of the
Philippines, plaintiffs agreed to indemnify defendant in the event Chemark should fail to comply with its obligations."'
(Original Records, p. 248) In support of the motion, the respondent bank attached the affidavit dated September 17,
1985 of Ms. Charis Marquez, Senior Assistant Manager, corporate banking group, SBTC including its annexes.
The petitioners filed an opposition to the motion for summary judgment but to no avail. The lower court rendered a
decision granting the motion for summary judgment. The petitioners' complaint was dismissed and they were ordered
to pay the respondent bank under the indemnity agreements.
The petitioners then filed with the Court of Appeals: 1) an appeal from the summary judgment and 2) a special civil
action for certiorari and prohibition with a prayer for preliminary injunction to annul the orders of the lower, court
granting motion for summary judgment and granting motion for execution pending appeal. The two cases were
consolidated.
The appellate court sustained the summary judgment. Both petitions were dismissed with costs against the petitioners.
A motion for reconsideration thereto was denied.
Hence, this petition.
On March 30, 1988, we issued a temporary restraining order to enjoin the enforcement of the questioned decision of
the appellate court. In a Resolution dated June 6, 1988, we gave due course to the petition.
The issue raised in the petition is whether or not the appellate court committed reversible error when it sustained the
trial court's summary judgment.
The petitioners submit that the appellate court committed such an error, to wit:
a. The rendition of Judge Mendoza's Summary Judgment was improper because petitioners'
Complaint and SBTC's Answer with Counterclaim raise triable issues of fact. The Court of
Appeals, therefore, erred when it sustained Judge Mendoza's Summary Judgment.
b. Assuming (the untrue) that there were no "genuine issues as to any material fact," the
awards set out in Judge Mendoza's Summary Judgment were rendered in violation of rules of
evidence and laws and jurisprudence on interest, penalties and attorney's fees. The appellate
court, therefore, committed the same violation when it upheld Judge Mendoza's Summary
Judgment. (Rollo, p. 325).
A Summary Judgment may be rendered by a court upon motion of a party before trial and after submission of
pleadings, admissions, documents and/or affidavits and counter affidavits when it is clear that "except as to the amount
of damages, there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a
matter of law." (Rule 34, Rules of Court). By genuine issue is meant an issue of fact which calls for the presentation
of evidence Cadirao v. Estenzo, 132 SCRA 93) as distinguished from an issue which is sham, fictitious, contrived, set
up in bad faith, or patently unsubstantial as not to constitute a genuine issue for trial. (Vergara, Sr. v. Suelto, et al.,
G.R. No. 74766 December 21, 1987, Cadirao v. Estenzo supra; Mercado, et al. v. Court of Appeals, G.R. No. L-44001
June 10, 1988) This can be determined by the court on the basis of the pleadings, admissions, documents, affidavits
and/or counter-affidavits submitted by the parties to the court. (Section 3, Rule 34, Revised Rules of Court; Vergara
v. Suelto supra; Cadirao v. Estenzo supra).
The pleadings, admissions and affidavits submitted in court in this case reveal the following facts:
In August 1981, Chemark was granted by respondent bank a credit line of P4.0 million which was increased in
February 1982 to P20.0 million, to wit; Export loan line from P2.0 million to P15.00 million; Import LC/TR-from P2.0
million to P5.0 million. The terms and conditions of this P20 million credit are stated in the Credit Line Agreement
dated February 8, 1982 (p. 254, Records). On this same day, February 8, 1982 the petitioners executed separate, but
with similar terms, indemnity agreements whereby they bound themselves jointly and severally with Chemark to pay
respondent bank upon demand and without excussion of whatever amount Chemark may be indebted to said bank
by virtue of said credit line accommodation including the substitution, renewals, extensions, increases and other
amendments thereof; and that upon default of Chemark, proper demands to pay were made on the petitioners to
comply with their obligations. The three indemnity agreements binding each of the petitioners contain the following
provisions:
INDEMNITY AGREEMENT
KNOW ALL MEN BY THESE PRESENTS: That
DYNETICS, INC., a corportion duly organized and existing under and by virtue of the laws of
the Philippines, with offices at the FTI Complex, Taguig, Metro Manila for and in consideration
of the credit accommodation in the total amount of TWENTY MILLION (P20,000,000.00)
PESOS granted by the SECURITY BANK & TRUST COMPANY, a commercial banking
corporation duly organized and existing under and by virtue of the laws of the Philippines, with
offices at 6778 Ayala Avenue, Makati, Metro Manila, hereinafter referred to as the BANK, in
favor of CHEMARK ELECTRIC MOTORS, INC., ... a corporation duly organized and existing
under and by virtue of the laws of the Philippines, with offices at the 2nd Floor, Princess
Building, Esteban Street, Legaspi Village, Makati, Metro Manila, hereinafter referred to as the
CLIENT, with the stipulated interests and charges thereon, evidenced by that/those certain
AMENDED CREDIT LINE AGREEMENT made and executed by and between the CLIENT
and the BANK on even date hereby bind(s) himself/themselves jointly and severally with the
CLIENT in favor of the BANK for the payment, upon demand and without benefit of excussion,
of whatever amount or amounts the CLIENT may be indebted to the BANK under and by virtue
of aforesaid credit accommodation(s) including the substitutions, renewals, extensions,
increases, amendments, conversions and revivals of the aforesaid credit accommodation(s),
as well as of the amount or amounts of such other obligations that the CLIENT may owe the
BANK, whether direct or indirect, principal or secondary, as appears in the accounts, books
and records of the BANK, plus interest and expenses arising from any agreement or
agreements that may have heretofore been made, or may hereafter be executed by and
between the parties thereto, including the substitutions, renewals, extensions, increases,
amendments, conversions and revivals of the aforesaid credit accommodation(s), and further
bind(s) himself/themselves with the CLIENT in favor of the BANK for the faithful compliance of
all the aforesaid credit accommodation(s), all of which are incorporated herein and made part
hereof by reference.
IN WITNESS WHEREOF, these presents are signed at Makati, Metro Manila on this 8th day
of February, 1982. ... and/or its trust accounts funding this loan
DYNETICS, INC.
(SGD.) ANTONIO M. GARCIA (SGD.) DOMINADOR GAMEZ
Signed in the Presence of.
(SGD.) JONA C. CAJUYONG (SGD.) TERESITA A. DE GUZMAN
(Original Records, pp. 306-307)
Both Dynetics and Matrix were authorized by their respective board of directors to execute the
indemnity agreements. In the case of Dynetics, Corporate Secretary Antonio Pastelero
certified that during a meeting of the Board of Directors held on December 29, 1981 at its office
address, it was unanimously adopted that the corporation "... undertake to jointly and severally
guarantee the credit line of CHEMARK ELECTRIC MOTORS, INC. in favor of the SECURITY
BANK & TRUST COMPANY, in an amount not to exceed TWENTY MILLION (20,000,000.00)
PESOS" (p. 264, Original Records). In the case of MATRIX, Corporate Secretary Rene J.
Katigbak certified that at the meeting of the Board of Directors held on December 28, 1981, a
resolution was unanimously adopted to have the corporation "... jointly and severally guarantee
the credit line of CHEMARK ELECTRIC MOTORS, INC. in favor of the SECURITY BANK &
TRUST COMPANY, in an amount not to exceed TWENTY MILLION (P20,000,000.00)
PESOS. (Original Records, p. 262)
Chemark then availed of the P20.0 million credit line and executed two (2) promissory notes covering the following
amounts drawn against the Export Loan Line, to wit:
a) The sum of P6,350,750.00 drawn on March 23, 1983 with interest and penalty at the rate
indicated in Promissory Note No. DLS/74/540/83 to mature on June 21, 1983 (p. 255, Original
Records)
b) The sum of P8,649,250.00 drawn on August 9, 1983 with interest and penalty ac the rate
indicated in Promissory Note No. DLS/74/1358/83 to mature on September 8, 1983 (p. 256,
Original Records)
These obligations were not paid by Chemark when they became due. Hence, the respondent bank demanded from
the petitioners under the indemnity agreements the payment of the outstanding obligations of Chemark.
Undoubtedly, the obligations of the petitioners to the respondents are clearly defined in the pleadings, admissions and
the unrebutted affidavit of Ms. Marquez who handles the Chemark account.
Nevertheless, the petitioners insist that their complaint for declaratory relief tenders genuine issues which should be
threshed out in a full-blown trial, to wit:
xxx xxx xxx
11.1 First Defense: that the principal obligation has not yet matured because SBTC, agreed to
allow Chemark a grace period within which to recover its liquidity and pay the debt.
11.1A This defense is pleaded in the following allegations of the Complaint:
6. In the aftermath of the assassination of Senator Benigno S. Aquino, Jr., on August 21, 1983,
the Philippine economy was plunged into a deep crisis. There was a massive flight of capital;
the country's balance of payments deteriorated; business and industry practically stood still;
and the foreign debts of the country could not be serviced; banks collapsed, the exchange rate
between the Philippine Peso and US Dollar tripled and there was practically no foreign
exchange available in the country. The resultant extremely adverse economic conditions were
not foreseen or contemplated by persons or entities who became parties to a contract. None
of the parties to a contract expected nor did they intend that the terms and conditions they
agreed upon would operate under extreme adverse economic conditions.
7. Because of the recent economic developments here and abroad, the failure of one of the
stockholders of Chemark to comply with its commitments and Chemark's inability to collect
substantial receivables from its marketing representatives in the United States, Chemark
started to suffer liquidity problems. As a consequence, it was unable to pay its creditors, among
whom is the defendant. However, Chemark had more than sufficient assets to pay all its
obligations including its obligations to the defendant, except that its liquidity problems
prevented it from paying its creditors.
8. Chemark started negotiating with the defendant for the restructuring of its obligations to the
latter. For this purpose, it submitted several proposed courses of action to the defendant
whereby in time all of its obligations to the defendant would be paid.
9. In the meantime, the defendant demanded payment from the plaintiffs of the obligations of
Chemark. Although plaintiffs are not legally liable for the payment of such obligations, they
nonetheless, proposed to the defendant that the latter allow Chemark to recover its liquidity
until such time that it shall have recovered its ability to pay its obligations. An agreement in
principle was reached on this proposal and the defendant committed itself to allow Chemark
to recover from its liquidity problems and to refrain from demanding payment of the loans of
Chemark from the plaintiffs. (Emphasis supplied). (Rollo, pp. 328-329).
xxx xxx xxx
11.2 Second Defense: that SBTC and the petitioners did not intend to use petitioners'
Indemnity Agreements as collateral security for Chemark's loans and that SBTC extended the
loan solely on Chemark's viability as a business enterprise.
11.2A The Complaint pleads this defense in the following paragraphs:
5. ... when the defendant finally extended the loan to Chemark, it did so not because of the
aforesaid instruments (referring to the Indemnity Agreements) previously executed by the
(petitioners) which, in the meantime, were no longer valid and effective and intended by the
parties as collateral security for future Chemark loans, but because of defendant's assessment
of the viability of Chemark's business operations and interest income expected to be generated
from the loans to Chemark. (Emphasis supplied) (Rollo, pp. 329-330)
xxx xxx xxx
11.3 Third Defense: that Dynetic's execution of the Indemnity Agreement is contrary to its
purposes and is therefore ultra vires and unenforceable against it.
11.3A This defense is pleaded in the Complaint as follows:
13. Plaintiffs are not liable to the defendant under the Indemnity Agreement instruments xxx
for the following reasons:
xxx xxx xxx
(c) Assuming, without, conceding, that there is a valid consideration for the execution of the
aforesaid instruments and that said instruments continued to be valid and effective when the
defendant extended a credit accommodation to Chemark, said instruments are null and void
insofar as Dynetics is concerned as it is ultra vires, being contrary to the purpose of Dynetics,
its powers, licenses and franchise: (Emphasis supplied) (Rollo, pp. 332-333)
We find no material questions of facts tendered by these defenses as to the main issue on whether or not the
petitioners can be held liable to the respondent bank under their indemnity agreements.
The issue tendered in the first defense is "sham and fictitious" in the light of the terms of the indemnity agreements.
Thus, under the indemnity agreements, the petitioners bound themselves jointly and severally with Chemark in favor
of the respondent bank for the payment, upon demand and without benefit of excussion, of whatever amount or
amounts Chemark may be indebted to the respondent bank under and by virtue of the credit accommodations.
(Emphasis supplied) The economic conditions of the country are immaterial to the issue on the liability of the
petitioners under their indemnity agreements.
The issue raised in the second defense, on whether or not the indemnity agreements were intended as collaterals for
future Chemark loans is likewise sham and fictitious. Under the indemnity agreements, the petitioners bound
themselves to pay whatever amount Chemark may be indebted to the bank "under and by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s) ... (Emphasis supplied)
The argument as to whether or not Dynetics' execution of the indemnity agreement is contrary to its purposes and
therefore ultra vires and unenforceable against it does not tender a genuine issue. The record shows that Dynetics
was authorized to execute the indemnity agreements evidenced by the Corporate Secretary's certificate (p. 38, 264
Original Records).
This was not rebutted.
Indeed, we find no genuine issues raised in the complaint which can not be resolved by the pleadings, admissions
and the affidavit of Charis Marquez submitted to the court. As the appellate court said:
Dynetics, Garcia and Matrix attempted to avoid liability by trying hard to create factual issues
fit for trial. The attempt is but a hodgepodge of legal arguments and conclusions which can be
resolved without the rituals of trial. Thus, Dynetics urges that there is need for trial to determine
whether it can be compelled to pay considering that SEC by its Order of September 27, 1984
has prohibited Chemark from paying its creditors. The issue is strictly legal and can be decided
by determining the character of liability of Dynetics as joint and solidary debtor. Dynetics also
argues that it raised the issue of lack of consideration which must be tried on the merits. The
issue deserves scant consideration for the parties' Indemnity Agreement specifies the
consideration to be the grant of credit accommodation to Chemark in the sum of P20 M. Also
what is posed is a legal issue resolvable in light of the character of Dynetics as a joint and
solidary debtor. Dynetics also asseverates that it did not intend its Indemnity Agreement as
collaterals for future Chemark loans. This is a clear pretense considering that again under its
Indemnity Agreement, Dynetics clearly bound itself to pay whatever amount Chemark may be
indebted to Security Bank "under and by virtue of the aforesaid credit accommodation(s)
including the substitutions, renewals, extensions, increases, amendments, conversions and
revivals of aforesaid credit accommodation(s.)" There is nothing on record to substantiate the
pretense of mistake of Dynetics. (Rollo, p. 121)
xxx xxx xxx
Then Dynetics argues that it has raised the issue of novation in light of the new loan contracts
between Security Bank and Chemark. Again, the alleged new contracts are established facts
and need not be the subject of trial. Upon their basis, the court can conclude whether there is
novation of contract. (Rollo, P. 125)
The petitioners also assail the awards of penalty charges at 36% per annum and interest at 18% and 24% per annum
respectively on the loans. They contend that the interests are excessive and are not sustained by the evidence
because the rate of interest stipulated in the promissory notes is only 11 % per annum.
The lower courts based the computation of interests and penalty charges on the affidavit of Charis Marquez, Assistant
Manager of the Corporate Banking Group of Security Bank & Trust Co. Marquez was the account officer who handled
the account of Chemark. The pertinent portions of the affidavit read as follows:
22. As per statements of Accounts dated June l5, 1985, under the said promissory notes
(Annexes "2" and "3" hereof) covered by the subject Indemnity Agreements (Annexes "4", "7"
and "8" hereof), the total outstanding obligation of Dynetics, Inc., Matrix Management &
Trading Corporation and Antonio M. Garcia to Security Bank & Trust Co. was P38,189,038.27,
including interest and charges. Attached hereto as Annexes "9" and "l0" are copies of said
Statements of Accounts dated June 15, 1985;
23. In the said Statements of Accounts dated June 15, 1985, we charged 18% and 25% per
annum, respectively, because the subject loans (Annexes "2" and "3" hereof) were intended
to be rediscounted at the Central Bank at 11% per annum. However, when Chemark Electric
Motors, Inc. failed to give us the required letter of credit which was a requirement of the Central
Bank, we charged them 18% and 24% instead of 11% interest per annum. These higher
interest charges were based on and authorized under our Credit Proposal, copies of which are
hereto attached as Annexes "11" to "11-B". (Original Records, p. 252)
The increased interest rates are expressly provided for in the amended credit line agreement and in the two promissory
notes executed by Chemark in favor of Security Bank & Trust Co. We find no reversible error in the award of interests.
The penalty of 36% per annum is provided in the promissory notes (Annexes "3", "4" Affidavit), as follows:
If this note is not fully paid when due, the undersigned shall pay, in addition to the stipulated
interest, a penalty of 3% per month on the total outstanding principal and interest due and
unpaid. ... (Original Records, p. 256)
The affidavit and supporting documents were attached to the respondent bank's motion for summary judgment. The
petitioners failed to oppose Marquez' affidavit in their "Oppositions" to the motion for summary judgment. Neither did
they submit counter- affidavits, as was their right, to oppose these amounts due from them including the increased
interests and penalty charges. Under these circumstances, the respondent bank was entitled to summary judgment
(Philippine National Bank v. Phil. Leather Co., Inc., et al. 105 Phil. 400; See also Mercado, et al. v. Court of Appeals
supra). As earlier stated, the lower court committed no reversible error in awarding the questioned interests. We
<re||an1w>
cannot, however, agree with the appellate court as regards the award of penalty charges at 36% per annum.
Penalty interests are in the nature of liquidated damages (Cumagun v. Philippine American Insurance Co., Inc., et al.
G.R. No. 81453 August 15, 1988; Lambert v. Fox, 26 Phil. 588) and may be equitably reduced by the courts if they
are iniquitous or unconscionable. (See Articles 1229, 2227, New Civil Code).
The records show that on the first loan, the principal of which is P6,350,750.00, the penalty charges as of June 15,
1986 are already equivalent to P6,774,378.06 (p. 265, Original Records) and that on the second loan, the principal of
which is P8,649,250.00 the penalty charges as of June 15, 1985 are equivalent to P8,662,008.53. (p. 266, Original
Records) The P6,774,378.06 penalty charges in the first loan would have been earned by the private respondent after
only 725 days (1 year and 360 days) of delay in the payment of the loan while the P8,662,008.53 penalty charges
would have been earned by the private respondent after only 646 days (1 year and 281 days) of delay in the payment
of the loan. The figures from 1985 to 1988 would amount to several times the principal loans.
We agree with the petitioner that the penalty charges are excessive and unconscionable. The interest charges are
enough punishment for the petitioners' failure to comply with their obligations.
Finally, the petitioners question the amount for attorney's fees equivalent to 10% of their obligation.
Again, Chemark's promissory notes provide for the award of attorney's fees in case of default to pay the loans, to wit:
xxx xxx xxx

If this note is not fully paid when due, the undersigned shall pay, in addition to the stipulated
interest, a penalty of 3% per month on the total outstanding principal and interest due and
unpaid. The undersigned shall also pay, as and for attorney's fee, a sum equivalent to 20% of
the total amount due under this note plus expenses and costs of collection, in case this note
is placed in the hands of an attorney for collection. (See Annexes "2", "3", Affidavit of Charis
Marquez) (Original Records, p. 255)
The award for attorney's fees is justified and, in fact, is even lower than that agreed upon by the parties.
WHEREFORE, the instant petition is DISMISSED. The questioned decision and resolution of the Court of Appeals
are AFFIRMED except for the award of penalty charges which is stricken from the judgment. The Temporary
Restraining Order issued on March 30, 1988 is LIFTED. Costs against the petitioners.
SO ORDERED.

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Republic of the Philippines

G.R. No. 167519 January 14, 2015

THE WELLEX GROUP, INC., Petitioner,

Wellex is a corporation established under Philippine law and it maintains airline

Terms of the First Memorandum of Agreement

The preambular clauses of the First Memorandum of Agreement state:

WHEREAS, U-LAND is engaged in the business of airline transportation in Taiwan,

(a) U-LAND shall acquire from WELLEX, shares of stock of AIR

(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE

I. Acquisition of APIC and PEC shares

Thus, Section 2 of the First Memorandum of Agreement reads:

II. Operation and management of APIC/PEC/APC

U-Land was "entitled to a proportionate representation in the Board of Directors of APIC

Section 3 of the First Memorandum of Agreement reads:

3. Operation/Management of APIC/APC. - U-LAND shall be entitled to a proportionate

III. Entering into and funding a joint development agreement

6. Primacy of Agreement. It is agreed that in case of conflict between the provisions

Annex "A" or the Second Memorandum of Agreement

The Second Memorandum of Agreement states:

AIR PHILIPPINES INTERNATIONAL CORPORATION (formerly FORUM PACIFIC,

NOW, THEREFORE, the parties agree as follows:

1. TWGI agrees to transfer the APC ADVANCES in APIC in

2. TWGI likewise agrees to transfer the APC SHARES to APIC

3. It is the basic understanding of the parties hereto that the

4. Unless the parties agree otherwise, the effectivity of this

IN WITNESS WHEREOF, the parties have caused these

The Second Memorandum of Agreement was signed by Mr. Gatchalian, APIC

Date Amount (in US$)

Wellex acknowledged the receipt of these remittances in a confirmation letter

Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land stock

In addition, Wellex delivered to U-Land Transfer Certificates of Title (TCT) Nos. T-

The case proceeded to trial.

A I was not involved in the negotiation, sir.

A Yes, it was part of the contract."

(TSN, Elvira Ting, June 6, 2000, pp. 8-10)

Q How much shares of Air Philippines Corporation is owned by Wellex Group?

A Around twenty...at this moment around twenty five percent (25%).

A There are several individual owners, I cannot recall the names.

A As of this moment, no sir."

A There were queries on the matter.

Q And what was your answer to those queries, Madam Witness?

A We informed them that the decision was still in the process.

A APC to APIC, well at that time its still in the process.

(lbid, pp. 25-29)

The lower court . . . correctly ruled that:

Hence, this Petition was filed.

The Petition must be denied.

In Norton Resources and Development Corporation v. All Asia Bank Corporation:151

The second preambular clause of the First Memorandum of Agreement reads:

Section 1 of the First Memorandum of Agreement reads:

I. Basic Agreement. - The parties agree to develop a long-term business relationship

(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE

As for the joint development agreement, the First Memorandum of Agreement

Article 1373 of the Civil Code provides:

Therefore, the understanding of the parties captured in the First Memorandum of

Section 9 of the First Memorandum of Agreement explicitly provides that:

There was no express or implied

Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor.

Article 1292. In order that an obligation may be extinguished by another which

Novation extinguishes an obligation between two parties when there is a substitution of