CATHAY PACIFIC AIRWAYS, LTD., petitioner, vs. SPOUSES witnessed by all the other passengers waiting for boarding.
waiting for boarding. They
DANIEL VAZQUEZ and MARIA LUISA MADRIGAL
VAZQUEZ, respondents.
DECISION
DAVIDE, JR., C.J.:
Is an involuntary upgrading of an airline passengers
accommodation from one class to a more superior class at no extra
cost a breach of contract of carriage that would entitle the passenger
to an award of damages? This is a novel question that has to be
resolved in this case.
The facts in this case, as found by the Court of Appeals and
adopted by petitioner Cathay Pacific Airways, Ltd., (hereinafter
Cathay) are as follows:
Cathay is a common carrier engaged in the business of
transporting passengers and goods by air. Among the many routes it
services is the Manila-Hongkong-Manila course. As part of its
marketing strategy, Cathay accords its frequent flyers membership
in its Marco Polo Club. The members enjoy several privileges, such
as priority for upgrading of booking without any extra charge
whenever an opportunity arises. Thus, a frequent flyer booked in
the Business Class has priority for upgrading to First Class if the
Business Class Section is fully booked.
Respondents-spouses Dr. Daniel Earnshaw Vazquez and
Maria Luisa Madrigal Vazquez are frequent flyers of Cathay and are
Gold Card members of its Marco Polo Club. On 24 September 1996,
the Vazquezes, together with their maid and two friends Pacita Cruz
and Josefina Vergel de Dios, went to Hongkong for pleasure and
business.
For their return flight to Manila on 28 September 1996, they
were booked on Cathays Flight CX-905, with departure time at 9:20
p.m. Two hours before their time of departure, the Vazquezes and
their companions checked in their luggage at Cathays check-in
counter at Kai Tak Airport and were given their respective boarding
passes, to wit, Business Class boarding passes for the Vazquezes and
their two friends, and Economy Class for their maid. They then
proceeded to the Business Class passenger lounge.
When boarding time was announced, the Vazquezes and their
two friends went to Departure Gate No. 28, which was designated for
Business Class passengers. Dr. Vazquez presented his boarding pass
to the ground stewardess, who in turn inserted it into an electronic
machine reader or computer at the gate. The ground stewardess was
assisted by a ground attendant by the name of Clara Lai Han
Chiu. When Ms. Chiu glanced at the computer monitor, she saw a
message that there was a seat change from Business Class to First
Class for the Vazquezes.
Ms. Chiu approached Dr. Vazquez and told him that the
Vazquezes accommodations were upgraded to First Class. Dr.
Vazquez refused the upgrade, reasoning that it would not look nice
for them as hosts to travel in First Class and their guests, in the
Business Class; and moreover, they were going to discuss business
matters during the flight. He also told Ms. Chiu that she could have
other passengers instead transferred to the First Class
Section. Taken aback by the refusal for upgrading, Ms. Chiu
consulted her supervisor, who told her to handle the situation and
convince the Vazquezes to accept the upgrading. Ms. Chiu informed
the latter that the Business Class was fully booked, and that since
they were Marco Polo Club members they had the priority to be
upgraded to the First Class. Dr. Vazquez continued to refuse, so Ms.
Chiu told them that if they would not avail themselves of the
privilege, they would not be allowed to take the flight. Eventually,
after talking to his two friends, Dr. Vazquez gave in. He and Mrs.
Vazquez then proceeded to the First Class Cabin.
Upon their return to Manila, the Vazquezes, in a letter of 2
October 1996 addressed to Cathays Country Manager, demanded
that they be indemnified in the amount of P1million for the
humiliation and embarrassment caused by its employees. They also
demanded a written apology from the management of Cathay,
preferably a responsible person with a rank of no less than the
Country Manager, as well as the apology from Ms. Chiu within
fifteen days from receipt of the letter.
In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to
Cathays Country Manager Argus Guy Robson, informed the
Vazquezes that Cathay would investigate the incident and get back
to them within a weeks time.
also claimed that they were unjustifiably delayed to board the plane,
and when they were finally permitted to get into the aircraft, the
forward storage compartment was already full. A flight stewardess
instructed Dr. Vazquez to put his roll-on luggage in the overhead
storage compartment. Because he was not assisted by any of the
crew in putting up his luggage, his bilateral carpal tunnel syndrome
was aggravated, causing him extreme pain on his arm and
wrist. The Vazquezes also averred that they belong to the
uppermost and absolutely top elite of both Philippine Society and
the Philippine financial community, [and that] they were among the
wealthiest persons in the Philippine[s].
In its answer, Cathay alleged that it is a practice among
commercial airlines to upgrade passengers to the next better class of
accommodation, whenever an opportunity arises, such as when a
certain section is fully booked. Priority in upgrading is given to its
frequent flyers, who are considered favored passengers like the
Vazquezes. Thus, when the Business Class Section of Flight CX-905
was fully booked, Cathays computer sorted out the names of favored
passengers for involuntary upgrading to First Class. When Ms. Chiu
informed the Vazquezes that they were upgraded to First Class, Dr.
Vazquez refused. He then stood at the entrance of the boarding
apron, blocking the queue of passengers from boarding the plane,
which inconvenienced other passengers. He shouted that it was
impossible for him and his wife to be upgraded without his two
friends who were traveling with them. Because of Dr. Vazquezs
outburst, Ms. Chiu thought of upgrading the traveling companions
of the Vazquezes. But when she checked the computer, she learned
that the Vazquezes companions did not have priority for
upgrading. She then tried to book the Vazquezes again to their
original seats. However, since the Business Class Section was already
fully booked, she politely informed Dr. Vazquez of such fact and
explained that the upgrading was in recognition of their status as
Cathays valued passengers. Finally, after talking to their guests, the
Vazquezes eventually decided to take the First Class
accommodation.
Cathay also asserted that its employees at the Hong Kong
airport acted in good faith in dealing with the Vazquezes; none of
them shouted, humiliated, embarrassed, or committed any act of
disrespect against them (the Vazquezes). Assuming that there was
indeed a breach of contractual obligation, Cathay acted in good
faith, which negates any basis for their claim for temperate, moral,
and exemplary damages and attorneys fees. Hence, it prayed for the
dismissal of the complaint and for payment of P100,000 for
exemplary damages and P300,000 as attorneys fees and litigation
expenses.
During the trial, Dr. Vazquez testified to support the
allegations in the complaint. His testimony was corroborated by his
two friends who were with him at the time of the incident, namely,
Pacita G. Cruz and Josefina Vergel de Dios.
For its part, Cathay presented documentary evidence and the
testimonies of Mr. Yuen; Ms. Chiu; Norma Barrientos, Comptroller
of its retained counsel; and Mr. Robson. Yuen and Robson testified
on Cathays policy of upgrading the seat accommodation of its Marco
Polo Club members when an opportunity arises. The upgrading of
the Vazquezes to First Class was done in good faith; in fact, the First
Class Section is definitely much better than the Business Class in
terms of comfort, quality of food, and service from the cabin
crew. They also testified that overbooking is a widely accepted
practice in the airline industry and is in accordance with the
International Air Transport Association (IATA)
regulations. Airlines overbook because a lot of passengers do not
show up for their flight. With respect to Flight CX-905, there was no
overall overbooking to a degree that a passenger was bumped off or
downgraded. Yuen and Robson also stated that the demand letter of
the Vazquezes was immediately acted upon. Reports were gathered
from their office in Hong Kong and immediately forwarded to their
counsel Atty. Remollo for legal advice. However, Atty. Remollo
begged off because his services were likewise retained by the
Vazquezes; nonetheless, he undertook to solve the problem in behalf
of Cathay. But nothing happened until Cathay received a copy of the
complaint in this case. For her part, Ms. Chiu denied that she
shouted or used foul or impolite language against the
Vazquezes. Ms. Barrientos testified on the amount of attorneys fees

d) Attorneys fees and expenses of litigation in the
amount of P1,000,000.00 for each
plaintiff; and
e) Costs of suit.
SO ORDERED.
According to the trial court, Cathay offers various classes of
seats from which passengers are allowed to choose regardless of
their reasons or motives, whether it be due to budgetary constraints
or whim. The choice imposes a clear obligation on Cathay to
transport the passengers in the class chosen by them. The carrier
cannot, without exposing itself to liability, force a passenger to
involuntarily change his choice. The upgrading of the Vazquezes
accommodation over and above their vehement objections was due
to the overbooking of the Business Class. It was a pretext to pack as
many passengers as possible into the plane to maximize Cathays
revenues. Cathays actuations in this case displayed deceit, gross
negligence, and bad faith, which entitled the Vazquezes to awards
for damages.
On appeal by the petitioners, the Court of Appeals, in its
[2]
decision of 24 July 2001, deleted the award for exemplary
damages; and it reduced the awards for moral and nominal damages
for each of the Vazquezes to P250,000 and P50,000, respectively,
and the attorneys fees and litigation expenses to P50,000 for both
of them.
The Court of Appeals ratiocinated that by upgrading the
Vazquezes to First Class, Cathay novated the contract of carriage
without the formers consent. There was a breach of contract not
because Cathay overbooked the Business Class Section of Flight CX-
905 but because the latter pushed through with the upgrading
despite the objections of the Vazquezes.
However, the Court of Appeals was not convinced that Ms.
Chiu shouted at, or meant to be discourteous to, Dr. Vazquez,
although it might seemed that way to the latter, who was a member
of the elite in Philippine society and was not therefore used to being
harangued by anybody. Ms. Chiu was a Hong Kong Chinese whose
fractured Chinese was difficult to understand and whose manner of
speaking might sound harsh or shrill to Filipinos because of cultural
differences. But the Court of Appeals did not find her to have acted
with deliberate malice, deceit, gross negligence, or bad faith. If at
all, she was negligent in not offering the First Class accommodations
to other passengers. Neither can the flight stewardess in the First
Class Cabin be said to have been in bad faith when she failed to
assist Dr. Vazquez in lifting his baggage into the overhead storage
bin. There is no proof that he asked for help and was refused even
after saying that he was suffering from bilateral carpal tunnel
syndrome. Anent the delay of Yuen in responding to the demand
letter of the Vazquezes, the Court of Appeals found it to have been
sufficiently explained.
The Vazquezes and Cathay separately filed motions for a
reconsideration of the decision, both of which were denied by the
Court of Appeals.
Cathay seasonably filed with us this petition in this
case. Cathay maintains that the award for moral damages has no
basis, since the Court of Appeals found that there was no wanton,
fraudulent, reckless and oppressive display of manners on the part
of its personnel; and that the breach of contract was not attended by
fraud, malice, or bad faith. If any damage had been suffered by the
Vazquezes, it was damnum absque injuria, which is damage without
injury, damage or injury inflicted without injustice, loss or damage
without violation of a legal right, or a wrong done to a man for which
the law provides no remedy. Cathay also invokes our decision
[3]
in United Airlines, Inc. v. Court of Appeals where we recognized that,
in accordance with the Civil Aeronautics Boards Economic
Regulation No. 7, as amended, an overbooking that does not exceed
ten percent cannot be considered deliberate and done in bad faith.
We thus deleted in that case the awards for moral and exemplary
damages, as well as attorneys fees, for lack of proof of overbooking
exceeding ten percent or of bad faith on the part of the airline
carrier.
On the other hand, the Vazquezes assert that the Court of
Appeals was correct in granting awards for moral and nominal
damages and attorneys fees in view of the breach of contract
committed by Cathay for transferring them from the Business Class
to First Class Section without prior notice or consent and over their
[4]
cause of the obligation which is established. Undoubtedly, a
contract of carriage existed between Cathay and the Vazquezes.
They voluntarily and freely gave their consent to an agreement
whose object was the transportation of the Vazquezes from Manila
to Hong Kong and back to Manila, with seats in the Business Class
Section of the aircraft, and whose cause or consideration was the
fare paid by the Vazquezes to Cathay.
The only problem is the legal effect of the upgrading of the
seat accommodation of the Vazquezes. Did it constitute a breach of
contract?
Breach of contract is defined as the failure without legal reason
[5]
to comply with the terms of a contract. It is also defined as the
[f]ailure, without legal excuse, to perform any promise which forms
[6]
the whole or part of the contract.
In previous cases, the breach of contract of carriage consisted
in either the bumping off of a passenger with confirmed reservation
or the downgrading of a passengers seat accommodation from one
class to a lower class. In this case, what happened was the
reverse. The contract between the parties was for Cathay to
transport the Vazquezes to Manila on a Business Class
accommodation in Flight CX-905. After checking-in their luggage at
the Kai Tak Airport in Hong Kong, the Vazquezes were given
boarding cards indicating their seat assignments in the Business
Class Section. However, during the boarding time, when the
Vazquezes presented their boarding passes, they were informed that
they had a seat change from Business Class to First Class. It turned
out that the Business Class was overbooked in that there were more
passengers than the number of seats. Thus, the seat assignments of
the Vazquezes were given to waitlisted passengers, and the
Vazquezes, being members of the Marco Polo Club, were upgraded
from Business Class to First Class.
We note that in all their pleadings, the Vazquezes never
denied that they were members of Cathays Marco Polo Club. They
knew that as members of the Club, they had priority for upgrading
of their seat accommodation at no extra cost when an opportunity
arises. But, just like other privileges, such priority could be
waived. The Vazquezes should have been consulted first whether
they wanted to avail themselves of the privilege or would consent to
a change of seat accommodation before their seat assignments were
given to other passengers. Normally, one would appreciate and
accept an upgrading, for it would mean a better
accommodation. But, whatever their reason was and however odd it
might be, the Vazquezes had every right to decline the upgrade and
insist on the Business Class accommodation they had booked for
and which was designated in their boarding passes. They clearly
waived their priority or preference when they asked that other
passengers be given the upgrade. It should not have been imposed
on them over their vehement objection. By insisting on the upgrade,
Cathay breached its contract of carriage with the Vazquezes.
We are not, however, convinced that the upgrading or the
breach of contract was attended by fraud or bad faith. Thus, we
resolve the second issue in the negative.
Bad faith and fraud are allegations of fact that demand clear
and convincing proof. They are serious accusations that can be so
conveniently and casually invoked, and that is why they are never
presumed. They amount to mere slogans or mudslinging unless
convincingly substantiated by whoever is alleging them.
Fraud has been defined to include an inducement through
insidious machination. Insidious machination refers to a deceitful
scheme or plot with an evil or devious purpose. Deceit exists where
the party, with intent to deceive, conceals or omits to state material
facts and, by reason of such omission or concealment, the other
party was induced to give consent that would not otherwise have
[7]
been given.
Bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral obliquity
and conscious doing of a wrong, a breach of a known duty through
some motive or interest or ill will that partakes of the nature of
[8]
fraud.
We find no persuasive proof of fraud or bad faith in this
case. The Vazquezes were not induced to agree to the upgrading
through insidious words or deceitful machination or through willful
concealment of material facts. Upon boarding, Ms. Chiu told the
Vazquezes that their accommodations were upgraded to First Class
 We are not persuaded by the Vazquezes argument that the
overbooking of the Business Class Section constituted bad faith on
the part of Cathay. Section 3 of the Economic Regulation No. 7 of the
Civil Aeronautics Board, as amended, provides:
Sec 3. Scope. This regulation shall apply to every Philippine and
foreign air carrier with respect to its operation of flights or portions
of flights originating from or terminating at, or serving a point
within the territory of the Republic of the Philippines insofar as it
denies boarding to a passenger on a flight, or portion of a flight
inside or outside the Philippines, for which he holds confirmed
reserved space. Furthermore, this Regulation is designed to cover
only honest mistakes on the part of the carriers and excludes
deliberate and willful acts of non-accommodation. Provided,
however, that overbooking not exceeding 10% of the seating capacity
of the aircraft shall not be considered as a deliberate and willful act
of non-accommodation.
It is clear from this section that an overbooking that does not
exceed ten percent is not considered deliberate and therefore does
[10]
not amount to bad faith. Here, while there was admittedly an
overbooking of the Business Class, there was no evidence of
overbooking of the plane beyond ten percent, and no passenger was
ever bumped off or was refused to board the aircraft.
Now we come to the third issue on damages.
The Court of Appeals awarded each of the Vazquezes moral
damages in the amount of P250,000. Article 2220 of the Civil Code
provides:
Article 2220. Willful injury to property may be a legal ground for
awarding moral damages if the court should find that, under the
circumstances, such damages are justly due. The same rule applies
to breaches of contract where the defendant acted fraudulently or in
bad faith.
Moral damages include physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. Although
incapable of pecuniary computation, moral damages may be
recovered if they are the proximate result of the defendants
[11]
wrongful act or omission. Thus, case law establishes the following
requisites for the award of moral damages: (1) there must be an
injury clearly sustained by the claimant, whether physical, mental or
psychological; (2) there must be a culpable act or omission factually
established; (3) the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) the
award for damages is predicated on any of the cases stated in Article
[12]
2219 of the Civil Code.
Moral damages predicated upon a breach of contract of
carriage may only be recoverable in instances where the carrier is
guilty of fraud or bad faith or where the mishap resulted in the death
[13]
of a passenger. Where in breaching the contract of carriage the
airline is not shown to have acted fraudulently or in bad faith,
liability for damages is limited to the natural and probable
consequences of the breach of the obligation which the parties had
foreseen or could have reasonably foreseen. In such a case the
[14]
liability does not include moral and exemplary damages.
In this case, we have ruled that the breach of contract of
carriage, which consisted in the involuntary upgrading of the
Vazquezes seat accommodation, was not attended by fraud or bad
faith. The Court of Appeals award of moral damages has, therefore,
no leg to stand on.
The deletion of the award for exemplary damages by the Court
of Appeals is correct. It is a requisite in the grant of exemplary
damages that the act of the offender must be accompanied by bad
[15]
faith or done in wanton, fraudulent or malevolent manner. Such
requisite is absent in this case. Moreover, to be entitled thereto the
claimant must first establish his right to moral, temperate, or
[16]
compensatory damages. Since the Vazquezes are not entitled to
any of these damages, the award for exemplary damages has no legal
basis. And where the awards for moral and exemplary damages are
[17]
eliminated, so must the award for attorneys fees.
The most that can be adjudged in favor of the Vazquezes for
Cathays breach of contract is an award for nominal damages under
Article 2221 of the Civil Code, which reads as follows:
Article 2221 of the Civil Code provides:
Article 2221. Nominal damages are adjudicated in order that a right
of the plaintiff, which has been violated or invaded by the defendant,
the respondents-spouses with additional amenities for the one and
[18]
one-half (1 1/2) hour flight to Manila, unintended tension ensued.
Nonetheless, considering that the breach was intended to give more
benefit and advantage to the Vazquezes by upgrading their Business
Class accommodation to First Class because of their valued status as
Marco Polo members, we reduce the award for nominal damages
to P5,000.
Before writing finis to this decision, we find it well-worth to
quote the apt observation of the Court of Appeals regarding the
awards adjudged by the trial court:
We are not amused but alarmed at the lower courts unbelievable
alacrity, bordering on the scandalous, to award excessive amounts as
damages. In their complaint, appellees asked for P1 million as
moral damages but the lower court awarded P4 million; they asked
for P500,000.00 as exemplary damages but the lower court
cavalierly awarded a whooping P10 million; they asked
for P250,000.00 as attorneys fees but were awarded P2 million; they
did not ask for nominal damages but were awarded P200,000.00. It
is as if the lower court went on a rampage, and why it acted that way
is beyond all tests of reason. In fact the excessiveness of the total
award invites the suspicion that it was the result of prejudice or
corruption on the part of the trial court.
The presiding judge of the lower court is enjoined to hearken to the
Supreme Courts admonition in Singson vs. CA (282 SCRA 149
[1997]), where it said:
The well-entrenched principle is that the grant of moral damages
depends upon the discretion of the court based on the circumstances
of each case. This discretion is limited by the principle that the
amount awarded should not be palpably and scandalously excessive
as to indicate that it was the result of prejudice or corruption on the
part of the trial court.
and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was
held:
Nonetheless, we agree with the injunction expressed by the Court of
Appeals that passengers must not prey on international airlines for
damage awards, like trophies in a safari. After all neither the social
standing nor prestige of the passenger should determine the extent
to which he would suffer because of a wrong done, since the dignity
affronted in the individual is a quality inherent in him and not
[19]
conferred by these social indicators.
We adopt as our own this observation of the Court of Appeals.
WHEREFORE, the instant petition is hereby
partly GRANTED. The Decision of the Court of Appeals of 24 July
2001 in CA-G.R. CV No. 63339 is hereby MODIFIED, and as
modified, the awards for moral damages and attorneys fees are set
aside and deleted, and the award for nominal damages is reduced
to P5,000.
No pronouncement on costs.
SO ORDERED.
Vitug, Carpio, and Azcuna, JJ., concur.
Ynares-Santiago, J., on leave.
SINGAPORE AIRLINES LIMITED, petitioner, vs. ANDION
FERNANDEZ, respondent.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari assailing the
[1]
Decision of the Court of Appeals which affirmed in toto the
[2]
decision of the Regional Trial Courtof Pasig City, Branch 164 in
Civil Case No. 60985 filed by the respondent for damages.
The Case for the Respondent
Respondent Andion Fernandez is an acclaimed soprano here
in the Philippines and abroad. At the time of the incident, she was
availing an educational grant from the Federal Republic of
[3]
Germany, pursuing a Masters Degree in Music majoring in Voice.
She was invited to sing before the King and Queen
of Malaysia on February 3 and 4, 1991. For this singing
engagement, an airline passage ticket was purchased from petitioner
Singapore Airlines which would transport her
to Manila from Frankfurt, Germany on January 28,
1991. From Manila, she would proceed to Malaysia on the next
[4]
 On January 27, 1991, Flight No. SQ 27 left Frankfurt but
arrived in Singapore two hours late or at about 11:00 in the
morning of January 28, 1991. By then, the aircraft bound
for Manila had left as scheduled, leaving the respondent and about
[6]
25 other passengers stranded in the Changi Airport in Singapore.
Upon disembarkation at Singapore, the respondent
approached the transit counter who referred her to the nightstop
counter and told the lady employee thereat that it was important for
her to reach Manila on that day, January 28, 1991. The lady
employee told her that there were no more flights to Manila for
that day and that respondent had no choice but to stay
in Singapore. Upon respondents persistence, she was told that she
can actually fly to Hong Konggoing to Manila but since her ticket
was non-transferable, she would have to pay for the ticket. The
respondent could not accept the offer because she had no money to
[7]
pay for it. Her pleas for the respondent to make arrangements to
[8]
transport her to Manila were unheeded.
The respondent then requested the lady employee to use their
phone to make a call to Manila. Over the employees reluctance, the
respondent telephoned her mother to inform the latter that she
missed the connecting flight. The respondent was able to contact a
family friend who picked her up from the airport for her overnight
[9]
stay in Singapore.
The next day, after being brought back to the airport, the
respondent proceeded to petitioners counter which says: Immediate
Attention To Passengers with Immediate Booking. There were four
or five passengers in line. The respondent approached petitioners
male employee at the counter to make arrangements for immediate
booking only to be told: Cant you see I am doing something. She
explained her predicament but the male employee uncaringly
[10]
retorted: Its your problem, not ours.
The respondent never made it to Manila and was forced to
take a direct flight from Singapore to Malaysia on January 29,
1991, through the efforts of her mother and travel agency
in Manila. Her mother also had to travel to Malaysia bringing
with her respondents wardrobe and personal things needed for the
performance that caused them to incur an expense of about
[11]
P50,000.
As a result of this incident, the respondents performance
before the Royal Family of Malaysia was below par. Because of the
rude and unkind treatment she received from the petitioners
personnel in Singapore, the respondent was engulfed with fear,
anxiety, humiliation and embarrassment causing her to suffer
mental fatigue and skin rashes. She was thereby compelled to seek
immediate medical attention upon her return to Manila for acute
[12]
urticaria.
On June 15, 1993, the RTC rendered a decision with the
following dispositive portion:
ACCORDINGLY and as prayed for, defendant Singapore Airlines is
ordered to pay herein plaintiff Andion H. Fernandez the sum of:
1. FIFTY THOUSAND (P50,000.00) PESOS as
compensatory or actual damages;
2. TWO HUNDRED and FIFTY THOUSAND
(P250,000.00) PESOS as moral damages
considering plaintiffs professional
standing in the field of culture at home
and abroad;
3. ONE HUNDRED THOUSAND (P100,000.00)
PESOS as exemplary damages;
4. SEVENTY-FIVE THOUSAND (P75,000.00)
PESOS as attorneys fees; and
5. To pay the costs of suit.
[13]
SO ORDERED.
The petitioner appealed the decision to the Court of Appeals.
On June 10, 1998, the CA promulgated the assailed decision
finding no reversible error in the appealed decision of the trial
[14]
court.
Forthwith, the petitioner filed the instant petition for review,
raising the following errors:
I C.C.).Since part of the failure to comply with the obligation of
THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING
IN TOTO THE DECISION OF THE TRIAL COURT THAT
AWARDED DAMAGES TO RESPONDENT FOR THE ALLEGED
FAILURE OF THE PETITIONER TO
on January 27, 1991. The plane could not take off from the airport as
the place was shrouded with fog. This delay caused a snowball
effect whereby the other flights were consequently delayed. The
plane carrying the respondent arrived in Singapore two (2) hours
[16]
behind schedule. The delay was even compounded when the
plane could not travel the normal route which was through
the Middle East due to the raging Gulf War at that time. It had to
pass through the restricted Russian airspace which was more
[17]
congested.
Under these circumstances, petitioner therefore alleged that it
cannot be faulted for the delay in arriving in Singapore on January
28, 1991 and causing the respondent to miss her connecting flight
to Manila.
The petitioner further contends that it could not also be held
in bad faith because its personnel did their best to look after the
needs and interests of the passengers including the
respondent. Because the respondent and the other 25 passengers
missed their connecting flight to Manila, the petitioner
automatically booked them to the flight the next day and gave them
free hotel accommodations for the night. It was respondent who did
not take petitioners offer and opted to stay with a family friend
in Singapore.
The petitioner also alleges that the action of the respondent
was baseless and it tarnished its good name and image earned
through the years for which, it was entitled to damages in the
amount of P1,000,000; exemplary damages of P500,000; and
[18]
attorneys fees also in the amount of P500,000.
The petition is barren of merit.
When an airline issues a ticket to a passenger, confirmed for a
particular flight on a certain date, a contract of carriage arises. The
passenger then has every right to expect that he be transported on
that flight and on that date. If he does not, then the carrier opens
[19]
itself to a suit for a breach of contract of carriage.
The contract of air carriage is a peculiar one. Imbued with
public interest, the law requires common carriers to carry the
passengers safely as far as human care and foresight can provide,
using the utmost diligence of very cautious persons with due regard
[20]
for all the circumstances. In an action for breach of contract of
carriage, the aggrieved party does not have to prove that the
common carrier was at fault or was negligent. All that is necessary
to prove is the existence of the contract and the fact of its non-
[21]
performance by the carrier.
In the case at bar, it is undisputed that the respondent carried a
confirmed ticket for the two-legged trip
from Frankfurt to Manila: 1) Frankfurt-Singapore; and 2)
Singapore-Manila. In her contract of carriage with the petitioner,
the respondent certainly expected that she would fly to Manila on
Flight No. SQ 72 on January 28, 1991. Since the petitioner did not
transport the respondent as covenanted by it on said terms, the
petitioner clearly breached its contract of carriage with the
respondent. The respondent had every right to sue the petitioner
for this breach. The defense that the delay was due to fortuitous
events and beyond petitioners control is unavailing. In PAL vs.
[22]
CA, we held that:
.... Undisputably, PALs diversion of its flight due to inclement
weather was a fortuitous event. Nonetheless, such occurrence did
not terminate PALs contract with its passengers. Being in the
business of air carriage and the sole one to operate in the country,
PAL is deemed to be equipped to deal with situations as in the case
at bar. What we said in one case once again must be stressed, i.e.,
the relation of carrier and passenger continues until the latter has
been landed at the port of destination and has left the carriers
premises. Hence, PAL necessarily would still have to exercise
extraordinary diligence in safeguarding the comfort, convenience
and safety of its stranded passengers until they have reached their
final destination...
...
...If the cause of non-fulfillment of the contract is due to a fortuitous
event, it has to be the sole and only cause (Art. 1755 C.C., Art. 1733
common carrier to deliver its passengers safely to their destination
lay in the defendants failure to provide comfort and convenience to
its stranded passengers using extraordinary diligence, the cause of
non-fulfillment is not solely and exclusively due to fortuitous event,
 court,Flight SQ-27/28 maybe delayed for about says: Immediate Attention to Passengers with Immediate Booking
half an hour to transfer plaintiff to her was rude to her when he curtly retorted that he was busy attending
connecting flight. As pointed out above, delay is to other passengers in line. The trial court concluded that this
normal in commercial air transportation (RTC inattentiveness and rudeness of petitioners personnel to
Decision, p. 22); or respondents plight was gross enough amounting to bad faith. This
(b) Petitioner airlines could have carried her on one of is a finding that is generally binding upon the Court which we find
its flights bound for Hongkong and arranged for no reason to disturb.
a connecting flight from Hongkong Article 2232 of the Civil Code provides that in a contractual or
to Manila all on the same date. But then the quasi-contractual relationship, exemplary damages may be awarded
airline personnel who informed her of such only if the defendant had acted in a wanton, fraudulent, reckless,
possibility told her that she has to pay for that oppressive or malevolent manner. In this case, petitioners
flight. Regrettably, respondent did not have employees acted in a wanton, oppressive or malevolent
sufficient funds to pay for it. (TSN, 30 March manner. The award of exemplary damages is, therefore, warranted
1992, pp.8-9; RTC Decision, pp. 22-23) Knowing in this case.
the predicament of the respondent, petitioner did WHEREFORE, the Petition is DENIED. The Decision of the
not offer to shoulder the cost of the ticket for that Court of Appeals is AFFIRMED.
flight; or SO ORDERED.
(c) As noted by the trial court from the account of Puno, (Chairman), Quisumbing, Austria-Martinez, and Tinga,
petitioners witness, Bob Khkimyong, that a JJ., concur.
passenger such as the plaintiff could have been
accommodated in another international airline
such as Lufthansa to bring the plaintiff to
Singapore early enough from Frankfurt provided
that there was prior communication from that
*
station to enable her to catch the connecting EQUITABLE PCI BANK, G.R. No. 171545
flight to Manila because of the urgency of her AIMEE YU and BEJAN
business in Manila(RTC Decision, p. 23) LIONEL APAS,
The petitioners diligence in communicating to its passengers Petitioners, Present:
the consequences of the delay in their flights was wanting. As PUNO, C.J., Chairperson,
elucidated by the trial court: - v e r s u s - SANDOVAL-GUTIERREZ,
It maybe that delay in the take off and arrival of commercial aircraft CORONA,
could not be avoided and may be caused by diverse factors such as A
those testified to by defendants pilot. However, knowing fully well ZCUNA
that even before the plaintiff boarded defendants Jumbo aircraft and
in Frankfurt bound for Singapore, it has already incurred a delay LEONA
of two hours. Nevertheless, defendant did not take the trouble of RDO-DE
informing plaintiff, among its other passengers of such a delay and CASTRO, JJ.
**
that in such a case, the usual practice of defendant airline will be NG SHEUNG NGOR doing
that they have to stay overnight at their connecting airport; and business under the name
much less did it inquire from the plaintiff and the other 25 and style KEN MARKETING, Promulgated:
passengers bound for Manila whether they are amenable to stay KEN APPLIANCE DIVISION,
overnight in Singapore and to take the connecting flight to Manila INC. and BENJAMIN E. GO,
the next day. Such information should have been given and Respondents. December 19, 2007
inquiries made in Frankfurt because even the defendant airlines
manual provides that in case of urgency to reach his or her
destination on the same date, the head office of defendant in x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - x
Singapore must be informed by telephone or telefax so as the latter
may make certain arrangements with other airlines in Frankfurt to DECISION
bring such a passenger with urgent business to Singapore in such a
manner that the latter can catch up with her connecting flight such CORONA, J.:
[23]
as S-27/28 without spending the night in Singapore
[1]
The respondent was not remiss in conveying her apprehension This petition for review on certiorari seeks to set aside the
[2]
about the delay of the flight when she was still in Frankfurt. Upon decision of the Court of Appeals (CA) in CA-G.R. SP No. 83112 and
[3]
the assurance of petitioners personnel in Frankfurt that she will be its resolution denying reconsideration.
[4]
transported to Manila on the same date, she had every right to On October 7, 2001, respondents Ng Sheung Ngor, Ken
expect that obligation fulfilled. She testified, to wit: Appliance Division, Inc. and Benjamin E. Go filed an action for
Q: Now, since you were late, when the plane that arrived annulment and/or reformation of documents and
[5]
from Frankfurt was late, did you not make contracts against petitioner Equitable PCI Bank (Equitable) and its
arrangements so that your flight employees, Aimee Yu and Bejan Lionel Apas, in the Regional Trial
[6]
from Singapore to Manilawould be adjusted? Court (RTC), Branch 16 of Cebu City. They claimed that
A: I asked the lady at the ticket counter, the one who Equitable induced them to avail of its peso and dollar credit facilities
[7]
gave the boarding pass in Frankfurt and I asked by offering low interest rates so they accepted Equitable's proposal
her, Since my flight going to Singapore would be and signed the bank's pre-printed promissory notes on various dates
late, what would happen to my Singapore-Manila beginning 1996. They, however, were unaware that the documents
flight? and then she said, Dont worry, Singapore contained identical escalation clauses granting Equitable authority
[8]
Airlines would be responsible to bring you to to increase interest rates without their consent.
Manila on the same date. And then they have
informed the name of the officer, or whatever, that Equitable, in its answer, asserted that respondents knowingly
[24]
our flight is going to be late. accepted all the terms and conditions contained in the promissory
[9]
When a passenger contracts for a specific flight, he has a notes. In fact, they continuously availed of and benefited from
[10]
purpose in making that choice which must be respected. This Equitable's credit facilities for five years.
choice, once exercised, must not be impaired by a breach on the part
[25]
of the airline without the latter incurring any liability. For After trial, the RTC upheld the validity of the promissory notes. It
petitioners failure to bring the respondent to her destination, as found that, in 2001 alone, Equitable restructured respondents' loans
[11]
 [29]
WHEREFORE, premises considered, judgment A writ of execution was thereafter issued and three real
[30]
is hereby rendered: properties of Equitable were levied upon.

A) Ordering [Equitable] to reinstate and
return the amount of [respondents']
deposit placed on hold status;
B) Ordering [Equitable] to pay
[respondents] the sum of P12 [m]illion
[p]esos as moral damages;
C) Ordering [Equitable] to pay
[respondents] the sum of P10 [m]illion
[p]esos as exemplary damages;
D) Ordering defendants Aimee Yu and
Bejan [Lionel] Apas to pay
[respondents], jointly and severally, the
sum of [t]wo [m]illion [p]esos as moral
and exemplary damages;
E) Ordering [Equitable, Aimee Yu and
Bejan Lionel Apas], jointly and
severally, to pay [respondents']
attorney's fees in the sum of P300,000;
litigation expenses in the sum
of P50,000 and the cost of suit;
F) Directing plaintiffs Ng Sheung Ngor
and Ken Marketing to pay [Equitable]
the unpaid principal obligation for the
peso loan as well as the unpaid
obligation for the dollar denominated
loan;
G) Directing plaintiff Ng Sheung Ngor
and Ken Marketing to pay [Equitable]
interest as follows:
1) 12% per annum for the peso
loans;
2) 8% per annum for the dollar
loans. The basis for the payment
of the dollar obligation is the
conversion rate of P26.50 per
dollar availed of at the time of
incurring of the obligation in
accordance with Article 1250 of the
Civil Code of the Philippines;
On March 26, 2004, Equitable filed a petition for relief in the RTC
[31]
from the March 1, 2004 order. It, however, withdrew that petition
[32]
on March 30, 2004 and instead filed a petition for certiorari with
an application for an injunction in the CA to enjoin the
implementation and execution of the March 24, 2004 omnibus
[33]
order.
On June 16, 2004, the CA granted Equitable's application for
injunction. A writ of preliminary injunction was correspondingly
[34]
issued.
Notwithstanding the writ of injunction, the properties of Equitable
previously levied upon were sold in a public auction on July 1, 2004.
Respondents were the highest bidders and certificates of sale were
[35]
issued to them.
On August 10, 2004, Equitable moved to annul the July 1, 2004
auction sale and to cite the sheriffs who conducted the sale in
contempt for proceeding with the auction despite the injunction
[36]
order of the CA.
On October 28, 2005, the CA dismissed the petition for
[37]
certiorari. It found Equitable guilty of forum shopping because
the bank filed its petition for certiorari in the CA several hours
[38]
before withdrawing its petition for relief in the RTC. Moreover,
Equitable failed to disclose, both in the statement of material dates
and certificate of non-forum shopping (attached to its petition for
certiorari in the CA), that it had a pending petition for relief in the
[39]
RTC.
[40] [41]
Equitable moved for reconsideration but it was denied. Thus,
this petition.
Equitable asserts that it was not guilty of forum shopping because
the petition for relief was withdrawn on the same day the petition
[42]
for certiorari was filed. It likewise avers that its petition for
certiorari was meritorious because the RTC committed grave abuse
of discretion in issuing the March 24, 2004 omnibus order which was
based on an erroneous assumption. The March 1, 2004 order
denying its notice of appeal for non payment of appeal fees was
[43]
erroneous because it had in fact paid the required fees. Thus, the
RTC, by issuing its March 24, 2004 omnibus order, effectively
prevented Equitable from appealing the patently wrong February 5,
[44]
2004 decision.
This petition is meritorious.

H) Dismissing [Equitable's] Forum shopping exists when two or more actions involving the same
counterclaim except the payment of the transactions, essential facts and circumstances are filed and those
aforestated unpaid principal loan actions raise identical issues, subject matter and causes of
[45]
obligations and interest. action. The test is whether, in two or more pending cases, there is
[46]
identity of parties, rights or causes of actions and reliefs.
[19]
SO ORDERED.
Equitable's petition for relief in the RTC and its petition for
certiorari in the CA did not have identical causes of action. The
[20]
Equitable and respondents filed their respective notices of appeal. petition for relief from the denial of its notice of appeal was based on
the RTCs judgment or final order preventing it from taking an
[47]
In the March 1, 2004 order of the RTC, both notices were denied due appeal by fraud, accident, mistake or excusable negligence. On
course because Equitable and respondents failed to submit proof the other hand, its petition for certiorari in the CA, a special civil
[21]
that they paid their respective appeal fees. action, sought to correct the grave abuse of discretion amounting to
[48]
lack of jurisdiction committed by the RTC.
WHEREFORE, premises considered,
the appeal interposed by defendants from the In a petition for relief, the judgment or final order is
Decision in the above-entitled case rendered by a court with competent jurisdiction. In a petition for
is DENIED due course. As of February 27, certiorari, the order is rendered by a court without or in excess of its
2004, the Decision dated February 5, 2004, is jurisdiction.
considered final and executory in so far
as [Equitable, Aimee Yu and Bejan Lionel Moreover, Equitable substantially complied with the rule on non-
[22]
Apas] are concerned. (emphasis supplied) forum shopping when it moved to withdraw its petition for relief in
the RTC on the same day (in fact just four hours and forty minutes
after) it filed the petition for certiorari in the CA. Even if Equitable
 of jurisdiction, and there is no appeal, nor any
plain, speedy or adequate remedy in the
ordinary course of law, a person aggrieved
thereby may file a verified petition in the proper
court, alleging the facts with certainty and
praying that judgment be rendered annulling or
modifying the proceedings of such tribunal,
board or officer, and granting such incidental
reliefs as law and justice may require.
The petition shall be accompanied by a certified
true copy of the judgment, order or resolution
subject thereof, copies of all pleadings and
documents relevant and pertinent thereto, and a
sworn certificate of non-forum shopping as
provided in the third paragraph of Section 3,
Rule 46.
There are two substantial requirements in a petition for certiorari.
These are:
1. that the tribunal, board or officer
exercising judicial or quasi-judicial
functions acted without or in excess of
his or its jurisdiction or with grave
abuse of discretion amounting to lack
or excess of jurisdiction; and
2. that there is no appeal or any
plain, speedy and adequate remedy in
the ordinary course of law.
For a petition for certiorari premised on grave abuse of discretion to
prosper, petitioner must show that the public respondent patently
and grossly abused his discretion and that abuse amounted to an
evasion of positive duty or a virtual refusal to perform a duty
enjoined by law or to act at all in contemplation of law, as where the
power was exercised in an arbitrary and despotic manner by reason
[49]
of passion or hostility.
The March 1, 2004 order denied due course to the notices of appeal
of both Equitable and respondents. However, it declared that the
February 5, 2004 decision was final and executory only with
[50]
respect to Equitable. As expected, the March 24, 2004 omnibus
order denied Equitable's motion for reconsideration and granted
[51]
respondents' motion for the issuance of a writ of execution.
The March 1, 2004 and March 24, 2004 orders of the RTC
were obviously intended to prevent Equitable, et al. from appealing
the February 5, 2004 decision. Not only that. The execution of the
decision was undertaken with indecent haste, effectively obviating
or defeating Equitable's right to avail of possible legal remedies. No
matter how we look at it, the RTC committed grave abuse of
discretion in rendering those orders.
With regard to whether Equitable had a plain, speedy and adequate
remedy in the ordinary course of law, we hold that there was none.
The RTC denied due course to its notice of appeal in the March 1,
2004 order. It affirmed that denial in the March 24, 2004 omnibus
order. Hence, there was no way Equitable could have possibly
[52]
appealed the February 5, 2004 decision.
Although Equitable filed a petition for relief from the March 24,
2004 order, that petition was not a plain, speedy and adequate
[53]
remedy in the ordinary course of law. A petition for relief under
Rule 38 is an equitable remedy allowed only in exceptional
circumstances or where there is no other available or adequate
[54]
remedy.
Thus, we grant Equitable's petition for certiorari and consequently
give due course to its appeal.
The jurisdiction of this Court in Rule 45 petitions is limited to
[55]
questions of law. There is a question of law when the doubt or
The RTC upheld the validity of the promissory notes
despite respondents assertion that those documents were contracts
of adhesion.
A contract of adhesion is a contract whereby almost all of its
[58]
provisions are drafted by one party. The participation of the other
party is limited to affixing his signature or his adhesion to the
[59]
contract. For this reason, contracts of adhesion are strictly
[60]
construed against the party who drafted it.
It is erroneous, however, to conclude that contracts of adhesion are
invalid per se. They are, on the contrary, as binding as ordinary
contracts. A party is in reality free to accept or reject it. A contract of
adhesion becomes void only when the dominant party takes
advantage of the weakness of the other party, completely depriving
[61]
the latter of the opportunity to bargain on equal footing.
That was not the case here. As the trial court noted, if the terms and
conditions offered by Equitable had been truly prejudicial to
respondents, they would have walked out and negotiated with
another bank at the first available instance. But they did not. Instead,
they continuously availed of Equitable's credit facilities for five long
years.
While the RTC categorically found that respondents had
outstanding dollar- and peso-denominated loans with Equitable, it,
however, failed to ascertain the total amount due (principal, interest
and penalties, if any) as of July 9, 2001. The trial court did not
explain how it arrived at the amounts of US$228,200
[62]
and P1,000,000. In Metro Manila Transit Corporation v. D.M.
[63]
Consunji, we reiterated that this Court is not a trier of facts and it
shall pass upon them only for compelling reasons which
[64]
unfortunately are not present in this case. Hence, we ordered the
partial remand of the case for the sole purpose of determining the
[65]
amount of actual damages.
Escalation clauses are not void per se. However, one which grants
the creditor an unbridled right to adjust the interest independently
and upwardly, completely depriving the debtor of the right to assent
to an important modification in the agreement is void. Clauses of
[66]
that nature violate the principle of mutuality of contracts. Article
[67]
1308 of the Civil Code holds that a contract must bind both
contracting parties; its validity or compliance cannot be left to the
[68]
will of one of them.
For this reason, we have consistently held that a valid escalation
clause provides:
1. that the rate of interest
will only be increased if the applicable
maximum rate of interest is increased
by law or by the Monetary Board; and
2. that the stipulated rate of
interest will be reduced if
the applicable maximum rate of
interest is reduced by law or by the
Monetary Board (de-escalation
[69]
clause).
The RTC found that Equitable's promissory notes uniformly stated:
If subject promissory note is extended, the
interest for subsequent extensions shall be at
[70]
such rate as shall be determined by the bank.
Equitable dictated the interest rates if the term (or period
for repayment) of the loan was extended. Respondents had no
choice but to accept them. This was a violation of Article 1308 of the
Civil Code. Furthermore, the assailed escalation clause did not
contain the necessary provisions for validity, that is, it neither
Thereafter, Equitable was entitled to legal interest of 12% p.a. on all
amounts due.
Extraordinary inflation exists when there is an unusual decrease in
the purchasing power of currency (that is, beyond the common
fluctuation in the value of currency) and such decrease could not be
reasonably foreseen or was manifestly beyond the contemplation of
the parties at the time of the obligation. Extraordinary deflation, on
[73]
the other hand, involves an inverse situation.
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation
or deflation of the currency stipulated should
intervene, the value of the currency at the time
of the establishment of the obligation shall be
the basis of payment, unless there is an
agreement to the contrary.
For extraordinary inflation (or deflation) to affect an
obligation, the following requisites must be proven:
1. that there was an official
declaration of extraordinary inflation
or deflation from the Bangko Sentral
[74]
ng Pilipinas (BSP);
2. that the obligation was
[75]
contractual in nature; and
3. that the parties expressly agreed
to consider the effects of the
[76]
extraordinary inflation or deflation.
Despite the devaluation of the peso, the BSP never declared a
situation of extraordinary inflation. Moreover, although the
obligation in this instance arose out of a contract, the parties did not
agree to recognize the effects of extraordinary inflation (or
[77]
deflation). The RTC never mentioned that there was a such
stipulation either in the promissory note or loan agreement.
Therefore, respondents should pay their dollar-denominated loans
[78]
at the exchange rate fixed by the BSP on the date of maturity.
Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered, not to impose a
[79]
penalty to the wrongdoer. To be entitled to moral damages, a
claimant must prove:
1. That he or she suffered
besmirched reputation, or physical,
mental or psychological suffering
sustained by the claimant;
2. That the defendant committed a
wrongful act or omission;
3. That the wrongful act or omission
was the proximate cause of the
damages the claimant sustained;
4. The case is predicated on any of
the instances expressed or envisioned
[80] [81] [82]
by Article 2219 and 2220 .
In culpa contractual or breach of contract, moral damages
are recoverable only if the defendant acted fraudulently or in bad
[83]
faith or in wanton disregard of his contractual obligations. The
breach must be wanton, reckless, malicious or in bad faith, and
[84]
oppressive or abusive.
The RTC found that respondents did not pay Equitable the interest
due on February 9, 2001 (or any month thereafter prior to the
[85]
absence of proof. The undeniable fact was that, whatever damage
respondents sustained was purely the consequence of their failure
to pay their loans. There was therefore absolutely no basis for the
award of moral damages to them.
Neither was there reason to award exemplary damages. Since
respondents were not entitled to moral damages, neither should
[89]
they be awarded exemplary damages. And if respondents were
not entitled to moral and exemplary damages, neither could they be
[90]
awarded attorney's fees and litigation expenses.
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the
Court of Appeals in CA-G.R. SP No. 83112 are
hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court,
Branch 16, Cebu City in Civil Case No. CEB-26983 is
hereby ANNULLED for being rendered with grave abuse of
discretion amounting to lack or excess of jurisdiction. All
proceedings undertaken pursuant thereto are likewise declared null
and void.
The March 1, 2004 order of the Regional Trial Court, Branch 16 of
Cebu City in Civil Case No. CEB-26983 is hereby SET ASIDE. The
appeal of petitioners Equitable PCI Bank, Aimee Yu and Bejan
Lionel Apas is therefore given due course.
The February 5, 2004 decision of the Regional Trial Court, Branch 16
of Cebu City in Civil Case No. CEB-26983 is accordingly SET
ASIDE. New judgment is hereby entered:
1. ordering respondents Ng Sheung
Ngor, doing business under the name and style of
Ken Marketing, Ken Appliance Division, Inc. and
Benjamin E. Go to pay petitioner Equitable PCI
Bank the principal amount of their dollar- and
peso-denominated loans;
2. ordering respondents Ng Sheung
Ngor, doing business under the name and style of
Ken Marketing, Ken Appliance Division, Inc. and
Benjamin E. Go to pay petitioner Equitable PCI
Bank interest at:
a) 12.66% p.a. with respect to
their dollar-denominated loans from
January 10, 2001 to July 9, 2001;
b) 20% p.a. with respect to
their peso-denominated loans from
[91]
January 10, 2001 to July 9, 2001;
c) pursuant to our ruling
in Eastern Shipping Lines v. Court of
[92]
Appeals, the total amount due on
July 9, 2001 shall earn legal interest at
12% p.a. from the time petitioner
Equitable PCI Bank demanded
payment, whether judicially or extra-
judicially; and
d) after this Decision becomes
final and executory, the applicable rate
shall be 12% p.a. until full satisfaction;
3. all other claims and counterclaims
are dismissed.
As a starting point, the Regional Trial Court, Branch 16 of Cebu City
shall compute the exact amounts due on the respective dollar-
denominated and peso-denominated loans, as of July 9, 2001, of
respondents Ng Sheung Ngor, doing business under the name and
style of Ken Marketing, Ken Appliance Division and Benjamin E. Go.
SO ORDERED.
ILEANA DR. MACALINAO, G.R. No. 17
 days from date or dates thereof. Failure of the
Cardholder to pay the charges made through the
DECISION CARD within the payment period as stated in the
SOA or within thirty (30) days from actual date or
dates of purchase whichever occur earlier, shall
VELASCO, JR., J.: render him in default without the necessity of
demand from BCC, which the Cardholder
expressly waives. The charges or balance
The Case thereof remaining unpaid after the payment
Before us is a Petition for Review on Certiorari under Rule due date indicated on the monthly Statement
45 of the Rules of Court seeking to reverse and set aside the June 30, of Accounts shall bear interest at the rate of 3%
[1]
2006 Decision of the Court of Appeals (CA) and its November 21, per month for BPI Express Credit, BPI Gold
[2]
2006 Resolution denying petitioners motion for reconsideration. Mastercard and an additional penalty fee
The Facts equivalent to another 3% of the amount due for
Petitioner Ileana Macalinao was an approved cardholder every month or a fraction of a months
of BPI Mastercard, one of the credit card facilities of respondent delay. PROVIDED that if there occurs any
[3]
Bank of the Philippine Islands (BPI). Petitioner Macalinao made change on the prevailing market rates, BCC shall
some purchases through the use of the said credit card and defaulted have the option to adjust the rate of interest
in paying for said purchases. She subsequently received a letter and/or penalty fee due on the outstanding
dated January 5, 2004 from respondent BPI, demanding payment of obligation with prior notice to the cardholder.
the amount of one hundred forty-one thousand five hundred The Cardholder hereby authorizes BCC to
eighteen pesos and thirty-four centavos (PhP 141,518.34), as follows: correspondingly increase the rate of such interest
Statemen Previous Purchases Penalt Financ Balance [in] the event of changes in the prevailing market
t Date Balance (Payment y e Due rates, and to charge additional service fees as
s) Interes Charge may be deemed necessary in order to maintain
t s its service to the Cardholder. A CARD with
10/27/200 94,843.7 559.72 3,061.99 98,456.41 outstanding balance unpaid after thirty (30) days
2 0 from original billing statement date shall
11/27/200 98,465.41 (15,000) 0 2,885.61 86,351.02 automatically be suspended, and those with
2 accounts unpaid after ninety (90) days from said
12/31/200 86,351.02 30,308.80 259.05 2,806.41 119,752.28 original billing/statement date shall
2 automatically be cancel (sic), without prejudice
to BCCs right to suspend or cancel any card
1/27/2003 119,752.2 618.23 3,891.07 124,234.5
anytime and for whatever reason. In case of
8 8
default in his obligation as provided herein,
2/27/2003 124,234.5 990.93 4,037.62 129,263.13 Cardholder shall surrender his/her card to BCC
8 and in addition to the interest and penalty
3/27/2003 129,263.1 (18,000.00 298.72 3,616.05 115,177.90 charges aforementioned , pay the following
3 ) liquidated damages and/or fees (a) a collection
4/27/2003 115,177.9 644.26 3,743.28 119,565.44 fee of 25% of the amount due if the account is
0 referred to a collection agency or attorney; (b)
5/27/2003 119,565.4 (10,000.00 402.95 3,571.71 113,540.10 service fee for every dishonored check issued by
4 ) the cardholder in payment of his account
6/29/2003 113,540.1 8,362.50 323.57 3,607.32 118,833.49 without prejudice, however, to BCCs right of
0 (7,000.00) considering Cardholders account, and (c) a final
7/27/2003 118,833.4 608.07 3,862.0 123,375.65 fee equivalent to 25% of the unpaid balance,
9 9 exclusive of litigation expenses and judicial cost,
8/27/2003 123,375.6 1,050.2 4,009.7 128,435.5 if the payment of the account is enforced though
5 0 1 6 court action. Venue of all civil suits to enforce
9/28/2003 128,435.5 1,435.51 4,174.16 134,045.2 this Agreement or any other suit directly or
6 3 indirectly arising from the relationship between
10/28/200 the parties as established herein, whether arising
3 from crimes, negligence or breach thereof, shall
be in the process of courts of the City of Makati
11/28/200
or in other courts at the option of
3 [4]
BCC. (Emphasis supplied.)
12/28/200
3 For failure of petitioner Macalinao to settle her obligations,
1/27/2004 141,518.3 8,491.1 4,599.34 154,608.7 respondent BPI filed with the Metropolitan Trial Court (MeTC) of
4 0 8 Makati City a complaint for a sum of money against her and her
husband, Danilo SJ. Macalinao. This was raffled to Branch 66 of the
Under the Terms and Conditions Governing the Issuance MeTC and was docketed as Civil Case No. 84462 entitled Bank of the
and Use of the BPI Credit and BPI Mastercard, the charges or Philippine Islands vs. Spouses Ileana Dr. Macalinao and Danilo SJ.
balance thereof remaining unpaid after the payment due date Macalinao.
[5]

indicated on the monthly Statement of Accounts shall bear interest
at the rate of 3% per month and an additional penalty fee equivalent
to another 3% per month. Particularly:
8. PAYMENT OF CHARGES BCC shall
furnish the Cardholder a monthly Statement of
Account (SOA) and the Cardholder agrees that
In said complaint, respondent BPI prayed for the payment
of the amount of one hundred fifty-four thousand six hundred eight
pesos and seventy-eight centavos (PhP 154,608.78) plus 3.25% finance
charges and late payment charges equivalent to 6% of the amount
due from February 29, 2004 and an amount equivalent to 25% of the
total amount due as attorneys fees, and of the cost of suit.
[6]

all charges made through the use of the CARD
shall be paid by the Cardholder as stated in the
SOA on or before the last day for payment, which
is twenty (20) days from the date of the said SOA,
After the summons and a copy of the complaint were
served upon petitioner Macalinao and her husband, they failed to
[7]
file their Answer. Thus, respondent BPI moved that judgment be
rendered in accordance with Section 6 of the Rule on Summary
[8]
 Macalinao by ordering the latter to pay the II.
former jointly and severally the following: THE COURT OF APPEALS ARBITRARILY
1. The amount of PESOS: ONE MODIFIED THE REDUCED RATE OF
HUNDRED FORTY ONE INTEREST FROM 2% TO 3%, CONTRARY TO
THOUSAND FIVE HUNDRED THE TENOR OF ITS OWN DECISION.
EIGHTEEN AND 34/100
(P141,518.34) plus interest and penalty III.
charges of 2% per month from January THE COURT A QUO, INSTEAD OF
05, 2004 until fully paid; PROCEEDING WITH A RECOMPUTATION,
2. P10,000.00 as and by way of SHOULD HAVE DISMISSED THE CASE FOR
attorneys fees; and FAILURE OF RESPONDENT BPI TO PROVE
3. Cost of suit. THE CORRECT AMOUNT OF PETITIONERS
OBLIGATION, OR IN THE ALTERNATIVE,
[11]
SO ORDERED. REMANDED THE CASE TO THE LOWER
COURT FOR RESPONDENT BPI TO
Only petitioner Macalinao and her husband appealed to PRESENT PROOF OF THE CORRECT
the Regional Trial Court (RTC) of Makati City, their recourse AMOUNT THEREOF.
docketed as Civil Case No. 04-1153. In its Decision dated October 14, Our Ruling
2004, the RTC affirmed in toto the decision of the MeTC and held: The petition is partly meritorious.
In any event, the sum of P141,518.34 The Interest Rate and Penalty Charge of 3% Per Month or 36% Per
adjudged by the trial court appeared to be the Annum Should Be Reduced to 2% Per Month or 24% Per Annum
result of a recomputation at the reduced rate of In its Complaint, respondent BPI originally imposed the
2% per month. Note that the total amount sought interest and penalty charges at the rate of 9.25% per month or 111%
by the plaintiff-appellee was P154,608.75 per annum. This was declared as unconscionable by the lower
exclusive of finance charge of 3.25% per month courts for being clearly excessive, and was thus reduced to 2% per
and late payment charge of 6% per month. month or 24% per annum. On appeal, the CA modified the rate of
interest and penalty charge and increased them to 3% per month or
WHEREFORE, the appealed decision is 36% per annum based on the Terms and Conditions Governing the
hereby affirmed in toto. Issuance and Use of the BPI Credit Card, which governs the
transaction between petitioner Macalinao and respondent BPI.
No pronouncement as to costs. In the instant petition, Macalinao claims that the interest
rate and penalty charge of 3% per month imposed by the CA is
[12]
SO ORDERED. iniquitous as the same translates to 36% per annum or thrice the
[15]
legal rate of interest. On the other hand, respondent BPI asserts
that said interest rate and penalty charge are reasonable as the same
Unconvinced, petitioner Macalinao filed a petition for are based on the Terms and Conditions Governing the Issuance and
[16]
review with the CA, which was docketed as CA-G.R. SP No. 92031. Use of the BPI Credit Card.
The CA affirmed with modification the Decision of the RTC: We find for petitioner. We are of the opinion that the
WHEREFORE, the appealed interest rate and penalty charge of 3% per month should be
decision is AFFIRMED but MODIFIED with equitably reduced to 2% per month or 24% per annum.
respect to the total amount due and interest Indeed, in the Terms and Conditions Governing the
rate. Accordingly, petitioners are jointly and Issuance and Use of the BPI Credit Card, there was a stipulation on
severally ordered to pay respondent Bank of the the 3% interest rate. Nevertheless, it should be noted that this is not
Philippine Islands the following: the first time that this Court has considered the interest rate of 36%
per annum as excessive and unconscionable. We held in Chua vs.
[17]
1. The amount of One Timan:
Hundred Twenty Six The stipulated interest rates of 7% and
Thousand Seven 5% per month imposed on respondents loans
Hundred Six Pesos and must be equitably reduced to 1% per month or
Seventy Centavos plus 12% per annum. We need not unsettle the
interest and penalty principle we had affirmed in a plethora of cases
charges of 3% per month that stipulated interest rates of 3% per month
from January 5, 2004 and higher are excessive, iniquitous,
until fully paid; unconscionable and exorbitant. Such
2. P10,000.00 as and by stipulations are void for being contrary to
way of attorneys fees; morals, if not against the law. While C.B.
and Circular No. 905-82, which took effect on January
3. Cost of Suit. 1, 1983, effectively removed the ceiling on interest
rates for both secured and unsecured loans,
[13]
SO ORDERED. regardless of maturity, nothing in the said
circular could possibly be read as granting carte
Although sued jointly with her husband, petitioner blanche authority to lenders to raise interest rates
Macalinao was the only one who filed the petition before the CA to levels which would either enslave their
[14]
since her husband already passed away on October 18, 2005. borrowers or lead to a hemorrhaging of their
In its assailed decision, the CA held that the amount of PhP assets. (Emphasis supplied.)
141,518.34 (the amount sought to be satisfied in the demand letter of
respondent BPI) is clearly not the result of the re-computation at the
reduced interest rate as previous higher interest rates were already Since the stipulation on the interest rate is void, it is as if
incorporated in the said amount. Thus, the said amount should not there was no express contract thereon. Hence, courts may reduce the
[18]
be made as basis in computing the total obligation of petitioner interest rate as reason and equity demand.
Macalinao. Further, the CA also emphasized that respondent BPI The same is true with respect to the penalty charge.
should not compound the interest in the instant case absent a Notably, under the Terms and Conditions Governing the Issuance
stipulation to that effect. The CA also held, however, that the MeTC and Use of the BPI Credit Card, it was also stated therein that
erred in modifying the amount of interest rate from 3% monthly to respondent BPI shall impose an additional penalty charge of 3% per
3% per month or 36% per annum, in addition to regular interests, is (7,000.00)
indeed iniquitous and unconscionable. 7/27/2003 83,515.00 83,515.00 835.15
Thus, under the circumstances, the Court finds it equitable 8/27/2003 83,515.00 83,515.00 835.15
to reduce the interest rate pegged by the CA at 1.5% monthly to 1% 9/28/2003 83,515.00 83,515.00 835.15
monthly and penalty charge fixed by the CA at 1.5% monthly to 1% 10/28/2003 83,515.00 83,515.00 835.15
monthly or a total of 2% per month or 24% per annum in line with
11/28/2003 83,515.00 83,515.00 835.15
the prevailing jurisprudence and in accordance with Art. 1229 of the
Civil Code. 12/28/2003 83,515.00 83,515.00 835.15
1/27/2004 83,515.00 83,515.00 835.15
There Is No Basis for the Dismissal of the Case, TOTAL 83,515.00 14,397
Much Less a Remand of the Same for Further Reception of
Evidence
WHEREFORE, the petition is PARTLY GRANTED. The CA
Decision dated June 30, 2006 in CA-G.R. SP No. 92031 is
Petitioner Macalinao claims that the basis of the re- hereby MODIFIED with respect to the total amount due, interest
computation of the CA, that is, the amount of PhP 94,843.70 stated rate, and penalty charge. Accordingly, petitioner Macalinao is
on the October 27, 2002 Statement of Account, was not the amount ordered to pay respondent BPI the following:
of the principal obligation. Thus, this allegedly necessitates a re- (1) The amount of one hundred twelve thousand three
examination of the evidence presented by the parties. For this hundred nine pesos and fifty-two centavos (PhP 112,309.52) plus
reason, petitioner Macalinao further contends that the dismissal of interest and penalty charges of 2% per month from January 5, 2004
the case or its remand to the lower court would be a more until fully paid;
appropriate disposition of the case.
Such contention is untenable. Based on the records, the (2) PhP 10,000 as and by way of attorneys fees; and
summons and a copy of the complaint were served upon petitioner
Macalinao and her husband on May 4, 2004. Nevertheless, they (3) Cost of suit.
failed to file their Answer despite such service. Thus, respondent BPI
[21]
moved that judgment be rendered accordingly. Consequently, a SO ORDERED.
decision was rendered by the MeTC on the basis of the evidence
submitted by respondent BPI. This is in consonance with Sec. 6 of
the Revised Rule on Summary Procedure, which states: HEIRS OF SERVANDO G.R. No. 159709
Sec. 6. Effect of failure to FRANCO,
answer. Should the defendant fail to answer the Petitioners, Present:
complaint within the period above provided,
the court, motu proprio, or on motion of the LEONARDO-DE CASTRO,
plaintiff, shall render judgment as may be Acting Chairperson,
warranted by the facts alleged in the complaint - versus - BERSAMIN,
and limited to what is prayed for DEL CASTILLO,
therein: Provided, however, that the court may VILLARAMA, JR, and
in its discretion reduce the amount of damages PERLAS-BERNABE, JJ.
and attorneys fees claimed for being excessive or Promulgated:
otherwise unconscionable. This is without SPOUSES VERONICA
prejudice to the applicability of Section 3(c), Rule AND DANILO June 27, 2012
10 of the Rules of Court, if there are two or more GONZALES,
defendants. (As amended by the 1997 Rules of Respondents.
Civil Procedure; emphasis supplied.)
x-----------------------------------------------------------------------------------------x

DECISION
Considering the foregoing rule, respondent BPI should not
be made to suffer for petitioner Macalinaos failure to file an answer
BERSAMIN, J.:
and concomitantly, to allow the latter to submit additional evidence
There is novation when there is an irreconcilable incompatibility
by dismissing or remanding the case for further reception of
between the old and the new obligations. There is no novation in
evidence. Significantly, petitioner Macalinao herself admitted the
case of only slight modifications; hence, the old obligation prevails.
existence of her obligation to respondent BPI, albeit with reservation
as to the principal amount. Thus, a dismissal of the case would cause
The petitioners challenge the decision promulgated on March 19,
great injustice to respondent BPI. Similarly, a remand of the case for [1]
2003, whereby the Court of Appeals (CA) upheld the issuance of a
further reception of evidence would unduly prolong the proceedings
writ of execution by the Regional Trial Court (RTC), Branch 16, in
of the instant case and render inutile the proceedings conducted
Malolos, Bulacan.
before the lower courts.
Significantly, the CA correctly used the beginning balance
of PhP 94,843.70 as basis for the re-computation of the interest
considering that this was the first amount which appeared on the
Statement of Account of petitioner Macalinao. There is no other
amount on which the re-computation could be based, as can be
Antecedents
gathered from the evidence on record. Furthermore, barring a
The Court adopts the following summary of the
showing that the factual findings complained of are totally devoid of [2]
antecedents rendered by the Court in Medel v. Court of Appeals, the
support in the record or that they are so glaringly erroneous as to
case from which this case originated, to wit:
constitute serious abuse of discretion, such findings must stand, for
this Court is not expected or required to examine or contrast the
[22] On November 7, 1985, Servando Franco
evidence submitted by the parties.
and Leticia Medel (hereafter Servando and
In view of the ruling that only 1% monthly interest and 1%
Leticia) obtained a loan from Veronica R.
penalty charge can be applied to the beginning balance of PhP
Gonzales (hereafter Veronica), who was engaged
94,843.70, this Court finds the following computation more
in the money lending business under the name
appropriate:
Gonzales Credit Enterprises, in the amount
of P50,000.00, payable in two

On maturity of the two promissory notes,
the borrowers failed to pay the indebtedness.
On June 11, 1986, Servando and Leticia
secured from Veronica still another loan in the
amount of P300,000.00, maturing in one month,
secured by a real estate mortgage over a property
belonging to Leticia Makalintal Yaptinchay, who
issued a special power of attorney in favor of
Leticia Medel, authorizing her to execute the
mortgage. Servando and Leticia executed a
promissory note in favor of Veronica to pay the
sum of P300,000.00, after a month, or on July 11,
1986. However, only the sum of P275,000.00,
was given to them out of the proceeds of the loan.
Like the previous loans, Servando and
Medel failed to pay the third loan on maturity.
On July 23, 1986, Servando and
Leticia with the latter's husband, Dr. Rafael
Medel, consolidated all their previous unpaid
loans totaling P440,000.00, and sought from
Veronica another loan in the amount
of P60,000.00, bringing their indebtedness to a
total of P500,000.00, payable on August 23,
1986. They executed a promissory note, reading
as follows:
Baliwag, Bulacan July 23, 1986
Maturity Date August 23, 1986
P500,000.00
FOR VALUE RECEIVED, I/WE jointly and severally promise to
pay to the order of VERONICA R. GONZALES doing business
in the business style of GONZALES CREDIT ENTERPRISES,
Filipino, of legal age, married to Danilo G. Gonzales, Jr., of
Baliwag Bulacan, the sum of PESOS ........ FIVE HUNDRED
THOUSAND ..... (P500,000.00) Philippine
Currency with interestthereon at the rate of 5.5 PER CEN
T per month plus 2% service charge per annum from dat
e hereof until fully paid according to the amortization
schedule contained herein. (Underscoring supplied)
Payment will be made in full at the maturity date.
Should I/WE fail to pay any amortization or portion here
of when due, all the other installments together with all
interest accrued shall immediately be due and payable and
I/WE hereby agree to pay
an additional amount equivalent to one percent (1%) per
month of the amount due and demandable as penalty cha
rges in the form of liquidated damages until fully paid; and
the
further sum of TWENTY FIVE PER CENT (25%) thereof i
n full, without deductions as Attorney's Fee whether actually
incurred or not, of the total amount due and demandable,
exclusive of costs and judicial or extra judicial
expenses. (Underscoring supplied)
I, WE further agree that in the event the present rate of interest
on loan is increased by law or the Central Bank of the
Philippines, the holder shall have the option to apply and
collect the increased interest charges without notice although
the original interest have already been collected wholly or
partially unless the contrary is required by law.
It is also a special condition of this contract that the parties
herein agree that the amount of peso-obligation under this
agreement is based on the present value of peso, and if there be
any change in the value thereof, due to extraordinary inflation
part of it, the debtors waive all
his/their rights under the provisions
of Section 12, Rule 39, of the Revised
Rules of Court.
On maturity of the loan, the borrowers
failed to pay the indebtedness of P500,000.00,
plus interests and penalties, evidenced by the
above-quoted promissory note.
On February 20, 1990, Veronica R.
Gonzales, joined by her husband Danilo G.
Gonzales, filed with the Regional Trial Court of
Bulacan, Branch 16, at Malolos, Bulacan, a
complaint for collection of the full amount of the
loan including interests and other charges.
In his answer to the complaint filed with the trial court on
April 5, 1990, defendant Servando alleged that he did not obtain
any loan from the plaintiffs; that it was defendants Leticia and Dr.
Rafael Medel who borrowed from the plaintiffs the sum
of P500,000.00, and actually received the amount and benefited
therefrom; that the loan was secured by a real estate mortgage
executed in favor of the plaintiffs, and that he (Servando Franco)
signed the promissory note only as a witness.
In their separate answer filed on April 10,1990, defendants
Leticia and Rafael Medel alleged that the loan was the transaction
of Leticia Yaptinchay, who executed a mortgage in favor of the
plaintiffs over a parcel of real estate situated in San Juan,
Batangas; that the interest rate is excessive at 5.5% per month with
additional service charge of 2% per annum, and penalty charge of
1% per month; that the stipulation for attorney's fees of 25% of the
amount due is unconscionable, illegal and excessive, and that
substantial payments made were applied to interest, penalties
and other charges.
After due trial, the lower court declared that the due
execution and genuineness of the four promissory notes had been
duly proved, and ruled that although the Usury Law had been
repealed, the interest charged by the plaintiffs on the loans was
unconscionable and "revolting to the conscience". Hence, the trial
court applied "the provision of the New [Civil] Code" that the
"legal rate of interest for loan or forbearance of money, goods or
credit is 12% per annum."
Accordingly, on December 9, 1991, the trial court rendered
judgment, the dispositive portion of which reads as follows:
WHEREFORE, premises considered, judgment is hereby
rendered, as follows:
1. Ordering the defendants Servando Franco and Leticia
Medel, jointly and severally, to pay plaintiffs the amount
of P47,000.00 plus 12% interest per annum from November 7,
1985 and 1% per month as penalty, until the entire amount is
paid in full.
2. Ordering the defendants Servando Franco and Leticia Y.
Medel to plaintiffs, jointly and severally the amount
of P84,000.00 with 12% interest per annum and 1% per cent per
month as penalty from November 19,1985 until the whole
amount is fully paid;
3. Ordering the defendants to
pay the plaintiffs, jointly and
severally, the amount of P285,000.00
plus 12% interest per annum and 1%
per month as penalty from July 11,
1986, until the whole amount is fully
paid;
4. Ordering the defendants to
pay plaintiffs, jointly and severally,
 consolidated all the unpaid loans of the
defendants, is the law that governs the
parties. They further argued that Circular No.
416 of the Central Bank prescribing the rate of
interest for loans or forbearance of money, goods
or credit at 12% per annum, applies only in the
absence of a stipulation on interest rate, but not
when the parties agreed thereon.
The Court of Appeals sustained the
plaintiffs-appellants' contention. It ruled that
the Usury Law having become legally inexistent
with the promulgation by the Central Bank in
1982 of Circular No. 905, the lender and borrower
could agree on any interest that may be charged
on the loan. The Court of Appeals further held
that "the imposition of an additional amount
equivalent to 1% per month of the amount due
and demandable as penalty charges in the form
of liquidated damages until fully paid was
allowed by law.
Accordingly, on March 21, 1997, the Court
of Appeals promulgated it decision reversing that
of the Regional Trial Court, disposing as follows:
WHEREFORE, the appealed
judgment is hereby MODIFIED such
that defendants are hereby ordered
to pay the plaintiffs the sum
of P500,000.00, plus 5.5% per month
interest and 2% service charge per
annum effective July 23, 1986, plus 1%
per month of the total amount due
and demandable as penalty charges
effective August 24, 1986, until the
entire amount is fully paid.
The award to the plaintiffs
of P50,000.00 as attorney's fees is
affirmed. And so is the imposition
of costs against the defendants.
SO ORDERED.
On April 15, 1997, defendants-appellants
filed a motion for reconsideration of the said
decision. By resolution dated November 25, 1997,
[3]
the Court of Appeals denied the motion.
On review, the Court in Medel v. Court of Appeals struck
down as void the stipulation on the interest for being iniquitous or
unconscionable, and revived the judgment of the RTC rendered on
December 9, 1991, viz:
WHEREFORE, the Court hereby
REVERSES and SETS ASIDE the decision of the
Court of Appeals promulgated on March 21, 1997,
and its resolution dated November 25, 1997.
Instead, we render judgment REVIVING and
AFFIRMING the decision dated December 9,
1991, of the Regional Trial Court of Bulacan,
Branch 16, Malolos, Bulacan, in Civil Case No.
134-M-90, involving the same parties.
No pronouncement as to costs in this
instance.
[4]
SO ORDERED.
Upon the finality of the decision in Medel v. Court of
[5]
Appeals, the respondents moved for execution. Servando Franco
[6]
opposed, claiming that he and the respondents had agreed to fix
[7]
the entire obligation at P775,000.00. According to Servando, their
agreement, which was allegedly embodied in a receipt dated
[8]
immutable and unalterable and hence may no
longer be modified at any respect except only to
correct clerical errors or mistakes (Korean
Airlines Co. Ltd. vs. C.A., 247 SCRA 599). In this
respect, the decision deserves to be respected.
The argument about the modification of
the contract or non-participation of defendant
Servando Franco in the proceedings on appeal
on the alleged belief that the payment he made
had already absolved him from liability is of no
moment. Primarily, the decision was for him and
Leticia Medel to pay the plaintiffs jointly and
severally the amounts stated in the Decision. In
other words, the liability of the defendants
thereunder is solidary. Based on this aspect
alone, the new defense raised by defendant
Franco is unavailing.
WHEREFORE, in the light of all the
foregoing, the Court hereby grants the Motion
for Execution of Judgment.
Accordingly, let a writ of execution be
issued for implementation by the Deputy Sheriff
of this Court.
[9]
SO ORDERED.
[10]
On March 8, 2001, the RTC issued the writ of execution.
[11]
Servando moved for reconsideration, but the RTC
[12]
denied his motion.
On March 19, 2003, the CA affirmed the RTC through its assailed
decision, ruling that the execution was proper because of Servandos
failure to comply with the terms of the compromise agreement,
[13]
stating:
Petitioner cannot deny the fact that there
was no full compliance with the tenor of the
compromise agreement. Private respondents on
their part did not disregard the payments made
by the petitioner. They even offered that
whatever payments made by petitioner, it can be
deducted from the principal obligation including
interest. However, private respondents posit that
the payments made cannot alter, modify or
revoke the decision of the Supreme Court in the
instant case.
In the case of Prudence Realty and
Development Corporation vs. Court of Appeals, the
Supreme Court ruled that:
When the terms of the
compromise judgment is violated,
the aggrieved party must move for its
execution, not its invalidation.
It is clear from the aforementioned
jurisprudence that even if there is a compromise
agreement and the terms have been violated, the
aggrieved party, such as the private respondents,
has the right to move for the issuance of a writ of
execution of the final judgment subject of the
compromise agreement.
Moreover, under the circumstances of
this case, petitioner does not stand to suffer any
harm or prejudice for the simple reason that
 [14]
His motion for reconsideration having been denied, Servando
appealed. He was eventually substituted by his heirs, now the
petitioners herein, on account of his intervening death. The
[15]
substitution was pursuant to the resolution dated June 15, 2005.
Issue
The petitioners submit that the CA erred in ruling that:
I a contract should expressly agree to abrogate the old contract in
THE 9 DECEMBER 1991 DECISION OF
BRANCH 16 OF THE REGIONAL TRIAL
COURT OF MALOLOS, BULACAN WAS NOT
NOVATED BY THE COMPROMISE
AGREEMENT BETWEEN THE PARTIES ON 5
FEBRUARY 1992.
II
THE LIABILITY OF THE PETITIONER TO
RESPONDENTS SHOULD BE BASED ON THE
DECEMBER 1991 DECISION OF BRANCH 16 OF
THE REGIONAL TRIAL COURT OF
MALOLOS, BULACAN AND NOT ON THE
COMPROMISE AGREEMENT EXECUTED IN
1992.
The petitioners insist that the RTC could not validly enforce a
judgment based on a promissory note that had been already
novated; that the promissory note had been impliedly novated when
the principal obligation of P500,000.00 had been fixed
at P750,000.00, and the maturity date had been extended from
August 23, 1986 to February 29, 1992.
In contrast, the respondents aver that the petitioners seek to alter,
modify or revoke the final and executory decision of the Court; that
novation did not take place because there was no complete
incompatibility between the promissory note and the memorandum
receipt; that Servandos previous payment would be deducted from
the total liability of the debtors based on the RTCs decision.
Issue
Was there a novation of the August 23, 1986 promissory
note when respondent Veronica Gonzales issued the February 5,
1992 receipt?
Ruling
The petition lacks merits.
I replaced and extinguished, as the petitioners claim.
Novation did not transpire because no
irreconcilable incompatibility existed
between the promissory note and the receipt
To buttress their claim of novation, the petitioners rely on the
receipt issued on February 5, 1992 by respondent Veronica whereby
Servandos obligation was fixed at P750,000.00. They insist that even
the maturity date was extended until February 29, 1992. Such
changes, they assert, were incompatible with those of the original
agreement under the promissory note.
The petitioners assertion is wrong.
A novation arises when there is a substitution of an obligation by a
subsequent one that extinguishes the first, either by changing the
object or the principal conditions, or by substituting the person of
the debtor, or by subrogating a third person in the rights of the
[16]
creditor. For a valid novation to take place, there must be,
therefore: (a) a previous valid obligation; (b) an agreement of the
parties to make a new contract; (c) an extinguishment of the old
[17]
contract; and (d) a valid new contract. In short, the new obligation
extinguishes the prior agreement only when the substitution is
unequivocally declared, or the old and the new obligations are
incompatible on every point. A compromise of a final judgment
will be charged as stipulated in the promissory
note subject of this case.
(
Sgd)
V
[19]
. Gonzalez
To be clear, novation is not presumed. This means that the parties to
favor of a new one. In the absence of the express agreement, the old
and the new obligations must be incompatible on every
[20]
point. According to California Bus Lines, Inc. v. State Investment
[21]
House, Inc.:
The extinguishment of the old obligation by the
new one is a necessary element of novation
which may be effected either expressly or
impliedly. The term expressly means that the
contracting parties incontrovertibly disclose that
their object in executing the new contract is to
extinguish the old one. Upon the other hand, no
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.
There is incompatibility when the two obligations cannot stand
together, each one having its independent existence. If the two
obligations cannot stand together, the latter obligation novates the
[22]
first. Changes that breed incompatibility must be essential in
nature and not merely accidental. The incompatibility must affect
any of the essential elements of the obligation, such as its object,
cause or principal conditions thereof; otherwise, the change is
merely modificatory in nature and insufficient to extinguish the
[23]
original obligation.
In light of the foregoing, the issuance of the receipt created no new
obligation. Instead, the respondents only thereby recognized the
original obligation by stating in the receipt that the P400,000.00
was partial payment of loan and by referring to the promissory note
subject of the case in imposing the interest. The loan mentioned in
the receipt was still the same loan involving the P500,000.00
extended to Servando. Advertence to the interest stipulated in the
promissory note indicated that the contract still subsisted, not
The receipt dated February 5, 1992 was only the proof of Servandos
payment of his obligation as confirmed by the decision of the RTC. It
did not establish the novation of his agreement with the
respondents. Indeed, the Court has ruled that an obligation to pay a
sum of money is not novated by an instrument that expressly
recognizes the old, or changes only the terms of payment, or adds
other obligations not incompatible with the old ones, or the new
[24]
contract merely supplements the old one. A new contract that is a
mere reiteration, acknowledgment or ratification of the old contract
with slight modifications or alterations as to the cause or object or
principal conditions can stand together with the former one, and
[25]
there can be no incompatibility between them. Moreover, a
creditors acceptance of payment after demand does not operate as a
[26]
modification of the original contract.
Worth noting is that Servandos liability was joint and solidary with
his co-debtors. In a solidary obligation, the creditor may proceed
against any one of the solidary debtors or some or all of them
[27]
simultaneously. The choice to determine against whom the
collection is enforced belongs to the creditor until the obligation is
[28]
fully satisfied. Thus, the obligation was being enforced against
Servando, who, in order to escape liability, should have presented
evidence to prove that his obligation had already been cancelled by
The petitioners argue that Servandos remaining liability amounted
to only P375,000.00, the balance indicated in the February 5, 1992
receipt. Accordingly, the balance was not yet due because the
respondents did not yet make a demand for payment.
The petitioners cannot be upheld.
The balance of P375,000.00 was premised on the taking place of a
novation. However, as found now, novation did not take place.
Accordingly, Servandos obligation, being solidary, remained to be
that decreed in the December 9, 1991 decision of the RTC, inclusive
of interests, less the amount of P400,000.00 that was meanwhile
paid by him.
WHEREFORE, the Court AFFIRMS the decision of the
Court of Appeals promulgated on March 19, 2003; ORDERS the
Regional Trial Court, Branch 16, in Malolos, Bulacan to proceed with
the execution based on its decision rendered on December 9, 1991,
deducting the amount of P400,000.00 already paid by the late
Servando Franco; and DIRECTS the petitioners to pay the costs of
suit.
SO ORDERED.
G.R. No. 128690 January 21, 1999
ABS-CBN BROADCASTING CORPORATION, petitioner,
vs.
HONORABLE COURT OF APPEALS, REPUBLIC
BROADCASTING CORP, VIVA PRODUCTION, INC., and
VICENTE DEL ROSARIO, respondents.
DAVIDE, JR., CJ.:
In this petition for review on certiorari, petitioner ABS-CBN
Broadcasting Corp. (hereafter ABS-CBN) seeks to reverse and set
1 2
aside the decision of 31 October 1996 and the resolution of 10
March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The
3
former affirmed with modification the decision of 28 April 1993 of
the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil
Case No. Q-92-12309. The latter denied the motion to reconsider the
decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court of
Appeals, are as follows:
In 1990, ABS-CBN and Viva executed a Film
Exhibition Agreement (Exh. "A") whereby Viva
gave ABS-CBN an exclusive right to exhibit some
Viva films. Sometime in December 1991, in
accordance with paragraph 2.4 [sic] of said
agreement stating that —.
1.4 ABS-CBN shall have the right of first refusal
to the next twenty-four (24) Viva films for TV
telecast under such terms as may be agreed upon
by the parties hereto, provided, however, that
such right shall be exercised by ABS-CBN from
the actual offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through
its vice-president Charo Santos-Concio, a list of three(3) film
packages (36 title) from which ABS-CBN may exercise its right of
first refusal under the afore-said agreement (Exhs. "1" par, 2, "2,"
"2-A'' and "2-B"-Viva). ABS-CBN, however through Mrs. Concio,
"can tick off only ten (10) titles" (from the list) "we can purchase"
(Exh. "3" - Viva) and therefore did not accept said list (TSN, June
8, 1992, pp. 9-10). The titles ticked off by Mrs. Concio are not the
subject of the case at bar except the film ''Maging Sino Ka Man."
For further enlightenment, this rejection letter dated January 06,
1992 (Exh "3" - Viva) is hereby quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I
would like to express my difficulty in recommending the
purchase of the three film packages you are offering ABS-CBN.
From among the three packages I can only tick off 10 titles we
can purchase. Please see attached. I hope you will understand
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us before and
have been rejected because of the ruling of MTRCB to have
them aired at 9:00 p.m. due to their very adult themes.
As for the 10 titles I have choosen [sic] from the 3 packages please
consider including all the other Viva movies produced last year. I
have quite an attractive offer to make.
Thanking you and with my warmest regards.
On February 27, 1992, defendant Del Rosario approached ABS-CBN's
Ms. Concio, with a list consisting of 52 original movie titles (i.e. not
yet aired on television) including the 14 titles subject of the present
case, as well as 104 re-runs (previously aired on television) from
which ABS-CBN may choose another 52 titles, as a total of 156 titles,
proposing to sell to ABS-CBN airing rights over this package of 52
originals and 52 re-runs for P60,000,000.00 of which P30,000,000.00
will be in cash and P30,000,000.00 worth of television spots (Exh. "4"
to "4-C" Viva; "9" -Viva).
On April 2, 1992, defendant Del Rosario and ABS-
CBN general manager, Eugenio Lopez III, met at
the Tamarind Grill Restaurant in Quezon City to
discuss the package proposal of Viva. What
transpired in that lunch meeting is the subject of
conflicting versions. Mr. Lopez testified that he
and Mr. Del Rosario allegedly agreed that ABS-
CRN was granted exclusive film rights to
fourteen (14) films for a total consideration of P36
million; that he allegedly put this agreement as to
the price and number of films in a "napkin'' and
signed it and gave it to Mr. Del Rosario (Exh. D;
TSN, pp. 24-26, 77-78, June 8, 1992). On the other
hand, Del Rosario denied having made any
agreement with Lopez regarding the 14 Viva
films; denied the existence of a napkin in which
Lopez wrote something; and insisted that what
he and Lopez discussed at the lunch meeting was
Viva's film package offer of 104 films (52 originals
and 52 re-runs) for a total price of P60 million.
Mr. Lopez promising [sic]to make a counter
proposal which came in the form of a proposal
contract Annex "C" of the complaint (Exh. "1"·-
 defendant Del Rosario and one film was added
by Ms. Concio, for a consideration of P35 million.
Exhibit "C" provides that ABS-CBN is granted
films right to 53 films and contains a right of first
refusal to "1992 Viva Films." The said counter
proposal was however rejected by Viva's Board of
Directors [in the] evening of the same day, April
7, 1992, as Viva would not sell anything less than
the package of 104 films for P60 million pesos
(Exh. "9" - Viva), and such rejection was relayed
to Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN
and following several negotiations and meetings
defendant Del Rosario and Viva's President
Teresita Cruz, in consideration of P60 million,
signed a letter of agreement dated April 24, 1992.
granting RBS the exclusive right to air 104 Viva-
produced and/or acquired films (Exh. "7-A" - RBS;
Exh. "4" - RBS) including the fourteen (14) films
4
subject of the present case.
On 27 May 1992, ABS-CBN filed before the RTC a complaint for
specific performance with a prayer for a writ of preliminary
injunction and/or temporary restraining order against private
5
respondents Republic Broadcasting Corporation (hereafter RBS ),
Viva Production (hereafter VIVA), and Vicente Del Rosario. The
complaint was docketed as Civil Case No. Q-92-12309.
On 27 May 1992, RTC issued a temporary restraining
6
order enjoining private respondents from proceeding with the
airing, broadcasting, and televising of the fourteen VIVA films
subject of the controversy, starting with the film Maging Sino Ka
Man, which was scheduled to be shown on private respondents RBS'
channel 7 at seven o'clock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued an
7
order directing the issuance of a writ of preliminary injunction
upon ABS-CBN's posting of P35 million bond. ABS-CBN moved for
8
the reduction of the bond, while private respondents moved for
9
reconsideration of the order and offered to put up a counterbound.
In the meantime, private respondents filed separate answers with
10
counterclaim. RBS also set up a cross-claim against VIVA..
11
On 3 August 1992, the RTC issued an order dissolving the writ of
preliminary injunction upon the posting by RBS of a P30 million
counterbond to answer for whatever damages ABS-CBN might
suffer by virtue of such dissolution. However, it reduced petitioner's
injunction bond to P15 million as a condition precedent for the
reinstatement of the writ of preliminary injunction should private
respondents be unable to post a counterbond.
12
At the pre-trial on 6 August 1992, the parties, upon suggestion of
the court, agreed to explore the possibility of an amicable
settlement. In the meantime, RBS prayed for and was granted
reasonable time within which to put up a P30 million counterbond
in the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement RBS posted
on 1 October 1992 a counterbond, which the RTC approved in its
13
Order of 15 October 1992.
On 19 October 1992, ABS-CBN filed a motion for
14
reconsideration of the 3 August and 15 October 1992 Orders,
15
which RBS opposed.
16
On 29 October 1992, the RTC conducted a pre-trial.
Pending resolution of its motion for reconsideration, ABS-CBN filed
17
with the Court of Appeals a petition challenging the RTC's Orders
of 3 August and 15 October 1992 and praying for the issuance of a writ
of preliminary injunction to enjoin the RTC from enforcing said
orders. The case was docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary
18
restraining order to enjoin the airing, broadcasting, and televising
of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a
19
decision dismissing the petition in CA -G.R. No. 29300 for being
premature. ABS-CBN challenged the dismissal in a petition for
review filed with this Court on 19 January 1993, which was docketed
as G.R. No. 108363.
In the meantime the RTC received the evidence for the parties in
Civil Case No. Q-192-1209. Thereafter, on 28 April 1993, it rendered a
20
decision in favor of RBS and VIVA and against ABS-CBN
Directors, and said agreement was disapproved during the meeting
of the Board on 7 April 1992. Hence, there was no basis for ABS-
CBN's demand that VIVA signed the 1992 Film Exhibition
Agreement. Furthermore, the right of first refusal under the 1990
Film Exhibition Agreement had previously been exercised per Ms.
Concio's letter to Del Rosario ticking off ten titles acceptable to
them, which would have made the 1992 agreement an entirely new
contract.
21
On 21 June 1993, this Court denied ABS-CBN's petition for review
in G.R. No. 108363, as no reversible error was committed by the
Court of Appeals in its challenged decision and the case had
"become moot and academic in view of the dismissal of the main
action by the court a quo in its decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of
Appeals claiming that there was a perfected contract between ABS-
CBN and VIVA granting ABS-CBN the exclusive right to exhibit the
subject films. Private respondents VIVA and Del Rosario also
appealed seeking moral and exemplary damages and additional
attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed with
the RTC that the contract between ABS-CBN and VIVA had not
been perfected, absent the approval by the VIVA Board of Directors
of whatever Del Rosario, it's agent, might have agreed with Lopez III.
The appellate court did not even believe ABS-CBN's evidence that
Lopez III actually wrote down such an agreement on a "napkin," as
the same was never produced in court. It likewise rejected ABS-
CBN's insistence on its right of first refusal and ratiocinated as
follows:
As regards the matter of right of first refusal, it
may be true that a Film Exhibition Agreement
was entered into between Appellant ABS-CBN
and appellant VIVA under Exhibit "A" in 1990,
and that parag. 1.4 thereof provides:
1.4 ABS-CBN shall have the right of first refusal to the next twenty-
four (24) VIVA films for TV telecast under such terms as may be
agreed upon by the parties hereto, provided, however, that such
right shall be exercised by ABS-CBN within a period of fifteen (15)
days from the actual offer in writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of
ABS-CBN shall still be subject to such terms as may be agreed upon
by the parties thereto, and that the said right shall be exercised by
ABS-CBN within fifteen (15) days from the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit "A" on the right of first
refusal did not fix the price of the film right to the twenty-four (24)
films, nor did it specify the terms thereof. The same are still left to be
agreed upon by the parties.
In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records,
p. 89) stated that it can only tick off ten (10) films, and the draft
contract Exhibit "C" accepted only fourteen (14) films, while parag. 1.4
of Exhibit "A'' speaks of the next twenty-four (24) films.
The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A.
2-B; Records, pp. 86-88; Decision, p. 11, Records, p. 1150), when the
first list of VIVA films was sent by Mr. Del Rosario to ABS-CBN. The
Vice President of ABS-CBN, Ms. Charo Santos-Concio, sent a letter
dated January 6, 1992 (Exhibit 3, Records, p. 89) where ABS-CBN
exercised its right of refusal by rejecting the offer of VIVA.. As aptly
observed by the trial court, with the said letter of Mrs. Concio of
January 6, 1992, ABS-CBN had lost its right of first refusal. And even
if We reckon the fifteen (15) day period from February 27, 1992
(Exhibit 4 to 4-C) when another list was sent to ABS-CBN after the
letter of Mrs. Concio, still the fifteen (15) day period within which
22
ABS-CBN shall exercise its right of first refusal has already expired.
Accordingly, respondent court sustained the award of actual
damages consisting in the cost of print advertisements and the
premium payments for the counterbond, there being adequate proof
of the pecuniary loss which RBS had suffered as a result of the filing
of the complaint by ABS-CBN. As to the award of moral damages,
the Court of Appeals found reasonable basis therefor, holding that
RBS's reputation was debased by the filing of the complaint in Civil
Case No. Q-92-12309 and by the non-showing of the film "Maging
Its motion for reconsideration having been denied, ABS-CBN filed
the petition in this case, contending that the Court of Appeals
gravely erred in
I paid for the counterbond constituted a pecuniary loss upon which it
. . . RULING THAT THERE WAS NO
PERFECTED CONTRACT BETWEEN
PETITIONER AND PRIVATE RESPONDENT
VIVA NOTWITHSTANDING
PREPONDERANCE OF EVIDENCE ADDUCED
BY PETITIONER TO THE CONTRARY.
II
. . . IN AWARDING ACTUAL AND
COMPENSATORY DAMAGES IN FAVOR OF
PRIVATE RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY
DAMAGES IN FAVOR OF PRIVATE
RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN
FAVOR OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first
refusal over twenty-four titles under the 1990 Film Exhibition
Agreement, as it had chosen only ten titles from the first list. It insists
that we give credence to Lopez's testimony that he and Del Rosario
met at the Tamarind Grill Restaurant, discussed the terms and
conditions of the second list (the 1992 Film Exhibition Agreement)
and upon agreement thereon, wrote the same on a paper napkin. It
also asserts that the contract has already been effective, as the
elements thereof, namely, consent, object, and consideration were
established. It then concludes that the Court of Appeals'
pronouncements were not supported by law and jurisprudence, as
per our decision of 1 December 1995 in Limketkai Sons Milling, Inc. v.
23
Court of Appeals, which cited Toyota Shaw, Inc. v. Court of
24 25
Appeals, Ang Yu Asuncion v. Court of Appeals, and Villonco Realty
26
Company v. Bormaheco. Inc.
Anent the actual damages awarded to RBS, ABS-CBN disavows
liability therefor. RBS spent for the premium on the counterbond of
its own volition in order to negate the injunction issued by the trial
court after the parties had ventilated their respective positions
during the hearings for the purpose. The filing of the counterbond
was an option available to RBS, but it can hardly be argued that
ABS-CBN compelled RBS to incur such expense. Besides, RBS had
another available option, i.e., move for the dissolution or the
injunction; or if it was determined to put up a counterbond, it could
have presented a cash bond. Furthermore under Article 2203 of the
Civil Code, the party suffering loss or injury is also required to
exercise the diligence of a good father of a family to minimize the
damages resulting from the act or omission. As regards the cost of
print advertisements, RBS had not convincingly established that this
was a loss attributable to the non showing "Maging Sino Ka Man"; on
the contrary, it was brought out during trial that with or without the
case or the injunction, RBS would have spent such an amount to
generate interest in the film.
ABS-CBN further contends that there was no clear basis for the
awards of moral and exemplary damages. The controversy involving
ABS-CBN and RBS did not in any way originate from business
transaction between them. The claims for such damages did not
arise from any contractual dealings or from specific acts committed
by ABS-CBN against RBS that may be characterized as wanton,
fraudulent, or reckless; they arose by virtue only of the filing of the
complaint, An award of moral and exemplary damages is not
warranted where the record is bereft of any proof that a party acted
27
maliciously or in bad faith in filing an action. In any case, free
resort to courts for redress of wrongs is a matter of public policy. The
law recognizes the right of every one to sue for that which he
honestly believes to be his right without fear of standing trial for
damages where by lack of sufficient evidence, legal technicalities, or
a different interpretation of the laws on the matter, the case would
28
lose ground. One who makes use of his own legal right does no
29
injury. If damage results front the filing of the complaint, it
30
is damnum absque injuria. Besides, moral damages are generally
not awarded in favor of a juridical person, unless it enjoys a good
reputation that was debased by the offending party resulting in
31
them regarding the object and consideration of the alleged contract.
It affirms that the ABS-CBN's claim of a right of first refusal was
correctly rejected by the trial court. RBS insist the premium it had
may recover. It was obliged to put up the counterbound due to the
injunction procured by ABS-CBN. Since the trial court found that
ABS-CBN had no cause of action or valid claim against RBS and,
therefore not entitled to the writ of injunction, RBS could recover
from ABS-CBN the premium paid on the counterbond. Contrary to
the claim of ABS-CBN, the cash bond would prove to be more
expensive, as the loss would be equivalent to the cost of money RBS
would forego in case the P30 million came from its funds or was
borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements
for the cancelled showing of the film "Maging Sino Ka Man" because
the print advertisements were put out to announce the showing on a
particular day and hour on Channel 7, i.e., in its entirety at one time,
not a series to be shown on a periodic basis. Hence, the print
advertisement were good and relevant for the particular date
showing, and since the film could not be shown on that particular
date and hour because of the injunction, the expenses for the
advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-
CBN filed the case and secured injunctions purely for the purpose of
harassing and prejudicing RBS. Pursuant then to Article 19 and 21 of
the Civil Code, ABS-CBN must be held liable for such
34
damages. Citing Tolentino, damages may be awarded in cases of
abuse of rights even if the act done is not illicit and there is abuse of
rights were plaintiff institutes and action purely for the purpose of
harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and
exemplary damages, private respondents RBS cited People
35
v. Manero, where it was stated that such entity may recover moral
and exemplary damages if it has a good reputation that is debased
resulting in social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation has
been debased by ABS-CBN's acts in this case.
When RBS was not able to fulfill its commitment
to the viewing public to show the film "Maging
Sino Ka Man" on the scheduled dates and times
(and on two occasions that RBS advertised), it
suffered serious embarrassment and social
humiliation. When the showing was canceled,
late viewers called up RBS' offices and subjected
RBS to verbal abuse ("Announce kayo nang
announce, hindi ninyo naman ilalabas,"
"nanloloko yata kayo") (Exh. 3-RBS, par. 3). This
alone was not something RBS brought upon
itself. it was exactly what ABS-CBN had planned
to happen.
The amount of moral and exemplary damages
cannot be said to be excessive. Two reasons
justify the amount of the award.
The first is that the humiliation suffered by RBS
is national extent. RBS operations as a
broadcasting company is [sic] nationwide. Its
clientele, like that of ABS-CBN, consists of those
who own and watch television. It is not an
exaggeration to state, and it is a matter of judicial
notice that almost every other person in the
country watches television. The humiliation
suffered by RBS is multiplied by the number of
televiewers who had anticipated the showing of
the film "Maging Sino Ka Man" on May 28 and
November 3, 1992 but did not see it owing to the
cancellation. Added to this are the advertisers
who had placed commercial spots for the telecast
and to whom RBS had a commitment in
consideration of the placement to show the film
in the dates and times specified.
The second is that it is a competitor that caused
RBS to suffer the humiliation. The humiliation
and injury are far greater in degree when caused
by an entity whose ultimate business objective is
 I.
The first issue should be resolved against ABS-CBN. A contract is a
meeting of minds between two persons whereby one binds himself
37
to give something or to render some service to another for a
consideration. there is no contract unless the following requisites
concur: (1) consent of the contracting parties; (2) object certain which
is the subject of the contract; and (3) cause of the obligation, which is
38
established. A contract undergoes three stages:
(a) preparation, conception, or generation, which
is the period of negotiation and bargaining,
ending at the moment of agreement of the
parties;
(b) perfection or birth of the contract, which is
the moment when the parties come to agree on
the terms of the contract; and
(c) consummation or death, which is the
fulfillment or performance of the terms agreed
39
upon in the contract.
Contracts that are consensual in nature are perfected upon mere
meeting of the minds, Once there is concurrence between the offer
and the acceptance upon the subject matter, consideration, and
terms of payment a contract is produced. The offer must be certain.
To convert the offer into a contract, the acceptance must be absolute
and must not qualify the terms of the offer; it must be plain,
unequivocal, unconditional, and without variance of any sort from
the proposal. A qualified acceptance, or one that involves a new
proposal, constitutes a counter-offer and is a rejection of the original
offer. Consequently, when something is desired which is not exactly
what is proposed in the offer, such acceptance is not sufficient to
generate consent because any modification or variation from the
40
terms of the offer annuls the offer.
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at
the Tamarind Grill on 2 April 1992 to discuss the package of films,
said package of 104 VIVA films was VIVA's offer to ABS-CBN to
enter into a new Film Exhibition Agreement. But ABS-CBN, sent,
through Ms. Concio, a counter-proposal in the form of a draft
contract proposing exhibition of 53 films for a consideration of P35
million. This counter-proposal could be nothing less than the
counter-offer of Mr. Lopez during his conference with Del Rosario at
Tamarind Grill Restaurant. Clearly, there was no acceptance of
VIVA's offer, for it was met by a counter-offer which substantially
varied the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
41 42
Appeals and Villonco Realty Company v. Bormaheco, Inc., is
misplaced. In these cases, it was held that an acceptance may contain
a request for certain changes in the terms of the offer and yet be a
binding acceptance as long as "it is clear that the meaning of the
acceptance is positively and unequivocally to accept the offer,
whether such request is granted or not." This ruling was, however,
43
reversed in the resolution of 29 March 1996, which ruled that the
acceptance of all offer must be unqualified and absolute, i.e., it
"must be identical in all respects with that of the offer so as to
produce consent or meeting of the minds."
On the other hand, in Villonco, cited in Limketkai, the alleged
changes in the revised counter-offer were not material but merely
clarificatory of what had previously been agreed upon. It cited the
44
statement in Stuart v. Franklin Life Insurance Co. that "a vendor's
change in a phrase of the offer to purchase, which change does not
essentially change the terms of the offer, does not amount to a
45
rejection of the offer and the tender of a counter-offer." However,
when any of the elements of the contract is modified upon
acceptance, such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of
VIVA's offer. Hence, they underwent a period of bargaining. ABS-
CBN then formalized its counter-proposals or counter-offer in a
draft contract, VIVA through its Board of Directors, rejected such
counter-offer, Even if it be conceded arguendo that Del Rosario had
accepted the counter-offer, the acceptance did not bind VIVA, as
there was no proof whatsoever that Del Rosario had the specific
authority to do so.
46
Under Corporation Code, unless otherwise provided by said Code,
corporate powers, such as the power; to enter into contracts; are
exercised by the Board of Directors. However, the Board may
delegate such powers to either an executive committee or officials or
that lunch meeting on April 02, 1992 at the
Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the
Tamarind Grill referred to the price and the number of films,
which he wrote on a napkin. However, Exhibit "C"
contains numerous provisions which, were not discussed at the
Tamarind Grill, if Lopez testimony was to be believed nor could
they have been physically written on a napkin. There was even
doubt as to whether it was a paper napkin or a cloth napkin. In
short what were written in Exhibit "C'' were not discussed, and
therefore could not have been agreed upon, by the parties. How
then could this court compel the parties to sign Exhibit "C" when
the provisions thereof were not previously agreed upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the
subject matter of the contract was 14 films. The complaint in fact
prays for delivery of 14 films. But Exhibit "C" mentions 53 films as
its subject matter. Which is which If Exhibits "C" reflected the true
intent of the parties, then ABS-CBN's claim for 14 films in its
complaint is false or if what it alleged in the complaint is true, then
Exhibit "C" did not reflect what was agreed upon by the parties.
This underscores the fact that there was no meeting of the minds
as to the subject matter of the contracts, so as to preclude
perfection thereof. For settled is the rule that there can be no
contract where there is no object which is its subject matter (Art.
1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit
testimony (Exh. "D") states:
We were able to reach an agreement. VIVA gave us the exclusive
license to show these fourteen (14) films, and we agreed to pay Viva
the amount of P16,050,000.00 as well as grant Viva commercial
slots worth P19,950,000.00. We had already earmarked this P16,
050,000.00.
which gives a total consideration of P36 million (P19,950,000.00
plus P16,050,000.00. equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q. What was written in this napkin?
A. The total price, the breakdown the known Viva movies, the 7
blockbuster movies and the other 7 Viva movies because the price
was broken down accordingly. The none [sic] Viva and the seven
other Viva movies and the sharing between the cash portion and
the concerned spot portion in the total amount of P35 million
pesos.
Now, which is which? P36 million or P35 million? This weakens
ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she
transmitted Exhibit "C" to Mr. Del Rosario with a handwritten
note, describing said Exhibit "C" as a "draft." (Exh. "5" - Viva; tsn pp.
23-24 June 08, 1992). The said draft has a well defined meaning.
Since Exhibit "C" is only a draft, or a tentative, provisional or
preparatory writing prepared for discussion, the terms and
conditions thereof could not have been previously agreed upon by
ABS-CBN and Viva Exhibit "C'' could not therefore legally bind
Viva, not having agreed thereto. In fact, Ms. Concio admitted that
the terms and conditions embodied in Exhibit "C" were prepared
by ABS-CBN's lawyers and there was no discussion on said terms
and conditions. . . .
As the parties had not yet discussed the proposed
terms and conditions in Exhibit "C," and there
was no evidence whatsoever that Viva agreed to
the terms and conditions thereof, said document
cannot be a binding contract. The fact that Viva
refused to sign Exhibit "C" reveals only two [sic]
well that it did not agree on its terms and
conditions, and this court has no authority to
compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he
and Mr. Del Rosario agreed upon at the
Tamarind Grill was only provisional, in the sense
that it was subject to approval by the Board of
Directors of Viva. He testified:
Q. Now, Mr. Witness, and
after that Tamarind meeting
... the second meeting
wherein you claimed that you
 Q. So, he was going to
forward that to the board of
Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43,
June 8, 1992)
Q. Did Mr. Del Rosario tell
you that he will submit it to
his Board for approval?
A. Yes, sir. (Tsn, p. 69, June 8,
1992).
The above testimony of Mr. Lopez shows beyond
doubt that he knew Mr. Del Rosario had no
authority to bind Viva to a contract with ABS-
CBN until and unless its Board of Directors
approved it. The complaint, in fact, alleges that
Mr. Del Rosario "is the Executive Producer of
defendant Viva" which "is a corporation." (par. 2,
complaint). As a mere agent of Viva, Del Rosario
could not bind Viva unless what he did is ratified
by its Board of Directors. (Vicente vs. Geraldez, 52
SCRA 210; Arnold vs. Willetsand Paterson, 44
Phil. 634). As a mere agent, recognized as such by
plaintiff, Del Rosario could not be held liable
jointly and severally with Viva and his inclusion
as party defendant has no legal basis. (Salonga
vs. Warner Barner [sic] , COLTA , 88 Phil. 125;
Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations
in the complaint are clear admissions that what
was supposed to have been agreed upon at the
Tamarind Grill between Mr. Lopez and Del
Rosario was not a binding agreement. It is as it
should be because corporate power to enter into
a contract is lodged in the Board of Directors.
(Sec. 23, Corporation Code). Without such board
approval by the Viva board, whatever agreement
Lopez and Del Rosario arrived at could not ripen
into a valid contract binding upon Viva (Yao Ka
Sin Trading vs. Court of Appeals, 209 SCRA 763).
The evidence adduced shows that the Board of
Directors of Viva rejected Exhibit "C" and
insisted that the film package for 140 films be
49
maintained (Exh. "7-1" - Viva ).
The contention that ABS-CBN had yet to fully exercise its right of
first refusal over twenty-four films under the 1990 Film Exhibition
Agreement and that the meeting between Lopez and Del Rosario
was a continuation of said previous contract is untenable. As
observed by the trial court, ABS-CBN right of first refusal had
already been exercised when Ms. Concio wrote to VIVA ticking off
ten films, Thus:
[T]he subsequent negotiation with ABS-CBN two
(2) months after this letter was sent, was for an
entirely different package. Ms. Concio herself
admitted on cross-examination to having used or
exercised the right of first refusal. She stated that
the list was not acceptable and was indeed not
accepted by ABS-CBN, (TSN, June 8, 1992, pp. 8-
10). Even Mr. Lopez himself admitted that the
right of the first refusal may have been already
exercised by Ms. Concio (as she had). (TSN, June
8, 1992, pp. 71-75). Del Rosario himself knew and
understand [sic] that ABS-CBN has lost its rights
of the first refusal when his list of 36 titles were
50
rejected (Tsn, June 9, 1992, pp. 10-11)
II
However, we find for ABS-CBN on the issue of damages. We shall
first take up actual damages. Chapter 2, Title XVIII, Book IV of the
Civil Code is the specific law on actual or compensatory damages.
Except as provided by law or by stipulation, one is entitled to
compensation for actual damages only for such pecuniary loss
51
suffered by him as he has duly proved. The indemnification shall
comprehend not only the value of the loss suffered, but also that of
52
the profits that the obligee failed to obtain. In contracts and
quasi-contracts the damages which may be awarded are dependent
injury, or for injury to the plaintiff's business standing or
55
commercial credit.
The claim of RBS for actual damages did not arise from contract,
quasi-contract, delict, or quasi-delict. It arose from the fact of filing
of the complaint despite ABS-CBN's alleged knowledge of lack of
cause of action. Thus paragraph 12 of RBS's Answer with
Counterclaim and Cross-claim under the heading
COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully
well that it has no cause of action RBS. As a result
thereof, RBS suffered actual damages in the
56
amount of P6,621,195.32.
Needless to state the award of actual damages cannot be
comprehended under the above law on actual damages. RBS could
only probably take refuge under Articles 19, 20, and 21 of the Civil
Code, which read as follows:
Art. 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.
Art. 20. Every person who, contrary to law,
wilfully or negligently causes damage to another,
shall indemnify the latter for tile same.
Art. 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.
It may further be observed that in cases where a writ of preliminary
injunction is issued, the damages which the defendant may suffer by
57
reason of the writ are recoverable from the injunctive bond. In
this case, ABS-CBN had not yet filed the required bond; as a matter
of fact, it asked for reduction of the bond and even went to the Court
of Appeals to challenge the order on the matter, Clearly then, it was
not necessary for RBS to file a counterbond. Hence, ABS-CBN
cannot be held responsible for the premium RBS paid for the
counterbond.
Neither could ABS-CBN be liable for the print advertisements for
"Maging Sino Ka Man" for lack of sufficient legal basis. The RTC
issued a temporary restraining order and later, a writ of preliminary
injunction on the basis of its determination that there existed
sufficient ground for the issuance thereof. Notably, the RTC did not
dissolve the injunction on the ground of lack of legal and factual
basis, but because of the plea of RBS that it be allowed to put up a
counterbond.
As regards attorney's fees, the law is clear that in the absence of
stipulation, attorney's fees may be recovered as actual or
compensatory damages under any of the circumstances provided for
58
in Article 2208 of the Civil Code.
The general rule is that attorney's fees cannot be recovered as part of
damages because of the policy that no premium should be placed on
59
the right to litigate. They are not to be awarded every time a party
wins a suit. The power of the court to award attorney's fees under
Article 2208 demands factual, legal, and equitable
60
justification. Even when claimant is compelled to litigate with third
persons or to incur expenses to protect his rights, still attorney's fees
may not be awarded where no sufficient showing of bad faith could
be reflected in a party's persistence in a case other than erroneous
61
conviction of the righteousness of his cause.
As to moral damages the law is Section 1, Chapter 3, Title XVIII,
Book IV of the Civil Code. Article 2217 thereof defines what are
included in moral damages, while Article 2219 enumerates the cases
where they may be recovered, Article 2220 provides that moral
damages may be recovered in breaches of contract where the
defendant acted fraudulently or in bad faith. RBS's claim for moral
damages could possibly fall only under item (10) of Article 2219,
thereof which reads:
(10) Acts and actions referred to in Articles 21, 26,
27, 28, 29, 30, 32, 34, and 35.
Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered. and not to
62
impose a penalty on the wrongdoer. The award is not meant to
enrich the complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or amusements
that will serve to obviate then moral suffering he has undergone. It is
that is debased, resulting in social humiliation" is an obiter dictum.
On this score alone the award for damages must be set aside, since
RBS is a corporation.
The basic law on exemplary damages is Section 5, Chapter 3, Title
XVIII, Book IV of the Civil Code. These are imposed by way of
example or correction for the public good, in addition to moral,
68
temperate, liquidated or compensatory damages. They are
recoverable in criminal cases as part of the civil liability when the
crime was committed with one or more aggravating
69
circumstances; in quasi-contracts, if the defendant acted with
70
gross negligence; and in contracts and quasi-contracts, if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or
71
malevolent manner.
It may be reiterated that the claim of RBS against ABS-CBN is not
based on contract, quasi-contract, delict, or quasi-delict, Hence, the
claims for moral and exemplary damages can only be based on
Articles 19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the following: (1)
the existence of a legal right or duty, (2) which is exercised in bad
faith, and (3) for the sole intent of prejudicing or injuring another.
Article 20 speaks of the general sanction for all other provisions of
law which do not especially provide for their own sanction; while
Article 21 deals with acts contra bonus mores, and has the following
elements; (1) there is an act which is legal, (2) but which is contrary to
morals, good custom, public order, or public policy, and (3) and it is
72
done with intent to injure.
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21.
Malice or bad faith implies a conscious and intentional design to do
73
a wrongful act for a dishonest purpose or moral obliquity. Such
74
must be substantiated by evidence.
There is no adequate proof that ABS-CBN was inspired by malice or
bad faith. It was honestly convinced of the merits of its cause after it
had undergone serious negotiations culminating in its formal
submission of a draft contract. Settled is the rule that the adverse
result of an action does not per se make the action wrongful and
subject the actor to damages, for the law could not have meant to
impose a penalty on the right to litigate. If damages result from a
75
person's exercise of a right, it is damnum absque injuria.
WHEREFORE, the instant petition is GRANTED. The challenged
decision of the Court of Appeals in CA-G.R. CV No, 44125 is hereby
REVERSED except as to unappealed award of attorney's fees in
favor of VIVA Productions, Inc.1âwphi1.nêt
No pronouncement as to costs.
SO ORDERED.
G.R. No. 128690 January 21, 1999
ABS-CBN BROADCASTING CORPORATION, petitioner,
vs.
HONORABLE COURT OF APPEALS, REPUBLIC
BROADCASTING CORP, VIVA PRODUCTION, INC., and
VICENTE DEL ROSARIO, respondents.
DAVIDE, JR., CJ.:
In this petition for review on certiorari, petitioner ABS-CBN
Broadcasting Corp. (hereafter ABS-CBN) seeks to reverse and set
1 2
aside the decision of 31 October 1996 and the resolution of 10
March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The
3
former affirmed with modification the decision of 28 April 1993 of
the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil
Case No. Q-92-12309. The latter denied the motion to reconsider the
decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court of
Appeals, are as follows:
In 1990, ABS-CBN and Viva executed a Film
Exhibition Agreement (Exh. "A") whereby Viva
gave ABS-CBN an exclusive right to exhibit some
Viva films. Sometime in December 1991, in
accordance with paragraph 2.4 [sic] of said
agreement stating that —.
1.4 ABS-CBN shall have the right of first refusal
to the next twenty-four (24) Viva films for TV
telecast under such terms as may be agreed upon
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I
would like to express my difficulty in recommending the purchase of
the three film packages you are offering ABS-CBN.
From among the three packages I can only tick off 10 titles we can
purchase. Please see attached. I hope you will understand my
position. Most of the action pictures in the list do not have big action
stars in the cast. They are not for primetime. In line with this I wish
to mention that I have not scheduled for telecast several action
pictures in out very first contract because of the cheap production
value of these movies as well as the lack of big action stars. As a film
producer, I am sure you understand what I am trying to say as Viva
produces only big action pictures.
In fact, I would like to request two (2) additional runs for these
movies as I can only schedule them in our non-primetime slots. We
have to cover the amount that was paid for these movies because as
you very well know that non-primetime advertising rates are very
low. These are the unaired titles in the first contract.
1. Kontra Persa [sic].
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us before and have
been rejected because of the ruling of MTRCB to have them aired at
9:00 p.m. due to their very adult themes.
As for the 10 titles I have choosen [sic] from the 3 packages please
consider including all the other Viva movies produced last year. I
have quite an attractive offer to make.
On February 27, 1992, defendant Del Rosario approached ABS-CBN's
Ms. Concio, with a list consisting of 52 original movie titles (i.e. not
yet aired on television) including the 14 titles subject of the present
case, as well as 104 re-runs (previously aired on television) from
which ABS-CBN may choose another 52 titles, as a total of 156 titles,
proposing to sell to ABS-CBN airing rights over this package of 52
originals and 52 re-runs for P60,000,000.00 of which P30,000,000.00
will be in cash and P30,000,000.00 worth of television spots (Exh. "4"
to "4-C" Viva; "9" -Viva).
On April 2, 1992, defendant Del Rosario and ABS-
CBN general manager, Eugenio Lopez III, met at
the Tamarind Grill Restaurant in Quezon City to
discuss the package proposal of Viva. What
transpired in that lunch meeting is the subject of
conflicting versions. Mr. Lopez testified that he
and Mr. Del Rosario allegedly agreed that ABS-
CRN was granted exclusive film rights to
fourteen (14) films for a total consideration of P36
million; that he allegedly put this agreement as to
the price and number of films in a "napkin'' and
signed it and gave it to Mr. Del Rosario (Exh. D;
TSN, pp. 24-26, 77-78, June 8, 1992). On the other
hand, Del Rosario denied having made any
agreement with Lopez regarding the 14 Viva
films; denied the existence of a napkin in which
Lopez wrote something; and insisted that what
he and Lopez discussed at the lunch meeting was
Viva's film package offer of 104 films (52 originals
and 52 re-runs) for a total price of P60 million.
Mr. Lopez promising [sic]to make a counter
proposal which came in the form of a proposal
contract Annex "C" of the complaint (Exh. "1"·-
Viva; Exh. "C" - ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano
Gozon of RBS Senior vice-president for Finance
discussed the terms and conditions of Viva's offer
to sell the 104 films, after the rejection of the
same package by ABS-CBN.
On April 07, 1992, defendant Del Rosario received
through his secretary, a handwritten note from
 the package of 104 films for P60 million pesos
(Exh. "9" - Viva), and such rejection was relayed
to Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN
and following several negotiations and meetings
defendant Del Rosario and Viva's President
Teresita Cruz, in consideration of P60 million,
signed a letter of agreement dated April 24, 1992.
granting RBS the exclusive right to air 104 Viva-
produced and/or acquired films (Exh. "7-A" - RBS;
Exh. "4" - RBS) including the fourteen (14) films
4
subject of the present case.
On 27 May 1992, ABS-CBN filed before the RTC a complaint for
specific performance with a prayer for a writ of preliminary
injunction and/or temporary restraining order against private
5
respondents Republic Broadcasting Corporation (hereafter RBS ),
Viva Production (hereafter VIVA), and Vicente Del Rosario. The
complaint was docketed as Civil Case No. Q-92-12309.
On 27 May 1992, RTC issued a temporary restraining
6
order enjoining private respondents from proceeding with the
airing, broadcasting, and televising of the fourteen VIVA films
subject of the controversy, starting with the film Maging Sino Ka
Man, which was scheduled to be shown on private respondents RBS'
channel 7 at seven o'clock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued an
7
order directing the issuance of a writ of preliminary injunction
upon ABS-CBN's posting of P35 million bond. ABS-CBN moved for
8
the reduction of the bond, while private respondents moved for
9
reconsideration of the order and offered to put up a counterbound.
In the meantime, private respondents filed separate answers with
10
counterclaim. RBS also set up a cross-claim against VIVA..
11
On 3 August 1992, the RTC issued an order dissolving the writ of
preliminary injunction upon the posting by RBS of a P30 million
counterbond to answer for whatever damages ABS-CBN might
suffer by virtue of such dissolution. However, it reduced petitioner's
injunction bond to P15 million as a condition precedent for the
reinstatement of the writ of preliminary injunction should private
respondents be unable to post a counterbond.
12
At the pre-trial on 6 August 1992, the parties, upon suggestion of
the court, agreed to explore the possibility of an amicable
settlement. In the meantime, RBS prayed for and was granted
reasonable time within which to put up a P30 million counterbond
in the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement RBS posted
on 1 October 1992 a counterbond, which the RTC approved in its
13
Order of 15 October 1992.
On 19 October 1992, ABS-CBN filed a motion for
14
reconsideration of the 3 August and 15 October 1992 Orders,
15
which RBS opposed.
16
On 29 October 1992, the RTC conducted a pre-trial.
Pending resolution of its motion for reconsideration, ABS-CBN filed
17
with the Court of Appeals a petition challenging the RTC's Orders
of 3 August and 15 October 1992 and praying for the issuance of a writ
of preliminary injunction to enjoin the RTC from enforcing said
orders. The case was docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary
18
restraining order to enjoin the airing, broadcasting, and televising
of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a
19
decision dismissing the petition in CA -G.R. No. 29300 for being
premature. ABS-CBN challenged the dismissal in a petition for
review filed with this Court on 19 January 1993, which was docketed
as G.R. No. 108363.
In the meantime the RTC received the evidence for the parties in
Civil Case No. Q-192-1209. Thereafter, on 28 April 1993, it rendered a
20
decision in favor of RBS and VIVA and against ABS-CBN
disposing as follows:
WHEREFORE, under cool reflection and
prescinding from the foregoing, judgments is
rendered in favor of defendants and against the
plaintiff.
(1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:
a) P107,727.00, the amount of premium paid by RBS to the surety
Directors, and said agreement was disapproved during the meeting
of the Board on 7 April 1992. Hence, there was no basis for ABS-
CBN's demand that VIVA signed the 1992 Film Exhibition
Agreement. Furthermore, the right of first refusal under the 1990
Film Exhibition Agreement had previously been exercised per Ms.
Concio's letter to Del Rosario ticking off ten titles acceptable to
them, which would have made the 1992 agreement an entirely new
contract.
21
On 21 June 1993, this Court denied ABS-CBN's petition for review
in G.R. No. 108363, as no reversible error was committed by the
Court of Appeals in its challenged decision and the case had
"become moot and academic in view of the dismissal of the main
action by the court a quo in its decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of
Appeals claiming that there was a perfected contract between ABS-
CBN and VIVA granting ABS-CBN the exclusive right to exhibit the
subject films. Private respondents VIVA and Del Rosario also
appealed seeking moral and exemplary damages and additional
attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed with
the RTC that the contract between ABS-CBN and VIVA had not
been perfected, absent the approval by the VIVA Board of Directors
of whatever Del Rosario, it's agent, might have agreed with Lopez III.
The appellate court did not even believe ABS-CBN's evidence that
Lopez III actually wrote down such an agreement on a "napkin," as
the same was never produced in court. It likewise rejected ABS-
CBN's insistence on its right of first refusal and ratiocinated as
follows:
As regards the matter of right of first refusal, it may be true that a
Film Exhibition Agreement was entered into between Appellant
ABS-CBN and appellant VIVA under Exhibit "A" in 1990, and that
parag. 1.4 thereof provides:
1.4 ABS-CBN shall have the right of first refusal to the next twenty-
four (24) VIVA films for TV telecast under such terms as may be
agreed upon by the parties hereto, provided, however, that such
right shall be exercised by ABS-CBN within a period of fifteen (15)
days from the actual offer in writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of
ABS-CBN shall still be subject to such terms as may be agreed upon
by the parties thereto, and that the said right shall be exercised by
ABS-CBN within fifteen (15) days from the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit "A" on
the right of first refusal did not fix the price of the
film right to the twenty-four (24) films, nor did it
specify the terms thereof. The same are still left
to be agreed upon by the parties.
In the instant case, ABS-CBN's letter of rejection
Exhibit 3 (Records, p. 89) stated that it can only
tick off ten (10) films, and the draft contract
Exhibit "C" accepted only fourteen (14) films,
while parag. 1.4 of Exhibit "A'' speaks of the next
twenty-four (24) films.
The offer of V1VA was sometime in December
1991 (Exhibits 2, 2-A. 2-B; Records, pp. 86-88;
Decision, p. 11, Records, p. 1150), when the first list
of VIVA films was sent by Mr. Del Rosario to
ABS-CBN. The Vice President of ABS-CBN, Ms.
Charo Santos-Concio, sent a letter dated January
6, 1992 (Exhibit 3, Records, p. 89) where ABS-CBN
exercised its right of refusal by rejecting the offer
of VIVA.. As aptly observed by the trial court,
with the said letter of Mrs. Concio of January 6,
1992, ABS-CBN had lost its right of first refusal.
And even if We reckon the fifteen (15) day period
from February 27, 1992 (Exhibit 4 to 4-C) when
another list was sent to ABS-CBN after the letter
of Mrs. Concio, still the fifteen (15) day period
within which ABS-CBN shall exercise its right of
22
first refusal has already expired.
Accordingly, respondent court sustained the award of actual
damages consisting in the cost of print advertisements and the
reduced the awards of moral damages to P2 million, exemplary
damages to P2 million, and attorney's fees to P500, 000.00.
On the other hand, respondent Court of Appeals denied VIVA and
Del Rosario's appeal because it was "RBS and not VIVA which was
actually prejudiced when the complaint was filed by ABS-CBN."
Its motion for reconsideration having been denied, ABS-CBN filed
the petition in this case, contending that the Court of Appeals
gravely erred in
I paid for the counterbond constituted a pecuniary loss upon which it
. . . RULING THAT THERE WAS NO
PERFECTED CONTRACT BETWEEN
PETITIONER AND PRIVATE RESPONDENT
VIVA NOTWITHSTANDING
PREPONDERANCE OF EVIDENCE ADDUCED
BY PETITIONER TO THE CONTRARY.
II
. . . IN AWARDING ACTUAL AND
COMPENSATORY DAMAGES IN FAVOR OF
PRIVATE RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY
DAMAGES IN FAVOR OF PRIVATE
RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN
FAVOR OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first
refusal over twenty-four titles under the 1990 Film Exhibition
Agreement, as it had chosen only ten titles from the first list. It insists
that we give credence to Lopez's testimony that he and Del Rosario
met at the Tamarind Grill Restaurant, discussed the terms and
conditions of the second list (the 1992 Film Exhibition Agreement)
and upon agreement thereon, wrote the same on a paper napkin. It
also asserts that the contract has already been effective, as the
elements thereof, namely, consent, object, and consideration were
established. It then concludes that the Court of Appeals'
pronouncements were not supported by law and jurisprudence, as
per our decision of 1 December 1995 in Limketkai Sons Milling, Inc. v.
23
Court of Appeals, which cited Toyota Shaw, Inc. v. Court of
24 25
Appeals, Ang Yu Asuncion v. Court of Appeals, and Villonco Realty
26
Company v. Bormaheco. Inc.
Anent the actual damages awarded to RBS, ABS-CBN disavows
liability therefor. RBS spent for the premium on the counterbond of
its own volition in order to negate the injunction issued by the trial
court after the parties had ventilated their respective positions
during the hearings for the purpose. The filing of the counterbond
was an option available to RBS, but it can hardly be argued that
ABS-CBN compelled RBS to incur such expense. Besides, RBS had
another available option, i.e., move for the dissolution or the
injunction; or if it was determined to put up a counterbond, it could
have presented a cash bond. Furthermore under Article 2203 of the
Civil Code, the party suffering loss or injury is also required to
exercise the diligence of a good father of a family to minimize the
damages resulting from the act or omission. As regards the cost of
print advertisements, RBS had not convincingly established that this
was a loss attributable to the non showing "Maging Sino Ka Man"; on
the contrary, it was brought out during trial that with or without the
case or the injunction, RBS would have spent such an amount to
generate interest in the film.
ABS-CBN further contends that there was no clear basis for the
awards of moral and exemplary damages. The controversy involving
ABS-CBN and RBS did not in any way originate from business
transaction between them. The claims for such damages did not
arise from any contractual dealings or from specific acts committed
by ABS-CBN against RBS that may be characterized as wanton,
fraudulent, or reckless; they arose by virtue only of the filing of the
complaint, An award of moral and exemplary damages is not
warranted where the record is bereft of any proof that a party acted
27
maliciously or in bad faith in filing an action. In any case, free
resort to courts for redress of wrongs is a matter of public policy. The
law recognizes the right of every one to sue for that which he
honestly believes to be his right without fear of standing trial for
damages where by lack of sufficient evidence, legal technicalities, or
a different interpretation of the laws on the matter, the case would
28
showing of bad faith would be reflected in a party' s persistence in a
case other than an erroneous conviction of the righteousness of his
33
cause, attorney's fees shall not be recovered as cost."
On the other hand, RBS asserts that there was no perfected contract
between ABS-CBN and VIVA absent any meeting of minds between
them regarding the object and consideration of the alleged contract.
It affirms that the ABS-CBN's claim of a right of first refusal was
correctly rejected by the trial court. RBS insist the premium it had
may recover. It was obliged to put up the counterbound due to the
injunction procured by ABS-CBN. Since the trial court found that
ABS-CBN had no cause of action or valid claim against RBS and,
therefore not entitled to the writ of injunction, RBS could recover
from ABS-CBN the premium paid on the counterbond. Contrary to
the claim of ABS-CBN, the cash bond would prove to be more
expensive, as the loss would be equivalent to the cost of money RBS
would forego in case the P30 million came from its funds or was
borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements
for the cancelled showing of the film "Maging Sino Ka Man" because
the print advertisements were put out to announce the showing on a
particular day and hour on Channel 7, i.e., in its entirety at one time,
not a series to be shown on a periodic basis. Hence, the print
advertisement were good and relevant for the particular date
showing, and since the film could not be shown on that particular
date and hour because of the injunction, the expenses for the
advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-
CBN filed the case and secured injunctions purely for the purpose of
harassing and prejudicing RBS. Pursuant then to Article 19 and 21 of
the Civil Code, ABS-CBN must be held liable for such
34
damages. Citing Tolentino, damages may be awarded in cases of
abuse of rights even if the act done is not illicit and there is abuse of
rights were plaintiff institutes and action purely for the purpose of
harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and
exemplary damages, private respondents RBS cited People
35
v. Manero, where it was stated that such entity may recover moral
and exemplary damages if it has a good reputation that is debased
resulting in social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation has
been debased by ABS-CBN's acts in this case.
When RBS was not able to fulfill its commitment
to the viewing public to show the film "Maging
Sino Ka Man" on the scheduled dates and times
(and on two occasions that RBS advertised), it
suffered serious embarrassment and social
humiliation. When the showing was canceled,
late viewers called up RBS' offices and subjected
RBS to verbal abuse ("Announce kayo nang
announce, hindi ninyo naman ilalabas,"
"nanloloko yata kayo") (Exh. 3-RBS, par. 3). This
alone was not something RBS brought upon
itself. it was exactly what ABS-CBN had planned
to happen.
The amount of moral and exemplary damages
cannot be said to be excessive. Two reasons
justify the amount of the award.
The first is that the humiliation suffered by RBS
is national extent. RBS operations as a
broadcasting company is [sic] nationwide. Its
clientele, like that of ABS-CBN, consists of those
who own and watch television. It is not an
exaggeration to state, and it is a matter of judicial
notice that almost every other person in the
country watches television. The humiliation
suffered by RBS is multiplied by the number of
televiewers who had anticipated the showing of
the film "Maging Sino Ka Man" on May 28 and
November 3, 1992 but did not see it owing to the
cancellation. Added to this are the advertisers
who had placed commercial spots for the telecast
and to whom RBS had a commitment in
consideration of the placement to show the film
The key issues for our consideration are (1) whether there was a
perfected contract between VIVA and ABS-CBN, and (2) whether
RBS is entitled to damages and attorney's fees. It may be noted that
the award of attorney's fees of P212,000 in favor of VIVA is not
assigned as another error.
I.
The first issue should be resolved against ABS-CBN. A contract is a
meeting of minds between two persons whereby one binds himself
37
to give something or to render some service to another for a
consideration. there is no contract unless the following requisites
concur: (1) consent of the contracting parties; (2) object certain which
is the subject of the contract; and (3) cause of the obligation, which is
38
established. A contract undergoes three stages:
(a) preparation, conception, or generation, which
is the period of negotiation and bargaining,
ending at the moment of agreement of the
parties;
(b) perfection or birth of the contract, which is
the moment when the parties come to agree on
the terms of the contract; and
(c) consummation or death, which is the
fulfillment or performance of the terms agreed
39
upon in the contract.
Contracts that are consensual in nature are perfected upon mere
meeting of the minds, Once there is concurrence between the offer
and the acceptance upon the subject matter, consideration, and
terms of payment a contract is produced. The offer must be certain.
To convert the offer into a contract, the acceptance must be absolute
and must not qualify the terms of the offer; it must be plain,
unequivocal, unconditional, and without variance of any sort from
the proposal. A qualified acceptance, or one that involves a new
proposal, constitutes a counter-offer and is a rejection of the original
offer. Consequently, when something is desired which is not exactly
what is proposed in the offer, such acceptance is not sufficient to
generate consent because any modification or variation from the
40
terms of the offer annuls the offer.
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at
the Tamarind Grill on 2 April 1992 to discuss the package of films,
said package of 104 VIVA films was VIVA's offer to ABS-CBN to
enter into a new Film Exhibition Agreement. But ABS-CBN, sent,
through Ms. Concio, a counter-proposal in the form of a draft
contract proposing exhibition of 53 films for a consideration of P35
million. This counter-proposal could be nothing less than the
counter-offer of Mr. Lopez during his conference with Del Rosario at
Tamarind Grill Restaurant. Clearly, there was no acceptance of
VIVA's offer, for it was met by a counter-offer which substantially
varied the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
41 42
Appeals and Villonco Realty Company v. Bormaheco, Inc., is
misplaced. In these cases, it was held that an acceptance may contain
a request for certain changes in the terms of the offer and yet be a
binding acceptance as long as "it is clear that the meaning of the
acceptance is positively and unequivocally to accept the offer,
whether such request is granted or not." This ruling was, however,
43
reversed in the resolution of 29 March 1996, which ruled that the
acceptance of all offer must be unqualified and absolute, i.e., it
"must be identical in all respects with that of the offer so as to
produce consent or meeting of the minds."
On the other hand, in Villonco, cited in Limketkai, the alleged
changes in the revised counter-offer were not material but merely
clarificatory of what had previously been agreed upon. It cited the
44
statement in Stuart v. Franklin Life Insurance Co. that "a vendor's
change in a phrase of the offer to purchase, which change does not
essentially change the terms of the offer, does not amount to a
45
rejection of the offer and the tender of a counter-offer." However,
when any of the elements of the contract is modified upon
acceptance, such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of
VIVA's offer. Hence, they underwent a period of bargaining. ABS-
CBN then formalized its counter-proposals or counter-offer in a
draft contract, VIVA through its Board of Directors, rejected such
counter-offer, Even if it be conceded arguendo that Del Rosario had
accepted the counter-offer, the acceptance did not bind VIVA, as
there was no proof whatsoever that Del Rosario had the specific
the latter's approval. In any event, there was between Del Rosario
and Lopez III no meeting of minds. The following findings of the
trial court are instructive:
A number of considerations militate against
ABS-CBN's claim that a contract was perfected at
that lunch meeting on April 02, 1992 at the
Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed
upon at the Tamarind Grill referred to the price
and the number of films, which he wrote on a
napkin. However, Exhibit "C" contains numerous
provisions which, were not discussed at the Tamarind
Grill, if Lopez testimony was to be believed nor
could they have been physically written on a
napkin. There was even doubt as to whether it
was a paper napkin or a cloth napkin. In short
what were written in Exhibit "C'' were not
discussed, and therefore could not have been
agreed upon, by the parties. How then could this
court compel the parties to sign Exhibit "C" when
the provisions thereof were not previously
agreed upon?
SECOND, Mr. Lopez claimed that what was
agreed upon as the subject matter of the contract
was 14 films. The complaint in fact prays for
delivery of 14 films. But Exhibit "C" mentions 53
films as its subject matter. Which is which If
Exhibits "C" reflected the true intent of the
parties, then ABS-CBN's claim for 14 films in its
complaint is false or if what it alleged in the
complaint is true, then Exhibit "C" did not reflect
what was agreed upon by the parties. This
underscores the fact that there was no meeting of
the minds as to the subject matter of the
contracts, so as to preclude perfection thereof.
For settled is the rule that there can be no
contract where there is no object which is its
subject matter (Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of
his affidavit testimony (Exh. "D") states:
We were able to reach an
agreement. VIVA gave us the
exclusive license to show
these fourteen (14) films, and
we agreed to pay Viva the
amount of P16,050,000.00 as
well as grant Viva commercial
slots worth P19,950,000.00.
We had already earmarked
this P16, 050,000.00.
which gives a total consideration of P36 million
(P19,950,000.00 plus P16,050,000.00. equals
P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q. What was written in this
napkin?
A. The total price, the
breakdown the known Viva
movies, the 7 blockbuster
movies and the other 7 Viva
movies because the price was
broken down accordingly.
The none [sic] Viva and the
seven other Viva movies and
the sharing between the cash
portion and the concerned
spot portion in the total
amount of P35 million pesos.
Now, which is which? P36 million or P35 million?
This weakens ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN
stated that she transmitted Exhibit "C" to Mr. Del
Rosario with a handwritten note, describing said
Exhibit "C" as a "draft." (Exh. "5" - Viva; tsn pp. 23-
As the parties had not yet discussed the proposed
terms and conditions in Exhibit "C," and there
was no evidence whatsoever that Viva agreed to
the terms and conditions thereof, said document
cannot be a binding contract. The fact that Viva
refused to sign Exhibit "C" reveals only two [sic]
well that it did not agree on its terms and
conditions, and this court has no authority to
compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he
and Mr. Del Rosario agreed upon at the
Tamarind Grill was only provisional, in the sense
that it was subject to approval by the Board of
Directors of Viva. He testified:
Q. Now, Mr. Witness, and
after that Tamarind meeting
... the second meeting
wherein you claimed that you
have the meeting of the
minds between you and Mr.
Vic del Rosario, what
happened?
A. Vic Del Rosario was
supposed to call us up and tell
us specifically the result of
the discussion with the Board
of Directors.
Q. And you are referring to
the so-called agreement
which you wrote in [sic] a
piece of paper?
A. Yes, sir.
Q. So, he was going to
forward that to the board of
Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43,
June 8, 1992)
Q. Did Mr. Del Rosario tell
you that he will submit it to
his Board for approval?
A. Yes, sir. (Tsn, p. 69, June 8,
1992).
The above testimony of Mr. Lopez shows beyond
doubt that he knew Mr. Del Rosario had no
authority to bind Viva to a contract with ABS-
CBN until and unless its Board of Directors
approved it. The complaint, in fact, alleges that
Mr. Del Rosario "is the Executive Producer of
defendant Viva" which "is a corporation." (par. 2,
complaint). As a mere agent of Viva, Del Rosario
could not bind Viva unless what he did is ratified
by its Board of Directors. (Vicente vs. Geraldez, 52
SCRA 210; Arnold vs. Willetsand Paterson, 44
Phil. 634). As a mere agent, recognized as such by
plaintiff, Del Rosario could not be held liable
jointly and severally with Viva and his inclusion
as party defendant has no legal basis. (Salonga
vs. Warner Barner [sic] , COLTA , 88 Phil. 125;
Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations
in the complaint are clear admissions that what
was supposed to have been agreed upon at the
Tamarind Grill between Mr. Lopez and Del
Rosario was not a binding agreement. It is as it
should be because corporate power to enter into
a contract is lodged in the Board of Directors.
(Sec. 23, Corporation Code). Without such board
approval by the Viva board, whatever agreement
Lopez and Del Rosario arrived at could not ripen
into a valid contract binding upon Viva (Yao Ka
Sin Trading vs. Court of Appeals, 209 SCRA 763).
The evidence adduced shows that the Board of
Directors of Viva rejected Exhibit "C" and
insisted that the film package for 140 films be
49
accepted by ABS-CBN, (TSN, June 8, 1992, pp. 8-
10). Even Mr. Lopez himself admitted that the
right of the first refusal may have been already
exercised by Ms. Concio (as she had). (TSN, June
8, 1992, pp. 71-75). Del Rosario himself knew and
understand [sic] that ABS-CBN has lost its rights
of the first refusal when his list of 36 titles were
50
rejected (Tsn, June 9, 1992, pp. 10-11)
II
However, we find for ABS-CBN on the issue of damages. We shall
first take up actual damages. Chapter 2, Title XVIII, Book IV of the
Civil Code is the specific law on actual or compensatory damages.
Except as provided by law or by stipulation, one is entitled to
compensation for actual damages only for such pecuniary loss
51
suffered by him as he has duly proved. The indemnification shall
comprehend not only the value of the loss suffered, but also that of
52
the profits that the obligee failed to obtain. In contracts and
quasi-contracts the damages which may be awarded are dependent
on whether the obligor acted with good faith or otherwise, It case of
good faith, the damages recoverable are those which are the natural
and probable consequences of the breach of the obligation and
which the parties have foreseen or could have reasonably foreseen
at the time of the constitution of the obligation. If the obligor acted
with fraud, bad faith, malice, or wanton attitude, he shall be
responsible for all damages which may be reasonably attributed to
53
the non-performance of the obligation. In crimes and quasi-
delicts, the defendant shall be liable for all damages which are the
natural and probable consequences of the act or omission
complained of, whether or not such damages has been foreseen or
54
could have reasonably been foreseen by the defendant.
Actual damages may likewise be recovered for loss or impairment of
earning capacity in cases of temporary or permanent personal
injury, or for injury to the plaintiff's business standing or
55
commercial credit.
The claim of RBS for actual damages did not arise from contract,
quasi-contract, delict, or quasi-delict. It arose from the fact of filing
of the complaint despite ABS-CBN's alleged knowledge of lack of
cause of action. Thus paragraph 12 of RBS's Answer with
Counterclaim and Cross-claim under the heading
COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully
well that it has no cause of action RBS. As a result
thereof, RBS suffered actual damages in the
56
amount of P6,621,195.32.
Needless to state the award of actual damages cannot be
comprehended under the above law on actual damages. RBS could
only probably take refuge under Articles 19, 20, and 21 of the Civil
Code, which read as follows:
Art. 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.
Art. 20. Every person who, contrary to law,
wilfully or negligently causes damage to another,
shall indemnify the latter for tile same.
Art. 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.
It may further be observed that in cases where a writ of preliminary
injunction is issued, the damages which the defendant may suffer by
57
reason of the writ are recoverable from the injunctive bond. In
this case, ABS-CBN had not yet filed the required bond; as a matter
of fact, it asked for reduction of the bond and even went to the Court
of Appeals to challenge the order on the matter, Clearly then, it was
not necessary for RBS to file a counterbond. Hence, ABS-CBN
cannot be held responsible for the premium RBS paid for the
counterbond.
Neither could ABS-CBN be liable for the print advertisements for
"Maging Sino Ka Man" for lack of sufficient legal basis. The RTC
issued a temporary restraining order and later, a writ of preliminary
injunction on the basis of its determination that there existed
sufficient ground for the issuance thereof. Notably, the RTC did not
dissolve the injunction on the ground of lack of legal and factual
be reflected in a party's persistence in a case other than erroneous AIR TERMINALS CO., INC., MANILA
61
conviction of the righteousness of his cause. INTERNATIONAL AIRPORT AUTHORITY,
As to moral damages the law is Section 1, Chapter 3, Title XVIII, DEPARTMENT OF TRANSPORTATION AND
Book IV of the Civil Code. Article 2217 thereof defines what are COMMUNICATIONS and SECRETARY LEANDRO M.
included in moral damages, while Article 2219 enumerates the cases MENDOZA, in his capacity as Head of the Department
where they may be recovered, Article 2220 provides that moral of Transportation and Communications, respondents,
damages may be recovered in breaches of contract where the MIASCOR GROUNDHANDLING CORPORATION, DNATA-
defendant acted fraudulently or in bad faith. RBS's claim for moral WINGS AVIATION SYSTEMS CORPORATION,
damages could possibly fall only under item (10) of Article 2219, MACROASIA-EUREST SERVICES, INC., MACROASIA-
thereof which reads: MENZIES AIRPORT SERVICES CORPORATION,
(10) Acts and actions referred to in Articles 21, 26, MIASCOR CATERING SERVICES CORPORATION,
27, 28, 29, 30, 32, 34, and 35. MIASCOR AIRCRAFT MAINTENANCE
Moral damages are in the category of an award designed to CORPORATION, and MIASCOR LOGISTICS
compensate the claimant for actual injury suffered. and not to CORPORATION, petitioners-in-intervention,
62
impose a penalty on the wrongdoer. The award is not meant to [G.R. No. 155547. May 5, 2003]
enrich the complainant at the expense of the defendant, but to SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and
enable the injured party to obtain means, diversion, or amusements CONSTANTINO G. JARAULA, petitioners,
that will serve to obviate then moral suffering he has undergone. It is vs. PHILIPPINE INTERNATIONAL AIR TERMINALS
aimed at the restoration, within the limits of the possible, of the CO., INC., MANILA INTERNATIONAL AIRPORT
spiritual status quo ante, and should be proportionate to the AUTHORITY, DEPARTMENT OF TRANSPORTATION
63
suffering inflicted. Trial courts must then guard against the award AND COMMUNICATIONS, DEPARTMENT OF PUBLIC
of exorbitant damages; they should exercise balanced restrained and WORKS AND HIGHWAYS, SECRETARY LEANDRO M.
measured objectivity to avoid suspicion that it was due to passion, MENDOZA, in his capacity as Head of the Department
64
prejudice, or corruption on the part of the trial court. of Transportation and Communications, and
The award of moral damages cannot be granted in favor of a SECRETARY SIMEON A. DATUMANONG, in his
corporation because, being an artificial person and having existence capacity as Head of the Department of Public Works and
only in legal contemplation, it has no feelings, no emotions, no Highways, respondents,
senses, It cannot, therefore, experience physical suffering and JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C.
mental anguish, which call be experienced only by one having a ZIALCITA, WILLY BUYSON VILLARAMA, PROSPERO
65
nervous system. The statement in People C. NOGRALES, PROSPERO A. PICHAY, JR., HARLIN
66 67
v. Manero and Mambulao Lumber Co. v. PNB that a CAST ABAYON, and BENASING O.
corporation may recover moral damages if it "has a good reputation MACARANBON, respondents-intervenors,
that is debased, resulting in social humiliation" is an obiter dictum. [G.R. No. 155661. May 5, 2003]
On this score alone the award for damages must be set aside, since CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B.
RBS is a corporation. VALENCIA, MA. TERESA V. GAERLAN, LEONARDO
The basic law on exemplary damages is Section 5, Chapter 3, Title DE LA ROSA, DINA C. DE LEON, VIRGIE CATAMIN
XVIII, Book IV of the Civil Code. These are imposed by way of RONALD SCHLOBOM, ANGELITO SANTOS, MA.
example or correction for the public good, in addition to moral, LUISA M. PALCON and SAMAHANG MANGGAGAWA
68
temperate, liquidated or compensatory damages. They are SA PALIPARAN NG PILIPINAS (SMPP), petitioners,
recoverable in criminal cases as part of the civil liability when the vs. PHILIPPINE INTERNATIONAL AIR TERMINALS
crime was committed with one or more aggravating CO., INC., MANILA INTERNATIONAL AIRPORT
69
circumstances; in quasi-contracts, if the defendant acted with AUTHORITY, DEPARTMENT OF TRANSPORTATION
70
gross negligence; and in contracts and quasi-contracts, if the AND COMMUNICATIONS, SECRETARY LEANDRO M.
defendant acted in a wanton, fraudulent, reckless, oppressive, or MENDOZA, in his capacity as Head of the Department
71
malevolent manner. of Transportation and Communications, respondents.
It may be reiterated that the claim of RBS against ABS-CBN is not DECISION
based on contract, quasi-contract, delict, or quasi-delict, Hence, the PUNO, J.:
claims for moral and exemplary damages can only be based on Petitioners and petitioners-in-intervention filed the instant
Articles 19, 20, and 21 of the Civil Code. petitions for prohibition under Rule 65 of the Revised Rules of Court
The elements of abuse of right under Article 19 are the following: (1) seeking to prohibit the Manila International Airport Authority
the existence of a legal right or duty, (2) which is exercised in bad (MIAA) and the Department of Transportation and
faith, and (3) for the sole intent of prejudicing or injuring another. Communications (DOTC) and its Secretary from implementing the
Article 20 speaks of the general sanction for all other provisions of following agreements executed by the Philippine Government
law which do not especially provide for their own sanction; while through the DOTC and the MIAA and the Philippine International
Article 21 deals with acts contra bonus mores, and has the following Air Terminals Co., Inc. (PIATCO): (1) the Concession Agreement
elements; (1) there is an act which is legal, (2) but which is contrary to signed on July 12, 1997, (2) the Amended and Restated Concession
morals, good custom, public order, or public policy, and (3) and it is Agreement dated November 26, 1999, (3) the First Supplement to the
72
done with intent to injure. Amended and Restated Concession Agreement dated August 27,
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. 1999, (4) the Second Supplement to the Amended and Restated
Malice or bad faith implies a conscious and intentional design to do Concession Agreement dated September 4, 2000, and (5) the Third
73
a wrongful act for a dishonest purpose or moral obliquity. Such Supplement to the Amended and Restated Concession Agreement
74
must be substantiated by evidence. dated June 22, 2001 (collectively, the PIATCO Contracts).
There is no adequate proof that ABS-CBN was inspired by malice or The facts are as follows:
bad faith. It was honestly convinced of the merits of its cause after it In August 1989, the DOTC engaged the services of Aeroport de
had undergone serious negotiations culminating in its formal Paris (ADP) to conduct a comprehensive study of the Ninoy Aquino
submission of a draft contract. Settled is the rule that the adverse International Airport (NAIA) and determine whether the present
result of an action does not per se make the action wrongful and airport can cope with the traffic development up to the year
subject the actor to damages, for the law could not have meant to 2010. The study consisted of two parts: first, traffic forecasts,
impose a penalty on the right to litigate. If damages result from a capacity of existing facilities, NAIA future requirements, proposed
75
person's exercise of a right, it is damnum absque injuria. master plans and development plans; and second, presentation of
WHEREFORE, the instant petition is GRANTED. The challenged the preliminary design of the passenger terminal building. The
decision of the Court of Appeals in CA-G.R. CV No, 44125 is hereby ADP submitted a Draft Final Report to the DOTC in December 1989.
REVERSED except as to unappealed award of attorney's fees in Some time in 1993, six business leaders consisting of John
favor of VIVA Productions, Inc.1âwphi1.nêt Gokongwei, Andrew Gotianun, Henry Sy, Sr., Lucio Tan, George Ty
 On March 27, 1995, then DOTC Secretary Jose Garcia endorsed
the proposal of AEDC to the National Economic and Development
Authority (NEDA).A revised proposal, however, was forwarded by
the DOTC to NEDA on December 13, 1995. On January 5, 1996, the
NEDA Investment Coordinating Council (NEDA ICC) Technical
Board favorably endorsed the project to the ICC Cabinet Committee
which approved the same, subject to certain conditions, on January
19, 1996. On February 13, 1996, the NEDA passed Board Resolution
No. 2 which approved the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the
publication in two daily newspapers of an invitation for competitive
or comparative proposals on AEDCs unsolicited proposal, in
accordance with Sec. 4-A of RA 6957, as amended. The alternative
bidders were required to submit three (3) sealed envelopes on or
before 5:00 p.m. of September 20, 1996. The first envelope should
contain the Prequalification Documents, the second envelope the
Technical Proposal, and the third envelope the Financial Proposal of
the proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing
the availment of the Bid Documents and the submission of the
comparative bid proposals. Interested firms were permitted to
obtain the Request for Proposal Documents beginning June 28, 1996,
upon submission of a written application and payment of a non-
refundable fee of P50,000.00 (US$2,000).
The Bid Documents issued by the PBAC provided among
others that the proponent must have adequate capability to sustain
the financing requirement for the detailed engineering, design,
construction, operation, and maintenance phases of the
project. The proponent would be evaluated based on its ability to
provide a minimum amount of equity to the project, and its capacity
to secure external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting
all bidders to a pre-bid conference on July 29, 1996.
On August 16, 1996, the PBAC issued PBAC Bulletin No. 3
amending the Bid Documents. The following amendments were
made on the Bid Documents:
a. Aside from the fixed Annual Guaranteed Payment, the proponent
shall include in its financial proposal an additional percentage of
gross revenue share of the Government, as follows:
i. First 5 years 5.0%
ii. Next 10 years 7.5%
iii. Next 10 years 10.0%
b. The amount of the fixed Annual Guaranteed Payment shall be
subject of the price challenge. Proponent may offer an Annual
Guaranteed Payment which need not be of equal amount, but
payment of which shall start upon site possession.
c. The project proponent must have adequate capability to sustain
the financing requirement for the detailed engineering, design,
construction, and/or operation and maintenance phases of the
project as the case may be. For purposes of pre-qualification, this
capability shall be measured in terms of:
i. Proof of the availability of the project proponent and/or the
consortium to provide the minimum amount of equity for the
project; and
ii. a letter testimonial from reputable banks attesting that the project
proponent and/or the members of the consortium are banking with
them, that the project proponent and/or the members are of good
financial standing, and have adequate resources.
d. The basis for the prequalification shall be the proponents
compliance with the minimum technical and financial requirements
provided in the Bid Documents and the IRR of the BOT Law. The
minimum amount of equity shall be 30% of the Project Cost.
e. Amendments to the draft Concession Agreement shall be issued
from time to time. Said amendments shall only cover items that
would not materially affect the preparation of the proponents
proposal.
On August 29, 1996, the Second Pre-Bid Conference was held
where certain clarifications were made. Upon the request of
prospective bidder Peoples Air Cargo & Warehousing Co., Inc
(Paircargo), the PBAC warranted that based on Sec. 11.6, Rule 11 of
the Implementing Rules and Regulations of the BOT Law, only the
proposed Annual Guaranteed Payment submitted by the
challengers would be revealed to AEDC, and that the challengers
technical and financial proposals would remain confidential. The
1. It is difficult for Paircargo and Associates to meet the required minimum
equity requirement as prescribed in Section 8.3.4 of the Bid Documents
considering that the capitalization of each member company is so
structured to meet the requirements and needs of their current respective
business undertaking/activities. In order to comply with this equity
requirement, Paircargo is requesting PBAC to just allow each member of
(sic) corporation of the Joint Venture to just execute an agreement that
embodies a commitment to infuse the required capital in case the project is
awarded to the Joint Venture instead of increasing each corporations
current authorized capital stock just for prequalification purposes.
In prequalification, the agency is interested in ones financial
capability at the time of prequalification, not future or potential
capability.
A commitment to put up equity once awarded the project is not
enough to establish that present financial capability. However, total
financial capability of all member companies of the Consortium, to
be established by submitting the respective companies audited
financial statements, shall be acceptable.
2. At present, Paircargo is negotiating with banks and other institutions for
the extension of a Performance Security to the joint venture in the event
that the Concessions Agreement (sic) is awarded to them. However,
Paircargo is being required to submit a copy of the draft concession as one
of the documentary requirements. Therefore, Paircargo is requesting that
theyd (sic) be furnished copy of the approved negotiated agreement
between the PBAC and the AEDC at the soonest possible time.
A copy of the draft Concession Agreement is included in the Bid
Documents. Any material changes would be made known to
prospective challengers through bid bulletins. However, a final
version will be issued before the award of contract.
The PBAC also stated that it would require AEDC to sign
Supplement C of the Bid Documents (Acceptance of Criteria and
Waiver of Rights to Enjoin Project) and to submit the same with the
required Bid Security.
On September 20, 1996, the consortium composed of Peoples
Air Cargo and Warehousing Co., Inc. (Paircargo), Phil. Air and
Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security
Bank) (collectively, Paircargo Consortium) submitted their
competitive proposal to the PBAC. On September 23, 1996, the
PBAC opened the first envelope containing the prequalification
documents of the Paircargo Consortium. On the following day,
September 24, 1996, the PBAC prequalified the Paircargo
Consortium.
On September 26, 1996, AEDC informed the PBAC in writing
of its reservations as regards the Paircargo Consortium, which
include:
a. The lack of corporate approvals and financial capability of
PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;
c. The prohibition imposed by RA 337, as amended (the General
Banking Act) on the amount that Security Bank could legally invest
in the project;
d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint
Venture, for prequalification purposes; and
e. The appointment of Lufthansa as the facility operator, in view of
the Philippine requirement in the operation of a public utility.
The PBAC gave its reply on October 2, 1996, informing AEDC
that it had considered the issues raised by the latter, and that based
on the documents submitted by Paircargo and the established
prequalification criteria, the PBAC had found that the challenger,
Paircargo, had prequalified to undertake the project. The Secretary
of the DOTC approved the finding of the PBAC.
The PBAC then proceeded with the opening of the second
envelope of the Paircargo Consortium which contained its Technical
Proposal.
On October 3, 1996, AEDC reiterated its objections,
particularly with respect to Paircargos financial capability, in view of
the restrictions imposed by Section 21-B of the General Banking Act
and Sections 1380 and 1381 of the Manual Regulations for Banks and
Other Financial Intermediaries. On October 7, 1996, AEDC again
manifested its objections and requested that it be furnished with
excerpts of the PBAC meeting and the accompanying technical
evaluation report where each of the issues they raised were
addressed.
On October 16, 1996, the PBAC opened the third envelope
match the said bid, otherwise, the project would be awarded to
Paircargo.
As AEDC failed to match the proposal within the 30-day
period, then DOTC Secretary Amado Lagdameo, on December 11,
1996, issued a notice to Paircargo Consortium regarding AEDCs
failure to match the proposal.
On February 27, 1997, Paircargo Consortium incorporated into
Philippine International Airport Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged undue preference
given to PIATCO and reiterated its objections as regards the
prequalification of PIATCO.
On April 11, 1997, the DOTC submitted the concession
agreement for the second-pass approval of the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of
Pasig a Petition for Declaration of Nullity of the Proceedings,
Mandamus and Injunction against the Secretary of the DOTC, the
Chairman of the PBAC, the voting members of the PBAC and
Pantaleon D. Alvarez, in his capacity as Chairman of the PBAC
Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad
referendum to facilitate the approval, on a no-objection basis, of the
BOT agreement between the DOTC and PIATCO. As the ad
referendum gathered only four (4) of the required six (6) signatures,
the NEDA merely noted the agreement.
On July 9, 1997, the DOTC issued the notice of award for the
project to PIATCO.
On July 12, 1997, the Government, through then DOTC
Secretary Arturo T. Enrile, and PIATCO, through its President,
Henry T. Go, signed the Concession Agreement for the Build-
Operate-and-Transfer Arrangement of the Ninoy Aquino
International Airport Passenger Terminal III (1997 Concession
Agreement). The Government granted PIATCO the franchise to
operate and maintain the said terminal during the concession period
and to collect the fees, rentals and other charges in accordance with
the rates or schedules stipulated in the 1997 Concession
Agreement. The Agreement provided that the concession period
shall be for twenty-five (25) years commencing from the in-service
date, and may be renewed at the option of the Government for a
period not exceeding twenty-five (25) years. At the end of the
concession period, PIATCO shall transfer the development facility
to MIAA.
On November 26, 1998, the Government and PIATCO signed
an Amended and Restated Concession Agreement (ARCA). Among
the provisions of the 1997 Concession Agreement that were amended
by the ARCA were: Sec. 1.11 pertaining to the definition of certificate
of completion; Sec. 2.05 pertaining to the Special Obligations of
GRP; Sec. 3.02 (a) dealing with the exclusivity of the franchise given
to the Concessionaire; Sec. 4.04 concerning the assignment by
Concessionaire of its interest in the Development Facility; Sec. 5.08
(c) dealing with the proceeds of Concessionaires insurance; Sec. 5.10
with respect to the temporary take-over of operations by GRP; Sec.
5.16 pertaining to the taxes, duties and other imposts that may be
levied on the Concessionaire; Sec. 6.03 as regards the periodic
adjustment of public utility fees and charges; the entire Article VIII
concerning the provisions on the termination of the contract; and
Sec. 10.02 providing for the venue of the arbitration proceedings in
case a dispute or controversy arises between the parties to the
agreement.
Subsequently, the Government and PIATCO signed three
Supplements to the ARCA. The First Supplement was signed on
August 27, 1999; the Second Supplement on September 4, 2000; and
the Third Supplement on June 22, 2001 (collectively, Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the
ARCA defining Revenues or Gross Revenues; Sec. 2.05 (d) of the
ARCA referring to the obligation of MIAA to provide sufficient
funds for the upkeep, maintenance, repair and/or replacement of all
airport facilities and equipment which are owned or operated by
MIAA; and further providing additional special obligations on the
part of GRP aside from those already enumerated in Sec. 2.05 of the
ARCA.The First Supplement also provided a stipulation as regards
the construction of a surface road to connect NAIA Terminal II and
Terminal III in lieu of the proposed access tunnel crossing Runway
13/31; the swapping of obligations between GRP and PIATCO
regarding the improvement of Sales Road; and the changes in the
Finally, the Third Supplement provided for the obligations of
the Concessionaire as regards the construction of the surface road
connecting Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance
and operation of the NAIA Terminals I and II, had existing
concession contracts with various service providers to offer
international airline airport services, such as in-flight catering,
passenger handling, ramp and ground support, aircraft maintenance
and provisions, cargo handling and warehousing, and other services,
to several international airlines at the NAIA. Some of these service
providers are the Miascor Group, DNATA-Wings Aviation Systems
Corp., and the MacroAsia Group. Miascor, DNATA and MacroAsia,
together with Philippine Airlines (PAL), are the dominant players in
the industry with an aggregate market share of 70%.
On September 17, 2002, the workers of the international airline
service providers, claiming that they stand to lose their employment
upon the implementation of the questioned agreements, filed before
this Court a petition for prohibition to enjoin the enforcement of
[2]
said agreements.
On October 15, 2002, the service providers, joining the cause of
the petitioning workers, filed a motion for intervention and a
petition-in-intervention.
On October 24, 2002, Congressmen Salacnib Baterina, Clavel
Martinez and Constantino Jaraula filed a similar petition with this
[3]
Court.
On November 6, 2002, several employees of the MIAA likewise
[4]
filed a petition assailing the legality of the various agreements.
On December 11, 2002. another group of Congressmen, Hon.
Jacinto V. Paras, Rafael P. Nantes, Eduardo C. Zialcita, Willie B.
Villarama, Prospero C. Nograles, Prospero A. Pichay, Jr., Harlin Cast
Abayon and Benasing O. Macaranbon, moved to intervene in the
case as Respondents-Intervenors. They filed their Comment-In-
Intervention defending the validity of the assailed agreements and
praying for the dismissal of the petitions.
During the pendency of the case before this Court, President
Gloria Macapagal Arroyo, on November 29, 2002, in her speech at
the 2002 Golden Shell Export Awards at Malacaang Palace, stated
that she will not honor (PIATCO) contracts which the Executive
[5]
Branchs legal offices have concluded (as) null and void.
Respondent PIATCO filed its Comments to the present
petitions on November 7 and 27, 2002. The Office of the Solicitor
General and the Office of the Government Corporate Counsel filed
their respective Comments in behalf of the public respondents.
On December 10, 2002, the Court heard the case on oral
argument. After the oral argument, the Court then resolved in open
court to require the parties to file simultaneously their respective
Memoranda in amplification of the issues heard in the oral
arguments within 30 days and to explore the possibility of
arbitration or mediation as provided in the challenged contracts.
In their consolidated Memorandum, the Office of the Solicitor
General and the Office of the Government Corporate Counsel
prayed that the present petitions be given due course and that
judgment be rendered declaring the 1997 Concession Agreement, the
ARCA and the Supplements thereto void for being contrary to the
Constitution, the BOT Law and its Implementing Rules and
Regulations.
On March 6, 2003, respondent PIATCO informed the Court
that on March 4, 2003 PIATCO commenced arbitration proceedings
before the International Chamber of Commerce, International
Court of Arbitration (ICC) by filing a Request for Arbitration with
the Secretariat of the ICC against the Government of the Republic of
the Philippines acting through the DOTC and MIAA.
In the present cases, the Court is again faced with the task of
resolving complicated issues made difficult by their intersecting
legal and economic implications. The Court is aware of the far
reaching fall out effects of the ruling which it makes today. For more
than a century and whenever the exigencies of the times demand it,
this Court has never shirked from its solemn duty to dispense justice
and resolve actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not there
has been grave abuse of discretion amounting to lack or excess of
[6]
jurisdiction. To be sure, this Court will not begin to do otherwise
today.
We shall first dispose of the procedural issues raised by
prohibition as taxpayers and as parties whose rights and interests
stand to be violated by the implementation of the PIATCO
Contracts.
Petitioners-Intervenors in the same case are all corporations
organized and existing under Philippine laws engaged in the
business of providing in-flight catering, passenger handling, ramp
and ground support, aircraft maintenance and provisions, cargo
handling and warehousing and other services to several
international airlines at the Ninoy Aquino International Airport.
Petitioners-Intervenors allege that as tax-paying international airline
and airport-related service operators, each one of them stands to be
irreparably injured by the implementation of the PIATCO
Contracts. Each of the petitioners-intervenors have separate and
subsisting concession agreements with MIAA and with various
international airlines which they allege are being interfered with
and violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA
and Samahang Manggagawa sa Paliparan ng Pilipinas - a legitimate
labor union and accredited as the sole and exclusive bargaining
agent of all the employees in MIAA. Petitioners anchor their petition
for prohibition on the nullity of the contracts entered into by the
Government and PIATCO regarding the build-operate-and-transfer
of the NAIA IPT III. They filed the petition as taxpayers and persons
who have a legitimate interest to protect in the implementation of
the PIATCO Contracts.
Petitioners in both cases raise the argument that the PIATCO
Contracts contain stipulations which directly contravene numerous
provisions of the Constitution, specific provisions of the BOT Law
and its Implementing Rules and Regulations, and public policy.
Petitioners contend that the DOTC and the MIAA, by entering into
said contracts, have committed grave abuse of discretion amounting
to lack or excess of jurisdiction which can be remedied only by a writ
of prohibition, there being no plain, speedy or adequate remedy in
the ordinary course of law.
In particular, petitioners assail the provisions in the 1997
Concession Agreement and the ARCA which grant PIATCO the
exclusive right to operate a commercial international passenger
terminal within the Island of Luzon, except those international
airports already existing at the time of the execution of the
agreement. The contracts further provide that upon the
commencement of operations at the NAIA IPT III, the Government
shall cause the closure of Ninoy Aquino International Airport
Passenger Terminals I and II as international passenger terminals.
With respect to existing concession agreements between MIAA and
international airport service providers regarding certain services or
operations, the 1997 Concession Agreement and the ARCA
uniformly provide that such services or operations will not be
carried over to the NAIA IPT III and PIATCO is under no obligation
to permit such carry over except through a separate agreement duly
[8]
entered into with PIATCO.
With respect to the petitioning service providers and their
employees, upon the commencement of operations of the NAIA IPT
III, they allege that they will be effectively barred from providing
international airline airport services at the NAIA Terminals I and II
as all international airlines and passengers will be diverted to the
NAIA IPT III. The petitioning service providers will thus be
compelled to contract with PIATCO alone for such services, with no
assurance that subsisting contracts with MIAA and other
international airlines will be respected. Petitioning service providers
stress that despite the very competitive market, the substantial
capital investments required and the high rate of fees, they entered
into their respective contracts with the MIAA with the
understanding that the said contracts will be in force for the
stipulated period, and thereafter, renewed so as to allow each of the
petitioning service providers to recoup their investments and obtain
a reasonable return thereon.
Petitioning employees of various service providers at the NAIA
Terminals I and II and of MIAA on the other hand allege that with
the closure of the NAIA Terminals I and II as international
passenger terminals under the PIATCO Contracts, they stand to lose
employment.
The question on legal standing is whether such parties have
alleged such a personal stake in the outcome of the controversy as to
assure that concrete adverseness which sharpens the presentation of
Contracts. They stand to lose their source of livelihood, a property
right which is zealously protected by the Constitution. Moreover,
subsisting concession agreements between MIAA and petitioners-
intervenors and service contracts between international airlines and
petitioners-intervenors stand to be nullified or terminated by the
operation of the NAIA IPT III under the PIATCO Contracts. The
financial prejudice brought about by the PIATCO Contracts on
petitioners and petitioners-intervenors in these cases are legitimate
interests sufficient to confer on them the requisite standing to file
the instant petitions.
b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition
as members of the House of Representatives, citizens and taxpayers.
They allege that as members of the House of Representatives, they
are especially interested in the PIATCO Contracts, because the
contracts compel the Government and/or the House of
Representatives to appropriate funds necessary to comply with the
[11]
provisions therein. They cite provisions of the PIATCO Contracts
which require disbursement of unappropriated amounts in
compliance with the contractual obligations of the Government.
They allege that the Government obligations in the PIATCO
Contracts which compel government expenditure without
appropriation is a curtailment of their prerogatives as legislators,
contrary to the mandate of the Constitution that [n]o money shall be
paid out of the treasury except in pursuance of an appropriation
[12]
made by law.
Standing is a peculiar concept in constitutional law because in
some cases, suits are not brought by parties who have been
personally injured by the operation of a law or any other
government act but by concerned citizens, taxpayers or voters who
actually sue in the public interest. Although we are not unmindful
of the cases of Imus Electric Co. v. Municipality of
[13] [14]
Imus and Gonzales v. Raquiza wherein this Court held that
appropriation must be made only on amounts immediately
demandable, public interest demands that we take a more liberal
view in determining whether the petitioners suing as legislators,
taxpayers and citizens have locus standi to file the instant
[15]
petition. In Kilosbayan, Inc. v. Guingona, this Court held [i]n
line with the liberal policy of this Court on locus standi, ordinary
taxpayers, members of Congress, and even association of planters,
and non-profit civic organizations were allowed to initiate and
prosecute actions before this Court to question the constitutionality
or validity of laws, acts, decisions, rulings, or orders of various
[16]
government agencies or instrumentalities. Further, insofar as
taxpayers' suits are concerned . . . (this Court) is not devoid of
[17]
discretion as to whether or not it should be entertained. As
such . . . even if, strictly speaking, they [the petitioners] are not
covered by the definition, it is still within the wide discretion of the
Court to waive the requirement and so remove the impediment to its
addressing and resolving the serious constitutional questions
[18]
raised. In view of the serious legal questions involved and their
impact on public interest, we resolve to grant standing to the
petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this Court is without
jurisdiction to review the instant cases as factual issues are involved
which this Court is ill-equipped to resolve. Moreover, PIATCO
alleges that submission of this controversy to this Court at the first
instance is a violation of the rule on hierarchy of courts. They
contend that trial courts have concurrent jurisdiction with this Court
with respect to a special civil action for prohibition and hence,
following the rule on hierarchy of courts, resort must first be had
before the trial courts.
After a thorough study and careful evaluation of the issues
involved, this Court is of the view that the crux of the instant
controversy involves significant legal questions. The facts
necessary to resolve these legal questions are well established and,
hence, need not be determined by a trial court.
The rule on hierarchy of courts will not also prevent this Court
from assuming jurisdiction over the cases at bar. The said rule may
be relaxed when the redress desired cannot be obtained in the
appropriate courts or where exceptional and compelling
circumstances justify availment of a remedy within and calling for
[19]
the exercise of this Courts primary jurisdiction.
 There is one more procedural obstacle which must be
overcome. The Court is aware that arbitration proceedings pursuant
to Section 10.02 of the ARCA have been filed at the instance of
respondent PIATCO. Again, we hold that the arbitration step taken
by PIATCO will not oust this Court of its jurisdiction over the cases
at bar.
[20]
In Del Monte Corporation-USA v. Court of Appeals, even
after finding that the arbitration clause in the Distributorship
Agreement in question is valid and the dispute between the parties is
arbitrable, this Court affirmed the trial courts decision denying
petitioners Motion to Suspend Proceedings pursuant to the
arbitration clause under the contract. In so ruling, this Court held
that as contracts produce legal effect between the parties, their
assigns and heirs, only the parties to the Distributorship Agreement
are bound by its terms, including the arbitration clause stipulated
therein. This Court ruled that arbitration proceedings could be
called for but only with respect to the parties to the contract in
question. Considering that there are parties to the case who are
neither parties to the Distributorship Agreement nor heirs or assigns
of the parties thereto, this Court, citing its previous ruling in Salas,
[21]
Jr. v. Laperal Realty Corporation, held that to tolerate
the splitting of proceedings by allowing arbitration as to some of
the parties on the one hand and trial for the others on the other
hand would, in effect, result in multiplicity of suits, duplicitous
[22]
procedure and unnecessary delay. Thus, we ruled that
the interest of justice would best be served if the trial court hears
and adjudicates the case in a single and complete proceeding.
It is established that petitioners in the present cases who
have presented legitimate interests in the resolution of the
controversy are not parties to the PIATCO Contracts. Accordingly,
they cannot be bound by the arbitration clause provided for in the
ARCA and hence, cannot be compelled to submit to arbitration
proceedings. A speedy and decisive resolution of all the critical
issues in the present controversy, including those raised by
petitioners, cannot be made before an arbitral tribunal. The
object of arbitration is precisely to allow an expeditious
determination of a dispute. This objective would not be met if this
Court were to allow the parties to settle the cases by arbitration as
there are certain issues involving non-parties to the PIATCO
Contracts which the arbitral tribunal will not be equipped to resolve.
Now, to the merits of the instant controversy.
I testimonial from reputable banks attesting that the project
Is PIATCO a qualified bidder?
Public respondents argue that the Paircargo Consortium,
PIATCOs predecessor, was not a duly pre-qualified bidder on the
unsolicited proposal submitted by AEDC as the Paircargo
Consortium failed to meet the financial capability required under
the BOT Law and the Bid Documents. They allege that in computing
the ability of the Paircargo Consortium to meet the minimum equity
requirements for the project, the entire net worth of Security
Bank, a member of the consortium, should not be considered.
PIATCO relies, on the other hand, on the strength of the
Memorandum dated October 14, 1996 issued by the DOTC
Undersecretary Primitivo C. Cal stating that the Paircargo
Consortium is found to have a combined net worth
of P3,900,000,000.00, sufficient to meet the equity requirements of
the project. The said Memorandum was in response to a letter from
Mr. Antonio Henson of AEDC to President Fidel V. Ramos
questioning the financial capability of the Paircargo Consortium on
the ground that it does not have the financial resources to put up the
required minimum equity of P2,700,000,000.00. This contention is
based on the restriction under R.A. No. 337, as amended or the
General Banking Act that a commercial bank cannot invest in any
single enterprise in an amount more than 15% of its net worth. In the
said Memorandum, Undersecretary Cal opined:
The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5,
require that financial capability will be evaluated based on total
financial capability of all the member companies of the [Paircargo]
Consortium. In this connection, the Challenger was found to have a
combined net worth of P3,926,421,242.00 that could support a
project costing approximately P13 Billion.
It is not a requirement that the net worth must be unrestricted. To
impose that as a requirement now will be nothing less than unfair.
The financial statement or the net worth is not the sole basis in
having satisfied the minimum financial, technical, organizational
and legal standards required by the law, has submitted the lowest
[24]
bid and most favorable terms of the project. Further, the 1994
Implementing Rules and Regulations of the BOT Law provide:
Section 5.4 Pre-qualification Requirements.
.
c. Financial Capability: The project proponent must have adequate
capability to sustain the financing requirements for the detailed
engineering design, construction and/or operation and maintenance
phases of the project, as the case may be. For purposes of pre-
qualification, this capability shall be measured in terms of (i) proof
of the ability of the project proponent and/or the consortium to
provide a minimum amount of equity to the project, and (ii) a
letter testimonial from reputable banks attesting that the project
proponent and/or members of the consortium are banking with
them, that they are in good financial standing, and that they have
adequate resources. The government agency/LGU concerned shall
determine on a project-to-project basis and before pre-qualification,
the minimum amount of equity needed. (emphasis supplied)
Pursuant to this provision, the PBAC issued PBAC Bulletin No.
3 dated August 16, 1996 amending the financial capability
requirements for pre-qualification of the project proponent as
follows:
6. Basis of Pre-qualification
The basis for the pre-qualification shall be on the compliance of the
proponent to the minimum technical and financial requirements
provided in the Bid Documents and in the IRR of the BOT Law, R.A.
No. 6957, as amended by R.A. 7718.
The minimum amount of equity to which the proponents financial
capability will be based shall be thirty percent (30%) of the project
cost instead of the twenty percent (20%) specified in Section 3.6.4
of the Bid Documents. This is to correlate with the required debt-
to-equity ratio of 70:30 in Section 2.01a of the draft concession
agreement. The debt portion of the project financing should not
exceed 70% of the actual project cost.
Accordingly, based on the above provisions of law, the
Paircargo Consortium or any challenger to the unsolicited proposal
of AEDC has to show that it possesses the requisite financial
capability to undertake the project in the minimum amount of
30% of the project cost through (i) proof of the ability to provide a
minimum amount of equity to the project, and (ii) a letter
proponent or members of the consortium are banking with them,
that they are in good financial standing, and that they have adequate
resources.
As the minimum project cost was estimated to be
[25]
US$350,000,000.00 or roughly P9,183,650,000.00, the Paircargo
Consortium had to show to the satisfaction of the PBAC that it had
the ability to provide the minimum equity for the project in the
amount of at least P2,755,095,000.00.
Paircargos Audited Financial Statements as of 1993 and 1994
indicated that it had a net worth of P2,783,592.00 and P3,123,515.00
[26]
respectively. PAGS Audited Financial Statements as of 1995
indicate that it has approximately P26,735,700.00 to invest as its
[27]
equity for the project. Security Banks Audited Financial
Statements as of 1995 show that it has a net worth equivalent to its
[28]
capital funds in the amount of P3,523,504,377.00.
We agree with public respondents that with respect to Security
Bank, the entire amount of its net worth could not be invested in a
single undertaking or enterprise, whether allied or non-allied in
accordance with the provisions of R.A. No. 337, as amended or the
General Banking Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary
notwithstanding, the Monetary Board, whenever it shall deem
appropriate and necessary to further national development
objectives or support national priority projects, may authorize a
commercial bank, a bank authorized to provide commercial
banking services, as well as a government-owned and controlled
bank, to operate under an expanded commercial banking
authority and by virtue thereof exercise, in addition to powers
authorized for commercial banks, the powers of an Investment
House as provided in Presidential Decree No. 129, invest in the
equity of a non-allied undertaking, or own a majority or all of the
equity in a financial intermediary other than a commercial bank or
Further, the 1993 Manual of Regulations for Banks provides:
SECTION X383. Other Limitations and Restrictions. The following
limitations and restrictions shall also apply regarding equity
investments of banks.
a. In any single enterprise. The equity investments of banks in any
single enterprise shall not exceed at any time fifteen percent (15%) of
the net worth of the investing bank as defined in Sec. X106 and
Subsec. X121.5.
Thus, the maximum amount that Security Bank could validly
invest in the Paircargo Consortium is only P528,525,656.55,
representing 15% of its entire net worth. The total net worth
therefore of the Paircargo Consortium, after considering
the maximum amounts that may be validly invested by each of its
[29]
members is P558,384,871.55 or only 6.08% of the project cost, an
amount substantially less than the prescribed minimum equity
investment required for the project in the amount
of P2,755,095,000.00 or 30% of the project cost.
The purpose of pre-qualification in any public bidding is to
determine, at the earliest opportunity, the ability of the bidder to
undertake the project. Thus, with respect to the bidders financial
capacity at the pre-qualification stage, the law requires the
government agency to examine and determine the ability of the
bidder to fund the entire cost of the project by considering the
maximum amounts that each bidder may invest in the project at
the time of pre-qualification.
The PBAC has determined that any prospective bidder for the
construction, operation and maintenance of the NAIA IPT III project
should prove that it has the ability to provide equity in the minimum
amount of 30% of the project cost, in accordance with the 70:30 debt-
to-equity ratio prescribed in the Bid Documents. Thus, in the case of
Paircargo Consortium, the PBAC should determine the maximum
amounts that each member of the consortium may commit for the
construction, operation and maintenance of the NAIA IPT III
project at the time of pre-qualification. With respect to Security
Bank, the maximum amount which may be invested by it would
only be 15% of its net worth in view of the restrictions imposed by the
General Banking Act. Disregarding the investment ceilings provided
by applicable law would not result in a proper evaluation of whether
or not a bidder is pre-qualified to undertake the project as for all
intents and purposes, such ceiling or legal restriction determines
the true maximum amount which a bidder may invest in the
project.
Further, the determination of whether or not a bidder is pre-
qualified to undertake the project requires an evaluation of the
financial capacity of the said bidder at the time the bid is
submitted based on the required documents presented by the
bidder. The PBAC should not be allowed to speculate on
the future financial ability of the bidder to undertake the project
on the basis of documents submitted. This would open doors to
abuse and defeat the very purpose of a public bidding. This is
especially true in the case at bar which involves the investment of
billions of pesos by the project proponent. The relevant government
authority is duty-bound to ensure that the awardee of the contract
possesses the minimum required financial capability to complete the
project. To allow the PBAC to estimate the bidders future financial
capability would not secure the viability and integrity of the
project. A restrictive and conservative application of the rules and
procedures of public bidding is necessary not only to protect the
impartiality and regularity of the proceedings but also to ensure the
financial and technical reliability of the project. It has been held
that:
The basic rule in public bidding is that bids should be evaluated
based on the required documents submitted before and not after the
opening of bids. Otherwise, the foundation of a fair and competitive
public bidding would be defeated. Strict observance of the rules,
regulations, and guidelines of the bidding process is the only
[30]
safeguard to a fair, honest and competitive public bidding.
Thus, if the maximum amount of equity that a bidder may
invest in the project at the time the bids are submitted falls short
of the minimum amounts required to be put up by the bidder, said
bidder should be properly disqualified. Considering that at the pre-
qualification stage, the maximum amounts which the Paircargo
Consortium may invest in the project fell short of the minimum
amounts prescribed by the PBAC, we hold that Paircargo
substantially depart from the draft Concession Agreement included
in the Bid Documents. They maintain that a substantial departure
from the draft Concession Agreement is a violation of public policy
and renders the 1997 Concession Agreement null and void.
PIATCO maintains, however, that the Concession Agreement
attached to the Bid Documents is intended to be a draft, i.e., subject
to change, alteration or modification, and that this intention was
clear to all participants, including AEDC, and DOTC/MIAA. It
argued further that said intention is expressed in Part C (6) of Bid
Bulletin No. 3 issued by the PBAC which states:
6. Amendments to the Draft Concessions Agreement
Amendments to the Draft Concessions Agreement shall be issued
from time to time. Said amendments shall only cover items that
would not materially affect the preparation of the proponents
proposal.
By its very nature, public bidding aims to protect the public
interest by giving the public the best possible advantages through
open competition. Thus:
Competition must be legitimate, fair and honest. In the field of
government contract law, competition requires, not only `bidding
upon a common standard, a common basis, upon the same thing, the
same subject matter, the same undertaking,' but also that it be
legitimate, fair and honest; and not designed to injure or defraud the
[31]
government.
An essential element of a publicly bidded contract is that all
bidders must be on equal footing. Not simply in terms of application
of the procedural rules and regulations imposed by the relevant
government agency, but more importantly, on the contract
bidded upon. Each bidder must be able to bid on the same thing.
The rationale is obvious. If the winning bidder is allowed to later
include or modify certain provisions in the contract awarded such
that the contract is altered in any material respect, then the essence
of fair competition in the public bidding is destroyed. A public
bidding would indeed be a farce if after the contract is awarded, the
winning bidder may modify the contract and include provisions
which are favorable to it that were not previously made available to
the other bidders. Thus:
It is inherent in public biddings that there shall be a fair competition
among the bidders. The specifications in such biddings provide the
common ground or basis for the bidders. The specifications should,
[32]
accordingly, operate equally or indiscriminately upon all bidders.
The same rule was restated by Chief Justice Stuart of the
Supreme Court of Minnesota:
The law is well settled that where, as in this case, municipal
authorities can only let a contract for public work to the lowest
responsible bidder, the proposals and specifications therefore must
be so framed as to permit free and full competition. Nor can they
enter into a contract with the best bidder containing substantial
provisions beneficial to him, not included or contemplated in the
[33]
terms and specifications upon which the bids were invited.
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to
support its argument that the draft concession agreement is subject
to amendment, the pertinent portion of which was quoted above, the
PBAC also clarified that [s]aid amendments shall only cover items
that would not materially affect the preparation of the
proponents proposal.
While we concede that a winning bidder is not precluded from
modifying or amending certain provisions of the contract bidded
upon, such changes must not constitute substantial or material
amendments that would alter the basic parameters of the contract
and would constitute a denial to the other bidders of the
opportunity to bid on the same terms. Hence, the determination of
whether or not a modification or amendment of a contract bidded
out constitutes a substantial amendment rests on whether the
contract, when taken as a whole, would contain substantially
different terms and conditions that would have the effect of altering
the technical and/or financial proposals previously submitted by
other bidders. The alterations and modifications in the contract
executed between the government and the winning bidder must be
such as to render such executed contract to be an entirely different
contract from the one that was bidded upon.
In the case of Caltex (Philippines), Inc. v. Delgado Brothers,
[34]
Inc., this Court quoted with approval the ruling of the trial court
that an amendment to a contract awarded through public bidding,
parties to a contract executed after public bidding may alter or
[35]
amend it without another previous public bidding.
Hence, the question that comes to fore is this: is the 1997
Concession Agreement the same agreement that was offered for
public bidding, i.e., the draft Concession Agreement attached to
the Bid Documents? A close comparison of the draft Concession
Agreement attached to the Bid Documents and the 1997 Concession
Agreement reveals that the documents differ in at least two material
respects:
a. Modification on the Public
Utility Revenues and Non-Public
Utility Revenues that may be
collected by PIATCO
The fees that may be imposed and collected by PIATCO under
the draft Concession Agreement and the 1997 Concession
Agreement may be classified into three distinct categories: (1) fees
which are subject to periodic adjustment of once every two years in
accordance with a prescribed parametric formula and adjustments
are made effective only upon written approval by MIAA; (2) fees
other than those included in the first category which maybe adjusted
by PIATCO whenever it deems necessary without need for consent
of DOTC/MIAA; and (3) new fees and charges that may be imposed
by PIATCO which have not been previously imposed or collected at
the Ninoy Aquino International Airport Passenger Terminal I,
pursuant to Administrative Order No. 1, Series of 1993, as amended.
The glaring distinctions between the draft Concession Agreement
and the 1997 Concession Agreement lie in the types of fees included
in each category and the extent of the supervision and regulation
which MIAA is allowed to exercise in relation thereto.
For fees under the first category, i.e., those which are subject
to periodic adjustment in accordance with a prescribed parametric
formula and effective only upon written approval by MIAA, the
[36]
draft Concession Agreement includes the following:
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) groundhandling fees;
(4) rentals and airline offices;
(5) check-in counter rentals; and
(6) porterage fees.
Under the 1997 Concession Agreement, fees which are
subject to adjustment and effective upon MIAA approval are
[37]
classified as Public Utility Revenues and include:
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) check-in counter fees; and
(4) Terminal Fees.
The implication of the reduced number of fees that are subject
to MIAA approval is best appreciated in relation to fees included in
the second category identified above. Under the 1997 Concession
Agreement, fees which PIATCO may adjust whenever it deems
necessary without need for consent of DOTC/MIAA are Non-Public
Utility Revenues and is defined as all other income not classified as
Public Utility Revenues derived from operations of the Terminal
[38]
and the Terminal Complex. Thus, under the 1997 Concession
Agreement, groundhandling fees, rentals from airline offices and
porterage fees are no longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession
Agreement, MIAA reserves the right to regulate (1) lobby and
vehicular parking fees and (2) other new fees and charges that may
be imposed by PIATCO. Such regulation may be made by periodic
adjustment and is effective only upon written approval of MIAA.
The full text of said provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in
the aircraft parking fees, aircraft tacking fees, groundhandling fees,
rentals and airline offices, check-in-counter rentals and porterage
fees shall be allowed only once every two years and in accordance
with the Parametric Formula attached hereto as Annex F. Provided
that adjustments shall be made effective only after the written
express approval of the MIAA. Provided, further, that such approval
of the MIAA, shall be contingent only on the conformity of the
adjustments with the above said parametric formula. The first
adjustment shall be made prior to the In-Service Date of the
Terminal.
The MIAA reserves the right to regulate under the foregoing
justify the fee it may set from time to time, if in the reasonable
opinion of GRP the said fees have become exorbitant resulting in the
[40]
unreasonable deprivation of End Users of such services.
Thus, under the 1997 Concession Agreement, with respect to
(1) vehicular parking fee, (2) porterage fee and (3) greeter/well wisher
fee, all that MIAA can do is to require PIATCO to explain and
justify the fees set by PIATCO. In the draft Concession
Agreement, vehicular parking fee is subject to MIAA regulation and
approval under the second paragraph of Section 6.03 thereof while
porterage fee is covered by the first paragraph of the same provision.
There is an obvious relaxation of the extent of control and
regulation by MIAA with respect to the particular fees that may be
charged by PIATCO.
Moreover, with respect to the third category of fees that may
be imposed and collected by PIATCO, i.e., new fees and charges that
may be imposed by PIATCO which have not been previously
imposed or collected at the Ninoy Aquino International Airport
Passenger Terminal I, under Section 6.03 of the draft Concession
Agreement MIAA has reserved the right to regulate the same under
the same conditions that MIAA may regulate fees under the first
category, i.e., periodic adjustment of once every two years in
accordance with a prescribed parametric formula and effective only
upon written approval by MIAA. However, under the 1997
Concession Agreement, adjustment of fees under the third
category is not subject to MIAA regulation.
With respect to terminal fees that may be charged by
[41]
PIATCO, as shown earlier, this was included within the category
of Public Utility Revenues under the 1997 Concession Agreement.
This classification is significant because under the 1997 Concession
Agreement, Public Utility Revenues are subject to an Interim
Adjustment of fees upon the occurrence of certain extraordinary
[42]
events specified in the agreement. However, under the draft
Concession Agreement, terminal fees are not included in the types
[43]
of fees that may be subject to Interim Adjustment.
Finally, under the 1997 Concession Agreement, Public Utility
Revenues, except terminal fees, are denominated in US
[44]
Dollars while payments to the Government are in Philippine
Pesos. In the draft Concession Agreement, no such stipulation was
included. By stipulating that Public Utility Revenues will be paid to
PIATCO in US Dollars while payments by PIATCO to the
Government are in Philippine currency under the 1997 Concession
Agreement, PIATCO is able to enjoy the benefits of depreciations of
the Philippine Peso, while being effectively insulated from the
detrimental effects of exchange rate fluctuations.
When taken as a whole, the changes under the 1997
Concession Agreement with respect to reduction in the types of fees
that are subject to MIAA regulation and the relaxation of such
regulation with respect to other fees are significant amendments that
substantially distinguish the draft Concession Agreement from the
1997 Concession Agreement. The 1997 Concession Agreement, in
this respect, clearly gives PIATCO more favorable terms than
what was available to other bidders at the time the contract was
bidded out. It is not very difficult to see that the changes in the 1997
Concession Agreement translate to direct and concrete financial
advantages for PIATCO which were not available at the time the
contract was offered for bidding. It cannot be denied that under the
1997 Concession Agreement only Public Utility Revenues are
subject to MIAA regulation. Adjustments of all other fees imposed
and collected by PIATCO are entirely within its control.
Moreover, with respect to terminal fees, under the 1997 Concession
Agreement, the same is further subject to Interim Adjustments not
previously stipulated in the draft Concession Agreement. Finally,
the change in the currency stipulated for Public Utility Revenues
under the 1997 Concession Agreement, except terminal fees, gives
PIATCO an added benefit which was not available at the time of
bidding.
b. Assumption by the
Government of the liabilities of
PIATCO in the event of the latters
default thereof
Under the draft Concession Agreement, default by PIATCO
of any of its obligations to creditors who have provided, loaned or
advanced funds for the NAIA IPT III project does not result in the
assumption by the Government of these liabilities. In fact, nowhere
Liabilities, or (ii) allow the Unpaid Creditors, if qualified, to be
substituted as concessionaire and operator of the Development
Facility in accordance with the terms and conditions hereof, or
designate a qualified operator acceptable to GRP to operate the
Development Facility, likewise under the terms and conditions of
this Agreement; Provided that if at the end of the 180-day period
GRP shall not have served the Unpaid Creditors and Concessionaire
written notice of its choice, GRP shall be deemed to have elected to
take over the Development Facility with the concomitant
assumption of Attendant Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to
be substituted as concessionaire, the latter shall form and organize a
concession company qualified to take over the operation of the
Development Facility. If the concession company should elect to
designate an operator for the Development Facility, the concession
company shall in good faith identify and designate a qualified
operator acceptable to GRP within one hundred eighty (180) days
from receipt of GRPs written notice. If the concession company,
acting in good faith and with due diligence, is unable to designate a
qualified operator within the aforesaid period, then GRP shall at the
end of the 180-day period take over the Development Facility and
assume Attendant Liabilities.
The term Attendant Liabilities under the 1997 Concession
Agreement is defined as:
Attendant Liabilities refer to all amounts recorded and from time to
time outstanding in the books of the Concessionaire as owing to
Unpaid Creditors who have provided, loaned or advanced funds
actually used for the Project, including all interests, penalties,
associated fees, charges, surcharges, indemnities, reimbursements
and other related expenses, and further including amounts owed by
Concessionaire to its suppliers, contractors and sub-contractors.
Under the above quoted portions of Section 4.04 in relation to
the definition of Attendant Liabilities, default by PIATCO of its
loans used to finance the NAIA IPT III project triggers the
occurrence of certain events that leads to the assumption by the
Government of the liability for the loans. Only in one instance may
the Government escape the assumption of PIATCOs liabilities, i.e.,
when the Government so elects and allows a qualified operator to
take over as Concessionaire. However, this circumstance is
dependent on the existence and availability of a qualified
operator who is willing to take over the rights and obligations of
PIATCO under the contract, a circumstance that is not entirely
within the control of the Government.
Without going into the validity of this provision at this
juncture, suffice it to state that Section 4.04 of the 1997 Concession
Agreement may be considered a form of security for the loans
PIATCO has obtained to finance the project, an option that was not
made available in the draft Concession Agreement. Section 4.04 is
an important amendment to the 1997 Concession Agreement
because it grants PIATCO a financial advantage or benefit which
was not previously made available during the bidding
process. This financial advantage is a significant modification that
translates to better terms and conditions for PIATCO.
PIATCO, however, argues that the parties to the bidding
procedure acknowledge that the draft Concession Agreement is
subject to amendment because the Bid Documents permit financing
or borrowing. They claim that it was the lenders who proposed the
amendments to the draft Concession Agreement which resulted in
the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and
purpose of the BOT Law to allow the project proponent or the
winning bidder to obtain financing for the project, especially in this
case which involves the construction, operation and maintenance of
the NAIA IPT III. Expectedly, compliance by the project proponent
of its undertakings therein would involve a substantial amount of
investment. It is therefore inevitable for the awardee of the contract
to seek alternate sources of funds to support the project. Be that as it
may, this Court maintains that amendments to the contract bidded
upon should always conform to the general policy on public bidding
if such procedure is to be faithful to its real nature and purpose. By
its very nature and characteristic, competitive public bidding aims to
protect the public interest by giving the public the best possible
[45]
advantages through open competition. It has been held that the
three principles in public bidding are (1) the offer to the public; (2)
Public bidding is a standard practice for procuring government
contracts for public service and for furnishing supplies and other
materials. It aims to secure for the government the lowest possible
price under the most favorable terms and conditions, to curtail
favoritism in the award of government contracts and avoid suspicion
[47]
of anomalies and it places all bidders in equal footing. Any
government action which permits any substantial variance
between the conditions under which the bids are invited and the
contract executed after the award thereof is a grave abuse of
discretion amounting to lack or excess of jurisdiction which
warrants proper judicial action.
In view of the above discussion, the fact that the foregoing
substantial amendments were made on the 1997 Concession
Agreement renders the same null and void for being contrary to
public policy. These amendments convert the 1997 Concession
Agreement to an entirely different agreement from the contract
bidded out or the draft Concession Agreement. It is not difficult to
see that the amendments on (1) the types of fees or charges that are
subject to MIAA regulation or control and the extent thereof and (2)
the assumption by the Government, under certain conditions, of the
liabilities of PIATCO directly translates concrete financial
advantages to PIATCO that were previously not available during
the bidding process. These amendments cannot be taken as merely
supplements to or implementing provisions of those already existing
in the draft Concession Agreement. The amendments discussed
above present new terms and conditions which provide financial
benefit to PIATCO which may have altered the technical and
financial parameters of other bidders had they known that such
terms were available.
III
Direct Government Guarantee
Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of
the 1997 Concession Agreement provides:
Section 4.04 Assignment
.
(b) In the event Concessionaire should default in the payment of
an Attendant Liability, and the default resulted in the acceleration
of the payment due date of the Attendant Liability prior to its stated
date of maturity, the Unpaid Creditors and Concessionaire shall
immediately inform GRP in writing of such default. GRP shall
within one hundred eighty (180) days from receipt of the joint
written notice of the Unpaid Creditors and Concessionaire, either (i)
take over the Development Facility and assume the Attendant
Liabilities, or (ii) allow the Unpaid Creditors, if qualified to be
substituted as concessionaire and operator of the Development
facility in accordance with the terms and conditions hereof, or
designate a qualified operator acceptable to GRP to operate the
Development Facility, likewise under the terms and conditions of
this Agreement; Provided, that if at the end of the 180-day period
GRP shall not have served the Unpaid Creditors and Concessionaire
written notice of its choice, GRP shall be deemed to have elected
to take over the Development Facility with the concomitant
assumption of Attendant Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be
substituted as concessionaire, the latter shall form and organize a
concession company qualified to takeover the operation of the
Development Facility. If the concession company should elect to
designate an operator for the Development Facility, the concession
company shall in good faith identify and designate a qualified
operator acceptable to GRP within one hundred eighty (180) days
from receipt of GRPs written notice. If the concession company,
acting in good faith and with due diligence, is unable to designate a
qualified operator within the aforesaid period, then GRP shall at
the end of the 180-day period take over the Development Facility
and assume Attendant Liabilities.
.
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from time
to time outstanding in the books of the Concessionaire as owing
to Unpaid Creditors who have provided, loaned or advanced funds
actually used for the Project, including all interests, penalties,
associated fees, charges, surcharges, indemnities, reimbursements
and other related expenses, and further including amounts owed
by Concessionaire to its suppliers, contractors and sub-
[48]
 [51]
the prescribed period. In effect, whatever option the
Government chooses to take in the event of PIATCOs failure to
fulfill its loan obligations, the Government is still at a risk of
assuming PIATCOs outstanding loans. This is due to the fact that
the Government would only be free from assuming PIATCOs debts
if the unpaid creditors would be able to designate a qualified
operator within the period provided for in the contract. Thus, the
Governments assumption of liability is virtually out of its
control. The Government under the circumstances provided for in
the 1997 Concession Agreement is at the mercy of the existence,
availability and willingness of a qualified operator. The above
contractual provisions constitute a direct government guarantee
which is prohibited by law.
One of the main impetus for the enactment of the BOT Law is
the lack of government funds to construct the infrastructure and
development projects necessary for economic growth and
development. This is why private sector resources are being tapped
in order to finance these projects. The BOT law allows the private
sector to participate, and is in fact encouraged to do so by way of
incentives, such as minimizing the unstable flow of
[52]
returns, provided that the government would not have to
unnecessarily expend scarcely available funds for the project
itself. As such, direct guarantee, subsidy and equity by the
[53]
government in these projects are strictly prohibited. This is but
logical for if the government would in the end still be at a risk of
paying the debts incurred by the private entity in the BOT
projects, then the purpose of the law is subverted.
Section 2(n) of the BOT Law defines direct guarantee as follows:
(n) Direct government guarantee An agreement whereby the
government or any of its agencies or local government units assume
responsibility for the repayment of debt directly incurred by the
project proponent in implementing the project in case of a loan
default.
Clearly by providing that the Government assumes the
attendant liabilities, which consists of PIATCOs unpaid debts, the
1997 Concession Agreement provided for a direct government
guarantee for the debts incurred by PIATCO in the implementation
of the NAIA IPT III project. It is of no moment that the relevant
sections are subsumed under the title of assignment. The provisions
providing for direct government guarantee which is prohibited by
law is clear from the terms thereof.
The fact that the ARCA superseded the 1997 Concession
Agreement did not cure this fatal defect. Article IV, Section 4.04(c),
in relation to Article I, Section 1.06, of the ARCA provides:
Section 4.04 Security
. only arise after the Senior Lenders fail to appoint a qualified
(c) GRP agrees with Concessionaire (PIATCO) that it shall
negotiate in good faith and enter into direct agreement with the
Senior Lenders, or with an agent of such Senior Lenders (which
agreement shall be subject to the approval of the Bangko Sentral ng
Pilipinas), in such form as may be reasonably acceptable to both
GRP and Senior Lenders, with regard, inter alia, to the following
parameters:
. Government was not even given an option as to what course of
(iv) If the Concessionaire [PIATCO] is in default under a
payment obligation owed to the Senior Lenders, and as a result
thereof the Senior Lenders have become entitled to accelerate the
Senior Loans, the Senior Lenders shall have the right to notify GRP
of the same, and without prejudice to any other rights of the Senior
Lenders or any Senior Lenders agent may have (including without
limitation under security interests granted in favor of the Senior
Lenders), to either in good faith identify and designate a nominee
which is qualified under sub-clause (viii)(y) below to operate the
Development Facility [NAIA Terminal 3] or transfer the
Concessionaires [PIATCO] rights and obligations under this
Agreement to a transferee which is qualified under sub-clause (viii)
below;
. willingness of a qualified nominee or transferee is totally out of the
(vi) if the Senior Lenders, acting in good faith and using reasonable
efforts, are unable to designate a nominee or effect a transfer in
terms and conditions satisfactory to the Senior Lenders within one
hundred eighty (180) days after giving GRP notice as referred to
respectively in (iv) or (v) above, then GRP and the Senior Lenders
shall endeavor in good faith to enter into any other arrangement
.
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts in each case supported
by verifiable evidence from time to time owed or which may
become owing by Concessionaire [PIATCO] to Senior Lenders or
any other persons or entities who have provided, loaned, or
advanced funds or provided financial facilities to Concessionaire
[PIATCO] for the Project [NAIA Terminal 3], including, without
limitation, all principal, interest, associated fees, charges,
reimbursements, and other related expenses (including the fees,
charges and expenses of any agents or trustees of such persons or
entities), whether payable at maturity, by acceleration or otherwise,
and further including amounts owed by Concessionaire [PIATCO]
to its professional consultants and advisers, suppliers, contractors
[54]
and sub-contractors.
It is clear from the foregoing contractual provisions that in the
event that PIATCO fails to fulfill its loan obligations to its Senior
Lenders, the Government is obligated to directly negotiate and enter
into an agreement relating to NAIA IPT III with the Senior Lenders,
should the latter fail to appoint a qualified nominee or transferee
who will take the place of PIATCO. If the Senior Lenders and the
Government are unable to enter into an agreement after the
prescribed period, the Government must then pay PIATCO, upon
transfer of NAIA IPT III to the Government, termination payment
equal to the appraised value of the project or the value of the
attendant liabilities whichever is greater. Attendant liabilities as
defined in the ARCA includes all amounts owed or thereafter may
be owed by PIATCO not only to the Senior Lenders with whom
PIATCO has defaulted in its loan obligations but to all other persons
who may have loaned, advanced funds or provided any other type of
financial facilities to PIATCO for NAIA IPT III. The amount of
PIATCOs debt that the Government would have to pay as a result of
PIATCOs default in its loan obligations -- in case no qualified
nominee or transferee is appointed by the Senior Lenders and no
other agreement relating to NAIA IPT III has been reached between
the Government and the Senior Lenders -- includes, but is not
limited to, all principal, interest, associated fees, charges,
reimbursements, and other related expenses . . . whether payable at
[55]
maturity, by acceleration or otherwise.
It is clear from the foregoing that the ARCA provides for a
direct guarantee by the government to pay PIATCOs loans not
only to its Senior Lenders but all other entities who provided
PIATCO funds or services upon PIATCOs default in its loan
obligation with its Senior Lenders. The fact that the Governments
obligation to pay PIATCOs lenders for the latters obligation would
nominee or transferee does not detract from the fact that, should the
conditions as stated in the contract occur, the ARCA still obligates
the Government to pay any and all amounts owed by PIATCO to its
lenders in connection with NAIA IPT III. Worse, the conditions that
would make the Government liable for PIATCOs debts is triggered
by PIATCOs own default of its loan obligations to its Senior Lenders
to which loan contracts the Government was never a party to. The
action it should take in case PIATCO defaulted in the payment of its
senior loans. The Government, upon PIATCOs default, would be
merely notified by the Senior Lenders of the same and it is the
Senior Lenders who are authorized to appoint a qualified nominee
or transferee. Should the Senior Lenders fail to make such an
appointment, the Government is then automatically obligated to
directly deal and negotiate with the Senior Lenders regarding NAIA
IPT III. The only way the Government would not be liable for
PIATCOs debt is for a qualified nominee or transferee to be
appointed in place of PIATCO to continue the construction,
operation and maintenance of NAIA IPT III. This pre-condition,
however, will not take the contract out of the ambit of a direct
guarantee by the government as the existence, availability and
governments control. As such the Government is virtually at the
mercy of PIATCO (that it would not default on its loan obligations
to its Senior Lenders), the Senior Lenders (that they would appoint a
qualified nominee or transferee or agree to some other arrangement
with the Government) and the existence of a qualified nominee or
transferee who is able and willing to take the place of PIATCO in
concept in technology and/or is not part of the list of priority
projects, (2) no direct government guarantee, subsidy or equity is
required, and (3) the government agency or local government unit
has invited by publication other interested parties to a public
[56]
bidding and conducted the same. The failure to meet any of the
above conditions will result in the denial of the proposal. It is
further provided that the presence of direct government guarantee,
subsidy or equity will necessarily disqualify a proposal from being
[57]
treated and accepted as an unsolicited proposal. The BOT Law
clearly and strictly prohibits direct government guarantee, subsidy
and equity in unsolicited proposals that the mere inclusion of a
provision to that effect is fatal and is sufficient to deny the
proposal. It stands to reason therefore that if a proposal can be
denied by reason of the existence of direct government guarantee,
then its inclusion in the contract executed after the said proposal has
been accepted is likewise sufficient to invalidate the contract
itself. A prohibited provision, the inclusion of which would result in
the denial of a proposal cannot, and should not, be allowed to later
on be inserted in the contract resulting from the said proposal. The
basic rules of justice and fair play alone militate against such an
occurrence and must not, therefore, be countenanced particularly in
this instance where the government is exposed to the risk of
shouldering hundreds of million of dollars in debt.
This Court has long and consistently adhered to the legal
maxim that those that cannot be done directly cannot be done
[58]
indirectly. To declare the PIATCO contracts valid despite the
clear statutory prohibition against a direct government guarantee
would not only make a mockery of what the BOT Law seeks to
prevent -- which is to expose the government to the risk of
incurring a monetary obligation resulting from a contract of loan
between the project proponent and its lenders and to which the
Government is not a party to -- but would also render the BOT
Law useless for what it seeks to achieve - to make use of the
resources of the private sector in the financing, operation and
maintenance of infrastructure and development
[59]
projects which are necessary for national growth and
development but which the government, unfortunately, could ill-
afford to finance at this point in time.
IV
Temporary takeover of business affected with public
interest
Article XII, Section 17 of the 1987 Constitution provides:
Section 17. In times of national emergency, when the public interest
so requires, the State may, during the emergency and under
reasonable terms prescribed by it, temporarily take over or direct the
operation of any privately owned public utility or business affected
with public interest.
The above provision pertains to the right of the State in times
of national emergency, and in the exercise of its police power, to
temporarily take over the operation of any business affected with
public interest. In the 1986 Constitutional Commission, the term
national emergency was defined to include threat from external
aggression, calamities or national disasters, but not strikes unless it is
[60]
of such proportion that would paralyze government service. The
duration of the emergency itself is the determining factor as to how
[61]
long the temporary takeover by the government would last. The
temporary takeover by the government extends only to the
operation of the business and not to the ownership thereof. As such
the government is not required to compensate the private entity-
owner of the said business as there is no transfer of ownership,
whether permanent or temporary. The private entity-owner
affected by the temporary takeover cannot, likewise, claim just
compensation for the use of the said business and its properties as
the temporary takeover by the government is in exercise of
its police power and not of its power of eminent domain.
Article V, Section 5.10 (c) of the 1997 Concession Agreement
provides:
Section 5.10 Temporary Take-over of operations by GRP.
. to the In-Service Date would cease to be effective on the said
(c) In the event the development Facility or any part thereof and/or
the operations of Concessionaire or any part thereof, become the
subject matter of or be included in any notice, notification, or
declaration concerning or relating to acquisition, seizure or
appropriation by GRP in times of war or national emergency, GRP
Facility, and other consequential damages. If the parties cannot
agree on the reasonable compensation of Concessionaire, or on the
liability of GRP as aforesaid, the matter shall be resolved in
accordance with Section 10.01 [Arbitration]. Any amount
determined to be payable by GRP to Concessionaire shall be offset
[62]
from the amount next payable by Concessionaire to GRP.
PIATCO cannot, by mere contractual stipulation,
contravene the Constitutional provision on temporary
government takeover and obligate the government to pay
reasonable cost for the use of the Terminal and/or Terminal
[63]
Complex. Article XII, section 17 of the 1987 Constitution envisions
a situation wherein the exigencies of the times necessitate the
government to temporarily take over or direct the operation of any
privately owned public utility or business affected with public
interest. It is the welfare and interest of the public which is the
paramount consideration in determining whether or not to
temporarily take over a particular business. Clearly, the State in
effecting the temporary takeover is exercising its police
power. Police power is the most essential, insistent, and illimitable
[64]
of powers. Its exercise therefore must not be unreasonably
hampered nor its exercise be a source of obligation by the
government in the absence of damage due to arbitrariness of its
[65]
exercise. Thus, requiring the government to pay reasonable
compensation for the reasonable use of the property pursuant to the
operation of the business contravenes the Constitution.
V
Regulation of Monopolies
A monopoly is a privilege or peculiar advantage vested in one
or more persons or companies, consisting in the exclusive right (or
power) to carry on a particular business or trade, manufacture a
particular article, or control the sale of a particular
[66]
commodity. The 1987 Constitution strictly regulates
monopolies, whether private or public, and even provides for their
prohibition if public interest so requires. Article XII, Section 19 of
the 1987 Constitution states:
Sec. 19. The state shall regulate or prohibit monopolies when the
public interest so requires. No combinations in restraint of trade or
unfair competition shall be allowed.
Clearly, monopolies are not per se prohibited by the
Constitution but may be permitted to exist to aid the government in
carrying on an enterprise or to aid in the performance of various
[67]
services and functions in the interest of the public. Nonetheless,
a determination must first be made as to whether public interest
requires a monopoly. As monopolies are subject to abuses that can
inflict severe prejudice to the public, they are subject to a higher
level of State regulation than an ordinary business undertaking.
In the cases at bar, PIATCO, under the 1997 Concession
Agreement and the ARCA, is granted the exclusive right to
operate a commercial international passenger terminal within the
[68]
Island of Luzon at the NAIA IPT III. This is with the exception of
already existing international airports in Luzon such as those
located in the Subic Bay Freeport Special Economic Zone (SBFSEZ),
[69]
Clark Special Economic Zone (CSEZ) and in Laoag City. As such,
upon commencement of PIATCOs operation of NAIA IPT III,
Terminals 1 and 2 of NAIA would cease to function as international
passenger terminals. This, however, does not prevent MIAA to use
Terminals 1 and 2 as domestic passenger terminals or in any other
manner as it may deem appropriate except those activities that
would compete with NAIA IPT III in the latters operation as an
[70]
international passenger terminal. The right granted to PIATCO
to exclusively operate NAIA IPT III would be for a period of
[71]
twenty-five (25) years from the In-Service Date and renewable for
another twenty-five (25) years at the option of the
[72]
government. Both the 1997 Concession Agreement and the
ARCA further provide that, in view of the exclusive right granted
to PIATCO, the concession contracts of the service providers
currently servicing Terminals 1 and 2 would no longer be renewed
and those concession contracts whose expiration are subsequent
[73]
date.
The operation of an international passenger airport terminal is
no doubt an undertaking imbued with public interest. In entering
into a BuildOperate-and-Transfer contract for the construction,
operation and maintenance of NAIA IPT III, the government has
in the operation of a public utility as a monopoly. The operation of
said public utility can not be done in an arbitrary manner to the
detriment of the public which it seeks to serve. The right granted to
the public utility may be exclusive but the exercise of the right
cannot run riot. Thus, while PIATCO may be authorized to
exclusively operate NAIA IPT III as an international passenger
terminal, the Government, through the MIAA, has the right and the
duty to ensure that it is done in accord with public interest.
PIATCOs right to operate NAIA IPT III cannot also violate the rights
of third parties.
Section 3.01(e) of the 1997 Concession Agreement and the
ARCA provide:
3.01 Concession Period
. a certain Pedro Perez for the rights over a 250-square meter lot in
(e) GRP confirms that certain concession agreements relative to
certain services and operations currently being undertaken at the
Ninoy Aquino International Airport passenger Terminal I have a
validity period extending beyond the In-Service Date. GRP
through DOTC/MIAA, confirms that these services and
operations shall not be carried over to the Terminal and the
Concessionaire is under no legal obligation to permit such carry-
over except through a separate agreement duly entered into with
Concessionaire. In the event Concessionaire becomes involved in
any litigation initiated by any such concessionaire or operator, GRP
undertakes and hereby holds Concessionaire free and harmless on
full indemnity basis from and against any loss and/or any liability
resulting from any such litigation, including the cost of litigation and
the reasonable fees paid or payable to Concessionaires counsel of
choice, all such amounts shall be fully deductible by way of an offset
from any amount which the Concessionaire is bound to pay GRP
under this Agreement.
During the oral arguments on December 10, 2002, the counsel
for the petitioners-in-intervention for G.R. No. 155001 stated that
there are two service providers whose contracts are still existing and
whose validity extends beyond the In-Service Date. One contract
[77]
remains valid until 2008 and the other until 2010.
We hold that while the service providers presently operating at
NAIA Terminal 1 do not have an absolute right for the renewal or
the extension of their respective contracts, those contracts whose
duration extends beyond NAIA IPT IIIs In-Service-Date should not
be unduly prejudiced. These contracts must be respected not just by
the parties thereto but also by third parties. PIATCO cannot, by law
and certainly not by contract, render a valid and binding contract
nugatory. PIATCO, by the mere expedient of claiming an exclusive
right to operate, cannot require the Government to break its
contractual obligations to the service providers. In contrast to the
arrastre and stevedoring service providers in the case of Anglo-Fil
[78]
Trading Corporation v. Lazaro whose contracts consist of
temporary hold-over permits, the affected service providers in the
cases at bar, have a valid and binding contract with the Government,
through MIAA, whose period of effectivity, as well as the other terms
and conditions thereof, cannot be violated.
In fine, the efficient functioning of NAIA IPT III is imbued
with public interest. The provisions of the 1997 Concession
Agreement and the ARCA did not strip government, thru the MIAA,
of its right to supervise the operation of the whole NAIA complex,
including NAIA IPT III. As the primary government agency tasked
[79]
with the job, it is MIAAs responsibility to ensure that whoever by
contract is given the right to operate NAIA IPT III will do so within
the bounds of the law and with due regard to the rights of third
parties and above all, the interest of the public.
VI
CONCLUSION
In sum, this Court rules that in view of the absence of the
requisite financial capacity of the Paircargo Consortium,
predecessor of respondent PIATCO, the award by the PBAC of the
contract for the construction, operation and maintenance of the
NAIA IPT III is null and void. Further, considering that the 1997
Concession Agreement contains material and substantial
amendments, which amendments had the effect of converting the
1997 Concession Agreement into an entirely different agreement
from the contract bidded upon, the 1997 Concession Agreement is
similarly null and void for being contrary to public policy. The
provisions under Sections 4.04(b) and (c) in relation to Section 1.06
COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and
EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
[1]
Before us is a petition for review of the 21 June 2000
[2]
Decision and 14 December 2000 Resolution of the Court of
Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the
[3]
11 November 1996 decision of the Regional Trial Court of Quezon
[4] [5]
City, Branch 81, affirming the 15 December 1995 decision of the
[6]
Metropolitan Trial Court of Quezon City, Branch 31.
The Antecedents
In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to
Barrio Payatas, Quezon City. Pajuyo then constructed a house made
of light materials on the lot. Pajuyo and his family lived in the house
from 1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie
Guevarra (Guevarra) executed a Kasunduan or agreement. Pajuyo,
as owner of the house, allowed Guevarra to live in the house for free
provided Guevarra would maintain the cleanliness and orderliness
of the house. Guevarra promised that he would voluntarily vacate
the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of
the house and demanded that Guevarra vacate the house. Guevarra
refused.
Pajuyo filed an ejectment case against Guevarra with the
Metropolitan Trial Court of Quezon City, Branch 31 (MTC).
In his Answer, Guevarra claimed that Pajuyo had no valid title
or right of possession over the lot where the house stands because
the lot is within the 150 hectares set aside by Proclamation No. 137 for
socialized housing. Guevarra pointed out that from December 1985
to September 1994, Pajuyo did not show up or communicate with
him. Guevarra insisted that neither he nor Pajuyo has valid title to
the lot.
On 15 December 1995, the MTC rendered its decision in favor
of Pajuyo. The dispositive portion of the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered
for the plaintiff and against defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or
any other person or persons claiming any right
under him;
B) pay unto plaintiff the sum of THREE HUNDRED
PESOS (P300.00) monthly as reasonable
compensation for the use of the premises starting
from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of
attorneys fees; and
D) pay the cost of suit.
[7]
SO ORDERED.
Aggrieved, Guevarra appealed to the Regional Trial Court of
Quezon City, Branch 81 (RTC).
On 11 November 1996, the RTC affirmed the MTC decision.
The dispositive portion of the RTC decision reads:
WHEREFORE, premises considered, the Court finds no reversible
error in the decision appealed from, being in accord with the law
and evidence presented, and the same is hereby affirmed en toto.
[8]
SO ORDERED.
Guevarra received the RTC decision on 29 November
1996. Guevarra had only until 14 December 1996 to file his appeal
with the Court of Appeals. Instead of filing his appeal with the Court
of Appeals, Guevarra filed with the Supreme Court a Motion for
Extension of Time to File Appeal by Certiorari Based on Rule 42
(motion for extension). Guevarra theorized that his appeal raised
pure questions of law. The Receiving Clerk of the Supreme Court
received the motion for extension on 13 December 1996 or one day
before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with
the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court
[9]
issued a Resolution referring the motion for extension to the
Court of Appeals which has concurrent jurisdiction over the case.
The case presented no special and important matter for the
Supreme Court to take cognizance of at the first instance.
 Pajuyo filed a motion for reconsideration of the
decision. Pajuyo pointed out that the Court of Appeals should have
dismissed outright Guevarras petition for review because it was filed
out of time. Moreover, it was Guevarras counsel and not Guevarra
who signed the certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a
resolution denying Pajuyos motion for reconsideration. The
dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is
hereby DENIED. No costs.
[12]
SO ORDERED.
The Ruling of the MTC
The MTC ruled that the subject of the agreement between
Pajuyo and Guevarra is the house and not the lot. Pajuyo is the
owner of the house, and he allowed Guevarra to use the house only
by tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos
demand made Guevarras continued possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the
landlord and tenant relationship between Pajuyo and Guevarra. The
terms of the Kasunduanbound Guevarra to return possession of the
house on demand.
The RTC rejected Guevarras claim of a better right under
Proclamation No. 137, the Revised National Government Center
Housing Project Code of Policies and other pertinent laws. In an
ejectment suit, the RTC has no power to decide Guevarras rights
under these laws. The RTC declared that in an ejectment case, the
only issue for resolution is material or physical possession, not
ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are
squatters. Pajuyo and Guevarra illegally occupied the contested lot
which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was
also a squatter. Perez had no right or title over the lot because it is
public land. The assignment of rights between Perez and Pajuyo,
and the Kasunduan between Pajuyo and Guevarra, did not have any
legal effect. Pajuyo and Guevarra are in pari delicto or in equal
fault. The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings,
which held that the Kasunduan between Pajuyo and Guevarra
created a legal tie akin to that of a landlord and tenant
relationship. The Court of Appeals ruled that the Kasunduan is not
a lease contract but a commodatum because the agreement is not for
a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim
the property, the appellate court held that Guevarra has a better
right over the property under Proclamation No. 137. President
Corazon C. Aquino (President Aquino) issued Proclamation No. 137
on 7 September 1987. At that time, Guevarra was in physical
possession of the property. Under Article VI of the Code of Policies
Beneficiary Selection and Disposition of Homelots and Structures in
the National Housing Project (the Code), the actual occupant or
caretaker of the lot shall have first priority as beneficiary of the
project. The Court of Appeals concluded that Guevarra is first in the
hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate
court debunked Pajuyos claim that Guevarra filed his motion for
extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for
extension filed before the Supreme Court was stamped 13 December
1996 at 4:09 PM by the Supreme Courts Receiving Clerk. The Court
of Appeals concluded that the motion for extension bore a date,
contrary to Pajuyos claim that the motion for extension was
undated. Guevarra filed the motion for extension on time on 13
December 1996 since he filed the motion one day before the
expiration of the reglementary period on 14 December 1996. Thus,
the motion for extension properly complied with the condition
imposed by the Court of Appeals in its 28 January 1997
Resolution. The Court of Appeals explained that the thirty-day
extension to file the petition for review was deemed granted because
of such compliance.
The Court of Appeals rejected Pajuyos argument that the
appellate court should have dismissed the petition for review
the time when there was no more period
to extend as the decision of the Regional
Trial Court had already become final
and executory.
2) in giving due course, instead
of dismissing, private
respondents Petition for Review even
though the certification against forum-
shopping was signed only by counsel
instead of by petitioner himself.
3) in ruling that the Kasunduan voluntarily
entered into by the parties was in fact a
commodatum, instead of a Contract of
Lease as found by the Metropolitan Trial
Court and in holding that the
ejectment case filed against defendant-
appellant is without legal and factual
basis.
4) in reversing and setting aside the Decision
of the Regional Trial Court in Civil Case
No. Q-96-26943 and in holding that the
parties are in pari delicto being both
squatters, therefore, illegal occupants of
the contested parcel of land.
5) in deciding the unlawful detainer case
based on the so-called Code of Policies of
the National Government Center
Housing Project instead of deciding the
same under the Kasunduan voluntarily
executed by the parties, the terms and
conditions of which are the laws between
themselves.[13]
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However,
we find merit in the substantive issues Pajuyo is submitting for
resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed
outright Guevarras petition for review because the RTC decision
had already become final and executory when the appellate court
acted on Guevarras motion for extension to file the petition. Pajuyo
points out that Guevarra had only one day before the expiry of his
period to appeal the RTC decision. Instead of filing the petition for
review with the Court of Appeals, Guevarra filed with this Court an
undated motion for extension of 30 days to file a petition for
review. This Court merely referred the motion to the Court of
Appeals. Pajuyo believes that the filing of the motion for extension
with this Court did not toll the running of the period to perfect the
appeal. Hence, when the Court of Appeals received the motion, the
period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their
appellate jurisdiction are appealable to the Court of Appeals by
petition for review in cases involving questions of fact or mixed
[14]
questions of fact and law. Decisions of the regional trial courts
involving pure questions of law are appealable directly to this Court
[15]
by petition for review. These modes of appeal are now embodied
in Section 2, Rule 41 of the 1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision
involved only questions of law. Guevarra thus filed his motion for
extension to file petition for review before this Court on 14
December 1996. On 3 January 1997, Guevarra then filed his petition
for review with this Court. A perusal of Guevarras petition for
review gives the impression that the issues he raised were pure
questions of law. There is a question of law when the doubt or
[16]
difference is on what the law is on a certain state of facts. There is
a question of fact when the doubt or difference is on the truth or
[17]
falsity of the facts alleged.
In his petition for review before this Court, Guevarra no longer
disputed the facts. Guevarras petition for review raised these
questions: (1) Do ejectment cases pertain only to possession of a
structure, and not the lot on which the structure stands? (2) Does a
suit by a squatter against a fellow squatter constitute a valid case for
ejectment? (3) Should a Presidential Proclamation governing the lot
 [19]
petition for review. In Liboro v. Court of Appeals, we clarified that
the prohibition against granting an extension of time applies only in
a case where ordinary appeal is perfected by a mere notice of
appeal. The prohibition does not apply in a petition for review
where the pleading needs verification. A petition for review, unlike
an ordinary appeal, requires preparation and research to present a
[20]
persuasive position. The drafting of the petition for review entails
[21]
more time and effort than filing a notice of appeal. Hence, the
Court of Appeals may allow an extension of time to file a petition for
review.
In the more recent case of Commissioner of Internal Revenue v.
[22]
Court of Appeals, we held that Liboros clarification
of Lacsamana is consistent with the Revised Internal Rules of the
Court of Appeals and Supreme Court Circular No. 1-91. They all
allow an extension of time for filing petitions for review with the
Court of Appeals. The extension, however, should be limited to only
fifteen days save in exceptionally meritorious cases where the Court
of Appeals may grant a longer period.
A judgment becomes final and executory by operation of law.
Finality of judgment becomes a fact on the lapse of the reglementary
[23]
period to appeal if no appeal is perfected. The RTC decision
could not have gained finality because the Court of Appeals granted
the 30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion
when it approved Guevarras motion for extension. The Court of
Appeals gave due course to the motion for extension because it
complied with the condition set by the appellate court in its
resolution dated 28 January 1997. The resolution stated that the
Court of Appeals would only give due course to the motion for
extension if filed on time. The motion for extension met this
condition.
The material dates to consider in determining the timeliness of
the filing of the motion for extension are (1) the date of receipt of the
judgment or final order or resolution subject of the petition, and (2)
[24]
the date of filing of the motion for extension. It is the date of the
filing of the motion or pleading, and not the date of execution, that
determines the timeliness of the filing of that motion or
pleading. Thus, even if the motion for extension bears no date, the
date of filing stamped on it is the reckoning point for determining
the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the
RTC decision. Guevarra filed his motion for extension before this
Court on 13 December 1996, the date stamped by this Courts
Receiving Clerk on the motion for extension. Clearly, Guevarra filed
the motion for extension exactly one day before the lapse of the
reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed
Guevarras appeal on technical grounds, Pajuyo did not ask the
appellate court to deny the motion for extension and dismiss the
petition for review at the earliest opportunity. Instead, Pajuyo
vigorously discussed the merits of the case. It was only when the
Court of Appeals ruled in Guevarras favor that Pajuyo raised the
procedural issues against Guevarras petition for review.
A party who, after voluntarily submitting a dispute for
resolution, receives an adverse decision on the merits, is estopped
[25]
from attacking the jurisdiction of the court. Estoppel sets in not
because the judgment of the court is a valid and conclusive
adjudication, but because the practice of attacking the courts
jurisdiction after voluntarily submitting to it is against public
[26]
policy.
In his Comment before the Court of Appeals, Pajuyo also
failed to discuss Guevarras failure to sign the certification against
forum shopping. Instead, Pajuyo harped on Guevarras counsel
signing the verification, claiming that the counsels verification is
insufficient since it is based only on mere information.
A partys failure to sign the certification against forum
shopping is different from the partys failure to sign personally the
verification. The certificate of non-forum shopping must be signed
[27]
by the party, and not by counsel. The certification of counsel
[28]
renders the petition defective.
On the other hand, the requirement on verification of a
[29]
pleading is a formal and not a jurisdictional requisite. It is
intended simply to secure an assurance that what are alleged in the
pleading are true and correct and not the product of the imagination
the issue of ownership, the court may pass on such issue to
determine only the question of possession, especially if the
[33]
ownership is inseparably linked with the possession. The
adjudication on the issue of ownership is only provisional and will
not bar an action between the same parties involving title to the
[34]
land. This doctrine is a necessary consequence of the nature of
the two summary actions of ejectment, forcible entry and unlawful
detainer, where the only issue for adjudication is the physical or
[35]
material possession over the real property.
In this case, what Guevarra raised before the courts was that
he and Pajuyo are not the owners of the contested property and that
they are mere squatters. Will the defense that the parties to the
ejectment case are not the owners of the disputed lot allow the
courts to renounce their jurisdiction over the case? The Court of
Appeals believed so and held that it would just leave the parties
where they are since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is
not at issue in an action for recovery of possession. The parties
cannot present evidence to prove ownership or right to legal
possession except to prove the nature of the possession when
[36]
necessary to resolve the issue of physical possession. The same is
true when the defendant asserts the absence of title over the
property. The absence of title over the contested lot is not a ground
for the courts to withhold relief from the parties in an ejectment
case.
The only question that the courts must resolve in ejectment
proceedings is - who is entitled to the physical possession of the
premises, that is, to the possession de facto and not to the
[37]
possession de jure. It does not even matter if a partys title to the
[38]
property is questionable, or when both parties intruded into
public land and their applications to own the land have yet to be
[39]
approved by the proper government agency. Regardless of the
actual condition of the title to the property, the party in peaceable
quiet possession shall not be thrown out by a strong hand, violence
[40]
or terror. Neither is the unlawful withholding of property
allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such
[41]
possession even against the owner himself. Whatever may be the
character of his possession, if he has in his favor prior possession in
time, he has the security that entitles him to remain on the property
[42]
until a person with a better right lawfully ejects him. To repeat,
the only issue that the court has to settle in an ejectment suit is the
right to physical possession.
[43]
In Pitargue v. Sorilla, the government owned the land in
dispute. The government did not authorize either the plaintiff or
the defendant in the case of forcible entry case to occupy the
land. The plaintiff had prior possession and had already introduced
improvements on the public land. The plaintiff had a pending
application for the land with the Bureau of Lands when the
defendant ousted him from possession. The plaintiff filed the action
of forcible entry against the defendant. The government was not a
party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to
settle the issue of possession because while the application of the
plaintiff was still pending, title remained with the government, and
the Bureau of Public Lands had jurisdiction over the case. We
disagreed with the defendant. We ruled that courts have
jurisdiction to entertain ejectment suits even before the resolution of
the application. The plaintiff, by priority of his application and of
his entry, acquired prior physical possession over the public land
applied for as against other private claimants. That prior physical
possession enjoys legal protection against other private claimants
because only a court can take away such physical possession in an
ejectment case.
While the Court did not brand the plaintiff and the defendant
[44]
in Pitargue as squatters, strictly speaking, their entry into the
disputed land was illegal.Both the plaintiff and defendant entered
the public land without the owners permission. Title to the land
remained with the government because it had not awarded to
anyone ownership of the contested public land. Both the plaintiff
and the defendant were in effect squatting on government
property. Yet, we upheld the courts jurisdiction to resolve the issue
of possession even if the plaintiff and the defendant in the ejectment
 We further explained in Pitargue the greater interest that is at
stake in actions for recovery of possession. We made the following
pronouncements in Pitargue:
The question that is before this Court is: Are courts without
jurisdiction to take cognizance of possessory actions involving these
public lands before final award is made by the Lands Department,
and before title is given any of the conflicting claimants? It is one of
utmost importance, as there are public lands everywhere and there
are thousands of settlers, especially in newly opened regions. It also
involves a matter of policy, as it requires the determination of the
respective authorities and functions of two coordinate branches of
the Government in connection with public land conflicts.
Our problem is made simple by the fact that under the Civil Code,
either in the old, which was in force in this country before the
American occupation, or in the new, we have a possessory action,
the aim and purpose of which is the recovery of the physical
possession of real property, irrespective of the question as to who
has the title thereto. Under the Spanish Civil Code we had the
accion interdictal, a summary proceeding which could be brought
within one year from dispossession (Roman Catholic Bishop of Cebu
vs. Mangaron, 6 Phil. 286, 291); and as early as October 1, 1901, upon
the enactment of the Code of Civil Procedure (Act No. 190 of the
Philippine Commission) we implanted the common law action of
forcible entry (section 80 of Act No. 190), the object of which has
been stated by this Court to be to prevent breaches of the peace and
criminal disorder which would ensue from the withdrawal of the remedy,
and the reasonable hope such withdrawal would create that some
advantage must accrue to those persons who, believing themselves
entitled to the possession of property, resort to force to gain possession
rather than to some appropriate action in the court to assert their claims.
(Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So
before the enactment of the first Public Land Act (Act No. 926) the
action of forcible entry was already available in the courts of the
country. So the question to be resolved is, Did the Legislature
intend, when it vested the power and authority to alienate and
dispose of the public lands in the Lands Department, to exclude the
courts from entertaining the possessory action of forcible entry
between rival claimants or occupants of any land before award
thereof to any of the parties? Did Congress intend that the lands
applied for, or all public lands for that matter, be removed from the
jurisdiction of the judicial Branch of the Government, so that any
troubles arising therefrom, or any breaches of the peace or disorders
caused by rival claimants, could be inquired into only by the Lands
Department to the exclusion of the courts? The answer to this
question seems to us evident. The Lands Department does not have
the means to police public lands; neither does it have the means to
prevent disorders arising therefrom, or contain breaches of the
peace among settlers; or to pass promptly upon conflicts of
possession. Then its power is clearly limited to disposition and
alienation, and while it may decide conflicts of possession in order to
make proper award, the settlement of conflicts of possession which is
recognized in the court herein has another ultimate purpose, i.e., the
protection of actual possessors and occupants with a view to the
prevention of breaches of the peace. The power to dispose and alienate
could not have been intended to include the power to prevent or settle
disorders or breaches of the peace among rival settlers or claimants prior
to the final award. As to this, therefore, the corresponding branches
of the Government must continue to exercise power and jurisdiction
within the limits of their respective functions. The vesting of the
Lands Department with authority to administer, dispose, and alienate
public lands, therefore, must not be understood as depriving the other
branches of the Government of the exercise of the respective functions or
powers thereon, such as the authority to stop disorders and quell
breaches of the peace by the police, the authority on the part of the courts
to take jurisdiction over possessory actions arising therefrom not
involving, directly or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in American
courts to the effect that courts have no jurisdiction to determine the
rights of claimants to public lands, and that until the disposition of
the land has passed from the control of the Federal Government, the
courts will not interfere with the administration of matters
concerning the same. (50 C. J. 1093-1094.) We have no quarrel with
this principle. The determination of the respective rights of rival
claimants to public lands is different from the determination of who
claimants would be no other than that of forcible entry. This action,
both in England and the United States and in our jurisdiction, is a
summary and expeditious remedy whereby one in peaceful and
quiet possession may recover the possession of which he has been
deprived by a stronger hand, by violence or terror; its ultimate object
being to prevent breach of the peace and criminal disorder. (Supia
and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of the
remedy is mere possession as a fact, of physical possession, not a
legal possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or
right to possession is never in issue in an action of forcible entry; as a
matter of fact, evidence thereof is expressly banned, except to prove
the nature of the possession. (Second 4, Rule 72, Rules of Court.)
With this nature of the action in mind, by no stretch of the
imagination can conclusion be arrived at that the use of the remedy
in the courts of justice would constitute an interference with the
alienation, disposition, and control of public lands. To limit
ourselves to the case at bar can it be pretended at all that its result
would in any way interfere with the manner of the alienation or
disposition of the land contested? On the contrary, it would facilitate
adjudication, for the question of priority of possession having been
decided in a final manner by the courts, said question need no
longer waste the time of the land officers making the adjudication or
award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle
of pari delicto to this case.
[48]
Articles 1411 and 1412 of the Civil Code embody the principle
of pari delicto. We explained the principle of pari delicto in these
words:
The rule of pari delicto is expressed in the maxims ex dolo malo non
eritur actio and in pari delicto potior est conditio defedentis. The law will
not aid either party to an illegal agreement. It leaves the parties
[49]
where it finds them.
The application of the pari delicto principle is not absolute, as
there are exceptions to its application. One of these exceptions is
where the application of the pari delicto rule would violate well-
[50]
established public policy.
[51]
In Drilon v. Gaurana, we reiterated the basic policy behind
the summary actions of forcible entry and unlawful detainer. We
held that:
It must be stated that the purpose of an action of forcible entry and
detainer is that, regardless of the actual condition of the title to the
property, the party in peaceable quiet possession shall not be turned
out by strong hand, violence or terror. In affording this remedy of
restitution the object of the statute is to prevent breaches of the
peace and criminal disorder which would ensue from the
withdrawal of the remedy, and the reasonable hope such withdrawal
would create that some advantage must accrue to those persons
who, believing themselves entitled to the possession of property,
resort to force to gain possession rather than to some appropriate
action in the courts to assert their claims. This is the philosophy at
the foundation of all these actions of forcible entry and detainer
which are designed to compel the party out of possession to respect
[52]
and resort to the law alone to obtain what he claims is his.
Clearly, the application of the principle of pari delicto to a case
of ejectment between squatters is fraught with danger. To shut out
relief to squatters on the ground of pari delicto would openly invite
mayhem and lawlessness. A squatter would oust another squatter
from possession of the lot that the latter had illegally occupied,
emboldened by the knowledge that the courts would leave them
where they are. Nothing would then stand in the way of the ousted
squatter from re-claiming his prior possession at all cost.
Petty warfare over possession of properties is precisely what
ejectment cases or actions for recovery of possession seek to
[53]
prevent. Even the owner who has title over the disputed property
cannot take the law into his own hands to regain possession of his
property. The owner must go to court.
Courts must resolve the issue of possession even if the parties
to the ejectment suit are squatters. The determination of priority
and superiority of possession is a serious and urgent matter that
cannot be left to the squatters to decide. To do so would make
squatters receive better treatment under the law. The law restrains
property owners from taking the law into their own
hands. However, the principle of pari delicto as applied by the
 The ruling of the Court of Appeals has no factual and legal
basis.
First. Guevarra did not present evidence to show that the
contested lot is part of a relocation site under Proclamation No.
137. Proclamation No. 137 laid down the metes and bounds of the
land that it declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the
land specified by Proclamation No. 137. Guevarra had the burden to
prove that the disputed lot is within the coverage of Proclamation
No. 137. He failed to do so.
Second. The Court of Appeals should not have given credence
to Guevarras unsubstantiated claim that he is the beneficiary of
Proclamation No. 137. Guevarra merely alleged that in the survey the
project administrator conducted, he and not Pajuyo appeared as the
actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits
of Proclamation No. 137. Pajuyo allowed Guevarra to occupy the
disputed property in 1985. President Aquino signed Proclamation
No. 137 into law on 11 March 1986. Pajuyo made his earliest demand
for Guevarra to vacate the property in September 1994.
During the time that Guevarra temporarily held the property
up to the time that Proclamation No. 137 allegedly segregated the
disputed lot, Guevarra never applied as beneficiary of Proclamation
No. 137. Even when Guevarra already knew that Pajuyo was
reclaiming possession of the property, Guevarra did not take any
step to comply with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the
coverage of Proclamation No. 137 and Guevarra has a pending
application over the lot, courts should still assume jurisdiction and
resolve the issue of possession. However, the jurisdiction of the
courts would be limited to the issue of physical possession only.
[55]
In Pitargue, we ruled that courts have jurisdiction over
possessory actions involving public land to determine the issue of
physical possession. The determination of the respective rights of
rival claimants to public land is, however, distinct from the
determination of who has the actual physical possession or who has
[56]
a better right of physical possession. The administrative
disposition and alienation of public lands should be threshed out in
[57]
the proper government agency.
The Court of Appeals determination of Pajuyo and Guevarras
rights under Proclamation No. 137 was premature. Pajuyo and
Guevarra were at most merely potential beneficiaries of the law.
Courts should not preempt the decision of the administrative agency
mandated by law to determine the qualifications of applicants for
the acquisition of public lands. Instead, courts should expeditiously
resolve the issue of physical possession in ejectment cases to prevent
[58]
disorder and breaches of peace.
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyos prior possession of the lot
and ownership of the house built on it. Guevarra expressly admitted
the existence and due execution of
the Kasunduan. The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas,
Quezon City, ay nagbibigay pahintulot kay G. Eddie Guevarra, na
pansamantalang manirahan sa nasabing bahay at lote ng walang
bayad. Kaugnay nito, kailangang panatilihin nila ang kalinisan at
kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang
aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside
in the house and lot free of rent, but Guevarra was under obligation
to maintain the premises in good condition. Guevarra promised to
vacate the premises on Pajuyos demand but Guevarra broke his
promise and refused to heed Pajuyos demand to vacate.
These facts make out a case for unlawful detainer. Unlawful
detainer involves the withholding by a person from another of the
possession of real property to which the latter is entitled after the
expiration or termination of the formers right to hold
[59]
possession under a contract, express or implied.
Where the plaintiff allows the defendant to use his property by
tolerance without any contract, the defendant is necessarily bound
by an implied promise that he will vacate on demand, failing which,
[60]
an action for unlawful detainer will lie. The defendants refusal to
comply with the demand makes his continued possession of the
[61]
In a contract of commodatum, one of the parties delivers to
another something not consumable so that the latter may use the
[63]
same for a certain time and return it. An essential feature
of commodatum is that it is gratuitous. Another feature
of commodatum is that the use of the thing belonging to another is
[64]
for a certain period. Thus, the bailor cannot demand the return of
the thing loaned until after expiration of the period stipulated, or
after accomplishment of the use for which
[65]
the commodatum is constituted. If the bailor should have urgent
[66]
need of the thing, he may demand its return for temporary use. If
the use of the thing is merely tolerated by the bailor, he can demand
the return of the thing at will, in which case the contractual relation
[67]
is called aprecarium. Under the Civil Code, precarium is a kind
[68]
of commodatum.
The Kasunduan reveals that the accommodation accorded by
Pajuyo to Guevarra was not essentially gratuitous. While
the Kasunduan did not require Guevarra to pay rent, it obligated
him to maintain the property in good condition. The imposition of
this obligation makes the Kasunduan a contract different from
a commodatum. The effects of the Kasunduan are also different
from that of a commodatum. Case law on ejectment has treated
relationship based on tolerance as one that is akin to a landlord-
tenant relationship where the withdrawal of permission would
[69]
result in the termination of the lease. The tenants withholding of
the property would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and
Guevarra is one of commodatum, Guevarra as bailee would still have
the duty to turn over possession of the property to Pajuyo, the
bailor. The obligation to deliver or to return the thing received
attaches to contracts for safekeeping, or contracts of commission,
[70]
administration and commodatum. These contracts certainly
[71]
involve the obligation to deliver or return the thing received.
Guevarra turned his back on the Kasunduan on the sole
ground that like him, Pajuyo is also a squatter. Squatters, Guevarra
pointed out, cannot enter into a contract involving the land they
illegally occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between
squatters. Guevarra freely entered into the Kasunduan. Guevarra
cannot now impugn the Kasunduan after he had benefited from
it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who
between Pajuyo and Guevarra has a right to physical possession of
the contested property.The Kasunduan is the undeniable evidence
of Guevarras recognition of Pajuyos better right of physical
possession. Guevarra is clearly a possessor in bad faith. The absence
of a contract would not yield a different result, as there would still be
an implied promise to vacate.
Guevarra contends that there is a pernicious evil that is sought
to be avoided, and that is allowing an absentee squatter who (sic)
[72]
makes (sic) a profit out of his illegal act. Guevarra bases his
argument on the preferential right given to the actual occupant or
caretaker under Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra
because Guevarra stayed in the property without paying any
rent. There is also no proof that Pajuyo is a professional squatter
who rents out usurped properties to other squatters. Moreover, it is
for the proper government agency to decide who between Pajuyo
and Guevarra qualifies for socialized housing. The only issue that
we are addressing is physical possession.
Prior possession is not always a condition sine qua non in
[73]
ejectment. This is one of the distinctions between forcible entry
[74]
and unlawful detainer. In forcible entry, the plaintiff is deprived of
physical possession of his land or building by means of force,
intimidation, threat, strategy or stealth. Thus, he must allege and
[75]
prove prior possession. But in unlawful detainer, the defendant
unlawfully withholds possession after the expiration or termination
of his right to possess under any contract, express or implied. In such
[76]
a case, prior physical possession is not required.
Pajuyos withdrawal of his permission to Guevarra terminated
the Kasunduan. Guevarras transient right to possess the property
ended as well.Moreover, it was Pajuyo who was in actual possession
of the property because Guevarra had to seek Pajuyos permission to
temporarily hold the property and Guevarra had to follow the
 [80]
right to said property. We made this declaration because the
person who had title or who had the right to legal possession over
the disputed property was a party in the ejectment suit and that
party instituted the case against squatters or usurpers.
In this case, the owner of the land, which is the government, is
not a party to the ejectment case. This case is between
squatters. Had the government participated in this case, the courts
could have evicted the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property
is not impleaded in this case, we cannot evict on our own the parties.
Such a ruling would discourage squatters from seeking the aid of the
courts in settling the issue of physical possession. Stripping both the
plaintiff and the defendant of possession just because they are
squatters would have the same dangerous implications as the
application of the principle of pari delicto. Squatters would then
rather settle the issue of physical possession among themselves than
seek relief from the courts if the plaintiff and defendant in the
ejectment case would both stand to lose possession of the disputed
property. This would subvert the policy underlying actions for
recovery of possession.
Since Pajuyo has in his favor priority in time in holding the
property, he is entitled to remain on the property until a person who
has title or a better right lawfully ejects him. Guevarra is certainly
not that person. The ruling in this case, however, does not preclude
Pajuyo and Guevarra from introducing evidence and presenting
arguments before the proper administrative agency to establish any
[81]
right to which they may be entitled under the law.
In no way should our ruling in this case be interpreted to
condone squatting. The ruling on the issue of physical possession
does not affect title to the property nor constitute a binding and
conclusive adjudication on the merits on the issue of
[82]
ownership. The owner can still go to court to recover lawfully the
property from the person who holds the property without legal
title. Our ruling here does not diminish the power of government
agencies, including local governments, to condemn, abate, remove
or demolish illegal or unauthorized structures in accordance with
existing laws.
Attorneys Fees and Rentals
The MTC and RTC failed to justify the award of P3,000
attorneys fees to Pajuyo. Attorneys fees as part of damages are
awarded only in the instances enumerated in Article 2208 of the
[83]
Civil Code. Thus, the award of attorneys fees is the exception
[84]
rather than the rule. Attorneys fees are not awarded every time a
party prevails in a suit because of the policy that no premium should
[85]
be placed on the right to litigate. We therefore delete the
attorneys fees awarded to Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC
assessed against Guevarra. Guevarra did not dispute this factual
finding of the two courts. We find the amount reasonable
compensation to Pajuyo. The P300 monthly rental is counted from
the last demand to vacate, which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated
21 June 2000 and Resolution dated 14 December 2000 of the Court of
Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The Decision
dated 11 November 1996 of the Regional Trial Court of Quezon City,
Branch 81 in Civil Case No. Q-96-26943, affirming the Decision dated
15 December 1995 of the Metropolitan Trial Court of Quezon City,
Branch 31 in Civil Case No. 12432, is REINSTATED with
MODIFICATION. The award of attorneys fees is deleted. No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, Ynares-
Santiago, and Azcuna, JJ., concur.