G.R. No. 184041. October 13, 2010.* renewal of credit facility of Booklight in the amount of ₱10,000,000.

l of credit facility of Booklight in the amount of ₱10,000,000.00 under the prevailing

ANICETO G. SALUDO, JR., petitioner, vs. SECURITY BANK CORPORATION,
respondent.
Contracts; Suretyship; “By its nature, a continuing suretyship covers current and
future loans provided that, with respect to future loan transactions, they are x x x ‘within the
description or contemplation of the contract of guaranty.’ ”—In Gateway Electronics
Corporation v. Asianbank Corporation, 574 SCRA 698 (2008), the Court emphasized that
“[b]y its nature, a continuing suretyship covers current and future loans, provided that, with
respect to future loan transactions, they are x x x ‘within the description or contemplation of
the contract of guaranty.’ ”
Same; Contract of Adhesion; Definition of a Contract of Adhesion.—A contract of
adhesion is defined as one in which one of the parties imposes a ready-made form of
contract, which the other party may accept or reject, but which the latter cannot modify.
One party prepares the stipulation in the contract, while the other party merely affixes his
signature or his ‘adhesion’ thereto, giving no room for negotiation and depriving the latter of
the opportunity to bargain on equal footing.
Same; Same; Contracts of adhesion are not invalid per se.—A contract of adhesion
presupposes that the party adhering to the contract is a weaker party. That cannot be said
of petitioner. He is a lawyer. He is deemed knowledgeable of the legal implications of the
contract that he is signing. It must be borne in mind, however, that contracts of adhesion
are not invalid per se. Contracts of adhesion, where one party imposes a ready-made form of
contract on the other, are not entirely prohibited. The one who adheres to the contract is, in
reality, free to reject it entirely; if he adheres, he gives his consent.
security lending rate.6 From August 3 to 14, 1998, Booklight executed nine (9) promissory
notes7 in favor of SBC in the aggregate amount of ₱9,652,725.00. For failure to settle the
loans upon maturity, demands8 were made on Booklight and petitioner for the payment of
the obligation but the duo failed to pay. As of 15 May 2000, the obligation of Booklight stood
at ₱10,487,875.41, inclusive of interest past due and penalty.9
On 16 June 2000, SBC filed against Booklight and herein petitioner an action for collection
of sum of money with the RTC. Booklight initially filed a motion to dismiss, which was later
on denied for lack of merit. In his Answer, Booklight asserted that the amount demanded by
SBC was not based on the omnibus credit line facility of 30 May 1996, but rather on the
amendment of the credit facilities on 15 October 1996 increasing the loan line from
₱8,000,000.00 to ₱10,000,000.00. Booklight denied executing the promissory notes. It also
claimed that it was not in default as in fact, it paid the sum of ₱1,599,126.11 on 30
September 1999 as a prelude to restructuring its loan for which it earnestly negotiated for a
mutually acceptable agreement until 5 July 2000, without knowing that SBC had already
filed the collection case.10
In his Answer to the complaint, herein petitioner alleged that under the Continuing
Suretyship, it was the parties’ understanding that his undertaking and liability was merely
as an accommodation guarantor of Booklight. He countered that he came to know that
Booklight offered to pay SBC the partial payment of the loan and proposed the restructuring
of the obligation. Petitioner argued that said offer to pay constitutes a valid tender of
payment which discharged Booklight’s obligation to the extent of the offer. Petitioner also
averred that the imposition of the penalty on the supposed due and unpaid principal
obligation based on the penalty rate of 2% per month is clearly unconscionable.11

PETITION for review on certiorari of a decision of the Court of Appeals. On 7 March 2005, Booklight was declared in default. Consequently, SBC presented its
evidence ex-parte. The case against petitioner, however, proceeded and the latter was able
to present evidence on his behalf.
The facts are stated in the opinion of the Court.

After trial, the RTC ruled that petitioner is jointly and solidarily liable with Booklight
PEREZ, J.: under the Continuing Suretyship Agreement. The dispositive portion reads:

Before this Court is a petition for review on certiorari seeking the reversal of the
Decision1 of the Court of Appeals in CA-G.R. CV No. 88079 dated 24 January 2008 which
affirmed the Decision2 of Branch 149 of the Regional Trial Court (RTC) of Makati City,
finding petitioner Aniceto G. Saludo, Jr. and Booklight, Inc. (Booklight) jointly and severally
liable to Security Bank Corporation (SBC).
WHEREFORE, in view of the foregoing considerations, the Court hereby finds in favor of
the plaintiff against the defendants by ordering the defendants Booklight, Inc. and Aniceto
G. Saludo, Jr., jointly and severally liable (solidarily liable) to plaintiff [sic], the following
sums of Philippine Pesos:

PN No. Amount Interest Rate (per annum) Beginning—Until fully paid

The basic facts follow—
74/787/98 P1,927,000.00 20.189% November 2, 1998

On 30 May 1996, Booklight was extended an omnibus line credit facility3 by SBC in the 74/788/98 913,545.00 20.189% November 2, 1998
amount of ₱10,000,000.00. Said loan was covered by a Credit Agreement 4 and a Continuing
74/789/98 1,927,090.00 20.189% November 2, 1998
Suretyship5 with petitioner as surety, both documents dated 1 August 1996, to secure full
payment and performance of the obligations arising from the credit accommodation. 74/791/98 500,000.00 20.178% November 4, 1998

74/792/98 800,000.00 20.178% November 4, 1998

Booklight drew several availments of the approved credit facility from 1996 to 1997 and
faithfully complied with the terms of the loan. On 30 October 1997, SBC approved the 74/793/98 665,000.00 20.178% November 3, 1998
 74/808/98 970,000.00 20.178% November 9, 1998
74/822/98 975,000.00 20.178% November 12, 1998
74/823/98 975,000.00 20.178% November 12, 1998
with attorney’s fee of ₱100,000.00 plus cost of suit.12
The Court of Appeals affirmed in toto the ruling of the RTC. 13 Petitioner filed a motion for
reconsideration but it was denied by the Court of Appeals on 7 August 2008.14
Hence, the instant petition on the following arguments:
1. The first credit facility has a one-year term from 30 June 1996 to 30 June 1997 while the second
credit facility runs from 30 October 1997 to 30 October 1998.
2. When the first credit facility expired, its accessory contract, the Continuing Surety agreement
likewise expired.
3. The second credit facility is not covered by the Continuing Suretyship, thus, availments made in
1998 by Booklight are not covered by the Continuing Suretyship.
4. The approval of the second credit facility necessitates the consent of petitioner for the latter’s
Continuing Suretyship to be effective.1avvphi1
5. The nine (9) promissory notes executed and drawn by Booklight in 1998 did not specify that they
were drawn against and subject to the Continuing Suretyship. Neither was it mentioned in the
Continuing Suretyship that it was executed to serve as collateral to the nine (9) promissory notes.
6. The Continuing Suretyship is a contract of adhesion and petitioner’s participation to it is his
signing of his contract.
7. The approval of the second credit facility is considered a novation of the first sufficient to
extinguish the Continuing Suretyship and discharge petitioner.
8. The 20.178% interest rate imposed by the RTC is unconscionable. 15
The main derivative of these averments is the issue of whether or not petitioner should be
held solidarily liable for the second credit facility extended to Booklight.
We rule in the affirmative.
There is no doubt that Booklight was extended two (2) credit facilities, each with a one-year
term, by SBC. Booklight availed of these two (2) credit lines. While Booklight was able to
comply with its obligation under the first credit line, it defaulted in the payment of the loan
obligation amounting to ₱9,652,725.00 under the second credit line. There is likewise no
dispute that the first credit line facility, with a term from 30 June 1996 to 30 June 1997,
was covered by a Continuing Suretyship with petitioner acting as the surety. The dispute is
on the coverage by the Continuing Suretyship of the loan contracted under the second credit
facility.
Under the Continuing Suretyship, petitioner undertook to guarantee the following
obligations:
a) "Guaranteed Obligations" – the obligations of the Debtor arising from all credit
accommodations extended by the Bank to the Debtor, including increases, renewals, roll-
overs, extensions, restructurings, amendments or novations thereof, as well as (i) all
obligations of the Debtor presently or hereafter owing to the Bank, as appears in the
accounts, books and records of the Bank, whether direct or indirect, and (ii) any and all
expenses which the Bank may incur in enforcing any of its rights, powers and remedies
under the Credit Instruments as defined hereinbelow; 16 (Emphasis supplied.)
Whether the second credit facility is considered a renewal of the first or a brand new credit
facility altogether was indirectly answered by the trial court when it invoked paragraph 10
of the Continuing Suretyship which provides:
10. Continuity of Suretyship. – This Suretyship shall remain in full force and effect until full
and due payment and performance of the Guaranteed Obligations. This Suretyship shall not
be terminated by the partial payment to the Bank of Guaranteed Obligations by any other
surety or sureties of the Guaranteed Obligations, even if the particular surety or sureties
are relieved of further liabilities.17
and concluded that the liability of petitioner did not expire upon the termination of the first
credit facility.
It cannot be gainsaid that the second credit facility was renewed for another one-year term
by SBC. The terms of renewal read:
30 October 1997
BOOKLIGHT, INC.
xxxx
Gentlemen:
We are pleased to advise you that the Bank has approved the renewal of your credit facility
subject to the terms and conditions set forth below:
Facility : Loan Line
Amount : P10,000,000.00
Collateral : Existing JSS of Atty. Aniceto Saludo (marital consent waived)
Term : 180 day Promissory Notes
Interest Rate : Prevailing SBC lending rate; subject to monthly setting and payment
Expiry : October 31, 1998
x x x x.18
This very renewal is explicitly covered by the guaranteed obligations of the Continuing
Suretyship.
The essence of a continuing surety has been highlighted in the case of Totanes v. China
Banking Corporation19 in this wise:
Comprehensive or continuing surety agreements are, in fact, quite commonplace in present
day financial and commercial practice. A bank or financing company which anticipates
entering into a series of credit transactions with a particular company, normally requires
the projected principal debtor to execute a continuing surety agreement along with its
sureties. By executing such an agreement, the principal places itself in a position to enter
into the projected series of transactions with its creditor; with such suretyship agreement, A contract of adhesion presupposes that the party adhering to the contract is a weaker
there would be no need to execute a separate surety contract or bond for each financing or party. That cannot be said of petitioner. He is a lawyer. He is deemed knowledgeable of the
credit accommodation extended to the principal debtor.201awphil legal implications of the contract that he is signing.

In Gateway Electronics Corporation v. Asianbank Corporation, 21 the Court emphasized that It must be borne in mind, however, that contracts of adhesion are not invalid per se.
"[b]y its nature, a continuing suretyship covers current and future loans, provided that, with Contracts of adhesion, where one party imposes a ready-made form of contract on the other,
respect to future loan transactions, they are x x x ‘within the description or contemplation of are not entirely prohibited. The one who adheres to the contract is, in reality, free to reject it
the contract of guaranty.’" entirely; if he adheres, he gives his consent.25

Petitioner argues that the approval of the second credit facility necessitates his consent
considering the onerous and solidary liability of a surety. This is contrary to the express
waiver of his consent to such renewal, contained in paragraph 12 of the Continuing
Suretyship, which provides in part:
12. Waivers by the Surety. – The Surety hereby waives: x x x (v) notice or consent to any
modification, amendment, renewal, extension or grace period granted by the Bank to the
Debtor with respect to the Credit Instruments.22
Respondent, as last resort, harps on the novation of the first credit facility to exculpate itself
from liability from the second credit facility.
Finally, petitioner challenges the imposition of 20.189% interest rate as unconscionable. We
rule otherwise. In Development Bank of the Philippines v. Family Foods Manufacturing Co.
Ltd.,26 this Court upheld the validity of the imposition of 18% and 22% stipulated rates of
interest in the two (2) promissory notes. Likewise in Spouses Bacolor v. Banco Filipino
Savings and Mortgage Bank,27 the 24% interest rate agreed upon by parties was held as not
violative of the Usury Law, as amended by Presidential Decree No. 116.
WHEREFORE, the petition is DENIED. The Decision dated 24 January 2008 of the Court of
Appeals in CA-G.R. CV No. 88079 is AFFIRMED in toto.
SO ORDERED.

At the outset, it must be pointed out that the Credit Agreement is actually the principal
contract and it covers "all credit facilities now or hereafter extended by [SBC] to
[Booklight];"23 and that the suretyship agreement was executed precisely to guarantee these
obligations, i.e., the credit facilities arising from the credit agreement. The principal
contract is the credit agreement covered by the Continuing Suretyship.

The two loan facilities availed by Booklight under the credit agreement are the Omnibus
Line amounting to ₱10,000,000.00 granted to Booklight in 1996 and the other one is the
Loan Line of the same amount in 1997. Petitioner however seeks to muddle the issue by
insisting that these two availments were two separate principal contracts, conveniently
ignoring the fact that it is the credit agreement which constitutes the principal contract
signed by Booklight in order to avail of SBC’s credit facilities. The two credit facilities are
but loans made available to Booklight pursuant to the credit agreement.

On these facts the novation argument advanced by petitioner must fail.

There is no novation to speak of. It is the first credit facility that expired and not the Credit
Agreement. There was a second loan pursuant to the same credit agreement. The terms and
conditions under the Credit Agreement continue to apply and the Continuing Suretyship
continues to guarantee the Credit Agreement.

The lameness of petitioner’s stand is pointed up by his attempt to escape from liability by
labelling the Continuing Suretyship as a contract of adhesion.

A contract of adhesion is defined as one in which one of the parties imposes a ready-made
form of contract, which the other party may accept or reject, but which the latter cannot
modify. One party prepares the stipulation in the contract, while the other party merely
affixes his signature or his ‘adhesion’ thereto, giving no room for negotiation and depriving
the latter of the opportunity to bargain on equal footing.24
 G.R. No. 164538. August 9, 2010.*
METROPOLITAN BANK and TRUST COMPANY, petitioner, vs. ROGELIO REYNADO
and JOSE C. ADRANDEA,** respondents.
Criminal Law; Estafa; Novation; Criminal liability for estafa is not affected by a
compromise or novation of contract.—In a catena of cases, it was ruled that criminal liability
for estafa is not affected by a compromise or novation of contract. In Firaza v. People, 518
SCRA 681 (2007) and Recuerdo v. People, 493 SCRA 517 (2006), this Court ruled that in a
crime of estafa, reimbursement or belated payment to the offended party of the money
swindled by the accused does not extinguish the criminal liability of the latter. We also held
in People v. Moreno, 314 SCRA 556 (1999), and in People v. Ladera, 344 SCRA 647 (2000),
that “criminal liability for estafa is not affected by compromise or novation of contract, for it
is a public offense which must be prosecuted and punished by the Government on its own
motion even though complete reparation should have been made of the damage suffered by
the offended party.” Similarly in the case of Metropolitan Bank and Trust Company v.
Tonda, 338 SCRA 254 (2000), cited by petitioner, we held that in a crime of estafa,
reimbursement of or compromise as to the amount misappropriated, after the commission of
the crime, affects only the civil liability of the offender, and not his criminal liability.
Same; Criminal Procedure; Probable Cause; Preliminary Investigation; Definition of
Probable Cause; Generally, a public prosecutor is afforded a wide latitude of discretion in the
conduct of a preliminary investigation; Exception.—“Probable cause is defined as such facts
and circumstances that will engender a well-founded belief that a crime has been committed
and that the respondent is probably guilty thereof and should be held for trial.” Generally, a
public prosecutor is afforded a wide latitude of discretion in the conduct of a preliminary
investigation. By way of exception, however, judicial review is allowed where respondent
has clearly established that the prosecutor committed grave abuse of discretion that is,
when he has exercised his discretion “in an arbitrary, capricious, whimsical or despotic
manner by reason of passion or personal hostility, patent and gross enough as to amount to
an evasion of a positive duty or virtual refusal to perform a duty enjoined by law.” Tested
against these guidelines, we find that this case falls under the exception rather than the
general rule.
Same; Same; Same; Same; A preliminary investigation for the purpose of determining
the existence of probable cause is “not a part of the trial”; A finding of probable cause does not
require an inquiry into whether there is sufficient evidence to procure a conviction.—The
findings of the Secretary of Justice in sustaining the dismissal of the Complaint are matters
of defense best left to the trial court’s deliberation and contemplation after conducting the
trial of the criminal case. To emphasize, a preliminary investigation for the purpose of
determining the existence of probable cause is “not a part of the trial. A full and exhaustive
presentation of the parties’ evidence is not required, but only such as may engender a well-
grounded belief that an offense has been committed and that the accused is probably guilty
thereof.” A “finding of probable cause does not require an inquiry into whether there is
sufficient evidence to procure a conviction. It is enough that it is believed that the act or
omission complained of constitutes the offense charged.”
Same; Same; Same; Same; The presence or absence of the elements of the crime is
evidentiary in nature and is a matter of defense that may be passed upon of the a full-blown
trial on the merits.—In the case at bar, as analyzed by the prosecutor, a prima facie case
of estafa exists against respondents. As perused by her, the facts as presented in the
Complaint-Affidavit of the auditor are reasonable enough to excite her belief that
respondents are guilty of the crime complained of. In Andres v. Justice Secretary Cuevas,
460 SCRA 38 (2005), we had occasion to rule that the “presence or absence of the elements
of the crime is evidentiary in nature and is a matter of defense that may be passed upon
after a full-blown trial on the merits.”
Same; Same; Prosecution of Offenses; Public prosecutors, not the private complainant,
are the ones obliged to bring forth before the law those who have transgressed it.—Suffice it
to say that it is indubitably within the discretion of the prosecutor to determine who must
be charged with what crime or for what offense. Public prosecutors, not the private
complainant, are the ones obliged to bring forth before the law those who have transgressed
it.
Same; Same; Same; The law makes it a legal duty for prosecuting officers to file the
charges against whomsoever the evidence may show to be responsible for the offense.—
Section 2, Rule 110 of the Rules of Court mandates that all criminal actions must be
commenced either by complaint or information in the name of the People of the Philippines
against all persons who appear to be responsible therefor. Thus the law makes it a legal
duty for prosecuting officers to file the charges against whomsoever the evidence may show
to be responsible for the offense. The proper remedy under the circumstances where persons
who ought to be charged were not included in the complaint of the private complainant is
definitely not to dismiss the complaint but to include them in the information.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
DEL CASTILLO, J.:
"It is a hornbook doctrine in our criminal law that the criminal liability for estafa is not
affected by a compromise, for it is a public offense which must be prosecuted and punished
by the government on its own motion, even though complete reparation [has] been made of
the damage suffered by the private offended party. Since a criminal offense like estafa is
committed against the State, the private offended party may not waive or extinguish the
criminal liability that the law imposes for the commission of the crime."1
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks the reversal
of the Court of Appeals’ (CA’s) Decision2 dated October 21, 2002 in CA-G.R. SP No. 58548
and its further Resolution3 dated July 12, 2004 denying petitioner’s Motion for
Reconsideration.4
Factual Antecedents
On January 31, 1997, petitioner Metropolitan Bank and Trust Company charged
respondents before the Office of the City Prosecutor of Manila with the crime of estafa under
Article 315, paragraph 1(b) of the Revised Penal Code. In the affidavit 5 of petitioner’s audit
officer, Antonio Ivan S. Aguirre, it was alleged that the special audit conducted on the cash
and lending operations of its Port Area branch uncovered anomalous/fraudulent
transactions perpetrated by respondents in connivance with client Universal Converter
Philippines, Inc. (Universal); that respondents were the only voting members of the branch’s
credit committee authorized to extend credit accommodation to clients up to ₱200,000.00;
that through the so-called Bills Purchase Transaction, Universal, which has a paid-up
capital of only ₱125,000.00 and actual maintaining balance of ₱5,000.00, was able to make
withdrawals totaling ₱81,652,000.006 against uncleared regional checks deposited in its
account at petitioner’s Port Area branch; that, consequently, Universal was able to utilize
petitioner’s funds even before the seven-day clearing period for regional checks expired; that
Universal’s withdrawals against uncleared regional check deposits were without prior
approval of petitioner’s head office; that the uncleared checks were later dishonored by the
drawee bank for the reason "Account Closed"; and, that respondents acted with fraud,
deceit, and abuse of confidence.
In their defense, respondents denied responsibility in the anomalous transactions with
Universal and claimed that they only intended to help the Port Area branch solicit and
increase its deposit accounts and daily transactions.
Meanwhile, on February 26, 1997, petitioner and Universal entered into a Debt Settlement
Agreement7 whereby the latter acknowledged its indebtedness to the former in the total
amount of ₱50,990,976.278 as of February 4, 1997 and undertook to pay the same in bi-
monthly amortizations in the sum of ₱300,000.00 starting January 15, 1997, covered by
postdated checks, "plus balloon payment of the remaining principal balance and interest
and other charges, if any, on December 31, 2001."9
Findings of the Prosecutor
Following the requisite preliminary investigation, Assistant City Prosecutor Winnie M.
Edad (Prosecutor Edad) in her Resolution10 dated July 10, 1997 found petitioner’s evidence
insufficient to hold respondents liable for estafa. According to Prosecutor Edad:
The execution of the Debt Settlement Agreement puts complainant bank in estoppel to
argue that the liability is criminal. Since the agreement was made even before the filing of
this case, the relations between the parties [have] change[d], novation has set in and
prevented the incipience of any criminal liability on the part of respondents. 11
Thus, Prosecutor Edad recommended the dismissal of the case:
WHEREFORE, for insufficiency of evidence, it is respectfully recommended that the case be
dismissed.12
On December 9, 1997, petitioner appealed the Resolution of Prosecutor Edad to the
Department of Justice (DOJ) by means of a Petition for Review. 13
Ruling of the Department of Justice
On June 22, 1998, the DOJ dismissed the petition ratiocinating that:
It is evident that your client based on the same transaction chose to file estafa only against
its employees and treat with kid gloves its big time client Universal who was the one who
benefited from this transaction and instead, agreed that it should be paid on installment
basis.
To allow your client to make the choice is to make an unwarranted classification under the
law which will result in grave injustice against herein respondents. Thus, if your client
agreed that no estafa was committed in this transaction with Universal who was the
principal player and beneficiary of this transaction[,] more so with herein respondents
whose liabilities are based only on conspiracy with Universal.
Equivocally, there is no estafa in the instant case as it was not clearly shown how
respondents misappropriated the ₱53,873,500.00 which Universal owed your client after its
checks deposited with Metrobank were dishonored. Moreover, fraud is not present
considering that the Executive Committee and the Credit Committee of Metrobank were
duly notified of these transactions which they approved. Further, no damage was caused to
your client as it agreed [to] the settlement [with] Universal.14
A Motion for Reconsideration15 was filed by petitioner, but the same was denied on March 1,
2000 by then Acting Secretary of Justice Artemio G. Tuquero.16
Aggrieved, petitioner went to the CA by filing a Petition for Certiorari & Mandamus.17
Ruling of the Court of Appeals
By Decision18 of October 21, 2002, the CA affirmed the twin resolutions of the Secretary of
Justice. Citing jurisprudence19 wherein we ruled that while novation does not extinguish
criminal liability, it may prevent the rise of such liability as long as it occurs prior to the
filing of the criminal information in court.20 Hence, according to the CA, "[j]ust as Universal
cannot be held responsible under the bills purchase transactions on account of novation,
private respondents, who acted in complicity with the former, cannot be made liable [for] the
same transactions."21 The CA added that "[s]ince the dismissal of the complaint is founded
on legal ground, public respondents may not be compelled by mandamus to file an
information in court."22
Incidentally, the CA totally ignored the Comment23 of the Office of the Solicitor General
(OSG) where the latter, despite being the statutory counsel of public respondent DOJ,
agreed with petitioner that the DOJ erred in dismissing the complaint. It alleged that where
novation does not extinguish criminal liability for estafa neither does restitution negate the
offense already committed.24
Additionally, the OSG, in sharing the views of petitioner contended that failure to implead
other responsible individuals in the complaint does not warrant its dismissal, suggesting
that the proper remedy is to cause their inclusion in the information.25 This
notwithstanding, however, the CA disposed of the petition as follows:
WHEREFORE, the petition is DENIED due course and, accordingly, DISMISSED.
Consequently, the resolutions dated June 22, 1998 and March 1, 2000 of the Secretary of
Justice are AFFIRMED.
SO ORDERED.26
Hence, this instant petition before the Court.
On November 8, 2004, we required27 respondents to file Comment, not a motion to dismiss,
on the petition within 10 days from notice. The OSG filed a Manifestation and Motion in
Lieu of Comment28 while respondent Jose C. Adraneda (Adraneda) submitted his
Comment29 on the petition. The Secretary of Justice failed to file the required comment on
the OSG’s Manifestation and Motion in Lieu of Comment and respondent Rogelio Reynado
(Reynado) did not submit any. For which reason, we issued a show cause order30 on July 19,
2006. Their persistent non-compliance with our directives constrained us to resolve that
they had waived the filing of comment and to impose a fine of ₱1,000.00 on Reynado. Upon
submission of the required memorandum by petitioner and Adraneda, the instant petition
was submitted for resolution.
Issues
Petitioner presented the following main arguments for our consideration:
1. Novation and undertaking to pay the amount embezzled do not extinguish
criminal liability.
2. It is the duty of the public prosecutor to implead all persons who appear
criminally liable for the offense charged.
Petitioner persistently insists that the execution of the Debt Settlement Agreement with
Universal did not absolve private respondents from criminal liability for estafa. Petitioner
submits that the settlement affects only the civil obligation of Universal but did not
extinguish the criminal liability of the respondents. Petitioner thus faults the CA in
sustaining the DOJ which in turn affirmed the finding of Prosecutor Edad for committing
apparent error in the appreciation and the application of the law on novation. By
petitioner’s claim, citing Metropolitan Bank and Trust Co. v. Tonda,31 the "negotiations
pertain [to] and affect only the civil aspect of the case but [do] not preclude prosecution for
the offense already committed."32
In his Comment, Adraneda denies being a privy to the anomalous transactions and passes
on the sole responsibility to his co-respondent Reynado as the latter was able to conceal the
pertinent documents being the head of petitioner’s Port Area branch. Nonetheless, he
contends that because of the Debt Settlement Agreement, they cannot be held liable for
estafa.
The OSG, for its part, instead of contesting the arguments of petitioner, even prayed before
the CA to give due course to the petition contending that DOJ indeed erred in dismissing
the complaint for estafa.
Given the facts of the case, the basic issue presented before this Court is whether the
execution of the Debt Settlement Agreement precluded petitioner from holding respondents
liable to stand trial for estafa under Art. 315 (1)(b) of the Revised Penal Code. 33
Our Ruling
We find the petition highly meritorious.
Novation not a mode of extinguishing criminal liability for estafa; Criminal liability for
estafa not affected by compromise or novation of contract.
Initially, it is best to emphasize that "novation is not one of the grounds prescribed by the
Revised Penal Code for the extinguishment of criminal liability."34
In a catena of cases, it was ruled that criminal liability for estafa is not affected by a
compromise or novation of contract. In Firaza v. People 35 and Recuerdo v. People,36 this
Court ruled that in a crime of estafa, reimbursement or belated payment to the offended
party of the money swindled by the accused does not extinguish the criminal liability of the
latter. We also held in People v. Moreno37 and in People v. Ladera38 that "criminal liability
for estafa is not affected by compromise or novation of contract, for it is a public offense
which must be prosecuted and punished by the Government on its own motion even though
complete reparation should have been made of the damage suffered by the offended party."
Similarly in the case of Metropolitan Bank and Trust Company v. Tonda39 cited by
petitioner, we held that in a crime of estafa, reimbursement of or compromise as to the
amount misappropriated, after the commission of the crime, affects only the civil liability of
the offender, and not his criminal liability.
Thus, the doctrine that evolved from the aforecited cases is that a compromise or settlement
entered into after the commission of the crime does not extinguish accused’s liability for
estafa. Neither will the same bar the prosecution of said crime. Accordingly, in such a
situation, as in this case, the complaint for estafa against respondents should not be
dismissed just because petitioner entered into a Debt Settlement Agreement with Universal.
Even the OSG arrived at the same conclusion:
Contrary to the conclusion of public respondent, the Debt Settlement Agreement entered
into between petitioner and Universal Converter Philippines extinguishes merely the civil
aspect of the latter’s liability as a corporate entity but not the criminal liability of the
persons who actually committed the crime of estafa against petitioner Metrobank. x x x40
Unfortunately for petitioner, the above observation of the OSG was wittingly glossed over in
the body of the assailed Decision of the CA.
Execution of the Debt Settlement Agreement did not prevent the incipience of criminal
liability.
Even if the instant case is viewed from the standpoint of the law on contracts, the
disposition absolving the respondents from criminal liability because of novation is still
erroneous.
Under Article 1311 of the Civil Code, "contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and obligations arising from the contract
are not transmissible by their nature, or by stipulation or by provision of law." The civil law
principle of relativity of contracts provides that "contracts can only bind the parties who
entered into it, and it cannot favor or prejudice a third person, even if he is aware of such
contract and has acted with knowledge thereof."41
In the case at bar, it is beyond cavil that respondents are not parties to the agreement. The
intention of the parties thereto not to include them is evident either in the onerous or in the
beneficent provisions of said agreement. They are not assigns or heirs of either of the
parties. Not being parties to the agreement, respondents cannot take refuge therefrom to
bar their anticipated trial for the crime they committed. It may do well for respondents to
remember that the criminal action commenced by petitioner had its genesis from the alleged
fraud, unfaithfulness, and abuse of confidence perpetrated by them in relation to their
positions as responsible bank officers. It did not arise from a contractual dispute or matters
strictly between petitioner and Universal. This being so, respondents cannot rely on subject
settlement agreement to preclude prosecution of the offense already committed to the end of
extinguishing their criminal liability or prevent the incipience of any liability that may arise
from the criminal offense. This only demonstrates that the execution of the agreement
between petitioner and Universal has no bearing on the innocence or guilt of the
respondents.
Determination of the probable cause, a function belonging to the public prosecutor; judicial
review allowed where it has been clearly established that the prosecutor committed grave
abuse of discretion.
In a preliminary investigation, a public prosecutor determines whether a crime has been
committed and whether there is probable cause that the accused is guilty thereof. 42 The
Secretary of Justice, however, may review or modify the resolution of the prosecutor.
"Probable cause is defined as such facts and circumstances that will engender a well-
founded belief that a crime has been committed and that the respondent is probably guilty
thereof and should be held for trial."43 Generally, a public prosecutor is afforded a wide
latitude of discretion in the conduct of a preliminary investigation. By way of exception,
however, judicial review is allowed where respondent has clearly established that the
prosecutor committed grave abuse of discretion that is, when he has exercised his discretion
"in an arbitrary, capricious, whimsical or despotic manner by reason of passion or personal
hostility, patent and gross enough as to amount to an evasion of a positive duty or virtual
refusal to perform a duty enjoined by law."44 Tested against these guidelines, we find that
this case falls under the exception rather than the general rule.
A close scrutiny of the substance of Prosecutor Edad’s Resolution dated July 10, 1997
readily reveals that were it not for the Debt Settlement Agreement, there was indeed
probable cause to indict respondents for the crime charged. From her own assessment of the
Complaint-Affidavit of petitioner’s auditor, her preliminary finding is that "Ordinarily, the
offense of estafa has been sufficiently established."45 Interestingly, she suddenly changed
tack and declared that the agreement altered the relation of the parties and that novation
had set in preventing the incipience of any criminal liability on respondents. In light of the
jurisprudence herein earlier discussed, the prosecutor should not have gone that far and
executed an apparent somersault. Compounding further the error, the DOJ in dismissing
petitioner’s petition, ruled out estafa contrary to the findings of the prosecutor. Pertinent
portion of the ruling reads:
Equivocally, there is no estafa in the instant case as it was not clearly shown how
respondents misappropriated the ₱53,873,500.00 which Universal owed your client after its
checks deposited with Metrobank were dishonored. Moreover, fraud is not present
considering that the Executive Committee and the Credit Committee of Metrobank were
duly notified of these transactions which they approved. Further, no damage was caused to
your client as it agreed [to] the settlement [with] Universal.46
The findings of the Secretary of Justice in sustaining the dismissal of the Complaint are
matters of defense best left to the trial court’s deliberation and contemplation after
conducting the trial of the criminal case. To emphasize, a preliminary investigation for the
purpose of determining the existence of probable cause is "not a part of the trial. A full and
exhaustive presentation of the parties’ evidence is not required, but only such as may
engender a well-grounded belief that an offense has been committed and that the accused is
probably guilty thereof."47 A "finding of probable cause does not require an inquiry into
whether there is sufficient evidence to procure a conviction. It is enough that it is believed
that the act or omission complained of constitutes the offense charged." 48 So we held
in Balangauan v. Court of Appeals:49
Applying the foregoing disquisition to the present petition, the reasons of DOJ for affirming
the dismissal of the criminal complaints for estafa and/or qualified estafa are determinative
of whether or not it committed grave abuse of discretion amounting to lack or excess of
jurisdiction. In requiring "hard facts and solid evidence" as the basis for a finding of
probable cause to hold petitioners Bernyl and Katherene liable to stand trial for the crime
complained of, the DOJ disregards the definition of probable cause – that it is a reasonable
ground of presumption that a matter is, or may be, well-founded, such a state of facts in the
mind of the prosecutor as would lead a person of ordinary caution and prudence to believe,
or entertain an honest or strong suspicion, that a thing is so. The term does not mean
"actual and positive cause" nor does it import absolute certainty. It is merely based on
opinion and reasonable belief; that is, the belief that the act or omission complained of
constitutes the offense charged. While probable cause demands more than "bare suspicion,"
it requires "less than evidence which would justify conviction." Herein, the DOJ reasoned as
if no evidence was actually presented by respondent HSBC when in fact the records of the
case were teeming; or it discounted the value of such substantiation when in fact the
evidence presented was adequate to excite in a reasonable mind the probability that
petitioners Bernyl and Katherene committed the crime/s complained of. In so doing, the
DOJ whimsically and capriciously exercised its discretion, amounting to grave abuse of
discretion, which rendered its resolutions amenable to correction and annulment by the
extraordinary remedy of certiorari.
In the case at bar, as analyzed by the prosecutor, a prima facie case of estafa exists against
respondents. As perused by her, the facts as presented in the Complaint-Affidavit of the
auditor are reasonable enough to excite her belief that respondents are guilty of the crime
complained of. In Andres v. Justice Secretary Cuevas50 we had occasion to rule that the
"presence or absence of the elements of the crime is evidentiary in nature and is a matter of
defense that may be passed upon after a full-blown trial on the merits."51
Thus confronted with the issue on whether the public prosecutor and the Secretary of
Justice committed grave abuse of discretion in disposing of the case of petitioner, given the
sufficiency of evidence on hand, we do not hesitate to rule in the affirmative. We have
previously ruled that grave abuse of discretion may arise when a lower court or tribunal
violates and contravenes the Constitution, the law or existing jurisprudence.
Non-inclusion of officers of Universal not a ground for the dismissal of the complaint.
The DOJ in resolving to deny petitioner’s appeal from the resolution of the prosecutor gave
another ground – failure to implead the officers of Universal. It explained:
To allow your client to make the choice is to make an unwarranted classification under the
law which will result in grave injustice against herein respondents. Thus, if your client
agreed that no estafa was committed in this transaction with Universal who was the
principal player and beneficiary of this transaction[,] more so with herein respondents
whose liabilities are based only on conspiracy with Universal.521avvphi1
The ratiocination of the Secretary of Justice conveys the idea that if the charge against
respondents rests upon the same evidence used to charge co-accused (officers of Universal)
based on the latter’s conspiratorial participation, the non-inclusion of said co-accused in the public prosecutor is ordered to file the necessary information for estafa against the
charge should benefit the respondents. respondents.

The reasoning of the DOJ is flawed. SO ORDERED.

Suffice it to say that it is indubitably within the discretion of the prosecutor to determine
who must be charged with what crime or for what offense. Public prosecutors, not the
private complainant, are the ones obliged to bring forth before the law those who have
transgressed it.

Section 2, Rule 110 of the Rules of Court53 mandates that all criminal actions must be
commenced either by complaint or information in the name of the People of the Philippines
against all persons who appear to be responsible therefor. Thus the law makes it a legal
duty for prosecuting officers to file the charges against whomsoever the evidence may show
to be responsible for the offense. The proper remedy under the circumstances where persons
who ought to be charged were not included in the complaint of the private complainant is
definitely not to dismiss the complaint but to include them in the information. As the OSG
correctly suggested, the proper remedy should have been the inclusion of certain employees
of Universal who were found to have been in cahoots with respondents in defrauding
petitioner. The DOJ, therefore, cannot seriously argue that because the officers of Universal
were not indicted, respondents themselves should not likewise be charged. Their non-
inclusion cannot be perversely used to justify desistance by the public prosecutor from
prosecution of the criminal case just because not all of those who are probably guilty thereof
were charged.

Mandamus a proper remedy when resolution of public respondent is tainted with grave abuse
of discretion.

Mandamus is a remedial measure for parties aggrieved. It shall issue when "any tribunal,
corporation, board, officer or person unlawfully neglects the performance of an act which the
law specifically enjoins as a duty resulting from an office, trust or station."54 The writ of
mandamus is not available to control discretion neither may it be issued to compel the
exercise of discretion. Truly, it is a matter of discretion on the part of the prosecutor to
determine which persons appear responsible for the commission of a crime. However, the
moment he finds one to be so liable it becomes his inescapable duty to charge him therewith
and to prosecute him for the same. In such a situation, the rule loses its discretionary
character and becomes mandatory. Thus, where, as in this case, despite the sufficiency of
the evidence before the prosecutor, he refuses to file the corresponding information against
the person responsible, he abuses his discretion. His act is tantamount to a deliberate
refusal to perform a duty enjoined by law. The Secretary of Justice, on the other hand,
gravely abused his discretion when, despite the existence of sufficient evidence for the crime
of estafa as acknowledged by the investigating prosecutor, he completely ignored the latter’s
finding and proceeded with the questioned resolution anchored on purely evidentiary
matters in utter disregard of the concept of probable cause as pointed out in Balangauan. To
be sure, findings of the Secretary of Justice are not subject to review unless shown to have
been made with grave abuse.55 The present case calls for the application of the exception.
Given the facts of this case, petitioner has clearly established that the public prosecutor and
the Secretary of Justice committed grave abuse of discretion.

WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals
in CA-G.R. SP No. 58548 promulgated on October 21, 2002 affirming the Resolutions dated
June 22, 1998 and March 1, 2000 of the Secretary of Justice, and its Resolution dated July
12, 2004 denying reconsideration thereon are hereby REVERSED and SET ASIDE. The
 G.R. No. 186738. September 27, 2010.*
PRUDENTIAL BANK AND TRUST COMPANY (now BANK OF THE PHILIPPINE
ISLANDS),1 vs. LIWAYWAY ABASOLO, respondent.
Banks and Banking; Loans; To a banking institution, well-defined lending policies
and sound lending practices are essential to perform its lending function effectively and
minimize the risk inherent in any extension of credit.—In the absence of a lender-borrower
relationship between petitioner and Liwayway, there is no inherent obligation of petitioner
to release the proceeds of the loan to her. To a banking institution, well-defined lending
policies and sound lending practices are essential to perform its lending function effectively
and minimize the risk inherent in any extension of credit.
Same; Same; Doctrine of Apparent Authority; A banking corporation is liable to
innocent third persons where the representation is made in the course of its business by an
agent acting within the general scope of his authority even though, in the particular case, the
agent is secretly abusing his authority and attempting to perpetuate fraud upon his principal
or some person, for his own ultimate benefit.—The trial Court’s reliance on the doctrine of
apparent authority—that the principal, in this case petitioner, is liable for the obligations
contracted by its agent, in this case Mendiola,—does not lie. Prudential Bank v. Court of
Appeals, 223 SCRA 350 (1993), instructs: [A] banking corporation is liable to innocent third
persons where the representation is made in the course of its business by an agent acting
within the general scope of his authority even though, in the particular case, the agent
is secretly abusing his authority and attempting to perpetuate fraud upon his principal or
some person, for his own ultimate benefit. (underscoring supplied) The onus probandi that
attempt to commit fraud attended petitioner’s employee Mendiola’s acts and that he abused
his authority lies on Liwayway. She, however, failed to discharge the onus. It bears noting
that Mendiola was not privy to the approval or disallowance of Corazon’s application for a
loan nor that he would benefit by the approval thereof.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
CARPIO-MORALES, J.:
Leonor Valenzuela-Rosales inherited two parcels of land situated in Palanan, Sta. Cruz,
Laguna (the properties), registered as Original Certificates of Title Nos. RO-527 and RO-
528. After she passed away, her heirs executed on June 14, 1993 a Special Power of
Attorney (SPA) in favor of Liwayway Abasolo (respondent) empowering her to sell the
properties.2
Sometime in 1995, Corazon Marasigan (Corazon) wanted to buy the properties which were
being sold for ₱2,448,960, but as she had no available cash, she broached the idea of first
mortgaging the properties to petitioner Prudential Bank and Trust Company (PBTC), the
proceeds of which would be paid directly to respondent. Respondent agreed to the proposal.
On Corazon and respondent’s consultation with PBTC’s Head Office, its employee, Norberto
Mendiola (Mendiola), allegedly advised respondent to issue an authorization for Corazon to
mortgage the properties, and for her (respondent) to act as one of the co-makers so that the
proceeds could be released to both of them.
To guarantee the payment of the property, Corazon executed on August 25, 1995 a
Promissory Note for ₱2,448,960 in favor of respondent.
By respondent’s claim, in October 1995, Mendiola advised her to transfer the properties first
to Corazon for the immediate processing of Corazon’s loan application with assurance that
the proceeds thereof would be paid directly to her (respondent), and the obligation would be
reflected in a bank guarantee.
Heeding Mendiola’s advice, respondent executed a Deed of Absolute Sale over the properties
in favor of Corazon following which or on December 4, 1995, Transfer Certificates of Title
Nos. 164159 and 164160 were issued in the name of Corazon.
Corazon’s application for a loan with PBTC’s Tondo Branch was approved on December
1995. She thereupon executed a real estate mortgage covering the properties to secure the
payment of the loan. In the absence of a written request for a bank guarantee, the PBTC
released the proceeds of the loan to Corazon.
Respondent later got wind of the approval of Corazon’s loan application and the release of
its proceeds to Corazon who, despite repeated demands, failed to pay the purchase price of
the properties.
Respondent eventually accepted from Corazon partial payment in kind consisting of one
owner type jeepney and four passenger jeepneys,3 plus installment payments, which, by the
trial court’s computation, totaled ₱665,000.
In view of Corazon’s failure to fully pay the purchase price, respondent filed a complaint for
collection of sum of money and annulment of sale and mortgage with damages, against
Corazon and PBTC (hereafter petitioner), before the Regional Trial Court (RTC) of Sta.
Cruz, Laguna.4
In her Answer,5 Corazon denied that there was an agreement that the proceeds of the loan
would be paid directly to respondent. And she claimed that the vehicles represented full
payment of the properties, and had in fact overpaid ₱76,040.
Petitioner also denied that there was any arrangement between it and respondent that the
proceeds of the loan would be released to her. 6 It claimed that it "may process a loan
application of the registered owner of the real property who requests that proceeds of the
loan or part thereof be payable directly to a third party [but] the applicant must submit a
letter request to the Bank."7
On pre-trial, the parties stipulated that petitioner was not a party to the contract of sale
between respondent and Corazon; that there was no written request that the proceeds of the
loan should be paid to respondent; and that respondent received five vehicles as partial
payment of the properties.8
Despite notice, Corazon failed to appear during the trial to substantiate her claims.
By Decision of March 12, 2004,9 Branch 91 of the Sta. Cruz, Laguna RTC rendered
judgment in favor of respondent and against Corazon who was made directly liable to
respondent, and against petitioner who was made subsidiarily liable in the event that
Corazon fails to pay. Thus the trial court disposed:
WHEREFORE, premises considered, finding the plaintiff has established her claim against
the defendants, Corazon Marasigan and Prudential Bank and Trust Company, judgment is
hereby rendered in favor of the plaintiff ordering:
Defendant Corazon Marasigan to pay the plaintiff the amount of P1,783,960.00 plus three
percent (3%) monthly interest per month from August 25, 1995 until fully paid. Further, to
pay the plaintiff the sum equivalent to twenty percent five [sic] (25%) of P1,783,960.00 as
attorney’s fees.
Defendant Prudential Bank and Trust Company to pay the plaintiff the amount of
P1,783,960.00 or a portion thereof plus the legal rate of interest per annum until fully
paid in the event that Defendant Corazon Marasigan fails to pay the said amount or
a portion thereof.
Other damages claimed not duly proved are hereby dismissed.
So Ordered.10 (emphasis in the original; underscoring partly in the original, partly
supplied)
In finding petitioner subsidiarily liable, the trial court held that petitioner breached its
understanding to release the proceeds of the loan to respondent:
Liwayway claims that the bank should also be held responsible for breach of its obligation to
directly release to her the proceeds of the loan or part thereof as payment for the subject
lots. The evidence shows that her claim is valid. The Bank had such an obligation as proven
by evidence. It failed to rebut the credible testimony of Liwayway which was given in a
frank, spontaneous, and straightforward manner and withstood the test of rigorous cross-
examination conducted by the counsel of the Bank. Her credibility is further strengthened
by the corroborative testimony of Miguela delos Reyes who testified that she went with
Liwayway to the bank for several times. In her presence, Norberto Mendiola, the head of the
loan department, instructed Liwayway to transfer the title over the subject lots to Corazon
to facilitate the release of the loan with the guarantee that Liwayway will be paid upon the
release of the proceeds.
Further, Liwayway would not have executed the deed of sale in favor of Corazon had
Norberto Mendiola did not promise and guarantee that the proceeds of the loan would be
directly paid to her. Based on ordinary human experience, she would not have readily
transferred the title over the subject lots had there been no strong and reliable guarantee.
In this case, what caused her to transfer title is the promise and guarantee made by
Norberto Mendiola that the proceeds of the loan would be directly paid to her. 11 (emphasis
underscoring supplied)
On appeal, the Court of Appeals¸ by Decision of January 14, 2008 12, affirmed the trial
court’s decision with modification on the amount of the balance of the purchase price which
was reduced from ₱1,783,960 to ₱1,753,960. It disposed:
WHEREFORE, premises considered, the assailed Decision dated March 12, 2004 of the
Regional Trial Court of Sta. Cruz, Laguna, Branch 91, is AFFIRMED WITH
MODIFICATION as to the amount to be paid which is P1,753,960.00.
SO ORDERED.13 (emphasis in the original; underscoring supplied)
Petitioner’s motion for reconsideration having been denied by the appellate court by
Resolution of February 23, 2009, the present petition for review was filed.
The only issue petitioner raises is whether it is subsidiarily liable.
The petition is meritorious.
In the absence of a lender-borrower relationship between petitioner and Liwayway, there is
no inherent obligation of petitioner to release the proceeds of the loan to her.
To a banking institution, well-defined lending policies and sound lending practices are
essential to perform its lending function effectively and minimize the risk inherent in any
extension of credit.
Thus, Section X302 of the Manual of Regulations for Banks provides:
X-302. To ensure that timely and adequate management action is taken to maintain the
quality of the loan portfolio and other risk assets and that adequate loss reserves are set up
and maintained at a level sufficient to absorb the loss inherent in the loan portfolio and
other risk assets, each bank shall establish a system of identifying and monitoring existing
or potential problem loans and other risk assets and of evaluating credit policies vis-à-vis
prevailing circumstances and emerging portfolio trends. Management must also recognize
that loss reserve is a stabilizing factor and that failure to account appropriately for losses or
make adequate provisions for estimated future losses may result in misrepresentation of the
bank’s financial condition.
In order to identify and monitor loans that a bank has extended, a system of documentation
is necessary. Under this fold falls the issuance by a bank of a guarantee which is essentially
a promise to repay the liabilities of a debtor, in this case Corazon. It would be contrary to
established banking practice if Mendiola issued a bank guarantee, even if no request to that
effect was made.
The principle of relativity of contracts in Article 1311 of the Civil Code supports petitioner’s
cause:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in
case where the rights and obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. The heir is not liable beyond the value
of the property he received from the decedent.
If a contract should contain some stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A
mere incidental benefit or interest of a person is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a third person. (underscoring supplied)
For Liwayway to prove her claim against petitioner, a clear and deliberate act of conferring SO ORDERED.
a favor upon her must be present. A written request would have sufficed to prove this, given
the nature of a banking business, not to mention the amount involved.

Since it has not been established that petitioner had an obligation to Liwayway, there is no
breach to speak of. Liwayway’s claim should only be directed against Corazon. Petitioner
cannot thus be held subisidiarily liable.

To the Court, Liwayway did not rely on Mendiola’s representations, even if he indeed made
them. The contract for Liwayway to sell to Corazon was perfected from the moment there
was a meeting of minds upon the properties-object of the contract and upon the price. Only
the source of the funds to pay the purchase price was yet to be resolved at the time the two
inquired from Mendiola. Consider Liwayway’s testimony:

Q: We are referring to the promissory note which you aforementioned a while ago, why did
this promissory note come about?

A: Because the negotiation was already completed, sir, and the deed of sale will have to be
executed, I asked the defendant (Corazon) to execute the promissory note first before I could
execute a deed of absolute sale, for assurance that she really pay me, sir. 14 (emphasis and
underscoring supplied)

That it was on Corazon’s execution of a promissory note that prompted Liwayway to finally
execute the Deed of Sale is thus clear.

The trial Court’s reliance on the doctrine of apparent authority – that the principal, in this
case petitioner, is liable for the obligations contracted by its agent, in this case Mendiola, –
does not lie. Prudential Bank v. Court of Appeals15 instructs:

[A] banking corporation is liable to innocent third persons where the representation is made
in the course of its business by an agent acting within the general scope of his authority
even though, in the particular case, the agent is secretly abusing his authority and
attempting to perpetuate fraud upon his principal or some person, for his own ultimate
benefit.16 (underscoring supplied)

The onus probandi that attempt to commit fraud attended petitioner’s employee Mendiola’s
acts and that he abused his authority lies on Liwayway. She, however, failed to discharge
the onus. It bears noting that Mendiola was not privy to the approval or disallowance of
Corazon’s application for a loan nor that he would benefit by the approval thereof.

Aside from Liwayway’s bare allegations, evidence is wanting to show that there was
collusion between Corazon and Mendiola to defraud her. Even in Liwayway’s Complaint, the
allegation of fraud is specifically directed against Corazon.17

IN FINE, Liwayway’s cause of action lies against only Corazon.

WHEREFORE, the Decision of January 14, 2008 of the Court of Appeals, in so far as it
holds petitioner, Prudential Bank and Trust Company (now Bank of the Philippine Islands),
subsidiary liable in case its co-defendant Corazon Marasigan, who did not appeal the trial
court’s decision, fails to pay the judgment debt, is REVERSED and SET ASIDE. The
complaint against petitioner is accordingly DISMISSED.
G.R. No. 186550. July 5, 2010.*
ASIAN CATHAY FINANCE AND LEASING CORPORATION, petitioner, vs. SPOUSES
CESARIO GRAVADOR and NORMA DE VERA and SPOUSES EMMA CONCEPCION G.
DUMIGPI and FEDERICO L. DUMIGPI, respondents.
Loans; Interests; Interest rates, whenever unconscionable, may be equitably reduced or
even invalidated.—It is true that parties to a loan agreement have a wide latitude to
stipulate on any interest rate in view of Central Bank Circular No. 905, series of 1982,
which suspended the Usury Law ceiling on interest rate effective January 1, 1983. However,
interest rates, whenever unconscionable, may be equitably reduced or even invalidated. In
several cases, this Court had declared as null and void stipulations on interest and charges
that were found excessive, iniquitous and unconscionable. Records show that the amount of
loan obtained by respondents on October 22, 1999 was P800,000.00. Respondents paid the
installment for November 1999, but failed to pay the subsequent ones. On February 1, 2000,
ACFLC demanded payment of P1,871,480.00. In a span of three months, respondents’
obligation ballooned by more than P1,000,000.00. ACFLC failed to show any computation on
how much interest was imposed and on the penalties charged. Thus, we fully agree with the
CA that the amount claimed by ACFLC is unconscionable.
Same; Same; Usury Law; Stipulations authorizing the imposition of iniquitous or
unconscionable interest are contrary to morals, if not against the law; The nullity of the
stipulation on the usurious interest does not, however, affect the lender’s right to recover the
principal of the loan, nor would it affect the terms of the real estate mortgage.—Stipulations
authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if
not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and
void from the beginning. They cannot be ratified nor the right to set up their illegality as a
defense be waived. The nullity of the stipulation on the usurious interest does not, however,
affect the lender’s right to recover the principal of the loan. Nor would it affect the terms of
the real estate mortgage. The right to foreclose the mortgage remains with the creditors,
and said right can be exercised upon the failure of the debtors to pay the debt due. The debt
due is to be considered without the stipulation of the excessive interest. A legal interest of
12% per annum will be added in place of the excessive interest formerly imposed. The
nullification by the CA of the interest rate and the penalty charge and the consequent
imposition of an interest rate of 12% and penalty charge of 1% per month cannot, therefore,
be considered a reversible error.
Same; Foreclosure of Mortgage; Redemption; Waiver; For a waiver to be valid and
effective, it must, in the first place, be couched in clear and unequivocal terms which will
leave no doubt as to the intention of a party to give up a right or benefit which legally
pertains to him.—ACFLC next faults the CA for invalidating paragraph 14 of the real estate
mortgage which provides for the waiver of the mortgagor’s right of redemption. It argues
that the right of redemption is a privilege; hence, respondents are at liberty to waive their
right of redemption, as they did in this case. Settled is the rule that for a waiver to be valid
and effective, it must, in the first place, be couched in clear and unequivocal terms which
will leave no doubt as to the intention of a party to give up a right or benefit which legally
pertains to him. Additionally, the intention to waive a right or an advantage must be shown
clearly and convincingly. Unfortunately, ACFLC failed to convince us that respondents
waived their right of redemption voluntarily.
Same; Same; Same; When the redemptioner chooses to exercise his right of redemption,
it is the policy of the law to aid rather than to defeat his right.—In fine, when the
redemptioner chooses to exercise his right of redemption, it is the policy of the law to aid
rather than to defeat his right. Thus, we affirm the CA in nullifying the waiver of the right
of redemption provided in the real estate mortgage.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
NACHURA, J.:
On appeal is the June 10, 2008 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No.
83197, setting aside the April 5, 2004 decision2 of the Regional Trial Court (RTC), Branch 9,
Bulacan, as well as its subsequent Resolution3 dated February 11, 2009, denying petitioner’s
motion for reconsideration.
On October 22, 1999, petitioner Asian Cathay Finance and Leasing Corporation (ACFLC)
extended a loan of Eight Hundred Thousand Pesos (₱800,000.00)4 to respondent Cesario
Gravador, with respondents Norma de Vera and Emma Concepcion Dumigpi as co-makers.
The loan was payable in sixty (60) monthly installments of ₱24,400.00 each. To secure the
loan, respondent Cesario executed a real estate mortgage 5 over his property in Sta. Maria,
Bulacan, covered by Transfer Certificate of Title No. T-29234.6
Respondents paid the initial installment due in November 1999. However, they were unable
to pay the subsequent ones. Consequently, on February 1, 2000, respondents received a
letter demanding payment of ₱1,871,480.00 within five (5) days from receipt thereof.
Respondents requested for an additional period to settle their account, but ACFLC denied
the request. Petitioner filed a petition for extrajudicial foreclosure of mortgage with the
Office of the Deputy Sheriff of Malolos, Bulacan.
On April 7, 2000, respondents filed a suit for annulment of real estate mortgage and
promissory note with damages and prayer for issuance of a temporary restraining order
(TRO) and writ of preliminary injunction. Respondents claimed that the real estate
mortgage is null and void. They pointed out that the mortgage does not make reference to
the promissory note dated October 22, 1999. The promissory note does not specify the
maturity date of the loan, the interest rate, and the mode of payment; and it illegally
imposed liquidated damages. The real estate mortgage, on the other hand, contains a
provision on the waiver of the mortgagor’s right of redemption, a provision that is contrary
to law and public policy. Respondents added that ACFLC violated Republic Act No. 3765, or
the Truth in Lending Act, in the disclosure statement that should be issued to the borrower.
Respondents, thus, claimed that ACFLC’s petition for foreclosure lacked factual and legal
basis, and prayed that the promissory note, real estate mortgage, and any certificate of sale
that might be issued in connection with ACFLC’s petition for extrajudicial foreclosure be
declared null and void. In the alternative, respondents prayed that the court fix their
obligation at ₱800,000.00 if the mortgage could not be annulled, and declare as null and void
the provisions on the waiver of mortgagor’s right of redemption and imposition of the
liquidated damages. Respondents further prayed for moral and exemplary damages, as well
as attorney’s fees, and for the issuance of a TRO to enjoin ACFLC from foreclosing their
property.
On April 12, 2000, the RTC issued an Order,7 denying respondents’ application for TRO, as
the acts sought to be enjoined were already fait accompli.
On May 12, 2000, ACFLC filed its Answer, denying the material allegations in the
complaint and averring failure to state a cause of action and lack of cause of action, as
defenses. ACFLC claimed that it was merely exercising its right as mortgagor; hence, it
prayed for the dismissal of the complaint.
After trial, the RTC rendered a decision, dismissing the complaint for lack of cause of action.
Sustaining the validity of the promissory note and the real estate mortgage, the RTC held
that respondents are well-educated individuals who could not feign naiveté in the execution
of the loan documents. It, therefore, rejected respondents’ claim that ACFLC deceived them
into signing the promissory note, disclosure statement, and deed of real estate mortgage.
The RTC further held that the alleged defects in the promissory note and in the deed of real
estate mortgage are too insubstantial to warrant the nullification of the mortgage. It added
that a promissory note is not one of the essential elements of a mortgage; thus, reference to
a promissory note is neither indispensable nor imperative for the validity of the mortgage.
The RTC also upheld the interest rate and the penalty charge imposed by ACFLC, and the
waiver of respondents’ right of redemption provided in the deed of real estate mortgage.
The RTC disposed thus:
WHEREFORE, on the basis of the evidence on record and the laws/jurisprudence applicable
thereto, judgment is hereby rendered DISMISSING the complaint in the above-entitled case
for want of cause of action as well as the counterclaim of [petitioner] Asian Cathay Finance
& Leasing Corporation for moral and exemplary damages and attorney’s fees for abject lack
of proof to justify the same.
SO ORDERED.8
Aggrieved, respondents appealed to the CA. On June 10, 2008, the CA rendered the assailed
Decision, reversing the RTC. It held that the amount of ₱1,871,480.00 demanded by ACFLC
from respondents is unconscionable and excessive. Thus, it declared respondents’ principal
loan to be ₱800,000.00, and fixed the interest rate at 12% per annum and reduced the
penalty charge to 1% per month. It explained that ACFLC could not insist on the interest
rate provided on the note because it failed to provide respondents with the disclosure
statement prior to the consummation of the loan transaction. Finally, the CA invalidated
the waiver of respondents’ right of redemption for reasons of public policy. Thus, the CA
ordered:
WHEREFORE, premises considered, the appealed decision is REVERSED AND SET
ASIDE. Judgment is hereby rendered as follows:
1) Affirming the amount of the principal loan under the REM and Disclosure
Statement both dated October 22, 1999 to be ₱800,000.00, subject to:
a. 1% interest per month (12% per annum) on the principal from
November 23, 1999 until the date of the foreclosure sale, less ₱24,000.00
paid by [respondents] as first month amortization[;]
b. 1% penalty charge per month on the principal from December 23,
1999 until the date of the foreclosure sale.
2) Declaring par. 14 of the REM as null and void by reason of public policy, and
granting mortgagors a period of one year from the finality of this Decision within
which to redeem the subject property by paying the redemption price as computed
under paragraph 1 hereof, plus one percent (1%) interest thereon from the time of
foreclosure up to the time of the actual redemption pursuant to Section 28, Rule
39 of the 1997 Rules on Civil Procedure.
The claim of the [respondents] for moral and exemplary damages and attorney’s fees is
dismissed for lack of merit.
SO ORDERED.9
ACFLC filed a motion for reconsideration, but the CA denied it on February 11, 2009.
ACFLC is now before us, faulting the CA for reversing the dismissal of respondents’
complaint. It points out that respondents are well-educated persons who are familiar with
the execution of loan documents. Thus, they cannot be deceived into signing a document
containing provisions that they are not amenable to. ACFLC ascribes error on the part of
the CA for invalidating the interest rates imposed on respondents’ loan, and the waiver of
the right of redemption.
The appeal lacks merit.
It is true that parties to a loan agreement have a wide latitude to stipulate on any interest
rate in view of Central Bank Circular No. 905, series of 1982, which suspended the Usury
Law ceiling on interest rate effective January 1, 1983. However, interest rates, whenever
unconscionable, may be equitably reduced or even invalidated. In several cases, 10 this Court
had declared as null and void stipulations on interest and charges that were found
excessive, iniquitous and unconscionable.
Records show that the amount of loan obtained by respondents on October 22, 1999 was
₱800,000.00. Respondents paid the installment for November 1999, but failed to pay the
subsequent ones. On February 1, 2000, ACFLC demanded payment of ₱1,871,480.00. In a
span of three months, respondents’ obligation ballooned by more than ₱1,000,000.00.
ACFLC failed to show any computation on how much interest was imposed and on the
penalties charged. Thus, we fully agree with the CA that the amount claimed by ACFLC is
unconscionable.
In Spouses Isagani and Diosdada Castro v. Angelina de Leon Tan, Sps. Concepcion T.
Clemente and Alexander C. Clemente, Sps. Elizabeth T. Carpio and Alvin Carpio, Sps.
Marie Rose T. Soliman and Arvin Soliman and Julius Amiel Tan,11 this Court held:
The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and
an iniquitous deprivation of property, repulsive to the common sense of man. It has no
support in law, in principles of justice, or in the human conscience nor is there any reason
whatsoever which may justify such imposition as righteous and as one that may be
sustained within the sphere of public or private morals.
Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary the first instance, the title to the property was still in the name of respondent Cesario. The
to morals, if not against the law. Under Article 1409 of the Civil Code, these contracts are instant case was pending with the RTC when ACFLC filed a petition for foreclosure of
inexistent and void from the beginning. They cannot be ratified nor the right to set up their mortgage and even when a writ of possession was issued. Clearly, ACFLC’s title is subject to
illegality as a defense be waived. The nullity of the stipulation on the usurious interest does the final outcome of the present case.1avvphi1
not, however, affect the lender’s right to recover the principal of the loan. Nor would it affect
the terms of the real estate mortgage. The right to foreclose the mortgage remains with the
WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the Court
creditors, and said right can be exercised upon the failure of the debtors to pay the debt due.
of Appeals in CA-G.R. CV No. 83197 are AFFIRMED. Costs against petitioner.
The debt due is to be considered without the stipulation of the excessive interest. A legal
interest of 12% per annum will be added in place of the excessive interest formerly
imposed.12 The nullification by the CA of the interest rate and the penalty charge and the SO ORDERED.
consequent imposition of an interest rate of 12% and penalty charge of 1% per month
cannot, therefore, be considered a reversible error.

ACFLC next faults the CA for invalidating paragraph 14 of the real estate mortgage which
provides for the waiver of the mortgagor’s right of redemption. It argues that the right of
redemption is a privilege; hence, respondents are at liberty to waive their right of
redemption, as they did in this case.

Settled is the rule that for a waiver to be valid and effective, it must, in the first place, be
couched in clear and unequivocal terms which will leave no doubt as to the intention of a
party to give up a right or benefit which legally pertains to him. Additionally, the intention
to waive a right or an advantage must be shown clearly and convincingly.13 Unfortunately,
ACFLC failed to convince us that respondents waived their right of redemption voluntarily.

As the CA had taken pains to demonstrate:

The supposed waiver by the mortgagors was contained in a statement made in fine print in
the REM. It was made in the form and language prepared by [petitioner]ACFLC while the
[respondents] merely affixed their signatures or adhesion thereto. It thus partakes of the
nature of a contract of adhesion. It is settled that doubts in the interpretation of stipulations
in contracts of adhesion should be resolved against the party that prepared them. This
principle especially holds true with regard to waivers, which are not presumed, but which
must be clearly and convincingly shown. [Petitioner] ACFLC presented no evidence hence it
failed to show the efficacy of this waiver.

Moreover, to say that the mortgagor’s right of redemption may be waived through a fine
print in a mortgage contract is, in the last analysis, tantamount to placing at the
mortgagee’s absolute disposal the property foreclosed. It would render practically nugatory
this right that is provided by law for the mortgagor for reasons of public policy. A contract of
adhesion may be struck down as void and unenforceable for being subversive to public
policy, when the weaker party is completely deprived of the opportunity to bargain on equal
footing.14

In fine, when the redemptioner chooses to exercise his right of redemption, it is the policy of
the law to aid rather than to defeat his right.15 Thus, we affirm the CA in nullifying the
waiver of the right of redemption provided in the real estate mortgage.

Finally, ACFLC claims that respondents’ complaint for annulment of mortgage is a

collateral attack on its certificate of title. The argument is specious.

The instant complaint for annulment of mortgage was filed on April 7, 2000, long before the
consolidation of ACFLC’s title over the property. In fact, when respondents filed this suit at

No. L-47544. January 28, 1980.*
PEPITO VELASCO, AMABLE LUMANLAN, RAMON GALANG, FELIPE, LUMBANG and
APOLONIO DE LOS SANTOS, petitioners, vs. COURT OF APPEALS and GOVERNMENT
SERVICE INSURANCE SYSTEM, respondents.
Supreme Court; Jurisdiction; New Trial; Supreme Court may broaden its inquiry into
a case and decide the same on the merits rather than merely resolve the procedural question
raised.—From the foregoing brief statement of the nature of the instant case, it would
appear that Our sole function in this proceeding should be to resolve the single issue of
whether or not the Court of Appeals erred in ruling that the motion for new trial of the
GSIS in question should indeed be deemed pro-forma. But going over the extended
pleadings of both parties, the Court immediately impressed that substantial justice may not
be timely achieved, if We should decide this case upon such a technical ground alone. We
have carefully read all the allegations and arguments of the parties, very able and
comprehensively expounded by evidently knowledgeable and unusually competent counsel,
and We feel We can better serve the interests of justice by broadening the scope of Our
inquiry, for as the record before Us stands, We see that there is enough basis for Us to end
the basic controversy between the parties here and now, dispensing, however, with
procedural steps which would not anyway affect substantially the merits of their respective
claims.
Pleadings and Practice; The GSIS, as defendant, is deemed to have admitted the
factual allegation that petitioners, as plaintiffs below, built the houses in question, as the
GSIS limited its answer to denial of legal liability therefore.—In other words, apart from
admitting expressly that “the construction of houses and improvements has greatly
increased the value” of the subdivision it now owns, nowhere in its statement of the
material facts in Paragraph 5 of its answer relative to the allegations of the petitioners
regarding the construction by them of the houses in dispute and the cost thereof to each of
them does respondent deny said facts as not true. What GSIS limitedly alleged in its answer
is the legal proposition that it is not liable therefore because of lack of contractual privity
between it and petitioners. It may be safely said then that it does not now lie in the lips of
GSIS to maintain that petitioners did not build the houses in question and that the cost
thereof is different from what petitioners have stated in their complaint.
Same; Contracts; In the Deed of Quitclaim in question wherein Laigo Realty Corp.
waived in favor of GSIS its rights in favor of the subdivision in question arising out of its
development and assumed to pay the claims of any contractor, material furnisher, lot buyer,
etc. having connection with said development, the GSIS was not relieved of any liability to
petitioner for the cost of materials and labor the latter incurred in building the subdivision
houses if Laigo Realty Corp. is unable to pay them.—What is more, the reliance of GSIS on
the Deed of Quitclaim of May 7, 1970 is to Our mind misplaced. We have analyzed this
document carefully, and We are of the considered view that it is actually evidence against
GSIS. Even if what is unnatural in ordinary business or industrial experience were
assumed, that is, that GSIS was unaware all along during the period of their construction of
the work then being done by petitioners,—albeit it is possible there was no express consent
given thereto—by and thru the aforementioned deed of quitclaim, GSIS agreed to receive
and did actually receive the benefits of what petitioners had accomplished or would
accomplish under their contracts with Laigo. So much so, that the dispositive portion of the
quitclaim deed does not really relieve GSIS from liability to petitioners. Properly viewed,
GSIS virtually assumed under said deed, liability in regard to claims like those of
petitioners who might not be paid by Laigo albeit said liability has been made subject to the
reservation that it could seek indemnity from Laigo.
Same; Same; Mortgages; GSIS benefited, as buyer of the mortgaged subdivision in the
constructions made by petitioners while the same was owned by Laigo Realty Corp. It has to
pay for the said improvements as GSIS is in law the owner of said houses presently.—And in
the Joint Manifestation filed by the parties with the trial court as late as February 20, 1976,
GSIS made it clear that “defendant (GSIS) up to the present has not collected from the
house owners of the 63 houses built by the plaintiffs notwithstanding the foreclosure
proceedings and consolidation of ownership.” Again, it is thus obvious that GSIS assumed
ownership of the houses built by petitioners and was benefited by the same, and the fact
that it has not collected any payment from the “house owners” for the construction of the
houses respectively occupied by them is of no moment insofar as its liability to petitioners is
concerned. Surely, it is not pretended that those “house owners” would be allowed to enrich
themselves at the expense of petitioners. Indeed, the term “house owners” is inappropriate,
if only because in Paragraph 16 of its Comment on the petition herein, GSIS unequivocally
states that “GSIS foreclosed the properties including all improvements (the houses) in 1970”
and, thereby, became the owner of said houses.
Same; Same; Same; Same.—Upon the foregoing factual premises, the legal issue that
arises is whether or not GSIS is liable to the petitioners for the cost of the materials and
labor furnished by them in construction of the 63 houses now owned by the GSIS and for the
construction of which no payment has been made on the balance due petitioners. Our
considered view is and We so hold that even in equity alone, GSIS should pay the
petitioners. After all, it admits it has not collected from the ones who appear to be the
buyers thereof, albeit it must be collecting the installments on the lots. All it has to do then
is to pass on to them what it has to pay petitioners. In all, GSIS is, under the peculiar
circumstances of this case, the owner of said houses.
Same: Same; Liability of houseowner to laborers and materialmen.—Laigo admittedly
has not paid petitioners. The “bouncing” checks issued by it in their favor is mentioned by
GSIS itself in its statement of the facts. We hold that upon this premise, it is a fair
construction of the Deed of Quitclaim aforementioned, that GSIS can be held liable to
petitioners, without prejudice to its securing corresponding indemnity from Laigo. It is
obvious from the terms of said deed that GSIS contemplated the possibility of its being
liable for Laigo’s account, otherwise, there was no need for the reservation. This is one such
liability. In this connection, while, indeed, Article 1729 refers to the laborers and
materialmen themselves, under the peculiar circumstances of this case, it is but fair and
just that petitioners be deemed as suing for the reimbursement of what they have already
paid the laborers and materialmen as otherwise they (petitioners) would be unduly
prejudiced while either Laigo, GSIS or the occupants of the houses would enrich themselves
at their expense. It is a bad law that would allow such a result.
Same; Same; Obligations; Article 1311 of the Civil Code on privity of contracts is not
applicable where the situation contemplated falls under Art. 1727 on liability of houseowner
to laborers and materialmen.—At this juncture, We need to add only that Article 1311 of the
Civil Code which GSIS invokes is not applicable where the situation contemplated in Article
1729 obtains. The intention of the latter provision is to protect the laborers and the
materialmen from being taken advantage of by unscrupulous contractors and from possible
connivance between owners and contractors. Thus, a constructive vinculum or contractual
privity is created by this provision, by way of exception to the principle underlying Article
1311 between the owner, on the one hand, and those who furnish labor and/or materials, on
the other. As a matter of fact, insofar as the laborers are concerned, by a special law, Act No.
3959, they are given added protection by requiring contractors to file bonds guaranteeing
payment to them. And under Article 2242 of the Civil Code, paragraphs (3) and (4), claims of
laborers and materialmen, respectively, enjoy preference among the creditors of the owner
in regard to specific immovable property.
 Action; Mortgagor, after the mortgaged property was already sold, becomes a mere
necessary party, in an action by labor contractor against new owner to recover cost of houses
constructed on the subdivision.—GSIS contends that Laigo should have been joined as
defendant in this case. While petitioners could have done so, they were not under such
obligation mandatorily. Under the circumstances, of this case, Laigo is only a necessary
party, not an indispensable one. And to allay GSIS, its right to secure reimbursement from
Laigo is hereby reserved.
Contracts; Obligations; Evidence; While, it is of judicial notice that the costs of labor
and material have risen substantially since 1970, it is not fair to award petitioners four times
the value of the cost of their construction, but only interest at 12% per annum since they filed
their complaint.—Coming now to the amount for which GSIS is liable, We reiterate that, to
be sure, there is evidence in the record, uncontradicted at that, regarding the lower value of
money at the time the demand upon GSIS was made compared to that when petitioners
furnished the labor and materials in question. We are not, however, inclined to go along
with the trial court that the amount demanded should be multiplied four times. We believe
that it being a matter of judicial notice that the prices of labor and material have
substantially risen since 1970, it would be fair enough to make respondent liable for interest
on the amount of the demand, which is supported by evidence and not effectively disputed
by GSIS in its answer, at the rate of 12% per annum from the time petitioners filed their
complaint below on April 14, 1975.
Attorney’s; Award of P50,000.00 as attorney’s fee is merited where the case should not
have been brought to court as it could have been settled amicably and equitably.—In
addition, We hold that our award to petitioners of attorney’s fees in the amount of Fifty
Thousand (P50,000) Pesos would only be just and proper. As We view the position taken by
GSIS in this case, petitioners were compelled to litigate over a matter that could have been
justly and equitably settled without having to go to court, particularly, when it is considered
that under the Deed of Quitclaim, several times mentioned earlier, GSIS freely accepted
from Laigo the benefits of the expenses for labor and material incurred by petitioners in the
houses in question, hence, as We have said above, GSIS had no legal basis for insisting that
Article 1729 of the Civil Code does not apply to this case, it being indisputably the owner of
said houses already. Besides, it must be borne in mind that the claims of petitioners are in
the nature of claims of the laborers and materialmen themselves.
Aquino, J., concurring and dissenting:
Appeal; This case should not have been resolved on the merits, there being no
appeal.—I concur in the affirmance of the decision of the Court of Appeals but I dissent as to
the resolution of the merits of the case which has not been appealed to this Court.
PETITION for review of the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
BARREDO, J.:
Petition for certiorari, erroneously citing Section I of Rule 65, for the review of the decision
of the Special Division of Five of the Court of Appeals dated December 6, 1977 in CA .G.R.
No. 06152 declaring, by a vote of four to one, null and void the order of the Court of First
Instance of Pampanga in Civil Case No. 4260 dated December 2, 1976, which had declared
the judgment of said court in said case final and executory, directing in consequence, said
trial court to approve the record on appeal of herein respondent Government Service
Insurance System (GSIS for short) and to give due course to its appeal, setting aside
correspondingly the restraining order it had previously issued in the same case, the Court of
Appeals holding that, contrary to the ruling of the trial court, the motion for new trial of the
GSIS admittedly filed on time is not pro-forma and, therefore, the period to appeal the trial
court's decision in question had been suspended by said motion, hence, said decision was
still appealable.
From the foregoing brief statement of the nature of the instant case, it would appear that
Our sole function in this proceeding should be to resolve the single issue of whether or not
the Court of Appeals erred in ruling that the motion for new trial of the GSIS in question
should indeed be deemed pro-forma. But going over the extended pleadings of both parties,
the Court is immediately impressed that substantial justice may not be timely achieved, if
We should decide this case upon such a technical ground alone. We have carefully read all
the allegations and arguments of the parties, very ably and comprehensively expounded by
evidently knowledgeable and unusually competent counsel, and We feel We can better serve
the interests of justice by broadening the scope of Our inquiry, for as the record before Us
stands, We see that there is enough basis for Us to end the basic controversy between the
parties here and now, dispensing, however, with procedural steps which would not anyway
affect substantially the merits of their respective claims.
As a matter of fact, after our first study of this case, We already announced Our intention in
this direction at the hearing held on February 21, 1979, where Attys. Celestino T. Ocampo,
Vicente Sicat and Victoriano David appeared and argued for the petitioners and Justice
Manuel Lazaro and Atty. Antonio F. Navarrete, for the GSIS. We reiterated said intention
in Our resolution of said date by requiring the parties "to INFORM the Court ... whether or
not there are any issues of fact that the purported appeal of private respondent would
involve and whether or not petitioners controvert the same, with the end in view of enabling
this Court to take the necessary steps to convert this proceeding into an appeal ... (under)
Republic Act 5440". To be sure, in its compliance dated April 10, 1979 with said resolution,
GSIS does enumerate certain allegedly "pivotal factual issues" its appeal "would involve."
However, as will be explained anon even the "pivotal factual issues" referred to may be
justly resolved here without the need of returning this case to the trial court. The exact
position of the parties in respect to said issues and the allegations of fact in their pleadings
here and in the court below as well as the undisputed evidence related thereto are so clearly
stated and comprehensively discussed by the parties in their said pleadings that to conduct
further proceedings or to await any other briefs from them would be superfluous and a
waste of time and effort. Accordingly, We now deem this case as submitted for Our decision
as a duly made appeal under Republic Act 5440.
According to GSIS:
A Detailed Statement of Facts and of the Case
It is not without reason to state that the ambience of a particular case has much to contribute to the
resolution thereof. So it is with the instant case. And for a better appreciation of the antecedents
which led to the decision of the Court of First Instance of Pampanga and subsequently the
questioned decision of the respondent Court of Appeals, the environmental facts which spawned
them should thus be laid bare before this Honorable Court, the better to appreciate their factual
significance and legal consequences.
1. Sometime on November 10, 1965, Alta Farms secured from the GSIS a Three Million Two
Hundred Fifty Five Thousand Pesos (P3,255,000.00) loan and an additional loan of Five Million
Sixty-Two Thousand Pesos (P5,062,000.00) on October 5, 1967, to finance a piggery project. These
loans were secured by two mortgage (Exh. "B").
2. Alta Farms defaulted in the payment of its amortizations. it is presumably because of this that
Alta Farms executed a Deed of Sale With Assumption of Mortgage with Asian Engineering
Corporation on July 10, 1969 (Exh. "C"), but without the previous consent or approval of the GSIS
and in direct violation of the provisions of the mortgage contracts.
collecting only P216,500.00 (Exh. "W" evidence of Lumanlan). Thus, even the evidence of
Lumanlan on what is due him is conflicting.
6. Out of his claim, petitioner Lumanlan admits that Mrs. Rhody Laigo paid him in several
checks totalling P124,855.00 but which checks were all dishonored when presented for payment.
This is Exhibit "X" of petitioners.
7. Thus, on November 7, 1970, petitioner Lumanlan wrote a letter to Laigo Realty Corporation
(Exh. "Y", evidence of Lumanlan) which reads —

I wish to inform you that I have received from Mrs. Rhody E. Laigo several bank checks
3. Even without the approval of the Deed of Sale With Assumption of Mortgage by the GSIS, Asian which were either dishonored by the bank or were cancelled at the request of Mrs. Rhody
Engineering Corporation executed an Exclusive Sales Agency, Management and Administration E. Laigo for reasons of insufficient funds.
Contract in favor of Laigo Realty Corporation, with the intention of converting the piggery farm into
a subdivision (Exh. "D"). And on October 20, 1969, Asian Engineering executed another contract with
Laigo, whereby Laigo was to undertake the development of the property into a subdivision (Exh. The following are the checks:
"E"). Conformably with the two contracts (Exh "D" and "E"), Laigo started the development of the lot
into a subdivision.
DATE SER. NO. AMOUNT BANK

Contract of Petitioner
May 646371 P36,000.00 Prudential B
20,1970
Lumanlan and his admission
June 659907 9,000.00
10,1970
4. After developing the area, on December 4, 1969, Laigo entered into a contract (Exh. "GG") with
Amable Lumanlan, one of the petitioners, to construct for the home buyers, 20 houses on the
subdivision. The contract provided that Laigo shall secure the agreement and signature of the home June 30, 646397 20,000.00
1970
buyers (Paragraph 6 of Agreement, Exh. "GG") and that Laigo "shall pay for the houses on a "turn-
key" bases" (Paragraph 5 of Agreement, Exh. "GG"). The parties to the agreement are, stated by the
agreement itself, as follows: July 6, 1970 646398 19,800.00

July 3, 1970 464399 11,250.00

This Agreement, executed this 29th day of November, 1969, in the City of Manila, by and
between
LAIGO REALTY CORPORATION, ... Aug. 7,1970 659913 16,200.00
represented by its President,
RHODY E. LAIGO, ... hereinafter referred to as the FIRST PARTY Aug. 659914 12,605.00
- and - 14,1970
... AMABLE G. LUMANLAN ... hereinafter referred to as the SECOND PARTY.
And the signatories are -
Total P124,855.00
IN WITNESS WHEREOF, the parties hereunto affixed their signatures this 4th day of Dec.
1969 at Manila, Philippines.
(Sgd) Illegible
8. In the same letter, Exh, "Y", Lumanlan admits that the checks of Laigo that were dishonored
were intended to pay 8 houses occupied by home buyers, who caused the construction in
LAIGO REALTY CORPORATION ALEJANDRO Y. DE JESUS accordance with the Agreement of Laigo and Lumanlan (Exh. "GG"). The letter of Lumanlan also
admits -
BY: By:

This amount was intended to pay for eight (8) houses occupied by the following home buyers:
(Sgd) RHODY E. LAIGO (Sgd) Illegible

This amount was intended to pay for eight (8) houses

(t) RHODY E. LAIGO AMABLE G. LUMANLAN
occupied by the following home buyers:

- President -
1
. Liborio Yalung
(Sgd) Illegible

2. Caridad Pascua
ANASTACIO F. DANAN

3. Antonio Candelaria
(See Exh. "GG")
5. Petitioner Lumanlan allegedly constructed 20 houses for the home buyers and for which he
claims a balance of P309,187.76 from the home buyers and Laigo. This is reflected in Exhibit "X" 4. Alberto Rarela
of petitioners. However, in the letter of Lumanlan to the GSIS on January 7, 1972, he was
 5. Felomena Gonzales
states the 16,200.00
names of the home buyers, the cost of houses agreed upon, the
downpayment made by the buyers and their respective balance to Velasco. Since the
letter of Velasco, Exh. "AA", is a written admission that is highly revealing and
6. Estelita Manalang 16,200.00
illuminating we feel it important and material to quote therefrom as follows.
7. Rogelio Zabala 16,200.00
May I inform your good offices that the undersigned is one of the building
8. Wilhelmina Paras contractors 16,200.00
contracted by the Laigo Realty Corporation to construct residential
houses of lot buyers therein For your further information the following are the names
of the lot P123,400.00
owners for whom the undersigned have constructed houses for, including
the respective balances payable to me as of this date.
Refund for expenses
Name of Buyer
Cost of House
in the execution of Down
Balances
1. Benjamin Cristobal
P19,500.00
housing plans for the 1 ,455.00 P1,950.00
17,550.00
2. Nehemiah Quipot
P 124,855.00 23,000.00
2,300.00
20,700.00
3. Alberto Villalon
18,000.00
It is significant to note that Exhibits "GG", "W" "X" and "Y" are part of the evidence 1,800.00
16,200.00
of petitioners. 4. Luis Jacob
20,000.00
2,000.00
18,000.00
9. On December 17, 1970, Laigo acknowledged its dishonored checks and promised 5. Jose Salonga
20,000.00
to make good the same. This is reflected in Exhibit "Y-l" of petitioners. The 2,000.00
dishonored checks were all presented by petitioners and marked Exhibits "II-l" to 6. Antonio Jontillano
18,000.00

"II-6". 12,500.00
1,200.00
11,300.00

Contract of Petitioner
P101,750.00

Velasco and his admissions

Very respectfully yours,
10. On December 29, 1969, Laigo entered into a contract with petitioner Pepito
Velasco to construct houses for the home buyers who agreed with Velasco on the (Sgd. Pepito Velasco)
prices and the downpayment. Exhibits "HH" and "HH-l" for petitioners. The parties
to the contract are - This is the evidence of Velasco.

LAIGO REALTY CORPORATION, ... as the FIRST PARTY
- and -
... PEPITO VELASCO, ... jointly known as the SECOND PARTY;
12. Velasco admits that Laigo paid him in five (5) checks with the total amount of
P35,000.00 but which all bounched or were dishonored (Exh. "BB" of petitioners). It is
interesting to note that in the same letter of Velasco to his lawyer, Velasco also named the
buyers of the houses for whom he constructed the houses and the balance due from the
home buyers (See Exh. "BB" of petitioners).

Con tract of Petitioner

11. Petitioner Velasco constructed houses for various home buyers, who individually
agreed with Velasco, as to the prices and the downpayment to be paid by the
individual home buyers. de los Santos and his admissions

When neither Laigo nor the individual home buyers paid for the home constructed, 13. On March 4, 1970, Laigo entered into a contract with petitioner Apolonio de los Santos
Velasco wrote the GSIS to intercede for the unpaid accounts of the home buyers whereby the latter agreed to construct houses for the home buyers and Laigo agreed to pay
(Exh. "AA" for petitioners). Exhibit "AA" admits that Pepito Velasco is one of the the full purchase price of every house constructed ... based on a "turn- key arrangement".
building contractors contracted by Laigo to construct houses for home buyers. it (Vide Exh. "A") The parties to the contract are shown as follows:
 If these conditions above are acceptable to your good self, kindly signify (t) RAMON R. GALANG
your conformity below.
Contractor,
If these conditions above are acceptable to your good self, kindly signify your conformity
below.
(Vide Exh. "KK" for petitioners; emphasis supplied)

Truly yours,
Contract of Petitioner
(Sgd) Rhody E. Laigo
(t) RHODY E. LAIGO
CONFORME Lumbang
(Sgd) APOLONIO DE LOS SANTOS
(Date) March 4, 1970 15. Petitioner Felipe Lumbang also claims to have constructed for the home buyers upon
(Vide Exhibit "A" of petitioners) the instance of Laigo, four (4) houses with the balance of P82,705.00. Lumanlan admits
Contract of Petitioner that he constructed the four houses for the home buyers who paid him a downpayment
Galang and his admissions but who still have outstanding balances Vide Exh. "LL" for the petitioners).

14. Petitioner Ramon Galang also constructed a house for Victor Coquilla for an agreed
price of P14,000.00. Coquilla paid a downpayment of P1,400.00, thereby leaving a balance of
P12,600.00, which he wanted the GSIS to pay. Thus, in his letter to the GSIS (Exh "CC" for
Petitioners) he admits -
In connection with your Palos Verdes Estate Subdivision located in Talipapa,
Caloocan City and which was era d Realty Corporation I wish to inform you that I
have the Laigo Realty Corporation constructed in the subdivision the following house,
its owner and cost of construction
Name Of Owner
Cost of House
16. The Deed of Sale With Assumption of Mortgage between Alta Farms and Asian
Engineering, for one reason or another, was not approved by the GSIS. And when Alta
Farms failed to liquidate its accounts, GSIS foreclosed the properties including all
improvements (the house in 1970. In November and December 1971, the Certificate of
Sale in favor of the GSIS were issued.
17. While the properties were under foreclosure and even pending the consolidation of
titles, certain lots were sold on installment basis, for which Laigo received P985,000.00,
and 63 houses in various stages were constructed, among which are the houses allegedly
constructed by the petitioners.
xxx xxx xxx

Amount Paid 21. An along, from the time the contracts were entered into by Laigo Realty Corporation,
the petitioners had always directed their claims against Laigo Realty Corporation as
Balance may be shown by Exhibits "Z", "X", "Y" and "I-1"; Laigo would pay by checks to the
contractors; and when the checks were dishonored they would always file a protest with
1. Victor Coquilla Laigo Realty Corporation. Originally, an claims were addressed to Laigo Realty
Corporation, being the party who executed the contracts
P14,000.00
22. When the petitioners could not collect from Laigo and the home buyers and after the
P1,400.00 GSIS foreclosed the subdivision including the improvements (the houses constructed),
the petitioners sent a letter of demand on August 3, 1974 (Exhibit "EE") for GSIS to pay
P12,600.00 for the indebtedness of Laigo Realty Corporation. It is enlightening and interesting to
note that the annexes to the letter specifies who are the home buyers who caused the
May I inform your good Offices further that the amount of P12,600.00 referred to above as construction the agreed price of the construction between the home buyers and the
the 'balance 'is payable to the undersigned, Payment of which has been delayed for almost contractors, the downpayment made by the home buyers to the contractors, and the
one and a half years now. balance of the home buyers due the contractors by reason of the contracts (Exhibits "EE-
l" and "EE-2"). It is crystal clear from the letter of the lawyer of the petitioners that the
ones who caused the construction are home buyers through Laigo Realty Corporation,
Trusting that you give this letter your usual Prompt attention, I beg to remain that the home buyers made downpayments to the contractors, and that the latter agreed
to the price and the balance that were not paid by the home buyers This is certainly
Very respectfully yours, indubitable proof that the GSIS had nothing to do whatsoever in the construction of the
houses by the petitioners.
(Sgd.) Ramon R. Galang
23. On August 12. 1974, the Assistant General Manager on A legal affairs - he GSIS
categorically and specifically denied the an the firm and clear legal ground, among
others, that the has no privity of contract with the petitioners (Exhibit "FF"). This denial
of the claim of the negates, rebukes and belies any and all or on the other inter-office the
GSIS.
24. On April 14, 1975, the petitioners filed a case against the GSIS for the on of mm of
money representing labor and materials used in the construction of houses caused by
home buyers the intercession of Laigo Realty Corporation in the principal sum of
P607,328.27. The complaint, docketed as Civil Case No. 4260 of the Court of First
Instance of Pampanga, prayed for -
(1) The sum of SIX HUNDRED SEVEN THOUSAND THREE HUNDRED TWENTY EIGHT &
271100 PESOS (P607,328.27) in its current value due to inflation with legal interest from the
date of extrajudicial demand;
d That defendant up to the present has not collected the house owner of the 63 houses built by
the plaintiffs proceedings and consolidation of ownership
The petitioners thus did not choose to cross-examine or dispute what
they had agreed upon as the testimonies of the witnesses of the to
testify; hence, they stand as uncontroverted evidence. 1
Significantly, the trial court's conclusions of fact are substantially as alleged by the GSIS
above, except as to certain details which We deem immaterial in the light of the legal
provisions and principles upon which We believe the resolution of this controversy should be
based. It may be stated in this connection, however, that the trial court made the following
findings and conclusions as regards the amount petitioners are entitled to recover:
The next issue that would then necessarily follow is: - How much are the plaintiffs entitled to be
paid?

(2) the sum of FIFTY THOUSAND (P50,000.00) PESOS as attorney's fees;
(3) such sum for exemplary damages as may be assess by this Honorable Court against the
defendant; and
(4) the costs of this suit (Vide pp. 91-95 of the instant Amended Petition)
25. On July 30, 1975, and within the extensions of time granted, the GSIS filed its
Answer traversing the claims and alleging, among others, that the petitioners have no
privity of contract with the GSIS; that the petitioners have no cause of action; and that
Laigo Realty Corporation which entered into the contracts with the petitioners is a
necessary and indispensable party who should be included as a party to properly
ventilate the issues and to avoid multiplicity of suits (pp. 96-101 of the instant Amended
Petition).
Again, an examination of the plaintiffs' uncontroverted evidence disclose that as of the time they
were ordered to 'cease and desist' from introducing any further improvement on the property, they
had already constructed several houses valued (in common to them) in the total of P609,328.27 and
for which amount representing the actual cost of construction of the houses (materials and labor
already considered) as of those years of construction (1969-1970), they had not yet been fully paid;
that upon consolidation of ownership of the entire Palos Verdes Estate Subdivision where said
plaintiffs had introduced the improvements aforesaid in the GSIS, they made written request for
payment of what was already then due them on the defendant GSIS - new owner of the premises but
that their said request had fallen on deaf ears. Consequently, for having been compelled to litigate
and to incur unnecessary expenses instead of given the opportunity of making use of the proceeds of
their investment and labor in further investments and work, said plaintiffs are here now further
invoking justice and equity on their side and praying that they be paid their afore-stated entitlement
in the amount of P607,328.27 in the equivalent or present value of our Pesos as devaluated. Thus,
through testimonial evidence now also standing on record unrebutted, said plaintiffs proceeded to
show to the Court the effect of such devaluation of the currency on the prices of materials, as well as
on their rights and claims, as follow:

26. After pre-trial was terminated the petitioners presented their evidence, and 1969-1970 1975

thereafter, under date of December 16, 1975, they filed their Plaintiffs' Formal Offer of
Evidence (pp. 103-113 of the instant Amended Petition). MATERIAL Cost Cost

1. White Sand P9.00 per P30.00 per

27. On February 20, 1976, the petitioners and the GSIS filed their "Joint Manifestation" Porac cu. m. cu. m.
which in substance is a stipulation of facts (pp. 114-116 of the instant Amended
Petition). The petitioners agreed that the witnesses of the GSIS to be presented would 2. Crashed 15.00 per 30.00 per
testify on the following- Gravel-Baliwag cu. m. cu. m.

3. Cement 3.90 per bag 14.00 per

a. The execution of the Deed of Quitclaim dated May 7, 1970, executed in favor of defendant bag
GSIS by Laigo Realty notwithstanding the followed ownership." GSIS if they were presented
evidence." (Pp. 379-391, Record. Corporation freeing said defendant from any and all claims 4. Lumber .36 to .42 1. 70 to 1.80
arising out of the suppliers, contractors and house such as plaintiffs in the Palos Verdes Estate per per
which now constitutes the GSIS Hills Subdivision
board foot board ft.

b. At the time of the Extra-Judicial Foreclosure of the Estate Mortgage on November, 1971,
conducted by defendant or Laigo properties, plaintiff's claims are not registered; 5. Nails . 75 per kilo 4.20 per kilo

c. Plaintiffs' services were contracted by Laigo Corporation and not by the defendant GSIS; 6. GI Sheets 1.00 per 4.20 to 4.50
linear per
 new owner, and to keep for themselves as additional increment more than P 1.8 million OVER
foot linear foot
and ABOVE actual costs of materials and labor that went into the building of said houses,
according to their own allegations and evidence. Whether or not the trial court can, by the
7. Paint 10.50 to 1 38.00 to simple expedient of taking "judicial notice" of inflation, quadruple the plaintiffs' claim, in the
1.00 per 40.00
light of the Civil Code provision (Art. 1250) authorizing revaluation only upon proof
of "extraordinary inflation or deflation of the currency" and of Republic Act No. 524 providing
gallon per gallon that obligation shall be discharged in the currency that is legal tender at the time of payment, is
an important and far-reaching legal question that deserves further examination or review not
8. Iron bars 2.7 5 to 3. 15.00
only by this court but also, if need be, by the Supreme Court." (Pp. 31-32, Record.)
00

Truth to tell however, contrary to the contention of GSIS, the trial court's four-fold award
9. Toilet materials 110.00 to 410. 00 to
120.00 420. 00 may not be said to be entirely baseless and arbitrary, much less based on no more than the
judicial notice taken by His Honor that "a house costing, say P10,000 in 1969-1970, would
Water closet, Phil. now cost no less than P40,000." That the trial court did not award more than what
petitioners had demanded in their complaint is clearly evidenced by their allegation in
Standard with seat Paragraph 5 of their complaint regarding the effects of inflation as wen as by their prayer
cover that they be paid "the sum of Six Hundred Seven Thousand Three Hundred Twenty-Eight
and 27/100 Pesos (P607,328.27) in its current value due to inflation", as well as by the
testimonial evidence referred to in detail in the decision in question, as can be seen in the
And indeed, this Court can take judicial notice of the fact that a house costing, say portions thereof We have quoted above.
P10,000.00 in 1969-1970, would now cost no less than P40,000.00. So that, considering that
the generally accepted standard or ratio in the determination of the costs of materials and
Thus, We find and hold that the material facts in this case are beyond dispute and the only
labor supplied and put in the construction by the builder-contractors that the latter (labor)
issues We have to resolve are legal ones. It is clear to Us that petitioners did construct,
is 30% of that of the former (cost of materials), a computation of plaintiffs dues as is, or
furnishing the materials and labor needed for the purpose the 63 houses that now belong to
P607,328,27, would give this:
or are owned by respondent GSIS. It is alleged in Paragraphs 5 and 8 of petitioners'
complaint that:
a. — Cost of materials
P 467,175.50
5. That during the period of the joint venture agreement being negotiated by the Government
b. — Cost of labor Service Insurance System and the Laigo Realty Corporation, the plaintiffs herein constructed
140,152 .50 residential house and other improvements at the said GSIS His Subdivision, furnishing
Total materials, supplies, labor and miscellaneous services at their own expense, which costs of mass
607,328.00 labor and miscellaneous services total the amount of P607,328.27, and which is broken down or
itemized as follows:

In effect, by considering the aforesaid four times increase in said materials costing P467,175.50,
the same materials would now cost P1,868,702.00. By adding 30% of said amount of
Amable C. P309,187.76
P1,868.702.00, or P560,610.60 for the cost of labor, to the said cost of materials, the total amount Lumanlan ------
to which plaintiffs would therefore, be justly and equitably entitled is the sum of P2,429,312.60. ------
And the facts and circumstances as proven, in the honest opinion of this Court as a court of law
and equity, truly warrant that this said amount be awarded to the plaintiffs. (pp. 193-195, Pepito 142,510.00
Record.) Velasco --------
------------

Parenthetically, the following reprobation by the Court of Appeals of the foregoing posture Apolonio de 60,325.51
of the trial court reveals how much the same had evidently influenced said appellate court los Santos -----
---
to rule in favor of allowing respondent's appeal:
Felipe 82,705.00
Lumbang ------
This Court finds no compelling reason to bar appellate review of the unprecedented ------------
judgment, mentioned at the outset, which revalued upwards four-fold to repeat, four
times — the amount of plaintiffs' claim (as alleged in their complaint) Ramon 12,600.00
representing actual costs of houses built by them for the former owner-mortgagor of Galang ---------
-----------
the subdivision that, eventually, was acquired by the GSIS as highest bidder at the
foreclosure sale.
That the foregoing expenditures and- claims are computed on the basis of actual
It bears emphasis that "unjust enrichment", which was invoked by plaintiffs in suing the GSIS costs of ma and labor as of the time of the construction;
instead of the former owner and/or the developer (which contracted with plaintiff in regard to the
houses in question), is manifest in the judgment sought to be elevated to this appellate court.
For, under that judgment, plaintiffs stand to receive, from and at the expense of the GSIS, as
 That owing to the inflation which is a matter of judicial notice, such costs of
materials and labor is now reasonably assessed at very much more than the above-
mentioned amount
xxx xxx xxx
8. That the construction of houses and improvements has greatly increased the
value of the aforesaid defendant's property. (Pp. 71-72, Record.)
The answer of GSIS to the foregoing allegations is as follows:
5. It specifically denies the allegations in paragraph 5, the truth being defendant is
not liable for any of the materials, supplies and labor allegedly furnished and
supplied by plaintiffs to Palos Verdes Estate Subdivision as the same pertain
exclusively to Laigo Realty Corporation, since on 7 May 1970, Laigo Realty
Corporation executed a Deed of Quitclaim and Undertaking, xerox copy of which is
hereto attached as Annex "1" and made an integral part hereof, holding free and
harmless defendant from claims of materialmen, contractor or any other person
arising out of or having connection with the development of the said subdivision.
Thus the "NOW, THEREFORE" clause of said Deed of Quitclaim and Undertaking
provides:
NO THEREFORE, for and in consideration of the above premises; and in the event of
disapproval by the GSIS of its proposal to develop- the aforesaid property of ALTA FARMS,
INC. into a subdivision, REALTY CORPORATION hereby forever quitclaims, releases and
waives in favor of the GSIS its rights and interests in the aforesaid property of ALTA
FARMS, INC. arising out of the development of the aforesaid property into a subdivision,
and further shall answer and pay for any claim of or liability to any contractor, material
furnisher, lot buyer, or any other person arising out of or having connection with said
subdivision development. If the GSIS, for any reason, shall be held liable on any such claims
or liabilities or otherwise its mortgage hen be diminished, LAIGO REALTY
CORPORATION further binds itself to indemnify the GSIS such sums corresponding to
such claims or diminution.
xxx xxx xxx
8. It admits the allegations in paragraph 8.(Pp. 76-77, Record.)
In other words, apart from- admitting expressly that "the constructions of houses and
improvements has greatly increased the value" of the subdivision it now owns, nowhere in
its statement of the material facts in Paragraph 5 of its answer relative to the allegations of
the petitioners regarding the construction by them of the houses in dispute and the cost
thereof to each of them does respondent deny said facts as not true. What GSIS limitedly
alleged in its answer is the legal proposition that it is not liable therefor because of lack of
contractual privity between it and petitioners. It may be safely said then that it does not
now lie in the lips of GSIS to maintain that petitioners did not build the houses in question
and that the cost thereof is different from what petitioners have stated in their complaint.
What is more, the reliance of GSIS on the Deed of Quitclaim of May 7, 1970 is to Our mind
misplaced. We have analyzed this document carefully, and We are of the considered view
that it is actually evidence against GSIS. Even if what is unnatural in ordinary business or
industrial experience were assumed, that is, that GSIS was unaware all along during the
period of their construction of the work then being done by petitioners - albeit it is possible
there was no express consent given to - by and thru the aforementioned deed of quitclaim,
GSIS agreed to receive and did actually receive the benefits of what petitioners had
accomplished or would accomplish under their contracts with Laigo., So much so, that the
dispositive portion of the quitclaim dead does not really relieve GSIS from liability to
petitioners. Properly viewed, GSIS virtually assumed under said deed, liability in regard to
claims like those of petitioners who might not be paid by Laigo albeit said liability has been
made subject to the reservation that it could seek indemnity from Laigo.
GSIS received Alta Farms' proposal about the conversion of their piggery project into a
subdivision (in which Laigo Realty's participation was mentioned) as early as February 5,
1970. It was only in November, 1970 that it issued its "cease and desist" order. From all
indications, the jobs of petitioners were already practically finished then. Thus, in
Paragraph 17 of its Comment on the petition herein, GSIS states:
17. While the properties were under foreclosure and even pending the consolidation of titles, certain
lots were sold to installment basis, for which Laigo received P985,000.00, and 63 houses in various
stages were constructed, among which are the houses allegedly constructed by the petitioners. (P.
387, Record.)
And in the Joint Manifestation filed by the parties with the trial court as late as February
20, 1976, GSIS made it clear that "defendant (GSIS) up to the present has not collected from
the house owners of the 63 houses built by the plaintiffs notwithstanding the foreclosure
proceedings and consolidation 6f ownership." Again, it is thus obvious that GSIS assumed
ownership of the houses built by petitioners and was benefited by the same, and the fact
that it has not collected any payment from the "house owners" or the construction of the
houses respectively occupied by them is of no moment insofar as its liability to petitioners is
concerned. Surely, it is not pretended that those "house owners" would be allowed to enrich
themselves at the expense of petitioners. Indeed, the term "house owners" is inappropriate,
if only because in Paragraph 16 of its Comment on the petition herein, GSIS unequivocally
state that "GSIS foreclosed the properties including all improvements (the houses in 1970"
and, thereby, became the owner of said houses.
Upon the foregoing factual premises, the legal issue that arises is whether or not GSIS is
liable to the petitioners for the cost of the materials and labor furnished by them in
construction of the 63 houses now owned by the GSIS and for the construction of which no
payment has been made on the balance due petitioners. Our considered view is and We so
hold that even in equity alone, GSIS should pay the petitioners. After all, it admits it has
not collected from the ones who appear to be the buyers thereof, albeit it must be collecting
the installments on the lots. All it has to do then is to pass on to them what it has to pay
petitioners. In law, GSIS is, under the peculiar circumstances of this case, the owner of said
houses. Pursuant to Article 1729 of the Civil Code:
Those who put their labor upon or furnish materials for a piece of work undertaken by the contractor
have an action against the owner up to the amount owing from the latter to the contractor at the
time the claim is made. However, the following shall not prejudice the laborers, employees and
furnishers of materials:
1) Payments made by the owner to the contractor before they are due;
2) Renunciation by the contractor of any amount due him from the owner.
This article is subject to the provisions of special laws. (1597a)
Laigo admittedly has not paid petitioners. The "bouncing" checks issued by it in their favor
is mentioned by GSIS itself in its statement of the facts. We hold that upon this premise it is
a fair construction of the Deed of Quitclaim aforementioned, that GSIS can be held liable to
petitioners, without prejudice to its securing corresponding indemnity from Laigo. It is
obvious from the terms of said deed that GSIS contemplated the possibility of its being
liable for Laigo's account, otherwise, there was no need for the reservation. This is one such
liability. In this connection while, indeed, Article 1729 refers to the laborers and
materialmen themselves, under the peculiar circumstances of this case, it is but fair and
just that petitioners be deemed as suing for the reimbursement of what they have already
paid the laborers and materialmen, as otherwise they (petitioners) would be unduly
prejudiced while either Laigo, GSIS or the occupants of the houses would enrich themselves
at their expense. It is a bad law that would allow such a result.
At this juncture, We need to add only that Article 1311 of the Civil Code which GSIS
invokes is not applicable where the situation contemplated in Article 1729 obtains. The
intention of the latter provision is to protect the laborers and the materialmen from being
taken advantage of by unscrupulous contractors and from possible connivance between
owners and contractors. Thus, a constructive vinculum or contractual privity is created by
this provision, by way of exception to the principle underlying Article 1311 between the
owner, on the one hand, and those who furnish labor and/or materials, on the other. As a
matter of fact, insofar as the laborers are concerned, by a special law, Act No. 3959, they are
given added protection by requiring contractors to file bonds guaranteeing payment to them.
And under Article 2242 of the Civil Code, paragraphs (3) and (4), claims of laborers and
materialmen, respectively, enjoy preference among the creditors of the owner in regard to
specific immovable property.
As regards Article 525 of the Civil Code also invoked by GSIS, suffice it to say that this
provision refers particularly to instances where the bad faith or the good faith of the builder
is the decisive factor in determining liability. In the case at bar, there is no necessity to pass
on the question of whether petitioners acted in good faith or bad faith, for the simple reason
that under the Deed of Quitclaim, GSIS freely accepted the benefits of what they have
accomplished.
considered that under the Deed of Quitclaim several times mentioned earlier, GSIS freely
accepted from Laigo the benefits of the expenses for labor and material incurred by
petitioners in the houses in question, hence, as We have said above, GSIS had no legal basis
for insisting that Article 1729 of the Civil Code does not apply to this case, it being
indisputably the owner of said houses already. Besides, it must be borne in mind that the
claims of petitioners are in the nature of claims of the laborers and materialmen
themselves. Accordingly, Article 2208, paragraphs 2, 7 and 11, are applicable hereto.
Indeed, the "house owners " or occupants who have not paid either petitioners or Laigo, or
even the GSIS should not be allowed to enrich themselves at the expense of petitioners, and
the most feasible way of avoiding such a result is for GSIS to Pay Petitioners and then pass
on to said "house owners" what it would have to pay under this judgment.
IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered affirming the decision
appealed from, with the modification that respondent GSIS shall pay petitioners the total
amount of SIX HUNDRED SEVEN THOUSAND THREE HUNDRED TWENTY EIGHT
AND 27/100 PESOS (P607,328.27), plus interest at 8% per annum from April 14, 1975
(which is less than that allowed by Circular No. 416 of the Central Bank dated July 29,
1974) until fully paid, the said sum to correspond separately to petitioners as follows:
Amable C. Lumanlan P309,187.76 plus interest
Pepito Velasco 142,510.00
Apolonio de log Santos 60,325.51
Felipe Lumbang 82,705.00 and
Ramon Galang 12,600.00

plus Fifty Thousand (P50,000) Pesos as attorney's fees for an of them and the costs.
GSIS contends that Laigo should have been joined as defendant in this case. While
petitioners could have done so, they were not under such obligation mandatorily. Under the
circumstances of this case, Laigo is only a necessary party, not an indispensable one. And to
allay GSIS, its right to secure reimbursement from Laigo is hereby reserved.

Coming now to the amount for which GSIS is liable, We reiterate that, to be sure, there is
evidence in the record, uncontradicted at that, regarding the lower value of money at the
time the demand upon GSIS was made compared to that when petitioners furnished the
labor and materials in question. We are not, however, inclined to go along with the trial
court that the amount demanded should be multiplied four times. We believe that it being a
matter of judicial notice that the prices of labor and material have substantially risen since
1970, it would be fair enough to make respondent liable for interest on the amount of the
demand, which is supported by evidence and not effectively disputed by GSIS in its answer,
at the rate of 12% per annum from the time petitioners filed their complaint below on April
14,1975.

In addition, We hold that our award to petitioners of attorney's fees in the amount of Fifty
Thousand (P50,00.00) Pesos would only be just and proper. As We view the position taken
by GSIS in this case, petitioners were compelled to litigate over a matter that could have
been justly and equitably settled without having to go to court, particularly, when it is
 [No. 16454. September 29, 1921]
GEORGE A. KAUFFMAN, plaintiff and appellee, vs. THE PHILIPPINE NATIONAL BANK,
defendant and appellant.
1.BANKS AND BANKING; TELEGRAPHIC EXCHANGE; ACTION BY THE PAYEE.—A person in
whose favor a bank sells telegraphic exchange on a foreign country may, in case
payment is refused by the bank of destination, maintain an action against the bank
selling the exchange, without regard to whether such payee was an immediate party to
the purchase of the exchange or not.
2.CONTRACT; STIPULATION IN FAVOR OF THIRD PERSON; REVOCATION OF SUCH
STIPULATION.—A stipulation in favor of a third person cannot be revoked by the
obligated party alone, without the conformity of the other contracting party.
APPEAL from a judgment of the Court of First Instance of Manila. Ostrand, J.
The facts are stated in the opinion of the court.
Roman J. Lacson for appellant.
Ross & Lawrence for appellee.
STREET, J.:
At the time of the transaction which gave rise to this litigation the plaintiff, George A.
Kauffman, was the president of a domestic corporation engaged chiefly in the exportation of
hemp from the Philippine Islands and known as the Philippine Fiber and Produce
Company, of which company the plaintiff apparently held in his own right nearly the entire
issue of capital stock. On February 5, 1918, the board of directors of said company, declared
a dividend of P100,000 from its surplus earnings for the year 1917, of which the plaintiff
was entitled to the sum of P98,000. This amount was accordingly placed to his credit on the
books of the company, and so remained until in October of the same year when an
unsuccessful effort was made to transmit the whole, or a greater part thereof, to the
plaintiff in New York City.
In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the
Philippine Fiber and Produce Company, presented himself in the exchange department of
the Philippine National Bank in Manila and requested that a telegraphic transfer of
$45,000 should be made to the plaintiff in New York City, upon account of the Philippine
Fiber and Produce Company. He was informed that the total cost of said transfer, including
exchange and cost of message, would be P90,355.50. Accordingly, Wicks, as treasurer of the
Philippine Fiber and Produce Company, thereupon drew and delivered a check for that
amount on the Philippine National Bank; and the same was accepted by the officer selling
the exchange in payment of the transfer in question. As evidence of this transaction a
document was made out and delivered to Wicks, which is referred to by the bank’s assistant
cashier as its official receipt. This memorandum receipt is in the following
language:jgc:chanrobles.com.ph
"October 9th, 1918.
"CABLE TRANSFER BOUGHT FROM
"PHILIPPINE NATIONAL BANK,
"Manila, P. I. Stamp P18.
"Foreign Amount Rate
$45,000 3/8% P90,337.50
"Payable through Philippine National Bank, New York. To G. A. Kauffman, New York.
Total P90,355.50. Account of Philippine Fiber and Produce Company. Sold to Messrs.
Philippine Fiber and Produce Company, Manila.
(Sgd.) "Y. LERMA,
"Manager, Foreign Department."cralaw
\virtua1aw library
On the same day the Philippine National Bank dispatched to its New York agency a
cablegram to the following effect:jgc:c
hanrobles.com.ph
"Pay George A. Kauffman, New York, account Philip- pine Fiber Produce Co., $45,000.
(Sgd.) PHILIPPINE NATIONAL BANK, Manila."cralaw vir
tua1aw library
Upon receiving this telegraphic message, the bank’s representative in New York sent a
cable message in reply suggesting the advisability of withholding this money from
Kauffman, in view of his reluctance to accept certain bills of the Philippine Fiber and
Produce Company. The Philippine National Bank acquiesced in this and on October 11
dispatched to its New York agency another message to withhold the Kauffman payment as
suggested.
Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled to
Kauffman in New York, advising him that $45,000 had been placed to his credit in the New
York agency of the Philippine National Bank; and in response to this advice Kauffman
presented himself at the office of the Philippine National Bank in New York City on October
15, 1918, and demanded the money. By this time, however, the message from the Philippine
National Bank of October 11, directing the withholding of payment had been received in
New York, and payment was therefore refused.
In view of these facts, the plaintiff Kauffman instituted the present action in the Court of
First Instance of the city of Manila to recover said sum, with interest and costs; and
judgment having been there entered favorably to the plaintiff, the defendant appealed.
Among additional facts pertinent to the case we note the circumstance that at the time of
the transaction above-mentioned, the Philippine Fiber and Produce Company did not have
on deposit in the Philippine National Bank money adequate to pay the check for P90,355.50,
which was delivered in payment of the telegraphic order; but the company did have credit to
that extent, or more, for overdraft in current account, and the check in question was
charged as an overdraft against the Philippine Fiber and Produce Company and has
remained on the books of the bank as an interest-bearing item in the account of said
company.
It is furthermore noteworthy that no evidence has been introduced tending to show failure
of consideration with respect to the amount paid for said telegraphic order. It is true that in
the defendant’s answer it is suggested that the failure of the bank to pay over the amount of
this remittance to the plaintiff in New York City, pursuant to its agreement, was due to a
desire to protect the bank in its relations with the Philippine Fiber and Produce Company,
whose credit was secured at the bank by warehouse receipts on Philippine products; and it
is alleged that after the exchange in question was sold the bank found that it did not have
sufficient security to warrant payment of the remittance. In view, however, of the failure of
the bank to substantiate these allegations, or to offer any other proof showing failure of
consideration, it must be assumed that the obligation of the bank was supported by
adequate consideration.
In this court the defense is mainly, if not exclusively, based upon the proposition that,
inasmuch as the plaintiff Kauffman was not a party to the contract with the bank for the
transmission of this credit, no right of action can be vested in him for the breach thereof. "In
this situation," — we here quote the words of the appellant’s brief, — "if there exists a cause
of action against the defendant, it would not be in favor of the plaintiff who had taken no
part at all in the transaction nor had entered into any contract with the plaintiff, but in
favor of the Philippine Fiber and Produce Company, the party which contracted in its own
name with the defendant."
cralaw virtua1aw library
The question thus placed before us is one purely of law; and at the very threshold of the
discussion it can be stated that the provisions of the Negotiable Instruments Law (Act No.
2031) are not relevant to the case. The reason for this is that before the Negotiable
Instruments Law can come into operation there must be a document in existence of the
character described in section 1 of that Law; and no rights properly speaking arise in
respect to said instrument until it is delivered. In the case before us there was an order, it is
true, transmitted by the defendant bank to its New York branch, for the payment of a
specified sum of money to George A. Kauffman. But this order was not made payable "to
order" or "to bearer," as required in subsection (d) of that Act; and inasmuch as it never left
the possession of the bank, or its representative in New York City, there was no delivery in
the sense intended in section 16 of the same Law. In this connection it is unnecessary to
point out that the official receipt delivered! by the bank to the purchaser of the telegraphic
order, and already set out above, cannot itself be viewed in the light of a negotiable
instrument, although it affords complete proof of the obligation actually assumed by the
bank.
Stated in bare simplicity the admitted facts show that the defendant bank for a valuable
consideration paid by the Philippine Fiber and Produce Company agreed on October 9, 1918,
to cause a sum of money to be paid to the plaintiff in New York City; and the question is
whether the plaintiff can maintain an action against the bank for the nonperformance of
said undertaking. In other words, is the lack of privity with the contract on the part of the
plaintiff fatal to the maintenance of an action by him?
The only express provision of law that has been cited as bearing directly on this question is
the second paragraph of article 1257 of the Civil Code; and unless the present action can be
maintained under that provision, the plaintiff admittedly has no case. This provision states
an exception to the more general rule expressed in the first paragraph of the same article to
the effect that contracts are productive of effects only between the parties who execute
them; and in harmony with this general rule are numerous decisions of this court (Wolfson
v. Estate of Martinez, 20 Phil., 340; Ibañez de Aldecoa v. Hongkong and Shanghai Banking
Corporation, 22 Phil., 572, 584; Manila Railroad Co. v. Compañia Trasatlantica, and
Atlantic, Gulf & Pacific Co., 38 Phil., 875, 894.)
The paragraph introducing the exception which we are now to consider is in these
words:jgc:chanrobles.com.ph
"Should the contract contain any stipulation in favor of a third person, he may demand its
fulfillment, provided he has given notice of his acceptance to the person bound before the
stipulation has been revoked." (Art. 1257, par. 2, Civ. Code.)
In the case of Uy Tam and Uy Yet v. Leonard (30 Phil., 471), is found an elaborate
dissertation upon the history and interpretation of the paragraph above quoted and 80
complete is the discussion contained in that opinion that it would be idle for us here to go
over the same matter. Suffice it to say that Justice Trent, speaking for the court in that
case, sums up its conclusions upon the conditions governing the right of the person for
whose benefit a contract is made to maintain an action for the breach thereof in the
following words:jgc:chanrobles.com.ph
"So, we believe the fairest test, in this jurisdiction at least, whereby to determine whether
the interest of a third person in a contract is a stipulation pour autrui, or merely an
incidental interest, is to rely upon the intention of the parties as disclosed by their contract.
"If a third person claims an enforcible interest in the contract, that question must be settled
by determining whether the contracting parties desired to tender him such an interest. Did
they deliberately insert terms in their agreement with the avowed purpose of conferring a
favor upon such third person? In resolving this question, of course, the ordinary rules of
construction and interpretation of writings must be observed." (Uy Tam and Uy Yet v.
Leonard, supra.)
Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui, it
matters not whether the stipulation is in the nature of a gift or whether there is an
obligation owing from the promisee to the third person. That no such obligation exists may
in some degree assist in determining whether the parties intended to benefit a third person,
whether they stipulated for him." (Uy Tam and Uy Yet v. Leonard, supra.)
In the light of the conclusions thus stated, the right of the plaintiff to maintain the present
action is clear enough; for it is undeniable that the bank’s promise to cause a definite sum of
money to be paid to the plaintiff in New York City is a stipulation in his favor within the
meaning of the paragraph above quoted; and the circumstances under which that promise
was given disclose an evident intention on the part of the contracting parties that the
plaintiff should have that money upon demand in New York City. The recognition of this
unqualified right in the plaintiff to receive the money implies in our opinion the right in him
to maintain an action to recover it; and indeed if the provision in question were not
applicable to the facts now before us, it would be difficult to conceive of a case arising under
it.
It will be noted that under the paragraph cited a third person seeking to enforce compliance
with a stipulation in his favor must signify his acceptance before it has been revoked. In this
case the plaintiff clearly signified his acceptance to the bank by demanding payment; and
although the Philippine National Bank had already directed its New York agency to
withhold payment when this demand was made, the rights of the plaintiff cannot be
considered to have been prejudiced by that fact. The word "revoked," as there used, must be
understood to imply revocation by the mutual consent of the contracting parties, or at least
by direction of the party purchasing the exchange.
In the course of the argument attention was directed to the case of Legniti v. Mechanics, etc.
Bank (130 N. E. Rep., 597), decided by the Court of Appeals of the State of New York on
March 1, 1921, wherein it is held that, by selling a cable transfer of funds on a foreign
country in ordinary course, a bank incurs a simple contractual obligation, and cannot be
considered as holding the money which was paid for the transfer in the character of a
specific trust. Thus, it was said, "Cable transfers, therefore, mean a method of transmitting
money by cable wherein the seller engages that he has the balance at the point on which the
payment is ordered and that on receipt of the cable directing the transfer his correspondent
at such point will make payment to the beneficiary described in the cable. All these
transactions are matters of purchase and sale create no trust relationship."cralaw
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As we view it there is nothing in the decision referred to decisive of the question now before
us, which is merely that of the right of the beneficiary to maintain an action against the
bank selling the transfer.
Upon the considerations already stated, we are of the opinion that the right of action exists,
and the judgment must be affirmed. It is so ordered, with costs against the appellant.
Interest will be computed as prescribed in section 510 of the Code of Civil Procedure.
Johnson, Araullo, Avanceña and Villamor, JJ., concur.

No. L-20853. May 29, 1967.
BONIFACIO BROS., INC., ET AL., plaintiffs-appellants, vs. ENRIQUE MORA, ET AL.,
defendants-appellees.
Contracts; Contracts take effect only between the parties thereto; Exception.—
Contracts take effect only between the parties thereto, except in some specific instances
provided by law where the contract contains some stipulation in favor of a third person
which is known as a stipulation pour autrui or a provision in favor of a third person not a
party to the contract. Under this doctrine, a third person is allowed to avail himself of a
benef it granted to him by the terms of the contract, provided that the contracting parties
have clearly and deliberately conferred a favor upon such person. Consequently, a third
person, not a party to the contract, has no action against the parties thereto, and cannot
generally demand the enforcement of the same.
Same; Stipulation pour autrui; When a third person has an enforceable interest in the
contract.—The question of whether a third person has an enforceable interest in a contract
must be settled by determining whether the contracting parties intended to tender him such
an interest by deliberately inserting terms in their agreement with the avowed purpose of
conferring a favor upon such third person. The fairest test to determine whether the interest
of a third person in a contract is a stipulation pour autrui or merely an incidental interest,
is to rely upon the intention of the parties as disclosed by their contract.
Same; Insurance; Nature of insurance policy.—A policy of insurance is a distinct and
independent contract between the insured and insurer. A third person has no right in law or
equity to the proceeds of an insurance unless there is a contract or trust, expressed or
implied, between the insured and third person.
Same; Interpretation of clause in insurance contract regarding repair of damaged
vehicle.—The clause in an insurance policy, authorizing the owner of the damaged vehicle to
contract for its repair does not mean that the repairman is entitled to collect the cost of
repair out of the proceeds of the insurance. It merely establishes the procedure that the
insured has to follow in order to be entitled to indemnity for repair.
Same; Meaning of loss in insurance.—The word "loss" in insurance law embraces
injury or damage. A loss may be total or partial.
Same; When mortgagee of damaged car, as beneficiary, is preferred to the repairman
with respect to insurance proceeds.—Where the mortgagee is the beneficiary in a car
insurance, it has a better right than the repairman to the insurance proceeds.
APPEAL from a decision of the Court of First Instance of Manila. Solidum, J.
The facts are stated in the opinion of the Court.
CASTRO, J.:
This is an appeal from the decision of the Court of First Instance of Manila, Branch XV, in
civil case 48823, affirming the decision of the Municipal Court of Manila, declaring the H.S.
Reyes, Inc. as having a better right than the Bonifacio Bros. Inc. and the Ayala Auto Parts
Company, appellants herein, to the proceeds of motor insurance policy A-0615, in the sum of
P2,002.73, issued by the State Bonding & Insurance Co. Inc., and directing payment of the
said amount to the H.S. Reyes, Inc.
Enrique Mora, owner of an Oldsmobile sedan model 1956, bearing plate No. QC - 8088,
mortgaged the same to the H.S. Reyes, Inc., with the condition that the former would insure
the automobile, with the latter as beneficiary. The automobile was thereafter insured on
June 23, 1959 with the State Bonding & Insurance Co. Inc., and motor car insurance policy
A-0615 was issued to Enrique Mora, the pertinent provisions of which
read:jgc:chanrobles.com.ph
"1. The Company (referring to the State Bonding & Insurance Co., Inc) will, subject to the
Limits of Liability, indemnify the Insured against loss of or damages to the Motor Vehicle
and its accessories and spare parts whilst thereon; (a) by accidental collision or overturning
or collision or overturning consequently upon mechanical breakdown or consequent upon
wear and tear.
2. At its own option the Company may pay in cash the amount of the loss or damage or may
repair, reinstate, or replace the Motor Vehicle or any part thereof or its accessories or spare
parts. The liability of the Company shall not exceed to value of the parts whichever is the
less. The Insured’s estimate of value stated in the schedule will be the maximum amount
payable by the Company in respect of any claim for loss or damage.
4. The Insured may authorize the repair of the Motor Vehicle necessitated by damage for
which the Company may he liable under this Policy provided that: — (a) The estimated cost
of such repair does not exceed the Authorized Repair Limit. (b) A detailed estimate of the
cost is forwarded to the Company without delay, subject to the condition that ‘Loss, if any, is
payable to H.S. Reyes, Inc.’, by virtue of the fact that said Oldsmobile sedan was mortgaged
in favor of the said H.S. Reyes, Inc. and that under a clause in said insurance policy, any
loss was made payable to the H.S. Reyes, Inc. as Mortgagee;
During the effectivity of an insurance contract, the car met with an accident. The insurance
company then assigned the accident to the H.H. Bayne Adjustment Co. for investigation and
appraisal of the damage. Enrique Mora, without the knowledge and consent of the H.S.
Reyes, Inc., authorized the Bonifacio Bros. Inc. to furnish the labor and materials, some of
which were supplied by the Ayala Auto Parts Co. For the cost of labor and materials,
Enrique Mora was billed at P2,102.73 through the H. H. Bayne Adjustment Co. The
insurance company, after claiming a franchise in the amount of P100, drew a check in the
amount of P2,002.73, as proceeds of the insurance policy, payable to the order of Enrique
Mora or H.S. Reyes, Inc., and entrusted the check to the H.H. Bayne Adjustment Co. for
disposition and delivery to the proper party. In the meantime, the car was delivered to
Enrique Mora without the consent of the H.S. Reyes, Inc., and without payment to the
Bonifacio Bros. Inc. and Ayala Auto Parts Co. of the cost of repairs and materials.
Upon the theory that the insurance proceeds should be paid directly to them, the Bonifacio
Bros. Inc. and the Ayala Auto Parts Co. filed on May 8, 1961 a complaint with the Municipal
Court of Manila against Enrique Mora and the State Bonding & Insurance Co. Inc. for the
collection of the sum of P2,002.73. The insurance company filed its answer with a
counterclaim for interpleader, requiring the Bonifacio Bros. Inc. and the H.S. Reyes, Inc. to
interplead in order to determine who has a better right to the insurance proceeds in
question. Enrique Mora was declared in default for failure to appear at the hearing, and
evidence against him was received ex parte. However, the counsel for the Bonifacio Bros.
Inc., Ayala Auto Parts Co. and State Bonding & Insurance Co. Inc. submitted a stipulation
of facts, on the basis of which the Municipal Court rendered a decision declaring the H.S.
Reyes, Inc. as having a better right to the disputed amount, and ordering the State Bonding
& Insurance Co. Inc. to pay to the H.S Reyes, Inc. the said sum of P2,002.73. From this
decision, the herein appellants elevated the case to the Court of First Instance of Manila
before which the stipulation of facts was reproduced. On October 19, 1962 the latter court
rendered a decision, affirming the decision of the Municipal Court. The Bonifacio Bros. Inc.
and the Ayala Auto Parts Co. moved for reconsideration of the decision, but the trial court
denied the motion. Hence, this appeal.
The main issue raised is whether there is privity of contract between the Bonifacio Bros. Inc
and the Ayala Auto Parts Co. on the one hand and the insurance company on the other. The
appellants argue that the insurance company and Enrique Mora are parties to the repair of
the car as well as the to wage thereof performed. The authority for this assertion is to be
found, it is alleged, in paragraph 4 of the insurance contract which provides that "the
insured may authorize the repair of the Motor Vehicle necessitated by damage for which the
company may liable under the policy provided that (a) the estimated cost of such repair does
not exceed the Authorized Repair Limit, and (b) a detailed estimate of the cost is forwarded
to the company without delay." It is stressed that the H.H. Bayne Adjustment Company’s
recommendation of payment of the appellants’ bill for materials and repairs for which the
latter drew a check for P2,002.73 indicates that Mora and the H.H. Bayne Adjustment Co.
acted for and in representation of the insurance company.
This argument is, in our view, beside the point, because from the undisputed facts and from
the pleadings it will be seen that the appellants’ alleged cause of action rests exclusively
upon the terms of the insurance contract. The appellants seek to recover the insurance
proceeds, and for this purpose, they rely upon paragraph 4 of the insurance contract
document executed by and between the State Bonding & Insurance Company, Inc. and
Enrique Mora. The appellants are not mentioned in the contract as parties thereto; nor is
there any clause or provision thereof from which we can infer that there is an obligation on
the part of the insurance company to pay the cost of repairs directly to them. It is
fundamental that contracts take effect only between the parties thereto, except in some
specific instances provided by law where the contract contains some stipulation in favor of a
third person. 1 Such stipulation is known as stipulation pour autrui or a provision in favor
of a third person not a party to the contract. Under this doctrine, a third person is allowed to
avail himself of a benefit granted to him by the terms of the contract, provided that the
contracting parties have clearly and deliberately conferred a favor upon such person. 2
Consequently a third person not a party to the contract has no action against the parties
thereto, and cannot generally demand the enforcement of the same. 3 The question of
whether a third person has an enforceable interest in a contract, must be settled by
determining whether the contracting parties intended to tender him such an interest by
deliberately inserting terms in their agreement with the avowed purpose of conferring a
favor upon such third person. In this connection, this Court has laid down the rule that the
fairest test to determine whether the interest of a third person in a contract is a stipulation
pour autrui or merely an incidental interest, is to rely upon the intention of the parties as
disclosed by their contract. 4 In the instant case the insurance contract does not contain any
words or clauses to disclose an intent to give any benefit to any repairmen or material men
in case of repair of the car in question. The parties to the insurance contract omitted such
stipulation, which is a circumstance that supports the said conclusion. On the other hand,
the "loss payable" clause of the insurance policy stipulates that "Loss, if any, is payable to
H.S. Reyes, Inc." indicating that it was only the H.S. Reyes, Inc. which they intended to
benefit.
We likewise observe from the brief of the State Bonding & Insurance Company that it has
vehemently opposed the assertion or pretension of the appellants that they are privy to the
contract. If it were the intention of the Insurance Company to make itself liable to the
repair shop or material men, it could have easily inserted in the contract a stipulation to
that effect. To hold now that the original parties to the insurance contract intended to confer
upon the appellants the benefit claimed by them would require as to ignore the
indispensable requisite that a stipulation pour autrui must be clearly expressed by the
parties, which we cannot do.
As regards paragraph 4 of the insurance contract, a perusal thereof would show that instead
of establishing privity between the appellant and the insurance company, such stipulation
merely establishes the procedure that the insured has to follow in order to be entitled to
indemnity for repair. This paragraph therefore should not be construed as bringing into
existence in favor of the appellants a right of action against the insurance company as such
intention can never be inferred therefrom.
Another cogent reason for not recognizing a right of action by the appellants against the
insurance company is that "a policy of insurance is a distinct and independent contract
between the insured and insurer, and third persons have no right either in a court of equity,
or in a court of law, to the proceeds of it, unless there be some contract of trust, expressed or
implied, by the insured and third person." 5 In this case, no contract of trust, expressed or
implied exists. We, therefore, agree with the trial court that no cause of action exists in
favor of the appellants in so far as the proceeds of insurance are concerned. The appellant’s
claim, if at all, is merely equitable in nature and must be made effective through Enrique
Mora who entered into a contract with the Bonifacio Bros Inc. This conclusion is deducible
not only from the principle governing the operation and effect of insurance contracts in
general, but is clearly covered by the express provisions of section 50 of the Insurance Act
which read:jgc:chanrob
les.com.ph
"The insurance shall be applied exclusively to the proper interest of the person in whose
name it is made unless otherwise specified in the policy."cralaw virtua1aw library
The policy in question has been so framed that "Loss, if any, is payable to H. S. Reyes, Inc."
which unmistakably shows the intention of the parties.
The final contention of the appellants is that the right of the H. S. Reyes, Inc. to the
insurance proceeds arises only if there was loss and not where there is mere damage as in
the instant case. Suffice it to say that any attempt to draw a distinction between "loss" and
"damage" is uncalled for, because the word "loss" in insurance law embraces injury or
damage.
"Loss in insurance, defined. — The injury or damage sustained by the insured in
consequence of the happening of one or more of the accidents or misfortune against which
the insurer, in consideration of the premium, has undertaken to indemnify the insured." (1
Bouv. Ins. No. 1215; Black’s Law Dictionary; Cyclopedic Law Dictionary, cited in Martin’s
Phil. Commercial Laws, Vol. 1, 1961 ed. p. 608).
Indeed, according to sec. 120 of the Insurance Act, a loss may be either total or partial.
Accordingly, the judgment appealed from is hereby affirmed, at appellants’ cost.

No. L-27696. September 30, 1977.*
MIGUEL FLORENTINO, ROSARIO ENCARNACION de FLORENTINO, MANUEL ARCE,
JOSE FLORENTINO, VICTORINO FLORENTINO, ANTONIO FLORENTINO,
REMEDION ENCARNACION and SEVERINA ENCARNACION, petitioners-
appellants, vs. SALVADOR ENCARNACION, SR., SALVADOR ENCARNACION, JR., and
ANGEL ENCARNACION, oppositors to encumbrance-petitioners-appellees.
Contracts; Extra-judicial partition; Land Registration; The validity of or compliance
with a stipulation appearing in an extra-judicial partition cannot be left to the will of one of
the parties.—The stipulation (Exhibit 0-1) is part of an extra-judicial partition (Exh. 0) duly
agreed and signed by the parties, hence the same must bind the contracting parties thereto
and its validity or compliance cannot be left to the will of one of them (Art. 1308, N.C.C.).
Under Art. 1311 of the New Civil Code, this stipulation takes effect between the parties,
their assigns and heirs.
Same; Same; Same; A stipulation that the fruits of a parcel of land shall be used to
defray certain expenses connected with religious festivities or occasions is a stipulation pour
autrui.—The second paragraph of Article 1311 above-quoted states the law on
stipulations pour autrui. Considering the nature and purpose of the stipulation (Exh. 0-1),
We hold that said stipulation is a stipulation pour autrui. A stipulation pour autrui is a
stipulation in favor of a third person conferring a clear and deliberate favor upon him, and
which stipulation is merely a part of a contract entered into by the parties, neither of whom
acted as agent of the third person, and such third person may demands its fulfillment
provided that he communicates his acceptance to the obligor before it is revoked. The
requisites are: (1) that the application in favor of a third person should be a part, not the
whole, of the contract; (2) that the favorable stipulation should not be conditioned or
compensated by any kind of obligation whatever; and (3) neither of the contracting parties
bears the legal representation or authorization of third party.
Same; Same; Same; Test to be used in determining whether stipulation constitutes a
valid stipulation pour autrui.—The fairest test to determine whether the interest of third
person in a contract is a stipulation pour autrui or merely an incidental interest, is to rely
upon the intention of the parties as disclosed by their contract. In applying this test, it
matters not whether the stipulation is in the nature of a gift or whether there is an
obligation owing from the promisee to the third person. That no such obligation exists may
in some degree assist in determining whether the parties intended to benefit a third person.
Same: Same; Same; Same.—The evidence on record shows that the true intent of the
parties is to confer a direct and material benefit upon the Church. The fruits of the aforesaid
land were used thenceforth to defray the expenses of the Church in the preparation and
celebration of the Holy Week, an annual Church function. Suffice it to say that were it not
for Exhibit 0-1, the Church would have necessarily expended for this religious occasion, the
annual religious procession during the Holy Week and also for the repair and preservation
of all the statues, tables, carriages and all other things necessary for the celebration of the
Seven Last Words.
Same; Same; Same; A stipulation pour autrui may be accepted anytime before it is
revoked. Acceptance of a stipulation pour autrui need not be in any particular form and may
be inferred from the beneficiary’s enjoyment of the fruits flowing therefrom for a good number
of years.—While a stipulation in favor of a third person has no binding effect in itself before
its acceptance by the party favored, the law does not provide when the third person must
make his acceptance. As a rule, there is no time limit; such third person has all the time
until the stipulation is revoked. Here, We find that the Church accepted the stipulation in
its favor before it is sought to be revoked by some of the co-owners, namely the petitioners-
appellees herein. It is not disputed that from the time of the death of Dona Encarnacion
Florentino in 1941, as had always been the case since time immemorial, up to a year before
the filing of their application in May 1964, the Church had been enjoying the benefits of the
stipulation. The enjoyment of benefits flowing therefrom for almost seventeen years without
question from any quarters can only be construed as an implied acceptance by the Church of
the stipulation pour autrui before its revocation.
Same; Action; A party to a contract pour autrui may also bring an action for its
enforcement in the same manner as the beneficiary thereof.—That one of the parties to a
contract pour autrui is entitled to bring an action for its enforcement or to prevent its
breach is too clear to need any extensive discussion. Upon the other hand, that the contract
involved contained a stipulation pour autrui amplifies this settled rule only in the sense
that the third person for whose benefit the contract was entered into may also demand its
fulfillment provided he had communicated his acceptance thereof to the obligor before the
stipulation in his favor is revoked.
Land Registration; Jurisdiction; In special and exceptional circumstances, the kind
registration has authority and jurisdiction to adjudge the conflicting interests of the parties
before it without need of requiring the filing of a separate action, such as the annotation on
the torrens title being applied for of a stipulation pour autrui.—Firstly, the otherwise rigid
rule that the jurisdiction of the Land Registration Court, being special and limited in
character and proceedings thereon summary in nature, does not extend to cases involving
issues properly litigable in other independent suits or ordinary civil actions, has time and
again been relaxed in special and exceptional circumstances. x x x From these cases, it may
be gleaned and gathered that the peculiarity of the exceptions is based not alone on the fact
that Land Registration Courts are likewise the same Court of First Instance, but also the
following premises: (1) Mutual consent of the parties or their acquiescence in submitting the
aforesaid issues for determination by the court in the registration proceedings; (2) Full
opportunity given to the parties in the presentation of their respective sides of the issues
and of the evidence in support thereto; (3) Consideration by the court that the evidence
already of record is sufficient and adequate for rendering a decision upon these issues. In
the case at bar, the records clearly show that the second and third premises enumerated
above are fully met. With regards to the first premise, the petitioners-appellants cannot
claim that the issues anent Exhibit 0-1 were not put in issue because this is contradictory to
their stand before the lower court where they took the initial step in praying for the court’s
determination of the merits of Exhibit 0-1 as an encumbrance to be annotated on the title to
be issued by such court. On the other hand, the petitioners-appellees who had the right to
invoke the limited jurisdiction of the registration court failed to do so but met the issues
head-on. Secondly, for this very special reason, We will uphold the actuation of the lower
court in determining the conflicting interests of the parties in the registration proceedings
before it. This case has been languishing in our courts for thirteen long years. To require
that it be remanded to the lower court for another proceeding under its general jurisdiction
is not in consonance with our avowed policy of speedy justice.
APPEAL from the decision of the Court of First Instance of Ilocos Sur. Arciaga, J.
The facts are stated in the opinion of the Court.
Jose F. Singson and Miguel Florentino for appellants.
Pedro Singson for appellees.
GUERRERO, J.:
Appeal from the decision of the Court of First Instance of Ilocos Sur, acting as a land
registration court, in Land Registration case No. N-310.
On May 22, 1964, the petitioners-appellants Miguel Florentino, Remedios Encarnacion de
Florentino, Manuel Arce, Jose Florentino, Victorino Florentino, Antonio Florentino,
Remedior, Encarnacion and Severina Encamacion, and the Petitiners-appellees Salvador
Encamacion, Sr., Salvador Encamacion, Jr. and Angel Encarnacion filed with the Court of
First Instance of ilocos Sur an application for the registration under Act 496 of a parcel of
agricultural land located at Barrio Lubong Dacquel Cabugao Ilocos Sur.cha
The application alleged among other things that the applicants are the common and pro-
indiviso owners in fee simple of the said land with the improvements existing thereon; that
to the best of their knowledge and belief, there is no mortgage, lien or encumbrance of any
kind whatever affecting said land, nor any other person having any estate or interest
thereon, legal or equitable, remainder, reservation or in expectancy; that said applicants
had acquired the aforesaid land thru and by inheritance from their predecessors in interest,
lately from their aunt, Doña Encarnacion Florentino who died in Vigan, Ilocos Sur in 1941,
and for which the said land was adjudicated to them by virtue of the deed of extrajudicial
partition dated August 24, 1947; that applicants Salvador Encarnacion, Jr. and Angel
Encarnacion acquired their respective shares of the land thru purchase from the original
heirs, Jesus, Caridad, Lourdes and Dolores surnamed Singson one hand and from Asuncion
Florentino on the other.chanroblesvirtualawlibrarychanrobles virtual law library
After due notice and publication, the Court set the application for hearing. No Opposition
whatsoever was filed except that of the Director of Lands which was later withdrawn,
thereby leaving the option unopposed. Thereupon, an order of general default was
withdrawn against the whole world. Upon application of the asets the Clerk Of court was
commission will and to have the evidence of the agents and or to submit the for the Court's
for resolution.chanroblesvirtualawlibrarychanrobles virtual law library
The crucial point in controversy in this registration case is centered in the stipulation
marked Exhibit O-1 embodied in the deed of extrajudicial partition (Exhibit O) dated
August 24, 1947 which states:
Los productos de esta parcela de terreno situada en el Barrio Lubong Dacquel Cabugao
Ilocos Sur, se destination para costear los tos de procesio de la Tercera Caida celebration y
sermon de Siete Palbras Seis Estaciones de Cuaresma, procesion del Nino Jesus, tilaracion y
conservacion de los mismos, construction le union camarin en conde se depositan los carros
mesas y otras cosas que seven para lot leiracion de Siete Palabras y otras cosas mas Lo que
sobra de lihos productos despues de descontados todos los gastos se repartira nosotros los
herederos.
In his testimony during the trial, applicant Miguel Florentino asked the court to include the
said stipulation (Exhibit O-1) as an encumbrance on the land sought to be registered, and
cause the entry of the same on the face of the title that will finally be issued. Opposing its
entry on the title as an encumbrance, petitionersappellee Salvador Encamacion, Sr.,
Salvador Encarnaciori, Jr. and Angel Encarriacion filed on October 3, 1966 a manifestation
seeking to withdraw their application on their respective shares of the land sought to be
registered. The withdrawal was opposed by the petitioners-appellants.chanroblesvirtu
The Court after hearing the motion for withdrawal and the opposition thereto issued on
November 17, 1966 an order and for the purpose of ascertaining and implifying the issues
therein stated that all the applicants admit the truth of the following;
(1) That just after the death of Encarnacion FIorentino in 1941 up to last year and as had always been
the case since time immomorial the products of the land made subiect matter of this land has been used
in answering for the payment for the religious functions specified in the Deed Extrajudicial Partition
belated August 24, 1947:
(2) That this arrangement about the products answering for the comment of experisence for religions
functions as mentioned above was not registered in the office of the Register of Deeds under Act No 3344,
Act 496 or and, other system of registration;
(3) That all the herein applicants know of the existence of his arrangement as specified in the Deed of
Extra judicial Partition of A adjust 24, 1947;
(4) That the Deed of Extrajudicial Partition of August 24, 194-, not signed by Angel Encarnacion or
Salvador Encarnacion, Jr,.chanroblesvirtualawlibrarychanrobles virtual law
The court denied the petitioners-appellee motion to withdraw for lack of merit, and rendered a decision
under date of November 29, 1966 confirming the title of the property in favor of the f appoints with their
respective shares as follows: chanrobles virtual law library
Spouses Miguel Florentino and Rosario Encarnacion de Florentino, both of legal age, Filipinos, and
residents of Vigan, Ilocos Sur, consisting of an undivided 31/297 and 8.25/297 portions,
respectively; chanrobles virtual law library
Manuel Arce, of legal age, Filipino, married to Remedios Pichay and resident of Vigan, Ilocos Sur,
consisting of an undivided 66/297 portion; chanrobles virtual law library
Salvador Encarnacion, Jr., of legal age, Filipino, married to Angelita Nagar and resident of Vigan, Ilocos
Sur, consisting of an undivided 66/297; Jose Florentino, of legal age, Filipino, married to Salvacion
Florendo and resident of 16 South Ninth Diliman, Quezon City, consisting of an undivided 33/297
portion; chanrobles virtual law library
Angel Encarnacion, of legal age, Filipino, single and resident of 1514 Milagros St., Sta. Cruz, Manila,
consisting of an undivided 33/297 portion; chanrobles virtual law library
Victorino Florentino, of legal age, Filipino, married to Mercedes L. Encarnacion and resident of Vigan,
Ilocos Sur, consisting of an undivided 17.5/297 portion;
Antonio Florentino, of legal age, Filipino, single and resident of Vigan, Ilocos Sur, consisting of an
undivided 17.5/297;chanrobles virtual law library
Salvador Encarnacion, Sr., of legal age, Filipino, married to Dolores Singson, consisting of an undivided
8.25/297;chanrobles virtual law library
Remedios Encarnacion, of legal age, Filipino, single and resident of Vigan, Ilocos Sur, consisting of an
undivided 8.25/297 portion; andchanrobles virtual law library
Severina Encarnacion, of legal age, Filipino, single and resident of Vigan, Ilocos Sur, consisting of
8.25/297 undivided portion.
The court, after ruling "that the contention of the proponents of encumbrance is without
merit bemuse, taking the self-imposed arrangement in favor of the Church as a pure and
simple donation, the same is void for the that the donee here has riot accepted the donation
(Art. 745, Civil Code) and for the further that, in the case of Salvador Encarnacion, Jr. and
Angel Encarnacion, they had made no oral or written grant at all (Art. 748) as in fact they
are even opposed to it," 1 held in the Positive portion, as follows:
In view of all these, therefore, and insofar as the question of encumbrance is concerned, let
the religious expenses as herein specified be made and entered on the undivided shares,
interests and participations of all the applicants in this case, except that of Salvador
Encarnacion, Sr., Salvador Encarnacion, Jr. and Angel Encarnacion.
On January 3, 1967, petitioners-appellants filed their Reply to the Opposition reiterating
their previous arguments, and also attacking the junction of the registration court to pass
upon the validity or invalidity of the agreement Exhibit O-1, alleging that such is specified
only in an ordinary action and not proper in a land registration
proceeding.chanroblesvirtualawlibrarychanrobles virtual law library
The Motion for Reconsideration and of New Trial was denied on January 14, 1967 for lack of
merit, but the court modified its earlier decision of November 29, 1966, to wit:
This Court believes, and so holds, that the contention of the movants (proponents of the
encumbrance) is without merit because the arrangement, stipulation or grant as embodied
in Exhibit O (Escritura de Particion Extrajudicial), by whatever name it may be (called,
whether donation, usufruct or ellemosynary gift, can be revoked as in fact the oppositors
Salvador Encarnacion, Sr., who is the only one of the three oppositors who is a party to said
Exhibit O (the two others, Salvador Encarnacion, Jr. and Angel Encarnacion no parties to
it) did revoke it as shown by acts accompanying his refusal to have the same appear as an
encumbrance on the title to be issued. In fact, legally, the same can also be ignored or
discararded by will the three oppositors. The reasons are: First, if the said stipulation is
pour bodies in Exhibit O-1 is to be viewed as a stipulation pour autrui the same cannot now
be enforced because the Church in whose favor it was made has not communicated its
acceptance to the oppositors before the latter revoked it. Says the 2nd par. of Art. 1311 of
the New Civil Code:chanrobles virtual law library
"If a contract should contain some stipulation in favor of a third person he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A
mere incidental benefit or interest of a person is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a third person." No evide nee has ever
been submitted by the Church to show its clear acceptance of the grant before its revocation
by the oppositor Salvador Encarnacion, Sr. (or of the two other oppositors, Salvador
Encarnacion, Jr. and Angel Encarnacion, who didn't even make any giant, in the first place),
and so not even the movants who have officiously taken into themselves the right to enforce
the grant cannot now maintain any action to compel compliance with it. (Bank of the P.I. v.
Concepcion y Hijos, Inc., 53 Phil. 806). Second, the Church in whose favor the stipulation or
grant had apparently been made ought to be the proper party to compel the herein three
oppositors to abide with the stipulation. But it has not made any appearance nor registered
its opposition to the application even before Oct. 18, 1965 when an order of general default
was issued. Third, the movants are not, in the contemplation of Section 2, Rule 3 of the
Rules of Court, the real party in interest to raise the present issue; and Fourth, the movants
having once alleged in their application for registration that the land is without
encumbrance (par. 3 thereof), cannot now be alloted by the rules of pleading to contradict
said allegation of theirs. (McDaniel v. Apacible, 44 Phil. 248)chanrobles virtual law library
SO ORDERED. 2chanrobles virtual law library
After Motions for Reconsideration were denied by the court, the petitioners- appellants
appealed directly to this Court pursuant to Rule 4 1, Rules of Court, raising the following
assign of error:
I. The lower court erred in concluding that the stipulation embodied in Exhibit O on
religious expenses is just an arrangement stipulation, or grant revocable at the unilateral
option of the coowners.chanroblesvirtualawlibrarychanrobles virtual law library
II. The lower court erred in finding and concluding that the encumbrance or religious
expenses embodied in Exhibit O, the extrajudicial partition between the co-heirs, is binding
only on the appoints Miguel Florentino, Rosario Encarnacion de Florentino, Manuel Arce,
Jose Florentino, Antonio Florentino, Victorino Florentino, Remedios Encarnacion and
Severina Encarnacion.chanroblesvirtualawlibrarychanrobles virtual law library
III. The lower court as a registration court erred in passing upon the merits of the
encumbrance (Exhibit O-1) as the sanie was never put to issue and as the question involved
is an adjudication of rights of the parties.
We find the first and second assignments of error impressed with merit and, therefore,
tenable. The stipulation embodied in Exhibit O-1 on religious expenses is not revocable at
the unilateral option of the co-owners and neither is it binding only on the petitioners-
appellants Miguel Florentino, Rosario Encarnacion de Florentino Manuel Arce, Jose
Florentino, Victorino Florentino Antonio Florentino, Remedios Encarnacion and Severina E
It is also binding on the oppositors-appellees Angel Encarnacion, chanrobles virtual law
library
The stipulation (Exhibit 411) in pan of an extrajudicial partition (Exh. O) duly agreed and
signed by the parties, hence the sanie must bind the contracting parties thereto and its
validity or compliance cannot be left to the with of one of them (Art. 1308, N.C.C.). Under
Art 1311 of the New Civil Code, this stipulation takes effect between the parties, their
assign and heirs. The article provides:
Art. 1311. - Contracts take effect only between the parties, their assigns and heirs, except in
cases where the rights and obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. The heir is not liable beyond the value
of the property he received from the decedent.chanroblesvirtualawlibrarychanrobles virtual
law library
If a contract should contain a stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A
mere incidental benefit or interest of a person is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a third person.
The second paragraph of Article 1311 above-quoted states the law on stipulations pour
autrui. Consent the nature and purpose of the motion (Exh. O-1), We hold that said
stipulation is a station pour autrui. A stipulation pour autrui is a stipulation in favor of a
third person conferring a clear and deliberate favor upon him, and which stipulation is
merely a part of a contract entered into by the parties, neither of whom acted as agent of the
third person, and such third person and demand its fulfillment provoked that he
communicates his to the obligor before it is revoked. 3 The requisites are: (1) that the
stipulation in favor of a third person should be a part, not the whole, of the contract; (2) that
the favorable stipulation should not be conditioned or compensated by any kind of obligation
whatever; and (3) neither of the contracting bears the legal represented or authorization of
third person.chanroblesvirtualawlibrarychanrobles virtual law library
To constitute a valid stipulation pour autrui it must be the purpose and intent of the
stipulating parties to benefit the third and it is not sufficient that the third person may be
incidentally benefited by the stipulation. The fairest test to determine whether the interest
of third person in a contract is a stipulation pour autrui or merely an incidental interest, is
to rely upon the intention of the parties as disclosed by their contract. In applying this test,
it meters not whether the stipulation is in the nature of a gift or whether there is an
obligation owing from the promisee to the third person. That no such obsorption exists may
in some degree assist in determining whether the parties intended to benefit a third
person.4 chanrobles virtual law library
In the case at bar, the determining point is whether the co-owners intended to benefit the
Church when in their extrajudicial partition of several parcels of land inherited by them
from Doña Encarnacion Florendo they agreed that with respect to the land situated in
Barrio Lubong Dacquel Cabugao Ilocos Sur, the fruits thereof shall serve to defray the
religious expenses specified in Exhibit O-1. The evidence on record shows that the true
intent of the parties is to confer a direct and material benefit upon the Church. The fruits of
the aforesaid land were used thenceforth to defray the expenses of the Church in the
preparation and celebration of the Holy Week, an annual Church function. Suffice it to say
that were it not for Exhibit O-1, the Church would have necessarily expended for this
religious occasion, the annual relisgious procession during the Holy Wock and also for the
repair and preservation of all the statutes, for the celebration of the Seven Last
Word.chanroblesvirtualawlibrarychanrobles virtual law library
We find that the trial court erred in holding that the stipulation, arrangement or grant
(Exhibit O-1) is revocable at the option of the co-owners. While a stipulation in favor of a
third person has no binding effect in itself before its acceptance by the party favored, the
law does not provide when the third person must make his acceptance. As a rule, there is no
time at such third person has after the time until the stipulation is revoked. Here, We find
that the Church accepted the stipulation in its favor before it is sought to be revoked by
some of the co-owners, namely the petitioners-appellants herein. It is not disputed that from
the time of the with of Doña Encarnacion Florentino in 1941, as had always been the case
since time immemorial up to a year before the firing of their application in May 1964, the
Church had been enjoying the benefits of the stipulation. The enjoyment of benefits flowing
therefrom for almost seventeen years without question from any quarters can only be
construed as an implied acceptance by the Church of the stipulation pour autrui before its
revocation.
The acceptance does not have to be in any particular form, even when the stipulation is for
the third person an act of liberality or generosity on the part of the promisor or
promise. 5chanrobles virtual law library
It need not be made expressly and formally. Notification of acceptance, other than such as is
involved in the making of demand, is unnecessary. 6chanrobles virtual law library
A trust constituted between two contracting parties for the benefit of a third person is not
subject to the rules governing donation of real property. The beneficiary of a trust may
demand performance of the obligation without having formally accepted the benefit of the
this in a public document, upon mere acquiescence in the formation of the trust and
acceptance under the second paragraph of Art. 1257 of the Civil Code. 7chanrobles virtual
law library
Hence, the stipulation (Exhibit O-1) cannot now be revoked by any of the stipulators at their
own option. This must be so because of Article 1257, Civil Code and the cardinal rule of
contracts that it has the force of law between the parties. 8 Thus, this Court ruled in Garcia
v. Rita Legarda, Inc., 9"Article 1309 is a virtual reproduction of Article 1256 of the Civil
Code, so phrased to emphasize that the contract must bind both parties, based on the
principles (1) that obligation arising from contracts have the force of law between the
contracting parties; and (2) that there must be mutuality between the parties based on their
principle equality, to which is repugnant to have one party bound by the contract leaving
the other free therefrom." chanrobles virtual law library
Consequently, Salvador Encarnacion, Sr. must bear with Exhibit O-1, being a signatory to
the Deed of Extrajudicial Partition embodying such beneficial stipualtion. Likewise, with
regards to Salvador, Jr. and Angel Encarnacion, they too are bound to the agreement. Being
subsequent purchasers, they are privies or successors in interest; it is axiomatic that
contracts are enforceable against the parties and their privies. 10 Furthermore, they are
shown to have given their conformity to such agreement when they kept their peace in 1962
and 1963, having already bought their respective shares of the subject land but did not
question the enforcement of the agreement as against them. They are also shown to have
knowledge of Exhibit O-1 as they had admitted in a Deed of Real Mortgage executed by
them on March 8, 1962 involving their shares of the subject land that, "This parcel of land is
encumbered as evidenced by the document No. 420, page 94, Book 1, series 1947, executed
by the heirs of the late Encarnacion Florentino, on August 26, 1947, before M. Francisco
Ante, Notwy Public of Vigan, Ilocos Sur, in its page 10 of the said document of partition, and
also by other documents."chanrobles virtual law library
The annotation of Exhibit O-1 on the face of the title to be issued in this case is merely a
guarantee of the continued enforcement and fulfillment of the beneficial stipulation. It is
error for the lower court to rule that the petitioners-appellants are not the real parties in
interest, but the Church. That one of the parties to a contract pour autrui is entitled to
bring an action for its enforcement or to prevent its breach is too clear to need any extensive
discussion. Upon the other hand, that the contract involved contained a stipulation pour
autrui amplifies this settled rule only in the sense that the third person for whose benefit
the contract was entered into may also demand its fulfillment provoked he had
communicated his acceptance thereof to the obligor before the stipulation in his favor is
revoked. 11chanrobles virtual law library
Petitioners-appellants' third assignment of error is not well-taken. Firstly, the otherwise
rigid rule that the jurisdiction of the Land Registration Court, being special and limited in
character and proceedings thereon summary in nature, does not extend to cases involving
issues properly litigable in other independent suits or ordinary civil actions, has time and
again been relaxed in special and exceptional circumstances. (See Government of the Phil.
Islands v. Serafica, 61 Phil. 93 (1934); Caoibes v. Sison, 102 Phil. 19 (1957); Luna v. Santos,
102 Phil. 588 (1957); Cruz v. Tan, 93 Phil. 348 (1953); Gurbax Singh Pabla & Co. v. Reyes,
92 Phil. 177 (1952). From these cases, it may be gleaned and gathered that the peculiarity of
the exceptions is based not only on the fact that Land Registration Courts are likewise the
same Courts of First Instance, but also the following premises (1) Mutual consent of the
parties or their acquired in submitting the at aforesaid determination by the court in the
registration; (2) Full opportunity given to the parties in the presentation of their respective
skies of the issues and of the evidence in support thereto; (3) Consideration by the court that
the evidence already of record is sufficient and adequate for rendering a decision upon these
issues. 12 In the case at bar, the records clearly show that the second and third premism
enumerated abow are fully mt. With regards to first premise, the petioners-appellants
cannot claim that the issues anent Exhibit O-1 were not put in issue because this is
contrary to their stand before the lower court where they took the initial step in praying for
the court's determination of the merits of Exhibit O-1 as an encumbrance to be annotated on
the title to be issued by such court. On the other hand, the petitioners-appellees who had
the right to invoke the limited jurisdiction of the registration court failed to do so but met
the issues head-on.chanroblesvirtualawlibrarychanrobles virtual law library

Secondly, for this very special reason, We win uphold the actuation of the lower court in
determining the conflicting interests of the parties in the registration proceedings before it.
This case has been languishing in our courts for thirteen tong years. To require that it be
remanded to the lower court for another proceeding under its general jurisdiction is not in
consonance with our avowed policy of speedy justice. It would not be amiss to note that if
this case be remanded to the lower court, and should appeal again be made, the name issues
will once more be raised before us hence, Our decision to resolve at once the issues in the
instant petition.chanroblesvirtualawlibrarychanrobles virtual law library

IN VIEW OF THE FOREGOING, the decision of the Court of First Instance of Ilocos Sur in
Land Registration Case No. N-310 is affirmed but modified to allow the annotation of
Exhibit O-1 as an encumbrance on the face of the title to be finally issued in favor of all the
applications (herein appellants and herein appellees) in the registration proceedings
below.chanroblesvirtualawlibrarychanrobles virtual law library

No pronouncement as to cost.chanroblesvirtualawlibrarychanrobles virtual law library

SO ORDERED.

No. L-74521. November 11,1986.*
BANK OF AMERICA NT & SA, petitioner, vs. THE HON. FIRST CIVIL CASES DIVISION,
INTERMEBIATE APPELLATE COURT and AIR CARGO AND TRAVEL CORPORATION,
respondents.
Mercantile Law; Banks; Contracts; Restitution; No restitution of amount sent by a
foreign bank thru telex with apatent ora latent ambiguity payable to another person where
the person credited by the local bank is the proper beneficiary and the account number is
correct.—It is our considered opinion that, in the tested telex, considered either as a patent
ambiguity or as a latent ambiguity, the beneficiary is Minami. The mention of Account No.
24506–01–7, as well as the name of Minami, has to be given more weight than the mention
of the name of ACTC. BANKAMERICA could not have very well disregarded that account
number. It could also be that the mention of ACTC’s name was a further identification of
Minami, to prevent payment to a possible another “Toshiyuko Minami” who may not be
connected with ACTC. On the other hand, it should be difficult to concede that, in the tested
telex, Account No. 24506–01–7 was erroneously written and should be substituted by
Account No. 19842–01–2 in the name of ACTC.
Same; Same; Same; Stipulation pour autrui; Contract between foreign bank and a
local bank asking the latter topay an amount to a beneficiary, is a stipulation pour autrui.—
In Vargas Plow Factory, Inc. vs. Central Bank, it was held that “the opening of a letter of
credit in favor of the exporter becomes ultimately but the result of a stipulation pour
autrui” (27 SCRA 84 [1969]). Similarly, when KYOWA asked BANKAMERICA to pay an
amount to a beneficiary (either ACTC or Minami), the eontract was between KYOWA and
BANKAMERICA and it had a stipulation pour autrui.
Same; Same; Same; Same; Absence of protest by the alleged true beneficiary means
that the beneficiary ofthe amount is correct; Identity of the beneficiary should be in
accordance with the identification by the foreign bank and cannot be questioned by one not a
party to the arrangement between the foreign bank and the local bank.—It should be recalled
that the tested telex originated from KYOWA at the behest of Tokyo Tourist Corporation
with whom ACTC had business dealings. Minami, on the other hand, was the liaison officer
of ACTC in Japan. As the entity responsible for the tested telex was Tokyo Tourist
Corporation, it can reasonabiy be eoncluded that if it had intended that the US$23,595.00
should be credited to ACTC, upon leaming that the amount was credited to Minami, it
should have gone, together with the representatives of ACTC, in protest to KYOWA and
lodged a protest. Since that was not done, it could well be that Tokyo Tourist Corporation
had really intended its remittance to be credited to Minami The identity of the beneficiary
should be in accordance with the identification made by KYOWA, and ACTC cannot
question that identification as it is not a party to the arrangement between KYOWA and
BANKAMERICA (see Manila Railroad Co. vs. Compania Trasatlantica, 38 Phil. 875 [1918]).
PETITION to review the decision of the Intermediate Appellate Court.
The facts are stated in the opinion of the Court.
Agcaoili & Associates for petitioner.
Marcelo P. Villanuea for respondents.
MELENCIO-HERRERA, J.:
As the Petition and the Comment submitted by private respondent Air Cargo and Travel
Corporation (ACTC) have sufficiently argued the legal question involved in this case, the
Court has resolved to give due course to the Petition, with private respondent's Comment
being its Answer, and to consider this case submitted for decision.
The basic relevant facts have been stated by respondent Appellate Court as follows:
Shorn of non-essentials, the facts are: Plaintiff Air Cargo and Travel
Corporation is the owner of Account Number 19842-01-2 with defendant
Bank of America. Defendant Toshiyuki Minami, President of plaintiff
corporation in Japan, is the owner of Account Number 24506-01-7 with
defendant Bank.
On March 10, 1981, the Bank received a tested telex advise from Kyowa
Bank of Japan stating,
ADVISE PAY USDLS 23,595. — TO YOUR A/C NBR 24506-01-7 OF A.
C. TRAVEL CORPORATION MR. TOSHIYUKO MINAMI.
and the Bank Credited the amount of US$23,595.00 to Account Number
24506-07-1 (should be 24506-01-7) owned, as aforesaid, by Minami.
On March 12, 1981, Minami withdrew the sum of P180,000.00 the
equivalent in Philippine Pesos of the sum of US$23,595.00 from the
Bank on his Account Number 24506-07-1 (should be 24506-01-7)
It may be explained that the "tested" telex advice is a message signed in "code". Evidently,
there was a previous contractual agreement between Kyowa Bank of Japan (KYOWA) and
Petitioner (BANKAMERICA) that, from time to time, KYOWA can ask BANKAMERICA to
pay amounts to a third party (beneficiary) with BANKAMERICA afterwards billing
KYOWA the indicated amount given to the beneficiary. To assure itself that an Order
received from KYOWA really comes from KYOWA, it is usually agreed that KYOWA's
signature will be in accordance with a confidential code.
According to ACTC in its Comment, in the early part of 1981, it was Tokyo Tourist
Corporation in Japan which applied with Kyowa Bank, Ltd. also based in Tokyo, Japan, for
telegraphic transfer of the sum of US$23,595.00 payable to ACTC's account with
BANKAMERICA, Manila.
When the tested telex was received on May 10, 1981, employees of BANKAMERICA noted
its patent ambiguity. Notwithstanding, on the following day, BANKAMERICA credited the
amount of US$23,595.00 to the account of Minami. ACTC claimed that the amount should
have been credited to its account and demanded restitution, but BANKAMERICA refused.
On February 18, 1982, ACTC filed suit for damages against BANKAMERICA and Minami
before the Trial Court in Pasig for the failure of BANKAMERICA to restitute. Minami was
declared in default. Thereafter, judgment was rendered with the following dispositive part:
IN VIEW OF THE FOREGOING CONSIDERATIONS, the Court upon a
judicious and fair assessment of the testimonial and documentary
evidences submitted by the parties is of the opinion and so holds that
 defendant Bank and defendant Minami must pay plaintiff, jointly and
severally the following.
1. The sum of US$23,595.00 or in Philippine Currency at the current
guiding rate of exchange which is P14.00 to the dollar, as and by way of
actual damages with interest at the rate of twelve (12%) per cent per
annum from the filing of the complaint until fully paid;
2. The sum of P50,000.00 as temperate and exemplary damages;
3. The sum of P10,000.00 as attorney's fees;;
4. The costs of this suit.
SO ORDERED.
Upon appeal taken by BANKAMERICA, Respondent Court "affirmed in toto, " except that
the dollar-peso rate of ex-change would be that "at the time of payment." Said respondent
Court:
We must say that the Bank personnel were in fact confused or in doubts
as to the real payee.
The Senior Clerk who initially received the tested telex had called up
Mr. Colegado, Mr. Ichiban, Miss Mayagama and Atty. Villanueva, all of
plaintiff-appellee, but he received "no answer."(Exh. 3; pp. 9-10, t.s.n.,
Dec. 2, 1982).
Thereupon, the processor checked the alphabetical listings and he saw
that the payee, Account Number 24506-01-7, matched the name
appearing in the tested telex advise (p. 10, t.s.n., Dec. 2, 1981).
The gross negligence then of appellant Bank may be sum (sic) up as
follows; The words "A.C. TRAVEL CORPORATION MR. TOSHIYUKO
MINAMI" engendered or cast doubt
on the part of the Senior Clerk as to the real payee
despite the "A.C. NBR 24506-01-7" and
should have consulted higher officials of plaintiff before giving the advise
to the processor who sent the same to the computer center for ultimate
processing (p. 11, Appellant's Brief).
The processor verified that Account Number 24506-01-7 belonged to
TOSHIYUKO MINAMI' only and not to "A.C. TRAVEL CORPORATION
MR. TOSHIYUKO MINAMI" and this circumstance should have moved
the processor to be more prudent and to consult higher officials instead
of sending the advise to the computer center for processing or crediting
the remittance to the account of Toshiyuko Minami, (Emphasis supplied)
We are constrained to reverse.
It is our considered opinion that, in the tested telex, considered either as a patent ambiguity
or as a latent ambiguity, the beneficiary is Minami. The mention of Account No. 24506-01-7,
as well as the name of Minami, has to be given more weight than the mention of the name of
ACTC. BANKAMERICA could not have very well disregarded that account number. It could
also be that the mention of ACTC's name was a further identification of Minami, to prevent
payment to a possible another "Toshiyuko Minami" who may not be connected with ACTC.
On the other hand, it should be difficult to concede that, in the tested telex, Account No.
24506-01-7 was erroneously written and should be substituted by Account No. 19842-01-2 in
the name of ACTC.
In Vargas Plow Factory, Inc. vs. Central Bank, it was held that "the opening of a letter of
credit in favor of the exporter becomes ultimately but the result of a stipulation pour autrui"
(27 SCRA 84 [1969]). Similarly, when KYOWA asked BANK-AMERICA to pay an amount to
a beneficiary (either ACTC or Minami), the contract was between KYOWA and BANK-
AMERICA and it had a stipulation pour autrui.
It should be recalled that the tested telex originated from KYOWA at the behest of Tokyo
Tourist Corporation with whom ACTC had business dealings. Minami, on the other hand,
was the liaison officer of ACTC in Japan. As the entity responsible for the tested telex was
Tokyo Tourist Corporation, it can reasonably be concluded that if it had intended that the
US$23,595.00 should be credited to ACTC, upon learning that the amount was credited to
Minami, it should have gone, together with the representatives of ACTC, in protest to
KYOWA and lodged a protest. Since that was not done, it could well be that Tokyo Tourist
Corporation had really intended its remittance to be credited to Minami. The identity of the
beneficiary should be in accordance with the identification made by KYOWA, and ACTC
cannot question that identification as it is not a party to the arrangement between KYOWA
and BANKAMERICA (see Manila Railroad Co. vs. Compañia Trasatlantica, 38 Phil. 875
[1918]).
WHEREFORE, the Decision of Respondent Court, in its case AC-G.R. CV No. 03985, is
hereby reversed in so far as Bank of America, NT & SA is concerned.
Without pronouncement as to costs.
SO ORDERED.

No. L-40234. December 14, 1987.*
MARIMPERIO COMPAÑIA NAVIERA, S.A., petitioner, vs. COURT OF APPE ALS and
UNION IMPORT & EXPORT CORPORATION and PHILIN TRADERS CORPORATION,
respondents.
Civil Law; Contracts; Art. 1311 of Civil Code; A party who has not taken part in the
contract, cannot sue or be sued for the performance or cancellation thereof, unless he has a
real interest affected thereby.—According to Article 1311 of the Civil Code, a contract takes
effect between the parties who made it, and also their assigns and heirs, except in cases
where the rights and obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. Since a contract may be violated only by the
parties, thereto as against each other, in an action upon that contract, the real parties in
interest, either as plaintiff or as defendant, must be parties to said contract. Therefore, a
party who has not taken part in it cannot sue or be sued for performance or for cancellation
thereof, unless he shows that he has a real interest affected thereby (Macias & Co. v.
Warner Barnes & Co., 43 Phil. 155 [1922] and Salonga v. Warner Barnes & Co., Ltd., 88
Phil. 125 [1951]; Coquia v. Fieldmen's Insurance Co., Inc., 26 SCRA 178 [1968]).
Same; Same; Lease; In a contract of sub-lease, the personality of the lessee does not
disappear and the sub-lease generally does not have any direct action against the owner of
the premises as lessor.—In a sub-lease, there are two leases and two distinct judicial
relations although intimately connected and related to each other, unlike in a case of
assignment of lease, where the lessee transmits absolutely his right, and his personality
disappears; there only remains in the juridical relation two persons, the lessor and the
assignee who is converted into a lessee (Moreno, Philippine Law Dictionary, 2nd ed., p. 594).
In other words, in a contract of sub-lease, the personality of the lessee does not disappear;
he does not transmit absolutely his rights and obligations to the sub-lessee; and the sub-
lessee generally does not have any direct action against the owner of the premises as lessor,
to require the compliance of the obligations contracted with the plaintiff as lessee, or vice
versa (10 Manresa, Spanish Civil Code, 438).
Same; Same; Transportation Laws; Article 52 of Code of Commerce provides that the
charter party shall contain the name, surname and domicile of the charterer, and if he is
acting by commission, that of the person for whose account he makes the contract.—It is
undisputed that the charter party, basis of the complaint, was entered into between
petitioner Marimperio Compañia Naviera, S.A., through its duly authorized agent in
London, the N & J Vlassopulos, Ltd., and the Interocean Shipping Company of Manila
through the latter's duly authorized broker, the Overseas Steamship Co., Inc., represented
by Matthews, Wrightson Burbridge Ltd., for the Charter of the "SS PAXOI" (Amended
Complaint, Amended Record on Appeal, p. 33; Complaint-in-Intervention, Amended Record
on Appeal, p. 87), It is also alleged in both the Complaint (Amended Record on Appeal, p.
18) and the Amended Complaint (Amended Record on Appeal, p. 39) that the Interocean
Shipping Company sublet the said vessel to respondent Union Import and Export
Corporation which in turn sublet the same to respondent Philin Traders Corporation. It is
admitted by respondents that the charterer is the Interocean Shipping Company. Even
paragraph 3 of the complaintin-intervention alleges that respondents were given the use of
the vessel "pursuant to paragraph 20 of the Uniform Time Charter x x x" which precisely
provides for the subletting of the vessel by the charterer (Rollo, p. 24). Furthermore, Article
652 of the Code of Commerce provides that the charter party shall contain, among others,
the name, surname, and domicile of the charterer, and if he states that he is acting by
commission, that of the person for whose account he makes the contract. It is obvious from
the disclosure made in the charter party by the authorized broker, the Overseas Steamship
Co., Inc., that the real charterer is the Interocean Shipping Company (which sublet the
vessel to Union Import and Export Corporation which in turn sublet it to Philin Traders
Corporation).
Same; Same; Same; Petitioner can rescind the charter party extrajudicially.—
Premises considered, (1) the decision of the Court of Appeals affirming the amended
decision of the Court of First Instance of Manila, Branch VIII, is hereby REVERSED and
SET ASIDE except for that portion of the decision dismissing the complaint-in intervention;
and (2) the original decision of the trial court is hereby REINSTATED.
PETITION for certiorari to review the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
PARAS, J.:
This is a petition for certiorari under Section 1, Rule 65 of the Rules of Court seeking the
annulment and setting aside of the decision of the Court of Appeals * and promulgated on
September 2, 1974 in CA-G.R. No. 48521-R entitled "Union Import and Export Corporation,
et al., Plaintiffs-Appellees v. Marimperio Compañia Naviera, S.A., Defendant-Appellant",
ordering petitioner to pay respondent the total sum of US $265,482.72 plus attorney's fees of
US$100,000.00 and (b) the resolution of the said Court of Appeals in the same case, dated
February 17, 1975 fixing the amount of attorney, s fees to Pl00,000.00 instead of
$100,000.00 as erroneously stated in the decision but denying petitioner's motion for
reconsideration and/or new trial.
The dispositive portion of the decision sought to be annulled (Rollo, p. 215) reads as follows:
For all the foregoing, and in accordance therewith, let judgment be entered (a) affirming
the decision appealed from insofar as it directs the defendant-appellant: (1) to pay
plaintiffs the sum of US $22,500.00 representing the remittance of plaintiffs to said
defendant for the first 15-day hire of the vessel "SS PAXOI" including overtime and an
overpayment of US $254.00; (2) to pay plaintiffs the sum of US $16,000.00,
corresponding to the remittance of plaintiffs to defendant for the second 15-day hire of
the aforesaid vessel; (3) to pay plaintiffs the sum of US $6,982.72, representing the cost
of bunker oil, survey and watering of the said vessel; (4) to pay plaintiffs the sum of US
$100,000.00 as and for attorney's fees; and, (b) reversing the portion granting
commission to the intervenor-appellee and hereby dismissing the complaint-in-
intervention. The order of the court a quo denying the plaintiffs' Motion for Partial
Reconsideration, is likewise, affirmed, without any special pronouncement as to costs.
The facts of the case as gathered from the amended decision of the lower court (Amended
Record on Appeal, p. 352), are as follows:
In 1964 Philippine Traders Corporation and Union Import and Export Corporation entered
into a joint business venture for the purchase of copra from Indonesia for sale in Europe.
James Liu President and General Manager of the Union took charge of the European
market and the chartering of a vessel to take the copra to Europe. Peter Yap of Philippine
on the other hand, found one P.T. Karkam in Dumai Sumatra who had around 4,000 tons of
copra for sale. Exequiel Toeg of Interocean was commissioned to look for a vessel and he
found the vessel "SS Paxoi" of Marimperio available. Philippine and Union authorized Toeg
to negotiate for its charter but with instructions to keep confidential the fact that they are
the real charterers.
Consequently on March 21, 1965, in London England, a "Uniform Time Charter" for the hire
of vessel "Paxoi" was entered into by the owner, Marimperio Compania Naviera, S.A.
through its agents N. & J. Vlassopulos Ltd. and Matthews Wrightson, Burbridge, Ltd. to be
referred to simply as Matthews, representing Interocean Shipping Corporation, which was
made to appear as charterer, although it merely acted in behalf of the real charterers,
private respondents herein.
The pertinent provisions or clauses of the Charter Party read:
1. The owners let, and the Charterers hire the Vessel for a period of 1 (one) trip via safe
port or ports Hong Kong, Philippine Islands and/or INDONESIA from the time the
Vessel is delivered and placed at the disposal of the Charterers on sailing HSINKANG
... .
4. The Charterers are to provide and pay for oil-fuel, water for boilers, port charges,
pilotages ... .
6. The Charterers to pay as hire s.21 (Twenty-one Shillings per deadweights ton per 30
days or pro rata commencing in accordance with Clause 1 until her redelivery to the
owners.
Payment of hire to be made in cash as per Clause 40 without discount, every 15 days in
advance.
In default of payment of the Owners to have the right of withdrawing the vessel from
the services of the Charterers, without noting any protest and without interference by
any court or any formality whatsoever and without prejudice the Owners may otherwise
have on the Charterers under the Charter.
7. The Vessel to be redelivered on the expiration of the Charter in the same good order
as when delivered to the Charterers (fair wear and tear expected) in the Charterer's
option in ANTWERP HAMBURG RANGE.
20. The Charterers to have the option of subletting the Vessel, giving due notice to the
Owners, but the original Charterers always to remain responsible to the Owners for due
performance of the Charter.
29. Export and/or import permits for Charterers'cargo to the Charterers'risk and
expense. Charterers to obtain and be responsible for all the necessary permits to enter
and/or trade in and out of all ports during the currency of the Charter at their risk and
expense. ...
33. Charterers to pay as overtime, bonus and premiums to Master, Officers and crew,
the sum of 200 (Two Hundred Pounds) per month to be paid together with hire.
37. Bunkers on delivery as on board. Bunkers on redelivery maximum 110 tons. Prices
of bunkers at 107' per long ton at both ends.
38. Upon sailing from each loading port, Master to cable SEASHIPS MANILA advising
the quantity loaded and the time of completion.
40. The hire shall be payable in external sterling or at Charterers' option in U.S. dollars
in London; - Williams Deacon's Vlassopulos Ltd., Account No. 861769.
In view of the aforesaid Charter, on March 30, 1965 plaintiff Charterer cabled a firm offer to
P.T. Karkam to buy the 4,000 tons of copra for U.S.$180.00 per ton, the same to be loaded
either in April or May, 1965. The offer was accepted and plaintiffs opened two irrevocable
letters of Credit in favor of P.T. Karkam
On March 29, 1965, the Charterer was notified by letter by Vlassopulos through Matthews
that the vessel "PAXOI" had sailed from Hsinkang at noontime on March 27, 196-5 and that
it had left on hire at that time and date under the Uniform Time-Charter.
The Charterer was however twice in default in its payments which were supposed to have
been done in advance. The first 15-day hire comprising the period from March 27 to April 1-
1, 1965 was paid despite follow-ups only on April 6, 1965 and the second 15-day hire for the
period from April 12 to April 27, 1965 was paid also despite follow-ups only on April 26,
1965. On April 14, 1965 upon representation of Toeg, the Esso Standard Oil (Hongkong)
Company supplied the vessel with 400 tons of bunker oil at a cost of US $6,982.73.
Although the late payments for the charter of the vessel were received and acknowledged by
Vlassopulos without comment or protest, said agent notified Matthews, by telex on April 23,
1965 that the shipowners in accordance with Clause 6 of the Charter Party were
withdrawing the vessel from Charterer's service and holding said Charterer responsible for
unpaid hirings and all legal claims.
On April 29, 1965, the shipowners entered into another charter agreement with another
Charterer, the Nederlansche Stoomvart of Amsterdam, the delivery date of which was
around May 3, 1965 for a trip via Indonesia to Antwep/Hamburg at an increase charter cost.
Meanwhile, the original Charterer again remitted on April 30, 1965, the amount
corresponding to the 3rd 15-day hire of the vessel "PAXOI" but this time the remittance was
refused.
On May 3,1965, respondents Union Import and Export Corporation and Philippine Traders
Corporation filed a complaint with the Court of First Instance of Manila, Branch VIII,
against the Unknown Owners of the Vessel "SS Paxoi" for specific performance with prayer
for preliminary attachment, alleging, among other things, that the defendants (unknown
owners) through their duly authorized agent in London, the N & J Vlassopulos Ltd., ship
brokers, entered into a contract of Uniform Time-Charter with the Interocean Shipping
Company of Manila through the latter's duly authorized broker, the Overseas Steamship
Co., Inc., for the Charter of the vessel SS PAXOI' under the terms and conditions appearing
therein ...; that, immediately thereafter, the Interocean Shipping Company sublet,the said
vessel to the plaintiff Union Import & Export, Corporation which in turn sublet the same to
the other plaintiff, the Philippine Traders Corporation (Amended Record on Appeal, p. 17).
Respondents as plaintiffs in the complaint obtained a writ of preliminary attachment of
vessel PAXOI' " which was anchored at Davao on May 5, 1969, upon the filing of the
corresponding bond of P1,663,030.00 (Amended Record on Appeal, p. 27). However, the
attachment was lifted on May 15, 1969 upon defendant's motion and filing of a counterbond
for P1,663,030 (Amended Record on Appeal, p. 62).
On May 11, 1965, the complaint was amended to Identify the defendant as Marimperio
Compania Naviera S.A., petitioner herein (Amended Record on Appeal, p. 38). In answer to
the amended complaint, by way of special defenses defendant (petitioner herein) alleged
among others that the Charter Party covering its vessel "SS PAXOI" was entered into by
defendant with Interocean Shipping Co. which is not a party in the complaint; that
defendant has no agreement or relationship whatsoever with the plaintiffs; that plaintiffs
are unknown to defendant; that the charter party entered into by defendant with the
Interocean Shipping Co. over the vessel "SS PAXOI" does not authorize a sub-charter of said
vessel to other parties; and that at any rate, any such sub-charter was without the
knowledge or consent of defendant or defendant's agent, and therefore, has no effect and/or
is not binding upon defendant. By way of counterclaim, defendant prayed that plaintiffs be
ordered to pay defendant (1) the sum of 5,085.133d or its equivalent, in Philippine currency
of P54,929.60, which the defendant failed to realize under the substitute charter, from May
3, 1965 to May 16, 1965, while the vessel was under attachment; (2) the sum of E68.7.10 or
its equivalent of P7,132.83, Philippine currency, as premium for defendant's counterbond for
the first year, and such other additional premiums that will have to be paid by defendant for
additional premiums while the case is pending; and (3) a sum of not less than P200,000.00
for and as attomey's fees and expenses of litigations (Amended Record on Appeal, p. 64).
On March 16, 1966, respondent Interocean Shipping Corporation filed a complaint-in-
intervention to collect what it claims to be its loss of income by way of commission and
expenses in the amount of P15,000.00 and the sum of P2,000.00 for attorney's fees
(Amended Record on Appeal, p. 87). In its amended answer to the complaint-in-intervention
petitioner, by way of special defenses alleged that (1) the plaintiff-in-intervention, being the
charterer, did not notify the defendant shipowner, petitioner, herein, about any alleged sub-
charter of the vessel "SS PAXOI" to the plaintiffs; consequently, there is no privity of
contract between defendant and plaintiffs and it follows that plaintiff-in-intervention, as
charterer, is responsible for defendant shipowner for the proper performance of the charter
party; (2) that the charter party provides that any dispute arising from the charter party
should be referred to arbitration in London; that Charterer plaintiff-in-intervention has not
complied with this provision of the charter party; consequently its complaint-in intervention
is premature; and (3) that the alleged commission of 2 1/2 and not become due for the
reason, among others, that the charterer violated the contract, and the full hiring fee due
the shipowner was not paid in accordance with the terms and conditions of the charter
party. By way of counterclaim defendant shipowner charged the plaintiff-in-intervention
attorney's fees and expenses of litigation in the sum of P10,000.00 (Amended Record on
Appeal, p. 123).
On November 22, 1969 the Court of First Instance of Manila, Branch VIII rendered its
decision ** in favor of defendant Marimperio Compania Naviera, S.A., petitioner herein, and
against plaintiffs Union Import and Export Corporation and Philippine Traders
Corporation, respondents herein, dismissing the amended complaint, and ordering said
plaintiff on the counterclaim to pay defendant, jointly and severally, the amount of f
8,011.38 or its equivalent in Philippine currency of P75,303.40, at the exchange rate of
P9.40 to 1 for the unearned charter hire due to the attachment of the vessel "PAXOI" in
Davao, plus premiums paid on the counterbond as of April 22, 1968 plus the telex and cable
charges and the sum of P10,000.00 as attorney's fees and costs. The trial court dismissed
the complaint-in-intervention, ordering the intervenor, on the counterclaim, to pay
defendant the sum of P10,000.00 as attorney's fees, and the costs (Amended Record on
Appeal, p. 315).
Plaintiffs filed a Motion for Reconsideration and/or new trial of the decision of the trial court
on December 23, 1969 (Amended Record on Appeal, p. 286); the intervenor filed its motion
for reconsideration and/or new trial on January 7, 1970 (Amended Record on Appeal, p.
315).
Acting on the two motions for reconsideration, the trial court reversed its stand in its
amended decision dated January 24, 1978. The dispositive portion of the amended decision
states:
FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment for the
plaintiffs Union Import & Export Corporation and Philin Traders Corporation, and
plaintiff-in-intervention, Interocean Shipping Corporation, and consequently orders the
defendant, Marimperio Compania Naveria S.A.:
(1) To pay plaintiffs the sum of US$22,500.00 representing the remittance of
plaintiffs to said defendant for the first 15-day hire of the vessel "SS PAXOI"
including overtime and an overpayment of US$254.00;
(2) To pay plaintiffs the sum of US$16,000.00 corresponding to the remittance of
plaintiffs to defendant for the second 15-day hire of the aforesaid vessel;
(3) To pay plaintiffs the sum of US$6,982.72 representing the cost of bunker oil,
survey and watering of the said vessel;
(4) To pay plaintiffs the sum of US$220,0,00.00 representing the unrealized profits;
and
(5) To pay plaintiffs the sum of P100,000.00, as and for attorney's fees (Moran,
Comments on the Rules of Court, Vol. III, 1957 5d 644, citing Haussermann vs.
Rahmayer, 12 Phil. 350; and others)" (Francisco vs. Matias, G.R. No. L-16349,
January 31, 1964; Sison vs. Suntay, G.R. No. L-1000 . December 28, 1957).
The Court further orders defendant to pay plaintiff-in-intervention the amount of
P15,450.44, representing the latter's commission as broker, with interest thereon at
6% per annum from the date of the filing of the complaint-in-intervention, until fully
paid, plus the sum of P2,000.00 as attorney's fees.
The Court finally orders the defendant to pay the costs.
In view of the above conclusion, the Court orders the dismissal of the counterclaims filed
by defendant against the plaintiffs and plaintiff-in- intervention, as wen as its motion
for the award of damages in connection with the issuance of the writ of preliminary
attachment.
Defendant (petitioner herein), filed a motion for reconsideration and/or new trial of the
amended decision on February 19, 1970 (Amended Record on Appeal, p. 382). Meanwhile a
new Judge was assigned to the Trial Court (Amended Record on Appeal, p. 541). On
September 10, 1970 the trial court issued its order of September 10, 1970 *** denying
defendant's motion for reconsideration (Amended Record on Appeal, p. 583).
On Appeal, the Court of Appeals affirmed the amended decision of the lower court except
the portion granting commission to the intervenor- appellee, which it reversed thereby
dismissing the complaint-in- intervention. Its two motions (1) for reconsideration and/or
new trial and (2) for new trial having been denied by the Court of Appeals in its Resolution
of February 17, 1975 which, however, fixed the amount of attorney's fees at P100,000.00
instead of $100,000.00 (Rollo, p. 81), petitioner filed with this Court its petition for review
on certiorari on March 19, 197 5 (Rollo, p. 86).
After deliberating on the petition, the Court resolved to require the respondents to comment
thereon, in its resolution dated April 2, 1975 (rollo, p. 225).
The comment on petition for review by certiorari was filed by respondents on April 21, 1975,
praying that the petition for review by certiorari dated March 18, 1975 be dismissed for lack
of merit Rollo p. 226). The reply to comment was filed on May 8, 1975 (Rollo, p. 259). The
rejoinder to reply to comment was filed on May 13, 197 5 (Rollo, p. 264).
On October 20, 1975, the Court resolved (a) to give due course to the petition; (b) to treat the
petition for review as a special civil action; and (c) to require both parties to submit their
respective memoranda within thirty (30) days from notice hereof (Rollo, p. 27).
Respondents filed their memoranda on January 27, 1976 (Rollo, p. 290); petitioner, on
February 26, 1976 (Rollo, p. 338). Respondents' reply memorandum was filed on April 14,
1976 (Rollo, p. 413) and Rejoinder to respondents' reply memorandum was filed on May 28,
1976 (Rollo, p. 460).
On June 11, 1976, the Court resolved to admit petitioner's rejoinder to respondents' reply
memorandum and to declare this case submitted for decision (Rollo, p. 489).
The main issues raised by petitioner are:
1. Whether or not respondents have the legal capacity to bring the suit for specific
performance against petitioner based on the charter party, and
2. Whether or not the default of Charterer in the payment of the charter hire within the
time agreed upon gives petitioner a right to rescind the charter party extra judicially.
I.
According to Article 1311 of the Civil Code, a contract takes effect between the parties who
made it, and also their assigns and heirs, except in cases where the rights and obligations
arising from the contract are not transmissible by their nature, or by stipulation or by
provision of law. Since a contract may be violated only by the parties, thereto as against
each other, in an action upon that contract, the real parties in interest, either as plaintiff or
as defendant, must be parties to said contract. Therefore, a party who has not taken part in
it cannot sue or be sued for performance or for cancellation thereof, unless he shows that he
has a real interest affected thereby (Macias & Co. v. Warner Barners & Co., 43 Phil. 155
[1922] and Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125 [1951]; Coquia v. Fieldmen's
Insurance Co., Inc., 26 SCRA 178 [1968]).
It is undisputed that the charter party, basis of the complaint, was entered into between
petitioner Marimperio Compañia Naviera, S.A., through its duly authorized agent in
London, the N & J Vlassopulos Ltd., and the Interocean Shipping Company of Manila
through the latter's duly authorized broker, the Overseas Steamship Co., Inc., represented
by Matthews, Wrightson Burbridge Ltd., for the Charter of the 'SS PAXOI' (Amended
Complaint, Amended Record on Appeal, p. 33; Complaint-in-Intervention, Amended Record
on Appeal, p. 87). It is also alleged in both the Complaint (Amended Record on Appeal 18)
and the Amended Complaint (Amended Record on Appeal, p. 39) that the Interocean
Shipping Company sublet the said vessel to respondent Union Import and Export
Corporation which in turn sublet the same to respondent Philippine Traders Corporation. It
is admitted by respondents that the charterer is the Interocean Shipping Company. Even
paragraph 3 of the complaint-in-intervention alleges that respondents were given the use of
the vessel "pursuant to paragraph 20 of the Uniform Time Charter ..." which precisely
provides for the subletting of the vessel by the charterer (Rollo, p. 24). Furthermore, Article
652 of the Code of Commerce provides that the charter party shall contain, among others,
the name, surname, and domicile of the charterer, and if he states that he is acting by
commission, that of the person for whose account he makes the contract. It is obvious from
the disclosure made in the charter party by the authorized broker, the Overseas Steamship
Co., Inc., that the real charterer is the Interocean Shipping Company (which sublet the
vessel to Union Import and Export Corporation which in turn sublet it to Philippine Traders
Corporation).
In a sub-lease, there are two leases and two distinct judicial relations although intimately
connected and related to each other, unlike in a case of assignment of lease, where the
lessee transmits absolutely his right, and his personality disappears; there only remains in
the juridical relation two persons, the lessor and the assignee who is converted into a lessee
(Moreno, Philippine Law Dictionary, 2nd ed., p. 594). In other words, in a contract of sub-
lease, the personality of the lessee does not disappear; he does not transmit absolutely his
rights and obligations to the sub-lessee; and the sub-lessee generally does not have any
direct action against the owner of the premises as lessor, to require the compliance of the
obligations contracted with the plaintiff as lessee, or vice versa (10 Manresa, Spanish Civil
Code, 438).
However, there are at least two instances in the Civil Code which allow the lessor to bring
an action directly (accion directa) against the sub-lessee (use and preservation of the
premises under Art. 1651, and rentals under Article 1652).
Art. 1651 reads:
Without prejudice to his obligation toward the sub-lessor, the sub-lessee is bound to the
lessor for all acts which refer to the use and preservation of the thing leased in the
manner stipulated between the lessor and the lessee.
Article 1652 reads:
The sub-lessee is subsidiarily liable to the lessor for any rent due from the lessee.
However, the sub-lessee shall not be responsible beyond the amount of rent due from
him, in accordance with the terms of the sub-lease, at the time of the extra-judicial
demand by the lessor.
Payments of rent in advance by the sub-lessee shall be deemed not to have been made,
so far as the lessor's claim is concerned, unless said payments were effected in virtue of
the custom of the place.
It will be noted however that in said two Articles it is not the sub-lessee, but the lessor, who
can bring the action. In the instant case, it is clear that the sub-lessee as such cannot
maintain the suit they filed with the trial court (See A. Maluenda and Co. v. Enriquez, 46
Phil. 916).
In the law of agency "with an undisclosed principal, the Civil Code in Article 1883 reads:
Unquestionably, as of April 23, 1965, when Vlassopulos notified Matthews of the
withdrawal of the vessel from the Charterers' service, the latter was already in default.
Accordingly, under Clause 6 of the charter party the owners had the right to withdraw " SS
PAXO I " from the service of charterers, which withdrawal they did.

If an agent acts in his own name, the principal has no right of action against the persons
with whom the agent has contracted; neither have such persons against the principal.
In such case the agent is the one directly bound in favor of the person with whom he has
contracted, as if the transaction were his own, except when the contract involves things
belonging to the principal.
The provisions of this article shag be understood to be without prejudice to the actions
between the principal and agent.
The question that now arises is whether or not petitioner can rescind the charter party
extra-judicially. The answer is also in the affirmative. A contract is the law between the
contracting parties, and when there is nothing in it which is contrary to law, morals, good
customs, public policy or public order, the validity of the contract must be sustained
(Consolidated Textile Mills, Inc. v. Reparations Commission, 22 SCRA 674 [19681; Lazo v.
Republic Surety & Insurance Co., Inc., 31 SCRA 329 [1970]; Castro v. Court of Appeals, 99
SCRA 722 [1980]; Escano v. Court of Appeals, 100 SCRA 197 [1980]). A judicial action for
the rescission of a contract is not necessary where the contract provides that it may be
revoked and cancelled for violation of any of its terms and conditions (Enrile v. Court of
Appeals, 29 SCRA 504 [1969]; University of the Philippines v. De los Angeles, 35 SCRA 102
[1970]; Palay, Inc. v. Clave, 124 SCRA 638 [1983]).

While in the instant case, the true charterers of the vessel were the private respondents
herein and they chartered the vessel through an intermediary which upon instructions from
them did not disclose their names. Article 1883 cannot help the private respondents,
because although they were the actual principals in the charter of the vessel, the law does
not allow them to bring any action against the adverse party and vice, versa.
PREMISES CONSIDERED, (1) the decision of the Court of Appeals affirming the amended
decision of the Court of First Instance of Manila, Branch VIII, is hereby REVERSED and
SET ASIDE except for that portion of the decision dismissing the complaint-in-intervention;
and (2) the original decision of the trial court is hereby REINSTATED.

II. SO ORDERED.

The answer to the question of whether or not the default of charterer in the payment of the
charter hire within the time agreed upon gives petitioner a right to rescind the charter
party extrajudicially, is undoubtedly in the affirmative.

Clause 6 of the Charter party specifically provides that the petitioner has the right to
withdraw the vessel fromthe service of the charterers, without noting any protest and
without interference of any court or any formality in the event that the charterer defaults in
the payment of hire. The payment of hire was to be made every fifteen (1 5) days in advance.

It is undisputed that the vessel "SS PAXOI" came on hire on March 27, 1965. On March 29,
Vlassopulos notified by letter the charterer through Matthews of that fact, enclosing therein
owner's debit note for a 15-day hire payable in advance. On March 30, 1965 the shipowner
again notified Matthews that the payment for the first 15-day hire was overdue. Again on
April 2 the shipowner telexed Matthews insisting on the payment, but it was only on April 7
that the amount of US $22,500.00 was remitted to Williams Deacons Bank, Ltd. through the
Rizal Commercial Banking Corporation for the account of Vlassopulos, agent of petitioner,
corresponding to the first 15-day hire from March 27 to April 11, 1965.

On April 8, 1965, Vlassopulos acknowledged receipt of the payment, again with a debit note
for the second 15-day hire and overtime which was due on April 11, 1965. On April 23, 1965,
Vlassopulos notified Matthews by telex that charterers were in default and in accordance
with Clause 6 of the charter party, the vessel was being withdrawn from charterer's service,
holding them responsible for unpaid hire and all other legal claims of the owner.
Respondents remitted the sum of US$6,000.00 and US$10,000.00 to the bank only on April
26, 1965 representing payment for the second 15-day hire from April 12 to April 27, 1965,
received and accepted by the payee, Vlassopulos without any comment or protest.

[No. 13505. February 4, 1919.]
GEO. W. DAYWALT, plaintiff and appellant, vs. LA CORPORACIÓN DE LOS PADRES
AGUSTINOS RECOLETOS ET AL., defendants and appellees.
1.CONTRACTS; DAMAGES FOR BREACH; LIABILITY OF THIRD PARTY.—Whatever
may be the character of the liability, if any, which a stranger to a contract may incur by
advising or assisting one of the parties to evade performance, he cannot become more
extensively liable in damages for the nonperformance of the contract than the party in whose
behalf he intermeddles.
2.ID.; ID.; MEASURE OF DAMAGES FOR BREACH OF CONTRACT.—The damages
recoverable upon breach of contract are, primarily, the ordinary, natural and in a sense the
necessary damage resulting from the breach. Other damages, known as special damages, are
recoverable where it appears that the particular conditions which made such damages a
probable consequence of the breach were known to the delinquent party at the time the
contract was made. This proposition must be understood with the qualification that, if the
damages are in the legal sense remote or speculative, knowledge of the special conditions
which render such damages possible will not make them recoverable. Special damages of this
character cannot be recovered unless made the subject of special stipulation.
3.ID. ; ID. ; ID. ; DAMAGES FOR BREACH OF CONTRACT FOR SALE OF LAND.—The
damages ordinarily recoverable against a vendor for failure to deliver land which he has
contracted to deliver is the value of the use and occupation of the land for the time during
which it is wrongfully withheld.
APPEAL from a judgment of the Court of First Instance of Manila. Ostrand, J.
The facts are stated in the opinion of the court.
C. C. Cohn and Thos. D. Aitken for appellant.
Crossfield & O'Brien for appellee.
STREET, J.:
In the year 1902, Teodorica Endencia, an unmarried woman, resident in the Province of
Mindoro, executed a contract whereby she obligated herself to convey to Geo. W. Daywalt, a
tract of land situated in the barrio of Mangarin, municipality of Bulalacao, now San Jose, in
said province. It was agreed that a deed should be executed as soon as the title to the land
should be perfected by proceedings in the Court of Land Registration and a Torrens
certificate should be produced therefore in the name of Teodorica Endencia. A decree
recognizing the right of Teodorica as owner was entered in said court in August 1906, but
the Torrens certificate was not issued until later. The parties, however, met immediately
upon the entering of this decree and made a new contract with a view to carrying their
original agreement into effect. This new contract was executed in the form of a deed of
conveyance and bears date of August 16, 1906. The stipulated price was fixed at P4,000, and
the area of the land enclosed in the boundaries defined in the contract was stated to be 452
hectares and a fraction.
The second contract was not immediately carried into effect for the reason that the Torrens
certificate was not yet obtainable and in fact said certificate was not issued until the period
of performance contemplated in the contract had expired. Accordingly, upon October 3,
1908, the parties entered into still another agreement, superseding the old, by which
Teodorica Endencia agreed upon receiving the Torrens title to the land in question, to
deliver the same to the Hongkong and Shanghai Bank in Manila, to be forwarded to the
Crocker National Bank in San Francisco, where it was to be delivered to the plaintiff upon
payment of a balance of P3,100.
The Torrens certificate was in time issued to Teodorica Endencia, but in the course of the
proceedings relative to the registration of the land, it was found by official survey that the
area of the tract inclosed in the boundaries stated in the contract was about 1.248 hectares
of 452 hectares as stated in the contract. In view of this development Teodorica Endencia
became reluctant to transfer the whole tract to the purchaser, asserting that she never
intended to sell so large an amount of land and that she had been misinformed as to its
area.
This attitude of hers led to litigation in which Daywalt finally succeeded, upon appeal to the
Supreme Court, in obtaining a decree for specific performance; and Teodorica Endencia was
ordered to convey the entire tract of land to Daywalt pursuant to the contract of October 3,
1908, which contract was declared to be in full force and effect. This decree appears to have
become finally effective in the early part of the year 1914. 1
The defendant, La Corporacion de los Padres Recoletos, is a religious corporation, with its
domicile in the city of Manila. Said corporation was formerly the owner of a large tract of
land, known as the San Jose Estate, on the island of Mindoro, which was sold to the
Government of the Philippine Islands in the year 1909. The same corporation was at this
time also the owner of another estate on the same island immediately adjacent to the land
which Teodorica Endencia had sold to Geo. W. Daywalt; and for many years the Recoletos
Fathers had maintained large herds of cattle on the farms referred to. Their representative,
charged with management of these farms, was father Isidoro Sanz, himself a members of
the order. Father Sanz had long been well acquainted with Teodorica Endencia and exerted
over her an influence and ascendency due to his religious character as well as to the
personal friendship which existed between them. Teodorica appears to be a woman of little
personal force, easily subject to influence, and upon all the important matters of business
was accustomed to seek, and was given, the advice of father Sanz and other members of his
order with whom she came in contact.
Father Sanz was fully aware of the existence of the contract of 1902 by which Teodorica
Endencia agreed to sell her land to the plaintiff as well as of the later important
developments connected with the history of that contract and the contract substituted
successively for it; and in particular Father Sanz, as well as other members of the defendant
corporation, knew of the existence of the contract of October 3, 1908, which, as we have
already seen finally fixed the rights of the parties to the property in question. When the
Torrens certificate was finally issued in 1909 in favor of Teodorica Endencia, she delivered it
for safekeeping to the defendant corporation, and it was then taken to Manila where it
remained in the custody and under the control of P. Juan Labarga the procurador and chief
official of the defendant corporation, until the deliver thereof to the plaintiff was made
compulsory by reason of the decree of the Supreme Court in 1914.
When the defendant corporation sold the San Jose Estate, it was necessary to bring the
cattle off of that property; and, in the first half of 1909, some 2,368 head were removed to
the estate of the corporation immediately adjacent to the property which the plaintiff had
purchased from Teodorica Endencia. As Teodorica still retained possession of said property
Father Sanz entered into an arrangement with her whereby large numbers of cattle
belonging to the defendant corporation were pastured upon said land during a period
extending from June 1, 1909, to May 1, 1914.
Under the first cause stated in the complaint in the present action the plaintiff seeks to
recover from the defendant corporation the sum of P24,000, as damages for the use and
occupation of the land in question by reason of the pasturing of cattle thereon during the
period stated. The trial court came to the conclusion that the defendant corporation was
liable for damages by reason of the use and occupation of the premises in the manner stated;
and fixed the amount to be recovered at P2,497. The plaintiff appealed and has assigned
error to this part of the judgment of the court below, insisting that damages should have
been awarded in a much larger sum and at least to the full extent of P24,000, the amount
claimed in the complaint.
As the defendant did not appeal, the property of allowing damages for the use and
occupation of the land to the extent o P2,497, the amount awarded, is not now in question
an the only thing here to be considered, in connection with this branch of the case, is
whether the damages allowed under this head should be increased. The trial court rightly
ignored the fact that the defendant corporation had paid Teodorica Endencia of ruse and
occupation of the same land during the period in question at the rate of P425 per annum,
inasmuch as the final decree of this court in the action for specific performance is conclusive
against her right, and as the defendant corporation had notice of the rights of the plaintiff
under this contract of purchase, it can not be permitted that the corporation should escape
liability in this action by proving payment of rent to a person other than the true owner.
With reference to the rate of which compensation should be estimated the trial court came
to the following conclusion:
As to the rate of the compensation, the plaintiff contends that the defendant corporation
maintained at leas one thousand head of cattle on the land and that the pasturage was
of the value of forty centavos per head monthly, or P4,800 annually, for the whole tract.
The court can not accept this view. It is rather improbable that 1,248 hectares of wild
Mindoro land would furnish sufficient pasturage for one thousand head of cattle during
the entire year, and, considering the locality, the rate of forty centavos per head monthly
seems too high. The evidence shows that after having recovered possession of the land
the plaintiff rented it to the defendant corporation for fifty centavos per hectares
annually, the tenant to pay the taxes on the land, and this appears to be a reasonable
rent. There is no reason to suppose that the land was worth more for grazing purposes
during the period from 1909 to 1913, than it was at the later period. Upon this basis the
plaintiff is entitled to damages in the sum of p2,497, and is under no obligation to
reimburse the defendants for the land taxes paid by either of them during the period the
land was occupied by the defendant corporation. It may be mentioned in this connection
that the Lontok tract adjoining the land in question and containing over three thousand
hectares appears to have been leased for only P1,000 a year, plus the taxes.
From this it will be seen that the trial court estimated the rental value of the land for
grazing purposes at 50 centavos per hectare per annum, and roughly adopted the period of
four years as the time for which compensation at that rate should be made. As the court had
already found that the defendant was liable for these damages from June, 1, 1909, to May 1,
1914, or a period of four years and eleven months, there seems some ground for the
contention made in the appellant's first assignment of error that the court's computation
was erroneous, even accepting the rule upon which the damages were assessed, as it is
manifest that at the rate of 50 centavos per hectare per annum, the damages for four years
and eleven months would be P3,090.
Notwithstanding this circumstance, we are of the opinion that the damages assessed are
sufficient to compensate the plaintiff for the use and occupation of the land during the whole
time it was used. There is evidence in the record strongly tending to show that the wrongful
use of the land by the defendant was not continuous throughout the year but was confined
mostly to the reason when the forage obtainable on the land of the defendant corporation
was not sufficient to maintain its cattle, for which reason it became necessary to allow them
to go over to pasture on the land in question; and it is not clear that the whole of the land
was used for pasturage at any time. Considerations of this character probably led the trial
court to adopt four years as roughly being the period during which compensation should be
allowed. But whether this was advertently done or not, we see no sufficient reason, in the
uncertainty of the record with reference to the number of the cattle grazed and the period
when the land was used, for substituting our guess for the estimate made by the trial court.
In the second cause of action stated in the complaint the plaintiff seeks to recover from the
defendant corporation the sum of P500,000, as damages, on the ground that said
corporation, for its own selfish purposes, unlawfully induced Teodorica Endencia to refrain
from the performance of her contract for the sale of the land in question and to withhold
delivery to the plaintiff of the Torrens title, and further, maliciously and without reasonable
cause, maintained her in her defense to the action of specific performance which was finally
decided in favor of the plaintiff in this court. The cause of action here stated is based on
liability derived from the wrongful interference of the defendant in the performance of the
contract between the plaintiff and Teodorica Endencia; and the large damages laid in the
complaint were, according to the proof submitted by the plaintiff, incurred as a result of a
combination of circumstances of the following nature: In 1911, it appears, the plaintiff, as
the owner of the land which he had bought from Teodorica Endencia entered into a contract
(Exhibit C) with S. B. Wakefield, of San Francisco, for the sale and disposal of said lands to
a sugar growing and milling enterprise, the successful launching of which depended on the
ability of Daywalt to get possession of the land and the Torrens certificate of title. In order
to accomplish this end, the plaintiff returned to the Philippine Islands, communicated his
arrangement to the defendant,, and made repeated efforts to secure the registered title for
delivery in compliance with said agreement with Wakefield. Teodorica Endencia seems to
have yielded her consent to the consummation of her contract, but the Torrens title was
then in the possession of Padre Juan Labarga in Manila, who refused to deliver the
document. Teodorica also was in the end contract with the plaintiff, with the result that the
plaintiff was kept out of possession until the Wakefield project for the establishment of a
large sugar growing and milling enterprise fell through. In the light of what has happened
in recent years in the sugar industry, we feel justified in saying that the project above
referred to, if carried into effect, must inevitably have proved a great success.
The determination of the issue presented in this second cause of action requires a
consideration of two points. The first is whether a person who is not a party to a contract for
the sale of land makes himself liable for damages to the vendee, beyond the value of the use
and occupation, by colluding with the vendor and maintaining him in the effort to resist an
action for specific performance. The second is whether the damages which the plaintiff seeks
to recover under this head are too remote and speculative to be the subject of recovery.
As preliminary to a consideration of the first of these questions, we deem it well it dispose of
the contention that the members of the defendants corporation, in advising and prompting
Teodorica Endencia not to comply with the contract of sale, were actuated by improper and
malicious motives. The trial court found that this contention was not sustained, observing
that while it was true that the circumstances pointed to an entire sympathy on the part of
the defendant corporation with the efforts of Teodorica Endencia to defeat the plaintiff's
claim to the land, the fact that its officials may have advised her not to carry the contract
into effect would not constitute actionable interference with such contract. It may be added
that when one considers the hardship that the ultimate performance of that contract
entailed on the vendor, and the doubt in which the issue was involved — to the extent that
the decision of the Court of the First Instance was unfavorable to the plaintiff and the
Supreme Court itself was divided — the attitude of the defendant corporation, as exhibited
in the conduct of its procurador, Juan Labarga, and other members of the order of the
Recollect Fathers, is not difficult to understand. To our mind a fair conclusion on this
feature of the case is that father Juan Labarga and his associates believed in good faith that
the contract cold not be enforced and that Teodorica would be wronged if it should be carried
into effect. Any advice or assistance which they may have given was, therefore, prompted by
no mean or improper motive. It is not, in our opinion, to be denied that Teodorica would
have surrendered the documents of title and given possession of the land but for the
influence and promptings of members of the defendants corporation. But we do not credit
the idea that they were in any degree influenced to the giving of such advice by the desire to
secure to themselves the paltry privilege of grazing their cattle upon the land in question to
the prejudice of the just rights of the plaintiff.
The attorney for the plaintiff maintains that, by interfering in the performance of the
contract in question and obstructing the plaintiff in his efforts to secure the certificate of
tittle to the land, the defendant corporation made itself a co-participant with Teodorica
Endencia in the breach of said contract; and inasmuch as father Juan Labarga, at the time
of said unlawful intervention between the contracting parties, was fully aware of the
existence of the contract (Exhibit C) which the plaintiff had made with S. B. Wakefield, of
San Francisco, it is insisted that the defendant corporation is liable for the loss consequent
upon the failure of the project outlined in said contract.
In this connection reliance is placed by the plaintiff upon certain American and English
decisions in which it is held that a person who is a stranger to contract may, by an
unjustifiable interference in the performance thereof, render himself liable for the damages
consequent upon non-performance. It is said that the doctrine of these cases was recognized
by this court in Gilchrist vs. Cuddy (29 Phil. Rep., 542); and we have been earnestly pressed
to extend the rule there enunciated to the situation here presente.
Somewhat more than half a century ago the English Court of the Queen's Bench saw its way
clear to permit an action for damages to be maintained against a stranger to a contract
wrongfully interfering in its performance. The leading case on this subject is Lumley vs. Gye
([1853], 2 El. & Bl., 216). It there appeared that the plaintiff, as manager of a theatre, had
entered into a contract with Miss Johanna Wagner, an opera singer,, whereby she bound
herself for a period to sing in the plaintiff's theatre and nowhere else. The defendant,
knowing of the existence of this contract, and, as the declaration alleged, "maliciously
intending to injure the plaintiff," enticed and produced Miss Wagner to leave the plaintiff's
employment. It was held that the plaintiff was entitled to recover damages. The right which
was here recognized had its origin in a rule, long familiar to the courts of the common law,
to the effect that any person who entices a servant from his employment is liable in
damages to the master. The master's interest in the service rendered by his employee is
here considered as a distinct subject of juridical right. It being thus accepted that it is a
legal wrong to break up a relation of personal service, the question now arose whether it is
illegal for one person to interfere with any contract relation subsisting between others. Prior
to the decision of Lumley vs. Gye [supra] it had been supposed that the liability here under
consideration was limited to the cases of the enticement of menial servants, apprentices,
and others to whom the English Statutes of Laborers were applicable. But in the case cited
the majority of the judges concurred in the opinion that the principle extended to all cases of
hiring. This doctrine was followed by the Court of Appeal in Bowen vs. Hall ([1881], 6 Q. B.,
Div., 333); and in Temperton vs. Russell ([1893], Q. B., 715), it was held that the right of
action for maliciously procuring a breach of contract is not confined to contracts for personal
services, but extends to contracts in general. In that case the contract which the defendant
had procured to be breached was a contract for the supply of building material.
Malice in some form is generally supposed to be an essential ingredient in cases of
interference with contract relations. But upon the authorities it is enough if the wrong-doer,
having knowledge of the existence of the contract relations, in bad faith sets about to break
it up. Whether his motive is to benefit himself or gratify his spite by working mischief to the
employer is immaterial. Malice in the sense of ill-will or spite is not essential.
Upon the question as to what constitutes legal justification, a good illustration was put in
the leading case. If a party enters into contract to go for another upon a journey to a remote
and unhealthful climate, and a third person, with a bona fide purpose of benefiting the one
who is under contract to go, dissuades him from the step, no action will lie. But if the advice
is not disinterested and the persuasion is used for "the indirect purpose of benefiting the
defendant at the expense of the plaintiff," the intermedler is liable if his advice is taken and
the contract broken.
The doctrine embodied in the cases just cited has sometimes been found useful, in the
complicated relations of modern industry, as a means of restraining the activities of labor
unions and industrial societies when improperly engaged in the promotion of strikes. An
illustration of the application of the doctrine in question in a case of this kind is found in
South Wales Miners Federation vs. Glamorgan Coal Co. ([1905]), A. C., 239). It there
appeared that certain miners employed in the plaintiff's collieries, acting under the order of
the executive council of the defendant federation, violated their contract with the plaintiff
by abstaining from work on certain days. The federation and council acted without any
actual malice or ill-will towards the plaintiff, and the only object of the order in question
was that the price of coal might thereby be kept up, a factor which affected the miner's wage
scale. It was held that no sufficient justification was shown and that the federation was
liable.
In the United States, the rule established in England by Lumley vs. Gye [supra] and
subsequent cases is commonly accepted, though in a few of the States the broad idea that a
stranger to a contract can be held liable upon its is rejected, and in these jurisdictions the
doctrine, if accepted at all, is limited to the situation where the contract is strictly for
personal service. (Boyson vs. Thorn, 98 Cal., 578; Chambers & Marshall vs. Baldwin 91 Ky.,
121; Bourlier vs. Macauley, 91 Ky., 135; Glencoe Land & Gravel Co. vs. Hudson Bros. Com.
Co., 138 Mo., 439.)
It should be observed in this connection that, according to the English and American
authorities, no question can be made as to the liability to one who interferes with a contract
existing between others by means which, under known legal cannons, can be denominated
an unlawful means. Thus, if performance is prevented by force, intimidation, coercion, or
threats, or by false or defamatory statements, or by nuisance or riot, the person using such
unlawful means is, under all the authorities, liable for the damage which ensues. And in
jurisdictions where the doctrine of Lumley vs. Gye [supra] is rejected, no liability can arise
from a meddlesome and malicious interference with a contract relation unless some such
unlawful means as those just indicated are used. (See cases last above cited.)
This brings us to the decision made by this court in Gilchrist vs. Cuddy (29 Phil. Rep., 542).
It there appeared that one Cuddy, the owner of a cinematographic film, let it under a rental
contract to the plaintiff Gilchrist for a specified period of time. In violation of the terms of
this agreement, Cuddy proceeded to turn over the film also under a rental contract, to the
defendants Espejo and Zaldarriaga. Gilchrist thereupon restored to the Court of First
Instance and produced an injunction restraining the defendants from exhibiting the film in
question in their theater during the period specified in the contract of Cuddy with Gilchrist.
Upon appeal to this court it was in effect held that the injunction was not improperly
granted, although the defendants did not, at the time their contract was made, know the
identity of the plaintiff as the person holding the prior contract but did know of the
existence of a contract in favor of someone. It was also said arguendo, that the defendants
would have been liable in damages under article 1902 of the Civil Code, if the action had
been brought by the plaintiff to recover damages. The force of the opinion is, we think,
somewhat weakened by the criticism contain in the concurring opinion, where it is said that
the question of breach of contract by inducement was not really involved in the case. Taking
the decision upon the point which was rally decided, it is authority for the proposition that
one who buys something which he knows has been sold to some other person can be
restrained from using that thing to the prejudice of the person having the prior and better
right.
Translated into terms applicable to the case at bar, the decision in Gilchrist vs. Cuddy (29
Phil. Rep., 542), indicates that the defendant corporation, having notice of the sale of the
land in question to Daywalt, might have been enjoined by the latter from using the property
for grazing its cattle thereon. That the defendant corporation is also liable in this action for
the damage resulting to the plaintiff from the wrongful use and occupation of the property
has also been already determined. But it will be observed that in order to sustain this
liability it is not necessary to resort to any subtle exegesis relative to the liability of a
stranger to a contract for unlawful interference in the performance thereof. It is enough that
defendant use the property with notice that the plaintiff had a prior and better right.
Article 1902 of the Civil Code declares that any person who by an act or omission,
characterized by fault or negligence, causes damage to another shall be liable for the
damage so done. Ignoring so much of this article as relates to liability for negligence, we
take the rule to be that a person is liable for damage done to another by any culpable act;
and by "culpable act" we mean any act which is blameworthy when judged by accepted legal
standards. The idea thus expressed is undoubtedly broad enough to include any rational
conception of liability for the tortious acts likely to be developed in any society. Thus
considered, it cannot be said that the doctrine of Lumley vs. Gye [supra] and related cases is
repugnant to the principles of the civil law.
Nevertheless, it must be admitted that the codes and jurisprudence of the civil law furnish a
somewhat uncongenial field in which to propagate the idea that a stranger to a contract
may sued for the breach thereof. Article 1257 of the Civil Code declares that contracts are
binding only between the parties and their privies. In conformity with this it has been held
that a stranger to a contract has no right of action for the nonfulfillment of the contract
except in the case especially contemplated in the second paragraph of the same article. (Uy
Tam and Uy Yet vs. Leonard, 30 Phil. Rep., 471.) As observed by this court in Manila
Railroad Co. vs. Compañia Transatlantica, R. G. No. 11318 (38 Phil. Rep., 875), a contract,
when effectually entered into between certain parties, determines not only the character
and extent of the liability of the contracting parties but also the person or entity by whom
the obligation is exigible. The same idea should apparently be applicable with respect to the
person against whom the obligation of the contract may be enforced; for it is evident that
there must be a certain mutuality in the obligation, and if the stranger to a contract is not
permitted to sue to enforce it, he cannot consistently be held liable upon it.
If the two antagonistic ideas which we have just brought into juxtaposition are capable of
reconciliation, the process must be accomplished by distinguishing clearly between the right
of action arising from the improper interference with the contract by a stranger thereto,
considered as an independent act generate of civil liability, and the right of action ex
contractu against a party to the contract resulting from the breach thereof. However, we do
not propose here to pursue the matter further, inasmuch as, for reasons presently to be
stated, we are of the opinion that neither the doctrine of Lumley vs. Gye [supra] nor the
application made of it by this court in Gilchrist vs. Cuddy (29 Phil. Rep., 542), affords any
basis for the recovery of the damages which the plaintiff is supposed to have suffered by
reason of his inability to comply with the terms of the Wakefield contract.
Whatever may be the character of the liability which a stranger to a contract may incur by
advising or assisting one of the parties to evade performance, there is one proposition upon
which all must agree. This is, that the stranger cannot become more extensively liable in
damages for the nonperformance of the contract than the party in whose behalf he
intermeddles. To hold the stranger liable for damages in excess of those that could be
recovered against the immediate party to the contract would lead to results at once
grotesque and unjust. In the case at bar, as Teodorica Endencia was the party directly
bound by the contract, it is obvious that the liability of the defendant corporation, even
admitting that it has made itself coparticipant in the breach of the contract, can in no even
exceed hers. This leads us to consider at this point the extent of the liability of Teodorica
Endencia to the plaintiff by reason of her failure to surrender the certificate of title and to
place the plaintiff in possession.
It should in the first place be noted that the liability of Teodorica Endencia for damages
resulting from the breach of her contract with Daywalt was a proper subject for adjudication
in the action for specific performance which Daywalt instituted against her in 1909 and
which was litigated by him to a successful conclusion in this court, but without obtaining
any special adjudication with reference to damages. Indemnification for damages resulting
from the breach of a contract is a right inseparably annexed to every action for the
fulfillment of the obligation (art. 1124, Civil Code); and its is clear that if damages are not
sought or recovered in the action to enforce performance they cannot be recovered in an
independent action. As to Teodorica Endencia, therefore, it should be considered that the
right of action to recover damages for the breach of the contract in question was exhausted
in the prior suit. However, her attorneys have not seen fit to interpose the defense of res
judicata in her behalf; and as the defendant corporation was not a party to that action, and
such defense could not in any event be of any avail to it, we proceed to consider the question
of the liability of Teodorica Endencia for damages without refernce to this point.
The most that can be said with refernce to the conduct of Teodorica Endencia is that she
refused to carry out a contract for the sale of certain land and resisted to the last an action
for specific performance in court. The result was that the plaintiff was prevented during a
period of several years from exerting that control over the property which he was entitled to
exert and was meanwhile unable to dispose of the property advantageously. Now, what is
the measure of damages for the wrongful detention of real property by the vender after the
time has come for him to place the purchaser in possession?
The damages ordinarily and normally recoverable against a vendor for failure to deliver
land which he has contracted to deliver is the value of the use and occupation of the land for
the time during which it is wrongfully withheld. And of course where the purchaser has not
paid the purchaser money, a deduction may be made in respect to the interest on the money
which constitutes the purchase price. Substantially the same rule holds with respect to the
liability of a landlord who fails to put his tenant in possession pursuant to contract of lease.
The measure of damages is the value of the leasehold interest, or use and occupation, less
the stipulated rent, where this has not been paid. The rule that the measure of damages for
the wrongful detention of land is normally to be found in the value of use and occupation is,
we believe, one of the things that may be considered certain in the law (39 cyc., 1630; 24
Cyc., 1052 Sedgewick on Damages, Ninth ed., sec. 185.) — almost as wellsettled, indeed, as
the rule that the measure of damages for the wrongful detention of money is to be found in
the interest.
We recognize the possibility that more extensive damages may be recovered where, at the
time of the creation of the contractual obligation, the vendor, or lessor, is aware of the use to
which the purchaser or lessee desires to put the property which is the subject of the
contract, and the contract is made with the eyes of the vendor or lessor open to the
possibility of the damage which may result to the other party from his own failure to give
possession. The case before us is not this character, inasmuch as at the time when the rights
of the parties under the contract were determined, nothing was known to any to them about
the San Francisco capitalist who would be willing to back the project portrayed in Exhibit C.
The extent of the liability for the breach of a contract must be determined in the light of the
situation in existence at the time the contract is made; and the damages ordinarily
recoverable are in all events limited to such as might be reasonable are in all events limited
to such as might be reasonably foreseen in the light of the facts then known to the
contracting parties. Where the purchaser desires to protect himself, in the contingency of
the failure of the vendor promptly to give possession, from the possibility of incurring other
damages than such as the incident to the normal value of the use and occupation, he should
cause to be inserted in the contract a clause providing for stipulated amount to the paid
upon failure of the vendor to give possession; and not case has been called to our attention
where, in the absence of such a stipulation, damages have been held to be recoverable by the
purchaser in excess of the normal value of use and occupation. On the contrary, the most
fundamental conceptions of the law relative to the assessment of damages are inconsistent
with such idea.
The principles governing this branch of the law were profoundly considered in the case
Hadley vs. Baxendale (9 Exch., 341), decided in the English Court of Exchequer in 1854; and
a few words relative to the principles governing will here be found instructive. The decision
in that case is considered a leading authority in the jurisprudence of the common law. The
plaintiffs in that case were proprietors of a mill in Gloucester, which was propelled by
steam, and which was engaged in grinding and supplying meal and flour to customers. The
shaft of the engine got broken, and it became necessarily that the broken shaft be sent to an
engineer or foundry man at Greenwich, to serve as a model for casting or manufacturing
another that would fit into the machinery. The broken shaft could be delivered at Greenwich
on the second day after its receipts by the carrier it. It was delivered to the defendants, who
were common carriers engaged in that business between these points, and who had told
plaintiffs it would be delivered at Greenwich on the second day after its delivery to them, if
delivered at a given hour. The carriers were informed that the mill was stopped, but were
not informed of the special purpose for which the broken shaft was desired to forwarded,
They were not told the mill would remain idle until the new shaft would be returned, or that
the new shaft could not be manufactured at Greenwich until the broken one arrived to serve
as a model. There was delay beyond the two days in delivering the broken shaft at
Greenwich, and a corresponding delay in starting the mill. No explanation of the delay was
offered by the carriers. The suit was brought to recover damages for the lost profits of the
mill, cause by the delay in delivering the broken shaft. It was held that the plaintiff could
not recover.
The discussion contained in the opinion of the court in that case leads to the conclusion that
the damages recoverable in case of the breach of a contract are two sorts, namely, (1) the
ordinary, natural, and in a sense necessary damage; and (2) special damages.
Ordinary damages is found in all breaches of contract where the are no special
circumstances to distinguish the case specially from other contracts. The consideration paid
for an unperformed promise is an instance of this sort of damage. In all such cases the
damages recoverable are such as naturally and generally would result from such a breach,
"according to the usual course of things." In case involving only ordinary damage no
discussion is ever indulged as to whether that damage was contemplated or not. This is
conclusively presumed from the immediateness and inevitableness of the damage, and the
recovery of such damage follows as a necessary legal consequence of the breach. Ordinary
damage is assumed as a matter of law to be within the contemplation of the parties.
Special damage, on the other hand, is such as follows less directly from the breach than
ordinary damage. It is only found in case where some external condition, apart from the
actual terms to the contract exists or intervenes, as it were, to give a turn to affairs and to
increase damage in a way that the promisor, without actual notice of that external
condition, could not reasonably be expected to foresee. Concerning this sort of damage,
Hadley vs. Baxendale (1854) [supra] lays down the definite and just rule that before such
damage can be recovered the plaintiff must show that the particular condition which made
the damage a possible and likely consequence of the breach was known to the defendant at
the time the contract was made.
The statement that special damages may be recovered where the likelihood of such damages
flowing from the breach of the contract is contemplated and foreseen by the parties needs to
be supplemented by a proposition which, though not enunciated in Hadley vs. Baxendale, is
yet clearly to be drawn from subsequent cases. This is that where the damage which a
plaintiff seeks to recover as special damage is so far speculative as to be in contemplation of
law remote, notification of the special conditions which make that damage possible cannot
render the defendant liable therefor. To bring damages which would ordinarily be treated as
remote within the category of recoverable special damages, it is necessary that the condition
should be made the subject of contract in such sense as to become an express or implied
term of the engagement. Horne vs. Midland R. Co. (L. R., 8 C. P., 131) is a case where the
damage which was sought to be recovered as special damage was really remote, and some of
the judges rightly places the disallowance of the damage on the ground that to make such
damage recoverable, it must so far have been within the contemplation of the parties as to
form at least an implied term of the contract. But others proceeded on the idea that the
notice given to the defendant was not sufficiently full and definite. The result was the same
in either view. The facts in that case were as follows: The plaintiffs, shoe manufacturers at
K, were under contract to supply by a certain day shoes to a firm in London for the French
government. They delivered the shoes to a carrier in sufficient time for the goods to reach
London at the time stipulated in the contract and informed the railroad agent that the shoes
would be thrown back upon their hands if they did not reach the destination in time. The
defendants negligently failed to forward the good in due season. The sale was therefore lost,
and the market having fallen, the plaintiffs had to sell at a loss.
In the preceding discussion we have considered the plaintiff's right chiefly against Teodorica
Endencia; and what has been said suffices in our opinion to demonstrate that the damages
laid under the second cause of action in the complaint could not be recovered from her, first,
because the damages laid under the second cause of action in the complaint could not be
recovered from her, first, because the damages in question are special damages which were
not within contemplation of the parties when the contract was made, and secondly, because
said damages are too remote to be the subject of recovery. This conclusion is also necessarily
fatal to the right of the plaintiff to recover such damages from the defendant corporation,
for, as already suggested, by advising Teodorica not to perform the contract, said
corporation could in no event render itself more extensively liable than the principle in the
contract.
Our conclusion is that the judgment of the trial court should be affirmed, and it is so
ordered, with costs against the appellant.

[No. 9356. February 18, 1915.]
C. S. GILCHRIST, plaintiff and appellee, vs. E. A. CUDDY ET AL., defendants. JOSE
FERNANDEZ ESPEJO and MARIANO ZALDARRIAGA, appellants.
1.DAMAGES; INTERFERENCE WITH CONTRACTS BY STRANGERS.—The interference
with lawful contracts by strangers thereto gives rise to an action for damages in favor of the
injured person. The law does not require that the responsible person shall have known the
identity of the injured person.
2.INJUNCTION; WHEN IT ISSUES; GENERAL DOCTRINE.—The general doctrine as to
when injunction issues, as stated in Devesa vs. Arbes (13 Phil. Rep., 273), affirmed.
3.ID.; INTERFERENCE WITH CONTRACTS BY STRANGERS.—The interference with
lawful contracts by strangers thereto does not of itself give the injured person a remedy by
injunction.
4.ID.; WHEN INJUNCTION ISSUES.—Courts usually grant an injunction where the
profits of the injured person are derived from his contractual relations with a large and
indefinite number of individuals, thus reducing him to the necessity of proving in an action
against the tort feasor that the latter is responsible in each case for the broken contract, or
else obliging him to institute individual suits against each contracting party, and so
exposing him to a multiplicity of suits.
5.ID.; ID.; FACTS OF THIS CASE.—The defendants induced the owner of a cinematograph
film to break his contract of lease with a theater owner and lease the film to them, with the
avowed purpose of exhibiting it in another theater in the same city. As the profits of the
lessee depended upon the patronage of the public and hence the task of estimating his
damages with accuracy would be quite difficult if not impossible: Held, That injunction
against further interference with the contract was properly issued.
6.APPEAL; REVIEW OF EVIDENCE.—In order that this court may review the evidence on
appeal, it is necessary that all the evidence be brought up. This is the duty of the appellant.
and upon his failure to perform it, we decline to review the evidence, but rely entirely upon
the pleadings and findings of fact of the trial court and examine only assigned errors of law.
This rule is subject to some exceptions, but the present case is not within any of them.
7.EVIDENCE; JUDICIAL NOTICE; CINEMATOGRAPH.—Judicial notice taken of the
general character of a cinematograph or motionpicture theater.
APPEAL from a judgment of the Court of First Instance of Iloilo. Powell, J.
The facts are stated in the opinion of the court.
C. Lozano for appellants.
Bruce, Lawrence, Ross & Block for appellee.
TRENT, J.:
An appeal by the defendants, Jose Fernandez Espejo and Mariano Zaldarriaga, from a
judgment of the Court of First Instance of Iloilo, dismissing their cross-complaint upon the
merits for damages against the plaintiff for the alleged wrongful issuance of a mandatory
and a preliminary injunction.
Upon the application of the appellee an ex parte mandatory injunction was issued on the 22d
of May, 1913, directing the defendant, E. A. Cuddy, to send to the appellee a certain
cinematograph film called "Zigomar" in compliance with an alleged contract which had been
entered into between these two parties, and at the time an ex parte preliminary injunction
was issued restraining the appellants from receiving and exhibiting in their theater the
Zigomar until further orders of the court. On the 26th of that month the appellants
appeared and moved the court to dissolve the preliminary injunction. When the case was
called for trial on August 6, the appellee moved for the dismissal of the complaint "for the
reason that there is no further necessity for the maintenance of the injunction." The motion
was granted without objection as to Cuddy and denied as to the appellants in order to give
them an opportunity to prove that the injunction were wrongfully issued and the amount of
damages suffered by reason thereof.
The pertinent part of the trial court's findings of fact in this case is as follows:
It appears in this case that Cuddy was the owner of the film Zigomar and that on
the 24th of April he rented it to C. S. Gilchrist for a week for P125, and it was to
be delivered on the 26th of May, the week beginning that day. A few days prior to
this Cuddy sent the money back to Gilchrist, which he had forwarded to him in
Manila, saying that he had made other arrangements with his film. The other
arrangements was the rental to these defendants Espejo and his partner for P350
for the week and the injunction was asked by Gilchrist against these parties from
showing it for the week beginning the 26th of May.
It appears from the testimony in this case, conclusively, that Cuddy willfully
violated his contract, he being the owner of the picture, with Gilchrist because the
defendants had offered him more for the same period. Mr. Espejo at the trial on
the permanent injunction on the 26th of May admitted that he knew that Cuddy
was the owner of the film. He was trying to get it through his agents Pathe
Brothers in Manila. He is the agent of the same concern in Iloilo. There is in
evidence in this case on the trial today as well as on the 26th of May, letters
showing that the Pathe Brothers in Manila advised this man on two different
occasions not to contend for this film Zigomar because the rental price was
prohibitive and assured him also that he could not get the film for about six weeks.
The last of these letters was written on the 26th of April, which showed
conclusively that he knew they had to get this film from Cuddy and from this
letter that the agent in Manila could not get it, but he made Cuddy an offer
himself and Cuddy accepted it because he was paying about three times as much
as he had contracted with Gilchrist for. Therefore, in the opinion of this court, the
defendants failed signally to show the injunction against the defendant was
wrongfully procured.
The appellants duly excepted to the order of the court denying their motion for new trial on
the ground that the evidence was insufficient to justify the decision rendered. There is
lacking from the record before us the deposition of the defendant Cuddy, which apparently
throws light upon a contract entered into between him and the plaintiff Gilchrist. The
contents of this deposition are discussed at length in the brief of the appellants and an
endeavor is made to show that no such contract was entered into. The trial court, which had
this deposition before it, found that there was a contract between Cuddy and Gilchrist. Not
having the deposition in question before us, it is impossible to say how strongly it militates
against this findings of fact. By a series of decisions we have construed section 143 and 497
(2) of the Code of Civil Procedure to require the production of all the evidence in this court.
This is the duty of the appellant and, upon his failure to perform it, we decline to proceed
with a review of the evidence. In such cases we rely entirely upon the pleadings and the
findings of fact of the trial court and examine only such assigned errors as raise questions of
law. (Ferrer vs. Neri Abejuela, 9 Phil. Rep., 324; Valle vs. Galera, 10 Phil. Rep., 619;
Salvacion vs. Salvacion, 13 Phil. Rep., 366; Breta vs. Smith, Bell & Co., 15 Phil. Rep., 446;
Arroyo vs. Yulo, 18 Phil. Rep., 236; Olsen & Co. vs. Matson, Lord & Belser Co., 19 Phil. Rep.,
102; Blum vs. Barretto, 19 Phil. Rep., 161; Cuyugan vs. Aguas, 19 Phil. Rep., 379;
Mapa vs. Chaves, 20 Phil. Rep., 147; Mans vs. Garry, 20 Phil. Rep., 134.) It is true that some
of the more recent of these cases make exceptions to the general rule. Thus, in Olsen &
Co. vs. Matson, Lord & Belser Co., (19 Phil. Rep., 102), that portion of the evidence before us
tended to show that grave injustice might result from a strict reliance upon the findings of
fact contained in the judgment appealed from. We, therefore, gave the appellant an
opportunity to explain the omission. But we required that such explanation must show a
satisfactory reason for the omission, and that the missing portion of the evidence must be
submitted within sixty days or cause shown for failing to do so. The other cases making
exceptions to the rule are based upon peculiar circumstances which will seldom arise in
practice and need not here be set forth, for the reason that they are wholly inapplicable to
the present case. The appellants would be entitled to indulgence only under the doctrine of
the Olsen case. But from that portion of the record before us, we are not inclined to believe
that the missing deposition would be sufficient to justify us in reversing the findings of fact
of the trial court that the contract in question had been made. There is in the record not
only the positive and detailed testimony of Gilchrist to this effect, but there is also a letter of
apology from Cuddy to Gilchrist in which the former enters into a lengthy explanation of his
reasons for leasing the film to another party. The latter could only have been called forth by
a broken contract with Gilchrist to lease the film to him. We, therefore, fail to find any
reason for overlooking the omission of the defendants to bring up the missing portion of the
evidence and, adhering to the general rule above referred to, proceed to examine the
questions of law raised by the appellants.
From the above-quoted findings of fact it is clear that Cuddy, a resident of Manila, was the
owner of the "Zigomar;" that Gilchrist was the owner of a cinematograph theater in Iloilo;
that in accordance with the terms of the contract entered into between Cuddy and Gilchrist
the former leased to the latter the "Zigomar" for exhibition in his (Gilchrist's) theater for the
week beginning May 26, 1913; and that Cuddy willfully violate his contract in order that he
might accept the appellant's offer of P350 for the film for the same period. Did the
appellants know that they were inducing Cuddy to violate his contract with a third party
when they induced him to accept the P350? Espejo admitted that he knew that Cuddy was
the owner of the film. He received a letter from his agents in Manila dated April
26, assuring him that he could not get the film for about six weeks. The arrangement
between Cuddy and the appellants for the exhibition of the film by the latter on the 26th of
May were perfected after April 26, so that the six weeks would include and extend beyond
May 26. The appellants must necessarily have known at the time they made their offer to
Cuddy that the latter had booked or contracted the film for six weeks from April 26.
Therefore, the inevitable conclusion is that the appellants knowingly induced Cuddy to
violate his contract with another person. But there is no specific finding that the appellants
knew the identity of the other party. So we must assume that they did not know that
Gilchrist was the person who had contracted for the film.
The appellants take the position that if the preliminary injunction had not been issued
against them they could have exhibited the film in their theater for a number of days
beginning May 26, and could have also subleased it to other theater owners in the nearby
towns and, by so doing, could have cleared, during the life of their contract with Cuddy, the
amount claimed as damages. Taking this view of the case, it will be unnecessary for us to
inquire whether the mandatory injunction against Cuddy was properly issued or not. No
question is raised with reference to the issuance of that injunction.
The right on the part of Gilchrist to enter into a contract with Cuddy for the lease of the film
must be fully recognized and admitted by all. That Cuddy was liable in an action for
damages for the breach of that contract, there can be no doubt. Were the appellants likewise
liable for interfering with the contract between Gilchrist and Cuddy, they not knowing at
the time the identity of one of the contracting parties? The appellants claim that they had a
right to do what they did. The ground upon which the appellants base this contention is,
that there was no valid and binding contract between Cuddy and Gilchrist and that,
therefore, they had a right to compete with Gilchrist for the lease of the film, the right to
compete being a justification for their acts. If there had been no contract between Cuddy
and Gilchrist this defense would be tenable, but the mere right to compete could not justify
the appellants in intentionally inducing Cuddy to take away the appellee's contractual
rights.
Chief Justice Wells in Walker vs. Cronin (107 Mass., 555), said: "Everyone has a right to
enjoy the fruits and advantages of his own enterprise, industry, skill and credit. He has no
right to be free from malicious and wanton interference, disturbance or annoyance. If
disturbance or loss come as a result of competition, or the exercise of like rights by others, it
is damnum absque injuria, unless some superior right by contract or otherwise is interfered
with."
In Read vs. Friendly Society of Operative Stonemasons ([1902] 2 K. B., 88), Darling, J., said:
"I think the plaintiff has a cause of action against the defendants, unless the court is
satisfied that, when they interfered with the contractual rights of plaintiff, the defendants
had a sufficient justification for their interference; . . . for it is not a justification that `they
acted bona fide in the best interests of the society of masons,' i. e., in their own interests.
Nor is it enough that `they were not actuated by improper motives.' I think their sufficient
justification for interference with plaintiff's right must be an equal or superior right in
themselves, and that no one can legally excuse himself to a man, of whose contract he has
procured the breach, on the ground that he acted on a wrong understanding of his own
rights, or without malice, or bona fide, or in the best interests of himself, or even that he
acted as an altruist, seeking only good of another and careless of his own advantage."
(Quoted with approval in Beekman vs. Marsters, 195 Mass., 205.)
It is said that the ground on which the liability of a third party for interfering with a
contract between others rests, is that the interference was malicious. The contrary view,
however, is taken by the Supreme Court of the United States in the case of
Angle vs. Railway Co. (151 U. S., 1). The only motive for interference by the third party in
that case was the desire to make a profit to the injury of one of the parties of the contract.
There was no malice in the case beyond the desire to make an unlawful gain to the
detriment of one of the contracting parties.
In the case at bar the only motive for the interference with the Gilchrist — Cuddy contract
on the part of the appellants was a desire to make a profit by exhibiting the film in their
theater. There was no malice beyond this desire; but this fact does not relieve them of the
legal liability for interfering with that contract and causing its breach. It is, therefore, clear,
under the above authorities, that they were liable to Gilchrist for the damages caused by
their acts, unless they are relieved from such liability by reason of the fact that they did not
know at the time the identity of the original lessee (Gilchrist) of the film.
The liability of the appellants arises from unlawful acts and not from contractual
obligations, as they were under no such obligations to induce Cuddy to violate his contract
with Gilchrist. So that if the action of Gilchrist had been one for damages, it would be
governed by chapter 2, title 16, book 4 of the Civil Code. Article 1902 of that code provides
that a person who, by act or omission, causes damages to another when there is fault or
negligence, shall be obliged to repair the damage do done. There is nothing in this article
which requires as a condition precedent to the liability of a tort-feasor that he must know
the identity of a person to whom he causes damages. In fact, the chapter wherein this article
is found clearly shows that no such knowledge is required in order that the injured party
may recover for the damage suffered.
But the fact that the appellants' interference with the Gilchrist contract was actionable did
not of itself entitle Gilchrist to sue out an injunction against them. The allowance of this
remedy must be justified under section 164 of the Code of Civil Procedure, which specifies
the circumstance under which an injunction may issue. Upon the general doctrine of
injunction we said in Devesa vs. Arbes (13 Phil. Rep., 273):
An injunction is a "special remedy" adopted in that code (Act No. 190) from
American practice, and originally borrowed from English legal procedure, which
was there issued by the authority and under the seal of a court of equity, and
limited, as in order cases where equitable relief is sought, to cases where there is
no "plain, adequate, and complete remedy at law," which "will not be granted
while the rights between the parties are undetermined, except in extraordinary
cases where material and irreparable injury will be done," which cannot be
compensated in damages, and where there will be no adequate remedy, and which
will not, as a rule, be granted, to take property out of the possession of one party
and put it into that of another whose title has not been established by law.
We subsequently affirmed the doctrine of the Devesa case in Palafox vs. Madamba (19 Phil.,
Rep., 444), and we take this occasion of again affirming it, believing, as we do, that the
indiscriminate use of injunctions should be discouraged.
Does the fact that the appellants did not know at the time the identity of the original lessee
of the film militate against Gilchrist's right to a preliminary injunction, although the
appellant's incurred civil liability for damages for such interference? In the examination of
the adjudicated cases, where in injunctions have been issued to restrain wrongful
interference with contracts by strangers to such contracts, we have been unable to find any
case where this precise question was involved, as in all of those cases which we have
examined, the identity of both of the contracting parties was known to the tort-feasors. We
might say, however, that this fact does not seem to have a controlling feature in those cases.
There is nothing in section 164 of the Code of Civil Procedure which indicates, even
remotely, that before an injunction may issue restraining the wrongful interference with
contrast by strangers, the strangers must know the identity of both parties. It would seem
that this is not essential, as injunctions frequently issue against municipal corporations,
public service corporations, public officers, and others to restrain the commission of acts
which would tend to injuriously affect the rights of person whose identity the respondents
could not possibly have known beforehand. This court has held that in a proper case
injunction will issue at the instance of a private citizen to restrain ultra vires acts of public
officials. (Severino vs. Governor-General, 16 Phil. Rep., 366.) So we proceed to the
determination of the main question of whether or not the preliminary injunction ought to
have been issued in this case.
As a rule, injunctions are denied to those who have an adequate remedy at law. Where the
choice is between the ordinary and the extraordinary processes of law, and the former are
sufficient, the rule will not permit the use of the latter. (In re Debs, 158 U. S., 564.) If the
injury is irreparable, the ordinary process is inadequate. In Wahle vs. Reinbach (76 Ill.,
322), the supreme court of Illinois approved a definition of the term "irreparable injury" in
the following language: "By `irreparable injury' is not meant such injury as is beyond the
possibility of repair, or beyond possible compensation in damages, nor necessarily great
injury or great damage, but that species of injury, whether great or small, that ought not to
be submitted to on the one hand or inflicted on the other; and, because it is so large on the
one hand, or so small on the other, is of such constant and frequent recurrence that no fair
or reasonable redress can be had therefor in a court of law." (Quoted with approval in
Nashville R. R. Co. vs. McConnell, 82 Fed., 65.)
The case at bar is somewhat novel, as the only contract which was broken was that between
Cuddy and Gilchrist, and the profits of the appellee depended upon the patronage of the
public, for which it is conceded the appellants were at liberty to complete by all fair does not
deter the application of remarked in the case of the "ticket scalpers" (82 Fed., 65), the
novelty of the facts does not deter the application of equitable principles. This court takes
judicial notice of the general character of a cinematograph or motion-picture theater. It is a
quite modern form of the play house, wherein, by means of an apparatus known as a
cinematograph or cinematograph, a series of views representing closely successive phases of
a moving object, are exhibited in rapid sequence, giving a picture which, owing to the
persistence of vision, appears to the observer to be in continuous motion. (The Encyclopedia
Britanica, vol. 6, p. 374.) The subjects which have lent themselves to the art of the
photographer in this manner have increased enormously in recent years, as well as have the
places where such exhibition are given. The attendance, and, consequently, the receipts, at
one of these cinematograph or motion-picture theaters depends in no small degree upon the
excellence of the photographs, and it is quite common for the proprietor of the theater to
secure an especially attractive exhibit as his "feature film" and advertise it as such in order
to attract the public. This feature film is depended upon to secure a larger attendance that if
its place on the program were filled by other films of mediocre quality. It is evident that the
failure to exhibit the feature film will reduce the receipts of the theater.
Hence, Gilchrist was facing the immediate prospect of diminished profits by reason of the
fact that the appellants had induced Cuddy to rent to them the film Gilchrist had counted
upon as his feature film. It is quite apparent that to estimate with any decree of accuracy
the damages which Gilchrist would likely suffer from such an event would be quite difficult
if not impossible. If he allowed the appellants to exhibit the film in Iloilo, it would be useless
for him to exhibit it again, as the desire of the public to witness the production would have
been already satisfied. In this extremity, the appellee applied for and was granted, as we
have indicated, a mandatory injunction against Cuddy requiring him to deliver the Zigomar
to Gilchrist, and a preliminary injunction against the appellants restraining them from
exhibiting that film in their theater during the weeks he (Gilchrist) had a right to exhibit it.
These injunction saved the plaintiff harmless from damages due to the unwarranted
interference of the defendants, as well as the difficult task which would have been set for
the court of estimating them in case the appellants had been allowed to carry out their
illegal plans. As to whether or not the mandatory injunction should have been issued, we
are not, as we have said, called upon to determine. So far as the preliminary injunction
issued against the appellants is concerned, which prohibited them from exhibiting the
Zigomar during the week which Gilchrist desired to exhibit it, we are of the opinion that the
circumstances justified the issuance of that injunction in the discretion of the court.
We are not lacking in authority to support our conclusion that the court was justified in
issuing the preliminary injunction against the appellants. Upon the precise question as to
whether injunction will issue to restrain wrongful interference with contracts by strangers
to such contracts, it may be said that courts in the United States have usually granted such
relief where the profits of the injured person are derived from his contractual relations with
a large and indefinite number of individuals, thus reducing him to the necessity of proving
in an action against the tort-feasor that the latter was responsible in each case for the
broken contract, or else obliging him to institute individual suits against each contracting
party and so exposing him to a multiplicity of suits. Sperry & Hutchinson Co. vs. Mechanics'
Clothing Co. (128 Fed., 800); Sperry & Hutchinson Co. vs. Louis Weber & Co. (161 Fed.,
219); Sperry & Hutchinson Co. vs. Pommer (199 Fed., 309); were all cases wherein the
respondents were inducing retail merchants to break their contracts with the company for
the sale of the latters' trading stamps. Injunction issued in each case restraining the
respondents from interfering with such contracts.
employment may be adjoined from including other employees to break their contracts and
enter into new contracts with a new employer of the servant who first broke his contract.
But the remedy by injunction cannot be used to restrain a legitimate competition, though
such competition would involve the violation of a contract. Nor will equity ordinarily enjoin
employees who have quit the service of their employer from attempting by proper argument
to persuade others from taking their places so long as they do not resort to force or
intimidations on obstruct the public thoroughfares."

In the case of the Nashville R. R. Co. vs. McConnell (82 Fed., 65), the court, among other
things, said: "One who wrongfully interferes in a contract between others, and, for the
purpose of gain to himself induces one of the parties to break it, is liable to the party injured
thereby; and his continued interference may be ground for an injunction where the injuries
resulting will be irreparable."
Beekman vs. Marster, supra, is practically on all fours with the case at bar in that there
was only one contract in question and the profits of the injured person depended upon the
patronage of the public. Hamby & Toomer vs. Georgia Iron & Coal Co., supra, is also similar
to the case at bar in that there was only one contract, the interference of which was stopped
by injunction.

In Hamby & Toomer vs. Georgia Iron & Coal Co. (127 Ga., 792), it appears that the For the foregoing reasons the judgment is affirmed, with costs, against the appellants.
respondents were interfering in a contract for prison labor, and the result would be, if they
were successful, the shutting down of the petitioner's plant for an indefinite time. The court
held that although there was no contention that the respondents were insolvent, the trial
court did not abuse its discretion in granting a preliminary injunction against the
respondents.

In Beekman vs. Marsters (195 Mass., 205), the plaintiff had obtained from the Jamestown
Hotel Corporation, conducting a hotel within the grounds of the Jamestown Exposition, a
contract whereby he was made their exclusive agent for the New England States to solicit
patronage for the hotel. The defendant induced the hotel corporation to break their contract
with the plaintiff in order to allow him to act also as their agent in the New England States.
The court held that an action for damages would not have afforded the plaintiff adequate
relief, and that an injunction was proper compelling the defendant to desist from further
interference with the plaintiff's exclusive contract with the hotel company.

In Citizens' Light, Heat & Power Co. vs. Montgomery Light & Water Power Co. (171 Fed.,
553), the court, while admitting that there are some authorities to the contrary, held that
the current authority in the United States and England is that:

The violation of a legal right committed knowingly is a cause of action, and that it
is a violation of a legal right to interfere with contractual relations recognized by
law, if there be no sufficient justification for the interference.
(Quinn vs. Leatham, supra, 510; Angle vs. Chicago, etc., Ry. Co., 151 U. S., 1; 14
Sup. Ct., 240; 38 L. Ed., 55; Martens vs. Reilly, 109 Wis., 464, 84 N. W., 840;
Rice vs. Manley, 66 N. Y., 82; 23 Am. Rep., 30; Bitterman vs. L. & N. R. R. Co., 207
U. S., 205; 28 Sup. Ct., 91; 52 L. Ed., 171; Beekman vs. Marsters, 195 Mass., 205;
80 N. E., 817; 11 L. R. A. [N. S.] 201; 122 Am. St. Rep., 232; South Wales Miners'
Fed. vs. Glamorgan Coal Co., Appeal Cases, 1905, p. 239.)

See also Nims on Unfair Business Competition, pp. 351- 371.

In 3 Elliot on Contracts, section 2511, it is said: "Injunction is the proper remedy to prevent
a wrongful interference with contract by strangers to such contracts where the legal remedy
is insufficient and the resulting injury is irreparable. And where there is a malicious
interference with lawful and valid contracts a permanent injunction will ordinarily issue
without proof of express malice. So, an injunction may be issued where the complainant to
break their contracts with him by agreeing to indemnify who breaks his contracts of

[No. L-8437. November 28, 1956]
ESTATE OF K.H. HEMADY, deceased, vs. LUZON SURETY CO., INC., claimant and
appellant.
1.CONTRACTS; BlNDING EFFECT OF CONTRACTS UPON HEIRS OF DECEASED
PARTY.—The binding effect of contracts upon the heirs of the deceased party is not altered
by the provision in the Rules of Court that money debts of a deceased must be liquidated
and paid from his estate before the residue is distributed among said heirs (Rule 89). The
reason is that whatever payment is thus made from the estate is ultimately a payment by
the heirs and distributees, since the amount of the paid claim in fact diminishes or reduces
the shares that the heirs would have been entitled to receive. The general rule, therefore, is
that a party’s contractual rights and obligations are transmissible to the successors.
2.ID.; SURETYSHIP; NATURE OF OBLIGATION OF SURETY.—The nature of the
obligation of the surety or guarantor does not warrant the conclusion that his peculiar
individual qualities are contemplated as a principal inducement for the contract. The
creditor expects of the surety nothing but the reimbursement of the moneys that said
creditor might have to disburse on account of the obligations of the principal debtors. This
reimbursement is a payment of a sum of money, resulting from an obligation to give; and to
the creditor, it was indifferent that the reimbursement should be made by the surety
himself or by some one else in his behalf, so long as the money was paid to it.
3.ID.; ID.; QUALIFICATION OF GUARANTOR; SUPERVENING INCAPACITY OF
GUARANTOR, EFFECT ON CONTRACT.—The qualification of integrity in the guarantor
or surety is required to be present only at the time of the perfection of the contract of
guaranty. Once the contract of guaranty has become perfected and binding, the supervening
dishonesty of the guarantor (that is to say, the disappearance of his integrity after he has
become bound) does not terminate the contract but merely entitles the creditor to demand a
replacement of the guarantor. But the step remains optional in the creditor: it is his right,
not his duty, he may waive it if he chooses, and hold the guarantor to his bargain.
APPEAL from an order of the Court of First Instance of Rizal. Caluag, J.
The facts are stated in the opinion of the Court.
Claro M. Recto for appellee.
Tolentino & Garcia and D.R. Cruz for appellant.
REYES, J.B. L., J.:
Appeal by Luzon Surety Co., Inc., from an order of the Court of First Instance of Rizal,
presided by Judge Hermogenes Caluag, dismissing its claim against the Estate of K. H.
Hemady (Special Proceeding No. Q-293) for failure to state a cause of action.
The Luzon Surety Co. had filed a claim against the Estate based on twenty different
indemnity agreements, or counter bonds, each subscribed by a distinct principal and by the
deceased K. H. Hemady, a surety solidary guarantor) in all of them, in consideration of the
Luzon Surety Co.’s of having guaranteed, the various principals in favor of different
creditors. The twenty counterbonds, or indemnity agreements, all contained the following
stipulations:
“Premiums. — As consideration for this suretyship, the undersigned jointly and severally,
agree to pay the COMPANY the sum of ________________ (P______) pesos, Philippines
Currency, in advance as premium there of for every __________ months or fractions thereof,
this ________ or any renewal or substitution thereof is in effect.
Indemnity. — The undersigned, jointly and severally, agree at all times to indemnify the
COMPANY and keep it indemnified and hold and save it harmless from and against any
and all damages, losses, costs, stamps, taxes, penalties, charges, and expenses of
whatsoever kind and nature which the COMPANY shall or may, at any time sustain or
incur in consequence of having become surety upon this bond or any extension, renewal,
substitution or alteration thereof made at the instance of the undersigned or any of them or
any order executed on behalf of the undersigned or any of them; and to pay, reimburse and
make good to the COMPANY, its successors and assigns, all sums and amount of money
which it or its representatives shall pay or cause to be paid, or become liable to pay, on
account of the undersigned or any of them, of whatsoever kind and nature, including 15% of
the amount involved in the litigation or other matters growing out of or connected therewith
for counsel or attorney’s fees, but in no case less than P25. It is hereby further agreed that
in case of extension or renewal of this ________ we equally bind ourselves for the payment
thereof under the same terms and conditions as above mentioned without the necessity of
executing another indemnity agreement for the purpose and that we hereby equally waive
our right to be notified of any renewal or extension of this ________ which may be granted
under this indemnity agreement.
Interest on amount paid by the Company. — Any and all sums of money so paid by the
company shall bear interest at the rate of 12% per annum which interest, if not paid, will
be accummulated and added to the capital quarterly order to earn the same interests as the
capital and the total sum thereof, the capital and interest, shall be paid to the COMPANY
as soon as the COMPANY shall have become liable therefore, whether it shall have paid out
such sums of money or any part thereof or not.
xxx xxx xxx
Waiver. — It is hereby agreed upon by and between the undersigned that any question
which may arise between them by reason of this document and which has to be submitted
for decision to Courts of Justice shall be brought before the Court of competent jurisdiction
in the City of Manila, waiving for this purpose any other venue. Our right to be notified of
the acceptance and approval of this indemnity agreement is hereby likewise waived.
xxx xxx xxx
Our Liability Hereunder. — It shall not be necessary for the COMPANY to bring suit
against the principal upon his default, or to exhaust the property of the principal, but the
liability hereunder of the undersigned indemnitor shall be jointly and severally, a primary
one, the same as that of the principal, and shall be exigible immediately upon the
occurrence of such default.” (Rec. App. pp. 98- 102.)
The Luzon Surety Co., prayed for allowance, as a contingent claim, of the value of the
twenty bonds it had executed in consideration of the counterbonds, and further asked for
judgment for the unpaid premiums and documentary stamps affixed to the bonds, with 12
per cent interest thereon.
Before answer was filed, and upon motion of the administratrix of Hemady’s estate, the
lower court, by order of September 23, 1953, dismissed the claims of Luzon Surety Co., on
two grounds: (1) that the premiums due and cost of documentary stamps were not
contemplated under the indemnity agreements to be a part of the undertaking of the
guarantor (Hemady), since they were not liabilities incurred after the execution of the
counterbonds; (2) that “whatever losses may occur after Hemady’s death, are not chargeable
to his estate, because upon his death he ceased to be guarantor.”
Taking up the latter point first, since it is the one more far reaching in effects, the reasoning
of the court below ran as follows:
“The administratrix further contends that upon the death of Hemady, his liability as a
guarantor terminated, and therefore, in the absence of a showing that a loss or damage was
suffered, the claim cannot be considered contingent. This Court believes that there is merit
in this contention and finds support in Article 2046 of the new Civil Code. It should be noted
that a new requirement has been added for a person to qualify as a guarantor, that is:
integrity. As correctly pointed out by the Administratrix, integrity is something purely
personal and is not transmissible. Upon the death of Hemady, his integrity was not
transmitted to his estate or successors. Whatever loss therefore, may occur after Hemady’s
death, are not chargeable to his estate because upon his death he ceased to be a guarantor.
Another clear and strong indication that the surety company has exclusively relied on the
personality, character, honesty and integrity of the now deceased K. H. Hemady, was the
fact that in the printed form of the indemnity agreement there is a paragraph entitled
‘Security by way of first mortgage, which was expressly waived and renounced by the
security company. The security company has not demanded from K. H. Hemady to comply
with this requirement of giving security by way of first mortgage. In the supporting papers
of the claim presented by Luzon Surety Company, no real property was mentioned in the
list of properties mortgaged which appears at the back of the indemnity agreement.” (Rec.
App., pp. 407-408).
We find this reasoning untenable. Under the present Civil Code (Article 1311), as well as
under the Civil Code of 1889 (Article 1257), the rule is that —
“Contracts take effect only as between the parties, their assigns and heirs, except in the
case where the rights and obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law.”
While in our successional system the responsibility of the heirs for the debts of their
decedent cannot exceed the value of the inheritance they receive from him, the principle
remains intact that these heirs succeed not only to the rights of the deceased but also to his
obligations. Articles 774 and 776 of the New Civil Code (and Articles 659 and 661 of the
preceding one) expressly so provide, thereby confirming Article 1311 already quoted.
“ART. 774. — Succession is a mode of acquisition by virtue of which the property, rights and
obligations to the extent of the value of the inheritance, of a person are transmitted through
his death to another or others either by his will or by operation of law.”
“ART. 776. — The inheritance includes all the property, rights and obligations of a person
which are not extinguished by his death.”
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court ruled:
“Under the Civil Code the heirs, by virtue of the rights of succession are subrogated to all
the rights and obligations of the deceased (Article 661) and cannot be regarded as third
parties with respect to a contract to which the deceased was a party, touching the estate of
the deceased (Barrios vs. Dolor, 2 Phil. 44).
xxx xxx xxx
“The principle on which these decisions rest is not affected by the provisions of the new Code
of Civil Procedure, and, in accordance with that principle, the heirs of a deceased person
cannot be held to be “third persons” in relation to any contracts touching the real estate of
their decedent which comes in to their hands by right of inheritance; they take such
property subject to all the obligations resting thereon in the hands of him from whom they
derive their rights.”
(See also Galasinao vs. Austria, 51 Off. Gaz. (No. 6) p. 2874 and de Guzman vs. Salak, 91
Phil., 265).
The binding effect of contracts upon the heirs of the deceased party is not altered by the
provision in our Rules of Court that money debts of a deceased must be liquidated and paid
from his estate before the residue is distributed among said heirs (Rule 89). The reason is
that whatever payment is thus made from the estate is ultimately a payment by the heirs
and distributees, since the amount of the paid claim in fact diminishes or reduces the shares
that the heirs would have been entitled to receive.
Under our law, therefore, the general rule is that a party’s contractual rights and
obligations are transmissible to the successors. The rule is a consequence of the progressive
“depersonalization” of patrimonial rights and duties that, as observed by Victorio Polacco,
has characterized the history of these institutions. From the Roman concept of a relation
from person to person, the obligation has evolved into a relation from patrimony to
patrimony, with the persons occupying only a representative position, barring those rare
cases where the obligation is strictly personal, i.e., is contracted intuitu personae, in
consideration of its performance by a specific person and by no other. The transition is
marked by the disappearance of the imprisonment for debt.
Of the three exceptions fixed by Article 1311, the nature of the obligation of the surety or
guarantor does not warrant the conclusion that his peculiar individual qualities are
contemplated as a principal inducement for the contract. What did the creditor Luzon
Surety Co. expect of K. H. Hemady when it accepted the latter as surety in the
counterbonds? Nothing but the reimbursement of the moneys that the Luzon Surety Co.
might have to disburse on account of the obligations of the principal debtors. This
reimbursement is a payment of a sum of money, resulting from an obligation to give; and to
the Luzon Surety Co., it was indifferent that the reimbursement should be made by Hemady
himself or by some one else in his behalf, so long as the money was paid to it.
The second exception of Article 1311, p. 1, is intransmissibility by stipulation of the parties.
Being exceptional and contrary to the general rule, this intransmissibility should not be
easily implied, but must be expressly established, or at the very least, clearly inferable from
the provisions of the contract itself, and the text of the agreements sued upon nowhere
indicate that they are non-transferable.
“(b) Intransmisibilidad por pacto. — Lo general es la transmisibilidad de darechos y obligaciones; chan
roblesvirtualawlibraryle excepcion, la intransmisibilidad. Mientras nada se diga en contrario impera el
principio de la transmision, como elemento natural a toda relacion juridica, salvo las personalisimas. Asi,
para la no transmision, es menester el pacto expreso, porque si no, lo convenido entre partes trasciende a
sus herederos.
Siendo estos los continuadores de la personalidad del causante, sobre ellos recaen los efectos de los
vinculos juridicos creados por sus antecesores, y para evitarlo, si asi se quiere, es indespensable
convension terminante en tal sentido.
Por su esencia, el derecho y la obligacion tienden a ir más allá de las personas que les dieron vida, y a
ejercer presion sobre los sucesores de esa persona; chan roblesvirtualawlibrarycuando no se quiera esto,
se impone una estipulacion limitativa expresamente de la transmisibilidad o de cuyos tirminos
claramente se deduzca la concresion del concreto a las mismas personas que lo otorgon.” (Scaevola,
Codigo Civil, Tomo XX, p. 541-542) (Emphasis supplied.)
Because under the law (Article 1311), a person who enters into a contract is deemed to have
contracted for himself and his heirs and assigns, it is unnecessary for him to expressly
stipulate to that effect; hence, his failure to do so is no sign that he intended his bargain to
terminate upon his death. Similarly, that the Luzon Surety Co., did not require bondsman
Hemady to execute a mortgage indicates nothing more than the company’s faith and
confidence in the financial stability of the surety, but not that his obligation was strictly
personal.
The third exception to the transmissibility of obligations under Article 1311 exists when
they are “not transmissible by operation of law”. The provision makes reference to those
cases where the law expresses that the rights or obligations are extinguished by death, as is
the case in legal support (Article 300), parental authority (Article 327), usufruct (Article
603), contracts for a piece of work (Article 1726), partnership (Article 1830 and agency
(Article 1919). By contract, the articles of the Civil Code that regulate guaranty or
suretyship (Articles 2047 to 2084) contain no provision that the guaranty is extinguished
upon the death of the guarantor or the surety.
The lower court sought to infer such a limitation from Art. 2056, to the effect that “one who
is obliged to furnish a guarantor must present a person who possesses integrity, capacity to
bind himself, and sufficient property to answer for the obligation which he guarantees”. It
will be noted, however, that the law requires these qualities to be present only at the time of
the perfection of the contract of guaranty. It is self-evident that once the contract has
become perfected and binding, the supervening incapacity of the guarantor would not
operate to exonerate him of the eventual liability he has contracted; if that be true of his
capacity to bind himself, it should also be true of his integrity, which is a quality mentioned
in the article alongside the capacity.
The foregoing ruling is of course without prejudice to the remedies of the administratrix
against the principal debtors under Articles 2071 and 2067 of the New Civil Code.
Our conclusion is that the solidary guarantor’s liability is not extinguished by his death, and
that in such event, the Luzon Surety Co., had the right to file against the estate a
contingent claim for reimbursement. It becomes unnecessary now to discuss the estate’s
liability for premiums and stamp taxes, because irrespective of the solution to this question,
the Luzon Surety’s claim did state a cause of action, and its dismissal was erroneous.
Wherefore, the order appealed from is reversed, and the records are ordered remanded to
the court of origin, with instructions to proceed in accordance with law. Costs against the
Administratrix- Appellee. SO ORDERED.

The foregoing concept is confirmed by the next Article 2057, that runs as follows:
“ART. 2057. — If the guarantor should be convicted in first instance of a crime involving
dishonesty or should become insolvent, the creditor may demand another who has all the
qualifications required in the preceding article. The case is excepted where the creditor has
required and stipulated that a specified person should be guarantor.”
From this article it should be immediately apparent that the supervening dishonesty of the
guarantor (that is to say, the disappearance of his integrity after he has become bound) does
not terminate the contract but merely entitles the creditor to demand a replacement of the
guarantor. But the step remains optional in the creditor: it is his right, not his duty; he may
waive it if he chooses, and hold the guarantor to his bargain. Hence Article 2057 of the
present Civil Code is incompatible with the trial court’s stand that the requirement of
integrity in the guarantor or surety makes the latter’s undertaking strictly personal, so
linked to his individuality that the guaranty automatically terminates upon his death.
The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not
being rendered intransmissible due to the nature of the undertaking, nor by the stipulations
of the contracts themselves, nor by provision of law, his eventual liability thereunder
necessarily passed upon his death to his heirs. The contracts, therefore, give rise to
contingent claims provable against his estate under section 5, Rule 87 (2 Moran, 1952 ed., p.
437; Gaskell & Co. vs. Tan Sit, 43 Phil. 810, 814).
“The most common example of the contigent claim is that which arises when a person is
bound as surety or guarantor for a principal who is insolvent or dead. Under the ordinary
contract of suretyship the surety has no claim whatever against his principal until he
himself pays something by way of satisfaction upon the obligation which is secured. When
he does this, there instantly arises in favor of the surety the right to compel the principal to
exonerate the surety. But until the surety has contributed something to the payment of the
debt, or has performed the secured obligation in whole or in part, he has no right of action
against anybody — no claim that could be reduced to judgment. (May vs. Vann, 15 Pla.,
553; Gibson vs. Mithell, 16 Pla., 519; Maxey vs. Carter, 10 Yarg. [Tenn.], 521 Reeves vs.
Pulliam, 7 Baxt. [Tenn.], 119; Ernst vs. Nou, 63 Wis., 134.)”
For Defendant administratrix it is averred that the above doctrine refers to a case where the
surety files claims against the estate of the principal debtor; and it is urged that the rule
does not apply to the case before us, where the late Hemady was a surety, not a principal
debtor. The argument evinces a superficial view of the relations between parties. If under
the Gaskell ruling, the Luzon Surety Co., as guarantor, could file a contingent claim against
the estate of the principal debtors if the latter should die, there is absolutely no reason why
it could not file such a claim against the estate of Hemady, since Hemady is a solidary co-
debtor of his principals. What the Luzon Surety Co. may claim from the estate of a principal
debtor it may equally claim from the estate of Hemady, since, in view of the existing
solidarity, the latter does not even enjoy the benefit of exhaustion of the assets of the
principal debtor.

G.R. No. 120554. September 21, 1999.*
SO PING BUN, petitioner, vs. COURT OF APPEALS, TEK HUA ENTERPRISING CORP.
and MANUEL C. TIONG, respondents.
Torts and Damages; Quasi-Delicts; Actions; Damages; Words and Phrases; Damage is
the loss, hurt, or harm which results from injury, and damages are the recompense or
compensation awarded for the damage suffered.—Damage is the loss, hurt, or harm which
results from injury, and damages are the recompense or compensation awarded for the
damage suffered. One becomes liable in an action for damages for a nontrespassory invasion
of another’s interest in the private use and enjoyment of asset if (a) the other has property
rights and privileges with respect to the use or enjoyment interfered with, (b) the invasion is
substantial, (c) the defendant’s conduct is a legal cause of the invasion, and (d) the invasion
is either intentional and unreasonable or unintentional and actionable under general
negligence rules.
Same; Same; Same; Same; Elements of Tort Interference.—The elements of tort
interference are: (1) existence of a valid contract; (2) knowledge on the part of the third
person of the existence of contract; and (3) interference of the third person is without legal
justification or excuse.
Same; Same; Same; Same; A duty which the law of torts is concerned with is respect
for the property of others, and a cause of action ex delicto may be predicated upon an
unlawful interference by one person of the enjoyment by the other of his private property.—A
duty which the law of torts is concerned with is respect for the property of others, and a
cause of action ex delicto may be predicated upon an unlawful interference by one person of
the enjoyment by the other of his private property. This may pertain to a situation where a
third person induces a party to renege on or violate his undertaking under a contract. In the
case before us, petitioner’s Trendsetter Marketing asked DCCSI to execute lease contracts
in its favor, and as a result petitioner deprived respondent corporation of the latter’s
property right. Clearly, and as correctly viewed by the appellate court, the three elements of
tort interference above-mentioned are present in the instant case.
Same; Same; Same; Same; Contracts; Where there was no malice in the interference of
a contract, and the impulse behind one’s conduct lies in a proper business interest rather
than in wrongful motives, a party cannot be a malicious interferer.—As early as Gilchrist vs.
Cuddy, we held that where there was no malice in the interference of a contract, and the
impulse behind one’s conduct lies in a proper business interest rather than in wrongful
motives, a party cannot be a malicious interferer. Where the alleged interferer is financially
interested, and such interest motivates his conduct, it cannot be said that he is an officious
or malicious intermeddler.
Same; Same; Same; Same; Same; While lack of malice precludes damages, it does not
relieve the interferer of the legal liability for entering into contracts and causing breach of
existing ones.—While we do not encourage tort interferers seeking their economic interest to
intrude into existing contracts at the expense of others, however, we find that the conduct
herein complained of did not transcend the limits forbidding an obligatory award for
damages in the absence of any malice. The business desire is there to make some gain to the
detriment of the contracting parties. Lack of malice, however, precludes damages. But it
does not relieve petitioner of the legal liability for entering into contracts and causing
breach of existing ones. The respondent appellate court correctly confirmed the permanent
injunction and nullification of the lease contracts between DCCSI and Trendsetter
Marketing, without awarding damages. The injunction saved the respondents from further
damage or injury caused by petitioner’s interference.
Damages; Attorney’s Fees; In connection with attorney’s fees, the award should be
commensurate to the benefits that would have been derived from a favorable judgment.—The
recovery of attorney’s fees in the concept of actual or compensatory damages, is allowed
under the circumstances provided for in Article 2208 of the Civil Code. One such occasion is
when the defendant’s act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest. But we have consistently held that the
award of considerable damages should have clear factual and legal bases. In connection with
attorney’s fees, the award should be commensurate to the benefits that would have been
derived from a favorable judgment. Settled is the rule that fairness of the award of damages
by the trial court calls for appellate review such that the award if far too excessive can be
reduced. This ruling applies with equal force on the award of attorney’s fees. In a long line
of cases we said, “It is not sound policy to place a penalty on the right to litigate. To compel
the defeated party to pay the fees of counsel for his successful opponent would throw wide
open the door of temptation to the opposing party and his counsel to swell the fees to undue
proportions.”
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Bengzon, Narciso, Cudala, Jimenez, Gonzales & Liwanag for petitioner.
Rafael Arsenio S. Dizon for Dee C. Chuan & Sons, Inc.
Saludo, Agpalo, Fernandez & Aquino for private respondents.
QUISUMBING, J.:
This petition for certiorari challenges the Decision 1 of the Court of Appeals dated October
10, 1994, and the Resolution 2 dated June 5, 1995, in CA-G.R. CV No. 38784. The appellate
court affirmed the decision of the Regional Trial Court of Manila, Branch 35, except for the
award of attorney's fees, as follows:
WHEREFORE, foregoing considered, the appeal of respondent-appellant
So Ping Bun for lack of merit is DISMISSED. The appealed decision
dated April 20, 1992 of the court a quo is modified by reducing the
attorney's fees awarded to plaintiff Tek Hua Enterprising Corporation
from P500,000.00 to P200,000.00. 3
The facts are as follows:
In 1963, Tek Hua Trading Co, through its managing partner, So Pek Giok, entered into
lease agreements with lessor Dee C. Chuan & Sons Inc. (DCCSI). Subjects of four (4) lease
contracts were premises located at Nos. 930, 930-Int., 924-B and 924-C, Soler Street,
Binondo, Manila. Tek Hua used the areas to store its textiles. The contracts each had a one-
year term. They provided that should the lessee continue to occupy the premises after the
term, the lease shall be on a month-to-month basis.
When the contracts expired, the parties did not renew the contracts, but Tek Hua continued
to occupy the premises. In 1976, Tek Hua Trading Co. was dissolved. Later, the original
members of Tek Hua Trading Co. including Manuel C. Tiong, formed Tek Hua Enterprising
Corp., herein respondent corporation.
So Pek Giok, managing partner of Tek Hua Trading, died in 1986. So Pek Giok's grandson,
petitioner So Ping Bun, occupied the warehouse for his own textile business, Trendsetter
Marketing.
On August 1, 1989, lessor DCCSI sent letters addressed to Tek Hua Enterprises, informing
the latter of the 25% increase in rent effective September 1, 1989. The rent increase was
later on reduced to 20% effective January 1, 1990, upon other lessees' demand. Again on
December 1, 1990, the lessor implemented a 30% rent increase. Enclosed in these letters
were new lease contracts for signing. DCCSI warned that failure of the lessee to accomplish
the contracts shall be deemed as lack of interest on the lessee's part, and agreement to the
termination of the lease. Private respondents did not answer any of these letters. Still, the
lease contracts were not rescinded.
On March 1, 1991, private respondent Tiong sent a letter to petitioner which reads as
follows:Due to my closed (sic) business associate (sic) for three decades with your late grandfather Mr.
So Pek Giok and late father, Mr. So Chong Bon, I allowed you temporarily to use the warehouse of Tek
Hua Enterprising Corp. for several years to generate your personal business.
Since I decided to go back into textile business, I need a warehouse immediately for my stocks.
Therefore, please be advised to vacate all your stocks in Tek Hua Enterprising Corp. Warehouse. You
are hereby given 14 days to vacate the premises unless you have good reasons that you have the
right to stay. Otherwise, I will be constrained to take measure to protect my interest.
Please give this urgent matter your preferential attention to avoid inconvenience on your part.
Very truly yours,
(Sgd) Manuel C. Tiong
MANUEL C. TIONG
President 4
Petitioner refused to vacate. On March 4, 1992, petitioner requested formal contracts of
lease with DCCSI in favor Trendsetter Marketing. So Ping Bun claimed that after the death
of his grandfather, So Pek Giok, he had been occupying the premises for his textile business
and religiously paid rent. DCCSI acceded to petitioner's request. The lease contracts in favor
of Trendsetter were executed.
In the suit for injunction, private respondents pressed for the nullification of the lease
contracts between DCCSI and petitioner. They also claimed damages.
After trial, the trial court ruled:
WHEREFORE, judgment is rendered:
1. Annulling the four Contracts of Lease (Exhibits A, A-1 to A-3, inclusive) all dated
March 11, 1991, between defendant So Ping Bun, doing business under the name and
style of "Trendsetter Marketing", and defendant Dee C. Chuan & Sons, Inc. over the
premises located at Nos. 924-B, 924-C, 930 and 930, Int., respectively, Soler Street,
Binondo Manila;
2. Making permanent the writ of preliminary injunction issued by this Court on June
21, 1991;
3. Ordering defendant So Ping Bun to pay the aggrieved party, plaintiff Tek Hua
Enterprising Corporation, the sum of P500,000.00, for attorney's fees;
4. Dismissing the complaint, insofar as plaintiff Manuel C. Tiong is concerned, and the
respective counterclaims of the defendant;
5. Ordering defendant So Ping Bun to pay the costs of this lawsuit;
This judgment is without prejudice to the rights of plaintiff Tek Hua Enterprising
Corporation and defendant Dee C. Chuan & Sons, Inc. to negotiate for the renewal of
their lease contracts over the premises located at Nos. 930, 930-Int., 924-B and 924-C
Soler Street, Binondo, Manila, under such terms and conditions as they agree upon,
provided they are not contrary to law, public policy, public order, and morals.
SO ORDERED. 5
Petitioner's motion for reconsideration of the above decision was denied.
On appeal by So Ping Bun, the Court of Appeals upheld the trial court. On motion for
reconsideration, the appellate court modified the decision by reducing the award of
attorney's fees from five hundred thousand (P500,000.00) pesos to two hundred thousand
(P200,000.00) pesos.
Petitioner is now before the Court raising the following issues:
I. WHETHER THE APPELLATE COURT ERRED IN AFFIRMING THE TRIAL COURT'S
DECISION FINDING SO PING BUN GUILTY OF TORTUOUS INTERFERENCE OF
CONTRACT?
II. WHETHER THE APPELLATE COURT ERRED IN AWARDING ATTORNEY'S FEES
OF P200,000.00 IN FAVOR OF PRIVATE RESPONDENTS.
The foregoing issues involve, essentially, the correct interpretation of the applicable law on
tortuous conduct, particularly unlawful interference with contract. We have to begin,
obviously, with certain fundamental principles on torts and damages.
Damage is the loss, hurt, or harm which results from injury, and damages are the
recompense or compensation awarded for the damage suffered. 6 One becomes liable in an
action for damages for a nontrespassory invasion of another's interest in the private use and
enjoyment of asset if (a) the other has property rights and privileges with respect to the use
or enjoyment interfered with, (b) the invasion is substantial, (c) the defendant's conduct is a
legal cause of the invasion, and (d) the invasion is either intentional and unreasonable or
unintentional and actionable under general negligence rules. 7
The elements of tort interference are: (1) existence of a valid contract; (2) knowledge on the
part of the third person of the existence of contract; and (3) interference of the third person
is without legal justification or excuse. 8
A duty which the law of torts is concerned with is respect for the property of others, and a
cause of action ex delicto may be predicated upon an unlawful interference by one person of
the enjoyment by the other of his private
property.9 This may pertain to a situation where a third person induces a party to renege on
or violate his undertaking under a contract. In the case before us, petitioner's Trendsetter
Marketing asked DCCSI to execute lease contracts in its favor, and as a result petitioner
deprived respondent corporation of the latter's property right. Clearly, and as correctly
viewed by the appellate court, the three elements of tort interference above-mentioned are
present in the instant case.
Authorities debate on whether interference may be justified where the defendant acts for
the sole purpose of furthering his own financial or economic interest. 10 One view is that, as
a general rule, justification for interfering with the business relations of another exists
where the actor's motive is to benefit himself. Such justification does not exist where his sole
motive is to cause harm to the other. Added to this, some authorities believe that it is not
necessary that the interferer's interest outweigh that of the party whose rights are invaded,
and that an individual acts under an economic interest that is substantial, not merely de
minimis, such that wrongful and malicious motives are negatived, for he acts in self-
protection. 11 Moreover justification for protecting one's financial position should not be
made to depend on a comparison of his economic interest in the subject matter with that of
others. 12 It is sufficient if the impetus of his conduct lies in a proper business interest
rather than in wrongful motives. 13
As early as Gilchrist vs. Cuddy, 14 we held that where there was no malice in the
interference of a contract, and the impulse behind one's conduct lies in a proper business
interest rather than in wrongful motives, a party cannot be a malicious interferer. Where
the alleged interferer is financially interested, and such interest motivates his conduct, it
cannot be said that he is an officious or malicious intermeddler. 15
In the instant case, it is clear that petitioner So Ping Bun prevailed upon DCCSI to lease
the warehouse to his enterprise at the expense of respondent corporation. Though petitioner
took interest in the property of respondent corporation and benefited from it, nothing on
record imputes deliberate wrongful motives or malice on him.
awarding damages. The injunction saved the respondents from further damage or injury
caused by petitioner's interference.
Lastly, the recovery of attorney's fees in the concept of actual or compensatory damages, is
allowed under the circumstances provided for in Article 2208 of the Civil Code. 16 One such
occasion is when the defendant's act or omission has compelled the plaintiff to litigate with
third persons or to incur expenses to protect his interest. 17 But we have consistently held
that the award of considerable damages should have clear factual and legal bases. 18 In
connection with attorney's fees, the award should be commensurate to the benefits that
would have been derived from a favorable judgment. Settled is the rule that fairness of the
award of damages by the trial court calls for appellate review such that the award if far too
excessive can be reduced. 19 This ruling applies with equal force on the award of attorney's
fees. In a long line of cases we said, "It is not sound policy to place in penalty on the right to
litigate. To compel the defeated party to pay the fees of counsel for his successful opponent
would throw wide open the door of temptation to the opposing party and his counsel to swell
the fees to undue proportions."20
Considering that the respondent corporation's lease contract, at the time when the cause of
action accrued, ran only on a month-to-month basis whence before it was on a yearly basis,
we find even the reduced amount of attorney's fees ordered by the Court of Appeals still
exorbitant in the light of prevailing jurisprudence. 21 Consequently, the amount of two
hundred thousand (P200,000.00) awarded by respondent appellate court should be reduced
to one hundred thousand (P100,000.00) pesos as the reasonable award or attorney's fees in
favor of private respondent corporation.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the
Court of Appeals in CA-G.R. CV No. 38784 are hereby AFFIRMED, with MODIFICATION
that the award of attorney's fees is reduced from two hundred thousand (P200,000.00) to
one hundred thousand (P100,000.00) pesos. No pronouncement as to costs.1âwphi1.nêt
SO ORDERED.

Sec. 1314 of the Civil Code categorically provides also that, "Any third person who induces
another to violate his contract shall be liable for damages to the other contracting party."
Petitioner argues that damage is an essential element of tort interference, and since the
trial court and the appellate court ruled that private respondents were not entitled to
actual, moral or exemplary damages, it follows that he ought to be absolved of any liability,
including attorney's fees.

It is true that the lower courts did not award damages, but this was only because the extent
of damages was not quantifiable. We had a similar situation in Gilchrist, where it was
difficult or impossible to determine the extent of damage and there was nothing on record to
serve as basis thereof. In that case we refrained from awarding damages. We believe the
same conclusion applies in this case.

While we do not encourage tort interferers seeking their economic interest to intrude into
existing contracts at the expense of others, however, we find that the conduct herein
complained of did not transcend the limits forbidding an obligatory award for damages in
the absence of any malice. The business desire is there to make some gain to the detriment
of the contracting parties. Lack of malice, however, precludes damages. But it does not
relieve petitioner of the legal liability for entering into contracts and causing breach of
existing ones. The respondent appellate court correctly confirmed the permanent injunction
and nullification of the lease contracts between DCCSI and Trendsetter Marketing, without