THIRD DIVISION

[G.R. NO. 138814 : April 16, 2009]

MAKATI STOCK EXCHANGE, INC., MA. VIVIAN YUCHENGCO, ADOLFO M. DUARTE,

MYRON C. PAPA, NORBERTO C. NAZARENO, GEORGE UY-TIOCO, ANTONIO A. LOPA,
RAMON B. ARNAIZ, LUIS J.L. VIRATA, and ANTONIO GARCIA, JR. Petitioners, v. MIGUEL
V. CAMPOS, substituted by JULIA ORTIGAS VDA. DE CAMPOS,1 Respondent.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 seeking the reversal of the
Decision2 dated 11 February 1997 and Resolution dated 18 May 1999 of the Court of Appeals in
CA-G.R. SP No. 38455.

The facts of the case are as follows:

SEC Case No. 02-94-4678 was instituted on 10 February 1994 by respondent Miguel V. Campos,
who filed with the Securities, Investigation and Clearing Department (SICD) of the Securities and
Exchange Commission (SEC), a Petition against herein petitioners Makati Stock Exchange, Inc.
(MKSE) and MKSE directors, Ma. Vivian Yuchengco, Adolfo M. Duarte, Myron C. Papa, Norberto
C. Nazareno, George Uy-Tioco, Antonio A, Lopa, Ramon B. Arnaiz, Luis J.L. Virata, and Antonio
Garcia, Jr. Respondent, in said Petition, sought: (1) the nullification of the Resolution dated 3
June 1993 of the MKSE Board of Directors, which allegedly deprived him of his right to participate
equally in the allocation of Initial Public Offerings (IPO) of corporations registered with MKSE; (2)
the delivery of the IPO shares he was allegedly deprived of, for which he would pay IPO prices;
and (3) the payment of P2 million as moral damages, P1 million as exemplary damages,
and P500,000.00 as attorney's fees and litigation expenses.

On 14 February 1994, the SICD issued an Order granting respondent's prayer for the issuance
of a Temporary Restraining Order to enjoin petitioners from implementing or enforcing the 3 June
1993 Resolution of the MKSE Board of Directors.

The SICD subsequently issued another Order on 10 March 1994 granting respondent's
application for a Writ of Preliminary Injunction, to continuously enjoin, during the pendency of SEC
Case No. 02-94-4678, the implementation or enforcement of the MKSE Board Resolution in
question. Petitioners assailed this SICD Order dated 10 March 1994 in a Petition
for Certiorari filed with the SEC en banc, docketed as SEC-EB No. 393.

On 11 March 1994, petitioners filed a Motion to Dismiss respondent's Petition in SEC Case No.
02-94-4678, based on the following grounds: (1) the Petition became moot due to the cancellation
of the license of MKSE; (2) the SICD had no jurisdiction over the Petition; and (3) the Petition
failed to state a cause of action.

The SICD denied petitioner's Motion to Dismiss in an Order dated 4 May 1994. Petitioners again
challenged the 4 May 1994 Order of SICD before the SEC en banc through another Petition for
Certiorari, docketed as SEC-EB No. 403.
In an Order dated 31 May 1995 in SEC-EB No. 393, the SEC en banc nullified the 10 March 1994
Order of SICD in SEC Case No. 02-94-4678 granting a Writ of Preliminary Injunction in favor of
respondent. Likewise, in an Order dated 14 August 1995 in SEC-EB No. 403, the SEC en banc
annulled the 4 May 1994 Order of SICD in SEC Case No. 02-94-4678 denying petitioners' Motion
to Dismiss, and accordingly ordered the dismissal of respondent's Petition before the SICD.

Respondent filed a Petition for Certiorari with the Court of Appeals assailing the Orders of the
SEC en banc dated 31 May 1995 and 14 August 1995 in SEC-EB No. 393 and SEC-EB No. 403,
respectively. Respondent's Petition before the appellate court was docketed as CA-G.R. SP No.
38455.

On 11 February 1997, the Court of Appeals promulgated its Decision in CA-G.R. SP No. 38455,
granting respondent's Petition for Certiorari, thus:

WHEREFORE, the petition in so far as it prays for annulment of the Orders dated May 31, 1995
and August 14, 1995 in SEC-EB Case Nos. 393 and 403 is GRANTED. The said orders are
hereby rendered null and void and set aside.

Petitioners filed a Motion for Reconsideration of the foregoing Decision but it was denied by the
Court of Appeals in a Resolution dated 18 May 1999.

Hence, the present Petition for Review raising the following arguments:

I.

THE SEC EN BANC DID NOT COMMIT GRAVE ABUSE OF DISCRETION AMOUNTING TO
LACK OR EXCESS OF JURISDICTION WHEN IT DISMISSED THE PETITION FILED BY
RESPONDENT BECAUSE ON ITS FACE, IT FAILED TO STATE A CAUSE OF ACTION.

II.

THE GRANT OF THE IPO ALLOCATIONS IN FAVOR OF RESPONDENT WAS A MERE

ACCOMMODATION GIVEN TO HIM BY THE BOARD OF [DIRECTORS] OF THE MAKATI
STOCK EXCHANGE, INC.

III.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE SEC EN BANC COMMITTED
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION
WHEN IT MADE AN EXTENDED INQUIRY AND PROCEEDED TO MAKE A DETERMINATION
AS TO THE TRUTH OF RESPONDENT'S ALLEGATIONS IN HIS PETITION AND USED AS
BASIS THE EVIDENCE ADDUCED DURING THE HEARING ON THE APPLICATION FOR THE
WRIT OF PRELIMINARY INJUNCTION TO DETERMINE THE EXISTENCE OR VALIDITY OF A
STATED CAUSE OF ACTION.

IV.

IPO ALLOCATIONS GRANTED TO BROKERS ARE NOT TO BE BOUGHT BY THE BROKERS

FOR THEMSELVES BUT ARE TO BE DISTRIBUTED TO THE INVESTING PUBLIC. HENCE,
RESPONDENT'S CLAIM FOR DAMAGES IS ILLUSORY AND HIS PETITION A NUISANCE
SUIT.3

On 18 September 2001, counsel for respondent manifested to this Court that his client died on 7
May 2001. In a Resolution dated 24 October 2001, the Court directed the substitution of
respondent by his surviving spouse, Julia Ortigas vda. de Campos.

Petitioners want this Court to affirm the dismissal by the SEC en banc of respondent's Petition in
SEC Case No. 02-94-4678 for failure to state a cause of action. On the other hand, respondent
insists on the sufficiency of his Petition and seeks the continuation of the proceedings before the
SICD.

A cause of action is the act or omission by which a party violates a right of another.4 A complaint
states a cause of action where it contains three essential elements of a cause of action, namely:
(1) the legal right of the plaintiff, (2) the correlative obligation of the defendant, and (3) the act or
omission of the defendant in violation of said legal right. If these elements are absent, the
complaint becomes vulnerable to dismissal on the ground of failure to state a cause of action.

If a defendant moves to dismiss the complaint on the ground of lack of cause of action, he is
regarded as having hypothetically admitted all the averments thereof. The test of sufficiency of
the facts found in a complaint as constituting a cause of action is whether or not admitting the
facts alleged, the court can render a valid judgment upon the same in accordance with the prayer
thereof. The hypothetical admission extends to the relevant and material facts well pleaded in the
complaint and inferences fairly deducible therefrom. Hence, if the allegations in the complaint
furnish sufficient basis by which the complaint can be maintained, the same should not be
dismissed regardless of the defense that may be assessed by the defendant.5

Given the foregoing, the issue of whether respondent's Petition in SEC Case No. 02-94-4678
sufficiently states a cause of action may be alternatively stated as whether, hypothetically
admitting to be true the allegations in respondent's Petition in SEC Case No. 02-94-4678, the
SICD may render a valid judgment in accordance with the prayer of said Petition.

A reading of the exact text of respondent's Petition in SEC Case No. 02-94-4678 is, therefore,
unavoidable. Pertinent portions of the said Petition reads:

7. In recognition of petitioner's invaluable services, the general membership of respondent

corporation [MKSE] passed a resolution sometime in 1989 amending its Articles of Incorporation,
to include the following provision therein:

"ELEVENTH - WHEREAS, Mr. Miguel Campos is the only surviving incorporator of the Makati
Stock Exchange, Inc. who has maintained his membership;

"WHEREAS, he has unselfishly served the Exchange in various capacities, as governor from
1977 to the present and as President from 1972 to 1976 and again as President from 1988 to the
present;

"WHEREAS, such dedicated service and leadership which has contributed to the advancement
and well being not only of the Exchange and its members but also to the Securities industry,
needs to be recognized and appreciated;
"WHEREAS, as such, the Board of Governors in its meeting held on February 09, 1989 has
correspondingly adopted a resolution recognizing his valuable service to the Exchange, reward
the same, and preserve for posterity such recognition by proposing a resolution to the
membership body which would make him as Chairman Emeritus for life and install in the
Exchange premises a commemorative bronze plaque in his honor;

"NOW, THEREFORE, for and in consideration of the above premises, the position of the
"Chairman Emeritus" to be occupied by Mr. Miguel Campos during his lifetime and irregardless
of his continued membership in the Exchange with the Privilege to attend all membership
meetings as well as the meetings of the Board of Governors of the Exchange, is hereby created."

8. Hence, to this day, petitioner is not only an active member of the respondent corporation, but
its Chairman Emeritus as well.

9. Correspondingly, at all times material to this petition, as an active member and Chairman
Emeritus of respondent corporation, petitioner has always enjoyed the right given to all the other
members to participate equally in the Initial Public Offerings (IPOs for brevity) of corporations.

10. IPOs are shares of corporations offered for sale to the public, prior to the listing in the trading
floor of the country's two stock exchanges. Normally, Twenty Five Percent (25%) of these shares
are divided equally between the two stock exchanges which in turn divide these equally among
their members, who pay therefor at the offering price.

11. However, on June 3, 1993, during a meeting of the Board of Directors of respondent-
corporation, individual respondents passed a resolution to stop giving petitioner the IPOs he is
entitled to, based on the ground that these shares were allegedly benefiting Gerardo O. Lanuza,
Jr., who these individual respondents wanted to get even with, for having filed cases before the
Securities and Exchange (SEC) for their disqualification as member of the Board of Directors of
respondent corporation.

12. Hence, from June 3, 1993 up to the present time, petitioner has been deprived of his right to
subscribe to the IPOs of corporations listing in the stock market at their offering prices.

13. The collective act of the individual respondents in depriving petitioner of his right to a share in
the IPOs for the aforementioned reason, is unjust, dishonest and done in bad faith, causing
petitioner substantial financial damage.6

There is no question that the Petition in SEC Case No. 02-94-4678 asserts a right in favor of
respondent, particularly, respondent's alleged right to subscribe to the IPOs of corporations listed
in the stock market at their offering prices; and stipulates the correlative obligation of petitioners
to respect respondent's right, specifically, by continuing to allow respondent to subscribe to the
IPOs of corporations listed in the stock market at their offering prices.

However, the terms right and obligation in respondent's Petition are not magic words that would
automatically lead to the conclusion that such Petition sufficiently states a cause of action. Right
and obligation are legal terms with specific legal meaning. A right is a claim or title to an interest
in anything whatsoever that is enforceable by law.7 An obligation is defined in the Civil Code as a
juridical necessity to give, to do or not to do.8 For every right enjoyed by any person, there is a
corresponding obligation on the part of another person to respect such right. Thus, Justice J.B.L.
Reyes offers9 the definition given by Arias Ramos as a more complete definition:
An obligation is a juridical relation whereby a person (called the creditor) may demand from
another (called the debtor) the observance of a determinative conduct (the giving, doing or not
doing), and in case of breach, may demand satisfaction from the assets of the latter.

The Civil Code enumerates the sources of obligations:

Art. 1157. Obligations arise from:

(1) Law;

(2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Quasi-delicts.

Therefore, an obligation imposed on a person, and the corresponding right granted to another,
must be rooted in at least one of these five sources. The mere assertion of a right and claim of an
obligation in an initiatory pleading, whether a Complaint or Petition, without identifying the basis
or source thereof, is merely a conclusion of fact and law. A pleading should state the ultimate
facts essential to the rights of action or defense asserted, as distinguished from mere conclusions
of fact or conclusions of law.10 Thus, a Complaint or Petition filed by a person claiming a right to
the Office of the President of this Republic, but without stating the source of his purported right,
cannot be said to have sufficiently stated a cause of action. Also, a person claiming to be the
owner of a parcel of land cannot merely state that he has a right to the ownership thereof, but
must likewise assert in the Complaint either a mode of acquisition of ownership or at least a
certificate of title in his name.

In the case at bar, although the Petition in SEC Case No. 02-94-4678 does allege respondent's
right to subscribe to the IPOs of corporations listed in the stock market at their offering prices, and
petitioners' obligation to continue respecting and observing such right, the Petition utterly failed
to lay down the source or basis of respondent's right and/or petitioners' obligation.

Respondent merely quoted in his Petition the MKSE Board Resolution, passed sometime in 1989,
granting him the position of Chairman Emeritus of MKSE for life. However, there is nothing in the
said Petition from which the Court can deduce that respondent, by virtue of his position as
Chairman Emeritus of MKSE, was granted by law, contract, or any other legal source, the right to
subscribe to the IPOs of corporations listed in the stock market at their offering prices.

A meticulous review of the Petition reveals that the allocation of IPO shares was merely alleged
to have been done in accord with a practice normally observed by the members of the stock
exchange, to wit:

IPOs are shares of corporations offered for sale to the public, prior to their listing in the trading
floor of the country's two stock exchanges. Normally, Twenty-Five Percent (25%) of these shares
are divided equally between the two stock exchanges which in turn divide these equally among
their members, who pay therefor at the offering price.11 (Emphasis supplied)cralawlibrary
A practice or custom is, as a general rule, not a source of a legally demandable or enforceable
right.12 Indeed, in labor cases, benefits which were voluntarily given by the employer, and which
have ripened into company practice, are considered as rights that cannot be diminished by the
employer.13 Nevertheless, even in such cases, the source of the employees' right is not custom,
but ultimately, the law, since Article 100 of the Labor Code explicitly prohibits elimination or
diminution of benefits.

There is no such law in this case that converts the practice of allocating IPO shares to MKSE
members, for subscription at their offering prices, into an enforceable or demandable right. Thus,
even if it is hypothetically admitted that normally, twenty five percent (25%) of the IPOs are divided
equally between the two stock exchanges - - which, in turn, divide their respective allocation
equally among their members, including the Chairman Emeritus, who pay for IPO shares at the
offering price - - the Court cannot grant respondent's prayer for damages which allegedly resulted
from the MKSE Board Resolution dated 3 June 1993 deviating from said practice by no longer
allocating any shares to respondent.chanrobles virtual law library

Accordingly, the instant Petition should be granted. The Petition in SEC Case No. 02-94-4678
should be dismissed for failure to state a cause of action. It does not matter that the SEC en banc,
in its Order dated 14 August 1995 in SEC-EB No. 403, overstepped its bounds by not limiting
itself to the issue of whether respondent's Petition before the SICD sufficiently stated a cause of
action. The SEC en banc may have been mistaken in considering extraneous evidence in granting
petitioners' Motion to Dismiss, but its discussion thereof are merely superfluous and obiter dictum.
In the main, the SEC en banc did correctly dismiss the Petition in SEC Case No. 02-94-4678 for
its failure to state the basis for respondent's alleged right, to wit:

Private respondent Campos has failed to establish the basis or authority for his alleged right to
participate equally in the IPO allocations of the Exchange. He cited paragraph 11 of the amended
articles of incorporation of the Exchange in support of his position but a careful reading of the said
provision shows nothing therein that would bear out his claim. The provision merely created the
position of chairman emeritus of the Exchange but it mentioned nothing about conferring upon
the occupant thereof the right to receive IPO allocations.14

With the dismissal of respondent's Petition in SEC Case No. 02-94-4678, there is no more need
for this Court to resolve the propriety of the issuance by SCID of a writ of preliminary injunction in
said case.

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 11
February 1997 and its Resolution dated 18 May 1999 in CA-G.R. SP No. 38455 are REVERSED
and SET ASIDE. The Orders dated 31 May 1995 and 14 August 1995 of the Securities and
Exchange Commission en banc in SEC-EB Case No. 393 and No. 403, respectively, are hereby
reinstated. No pronouncement as to costs.

SO ORDERED.
G.R. No. 109125 December 2, 1994

ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners,

vs.
THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENT
CORPORATION, respondents.

Antonio M. Albano for petitioners.

Umali, Soriano & Associates for private respondent.

VITUG, J.:

Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04 December
1991, in CA-G.R. SP No. 26345 setting aside and declaring without force and effect the orders
of execution of the trial court, dated 30 August 1991 and 27 September 1991, in Civil Case No.
87-41058.

The antecedents are recited in good detail by the appellate court thusly:

On July 29, 1987 a Second Amended Complaint for Specific Performance was
filed by Ang Yu Asuncion and Keh Tiong, et al., against Bobby Cu Unjieng, Rose
Cu Unjieng and Jose Tan before the Regional Trial Court, Branch 31, Manila in
Civil Case No. 87-41058, alleging, among others, that plaintiffs are tenants or
lessees of residential and commercial spaces owned by defendants described as
Nos. 630-638 Ongpin Street, Binondo, Manila; that they have occupied said
spaces since 1935 and have been religiously paying the rental and complying
with all the conditions of the lease contract; that on several occasions before
October 9, 1986, defendants informed plaintiffs that they are offering to sell the
premises and are giving them priority to acquire the same; that during the
negotiations, Bobby Cu Unjieng offered a price of P6-million while plaintiffs made
a counter offer of P5-million; that plaintiffs thereafter asked the defendants to put
their offer in writing to which request defendants acceded; that in reply to
defendant's letter, plaintiffs wrote them on October 24, 1986 asking that they
specify the terms and conditions of the offer to sell; that when plaintiffs did not
receive any reply, they sent another letter dated January 28, 1987 with the same
request; that since defendants failed to specify the terms and conditions of the
offer to sell and because of information received that defendants were about to
sell the property, plaintiffs were compelled to file the complaint to compel
defendants to sell the property to them.

Defendants filed their answer denying the material allegations of the complaint
and interposing a special defense of lack of cause of action.

After the issues were joined, defendants filed a motion for summary judgment
which was granted by the lower court. The trial court found that defendants' offer
to sell was never accepted by the plaintiffs for the reason that the parties did not
agree upon the terms and conditions of the proposed sale, hence, there was no
contract of sale at all. Nonetheless, the lower court ruled that should the
defendants subsequently offer their property for sale at a price of P11-million or
below, plaintiffs will have the right of first refusal. Thus the dispositive portion of
the decision states:

WHEREFORE, judgment is hereby rendered in favor of the

defendants and against the plaintiffs summarily dismissing the
complaint subject to the aforementioned condition that if the
defendants subsequently decide to offer their property for sale for
a purchase price of Eleven Million Pesos or lower, then the
plaintiffs has the option to purchase the property or of first refusal,
otherwise, defendants need not offer the property to the plaintiffs if
the purchase price is higher than Eleven Million Pesos.

SO ORDERED.

Aggrieved by the decision, plaintiffs appealed to this Court in

CA-G.R. CV No. 21123. In a decision promulgated on September 21, 1990
(penned by Justice Segundino G. Chua and concurred in by Justices Vicente V.
Mendoza and Fernando A. Santiago), this Court affirmed with modification the
lower court's judgment, holding:

In resume, there was no meeting of the minds between the parties

concerning the sale of the property. Absent such requirement, the
claim for specific performance will not lie. Appellants' demand for
actual, moral and exemplary damages will likewise fail as there
exists no justifiable ground for its award. Summary judgment for
defendants was properly granted. Courts may render summary
judgment when there is no genuine issue as to any material fact
and the moving party is entitled to a judgment as a matter of law
(Garcia vs. Court of Appeals, 176 SCRA 815). All requisites
obtaining, the decision of the court a quo is legally justifiable.

WHEREFORE, finding the appeal unmeritorious, the judgment

appealed from is hereby AFFIRMED, but subject to the following
modification: The court a quo in the aforestated decision gave the
plaintiffs-appellants the right of first refusal only if the property is
sold for a purchase price of Eleven Million pesos or lower;
however, considering the mercurial and uncertain forces in our
market economy today. We find no reason not to grant the same
right of first refusal to herein appellants in the event that the
subject property is sold for a price in excess of Eleven Million
pesos. No pronouncement as to costs.

SO ORDERED.

The decision of this Court was brought to the Supreme Court by petition for
review on certiorari. The Supreme Court denied the appeal on May 6, 1991 "for
insufficiency in form and substances" (Annex H, Petition).
On November 15, 1990, while CA-G.R. CV No. 21123 was pending consideration
by this Court, the Cu Unjieng spouses executed a Deed of Sale (Annex D,
Petition) transferring the property in question to herein petitioner Buen Realty and
Development Corporation, subject to the following terms and conditions:

1. That for and in consideration of the sum of FIFTEEN MILLION

PESOS (P15,000,000.00), receipt of which in full is hereby
acknowledged, the VENDORS hereby sells, transfers and
conveys for and in favor of the VENDEE, his heirs, executors,
administrators or assigns, the above-described property with all
the improvements found therein including all the rights and
interest in the said property free from all liens and encumbrances
of whatever nature, except the pending ejectment proceeding;

2. That the VENDEE shall pay the Documentary Stamp Tax,

registration fees for the transfer of title in his favor and other
expenses incidental to the sale of above-described property
including capital gains tax and accrued real estate taxes.

As a consequence of the sale, TCT No. 105254/T-881 in the name of the Cu

Unjieng spouses was cancelled and, in lieu thereof, TCT No. 195816 was issued
in the name of petitioner on December 3, 1990.

On July 1, 1991, petitioner as the new owner of the subject property wrote a
letter to the lessees demanding that the latter vacate the premises.

On July 16, 1991, the lessees wrote a reply to petitioner stating that petitioner
brought the property subject to the notice of lis pendens regarding Civil Case No.
87-41058 annotated on TCT No. 105254/T-881 in the name of the Cu Unjiengs.

The lessees filed a Motion for Execution dated August 27, 1991 of the Decision
in Civil Case No. 87-41058 as modified by the Court of Appeals in CA-G.R. CV
No. 21123.

On August 30, 1991, respondent Judge issued an order (Annex A, Petition)

quoted as follows:

Presented before the Court is a Motion for Execution filed by

plaintiff represented by Atty. Antonio Albano. Both defendants
Bobby Cu Unjieng and Rose Cu Unjieng represented by Atty.
Vicente Sison and Atty. Anacleto Magno respectively were duly
notified in today's consideration of the motion as evidenced by the
rubber stamp and signatures upon the copy of the Motion for
Execution.

The gist of the motion is that the Decision of the Court dated
September 21, 1990 as modified by the Court of Appeals in its
decision in CA G.R. CV-21123, and elevated to the Supreme
Court upon the petition for review and that the same was denied
by the highest tribunal in its resolution dated May 6, 1991 in G.R.
 No.
L-97276, had now become final and executory. As a
consequence, there was an Entry of Judgment by the Supreme
Court as of June 6, 1991, stating that the aforesaid modified
decision had already become final and executory.

It is the observation of the Court that this property in dispute was

the subject of the Notice of Lis Pendens and that the modified
decision of this Court promulgated by the Court of Appeals which
had become final to the effect that should the defendants decide
to offer the property for sale for a price of P11 Million or lower, and
considering the mercurial and uncertain forces in our market
economy today, the same right of first refusal to herein
plaintiffs/appellants in the event that the subject property is sold
for a price in excess of Eleven Million pesos or more.

WHEREFORE, defendants are hereby ordered to execute the

necessary Deed of Sale of the property in litigation in favor of
plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go for the
consideration of P15 Million pesos in recognition of plaintiffs' right
of first refusal and that a new Transfer Certificate of Title be
issued in favor of the buyer.

All previous transactions involving the same property

notwithstanding the issuance of another title to Buen Realty
Corporation, is hereby set aside as having been executed in bad
faith.

SO ORDERED.

On September 22, 1991 respondent Judge issued another order, the dispositive
portion of which reads:

WHEREFORE, let there be Writ of Execution issue in the above-

entitled case directing the Deputy Sheriff Ramon Enriquez of this
Court to implement said Writ of Execution ordering the defendants
among others to comply with the aforesaid Order of this Court
within a period of one (1) week from receipt of this Order and for
defendants to execute the necessary Deed of Sale of the property
in litigation in favor of the plaintiffs Ang Yu Asuncion, Keh Tiong
and Arthur Go for the consideration of P15,000,000.00 and
ordering the Register of Deeds of the City of Manila, to cancel and
set aside the title already issued in favor of Buen Realty
Corporation which was previously executed between the latter and
defendants and to register the new title in favor of the aforesaid
plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go.

SO ORDERED.
 On the same day, September 27, 1991 the corresponding writ of execution
(Annex C, Petition) was issued.1

On 04 December 1991, the appellate court, on appeal to it by private respondent, set aside and
declared without force and effect the above questioned orders of the court a quo.

In this petition for review on certiorari, petitioners contend that Buen Realty can be held bound
by the writ of execution by virtue of the notice of lis pendens, carried over on TCT No. 195816
issued in the name of Buen Realty, at the time of the latter's purchase of the property on 15
November 1991 from the Cu Unjiengs.

We affirm the decision of the appellate court.

A not too recent development in real estate transactions is the adoption of such arrangements
as the right of first refusal, a purchase option and a contract to sell. For ready reference, we
might point out some fundamental precepts that may find some relevance to this discussion.

An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The
obligation is constituted upon the concurrence of the essential elements thereof, viz: (a)
The vinculum juris or juridical tie which is the efficient cause established by the various sources
of obligations (law, contracts, quasi-contracts, delicts and quasi-delicts); (b) the object which is
the prestation or conduct; required to be observed (to give, to do or not to do); and (c)
the subject-persons who, viewed from the demandability of the obligation, are the active
(obligee) and the passive (obligor) subjects.

Among the sources of an obligation is a contract (Art. 1157, Civil Code), which is a meeting of
minds between two persons whereby one binds himself, with respect to the other, to give
something or to render some service (Art. 1305, Civil Code). A contract undergoes various
stages that include its negotiation or preparation, its perfection and, finally, its
consummation. Negotiation covers the period from the time the prospective contracting parties
indicate interest in the contract to the time the contract is concluded (perfected).
The perfection of the contract takes place upon the concurrence of the essential elements
thereof. A contract which is consensual as to perfection is so established upon a mere meeting
of minds, i.e., the concurrence of offer and acceptance, on the object and on the cause thereof.
A contract which requires, in addition to the above, the delivery of the object of the agreement,
as in a pledge or commodatum, is commonly referred to as a real contract. In a solemn contract,
compliance with certain formalities prescribed by law, such as in a donation of real property, is
essential in order to make the act valid, the prescribed form being thereby an essential element
thereof. The stage of consummation begins when the parties perform their respective
undertakings under the contract culminating in the extinguishment thereof.

Until the contract is perfected, it cannot, as an independent source of obligation, serve as a

binding juridical relation. In sales, particularly, to which the topic for discussion about the case at
bench belongs, the contract is perfected when a person, called the seller, obligates himself, for
a price certain, to deliver and to transfer ownership of a thing or right to another, called the
buyer, over which the latter agrees. Article 1458 of the Civil Code provides:

Art. 1458. By the contract of sale one of the contracting parties obligates himself
to transfer the ownership of and to deliver a determinate thing, and the other to
pay therefor a price certain in money or its equivalent.
 A contract of sale may be absolute or conditional.

When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably
the ownership of the thing sold is retained until the fulfillment of a positive suspensive condition
(normally, the full payment of the purchase price), the breach of the condition will prevent the
obligation to convey title from acquiring an obligatory force.2 In Dignos vs. Court of Appeals (158
SCRA 375), we have said that, although denominated a "Deed of Conditional Sale," a sale is
still absolute where the contract is devoid of any proviso that title is reserved or the right to
unilaterally rescind is stipulated, e.g., until or unless the price is paid. Ownership will then be
transferred to the buyer upon actual or constructive delivery (e.g., by the execution of a public
document) of the property sold. Where the condition is imposed upon the perfection of the
contract itself, the failure of the condition would prevent such perfection.3 If the condition is
imposed on the obligation of a party which is not fulfilled, the other party may either waive the
condition or refuse to proceed with the sale (Art. 1545, Civil Code).4

An unconditional mutual promise to buy and sell, as long as the object is made determinate and
the price is fixed, can be obligatory on the parties, and compliance therewith may accordingly be
exacted.5

An accepted unilateral promise which specifies the thing to be sold and the price to
be paid, when coupled with a valuable consideration distinct and separate from the price, is
what may properly be termed a perfected contract of option. This contract is legally binding, and
in sales, it conforms with the second paragraph of Article 1479 of the Civil Code, viz:

Art. 1479. . . .

An accepted unilateral promise to buy or to sell a determinate thing for a price

certain is binding upon the promissor if the promise is supported by a
consideration distinct from the price. (1451a)6

Observe, however, that the option is not the contract of sale itself.7 The optionee has the right,
but not the obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted
before a breach of the option, a bilateral promise to sell and to buy ensues and both parties are
then reciprocally bound to comply with their respective undertakings.8

Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect

promise (policitacion) is merely an offer. Public advertisements or solicitations and the like are
ordinarily construed as mere invitations to make offers or only as proposals. These relations,
until a contract is perfected, are not considered binding commitments. Thus, at any time prior to
the perfection of the contract, either negotiating party may stop the negotiation. The offer, at this
stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as
by its mailing and not necessarily when the offeree learns of the withdrawal (Laudico vs. Arias,
43 Phil. 270). Where a period is given to the offeree within which to accept the offer, the
following rules generally govern:

(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free
and has the right to withdraw the offer before its acceptance, or, if an acceptance has been
made, before the offeror's coming to know of such fact, by communicating that withdrawal to the
offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding
that this rule is applicable to a unilateral promise to sell under Art. 1479, modifying the previous
decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code;
Rural Bank of Parañaque, Inc., vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA
368). The right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise,
it could give rise to a damage claim under Article 19 of the Civil Code which ordains that "every
person must, in the exercise of his rights and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good faith."

(2) If the period has a separate consideration, a contract of "option" is deemed perfected, and it
would be a breach of that contract to withdraw the offer during the agreed period. The option,
however, is an independent contract by itself, and it is to be distinguished from the projected
main agreement (subject matter of the option) which is obviously yet to be concluded. If, in fact,
the optioner-offeror withdraws the offer before its acceptance (exercise of the option) by the
optionee-offeree, the latter may not sue for specific performance on the proposed contract
("object" of the option) since it has failed to reach its own stage of perfection. The optioner-
offeror, however, renders himself liable for damages for breach of the option. In these cases,
care should be taken of the real nature of the consideration given, for if, in fact, it has been
intended to be part of the consideration for the main contract with a right of withdrawal on the
part of the optionee, the main contract could be deemed perfected; a similar instance would be
an "earnest money" in a contract of sale that can evidence its perfection (Art. 1482, Civil Code).

In the law on sales, the so-called "right of first refusal" is an innovative juridical relation.
Needless to point out, it cannot be deemed a perfected contract of sale under Article 1458 of the
Civil Code. Neither can the right of first refusal, understood in its normal concept, per se be
brought within the purview of an option under the second paragraph of Article 1479,
aforequoted, or possibly of an offer under Article 13199 of the same Code. An option or an offer
would require, among other things,10 a clear certainty on both the object and the cause or
consideration of the envisioned contract. In a right of first refusal, while the object might be
made determinate, the exercise of the right, however, would be dependent not only on the
grantor's eventual intention to enter into a binding juridical relation with another but also on
terms, including the price, that obviously are yet to be later firmed up. Prior thereto, it can at
best be so described as merely belonging to a class of preparatory juridical relations governed
not by contracts (since the essential elements to establish the vinculum juris would still be
indefinite and inconclusive) but by, among other laws of general application, the pertinent
scattered provisions of the Civil Code on human conduct.

Even on the premise that such right of first refusal has been decreed under a final judgment, like
here, its breach cannot justify correspondingly an issuance of a writ of execution under a
judgment that merely recognizes its existence, nor would it sanction an action for specific
performance without thereby negating the indispensable element of consensuality in the
perfection of contracts.11 It is not to say, however, that the right of first refusal would be
inconsequential for, such as already intimated above, an unjustified disregard thereof, given, for
instance, the circumstances expressed in Article 1912 of the Civil Code, can warrant a recovery
for damages.

The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded a
"right of first refusal" in favor of petitioners. The consequence of such a declaration entails no
more than what has heretofore been said. In fine, if, as it is here so conveyed to us, petitioners
are aggrieved by the failure of private respondents to honor the right of first refusal, the remedy
is not a writ of execution on the judgment, since there is none to execute, but an action for
damages in a proper forum for the purpose.
Furthermore, whether private respondent Buen Realty Development Corporation, the alleged
purchaser of the property, has acted in good faith or bad faith and whether or not it should, in
any case, be considered bound to respect the registration of the lis pendens in Civil Case No.
87-41058 are matters that must be independently addressed in appropriate proceedings. Buen
Realty, not having been impleaded in Civil Case No. 87-41058, cannot be held subject to the
writ of execution issued by respondent Judge, let alone ousted from the ownership and
possession of the property, without first being duly afforded its day in court.

We are also unable to agree with petitioners that the Court of Appeals has erred in holding that
the writ of execution varies the terms of the judgment in Civil Case No. 87-41058, later affirmed
in CA-G.R. CV-21123. The Court of Appeals, in this regard, has observed:

Finally, the questioned writ of execution is in variance with the decision of the trial
court as modified by this Court. As already stated, there was nothing in said
decision 13 that decreed the execution of a deed of sale between the Cu Unjiengs
and respondent lessees, or the fixing of the price of the sale, or the cancellation
of title in the name of petitioner (Limpin vs. IAC, 147 SCRA 516; Pamantasan ng
Lungsod ng Maynila vs. IAC, 143 SCRA 311; De Guzman vs. CA, 137 SCRA
730; Pastor vs. CA, 122 SCRA 885).

It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not have
decreed at the time the execution of any deed of sale between the Cu Unjiengs and petitioners.

WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside the questioned
Orders, dated 30 August 1991 and 27 September 1991, of the court a quo. Costs against
petitioners.

SO ORDERED.

Narvasa, C.J., Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno
and Mendoza, JJ., concur.

Kapunan, J., took no part.

Feliciano, J., is on leave.

#Footnotes

1 Rollo, pp. 32-38.

2 Roque vs. Lapuz, 96 SCRA 741; Agustin vs. CA, 186 SCRA 375.

3 See People's Homesite and Housing Corp. vs. Court of Appeals, 133 SCRA
777.

4 Delta Motor Corporation vs. Genuino, 170 SCRA 29.

5 See Art. 1459; Atkins, Kroll and Co., Inc. vs. Cua Hian Tek, 102 Phil. 948.

6 It is well to note that when the consideration given, for what otherwise would
have been an option, partakes the nature in reality of a part payment of the
purchase price (termed as "earnest money" and considered as an initial payment
thereof), an actual contract of sale is deemed entered into and enforceable as
such.

7 Enriquez de la Cavada vs. Diaz, 37 Phil. 982.

8 Atkins, Kroll & Co., Inc., vs. Cua Hian Tek, 102 Phil. 948.

9 Article 1319, Civil Code, provides:

Art. 1319. Consent is manifested by the meeting of the offer and the acceptance
upon the thing and the cause which are to constitute the contract. The offer must
be certain and the acceptance absolute. A qualified acceptance constitutes a
counter-offer. (Emphasis supplied.)

10 It is also essential for an option to be binding that valuable consideration

distinct from the price should be given (see Montilla vs. Court of Appeals, 161
SCRA 167; Sps. Natino vs. IAC, 197 SCRA 323; Cronico vs. J.M. Tuason & Co.,
Inc., 78 SCRA 331).

11 See Article 1315 and 1318, Civil Code; Madrigal & Co. vs. Stevenson & Co.,
15 Phil. 38; Salonga vs. Ferrales, 105 SCRA 359).

12 Art. 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith.

13 The decision referred to reads:

In resume, there was no meeting of the minds between the parties concerning
the sale of the property. Absent such requirement, the claim for specific
performance will not lie. Appellants' demand for actual, moral and exemplary
damages will likewise fail as there exists no justifiable ground for its award.
Summary judgment for defendants was properly granted. Courts may render
summary judgment when there is no genuine issue as to any material fact and
the moving party is entitled to a judgment as a matter of law (Garcia vs. Court of
Appeals, 176 SCRA 815). All requisites obtaining, the decision of the court a
quo is legally justifiable.

WHEREFORE, finding the appeal unmeritorious, the judgment appealed from is

hereby AFFIRMED, but subject to the following modification: The court a quo in
the aforestated decision, gave the plaintiffs — considering the mercurial and
uncertain forces in our market economy today. We find no reason not to grant the
same right of first refusal to herein appellants in the event that the subject
property is sold for a price in excess of Eleven Million pesos. No pronouncement
as to costs.
G.R. No. 183204 January 13, 2014

THE METROPOLITAN BANK AND TRUST COMPANY, Petitioner,

vs.
ANA GRACE ROSALES AND YO YUK TO, Respondents.

DECISION

DEL CASTILLO, J.:

Bank deposits, which are in the nature of a simple loan or mutuum,1 must be paid upon demand
by the depositor.2

This Petition for Review on Certiorari3 under Rule 45 of the Rules of Court assails the April 2,
2008 Decision4 and the May 30, 2008 Resolution5 of he Court of Appeals CA) in CA-G.R. CV
No. 89086.

Factual Antecedents

Petitioner Metropolitan Bank and Trust Company is a domestic banking corporation duly
organized and existing under the laws of the Philippines.6 Respondent Ana Grace Rosales
(Rosales) is the owner of China Golden Bridge Travel Services,7 a travel agency.8 Respondent
Yo Yuk To is the mother of respondent Rosales.9

In 2000, respondents opened a Joint Peso Account10 with petitioner’s Pritil-Tondo Branch.11 As
of August 4, 2004, respondents’ Joint Peso Account showed a balance of ₱2,515,693.52.12

In May 2002, respondent Rosales accompanied her client Liu Chiu Fang, a Taiwanese National
applying for a retiree’s visa from the Philippine Leisure and Retirement Authority (PLRA), to
petitioner’s branch in Escolta to open a savings account, as required by the PLRA.13 Since Liu
Chiu Fang could speak only in Mandarin, respondent Rosales acted as an interpreter for her.14

On March 3, 2003, respondents opened with petitioner’s Pritil-Tondo Branch a Joint Dollar
Account15 with an initial deposit of US$14,000.00.16

On July 31, 2003, petitioner issued a "Hold Out" order against respondents’ accounts.17

On September 3, 2003, petitioner, through its Special Audit Department Head Antonio Ivan
Aguirre, filed before the Office of the Prosecutor of Manila a criminal case for Estafa through
False Pretences, Misrepresentation, Deceit, and Use of Falsified Documents, docketed as I.S.
No. 03I-25014,18 against respondent Rosales.19 Petitioner accused respondent Rosales and an
unidentified woman as the ones responsible for the unauthorized and fraudulent withdrawal of
US$75,000.00 from Liu Chiu Fang’s dollar account with petitioner’s Escolta Branch.20 Petitioner
alleged that on February 5, 2003, its branch in Escolta received from the PLRA a Withdrawal
Clearance for the dollar account of Liu Chiu Fang;21 that in the afternoon of the same day,
respondent Rosales went to petitioner’s Escolta Branch to inform its Branch Head, Celia A.
Gutierrez (Gutierrez), that Liu Chiu Fang was going to withdraw her dollar deposits in
cash;22 that Gutierrez told respondent Rosales to come back the following day because the
bank did not have enough dollars;23 that on February 6, 2003, respondent Rosales
accompanied an unidentified impostor of Liu Chiu Fang to the bank;24 that the impostor was
able to withdraw Liu Chiu Fang’s dollar deposit in the amount of US$75,000.00;25 that on March
3, 2003, respondents opened a dollar account with petitioner; and that the bank later discovered
that the serial numbers of the dollar notes deposited by respondents in the amount of
US$11,800.00 were the same as those withdrawn by the impostor.26

Respondent Rosales, however, denied taking part in the fraudulent and unauthorized
withdrawal from the dollar account of Liu Chiu Fang.27 Respondent Rosales claimed that she did
not go to the bank on February 5, 2003.28 Neither did she inform Gutierrez that Liu Chiu Fang
was going to close her account.29 Respondent Rosales further claimed that after Liu Chiu Fang
opened an account with petitioner, she lost track of her.30 Respondent Rosales’ version of the
events that transpired thereafter is as follows:

On February 6, 2003, she received a call from Gutierrez informing her that Liu Chiu Fang was at
the bank to close her account.31 At noon of the same day, respondent Rosales went to the bank
to make a transaction.32 While she was transacting with the teller, she caught a glimpse of a
woman seated at the desk of the Branch Operating Officer, Melinda Perez (Perez).33 After
completing her transaction, respondent Rosales approached Perez who informed her that Liu
Chiu Fang had closed her account and had already left.34 Perez then gave a copy of the
Withdrawal Clearance issued by the PLRA to respondent Rosales.35 On June 16, 2003,
respondent Rosales received a call from Liu Chiu Fang inquiring about the extension of her
PLRA Visa and her dollar account.36 It was only then that Liu Chiu Fang found out that her
account had been closed without her knowledge.37 Respondent Rosales then went to the bank
to inform Gutierrez and Perez of the unauthorized withdrawal.38 On June 23, 2003, respondent
Rosales and Liu Chiu Fang went to the PLRA Office, where they were informed that the
Withdrawal Clearance was issued on the basis of a Special Power of Attorney (SPA) executed
by Liu Chiu Fang in favor of a certain Richard So.39 Liu Chiu Fang, however, denied executing
the SPA.40 The following day, respondent Rosales, Liu Chiu Fang, Gutierrez, and Perez met at
the PLRA Office to discuss the unauthorized withdrawal.41 During the conference, the bank
officers assured Liu Chiu Fang that the money would be returned to her.42

On December 15, 2003, the Office of the City Prosecutor of Manila issued a Resolution
dismissing the criminal case for lack of probable cause.43 Unfazed, petitioner moved for
reconsideration.

On September 10, 2004, respondents filed before the Regional Trial Court (RTC) of Manila a
Complaint44 for Breach of Obligation and Contract with Damages, docketed as Civil Case No.
04110895 and raffled to Branch 21, against petitioner. Respondents alleged that they attempted
several times to withdraw their deposits but were unable to because petitioner had placed their
accounts under "Hold Out" status.45 No explanation, however, was given by petitioner as to why
it issued the "Hold Out" order.46 Thus, they prayed that the "Hold Out" order be lifted and that
they be allowed to withdraw their deposits.47 They likewise prayed for actual, moral, and
exemplary damages, as well as attorney’s fees.48

Petitioner alleged that respondents have no cause of action because it has a valid reason for
issuing the "Hold Out" order.49 It averred that due to the fraudulent scheme of respondent
Rosales, it was compelled to reimburse Liu Chiu Fang the amount of US$75,000.0050 and to file
a criminal complaint for Estafa against respondent Rosales.51
While the case for breach of contract was being tried, the City Prosecutor of Manila issued a
Resolution dated February 18, 2005, reversing the dismissal of the criminal complaint.52 An
Information, docketed as Criminal Case No. 05-236103,53 was then filed charging respondent
Rosales with Estafa before Branch 14 of the RTC of Manila.54

Ruling of the Regional Trial Court

On January 15, 2007, the RTC rendered a Decision55 finding petitioner liable for damages for
breach of contract.56 The RTC ruled that it is the duty of petitioner to release the deposit to
respondents as the act of withdrawal of a bank deposit is an act of demand by the
creditor.57 The RTC also said that the recourse of petitioner is against its negligent employees
and not against respondents.58 The dispositive portion of the Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered ordering [petitioner]

METROPOLITAN BANK & TRUST COMPANY to allow [respondents] ANA GRACE ROSALES
and YO YUK TO to withdraw their Savings and Time Deposits with the agreed interest, actual
damages of ₱50,000.00, moral damages of ₱50,000.00, exemplary damages of ₱30,000.00
and 10% of the amount due [respondents] as and for attorney’s fees plus the cost of suit.

The counterclaim of [petitioner] is hereby DISMISSED for lack of merit.

SO ORDERED.59

Ruling of the Court of Appeals

Aggrieved, petitioner appealed to the CA.

On April 2, 2008, the CA affirmed the ruling of the RTC but deleted the award of actual
damages because "the basis for [respondents’] claim for such damages is the professional fee
that they paid to their legal counsel for [respondent] Rosales’ defense against the criminal
complaint of [petitioner] for estafa before the Office of the City Prosecutor of Manila and not this
case."60 Thus, the CA disposed of the case in this wise:

WHEREFORE, premises considered, the Decision dated January 15, 2007 of the RTC, Branch
21, Manila in Civil Case No. 04-110895 is AFFIRMED with MODIFICATION that the award of
actual damages to [respondents] Rosales and Yo Yuk To is hereby DELETED.

SO ORDERED.61

Petitioner sought reconsideration but the same was denied by the CA in its May 30, 2008
Resolution.62

Issues

Hence, this recourse by petitioner raising the following issues:

A. THE [CA] ERRED IN RULING THAT THE "HOLD-OUT" PROVISION IN THE

APPLICATION AND AGREEMENT FOR DEPOSIT ACCOUNT DOES NOT APPLY IN
THIS CASE.
 B. THE [CA] ERRED WHEN IT RULED THAT PETITIONER’S EMPLOYEES WERE
NEGLIGENT IN RELEASING LIU CHIU FANG’S FUNDS.

C. THE [CA] ERRED IN AFFIRMING THE AWARD OF MORAL DAMAGES,

EXEMPLARY DAMAGES, AND ATTORNEY’S FEES.63

Petitioner’s Arguments

Petitioner contends that the CA erred in not applying the "Hold Out" clause stipulated in the
Application and Agreement for Deposit Account.64 It posits that the said clause applies to any
and all kinds of obligation as it does not distinguish between obligations arising ex contractu or
ex delictu.65 Petitioner also contends that the fraud committed by respondent Rosales was
clearly established by evidence;66 thus, it was justified in issuing the "Hold-Out"
order.67 Petitioner likewise denies that its employees were negligent in releasing the dollars.68 It
claims that it was the deception employed by respondent Rosales that caused petitioner’s
employees to release Liu Chiu Fang’s funds to the impostor.69

Lastly, petitioner puts in issue the award of moral and exemplary damages and attorney’s fees.
It insists that respondents failed to prove that it acted in bad faith or in a wanton, fraudulent,
oppressive or malevolent manner.70

Respondents’ Arguments

Respondents, on the other hand, argue that there is no legal basis for petitioner to withhold their
deposits because they have no monetary obligation to petitioner.71 They insist that petitioner
miserably failed to prove its accusations against respondent Rosales.72 In fact, no documentary
evidence was presented to show that respondent Rosales participated in the unauthorized
withdrawal.73 They also question the fact that the list of the serial numbers of the dollar notes
fraudulently withdrawn on February 6, 2003, was not signed or acknowledged by the alleged
impostor.74 Respondents likewise maintain that what was established during the trial was the
negligence of petitioner’s employees as they allowed the withdrawal of the funds without
properly verifying the identity of the depositor.75 Furthermore, respondents contend that their
deposits are in the nature of a loan; thus, petitioner had the obligation to return the deposits to
them upon demand.76 Failing to do so makes petitioner liable to pay respondents moral and
exemplary damages, as well as attorney’s fees.77

Our Ruling

The Petition is bereft of merit.

At the outset, the relevant issues in this case are (1) whether petitioner breached its contract
with respondents, and (2) if so, whether it is liable for damages. The issue of whether
petitioner’s employees were negligent in allowing the withdrawal of Liu Chiu Fang’s dollar
deposits has no bearing in the resolution of this case. Thus, we find no need to discuss the
same.

The "Hold Out" clause does not apply

to the instant case.

Petitioner claims that it did not breach its contract with respondents because it has a valid
reason for issuing the "Hold Out" order. Petitioner anchors its right to withhold respondents’
deposits on the Application and Agreement for Deposit Account, which reads:

Authority to Withhold, Sell and/or Set Off:

The Bank is hereby authorized to withhold as security for any and all obligations with the Bank,
all monies, properties or securities of the Depositor now in or which may hereafter come into the
possession or under the control of the Bank, whether left with the Bank for safekeeping or
otherwise, or coming into the hands of the Bank in any way, for so much thereof as will be
sufficient to pay any or all obligations incurred by Depositor under the Account or by reason of
any other transactions between the same parties now existing or hereafter contracted, to sell in
any public or private sale any of such properties or securities of Depositor, and to apply the
proceeds to the payment of any Depositor’s obligations heretofore mentioned.

xxxx

JOINT ACCOUNT

xxxx

The Bank may, at any time in its discretion and with or without notice to all of the Depositors,
assert a lien on any balance of the Account and apply all or any part thereof against any
indebtedness, matured or unmatured, that may then be owing to the Bank by any or all of the
Depositors. It is understood that if said indebtedness is only owing from any of the Depositors,
then this provision constitutes the consent by all of the depositors to have the Account answer
for the said indebtedness to the extent of the equal share of the debtor in the amount credited to
the Account.78

Petitioner’s reliance on the "Hold Out" clause in the Application and Agreement for Deposit
Account is misplaced.

The "Hold Out" clause applies only if there is a valid and existing obligation arising from any of
the sources of obligation enumerated in Article 115779 of the Civil Code, to wit: law, contracts,
quasi-contracts, delict, and quasi-delict. In this case, petitioner failed to show that respondents
have an obligation to it under any law, contract, quasi-contract, delict, or quasi-delict. And
although a criminal case was filed by petitioner against respondent Rosales, this is not enough
reason for petitioner to issue a "Hold Out" order as the case is still pending and no final
judgment of conviction has been rendered against respondent Rosales. In fact, it is significant to
note that at the time petitioner issued the "Hold Out" order, the criminal complaint had not yet
been filed. Thus, considering that respondent Rosales is not liable under any of the five sources
of obligation, there was no legal basis for petitioner to issue the "Hold Out" order. Accordingly,
we agree with the findings of the RTC and the CA that the "Hold Out" clause does not apply in
the instant case.

In view of the foregoing, we find that petitioner is guilty of breach of contract when it unjustifiably
refused to release respondents’ deposit despite demand. Having breached its contract with
respondents, petitioner is liable for damages.
Respondents are entitled to moral and
exemplary damages and attorney’s fees.1âwphi1

In cases of breach of contract, moral damages may be recovered only if the defendant acted
fraudulently or in bad faith,80 or is "guilty of gross negligence amounting to bad faith, or in
wanton disregard of his contractual obligations."81

In this case, a review of the circumstances surrounding the issuance of the "Hold Out" order
reveals that petitioner issued the "Hold Out" order in bad faith. First of all, the order was issued
without any legal basis. Second, petitioner did not inform respondents of the reason for the
"Hold Out."82 Third, the order was issued prior to the filing of the criminal complaint. Records
show that the "Hold Out" order was issued on July 31, 2003,83 while the criminal complaint was
filed only on September 3, 2003.84 All these taken together lead us to conclude that petitioner
acted in bad faith when it breached its contract with respondents. As we see it then,
respondents are entitled to moral damages.

As to the award of exemplary damages, Article 222985 of the Civil Code provides that exemplary
damages may be imposed "by way of example or correction for the public good, in addition to
the moral, temperate, liquidated or compensatory damages." They are awarded only if the guilty
party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.86

In this case, we find that petitioner indeed acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner when it refused to release the deposits of respondents without any legal
basis. We need not belabor the fact that the banking industry is impressed with public
interest.87 As such, "the highest degree of diligence is expected, and high standards of integrity
and performance are even required of it."88 It must therefore "treat the accounts of its depositors
with meticulous care and always to have in mind the fiduciary nature of its relationship with
them."89 For failing to do this, an award of exemplary damages is justified to set an example.

The award of attorney's fees is likewise proper pursuant to paragraph 1, Article 220890 of the
Civil Code.

In closing, it must be stressed that while we recognize that petitioner has the right to protect
itself from fraud or suspicions of fraud, the exercise of his right should be done within the
bounds of the law and in accordance with due process, and not in bad faith or in a wanton
disregard of its contractual obligation to respondents.

WHEREFORE, the Petition is hereby DENIED. The assailed April 2, 2008 Decision and the May
30, 2008 Resolution of the Court of Appeals in CA-G.R. CV No. 89086 are hereby AFFIRMED.

SO ORDERED.
 [G.R. NO. 177056 : September 18, 2009]

THE OFFICE OF THE SOLICITOR GENERAL, Petitioner, v. AYALA LAND INCORPORATED,

ROBINSON'S LAND CORPORATION, SHANGRI-LA PLAZA CORPORATION and SM
PRIME HOLDINGS, INC., Respondents.

DECISION

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari,1 under Rule 45 of the Revised Rules of
Court, filed by petitioner Office of the Solicitor General (OSG), seeking the reversal and setting
aside of the Decision2 dated 25 January 2007 of the Court of Appeals in CA-G.R. CV No.
76298, which affirmed in toto the Joint Decision3 dated 29 May 2002 of the Regional Trial Court
(RTC) of Makati City, Branch 138, in Civil Cases No. 00-1208 and No. 00-1210; and (2) the
Resolution4 dated 14 March 2007 of the appellate court in the same case which denied the
Motion for Reconsideration of the OSG. The RTC adjudged that respondents Ayala Land
Incorporated (Ayala Land), Robinsons Land Corporation (Robinsons), Shangri-la Plaza
Corporation (Shangri-la), and SM Prime Holdings, Inc. (SM Prime) could not be obliged to
provide free parking spaces in their malls to their patrons and the general public.

Respondents Ayala Land, Robinsons, and Shangri-la maintain and operate shopping malls in
various locations in Metro Manila. Respondent SM Prime constructs, operates, and leases out
commercial buildings and other structures, among which, are SM City, Manila; SM Centerpoint,
Sta. Mesa, Manila; SM City, North Avenue, Quezon City; and SM Southmall, Las Piñas.

The shopping malls operated or leased out by respondents have parking facilities for all kinds of
motor vehicles, either by way of parking spaces inside the mall buildings or in separate buildings
and/or adjacent lots that are solely devoted for use as parking spaces. Respondents Ayala
Land, Robinsons, and SM Prime spent for the construction of their own parking facilities.
Respondent Shangri-la is renting its parking facilities, consisting of land and building specifically
used as parking spaces, which were constructed for the lessor's account.

Respondents expend for the maintenance and administration of their respective parking
facilities. They provide security personnel to protect the vehicles parked in their parking facilities
and maintain order within the area. In turn, they collect the following parking fees from the
persons making use of their parking facilities, regardless of whether said persons are mall
patrons or not:

Respondent Parking Fees

Ayala Land On weekdays, P25.00 for the first four hours
and P10.00 for every succeeding hour; on
weekends, flat rate of P25.00 per day
Robinsons P20.00 for the first three hours and P10.00 for every
succeeding hour
Shangri-la Flat rate of P30.00 per day
SM Prime P10.00 to P20.00 (depending on whether the
parking space is outdoors or indoors) for the first
three hours and 59 minutes, and P10.00 for every
succeeding hour or fraction thereof

The parking tickets or cards issued by respondents to vehicle owners contain the stipulation that
respondents shall not be responsible for any loss or damage to the vehicles parked in
respondents' parking facilities.

In 1999, the Senate Committees on Trade and Commerce and on Justice and Human Rights
conducted a joint investigation for the following purposes: (1) to inquire into the legality of the
prevalent practice of shopping malls of charging parking fees; (2) assuming arguendo that the
collection of parking fees was legally authorized, to find out the basis and reasonableness of the
parking rates charged by shopping malls; and (3) to determine the legality of the policy of
shopping malls of denying liability in cases of theft, robbery, or carnapping, by invoking the
waiver clause at the back of the parking tickets. Said Senate Committees invited the top
executives of respondents, who operate the major malls in the country; the officials from the
Department of Trade and Industry (DTI), Department of Public Works and Highways (DPWH),
Metro Manila Development Authority (MMDA), and other local government officials; and the
Philippine Motorists Association (PMA) as representative of the consumers' group.

After three public hearings held on 30 September, 3 November, and 1 December 1999, the
afore-mentioned Senate Committees jointly issued Senate Committee Report No. 2255 on 2
May 2000, in which they concluded:

In view of the foregoing, the Committees find that the collection of parking fees by shopping
malls is contrary to the National Building Code and is therefor [sic] illegal. While it is true that the
Code merely requires malls to provide parking spaces, without specifying whether it is free or
not, both Committees believe that the reasonable and logical interpretation of the Code is that
the parking spaces are for free. This interpretation is not only reasonable and logical but finds
support in the actual practice in other countries like the United States of America where parking
spaces owned and operated by mall owners are free of charge.

Figuratively speaking, the Code has "expropriated" the land for parking - something similar to
the subdivision law which require developers to devote so much of the land area for parks.

Moreover, Article II of R.A. No. 9734 (Consumer Act of the Philippines) provides that "it is the
policy of the State to protect the interest of the consumers, promote the general welfare and
establish standards of conduct for business and industry." Obviously, a contrary interpretation
(i.e., justifying the collection of parking fees) would be going against the declared policy of R.A.
7394.

Section 201 of the National Building Code gives the responsibility for the administration and
enforcement of the provisions of the Code, including the imposition of penalties for
administrative violations thereof to the Secretary of Public Works. This set up, however, is not
being carried out in reality.

In the position paper submitted by the Metropolitan Manila Development Authority (MMDA), its
chairman, Jejomar C. Binay, accurately pointed out that the Secretary of the DPWH is
responsible for the implementation/enforcement of the National Building Code. After the
enactment of the Local Government Code of 1991, the local government units (LGU's) were
tasked to discharge the regulatory powers of the DPWH. Hence, in the local level, the Building
Officials enforce all rules/ regulations formulated by the DPWH relative to all building plans,
specifications and designs including parking space requirements. There is, however, no single
national department or agency directly tasked to supervise the enforcement of the provisions of
the Code on parking, notwithstanding the national character of the law.6

Senate Committee Report No. 225, thus, contained the following recommendations:

In light of the foregoing, the Committees on Trade and Commerce and Justice and Human
Rights hereby recommend the following:

1. The Office of the Solicitor General should institute the necessary action to enjoin the
collection of parking fees as well as to enforce the penal sanction provisions of the National
Building Code. The Office of the Solicitor General should likewise study how refund can be
exacted from mall owners who continue to collect parking fees.

2. The Department of Trade and Industry pursuant to the provisions of R.A. No. 7394, otherwise
known as the Consumer Act of the Philippines should enforce the provisions of the Code
relative to parking. Towards this end, the DTI should formulate the necessary implementing
rules and regulations on parking in shopping malls, with prior consultations with the local
government units where these are located. Furthermore, the DTI, in coordination with the
DPWH, should be empowered to regulate and supervise the construction and maintenance of
parking establishments.

3. Finally, Congress should amend and update the National Building Code to expressly prohibit
shopping malls from collecting parking fees by at the same time, prohibit them from invoking the
waiver of liability.7

Respondent SM Prime thereafter received information that, pursuant to Senate Committee

Report No. 225, the DPWH Secretary and the local building officials of Manila, Quezon City, and
Las Piñas intended to institute, through the OSG, an action to enjoin respondent SM Prime
and similar establishments from collecting parking fees, and to impose upon said
establishments penal sanctions under Presidential Decree No. 1096, otherwise known as the
National Building Code of the Philippines (National Building Code), and its Implementing Rules
and Regulations (IRR). With the threatened action against it, respondent SM Prime filed, on 3
October 2000, a Petition for Declaratory Relief8 under Rule 63 of the Revised Rules of Court,
against the DPWH Secretary and local building officials of Manila, Quezon City, and Las
Piñas. Said Petition was docketed as Civil Case No. 00-1208 and assigned to the RTC of
Makati City, Branch 138, presided over by Judge Sixto Marella, Jr. (Judge Marella). In its
Petition, respondent SM Prime prayed for judgment:

a) Declaring Rule XIX of the Implementing Rules and Regulations of the National Building Code
as ultra vires, hence, unconstitutional and void;

b) Declaring [herein respondent SM Prime]'s clear legal right to lease parking spaces
appurtenant to its department stores, malls, shopping centers and other commercial
establishments; andcralawlibrary
c) Declaring the National Building Code of the Philippines Implementing Rules and Regulations
as ineffective, not having been published once a week for three (3) consecutive weeks in a
newspaper of general circulation, as prescribed by Section 211 of Presidential Decree No.
1096.

[Respondent SM Prime] further prays for such other reliefs as may be deemed just and
equitable under the premises.9

The very next day, 4 October 2000, the OSG filed a Petition for Declaratory Relief and
Injunction (with Prayer for Temporary Restraining Order and Writ of Preliminary
Injunction)10 against respondents. This Petition was docketed as Civil Case No. 00-1210 and
raffled to the RTC of Makati, Branch 135, presided over by Judge Francisco B. Ibay (Judge
Ibay). Petitioner prayed that the RTC:

1. After summary hearing, a temporary restraining order and a writ of preliminary injunction be
issued restraining respondents from collecting parking fees from their customers;
andcralawlibrary

2. After hearing, judgment be rendered declaring that the practice of respondents in charging
parking fees is violative of the National Building Code and its Implementing Rules and
Regulations and is therefore invalid, and making permanent any injunctive writ issued in this
case.

Other reliefs just and equitable under the premises are likewise prayed for.11

On 23 October 2000, Judge Ibay of the RTC of Makati City, Branch 135, issued an Order
consolidating Civil Case No. 00-1210 with Civil Case No. 00-1208 pending before Judge Marella
of RTC of Makati, Branch 138.

As a result of the pre-trial conference held on the morning of 8 August 2001, the RTC issued a
Pre-Trial Order12 of even date which limited the issues to be resolved in Civil Cases No. 00-
1208 and No. 00-1210 to the following:

1. Capacity of the plaintiff [OSG] in Civil Case No. 00-1210 to institute the present proceedings
and relative thereto whether the controversy in the collection of parking fees by mall owners is a
matter of public welfare.

2. Whether declaratory relief is proper.

3. Whether respondent Ayala Land, Robinsons, Shangri-La and SM Prime are obligated to
provide parking spaces in their malls for the use of their patrons or the public in general, free of
charge.

4. Entitlement of the parties of [sic] award of damages.13

On 29 May 2002, the RTC rendered its Joint Decision in Civil Cases No. 00-1208 and No. 00-
1210.
The RTC resolved the first two issues affirmatively. It ruled that the OSG can initiate Civil Case
No. 00-1210 under Presidential Decree No. 478 and the Administrative Code of 1987.14 It also
found that all the requisites for an action for declaratory relief were present, to wit:

The requisites for an action for declaratory relief are: (a) there is a justiciable controversy; (b)
the controversy is between persons whose interests are adverse; (c) the party seeking the relief
has a legal interest in the controversy; and (d) the issue involved is ripe for judicial
determination.

SM, the petitioner in Civil Case No. 001-1208 [sic] is a mall operator who stands to be affected
directly by the position taken by the government officials sued namely the Secretary of Public
Highways and the Building Officials of the local government units where it operates shopping
malls. The OSG on the other hand acts on a matter of public interest and has taken a position
adverse to that of the mall owners whom it sued. The construction of new and bigger malls has
been announced, a matter which the Court can take judicial notice and the unsettled issue of
whether mall operators should provide parking facilities, free of charge needs to be resolved.15

As to the third and most contentious issue, the RTC pronounced that:

The Building Code, which is the enabling law and the Implementing Rules and Regulations do
not impose that parking spaces shall be provided by the mall owners free of charge. Absent
such directive[,] Ayala Land, Robinsons, Shangri-la and SM [Prime] are under no obligation to
provide them for free. Article 1158 of the Civil Code is clear:

"Obligations derived from law are not presumed. Only those expressly determined in this Code
or in special laws are demandable and shall be regulated by the precepts of the law which
establishes them; and as to what has not been foreseen, by the provisions of this Book
(1090).["]

xxx

The provision on ratios of parking slots to several variables, like shopping floor area or customer
area found in Rule XIX of the Implementing Rules and Regulations cannot be construed as a
directive to provide free parking spaces, because the enabling law, the Building Code does not
so provide. x x x.

To compel Ayala Land, Robinsons, Shangri-La and SM [Prime] to provide parking spaces for
free can be considered as an unlawful taking of property right without just compensation.

Parking spaces in shopping malls are privately owned and for their use, the mall operators
collect fees. The legal relationship could be either lease or deposit. In either case[,] the mall
owners have the right to collect money which translates into income. Should parking spaces be
made free, this right of mall owners shall be gone. This, without just compensation. Further, loss
of effective control over their property will ensue which is frowned upon by law.

The presence of parking spaces can be viewed in another light. They can be looked at as
necessary facilities to entice the public to increase patronage of their malls because without
parking spaces, going to their malls will be inconvenient. These are[,] however[,] business
considerations which mall operators will have to decide for themselves. They are not sufficient
to justify a legal conclusion, as the OSG would like the Court to adopt that it is the obligation of
the mall owners to provide parking spaces for free.16

The RTC then held that there was no sufficient evidence to justify any award for damages.

The RTC finally decreed in its 29 May 2002 Joint Decision in Civil Cases No. 00-1208 and No.
00-1210 that:

FOR THE REASONS GIVEN, the Court declares that Ayala Land[,] Inc., Robinsons Land
Corporation, Shangri-la Plaza Corporation and SM Prime Holdings[,] Inc. are not obligated to
provide parking spaces in their malls for the use of their patrons or public in general, free of
charge.

All counterclaims in Civil Case No. 00-1210 are dismissed.

No pronouncement as to costs.17

CA-G.R. CV No. 76298 involved the separate appeals of the OSG18 and respondent SM
Prime19 filed with the Court of Appeals. The sole assignment of error of the OSG in its
Appellant's Brief was:

THE TRIAL COURT ERRED IN HOLDING THAT THE NATIONAL BUILDING CODE DID NOT
INTEND MALL PARKING SPACES TO BE FREE OF CHARGE[;]20

while the four errors assigned by respondent SM Prime in its Appellant's Brief were:

THE TRIAL COURT ERRED IN FAILING TO DECLARE RULE XIX OF THE IMPLEMENTING
RULES AS HAVING BEEN ENACTED ULTRA VIRES, HENCE, UNCONSTITUTIONAL AND
VOID.

II

THE TRIAL COURT ERRED IN FAILING TO DECLARE THE IMPLEMENTING RULES

INEFFECTIVE FOR NOT HAVING BEEN PUBLISHED AS REQUIRED BY LAW.

III

THE TRIAL COURT ERRED IN FAILING TO DISMISS THE OSG'S PETITION FOR
DECLARATORY RELIEF AND INJUNCTION FOR FAILURE TO EXHAUST ADMINISTRATIVE
REMEDIES.

IV

THE TRIAL COURT ERRED IN FAILING TO DECLARE THAT THE OSG HAS NO LEGAL
CAPACITY TO SUE AND/OR THAT IT IS NOT A REAL PARTY-IN-INTEREST IN THE
INSTANT CASE.21
Respondent Robinsons filed a Motion to Dismiss Appeal of the OSG on the ground that the lone
issue raised therein involved a pure question of law, not reviewable by the Court of Appeals.

The Court of Appeals promulgated its Decision in CA-G.R. CV No. 76298 on 25 January 2007.
The appellate court agreed with respondent Robinsons that the appeal of the OSG should suffer
the fate of dismissal, since "the issue on whether or not the National Building Code and its
implementing rules require shopping mall operators to provide parking facilities to the public for
free" was evidently a question of law. Even so, since CA-G.R. CV No. 76298 also included the
appeal of respondent SM Prime, which raised issues worthy of consideration, and in order to
satisfy the demands of substantial justice, the Court of Appeals proceeded to rule on the merits
of the case.

In its Decision, the Court of Appeals affirmed the capacity of the OSG to initiate Civil Case No.
00-1210 before the RTC as the legal representative of the government,22 and as the one
deputized by the Senate of the Republic of the Philippines through Senate Committee Report
No. 225.

The Court of Appeals rejected the contention of respondent SM Prime that the OSG failed to
exhaust administrative remedies. The appellate court explained that an administrative review is
not a condition precedent to judicial relief where the question in dispute is purely a legal one,
and nothing of an administrative nature is to be or can be done.

The Court of Appeals likewise refused to rule on the validity of the IRR of the National Building
Code, as such issue was not among those the parties had agreed to be resolved by the RTC
during the pre-trial conference for Civil Cases No. 00-1208 and No. 00-1210. Issues cannot be
raised for the first time on appeal. Furthermore, the appellate court found that the controversy
could be settled on other grounds, without touching on the issue of the validity of the IRR. It
referred to the settled rule that courts should refrain from passing upon the constitutionality of a
law or implementing rules, because of the principle that bars judicial inquiry into a constitutional
question, unless the resolution thereof is indispensable to the determination of the case.

Lastly, the Court of Appeals declared that Section 803 of the National Building Code and Rule
XIX of the IRR were clear and needed no further construction. Said provisions were only
intended to control the occupancy or congestion of areas and structures. In the absence of any
express and clear provision of law, respondents could not be obliged and expected to provide
parking slots free of charge.

The fallo of the 25 January 2007 Decision of the Court of Appeals reads:

WHEREFORE, premises considered, the instant appeals are DENIED. Accordingly, appealed
Decision is hereby AFFIRMED in toto.23

In its Resolution issued on 14 March 2007, the Court of Appeals denied the Motion for
Reconsideration of the OSG, finding that the grounds relied upon by the latter had already been
carefully considered, evaluated, and passed upon by the appellate court, and there was no
strong and cogent reason to modify much less reverse the assailed judgment.

The OSG now comes before this Court, via the instant Petition for Review, with a single
assignment of error:
THE COURT OF APPEALS SERIOUSLY ERRED IN AFFIRMING THE RULING OF THE
LOWER COURT THAT RESPONDENTS ARE NOT OBLIGED TO PROVIDE FREE PARKING
SPACES TO THEIR CUSTOMERS OR THE PUBLIC.24

The OSG argues that respondents are mandated to provide free parking by Section 803 of the
National Building Code and Rule XIX of the IRR.

According to Section 803 of the National Building Code:

SECTION 803. Percentage of Site Occupancy

(a) Maximum site occupancy shall be governed by the use, type of construction, and height of
the building and the use, area, nature, and location of the site; and subject to the provisions of
the local zoning requirements and in accordance with the rules and regulations promulgated by
the Secretary.

In connection therewith, Rule XIX of the old IRR,25 provides:

RULE XIX - PARKING AND LOADING SPACE REQUIREMENTS

Pursuant to Section 803 of the National Building Code (PD 1096) providing for maximum site
occupancy, the following provisions on parking and loading space requirements shall be
observed:

1. The parking space ratings listed below are minimum off-street requirements for specific
uses/occupancies for buildings/structures:

1.1 The size of an average automobile parking slot shall be computed as 2.4 meters by 5.00
meters for perpendicular or diagonal parking, 2.00 meters by 6.00 meters for parallel parking. A
truck or bus parking/loading slot shall be computed at a minimum of 3.60 meters by 12.00
meters. The parking slot shall be drawn to scale and the total number of which shall be
indicated on the plans and specified whether or not parking accommodations, are attendant-
managed. (See Section 2 for computation of parking requirements).

xxx

1.7 Neighborhood shopping center - 1 slot/100 sq. m. of shopping floor area

The OSG avers that the aforequoted provisions should be read together with Section 102 of the
National Building Code, which declares:

SECTION 102. Declaration of Policy

It is hereby declared to be the policy of the State to safeguard life, health, property, and public
welfare, consistent with the principles of sound environmental management and control; and to
this end, make it the purpose of this Code to provide for all buildings and structures, a
framework of minimum standards and requirements to regulate and control their location, site,
design, quality of materials, construction, use, occupancy, and maintenance.
The requirement of free-of-charge parking, the OSG argues, greatly contributes to the aim of
safeguarding "life, health, property, and public welfare, consistent with the principles of sound
environmental management and control." Adequate parking spaces would contribute greatly to
alleviating traffic congestion when complemented by quick and easy access thereto because of
free-charge parking. Moreover, the power to regulate and control the use, occupancy, and
maintenance of buildings and structures carries with it the power to impose fees and,
conversely, to control - - partially or, as in this case, absolutely - - the imposition of such fees.

The Court finds no merit in the present Petition.

The explicit directive of the afore-quoted statutory and regulatory provisions, garnered from a
plain reading thereof, is that respondents, as operators/lessors of neighborhood shopping
centers, should provide parking and loading spaces, in accordance with the minimum ratio of
one slot per 100 square meters of shopping floor area. There is nothing therein pertaining to the
collection (or non-collection) of parking fees by respondents. In fact, the term "parking fees"
cannot even be found at all in the entire National Building Code and its IRR.

Statutory construction has it that if a statute is clear and unequivocal, it must be given its literal
meaning and applied without any attempt at interpretation.26 Since Section 803 of the National
Building Code and Rule XIX of its IRR do not mention parking fees, then simply, said provisions
do not regulate the collection of the same. The RTC and the Court of Appeals correctly applied
Article 1158 of the New Civil Code, which states:

Art. 1158. Obligations derived from law are not presumed. Only those expressly determined in
this Code or in special laws are demandable, and shall be regulated by the precepts of the law
which establishes them; and as to what has not been foreseen, by the provisions of this Book.
(Emphasis ours.)

Hence, in order to bring the matter of parking fees within the ambit of the National Building Code
and its IRR, the OSG had to resort to specious and feeble argumentation, in which the Court
cannot concur.

The OSG cannot rely on Section 102 of the National Building Code to expand the coverage of
Section 803 of the same Code and Rule XIX of the IRR, so as to include the regulation of
parking fees. The OSG limits its citation to the first part of Section 102 of the National Building
Code declaring the policy of the State "to safeguard life, health, property, and public welfare,
consistent with the principles of sound environmental management and control"; but totally
ignores the second part of said provision, which reads, "and to this end, make it the purpose of
this Code to provide for all buildings and structures, a framework of minimum standards and
requirements to regulate and control their location, site, design, quality of materials,
construction, use, occupancy, and maintenance." While the first part of Section 102 of the
National Building Code lays down the State policy, it is the second part thereof that explains
how said policy shall be carried out in the Code. Section 102 of the National Building Code is
not an all-encompassing grant of regulatory power to the DPWH Secretary and local building
officials in the name of life, health, property, and public welfare. On the contrary, it limits the
regulatory power of said officials to ensuring that the minimum standards and requirements for
all buildings and structures, as set forth in the National Building Code, are complied with.

Consequently, the OSG cannot claim that in addition to fixing the minimum requirements for
parking spaces for buildings, Rule XIX of the IRR also mandates that such parking spaces be
provided by building owners free of charge. If Rule XIX is not covered by the enabling law, then
it cannot be added to or included in the implementing rules. The rule-making power of
administrative agencies must be confined to details for regulating the mode or proceedings to
carry into effect the law as it has been enacted, and it cannot be extended to amend or expand
the statutory requirements or to embrace matters not covered by the statute. Administrative
regulations must always be in harmony with the provisions of the law because any resulting
discrepancy between the two will always be resolved in favor of the basic law.27

From the RTC all the way to this Court, the OSG repeatedly referred to Republic v.
Gonzales28 and City of Ozamis v. Lumapas29 to support its position that the State has the power
to regulate parking spaces to promote the health, safety, and welfare of the public; and it is by
virtue of said power that respondents may be required to provide free parking facilities. The
OSG, though, failed to consider the substantial differences in the factual and legal backgrounds
of these two cases from those of the Petition at bar.

In Republic, the Municipality of Malabon sought to eject the occupants of two parcels of land of
the public domain to give way to a road-widening project. It was in this context that the Court
pronounced:

Indiscriminate parking along F. Sevilla Boulevard and other main thoroughfares was prevalent;
this, of course, caused the build up of traffic in the surrounding area to the great discomfort and
inconvenience of the public who use the streets. Traffic congestion constitutes a threat to the
health, welfare, safety and convenience of the people and it can only be substantially relieved
by widening streets and providing adequate parking areas.

The Court, in City of Ozamis, declared that the City had been clothed with full power to control
and regulate its streets for the purpose of promoting public health, safety and welfare. The City
can regulate the time, place, and manner of parking in the streets and public places; and charge
minimal fees for the street parking to cover the expenses for supervision, inspection and control,
to ensure the smooth flow of traffic in the environs of the public market, and for the safety and
convenience of the public.

Republic and City of Ozamis involved parking in the local streets; in contrast, the present case
deals with privately owned parking facilities available for use by the general public. In Republic
and City of Ozamis, the concerned local governments regulated parking pursuant to their power
to control and regulate their streets; in the instant case, the DPWH Secretary and local building
officials regulate parking pursuant to their authority to ensure compliance with the minimum
standards and requirements under the National Building Code and its IRR. With the difference
in subject matters and the bases for the regulatory powers being invoked, Republic and City of
Ozamis do not constitute precedents for this case.

Indeed, Republic and City of Ozamis both contain pronouncements that weaken the position of
the OSG in the case at bar. In Republic, the Court, instead of placing the burden on private
persons to provide parking facilities to the general public, mentioned the trend in other
jurisdictions wherein the municipal governments themselves took the initiative to make more
parking spaces available so as to alleviate the traffic problems, thus:

Under the Land Transportation and Traffic Code, parking in designated areas along public
streets or highways is allowed which clearly indicates that provision for parking spaces serves a
useful purpose. In other jurisdictions where traffic is at least as voluminous as here, the
provision by municipal governments of parking space is not limited to parking along public
streets or highways. There has been a marked trend to build off-street parking facilities with the
view to removing parked cars from the streets. While the provision of off-street parking facilities
or carparks has been commonly undertaken by private enterprise, municipal governments have
been constrained to put up carparks in response to public necessity where private enterprise
had failed to keep up with the growing public demand. American courts have upheld the right of
municipal governments to construct off-street parking facilities as clearly redounding to the
public benefit.30

In City of Ozamis, the Court authorized the collection by the City of minimal fees for the parking
of vehicles along the streets: so why then should the Court now preclude respondents from
collecting from the public a fee for the use of the mall parking facilities? Undoubtedly,
respondents also incur expenses in the maintenance and operation of the mall parking facilities,
such as electric consumption, compensation for parking attendants and security, and upkeep of
the physical structures.

It is not sufficient for the OSG to claim that "the power to regulate and control the use,
occupancy, and maintenance of buildings and structures carries with it the power to impose fees
and, conversely, to control, partially or, as in this case, absolutely, the imposition of such fees."
Firstly, the fees within the power of regulatory agencies to impose are regulatory fees. It has
been settled law in this jurisdiction that this broad and all-compassing governmental
competence to restrict rights of liberty and property carries with it the undeniable power to
collect a regulatory fee. It looks to the enactment of specific measures that govern the relations
not only as between individuals but also as between private parties and the political
society.31 True, if the regulatory agencies have the power to impose regulatory fees, then
conversely, they also have the power to remove the same. Even so, it is worthy to note that the
present case does not involve the imposition by the DPWH Secretary and local building officials
of regulatory fees upon respondents; but the collection by respondents of parking fees from
persons who use the mall parking facilities. Secondly, assuming arguendo that the DPWH
Secretary and local building officials do have regulatory powers over the collection of parking
fees for the use of privately owned parking facilities, they cannot allow or prohibit such collection
arbitrarily or whimsically. Whether allowing or prohibiting the collection of such parking fees, the
action of the DPWH Secretary and local building officials must pass the test of classic
reasonableness and propriety of the measures or means in the promotion of the ends sought to
be accomplished.32

Keeping in mind the aforementioned test of reasonableness and propriety of measures or

means, the Court notes that Section 803 of the National Building Code falls under Chapter 8 on
Light and Ventilation. Evidently, the Code deems it necessary to regulate site occupancy to
ensure that there is proper lighting and ventilation in every building. Pursuant thereto, Rule XIX
of the IRR requires that a building, depending on its specific use and/or floor area, should
provide a minimum number of parking spaces. The Court, however, fails to see the connection
between regulating site occupancy to ensure proper light and ventilation in every building vis -
à -vis regulating the collection by building owners of fees for the use of their parking spaces.
Contrary to the averment of the OSG, the former does not necessarily include or imply the latter.
It totally escapes this Court how lighting and ventilation conditions at the malls could be affected
by the fact that parking facilities thereat are free or paid for.

The OSG attempts to provide the missing link by arguing that:

Under Section 803 of the National Building Code, complimentary parking spaces are required to
enhance light and ventilation, that is, to avoid traffic congestion in areas surrounding the
building, which certainly affects the ventilation within the building itself, which otherwise, the
annexed parking spaces would have served. Free-of-charge parking avoids traffic congestion by
ensuring quick and easy access of legitimate shoppers to off-street parking spaces annexed to
the malls, and thereby removing the vehicles of these legitimate shoppers off the busy streets
near the commercial establishments.33

The Court is unconvinced. The National Building Code regulates buildings, by setting the
minimum specifications and requirements for the same. It does not concern itself with traffic
congestion in areas surrounding the building. It is already a stretch to say that the National
Building Code and its IRR also intend to solve the problem of traffic congestion around the
buildings so as to ensure that the said buildings shall have adequate lighting and ventilation.
Moreover, the Court cannot simply assume, as the OSG has apparently done, that the traffic
congestion in areas around the malls is due to the fact that respondents charge for their parking
facilities, thus, forcing vehicle owners to just park in the streets. The Court notes that despite the
fees charged by respondents, vehicle owners still use the mall parking facilities, which are even
fully occupied on some days. Vehicle owners may be parking in the streets only because there
are not enough parking spaces in the malls, and not because they are deterred by the parking
fees charged by respondents. Free parking spaces at the malls may even have the opposite
effect from what the OSG envisioned: more people may be encouraged by the free parking to
bring their own vehicles, instead of taking public transport, to the malls; as a result, the parking
facilities would become full sooner, leaving more vehicles without parking spaces in the malls
and parked in the streets instead, causing even more traffic congestion.

Without using the term outright, the OSG is actually invoking police power to justify the
regulation by the State, through the DPWH Secretary and local building officials, of privately
owned parking facilities, including the collection by the owners/operators of such facilities of
parking fees from the public for the use thereof. The Court finds, however, that in totally
prohibiting respondents from collecting parking fees from the public for the use of the mall
parking facilities, the State would be acting beyond the bounds of police power.

Police power is the power of promoting the public welfare by restraining and regulating the use
of liberty and property. It is usually exerted in order to merely regulate the use and enjoyment of
the property of the owner. The power to regulate, however, does not include the power to
prohibit. A fortiori, the power to regulate does not include the power to confiscate. Police power
does not involve the taking or confiscation of property, with the exception of a few cases where
there is a necessity to confiscate private property in order to destroy it for the purpose of
protecting peace and order and of promoting the general welfare; for instance, the confiscation
of an illegally possessed article, such as opium and firearms.34

When there is a taking or confiscation of private property for public use, the State is no longer
exercising police power, but another of its inherent powers, namely, eminent domain. Eminent
domain enables the State to forcibly acquire private lands intended for public use upon payment
of just compensation to the owner.35

Normally, of course, the power of eminent domain results in the taking or appropriation of title
to, and possession of, the expropriated property; but no cogent reason appears why the said
power may not be availed of only to impose a burden upon the owner of condemned property,
without loss of title and possession.36 It is a settled rule that neither acquisition of title nor total
destruction of value is essential to taking. It is usually in cases where title remains with the
private owner that inquiry should be made to determine whether the impairment of a property is
merely regulated or amounts to a compensable taking. A regulation that deprives any person of
the profitable use of his property constitutes a taking and entitles him to compensation, unless
the invasion of rights is so slight as to permit the regulation to be justified under the police
power. Similarly, a police regulation that unreasonably restricts the right to use business
property for business purposes amounts to a taking of private property, and the owner may
recover therefor.37 ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Although in the present case, title to and/or possession of the parking facilities remain/s with
respondents, the prohibition against their collection of parking fees from the public, for the use
of said facilities, is already tantamount to a taking or confiscation of their properties. The State is
not only requiring that respondents devote a portion of the latter's properties for use as parking
spaces, but is also mandating that they give the public access to said parking spaces for free.
Such is already an excessive intrusion into the property rights of respondents. Not only are they
being deprived of the right to use a portion of their properties as they wish, they are further
prohibited from profiting from its use or even just recovering therefrom the expenses for the
maintenance and operation of the required parking facilities.

The ruling of this Court in City Government of Quezon City v. Judge Ericta38 is edifying. Therein,
the City Government of Quezon City passed an ordinance obliging private cemeteries within its
jurisdiction to set aside at least six percent of their total area for charity, that is, for burial
grounds of deceased paupers. According to the Court, the ordinance in question was null and
void, for it authorized the taking of private property without just compensation:

There is no reasonable relation between the setting aside of at least six (6) percent of the total
area of all private cemeteries for charity burial grounds of deceased paupers and the promotion
of' health, morals, good order, safety, or the general welfare of the people. The ordinance is
actually a taking without compensation of a certain area from a private cemetery to benefit
paupers who are charges of the municipal corporation. Instead of' building or maintaining a
public cemetery for this purpose, the city passes the burden to private cemeteries.

'The expropriation without compensation of a portion of private cemeteries is not covered by

Section 12(t) of Republic Act 537, the Revised Charter of Quezon City which empowers the city
council to prohibit the burial of the dead within the center of population of the city and to provide
for their burial in a proper place subject to the provisions of general law regulating burial
grounds and cemeteries. When the Local Government Code, Batas Pambansa Blg. 337
provides in Section 177(q) that a sangguniang panlungsod may "provide for the burial of the
dead in such place and in such manner as prescribed by law or ordinance" it simply authorizes
the city to provide its own city owned land or to buy or expropriate private properties to construct
public cemeteries. This has been the law, and practise in the past. It continues to the present.
Expropriation, however, requires payment of just compensation. The questioned ordinance is
different from laws and regulations requiring owners of subdivisions to set aside certain areas
for streets, parks, playgrounds, and other public facilities from the land they sell to buyers of
subdivision lots. The necessities of public safety, health, and convenience are very clear from
said requirements which are intended to insure the development of communities with salubrious
and wholesome environments. The beneficiaries of the regulation, in turn, are made to pay by
the subdivision developer when individual lots are sold to homeowners.
In conclusion, the total prohibition against the collection by respondents of parking fees from
persons who use the mall parking facilities has no basis in the National Building Code or its IRR.
The State also cannot impose the same prohibition by generally invoking police power, since
said prohibition amounts to a taking of respondents' property without payment of just
compensation.

Given the foregoing, the Court finds no more need to address the issue persistently raised by
respondent SM Prime concerning the unconstitutionality of Rule XIX of the IRR. In addition, the
said issue was not among those that the parties, during the pre-trial conference for Civil Cases
No. 12-08 and No. 00-1210, agreed to submit for resolution of the RTC. It is likewise axiomatic
that the constitutionality of a law, a regulation, an ordinance or an act will not be resolved by
courts if the controversy can be, as in this case it has been, settled on other grounds.39

WHEREFORE, the instant Petition for Review on Certiorari is hereby DENIED. The Decision
dated 25 January 2007 and Resolution dated 14 March 2007 of the Court of Appeals in CA-G.R.
CV No. 76298, affirming in toto the Joint Decision dated 29 May 2002 of the Regional Trial
Court of Makati City, Branch 138, in Civil Cases No. 00-1208 and No. 00-1210 are hereby
AFFIRMED. No costs.

SO ORDERED.

FIRST DIVISION

G.R. No. 146807 - May 9, 2002

PADCOM CONDOMINIUM CORPORATION, Petitioner, vs. ORTIGAS CENTER

ASSOCIATION, INC., Respondent.

DAVIDE, JR., C.J.:

Challenged in this case is the 30 June 2000 decision1 of the Court of Appeals in CA-G.R. CV
No. 60099, reversing and setting aside the 1 September 1997 decision2 of the Regional Trial
Court of Pasig City, Branch 264, in Civil Case No. 63801.3

Petitioner Padcom Condominium Corporation (hereafter PADCOM) owns and manages the
Padilla Office Condominium Building (PADCOM Building) located at Emerald Avenue, Ortigas
Center, Pasig City. The land on which the building stands was originally acquired from the
Ortigas & Company, Limited Partnership (OCLP), by Tierra Development Corporation (TDC)
under a Deed of Sale dated 4 September 1974. Among the terms and conditions in the deed of
sale was the requirement that the transferee and its successor-in-interest must become
members of an association for realty owners and long-term lessees in the area later known as
the Ortigas Center. Subsequently, the said lot, together with improvements thereon, was
conveyed by TDC in favor of PADCOM in a Deed of Transfer dated 25 February 1975. 4

In 1982, respondent Ortigas Center Association, Inc. (hereafter the Association) was organized
to advance the interests and promote the general welfare of the real estate owners and long-
term lessees of lots in the Ortigas Center. It sought the collection of membership dues in the
amount of two thousand seven hundred twenty-four pesos and forty centavos (P2,724.40) per
month from PADCOM. The corporate books showed that PADCOM owed the
Association P639,961.47, representing membership dues, interests and penalty charges from
April 1983 to June 1993.5 The letters exchanged between the parties through the years showed
repeated demands for payment, requests for extensions of payment, and even a settlement
scheme proposed by PADCOM in September 1990.

In view of PADCOM's failure and refusal to pay its arrears in monthly dues, including interests
and penalties thereon, the Association filed a complaint for collection of sum of money before
the trial court below, which was docketed as Civil Case No. 63801. The Association averred that
purchasers of lands within the Ortigas Center complex from OCLP are obligated under their
contracts of sale to become members of the Association. This obligation was allegedly passed
on to PADCOM when it bought the lot from TDC, its predecessor-in-interest.6

In its answer, PADCOM contended that it is a non-stock, non-profit association, and for it to
become a special member of the Association, it should first apply for and be accepted for
membership by the latter's Board of Directors. No automatic membership was apparently
contemplated in the Association's By-laws. PADCOM added that it could not be compelled to
become a member without violating its right to freedom of association. And since it was not a
member of the Association, it was not liable for membership dues, interests and penalties.7

During the trial, the Association presented its accountant as lone witness to prove that
PADCOM was, indeed, one of its members and, as such, did not pay its membership dues.

PADCOM, on the other hand, did not present its evidence; instead it filed a motion to dismiss by
way of demurrer to evidence. It alleged that the facts established by the Association showed no
right to the relief prayed for. It claimed that the provisions of the Association's By-laws and the
Deed of Transfer did not contemplate automatic membership. Rather, the owner or long-term
lessee becomes a member of the Association only after applying with and being accepted by its
Board of Directors. Assuming further that PADCOM was a member of the Association, the latter
failed to show that the collection of monthly dues was a valid corporate act duly authorized by a
proper resolution of the Association's Board of Directors.8

After due consideration of the issues raised in the motion to dismiss, the trial court rendered a
decision dismissing the complaint.9

The Association appealed the case to the Court of Appeals, which docketed the appeal as CA-
G.R. CV No. 60099. In its decision10 of 30 June 2000, the Court of Appeals reversed and set
aside the trial court's dismissal of Civil Case No. 63801, and decreed as follows:

WHEREFORE, the appealed decision dated September 1, 1997

is REVERSED and SET ASIDE and, in lieu thereof, a new one is entered ordering the appellee
(PADCOM) to pay the appellant (the Association) the following:

1) P639,961.47 as and for membership dues in arrears inclusive of earned interests and
penalties; and

2) P25,000.00 as and for attorney's fees.

Costs against the appellees.

SO ORDERED.
The Court of Appeals justified its ruling by declaring that PADCOM automatically became a
member of the Association when the land was sold to TDC. The intent to pass the obligation to
prospective transferees was evident from the annotation of the same clause at the back of the
Transfer Certificate of Title covering the lot. Despite disavowal of membership, PADCOM's
membership in the Association was evident from these facts: (1) PADCOM was included in the
Association's list of bona fide members as of 30 March 1995; (2) Narciso Padilla, PADCOM's
President, was one of the Association's incorporators; and (3) having received the demands for
payment, PADCOM not only acknowledged them, but asked for and was granted repeated
extensions, and even proposed a scheme for the settlement of its obligation. The Court of
Appeals also ruled that PADCOM cannot evade payment of its obligation to the Association
without violating equitable principles underlying quasi-contracts. Being covered by the
Association's avowed purpose to promote the interests and welfare of its members, PADCOM
cannot be allowed to expediently deny and avoid the obligation arising from such membership.

Dissatisfied with the adverse judgment of the Court of Appeals, PADCOM filed the petition for
review in this case. It raises the sole issue of whether it can be compelled to join the association
pursuant to the provision on automatic membership appearing as a condition in the Deed of
Sale of 04 September 1974 and the annotation thereof on Transfer Certificate of Title No.
457308.

PADCOM contends that it cannot be compelled to be a member of the Association solely by

virtue of the "automatic membership" clause that appears on the title of the property and the
Deed of Transfer. In 1975, when it bought the land, the Association was still inexistent.
Therefore, the provision on automatic membership was anticipatory in nature, subject to the
actual formation of the Association and the subsequent formulation of its implementing rules.

PADCOM likewise maintains that the Association's By-laws requires an application for
membership. Since it never sought membership, the Court of Appeals erred in concluding that it
was a member of the Association by implication. Aside from the lack of evidence proving such
membership, the Association has no basis to collect monthly dues since there is no board
resolution defining and prescribing how much should be paid.

For its part, the Association claims that the Deed of Sale between OCLP and TDC clearly
stipulates automatic membership for the owners of lots in the Ortigas Center, including their
successors-in-interest. The filing of applications and acceptance thereof by the Board of
Directors of the Association are, therefore, mere formalities that can be dispensed with or
waived. The provisions of the Association's By-laws cannot in any manner alter or modify the
automatic membership clause imposed on a property owner by virtue of an annotation of
encumbrance on his title.

The Association likewise asserts that membership therein requires the payment of certain
amounts for its operations and activities, as may be authorized by its Board of Directors. The
membership dues are for the common expenses of the homeowners for necessary services.

After a careful examination of the records of this case, the Court sees no reason to disturb the
assailed decision. The petition should be denied.

Section 44 of Presidential Decree No. 152911 mandates that:

SEC. 44. Statutory liens affecting title. - Every registered owner receiving a certificate of title in
pursuance of a decree of registration, and every subsequent purchaser of registered land taking
a certificate of title for value and in good faith, shall hold the same free from all encumbrances
except those noted on said certificate and any of the following encumbrances which may be
subsisting, namely: xxx

Under the Torrens system of registration, claims and liens of whatever character, except those
mentioned by law, existing against the land binds the holder of the title and the whole world.12

It is undisputed that when the land in question was bought by PADCOM's predecessor-in-
interest, TDC, from OCLP, the sale bound TDC to comply with paragraph (G) of the covenants,
conditions and restrictions of the Deed of Sale, which reads as follows:13

G. AUTOMATIC MEMBERSHIP WITH THE ASSOCIATION:

The owner of this lot, its successor-in-interest hereby binds himself to become a member of the
ASSOCIATION which will be formed by and among purchasers, fully paid up Lot BUYERS,
Building Owners and the COMPANY in respect to COMPANY OWNED LOTS.

The OWNER of this lot shall abide by such rules and regulations that shall be laid down by the
ASSOCIATION in the interest of security, maintenance, beautification and general welfare of the
OFFICE BUILDING zone. The ASSOCIATION when organized shall also, among others,
provide for and collect assessments which shall constitute a lien on the property, junior only to
liens of the Government for taxes.

Evidently, it was agreed by the parties that dues shall be collected from an automatic member
and such fees or assessments shall be a lien on the property.

This stipulation was likewise annotated at the back of Transfer Certificate of Title No. 457308
issued to TDC.14 And when the latter sold the lot to PADCOM on 25 February 1975, the Deed of
Transfer expressly stated:15

NOW, THEREFORE, for and in consideration of the foregoing premises, the DEVELOPER, by
these presents, cedes, transfers and conveys unto the CORPORATION the above-described
parcel of land evidenced by Transfer Certificate of Title No. 457308, as well as the Common
and Limited Common Areas of the Condominium project mentioned and described in the Master
Deed with Declaration of Restrictions (Annex "A" hereof), free from all liens and encumbrances,
except those already annotated at the back of said Transfer Certificate of Title No. 457308, xxx

This is so because any lien annotated on previous certificates of title should be incorporated in
or carried over to the new transfer certificates of title. Such lien is inseparable from the property
as it is a right in rem, a burden on the property whoever its owner may be. It subsists
notwithstanding a change in ownership; in short, the personality of the owner is
disregarded.16 As emphasized earlier, the provision on automatic membership was annotated in
the Certificate of Title and made a condition in the Deed of Transfer in favor of PADCOM.
Consequently, it is bound by and must comply with the covenant.

Moreover, Article 1311 of the Civil Code provides that contracts take effect between the parties,
their assigns and heirs. Since PADCOM is the successor-in-interest of TDC, it follows that the
stipulation on automatic membership with the Association is also binding on the former.
We are not persuaded by PADCOM's contention that the By-laws of the Association requires
application for membership and acceptance thereof by the Board of Directors. Section 2 of the
By-laws17 reads:

Section 2. Regular Members. - Upon acceptance by the Board of Directors of Ortigas Center
Association, Inc., all real estate owners, or long-term lessees of lots within the boundaries of the
Association as defined in the Articles of Incorporation become regular members, provided,
however that the long-term lessees of a lot or lots in said area shall be considered as the
regular members in lieu of the owners of the same. Likewise, regular membership in the
Association automatically ceases upon the cessation of a member to be an owner or long-term
lessee of real estate in the area.

A lessee shall be considered a long-term lessee if his lease is in writing and for a period of two
(2) years or more. Membership of a long-term lessee in the Association shall be co-terminus
with his legal possession (or his lease) of the lot/s in the area. Upon the lessee's cessation of
membership in the Association, the owner shall automatically succeed the lessee as member
thereat.

As lot owner, PADCOM is a regular member of the Association. No application for membership
is necessary. If at all, acceptance by the Board of Directors is a ministerial function considering
that PADCOM is deemed to be a regular member upon the acquisition of the lot pursuant to the
automatic membership clause annotated in the Certificate of Title of the property and the Deed
of Transfer.

Neither are we convinced by PADCOM's contention that the automatic membership clause is a
violation of its freedom of association. PADCOM was never forced to join the association. It
could have avoided such membership by not buying the land from TDC. Nobody forced it to buy
the land when it bought the building with the annotation of the condition or lien on the Certificate
of Title thereof and accepted the Deed. PADCOM voluntarily agreed to be bound by and respect
the condition, and thus to join the Association.

In addition, under the principle of estoppel, PADCOM is barred from disclaiming membership in
the Association. In estoppel, a person, who by his act or conduct has induced another to act in a
particular manner, is barred from adopting an inconsistent position, attitude or course of conduct
that thereby causes loss or injury to another.18

We agree with the Court of Appeals' conclusion from the facts or circumstances it enumerated
in its decision and enumerated above that PADCOM is, indeed, a regular member of the
Association. These facts and circumstances are sufficient grounds to apply the doctrine of
estoppel against PADCOM.

Having ruled that PADCOM is a member of the Association, it is obligated to pay its dues
incidental thereto. Article 1159 of the Civil Code mandates:

Art. 1159. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.

Assuming in gratis argumenti that PADCOM is not a member of the Association, it cannot evade
payment without violating the equitable principles underlying quasi-contracts. Article 2142 of the
Civil Code provides:
Art. 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-
contract to the end that no one shall be unjustly enriched or benefited at the expense of another.

Generally, it may be said that a quasi-contract is based on the presumed will or intent of the
obligor dictated by equity and by the principles of absolute justice. Examples of these principles
are: (1) it is presumed that a person agrees to that which will benefit him; (2) nobody wants to
enrich himself unjustly at the expense of another; or (3) one must do unto others what he would
want others to do unto him under the same circumstances.19

As resident and lot owner in the Ortigas area, PADCOM was definitely benefited by the
Association's acts and activities to promote the interests and welfare of those who acquire
property therein or benefit from the acts or activities of the Association.

Finally, PADCOM's argument that the collection of monthly dues has no basis since there was
no board resolution defining how much fees are to be imposed deserves scant consideration.
Suffice it is to say that PADCOM never protested upon receipt of the earlier demands for
payment of membership dues. In fact, by proposing a scheme to pay its obligation, PADCOM
cannot belatedly question the Association's authority to assess and collect the fees in
accordance with the total land area owned or occupied by the members, which finds support in
a resolution dated 6 November 1982 of the Association's incorporating directors20 and Section 2
of its By-laws.21

WHEREFORE, the petition is hereby DENIED for lack of merit.

Costs against petitioner.

SO ORDERED.

G.R. No. 170498 January 9, 2013

METROPOLITAN BANK & TRUST COMPANY, Petitioner,

vs.
ABSOLUTE MANAGEMENT CORPORATION, Respondent.

DECISION

BRION, J.:

We resolve petitioner Metropolitan Bank & Trust Company's (Metro bank's) petition for review
on certiorari1 seeking the reversal of the decision2 dated August 25, 2005 and the
resolution3 dated November 17, 2005 of the Court of Appeals (CA) in CA-G.R. SP No. 86336.
The assailed decision affirmed the order4 dated May 7, 2004 of the Regional Trial Court (RTC)
of Quezon City, Branch 80. The RTC had denied the admission of Metrobank's Fourth-Party
Complaint5 against the Estate of Jose L. Chua for being a money claim that falls under Section
5, Rule 86 of the Rules of Court; the claim should have been filed in the pending judicial
settlement of Chua’s estate before the RTC of Pasay City. The CA affirmed the RTC’s order
based on the same ground.
 Factual Antecedents

On October 5, 2000, Sherwood Holdings Corporation, Inc. (SHCI) filed a complaint for sum of
money against Absolute Management Corporation (AMC). The complaint was docketed as Civil
Case No. Q-00-42105 and was assigned to the RTC of Quezon City, Branch 80.6

SHCI alleged in its complaint that it made advance payments to AMC for the purchase of 27,000
pieces of plywood and 16,500 plyboards in the sum of ₱12,277,500.00, covered by Metrobank
Check Nos. 1407668502, 140768507, 140768530, 140768531, 140768532, 140768533 and
140768534. These checks were all crossed, and were all made payable to AMC. They were
given to Chua, AMC’s General Manager, in 1998.7

Chua died in 1999, 8 and a special proceeding for the settlement of his estate was commenced
before the RTC of Pasay City. This proceeding was pending at the time AMC filed its answer
with counterclaims and third-party complaint.9

SHCI made demands on AMC, after Chua’s death, for allegedly undelivered items worth
₱8,331,700.00. According to AMC, these transactions could not be found in its records. Upon
investigation, AMC discovered that in 1998, Chua received from SHCI 18 Metrobank checks
worth ₱31,807,500.00. These were all payable to AMC and were crossed or "for payee’s
account only."10

In its answer with counterclaims and third-party complaint,11 AMC averred that it had no
knowledge of Chua’s transactions with SHCI and it did not receive any money from the latter.
AMC also asked the RTC to hold Metrobank liable for the subject checks in case it is adjudged
liable to SHCI.

Metrobank filed a motion for bill of particulars,12 seeking to clarify certain ambiguous statements
in AMC’s answer. The RTC granted the motion but AMC failed to submit the required bill of
particulars. Hence, Metrobank filed a motion to strike out the third-party complaint.13

In the meantime, Metrobank filed a motion to dismiss14 against AMC on the ground that the
latter engaged in prohibited forum shopping. According to Metrobank, AMC’s claim against it is
the same claim that it raised against Chua’s estate in Special Proceedings No. 99-0023 before
the RTC of Pasay City, Branch 112. The RTC subsequently denied this motion.15

The RTC of Quezon City opted to defer consideration16 of Metrobank’s motion to strike out third-
party complaint17 and it instead granted AMC’s motion for leave to serve written interrogatories
on the third-party defendant.18 While Metrobank filed its answer to the written interrogatories,
AMC was again directed by the RTC, in an order19 dated August 13, 2003, to submit its bill of
particulars. Instead, AMC filed a motion for reconsideration20 which was denied in an
order21 dated October 28, 2003. AMC still did not file its bill of particulars. The RTC, on the other
hand, did not act on Metrobank’s motion to strike out AMC’s third-party complaint.22

In its answer23 dated December 1, 2003, Metrobank admitted that it deposited the checks in
question to the account of Ayala Lumber and Hardware, a sole proprietorship Chua owned and
managed. The deposit was allegedly done with the knowledge and consent of AMC. According
to
Metrobank, Chua then gave the assurance that the arrangement for the handling of the checks
carried AMC’s consent. Chua also submitted documents showing his position and interest in
AMC. These documents, as well as AMC’s admission in its answer that it allowed Chua to
manage AMC with a relative free hand, show that it knew of Chua’s arrangement with
Metrobank. Further, Chua’s records show that the proceeds of the checks were remitted to AMC
which cannot therefore now claim that it did not receive these proceeds.

Metrobank also raised the defense of estoppel. According to Metrobank, AMC had knowledge of
its arrangements with Chua for several years. Despite this arrangement, AMC did not object to
nor did it call the attention of Metrobank about Chua’s alleged lack of authority to deposit the
checks in Ayala Lumber and Hardware’s account. At this point, AMC is already estopped from
questioning Chua’s authority to deposit these checks in Ayala Lumber and Hardware’s account.

Lastly, Metrobank asserted that AMC gave Chua unbridled control in managing AMC’s affairs.
This measure of control amounted to gross negligence that was the proximate cause of the loss
that AMC must now bear.

Subsequently, Metrobank filed a motion for leave to admit fourth-party complaint24 against
Chua’s estate. It alleged that Chua’s estate should reimburse Metrobank in case it would be
held liable in the third-party complaint filed against it by AMC.

The RTC’s Ruling

In an order25 dated May 7, 2004, the RTC denied Metrobank’s motion. It likewise denied
Metrobank’s motion for reconsideration in an order26 dated July 7, 2004.

The RTC categorized Metrobank’s allegation in the fourth-party complaint as a "cobro de lo

indebido"27 – a kind of quasi-contract that mandates recovery of what has been improperly paid.
Quasi-contracts fall within the concept of implied contracts that must be included in the claims
required to be filed with the judicial settlement of the deceased’s estate under Section 5, Rule
86 of the Rules of Court. As such claim, it should have been filed in Special Proceedings No.
99-0023, not before the RTC as a fourth-party complaint. The RTC, acting in the exercise of its
general jurisdiction, does not have the authority to adjudicate the fourth-party complaint. As a
trial court hearing an ordinary action, it cannot resolve matters pertaining to special proceedings
because the latter is subject to specific rules.

Metrobank responded to the RTC ruling by filing a petition for certiorari28 under Rule 65 before
the CA.

The CA’s Ruling

The CA affirmed the RTC’s ruling that Metrobank’s fourth-party complaint should have been
filed in Special Proceedings No. 99-0023.29 According to the CA, the relief that Metrobank
prayed for was based on a quasi-contract and was a money claim categorized as an implied
contract that should be filed under Section 5, Rule 86 of the Rules of Court.

Based on the statutory construction principle of lex specialis derogat generali, the CA held that
Section 5, Rule 86 of the Rules of Court is a special provision that should prevail over the
general provisions of Section 11, Rule 6 of the Rules of Court. The latter applies to money
claims in ordinary actions while a money claim against a person already deceased falls under
the settlement of his estate that is governed by the rules on special proceedings. If at all, rules
for ordinary actions only apply suppletorily to special proceedings.

The Present Petition

In its present petition for review on certiorari,30 Metrobank asserts that it should be allowed to file
a fourth-party complaint against Chua’s estate in the proceedings before the RTC; its fourth-party
complaint was filed merely to enforce its right to be reimbursed by Chua’s estate in case
Metrobank is held liable to AMC. Hence, Section 11, Rule 6 of the Rules of Court should apply.

AMC, in its comment,31 maintains the line that the CA and the RTC rulings should be followed,
i.e., that Metrobank’s claim is a quasi-contract that should be filed as a claim under Section 5,
Rule 86 of the Rules of Court.

AMC also challenges the form of Metrobank’s petition for failure to comply with Section 4, Rule
45 of the Rules of Court. This provision requires petitions filed before the Supreme Court to be
accompanied by "such material portions of the record as would support the petition."

According to AMC, the petition’s annexes are mostly Metrobank’s pleadings and court issuances.
It did not append all relevant AMC pleadings before the RTC and the CA. For this reason, the
petition should have been dismissed outright.

Issues

The parties’ arguments, properly joined, present to us the following issues:

1) Whether the petition for review on certiorari filed by Metrobank before the Supreme
Court complies with Section 4, Rule 45 of the Rules of Court; and

2) Whether Metrobank’s fourth-party complaint against Chua’s estate should be allowed.

The Court’s Ruling

The Present Petition Complies With Section 4, Rule 45 of the Rules of Court

AMC posits that Metrobank’s failure to append relevant AMC pleadings submitted to the RTC and
to the CA violated Section 4, Rule 45 of the Rules of Court,32 and is a sufficient ground to dismiss
the petition under Section 5, Rule 45 of the Rules of Court.33

We disagree with AMC’s position.

In F.A.T. Kee Computer Systems, Inc. v. Online Networks International, Inc.,34 Online Networks
International, Inc. similarly assailed F.A.T. Kee Computer Systems, Inc.’s failure to attach the
transcript of stenographic notes (TSN) of the RTC proceedings, and claimed this omission to be
a violation of Section 4, Rule 45 of the Rules of Court that warranted the petition’s dismissal. The
Court held that the defect was not fatal, as the TSN of the proceedings before the RTC forms part
of the records of the case. Thus, there was no incurable omission that warranted the outright
dismissal of the petition.
The Court significantly pointed out in F.A.T. Kee that the requirement in Section 4, Rule 45 of the
Rules of Court is not meant to be an absolute rule whose violation would automatically lead to the
petition’s dismissal.35 The Rules of Court has not been intended to be totally rigid. In fact, the
Rules of Court provides that the Supreme Court "may require or allow the filing of such pleadings,
briefs, memoranda or documents as it may deem necessary within such periods and under such
conditions as it may consider appropriate";36 and "[i]f the petition is given due course, the Supreme
Court may require the elevation of the complete record of the case or specified parts thereof within
fifteen (15) days from notice."37 These provisions are in keeping with the overriding standard that
procedural rules should be liberally construed to promote their objective and to assist the parties
in obtaining a just, speedy and inexpensive determination of every action or proceeding.38

Under this guiding principle, we do not see Metrobank’s omission to be a fatal one that should
warrant the petition’s outright dismissal. To be sure, the omission to submit the adverse party’s
pleadings in a petition before the Court is not a commendable practice as it may lead to an unduly
biased narration of facts and arguments that masks the real issues before the Court. Such skewed
presentation could lead to the waste of the Court’s time in sifting through the maze of the parties’
narrations of facts and arguments and is a danger the Rules of Court seeks to avoid.

Our examination of Metrobank’s petition shows that it contains AMC’s opposition to its motion to
admit fourth-party complaint among its annexes. The rest of the pleadings have been
subsequently submitted as attachments in Metrobank’s Reply. A reading of these pleadings
shows that their arguments are the same as those stated in the orders of the trial court and the
Court of Appeals. Thus, even if Metrobank’s petition did not contain some of AMC’s pleadings,
the Court still had the benefit of a clear narration of facts and arguments according to both parties’
perspectives. In this broader view, the mischief that the Rules of Court seeks to avoid has not
really been present. If at all, the omission is not a grievous one that the spirit of liberality cannot
address.

The Merits of the Main Issue

The main issue poses to us two essential points that must be addressed. First, are quasi-contracts
included in claims that should be filed pursuant to Rule 86, Section 5 of the Rules of Court?
Second, if so, is Metrobank’s claim against the Estate of Jose Chua based on a quasi-contract?

Quasi-contracts are included in

claims that should be filed under Rule
86, Section 5 of the Rules of Court

In Maclan v. Garcia,39 Gabriel Maclan filed a civil case to recover from Ruben Garcia the
necessary expenses he spent as possessor of a piece of land. Garcia acquired the land as an
heir of its previous owner. He set up the defense that this claim should have been filed in the
special proceedings to settle the estate of his predecessor. Maclan, on the other hand, contended
that his claim arises from law and not from contract, express or implied. Thus, it need not be filed
in the settlement of the estate of Garcia’s predecessor, as mandated by Section 5, Rule 87 of the
Rules of Court (now Section 5, Rule 86).

The Court held under these facts that a claim for necessary expenses spent as previous
possessor of the land is a kind of quasi-contract. Citing Leung Ben v. O’Brien,40 it explained that
the term "implied contracts," as used in our remedial law, originated from the common law where
obligations derived from quasi-contracts and from law are both considered as implied contracts.
Thus, the term quasi-contract is included in the concept "implied contracts" as used in the Rules
of Court. Accordingly, liabilities of the deceased arising from quasi-contracts should be filed as
claims in the settlement of his estate, as provided in Section 5, Rule 86 of the Rules of Court. 41

Metrobank’s fourth-party complaint is

based on quasi-contract

Both the RTC and the CA described Metrobank’s claim against Chua’s estate as one based on
quasi-contract. A quasi-contract involves a juridical relation that the law creates on the basis of
certain voluntary, unilateral and lawful acts of a person, to avoid unjust enrichment.42 The Civil
Code provides an enumeration of quasi-contracts,43 but the list is not exhaustive and merely
provides examples.44

According to the CA, Metrobank’s fourth-party complaint falls under the quasi-contracts
enunciated in Article 2154 of the Civil Code.45 Article 2154 embodies the concept "solutio indebiti"
which arises when something is delivered through mistake to a person who has no right to
demand it. It obligates the latter to return what has been received through mistake. 46

Solutio indebiti, as defined in Article 2154 of the Civil Code, has two indispensable requisites: first,
that something has been unduly delivered through mistake; and second, that something was
received when there was no right to demand it.47

In its fourth-party complaint, Metrobank claims that Chua’s estate should reimburse it if it becomes
liable on the checks that it deposited to Ayala Lumber and Hardware’s account upon Chua’s
instructions.

This fulfills the requisites of solutio indebiti. First, Metrobank acted in a manner akin to a mistake
when it deposited the AMC checks to Ayala Lumber and Hardware’s account; because of Chua’s
control over AMC’s operations, Metrobank assumed that the checks payable to AMC could be
deposited to Ayala Lumber and Hardware’s account. Second, Ayala Lumber and Hardware had
no right to demand and receive the checks that were deposited to its account; despite Chua’s
control over AMC and Ayala Lumber and Hardware, the two entities are distinct, and checks
exclusively and expressly payable to one cannot be deposited in the account of the other. This
disjunct created an obligation on the part of Ayala Lumber and Hardware, through its sole
proprietor, Chua, to return the amount of these checks to Metrobank.

The Court notes, however, that its description of Metrobank’s fourth-party complaint as a
claimclosely analogous to solutio indebiti is only to determine the validity of the lower courts’
orders denying it. It is not an adjudication determining the liability of Chua’s estate against
Metrobank. The appropriate trial court should still determine whether Metrobank has a lawful claim
against Chua’s estate based on quasi-contract.1âwphi1

Metrobank’s fourth-party complaint,

as a contingent claim, falls within the
claims that should be filed under
Section 5, Rule 86 of the Rules of
Court

A distinctive character of Metrobank’s fourth-party complaint is its contingent nature – the claim
depends on the possibility that Metrobank would be adjudged liable to AMC, a future event that
may or may not happen. This characteristic unmistakably marks the complaint as a contingent
one that must be included in the claims falling under the terms of Section 5, Rule 86 of the Rules
of Court:

Sec. 5. Claims which must be filed under the notice. If not filed, barred; exceptions. – All claims
for money against the decedent, arising from contract, express or implied, whether the same be
due, not due, or contingent, all claims for funeral expenses and expenses for the last sickness of
the decedent, and judgment for money against the decedent, must be filed within the time limited
in the notice. [italics ours]

Specific provisions of Section 5, Rule

86 of the Rules of Court prevail over
general provisions of Section 11, Rule
6 of the Rules of Court

Metrobank argues that Section 11, Rule 6 of the Rules of Court should apply because it impleaded
Chua’s estate for reimbursement in the same transaction upon which it has been sued by AMC.
On this point, the Court supports the conclusion of the CA, to wit:

Notably, a comparison of the respective provisions of Section 11, Rule 6 and Section 5, Rule 86
of the Rules of Court readily shows that Section 11, Rule 6 applies to ordinary civil actions while
Section 5, Rule 86 specifically applies to money claims against the estate. The specific provisions
of Section 5, Rule 86 x x x must therefore prevail over the general provisions of Section 11, Rule
6.48

We read with approval the CA’s use of the statutory construction principle of lex specialis derogat
generali, leading to the conclusion that the specific provisions of Section 5, Rule 86 of the Rules
of Court should prevail over the general provisions of Section 11, Rule 6 of the Rules of Court;
the settlement of the estate of deceased persons (where claims against the deceased should be
filed) is primarily governed by the rules on special proceedings, while the rules provided for
ordinary claims, including Section 11, Rule 6 ofthe Rules of Court, merely apply suppletorily.49

In sum, on all counts in the considerations material to the issues posed, the resolution points to
the affirmation of the assailed CA decision and resolution. Metrobank's claim in its fourth-party
complaint against Chua's estate is based on quasi-contract. It is also a contingent claim that
depends on another event. Both belong to the category of claims against a deceased person that
should be filed under Section 5, Rule 86 of the Rules of Comi and, as such, should have been so
filed in Special Proceedings No. 99-0023.

WHEREFORE, premises considered, we hereby DENY the petition for lack of merit. The decision
of the Court of Appeals dated August 25, 2005, holding that the Regional Trial Court of Quezon
City, Branch 80, did not commit grave abuse of discretion in denying Metropolitan Bank & Trust
Company's motion for leave to admit fourth-party complaint Is

AFFIRMED. Costs against Metropolitan Bank & Trust Company.

SO ORDERED.
G.R. No. 96643. April 23, 1993.

ERNESTO DEIPARINE, JR., petitioner,

vs.
THE HON. COURT OF APPEALS, CESARIO CARUNGAY and ENGR. NICANOR TRINIDAD,
respondents.

Gregorio B. Escasinas for petitioner.

Florido and Associates for respondents.

SYLLABUS

1. CIVIL LAW; CONTRACTS; RESCISSION IS USED IN TWO DIFFERENT CONTEXTS IN THE

CIVIL CODE. — Deiparine seems to be confused over the right of rescission, which is used in
two different contexts in the Civil Code. Under the law on contracts, there are what are called
"rescissible contracts" which are enumerated in Article 1381 . . . There is also a right of rescission
under the law on obligations as granted in Article 1191.

2. ID.; ID.; ARTICLES 19, 1159, 1191, 1714, 1715 AND 1727, CIVIL CODE ARE APPLICABLE,
WHILE ARTICLES 1381, 1385 AND 1725, SAME CODE ARE NOT, IN CASE OF BREACH OF
CONSTRUCTION CONTRACT. — The petitioner challenges the application by the lower court of
Article 1191 of the Civil Code in rescinding the construction agreement. His position is that the
applicable rules are Articles 1385 and 1725 of the Civil Code . . . Article 1385, upon which
Deiparine relies, deals with the rescission of the contracts enumerated above, which do not
include the construction agreement in question . . . The construction contract falls squarely under
the coverage of Article 1191 because it imposes upon Deiparine the obligation to build the
structure and upon the Carungays the obligation to pay for the project upon its completion. Article
1191, unlike Article 1385, is not predicated on economic prejudice to one of the parties but on
breach of faith by one of them that violates the reciprocity between them. The violation of
reciprocity between Deiparine and the Carungay spouses, to wit, the breach caused by
Deiparine's failure to follow the stipulated plans and specifications, has given the Carungay
spouses the right to rescind or cancel the contract. Article 1725 cannot support the petitioner's
position either, for this contemplates a voluntary withdrawal by the owner without fault on the part
of the contractor, who is therefore entitled to indemnity, and even damages, for the work he has
already commenced. There is no such voluntary withdrawal in the case at bar. On the contrary,
the Carungays have been constrained to ask for judicial rescission because of the petitioner's
failure to comply with the terms and conditions of their contract. The other applicable provisions
are: Article 1714 . . . Article 1715 . . . Article 1727 . . . It is a basic principle in human relations,
acknowledged in Article 19 of the Civil Code, that "every person must, in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith." This
admonition is reiterated in Article 1159, which states that "obligations arising from contracts have
the force of law between the contracting parties and should be complied with in good faith." The
petitioner has ignored these exhortations and is therefore not entitled to the relief he seeks.

3. ADMINISTRATIVE LAW; THE PHILIPPINE DOMESTIC CONSTRUCTION BOARD HAS NO

POWER TO ADJUDICATE A CASE FOR RESCISSION OF CONSTRUCTION CONTRACT. —
The wording of P.D. 1746 is clear. The adjudicatory powers of the Philippine Domestic
Construction Board are meant to apply only to public construction contracts. Its power over private
construction contracts is limited to the formulation and recommendation of rules and procedures
for the adjudication and settlement of disputes involving such (private) contracts. It therefore has
no jurisdiction over cases like the one at bar which remain cognizable by the regular courts of
justice.

4. LEGAL AND JUDICIAL ETHICS; COUNSEL WHO TRIES TO MISLEAD THE COURT BY
DELIBERATELY MISQUOTING THE LAW IS SUBJECT TO DISCIPLINE. — Counsel is
obviously trying to mislead the Court. First, he purposely misquotes Section 6(b), paragraph 3,
substituting the word "the" for "public," . . . Second, he makes the wrong emphasis in paragraph
5, . . . For deliberately changing the language of the above-quoted paragraph 3, Atty. Gregorio B.
Escasinas has committed contempt of this Court and shall be disciplined. As for paragraph 5, the
correct stress should be on the words "formulate and recommend," which is all the body can do,
rather than on adjudication and settlement."

DECISION

CRUZ, J p:

This case involves not only the factual issue of breach of contract and the legal questions of
jurisdiction and rescission. The basic inquiry is whether the building subject of this litigation is safe
enough for its future occupants. The petitioner says it is, but the private respondents demur. They
have been sustained by the trial court and the appellate court. The petitioner says they have all
erred.

The spouses Cesario and Teresita Carungay entered into an agreement with Ernesto Deiparine,
Jr. on August 13, 19B2, for the construction of a three-story dormitory in Cebu City. 1 The
Carungays agreed to pay P970,000.00, inclusive of contractor's fee, and Deiparine bound himself
to erect the building "in strict accordance to (sic) plans and specifications." Nicanor Trinidad, Jr.,
a civil engineer, was designated as the representative of the Carungay spouses, with powers of
inspection and coordination with the contractor.

Deiparine started the construction on September 1, 1982. 2 On November 6, 1982, Trinidad sent
him a document entitled General Conditions and Specifications which inter alia prescribed 3,000
psi (pounds per square inch) as the minimum acceptable compressive strength of the building. 3

In the course of the construction, Trinidad reported to Cesario Carungay that Deiparine had been
deviating from the plans and specifications, thus impairing the strength and safety of the building.
On September 25, 1982, Carungay ordered Deiparine to first secure approval from him before
pouring cement. 4 This order was not heeded, prompting Carungay to send Deiparine another
memorandum complaining that the "construction works are faulty and done haphazardly . . .
mainly due to lax supervision coupled with . . . inexperienced and unqualified staff." 5 This
memorandum was also ignored.

After several conferences, the parties agreed to conduct cylinder tests to ascertain if the structure
thus far built complied with safety standards. Carungay suggested core testing. Deiparine was
reluctant at first but in the end agreed. He even promised that if the tests should show total failure,
or if the failure should exceed 10%, he would shoulder all expenses; otherwise, the tests should
be for the account of Carungay.

The core testing was conducted by Geo-Testing International, a Manila-based firm, on twenty-
four core samples. On the basis of 3,000 psi, all the samples failed; on the basis of 2,500 psi, only
three samples passed; and on the basis of 2,000 psi, nineteen samples failed. 6 This meant that
the building was structurally defective.

In view of this finding, the spouses Carungay filed complaint with the Regional Trial Court of Cebu
for the rescission of the construction contract and for damages. Deiparine moved to dismiss,
alleging that the court had no jurisdiction over construction contracts, which were now cognizable
by the Philippine Construction Development Board pursuant to Presidential Decree No. 1746. The
motion was denied in an order dated April 12, 1984.

After trial on the merits, Judge Juanito A. Bernad rendered judgment: a) declaring the construction
agreement rescinded; b) condemning Deiparine to have forfeited his expenses in the construction
in the same of P244,253.70; c) ordering Deiparine to reimburse to the spouses Carungay the sum
of P15,104.33 for the core testing; d) ordering Deiparine to demolish and remove all the existing
structures and restore the premises to their former condition before the construction began, being
allowed at the same time to take back with him all the construction materials belonging to him;
and e) ordering Deiparine to pay the Carungay spouses attorney's fees in the amount of
P10,000.00 as well as the costs of the suit. 7

On appeal, the decision was affirmed in toto by the respondent court on August 14, 1990. 8 His
motion for reconsideration having been denied, petitioner Ernesto Deiparine, Jr. has come to this
Court to question once more the jurisdiction of the regular courts over the case and the power of
the trial court to grant rescission. He will lose again.

The challenge to the jurisdiction of the trial court is untenable.

P.D. 1746 created the Construction Industry Authority of the Philippines (CIAP) as the umbrella
organization which shall exercise jurisdiction and supervision over certain administrative bodies
acting as its implementing branches. The implementing body in this case is the Philippine
Domestic Construction Board (PDCB) and not the inexistent Philippine Construction Development
Board as maintained by Deiparine.

Among the functions of the PDCB under Section 6 of the decree are to:

xxx xxx xxx

3. Adjudicate and settle claims and implementation of public construction contracts and for this
purpose, formulate and adopt the necessary rules and regulations subject to the approval of the
President:

xxx xxx xxx

5. Formulate and recommend rules and procedures for the adjudication and settlement of claims
and disputes in the implementation of contracts in private construction; (Emphasis supplied)

Deiparine argues that the Philippine Construction Development Board (that is, the Philippine
Domestic Construction Board) has exclusive jurisdiction to hear and try disputes arising from
domestic constructions. He invokes the above-mentioned functions to prove his point.
His counsel is obviously trying to mislead the Court. First, he purposely misquotes Section 6(b),
paragraph 3, substituting the word "the" for "public," thus:

3. Adjudicate and settle claims and disputes in the implementation of the construction contracts
and for this purpose, formulate and adopt the necessary rules and regulations subject to the
approval of the President; (Emphasis ours).

Second, he makes the wrong emphasis in paragraph 5, thus:

5. Formulate and recommend rules and procedures for the ADJUDICATION and SETTLEMENT
of CLAIMS and DISPUTES in the implementation of CONTRACTS in PRIVATE
CONSTRUCTIONS.

For deliberately changing the language of the abovequoted paragraph 3, Atty. Gregorio P.
Escasinas has committed contempt of this Court and shall be disciplined. As for paragraph 5, the
correct stress should be on the words "formulate and recommend," which is all the body can do,
rather than on "adjudication and settlement."

The wording of P.D. 1746 is clear. The adjudicatory powers of the Philippine Domestic
Construction Board are meant to apply only to public construction contracts. Its power over private
construction contracts is limited to the formulation and recommendation of rules and procedures
for the adjudication and settlement of disputes involving such (private) contracts. It therefore has
no jurisdiction over cases like the one at bar which remain cognizable by the regular courts of
justice.

On the issue of rescission, Deiparine insists that the construction agreement does not specify any
compressive strength for the structure nor does it require that the same be subjected to any kind
of stress test. Therefore, since he did not breach any of his covenants under the agreement, the
court erred in rescinding the contract.

The record shows that Deiparine commenced the construction soon after the signing of the
contract, even before Trinidad had submitted the contract documents, including the General
Conditions and Specifications.

According to Eduardo Logarta, the petitioner's own project engineer, Deiparine actually instructed
him and some of the other workers to ignore the specific orders or instructions of Carungay or
Trinidad relative to the construction. 9 Most of these orders involved safety measures such as:
(1) the use of two concrete vibrators in the pouring of all columns, beams and slabs; (2) making
PVC pipes well-capped to prevent concrete from setting inside them; (3) the use of 12-mm
reinforcement bars instead of 10-mm bars; (4) the use of mixed concrete reinforcements instead
of hollow block reinforcements; and (5) securing the approval of the owner or his representative
before any concrete-pouring so that it could be determined whether the cement mixture complied
with safety standards. Deiparine obviously wanted to avoid additional expenses which would
reduce his profit.

Parenthetically, it is not disputed that Deiparine is not a civil engineer or an architect but a master
mariner and former ship captain; 10 that Pio Bonilla, a retainer of Deiparine Construction, was not
the supervising architect of the protect; 11 that the real supervisor of the construction was
Eduardo-Logarta, who was only a third year civil engineering student at the time; 12 that his
understudy was Eduardo Martinez, who had then not yet passed the board examinations; 13 and
that the supposed project engineer, Nilo Paglinawan, was teaching full-time at the University of
San Jose-Recoletos, and had in fact entered the construction site only after November 4, 1982,
although the construction had already begun two months earlier. 14

It was after discovering that the specifications and the field memorandums were not being
followed by Deiparine that Carungay insisted on the stress tests.

There were actually two sets of specifications. The first "Specifications" are labeled as such and
are but a general summary of the materials to be used in the construction. These were prepared
by Trinidad prior to the execution of the contract for the purpose only of complying with the
document requirements of the loan application of Cesario Carungay with the Development Bank
of the Philippines. The other specifications, which were also prepared by Trinidad, are entitled
"General Conditions and Specifications" and laid down in detail the requirements of the private
respondent in the construction of his building.

In his testimony, Deiparine declared that when the contract was signed on August 13, 1982, it
was understood that the plans and specifications would be given to him by Trinidad later. 15
Deiparine thus admitted that the plans and specifications referred to in the construction agreement
were not the first Specifications but the General Conditions and Specifications submitted by
Trinidad in November 1982. This second set of specifications required a structural compressive
strength of 3,000 psi. 16 It completely belies Deiparine's contention that no compressive strength
of the dormitory was required.

Deiparine further argues that by following the concrete mixture indicated in the first specifications,
that is, 1:2:4, the structure would still attain a compressive strength of 2,500 psi, which was
acceptable for dormitories. According to him, the 3,000 psi prescribed in the General Conditions
and Specifications was recommended for roads, not for buildings. In so arguing, he is interpreting
the two specifications together but applying only the first and rejecting the second.

Deiparine also avers that the contract does not also require any kind of test to be done on the
structure and that, test or no test, he has not violated the agreement. Nevertheless, he subjected
the building to a cylinder test just to convince Carungay that the unfinished dormitory was
structurally sound.

A cylinder test is done by taking samples from fresh concrete, placing them in a cylinder mold and
allowing them to harden for a maximum of 28 days, following which they are subjected to
compression to determine if the cement mixture to be poured conforms to accepted standards in
construction. 17 Carungay was not satisfied with the results of the cylinder test because they were
inconsistent and could easily be falsified by the simple expedient of replacing the samples with a
good mixture although a different mixture had been used in the actual pouring. Consequently,
Carungay requested core testing, a more reliable procedure because the specimens obtained by
extracting concrete from the hardened existing structure would determine its actual strength. The
core test is less prone to manipulation than the cylinder test because the samples in the former
are taken from the building which is already standing. 18

Deiparine vehemently refused to go along with the core test, insisting that the results of the
cylinder test earlier made were conclusive enough to prove that the building was structurally
sound. What was the real reason for this refusal? After all, Carungay would shoulder the expenses
if the specimens passed the core test, unlike the cylinder test, which was for the petitioner's
account. The only logical explanation would be that Deiparine was not sure that the core test
would prove favorable to him.

We see no reason to disturb the factual finding of the courts below that Deiparine did not deal
with the Carungays in good faith. His breach of this duty constituted a substantial violation of the
contract correctible by judicial rescission.

The petitioner challenges the application by the lower court of Article 1191 of the Civil Code in
rescinding the construction agreement. His position is that the applicable rules are Articles 1385
and 1725 of the Civil Code.

Article 1385 states:

Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only
when he who demands rescission can return whatever he may be obliged to restore.

Article 1725 provides that in a contract for a piece of work:

The owner may withdraw at will from the construction of the work, although it may have been
commenced, indemnifying the contractor for all the latter's expenses, work, and the usefulness
which the owner may obtain therefrom, and damages.

Deiparine seems to be confused over the right of rescission, which is used in two different contexts
in the Civil Code.

Under the law on contracts, there are what are called "rescissible contracts" which are
enumerated in Article 1381 thus:

(1) Those which are entered into by guardians whenever the wards who they represent suffer
lesion by more than one-fourth of the value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number:

(3) Those undertaken in fraud of creditors when the later cannot in any other manner collect the
claims due them:

(4) Those which refer to things under litigation if they have been entered into by the defendants
without the knowledge and approval of the litigants or of competent judicial authority;

(5) All other contracts specially declared by law to be subject to rescission.

Article 1385, upon which Deiparine relies, deals with the rescission of the contracts enumerated
above, which do not include the construction agreement in question.

There is also a right of rescission under the law on obligations as granted in Article 1191, providing
as follows:
"Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period.

This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

This was the provision the trial court and the respondent court correctly applied because it relates
to contracts involving reciprocal obligations like the subject construction contract. The
construction contract fails squarely under the coverage of Article 1191 because it imposes upon
Deiparine the obligation to build the structure and upon the Carungays the obligation to pay for
the project upon its completion.

Article 1191, unlike Article 1385, is not predicated on economic prejudice to one of the, parties
but on breach of faith by one of them that violates the reciprocity between them. 19 The violation
of reciprocity between Deiparine and the Carungay spouses, to wit, the breach caused by
Deiparine's failure to follow the stipulated plans and specifications, has given the Carungay
spouses the right to rescind or cancel the contract.

Article 1725 cannot support the petitioner's position either, for this contemplates a voluntary
withdrawal by the owner without fault on the part of the contractor, who is therefore entitled to
indemnity, and even damages, for the work he has already commenced. there is no such
voluntary withdrawal in the case at bar. On the contrary, the Carungays have been constrained
to ask for judicial rescission because of the petitioner's failure to comply with the terms and
conditions of their contract.

The other applicable provisions are:

Article 1714. If the contractor agrees to produce the work from material furnished by him, he shall
deliver the thing produced to the employer and transfer dominion over the thing. This contract
shall be governed by the following articles as well as by the pertinent provisions on warranty of
title and against hidden defects and the payment of price in a contract of sale.

Article 1715. The contractor shall execute the work in such a manner that it has the qualities
agreed upon and has no defects which destroy or lessen its value or fitness for its ordinary or
stipulated use. Should the work be not of such quality, the employer may require that the
contractor remove the defect or execute another work. If the contractor fails or refuses to comply
with this obligation, the employer may have the defect removed or another work executed, at the
contractor's cost.

Article 1727. The contractor is responsible for the work done by persons employed by him.

While it is true that the stress test was not required in any of the contract documents, conducting
the test was the only manner by which the owner could determine if the contractor had been
faithfully complying with his presentations under their agreement. Furthermore, both parties later
agreed in writing that the core test should be conducted. When the structure failed under this test
the Carungay spouses were left with no other recourse than to rescind their contract.

It is a basic principle in human relations, acknowledged in Article 19 of the Civil Code, that "every
person must, in the performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith." This admonition is reiterated in Article 1159, which states that
"obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith." The petitioner has ignored these exhortations and is
therefore not entitled to the relief he seeks.

WHEREFORE, the challenged decision is hereby AFFIRMED and the instant petition for review
is DENIED, with costs against the petitioner. For deliberately changing the language of Section
6(b), paragraph 3, of P.D. No. 1746, Atty. Gregorio B. Escasinas is hereby fined P1,000.00, with
the warning that repetition of a similar offense will be dealt with more severely. It is so ordered.

G.R. No. L-48006 July 8, 1942

FAUSTO BARREDO, petitioner,

vs.
SEVERINO GARCIA and TIMOTEA ALMARIO, respondents.

Celedonio P. Gloria and Antonio Barredo for petitioner.

Jose G. Advincula for respondents.

BOCOBO, J.:

This case comes up from the Court of Appeals which held the petitioner herein, Fausto Barredo,
liable in damages for the death of Faustino Garcia caused by the negligence of Pedro Fontanilla,
a taxi driver employed by said Fausto Barredo.

At about half past one in the morning of May 3, 1936, on the road between Malabon and Navotas,
Province of Rizal, there was a head-on collision between a taxi of the Malate Taxicab driven by
Pedro Fontanilla and a carretela guided by Pedro Dimapalis. The carretela was overturned, and
one of its passengers, 16-year-old boy Faustino Garcia, suffered injuries from which he died two
days later. A criminal action was filed against Fontanilla in the Court of First Instance of Rizal, and
he was convicted and sentenced to an indeterminate sentence of one year and one day to two
years of prision correccional. The court in the criminal case granted the petition that the right to
bring a separate civil action be reserved. The Court of Appeals affirmed the sentence of the lower
court in the criminal case. Severino Garcia and Timotea Almario, parents of the deceased on
March 7, 1939, brought an action in the Court of First Instance of Manila against Fausto Barredo
as the sole proprietor of the Malate Taxicab and employer of Pedro Fontanilla. On July 8, 1939,
the Court of First Instance of Manila awarded damages in favor of the plaintiffs for P2,000 plus
legal interest from the date of the complaint. This decision was modified by the Court of Appeals
by reducing the damages to P1,000 with legal interest from the time the action was instituted. It
is undisputed that Fontanilla 's negligence was the cause of the mishap, as he was driving on the
wrong side of the road, and at high speed. As to Barredo's responsibility, the Court of Appeals
found:
 ... It is admitted that defendant is Fontanilla's employer. There is proof that he exercised
the diligence of a good father of a family to prevent damage. (See p. 22, appellant's brief.)
In fact it is shown he was careless in employing Fontanilla who had been caught several
times for violation of the Automobile Law and speeding (Exhibit A) — violation which
appeared in the records of the Bureau of Public Works available to be public and to
himself. Therefore, he must indemnify plaintiffs under the provisions of article 1903 of the
Civil Code.

The main theory of the defense is that the liability of Fausto Barredo is governed by the Revised
Penal Code; hence, his liability is only subsidiary, and as there has been no civil action against
Pedro Fontanilla, the person criminally liable, Barredo cannot be held responsible in the case.
The petitioner's brief states on page 10:

... The Court of Appeals holds that the petitioner is being sued for his failure to exercise
all the diligence of a good father of a family in the selection and supervision of Pedro
Fontanilla to prevent damages suffered by the respondents. In other words, The Court of
Appeals insists on applying in the case article 1903 of the Civil Code. Article 1903 of the
Civil Code is found in Chapter II, Title 16, Book IV of the Civil Code. This fact makes said
article to a civil liability arising from a crime as in the case at bar simply because Chapter
II of Title 16 of Book IV of the Civil Code, in the precise words of article 1903 of the Civil
Code itself, is applicable only to "those (obligations) arising from wrongful or negligent acts
or commission not punishable by law.

The gist of the decision of the Court of Appeals is expressed thus:

... We cannot agree to the defendant's contention. The liability sought to be imposed upon
him in this action is not a civil obligation arising from a felony or a misdemeanor (the crime
of Pedro Fontanilla,), but an obligation imposed in article 1903 of the Civil Code by reason
of his negligence in the selection or supervision of his servant or employee.

The pivotal question in this case is whether the plaintiffs may bring this separate civil action
against Fausto Barredo, thus making him primarily and directly, responsible under article 1903 of
the Civil Code as an employer of Pedro Fontanilla. The defendant maintains that Fontanilla's
negligence being punishable by the Penal Code, his (defendant's) liability as an employer is only
subsidiary, according to said Penal code, but Fontanilla has not been sued in a civil action and
his property has not been exhausted. To decide the main issue, we must cut through the tangle
that has, in the minds of many confused and jumbled together delitos and cuasi delitos, or crimes
under the Penal Code and fault or negligence under articles 1902-1910 of the Civil Code. This
should be done, because justice may be lost in a labyrinth, unless principles and remedies are
distinctly envisaged. Fortunately, we are aided in our inquiry by the luminous presentation of the
perplexing subject by renown jurists and we are likewise guided by the decisions of this Court in
previous cases as well as by the solemn clarity of the consideration in several sentences of the
Supreme Tribunal of Spain.

Authorities support the proposition that a quasi-delict or "culpa aquiliana " is a separate legal
institution under the Civil Code with a substantivity all its own, and individuality that is entirely
apart and independent from delict or crime. Upon this principle and on the wording and spirit
article 1903 of the Civil Code, the primary and direct responsibility of employers may be safely
anchored.
The pertinent provisions of the Civil Code and Revised Penal Code are as follows:

CIVIL CODE

ART. 1089 Obligations arise from law, from contracts and quasi-contracts, and from acts
and omissions which are unlawful or in which any kind of fault or negligence intervenes.

xxx xxx xxx

ART. 1092. Civil obligations arising from felonies or misdemeanors shall be governed by
the provisions of the Penal Code.

ART. 1093. Those which are derived from acts or omissions in which fault or negligence,
not punishable by law, intervenes shall be subject to the provisions of Chapter II, Title XVI
of this book.

xxx xxx xxx

ART 1902. Any person who by an act or omission causes damage to another by his fault
or negligence shall be liable for the damage so done.

ART. 1903. The obligation imposed by the next preceding article is enforcible, not only for
personal acts and omissions, but also for those of persons for whom another is
responsible.

The father and in, case of his death or incapacity, the mother, are liable for any damages
caused by the minor children who live with them.

Guardians are liable for damages done by minors or incapacitated persons subject to their
authority and living with them.

Owners or directors of an establishment or business are equally liable for any damages
caused by their employees while engaged in the branch of the service in which employed,
or on occasion of the performance of their duties.

The State is subject to the same liability when it acts through a special agent, but not if
the damage shall have been caused by the official upon whom properly devolved the duty
of doing the act performed, in which case the provisions of the next preceding article shall
be applicable.

Finally, teachers or directors of arts trades are liable for any damages caused by their
pupils or apprentices while they are under their custody.

The liability imposed by this article shall cease in case the persons mentioned therein
prove that they are exercised all the diligence of a good father of a family to prevent the
damage.

ART. 1904. Any person who pays for damage caused by his employees may recover from
the latter what he may have paid.
REVISED PENAL CODE

ART. 100. Civil liability of a person guilty of felony. — Every person criminally liable for a
felony is also civilly liable.

ART. 101. Rules regarding civil liability in certain cases. — The exemption from criminal
liability established in subdivisions 1, 2, 3, 5, and 6 of article 12 and in subdivision 4 of
article 11 of this Code does not include exemption from civil liability, which shall be
enforced to the following rules:

First. In cases of subdivision, 1, 2 and 3 of article 12 the civil liability for acts committed by
any imbecile or insane person, and by a person under nine years of age, or by one over
nine but under fifteen years of age, who has acted without discernment shall devolve upon
those having such person under their legal authority or control, unless it appears that there
was no fault or negligence on their part.

Should there be no person having such insane, imbecile or minor under his authority, legal
guardianship, or control, or if such person be insolvent, said insane, imbecile, or minor
shall respond with their own property, excepting property exempt from execution, in
accordance with the civil law.

Second. In cases falling within subdivision 4 of article 11, the person for whose benefit the
harm has been prevented shall be civilly liable in proportion to the benefit which they may
have received.

The courts shall determine, in their sound discretion, the proportionate amount for which each
one shall be liable.

When the respective shares can not be equitably determined, even approximately, or when the
liability also attaches to the Government, or to the majority of the inhabitants of the town, and, in
all events, whenever the damage has been caused with the consent of the authorities or their
agents, indemnification shall be made in the manner prescribed by special laws or regulations.

Third. In cases falling within subdivisions 5 and 6 of article 12, the persons using violence or
causing the fear shall be primarily liable and secondarily, or, if there be no such persons, those
doing the act shall be liable, saving always to the latter that part of their property exempt from
execution.

ART. 102. Subsidiary civil liability of innkeepers, tavern keepers and proprietors of
establishment. — In default of persons criminally liable, innkeepers, tavern keepers, and
any other persons or corporation shall be civilly liable for crimes committed in their
establishments, in all cases where a violation of municipal ordinances or some general or
special police regulation shall have been committed by them or their employees.

Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or theft
within their houses lodging therein, or the person, or for the payment of the value thereof,
provided that such guests shall have notified in advance the innkeeper himself, or the
person representing him, of the deposit of such goods within the inn; and shall furthermore
have followed the directions which such innkeeper or his representative may have given
them with respect to the care of and vigilance over such goods. No liability shall attach in
 case of robbery with violence against or intimidation against or intimidation of persons
unless committed by the innkeeper's employees.

ART. 103. Subsidiary civil liability of other persons. — The subsidiary liability established
in the next preceding article shall also apply to employers, teachers, persons, and
corporations engaged in any kind of industry for felonies committed by their servants,
pupils, workmen, apprentices, or employees in the discharge of their duties.

xxx xxx xxx

ART. 365. Imprudence and negligence. — Any person who, by reckless imprudence, shall
commit any act which, had it been intentional, would constitute a grave felony, shall suffer
the penalty of arresto mayor in its maximum period to prision correccional in its minimum
period; if it would have constituted a less grave felony, the penalty of arresto mayor in its
minimum and medium periods shall be imposed.

Any person who, by simple imprudence or negligence, shall commit an act which would
otherwise constitute a grave felony, shall suffer the penalty of arresto mayor in its medium
and maximum periods; if it would have constituted a less serious felony, the penalty
of arresto mayor in its minimum period shall be imposed."

It will thus be seen that while the terms of articles 1902 of the Civil Code seem to be broad enough
to cover the driver's negligence in the instant case, nevertheless article 1093 limits cuasi-delitos to
acts or omissions "not punishable by law." But inasmuch as article 365 of the Revised Penal Code
punishes not only reckless but even simple imprudence or negligence, the fault or negligence
under article 1902 of the Civil Code has apparently been crowded out. It is this overlapping that
makes the "confusion worse confounded." However, a closer study shows that such a
concurrence of scope in regard to negligent acts does not destroy the distinction between the civil
liability arising from a crime and the responsibility for cuasi-delitos or culpa extra-contractual. The
same negligent act causing damages may produce civil liability arising from a crime under article
100 of the Revised Penal Code, or create an action for cuasi-delito or culpa extra-
contractual under articles 1902-1910 of the Civil Code.

The individuality of cuasi-delito or culpa extra-contractual looms clear and unmistakable. This
legal institution is of ancient lineage, one of its early ancestors being the Lex Aquilia in the Roman
Law. In fact, in Spanish legal terminology, this responsibility is often referred to as culpa aquiliana.
The Partidas also contributed to the genealogy of the present fault or negligence under the Civil
Code; for instance, Law 6, Title 15, of Partida 7, says: "Tenudo es de fazer emienda, porque,
como quier que el non fizo a sabiendas en daño al otro, pero acaescio por su culpa."

The distinctive nature of cuasi-delitos survives in the Civil Code. According to article 1089, one of
the five sources of obligations is this legal institution of cuasi-delito or culpa extra-contractual: "los
actos . . . en que intervenga cualquier genero de culpa o negligencia." Then article 1093 provides
that this kind of obligation shall be governed by Chapter II of Title XVI of Book IV, meaning articles
1902-0910. This portion of the Civil Code is exclusively devoted to the legal institution of culpa
aquiliana.

Some of the differences between crimes under the Penal Code and the culpa aquiliana or cuasi-
delito under the Civil Code are:
1. That crimes affect the public interest, while cuasi-delitos are only of private concern.

2. That, consequently, the Penal Code punishes or corrects the criminal act, while the Civil Code,
by means of indemnification, merely repairs the damage.

3. That delicts are not as broad as quasi-delicts, because the former are punished only if there is
a penal law clearly covering them, while the latter, cuasi-delitos, include all acts in which "any king
of fault or negligence intervenes." However, it should be noted that not all violations of the penal
law produce civil responsibility, such as begging in contravention of ordinances, violation of the
game laws, infraction of the rules of traffic when nobody is hurt. (See Colin and Capitant, "Curso
Elemental de Derecho Civil," Vol. 3, p. 728.)

Let us now ascertain what some jurists say on the separate existence of quasi-delicts and the
employer's primary and direct liability under article 1903 of the Civil Code.

Dorado Montero in his essay on "Responsibilidad" in the "Enciclopedia Juridica Española" (Vol.
XXVII, p. 414) says:

El concepto juridico de la responsabilidad civil abarca diversos aspectos y comprende a

diferentes personas. Asi, existe una responsabilidad civil propiamente dicha, que en
ningun casl lleva aparejada responsabilidad criminal alguna, y otra que es consecuencia
indeclinable de la penal que nace de todo delito o falta."

The juridical concept of civil responsibility has various aspects and comprises different
persons. Thus, there is a civil responsibility, properly speaking, which in no case carries
with it any criminal responsibility, and another which is a necessary consequence of the
penal liability as a result of every felony or misdemeanor."

Maura, an outstanding authority, was consulted on the following case: There had been a collision
between two trains belonging respectively to the Ferrocarril Cantabrico and the Ferrocarril del
Norte. An employee of the latter had been prosecuted in a criminal case, in which the company
had been made a party as subsidiarily responsible in civil damages. The employee had been
acquitted in the criminal case, and the employer, the Ferrocarril del Norte, had also been
exonerated. The question asked was whether the Ferrocarril Cantabrico could still bring a civil
action for damages against the Ferrocarril del Norte. Maura's opinion was in the affirmative,
stating in part (Maura, Dictamenes, Vol. 6, pp. 511-513):

Quedando las cosas asi, a proposito de la realidad pura y neta de los hechos, todavia
menos parece sostenible que exista cosa juzgada acerca de la obligacion civil de
indemnizar los quebrantos y menoscabos inferidos por el choque de los trenes. El titulo
en que se funda la accion para demandar el resarcimiento, no puede confundirse con las
responsabilidades civiles nacidas de delito, siquiera exista en este, sea el cual sea,
una culpa rodeada de notas agravatorias que motivan sanciones penales, mas o menos
severas. La lesion causada por delito o falta en los derechos civiles, requiere
restituciones, reparaciones o indemnizaciones, que cual la pena misma atañen al orden
publico; por tal motivo vienen encomendadas, de ordinario, al Ministerio Fiscal; y claro es
que si por esta via se enmiendan los quebrantos y menoscabos, el agraviado excusa
procurar el ya conseguido desagravio; pero esta eventual coincidencia de los efectos, no
borra la diversidad originaria de las acciones civiles para pedir indemnizacion.
Estas, para el caso actual (prescindiendo de culpas contractuales, que no vendrian a
cuento y que tiene otro regimen), dimanan, segun el articulo 1902 del Codigo Civil, de
toda accion u omision, causante de daños o perjuicios, en que intervenga culpa o
negligencia. Es trivial que acciones semejantes son ejercitadas ante los Tribunales de lo
civil cotidianamente, sin que la Justicia punitiva tenga que mezclarse en los asuntos. Los
articulos 18 al 21 y 121 al 128 del Codigo Penal, atentos al espiritu y a los fines sociales
y politicos del mismo, desenvuelven y ordenan la materia de responsabilidades
civiles nacidas de delito, en terminos separados del regimen por ley comun de la culpa
que se denomina aquiliana, por alusion a precedentes legislativos del Corpus Juris. Seria
intempestivo un paralelo entre aquellas ordenaciones, y la de la obligacion de indemnizar
a titulo de culpa civil; pero viene al caso y es necesaria una de las diferenciaciones que
en el tal paralelo se notarian.

Los articulos 20 y 21 del Codigo Penal, despues de distribuir a su modo las

responsabilidades civiles, entre los que sean por diversos conceptos culpables del delito
o falta, las hacen extensivas a las empresas y los establecimientos al servicio de los
cuales estan los delincuentes; pero con caracter subsidiario, o sea, segun el texto
literal, en defecto de los que sean responsables criminalmente. No coincide en ello el
Codigo Civil, cuyo articulo 1903, dice; La obligacion que impone el articulo anterior es
exigible, no solo por los actos y omisiones propios, sino por los de aquellas personas de
quienes se debe responder; personas en la enumeracion de las cuales figuran los
dependientes y empleados de los establecimientos o empresas, sea por actos del
servicio, sea con ocasion de sus funciones. Por esto acontece, y se observa en la
jurisprudencia, que las empresas, despues de intervenir en las causas criminales con el
caracter subsidiario de su responsabilidad civil por razon del delito, son demandadas y
condenadas directa y aisladamente, cuando se trata de la obligacion, ante los tribunales
civiles.

Siendo como se ve, diverso el titulo de esta obligacion, y formando verdadero postulado
de nuestro regimen judicial la separacion entre justicia punitiva y tribunales de lo civil, de
suerte que tienen unos y otros normas de fondo en distintos cuerpos legales, y diferentes
modos de proceder, habiendose, por añadidura, abstenido de asistir al juicio criminal la
Compañia del Ferrocarril Cantabrico, que se reservo ejercitar sus acciones, parece
innegable que la de indemnizacion por los daños y perjuicios que le irrogo el choque, no
estuvo sub judice ante el Tribunal del Jurado, ni fue sentenciada, sino que permanecio
intacta, al pronunciarse el fallo de 21 de marzo. Aun cuando el veredicto no hubiese sido
de inculpabilidad, mostrose mas arriba, que tal accion quedaba legitimamente reservada
para despues del proceso; pero al declararse que no existio delito, ni responsabilidad
dimanada de delito, materia unica sobre que tenian jurisdiccion aquellos juzgadores, se
redobla el motivo para la obligacion civil ex lege, y se patentiza mas y mas que la accion
para pedir su cumplimiento permanece incolume, extraña a la cosa juzgada.

As things are, apropos of the reality pure and simple of the facts, it seems less tenable
that there should be res judicata with regard to the civil obligation for damages on account
of the losses caused by the collision of the trains. The title upon which the action for
reparation is based cannot be confused with the civil responsibilities born of a crime,
because there exists in the latter, whatever each nature, a culpa surrounded with
aggravating aspects which give rise to penal measures that are more or less severe. The
injury caused by a felony or misdemeanor upon civil rights requires restitutions,
reparations, or indemnifications which, like the penalty itself, affect public order; for this
 reason, they are ordinarily entrusted to the office of the prosecuting attorney; and it is clear
that if by this means the losses and damages are repaired, the injured party no longer
desires to seek another relief; but this coincidence of effects does not eliminate the
peculiar nature of civil actions to ask for indemnity.

Such civil actions in the present case (without referring to contractual faults which are not
pertinent and belong to another scope) are derived, according to article 1902 of the Civil
Code, from every act or omission causing losses and damages in which culpa or
negligence intervenes. It is unimportant that such actions are every day filed before the
civil courts without the criminal courts interfering therewith. Articles 18 to 21 and 121 to
128 of the Penal Code, bearing in mind the spirit and the social and political purposes of
that Code, develop and regulate the matter of civil responsibilities arising from a crime,
separately from the regime under common law, of culpa which is known as aquiliana, in
accordance with legislative precedent of the Corpus Juris. It would be unwarranted to
make a detailed comparison between the former provisions and that regarding the
obligation to indemnify on account of civil culpa; but it is pertinent and necessary to point
out to one of such differences.

Articles 20 and 21 of the Penal Code, after distriburing in their own way the civil
responsibilities among those who, for different reasons, are guilty of felony or
misdemeanor, make such civil responsibilities applicable to enterprises and
establishments for which the guilty parties render service, but with subsidiary character,
that is to say, according to the wording of the Penal Code, in default of those who are
criminally responsible. In this regard, the Civil Code does not coincide because article
1903 says: "The obligation imposed by the next preceding article is demandable, not only
for personal acts and omissions, but also for those of persons for whom another is
responsible." Among the persons enumerated are the subordinates and employees of
establishments or enterprises, either for acts during their service or on the occasion of
their functions. It is for this reason that it happens, and it is so observed in judicial
decisions, that the companies or enterprises, after taking part in the criminal cases
because of their subsidiary civil responsibility by reason of the crime, are sued and
sentenced directly and separately with regard to the obligation, before the civil courts.

Seeing that the title of this obligation is different, and the separation between punitive
justice and the civil courts being a true postulate of our judicial system, so that they have
different fundamental norms in different codes, as well as different modes of procedure,
and inasmuch as the Compaña del Ferrocarril Cantabrico has abstained from taking part
in the criminal case and has reserved the right to exercise its actions, it seems undeniable
that the action for indemnification for the losses and damages caused to it by the collision
was not sub judice before the Tribunal del Jurado, nor was it the subject of a sentence,
but it remained intact when the decision of March 21 was rendered. Even if the verdict had
not been that of acquittal, it has already been shown that such action had been legitimately
reserved till after the criminal prosecution; but because of the declaration of the non-
existence of the felony and the non-existence of the responsibility arising from the crime,
which was the sole subject matter upon which the Tribunal del Jurado had jurisdiction,
there is greater reason for the civil obligation ex lege, and it becomes clearer that the
action for its enforcement remain intact and is not res judicata.

Laurent, a jurist who has written a monumental work on the French Civil Code, on which the
Spanish Civil Code is largely based and whose provisions on cuasi-delito or culpa extra-
contractual are similar to those of the Spanish Civil Code, says, referring to article 1384 of the
French Civil Code which corresponds to article 1903, Spanish Civil Code:

The action can be brought directly against the person responsible (for another), without
including the author of the act. The action against the principal is accessory in the sense
that it implies the existence of a prejudicial act committed by the employee, but it is not
subsidiary in the sense that it can not be instituted till after the judgment against the author
of the act or at least, that it is subsidiary to the principal action; the action for responsibility
(of the employer) is in itself a principal action. (Laurent, Principles of French Civil Law,
Spanish translation, Vol. 20, pp. 734-735.)

Amandi, in his "Cuestionario del Codigo Civil Reformado" (Vol. 4, pp. 429, 430), declares that the
responsibility of the employer is principal and not subsidiary. He writes:

Cuestion 1. La responsabilidad declarada en el articulo 1903 por las acciones u omisiones

de aquellas personas por las que se debe responder, es subsidiaria? es principal? Para
contestar a esta pregunta es necesario saber, en primer lugar, en que se funda el precepto
legal. Es que realmente se impone una responsabilidad por una falta ajena? Asi parece
a primera vista; pero semejante afirmacion seria contraria a la justicia y a la maxima
universal, segun la que las faltas son personales, y cada uno responde de aquellas que
le son imputables. La responsabilidad de que tratamos se impone con ocasion de un delito
o culpa, pero no por causa de ellos, sino por causa del causi delito, esto es, de la
imprudencia o de la negligencia del padre, del tutor, del dueño o director del
establecimiento, del maestro, etc. Cuando cualquiera de las personas que enumera el
articulo citado (menores de edad, incapacitados, dependientes, aprendices) causan un
daño, la ley presume que el padre, el tutor, el maestro, etc., han cometido una falta de
negligencia para prevenir o evitar el daño. Esta falta es la que la ley castiga. No hay, pues,
responsabilidad por un hecho ajeno, sino en la apariencia; en realidad la responsabilidad
se exige por un hecho propio. La idea de que esa responsabilidad sea subsidiaria es, por
lo tanto, completamente inadmisible.

Question No. 1. Is the responsibility declared in article 1903 for the acts or omissions of
those persons for who one is responsible, subsidiary or principal? In order to answer this
question it is necessary to know, in the first place, on what the legal provision is based. Is
it true that there is a responsibility for the fault of another person? It seems so at first sight;
but such assertion would be contrary to justice and to the universal maxim that all faults
are personal, and that everyone is liable for those faults that can be imputed to him. The
responsibility in question is imposed on the occasion of a crime or fault, but not because
of the same, but because of the cuasi-delito, that is to say, the imprudence or negligence
of the father, guardian, proprietor or manager of the establishment, of the teacher, etc.
Whenever anyone of the persons enumerated in the article referred to (minors,
incapacitated persons, employees, apprentices) causes any damage, the law presumes
that the father, guardian, teacher, etc. have committed an act of negligence in not
preventing or avoiding the damage. It is this fault that is condemned by the law. It is,
therefore, only apparent that there is a responsibility for the act of another; in reality the
responsibility exacted is for one's own act. The idea that such responsibility is subsidiary
is, therefore, completely inadmissible.

Oyuelos, in his "Digesto: Principios, Doctrina y Jurisprudencia, Referentes al Codigo Civil

Español," says in Vol. VII, p. 743:
 Es decir, no responde de hechos ajenos, porque se responde solo de su propia culpa,
doctrina del articulo 1902; mas por excepcion, se responde de la ajena respecto de
aquellas personas con las que media algun nexo o vinculo, que motiva o razona la
responsabilidad. Esta responsabilidad, es directa o es subsidiaria? En el orden penal, el
Codigo de esta clase distingue entre menores e incapacitados y los demas, declarando
directa la primera (articulo 19) y subsidiaria la segunda (articulos 20 y 21); pero en el
orden civil, en el caso del articulo 1903, ha de entenderse directa, por el tenor del articulo
que impone la responsabilidad precisamente "por los actos de aquellas personas de
quienes se deba responder."

That is to say, one is not responsible for the acts of others, because one is liable only for
his own faults, this being the doctrine of article 1902; but, by exception, one is liable for
the acts of those persons with whom there is a bond or tie which gives rise to the
responsibility. Is this responsibility direct or subsidiary? In the order of the penal law, the
Penal Code distinguishes between minors and incapacitated persons on the one hand,
and other persons on the other, declaring that the responsibility for the former is direct
(article 19), and for the latter, subsidiary (articles 20 and 21); but in the scheme of the civil
law, in the case of article 1903, the responsibility should be understood as direct,
according to the tenor of that articles, for precisely it imposes responsibility "for the acts of
those persons for whom one should be responsible."

Coming now to the sentences of the Supreme Tribunal of Spain, that court has upheld the
principles above set forth: that a quasi-delict or culpa extra-contractual is a separate and distinct
legal institution, independent from the civil responsibility arising from criminal liability, and that an
employer is, under article 1903 of the Civil Code, primarily and directly responsible for the
negligent acts of his employee.

One of the most important of those Spanish decisions is that of October 21, 1910. In that case,
Ramon Lafuente died as the result of having been run over by a street car owned by the
"compañia Electric Madrileña de Traccion." The conductor was prosecuted in a criminal case but
he was acquitted. Thereupon, the widow filed a civil action against the street car company, paying
for damages in the amount of 15,000 pesetas. The lower court awarded damages; so the
company appealed to the Supreme Tribunal, alleging violation of articles 1902 and 1903 of the
Civil Code because by final judgment the non-existence of fault or negligence had been declared.
The Supreme Court of Spain dismissed the appeal, saying:

Considerando que el primer motivo del recurso se funda en el equivocado supuesto de

que el Tribunal a quo, al condonar a la compañia Electrica Madrileña al pago del daño
causado con la muerte de Ramon La fuente Izquierdo, desconoce el valor y efectos
juridicos de la sentencia absolutoria deictada en la causa criminal que se siguio por el
mismo hecho, cuando es lo cierto que de este han conocido las dos jurisdicciones bajo
diferentes as pectos, y como la de lo criminal declrao dentro de los limites de su
competencia que el hecho de que se trata no era constitutivo de delito por no haber
mediado descuido o negligencia graves, lo que no excluye, siendo este el unico
fundamento del fallo absolutorio, el concurso de la culpa o negligencia no califacadas,
fuente de obligaciones civiles segun el articulo 1902 del Codigo, y que alcanzan, segun
el 1903, netre otras perosnas, a los Directores de establecimientos o empresas por los
daños causados por sus dependientes en determinadas condiciones, es manifesto que la
de lo civil, al conocer del mismo hehco baho este ultimo aspecto y al condenar a la
compañia recurrente a la indemnizacion del daño causado por uno de sus empleados,
 lejos de infringer los mencionados textos, en relacion con el articulo 116 de la Ley de
Enjuciamiento Criminal, se ha atenido estrictamente a ellos, sin invadir atribuciones
ajenas a su jurisdiccion propia, ni contrariar en lo mas minimo el fallo recaido en la causa.

Considering that the first ground of the appeal is based on the mistaken supposition that
the trial court, in sentencing the Compañia Madrileña to the payment of the damage
caused by the death of Ramon Lafuente Izquierdo, disregards the value and juridical
effects of the sentence of acquittal rendered in the criminal case instituted on account of
the same act, when it is a fact that the two jurisdictions had taken cognizance of the same
act in its different aspects, and as the criminal jurisdiction declared within the limits of its
authority that the act in question did not constitute a felony because there was no grave
carelessness or negligence, and this being the only basis of acquittal, it does no exclude
the co-existence of fault or negligence which is not qualified, and is a source of civil
obligations according to article 1902 of the Civil Code, affecting, in accordance with article
1903, among other persons, the managers of establishments or enterprises by reason of
the damages caused by employees under certain conditions, it is manifest that the civil
jurisdiccion in taking cognizance of the same act in this latter aspect and in ordering the
company, appellant herein, to pay an indemnity for the damage caused by one of its
employees, far from violating said legal provisions, in relation with article 116 of the Law
of Criminal Procedure, strictly followed the same, without invading attributes which are
beyond its own jurisdiction, and without in any way contradicting the decision in that cause.
(Emphasis supplied.)

It will be noted, as to the case just cited:

First. That the conductor was not sued in a civil case, either separately or with the street car
company. This is precisely what happens in the present case: the driver, Fontanilla, has not been
sued in a civil action, either alone or with his employer.

Second. That the conductor had been acquitted of grave criminal negligence, but the Supreme
Tribunal of Spain said that this did not exclude the co-existence of fault or negligence, which is
not qualified, on the part of the conductor, under article 1902 of the Civil Code. In the present
case, the taxi driver was found guilty of criminal negligence, so that if he had even sued for his
civil responsibility arising from the crime, he would have been held primarily liable for civil
damages, and Barredo would have been held subsidiarily liable for the same. But the plaintiffs
are directly suing Barredo, on his primary responsibility because of his own presumed negligence
— which he did not overcome — under article 1903. Thus, there were two liabilities of Barredo:
first, the subsidiary one because of the civil liability of the taxi driver arising from the latter's
criminal negligence; and, second, Barredo's primary liability as an employer under article 1903.
The plaintiffs were free to choose which course to take, and they preferred the second remedy.
In so doing, they were acting within their rights. It might be observed in passing, that the plaintiff
choose the more expeditious and effective method of relief, because Fontanilla was either in
prison, or had just been released, and besides, he was probably without property which might be
seized in enforcing any judgment against him for damages.

Third. That inasmuch as in the above sentence of October 21, 1910, the employer was held liable
civilly, notwithstanding the acquittal of the employee (the conductor) in a previous criminal case,
with greater reason should Barredo, the employer in the case at bar, be held liable for damages
in a civil suit filed against him because his taxi driver had been convicted. The degree of
negligence of the conductor in the Spanish case cited was less than that of the taxi driver,
Fontanilla, because the former was acquitted in the previous criminal case while the latter was
found guilty of criminal negligence and was sentenced to an indeterminate sentence of one year
and one day to two years of prision correccional.

(See also Sentence of February 19, 1902, which is similar to the one above quoted.)

In the Sentence of the Supreme Court of Spain, dated February 14, 1919, an action was brought
against a railroad company for damages because the station agent, employed by the company,
had unjustly and fraudulently, refused to deliver certain articles consigned to the plaintiff. The
Supreme Court of Spain held that this action was properly under article 1902 of the Civil Code,
the court saying:

Considerando que la sentencia discutida reconoce, en virtud de los hechos que consigna
con relacion a las pruebas del pleito: 1.º, que las expediciones facturadas por la compañia
ferroviaria a la consignacion del actor de las vasijas vacias que en su demanda relacionan
tenian como fin el que este las devolviera a sus remitentes con vinos y alcoholes; 2.º, que
llegadas a su destino tales mercanias no se quisieron entregar a dicho consignatario por
el jefe de la estacion sin motivo justificado y con intencion dolosa, y 3.º, que la falta de
entrega de estas expediciones al tiempo de reclamarlas el demandante le originaron
daños y perjuicios en cantidad de bastante importancia como expendedor al por mayor
que era de vinos y alcoholes por las ganancias que dejo de obtener al verse privado de
servir los pedidos que se le habian hecho por los remitentes en los envases:

Considerando que sobre esta base hay necesidad de estimar los cuatro motivos que
integran este recurso, porque la demanda inicial del pleito a que se contrae no contiene
accion que nazca del incumplimiento del contrato de transporte, toda vez que no se funda
en el retraso de la llegada de las mercancias ni de ningun otro vinculo contractual entre
las partes contendientes, careciendo, por tanto, de aplicacion el articulo 371 del Codigo
de Comercio, en que principalmente descansa el fallo recurrido, sino que se limita a pedir
la reparaction de los daños y perjuicios producidos en el patrimonio del actor por la
injustificada y dolosa negativa del porteador a la entrega de las mercancias a su nombre
consignadas, segun lo reconoce la sentencia, y cuya responsabilidad esta claramente
sancionada en el articulo 1902 del Codigo Civil, que obliga por el siguiente a la Compañia
demandada como ligada con el causante de aquellos por relaciones de caracter
economico y de jurarquia administrativa.

Considering that the sentence, in question recognizes, in virtue of the facts which it
declares, in relation to the evidence in the case: (1) that the invoice issued by the railroad
company in favor of the plaintiff contemplated that the empty receptacles referred to in the
complaint should be returned to the consignors with wines and liquors; (2) that when the
said merchandise reached their destination, their delivery to the consignee was refused
by the station agent without justification and with fraudulent intent, and (3) that the lack of
delivery of these goods when they were demanded by the plaintiff caused him losses and
damages of considerable importance, as he was a wholesale vendor of wines and liquors
and he failed to realize the profits when he was unable to fill the orders sent to him by the
consignors of the receptacles:

Considering that upon this basis there is need of upholding the four assignments of error,
as the original complaint did not contain any cause of action arising from non-fulfillment of
a contract of transportation, because the action was not based on the delay of the goods
 nor on any contractual relation between the parties litigant and, therefore, article 371 of
the Code of Commerce, on which the decision appealed from is based, is not applicable;
but it limits to asking for reparation for losses and damages produced on the patrimony of
the plaintiff on account of the unjustified and fraudulent refusal of the carrier to deliver the
goods consigned to the plaintiff as stated by the sentence, and the carrier's
responsibility is clearly laid down in article 1902 of the Civil Code which binds, in virtue of
the next article, the defendant company, because the latter is connected with the person
who caused the damage by relations of economic character and by administrative
hierarchy. (Emphasis supplied.)

The above case is pertinent because it shows that the same act may come under both the Penal
Code and the Civil Code. In that case, the action of the agent was unjustified and fraudulent and
therefore could have been the subject of a criminal action. And yet, it was held to be also a proper
subject of a civil action under article 1902 of the Civil Code. It is also to be noted that it was the
employer and not the employee who was being sued.

Let us now examine the cases previously decided by this Court.

In the leading case of Rakes vs. Atlantic Gulf and Pacific Co. (7 Phil., 359, 362-365 [year 1907]),
the trial court awarded damages to the plaintiff, a laborer of the defendant, because the latter had
negligently failed to repair a tramway in consequence of which the rails slid off while iron was
being transported, and caught the plaintiff whose leg was broken. This Court held:

It is contended by the defendant, as its first defense to the action that the necessary
conclusion from these collated laws is that the remedy for injuries through negligence lies
only in a criminal action in which the official criminally responsible must be made primarily
liable and his employer held only subsidiarily to him. According to this theory the plaintiff
should have procured the arrest of the representative of the company accountable for not
repairing the track, and on his prosecution a suitable fine should have been imposed,
payable primarily by him and secondarily by his employer.

This reasoning misconceived the plan of the Spanish codes upon this subject. Article 1093
of the Civil Code makes obligations arising from faults or negligence not punished by the
law, subject to the provisions of Chapter II of Title XVI. Section 1902 of that chapter reads:

"A person who by an act or omission causes damage to another when there is fault
or negligence shall be obliged to repair the damage so done.

"SEC. 1903. The obligation imposed by the preceeding article is demandable, not
only for personal acts and omissions, but also for those of the persons for whom
they should be responsible.

"The father, and on his death or incapacity, the mother, is liable for the damages
caused by the minors who live with them.

xxx xxx xxx

"Owners or directors of an establishment or enterprise are equally liable for the

damages caused by their employees in the service of the branches in which the
latter may be employed or in the performance of their duties.
xxx xxx xxx

"The liability referred to in this article shall cease when the persons mentioned
therein prove that they employed all the diligence of a good father of a family to
avoid the damage."

As an answer to the argument urged in this particular action it may be sufficient to point
out that nowhere in our general statutes is the employer penalized for failure to provide or
maintain safe appliances for his workmen. His obligation therefore is one 'not punished by
the laws' and falls under civil rather than criminal jurisprudence. But the answer may be a
broader one. We should be reluctant, under any conditions, to adopt a forced construction
of these scientific codes, such as is proposed by the defendant, that would rob some of
these articles of effect, would shut out litigants against their will from the civil courts, would
make the assertion of their rights dependent upon the selection for prosecution of the
proper criminal offender, and render recovery doubtful by reason of the strict rules of proof
prevailing in criminal actions. Even if these articles had always stood alone, such a
construction would be unnecessary, but clear light is thrown upon their meaning by the
provisions of the Law of Criminal Procedure of Spain (Ley de Enjuiciamiento Criminal),
which, though never in actual force in these Islands, was formerly given a suppletory or
explanatory effect. Under article 111 of this law, both classes of action, civil and criminal,
might be prosecuted jointly or separately, but while the penal action was pending the civil
was suspended. According to article 112, the penal action once started, the civil remedy
should be sought therewith, unless it had been waived by the party injured or been
expressly reserved by him for civil proceedings for the future. If the civil action alone was
prosecuted, arising out of a crime that could be enforced only on private complaint, the
penal action thereunder should be extinguished. These provisions are in harmony with
those of articles 23 and 133 of our Penal Code on the same subject.

An examination of this topic might be carried much further, but the citation of these articles
suffices to show that the civil liability was not intended to be merged in the criminal nor
even to be suspended thereby, except as expressly provided in the law. Where an
individual is civilly liable for a negligent act or omission, it is not required that the injured
party should seek out a third person criminally liable whose prosecution must be a
condition precedent to the enforcement of the civil right.

Under article 20 of the Penal Code the responsibility of an employer may be regarded as
subsidiary in respect of criminal actions against his employees only while they are in
process of prosecution, or in so far as they determine the existence of the criminal act
from which liability arises, and his obligation under the civil law and its enforcement in the
civil courts is not barred thereby unless by the election of the injured person. Inasmuch as
no criminal proceeding had been instituted, growing our of the accident in question, the
provisions of the Penal Code can not affect this action. This construction renders it
unnecessary to finally determine here whether this subsidiary civil liability in penal actions
has survived the laws that fully regulated it or has been abrogated by the American civil
and criminal procedure now in force in the Philippines.

The difficulty in construing the articles of the code above cited in this case appears from
the briefs before us to have arisen from the interpretation of the words of article 1093,
"fault or negligence not punished by law," as applied to the comprehensive definition of
offenses in articles 568 and 590 of the Penal Code. It has been shown that the liability of
 an employer arising out of his relation to his employee who is the offender is not to be
regarded as derived from negligence punished by the law, within the meaning of articles
1902 and 1093. More than this, however, it cannot be said to fall within the class of acts
unpunished by the law, the consequence of which are regulated by articles 1902 and 1903
of the Civil Code. The acts to which these articles are applicable are understood to be
those not growing out of pre-existing duties of the parties to one another. But where
relations already formed give rise to duties, whether springing from contract or quasi
contract, then breaches of those duties are subject to articles 1101, 1103, and 1104 of the
same code. A typical application of this distinction may be found in the consequences of
a railway accident due to defective machinery supplied by the employer. His liability to his
employee would arise out of the contract of employment, that to the passengers out of the
contract for passage, while that to the injured bystander would originate in the negligent
act itself.

In Manzanares vs. Moreta, 38 Phil., 821 (year 1918), the mother of the 8 of 9-year-old child
Salvador Bona brought a civil action against Moreta to recover damages resulting from the death
of the child, who had been run over by an automobile driven and managed by the defendant. The
trial court rendered judgment requiring the defendant to pay the plaintiff the sum of P1,000 as
indemnity: This Court in affirming the judgment, said in part:

If it were true that the defendant, in coming from the southern part of Solana Street, had
to stop his auto before crossing Real Street, because he had met vehicles which were
going along the latter street or were coming from the opposite direction along Solana
Street, it is to be believed that, when he again started to run his auto across said Real
Street and to continue its way along Solana Street northward, he should have adjusted
the speed of the auto which he was operating until he had fully crossed Real Street and
had completely reached a clear way on Solana Street. But, as the child was run over by
the auto precisely at the entrance of Solana Street, this accident could not have occurred
if the auto had been running at a slow speed, aside from the fact that the defendant, at
the moment of crossing Real Street and entering Solana Street, in a northward direction,
could have seen the child in the act of crossing the latter street from the sidewalk on the
right to that on the left, and if the accident had occurred in such a way that after the
automobile had run over the body of the child, and the child's body had already been
stretched out on the ground, the automobile still moved along a distance of about 2 meters,
this circumstance shows the fact that the automobile entered Solana Street from Real
Street, at a high speed without the defendant having blown the horn. If these precautions
had been taken by the defendant, the deplorable accident which caused the death of the
child would not have occurred.

It will be noticed that the defendant in the above case could have been prosecuted in a criminal
case because his negligence causing the death of the child was punishable by the Penal Code.
Here is therefore a clear instance of the same act of negligence being a proper subject-matter
either of a criminal action with its consequent civil liability arising from a crime or of an entirely
separate and independent civil action for fault or negligence under article 1902 of the Civil Code.
Thus, in this jurisdiction, the separate individually of a cuasi-delito or culpa aquiliana under the
Civil Code has been fully and clearly recognized, even with regard to a negligent act for which the
wrongdoer could have been prosecuted and convicted in a criminal case and for which, after such
a conviction, he could have been sued for this civil liability arising from his crime.
Years later (in 1930) this Court had another occasion to apply the same doctrine. In Bernal and
Enverso vs. House and Tacloban Electric & Ice Plant, Ltd., 54 Phil., 327, the parents of the five-
year-old child, Purificacion Bernal, brought a civil action to recover damages for the child's death
as a result of burns caused by the fault and negligence of the defendants. On the evening of April
10, 1925, the Good Friday procession was held in Tacloban, Leyte. Fortunata Enverso with her
daughter Purificacion Bernal had come from another municipality to attend the same. After the
procession the mother and the daughter with two others were passing along Gran Capitan Street
in front of the offices of the Tacloban Electric & Ice Plant, Ltd., owned by defendants J. V. House,
when an automobile appeared from the opposite direction. The little girl, who was slightly ahead
of the rest, was so frightened by the automobile that she turned to run, but unfortunately she fell
into the street gutter where hot water from the electric plant was flowing. The child died that same
night from the burns. The trial courts dismissed the action because of the contributory negligence
of the plaintiffs. But this Court held, on appeal, that there was no contributory negligence, and
allowed the parents P1,000 in damages from J. V. House who at the time of the tragic occurrence
was the holder of the franchise for the electric plant. This Court said in part:

Although the trial judge made the findings of fact hereinbefore outlined, he nevertheless
was led to order the dismissal of the action because of the contributory negligence of the
plaintiffs. It is from this point that a majority of the court depart from the stand taken by the
trial judge. The mother and her child had a perfect right to be on the principal street of
Tacloban, Leyte, on the evening when the religious procession was held. There was
nothing abnormal in allowing the child to run along a few paces in advance of the mother.
No one could foresee the coincidence of an automobile appearing and of a frightened child
running and falling into a ditch filled with hot water. The doctrine announced in the much
debated case of Rakes vs. Atlantic Gulf and Pacific Co. ([1907]), 7 Phil., 359), still rule.
Article 1902 of the Civil Code must again be enforced. The contributory negligence of the
child and her mother, if any, does not operate as a bar to recovery, but in its strictest sense
could only result in reduction of the damages.

It is most significant that in the case just cited, this Court specifically applied article 1902 of the
Civil Code. It is thus that although J. V. House could have been criminally prosecuted for reckless
or simple negligence and not only punished but also made civilly liable because of his criminal
negligence, nevertheless this Court awarded damages in an independent civil action for fault or
negligence under article 1902 of the Civil Code.

In Bahia vs. Litonjua and Leynes (30 Phil., 624 [year 1915), the action was for damages for the
death of the plaintiff's daughter alleged to have been caused by the negligence of the servant in
driving an automobile over the child. It appeared that the cause of the mishap was a defect in the
steering gear. The defendant Leynes had rented the automobile from the International Garage of
Manila, to be used by him in carrying passengers during the fiesta of Tuy, Batangas. Leynes was
ordered by the lower court to pay P1,000 as damages to the plaintiff. On appeal this Court
reversed the judgment as to Leynes on the ground that he had shown that the exercised the care
of a good father of a family, thus overcoming the presumption of negligence under article 1903.
This Court said:

As to selection, the defendant has clearly shown that he exercised the care and diligence
of a good father of a family. He obtained the machine from a reputable garage and it was,
so far as appeared, in good condition. The workmen were likewise selected from a
standard garage, were duly licensed by the Government in their particular calling, and
apparently thoroughly competent. The machine had been used but a few hours when the
 accident occurred and it is clear from the evidence that the defendant had no notice, either
actual or constructive, of the defective condition of the steering gear.

The legal aspect of the case was discussed by this Court thus:

Article 1903 of the Civil Code not only establishes liability in cases of negligence, but also
provides when the liability shall cease. It says:

"The liability referred to in this article shall cease when the persons mentioned
therein prove that they employed all the diligence of a good father of a family to
avoid the damage."

From this article two things are apparent: (1) That when an injury is caused by the
negligence of a servant or employee there instantly arises a presumption of law that there
was negligence on the part of the matter or employer either in the selection of the servant
or employee, or in supervision over him after the selection, or both; and (2) that
presumption is juris tantum and not juris et de jure, and consequently, may be rebutted. It
follows necessarily that if the employer shows to the satisfaction of the court that in
selection and supervision he has exercised the care and diligence of a good father of a
family, the presumption is overcome and he is relieve from liability.

This theory bases the responsibility of the master ultimately on his own negligence and
not on that of his servant.

The doctrine of the case just cited was followed by this Court in Cerf vs. Medel (33 Phil., 37 [year
1915]). In the latter case, the complaint alleged that the defendant's servant had so negligently
driven an automobile, which was operated by defendant as a public vehicle, that said automobile
struck and damaged the plaintiff's motorcycle. This Court, applying article 1903 and following the
rule in Bahia vs. Litonjua and Leynes, said in part (p. 41) that:

The master is liable for the negligent acts of his servant where he is the owner or director
of a business or enterprise and the negligent acts are committed while the servant is
engaged in his master's employment as such owner.

Another case which followed the decision in Bahia vs. Litonjua and Leynes was Cuison vs. Norton
& Harrison Co., 55 Phil., 18 (year 1930). The latter case was an action for damages brought by
Cuison for the death of his seven-year-old son Moises. The little boy was on his way to school
with his sister Marciana. Some large pieces of lumber fell from a truck and pinned the boy
underneath, instantly killing him. Two youths, Telesforo Binoya and Francisco Bautista, who were
working for Ora, an employee of defendant Norton & Harrison Co., pleaded guilty to the crime of
homicide through reckless negligence and were sentenced accordingly. This Court, applying
articles 1902 and 1903, held:

The basis of civil law liability is not respondent superior but the relationship of pater
familias. This theory bases the liability of the master ultimately on his own negligence and
not on that of his servant. (Bahia vs. Litonjua and Leynes [1915], 30 Phil., 624; Cangco
vs. Manila Railroad Co. [1918], 38 Phil., 768.)
In Walter A. Smith & Co. vs. Cadwallader Gibson Lumber Co., 55 Phil., 517 (year 1930) the
plaintiff brought an action for damages for the demolition of its wharf, which had been struck by
the steamer Helen C belonging to the defendant. This Court held (p. 526):

The evidence shows that Captain Lasa at the time the plaintiff's wharf collapsed was a
duly licensed captain, authorized to navigate and direct a vessel of any tonnage, and that
the appellee contracted his services because of his reputation as a captain, according to
F. C. Cadwallader. This being so, we are of the opinion that the presumption of liability
against the defendant has been overcome by the exercise of the care and diligence of a
good father of a family in selecting Captain Lasa, in accordance with the doctrines laid
down by this court in the cases cited above, and the defendant is therefore absolved from
all liability.

It is, therefore, seen that the defendant's theory about his secondary liability is negatived by the
six cases above set forth. He is, on the authority of these cases, primarily and directly responsible
in damages under article 1903, in relation to article 1902, of the Civil Code.

Let us now take up the Philippine decisions relied upon by the defendant. We study first, City of
Manila vs. Manila Electric Co., 52 Phil., 586 (year 1928). A collision between a truck of the City of
Manila and a street car of the Manila Electric Co. took place on June 8, 1925. The truck was
damaged in the amount of P1,788.27. Sixto Eustaquio, the motorman, was prosecuted for the
crime of damage to property and slight injuries through reckless imprudence. He was found guilty
and sentenced to pay a fine of P900, to indemnify the City of Manila for P1,788.27, with subsidiary
imprisonment in case of insolvency. Unable to collect the indemnity from Eustaquio, the City of
Manila filed an action against the Manila Electric Company to obtain payment, claiming that the
defendant was subsidiarily liable. The main defense was that the defendant had exercised the
diligence of a good father of a family to prevent the damage. The lower court rendered judgment
in favor of the plaintiff. This Court held, in part, that this case was governed by the Penal Code,
saying:

With this preliminary point out of the way, there is no escaping the conclusion that the
provisions of the Penal Code govern. The Penal Code in easily understandable language
authorizes the determination of subsidiary liability. The Civil Code negatives its application
by providing that civil obligations arising from crimes or misdemeanors shall be governed
by the provisions of the Penal Code. The conviction of the motorman was a misdemeanor
falling under article 604 of the Penal Code. The act of the motorman was not a wrongful
or negligent act or omission not punishable by law. Accordingly, the civil obligation
connected up with the Penal Code and not with article 1903 of the Civil Code. In other
words, the Penal Code affirms its jurisdiction while the Civil Code negatives its jurisdiction.
This is a case of criminal negligence out of which civil liability arises and not a case of civil
negligence.

xxx xxx xxx

Our deduction, therefore, is that the case relates to the Penal Code and not to the Civil
Code. Indeed, as pointed out by the trial judge, any different ruling would permit the master
to escape scot-free by simply alleging and proving that the master had exercised all
diligence in the selection and training of its servants to prevent the damage. That would
be a good defense to a strictly civil action, but might or might not be to a civil action either
as a part of or predicated on conviction for a crime or misdemeanor. (By way of
 parenthesis, it may be said further that the statements here made are offered to meet the
argument advanced during our deliberations to the effect that article 0902 of the Civil Code
should be disregarded and codal articles 1093 and 1903 applied.)

It is not clear how the above case could support the defendant's proposition, because the Court
of Appeals based its decision in the present case on the defendant's primary responsibility under
article 1903 of the Civil Code and not on his subsidiary liability arising from Fontanilla's criminal
negligence. In other words, the case of City of Manila vs. Manila Electric Co., supra, is predicated
on an entirely different theory, which is the subsidiary liability of an employer arising from a
criminal act of his employee, whereas the foundation of the decision of the Court of Appeals in
the present case is the employer's primary liability under article 1903 of the Civil Code. We have
already seen that this is a proper and independent remedy.

Arambulo vs. Manila Electric Co. (55 Phil., 75), is another case invoked by the defendant. A
motorman in the employ of the Manila Electric Company had been convicted o homicide by simple
negligence and sentenced, among other things, to pay the heirs of the deceased the sum of
P1,000. An action was then brought to enforce the subsidiary liability of the defendant as employer
under the Penal Code. The defendant attempted to show that it had exercised the diligence of a
good father of a family in selecting the motorman, and therefore claimed exemption from civil
liability. But this Court held:

In view of the foregoing considerations, we are of opinion and so hold, (1) that the
exemption from civil liability established in article 1903 of the Civil Code for all who have
acted with the diligence of a good father of a family, is not applicable to the subsidiary civil
liability provided in article 20 of the Penal Code.

The above case is also extraneous to the theory of the defendant in the instant case, because
the action there had for its purpose the enforcement of the defendant's subsidiary liability under
the Penal Code, while in the case at bar, the plaintiff's cause of action is based on the defendant's
primary and direct responsibility under article 1903 of the Civil Code. In fact, the above case
destroys the defendant's contention because that decision illustrates the principle that the
employer's primary responsibility under article 1903 of the Civil Code is different in character from
his subsidiary liability under the Penal Code.

In trying to apply the two cases just referred to, counsel for the defendant has failed to recognize
the distinction between civil liability arising from a crime, which is governed by the Penal Code,
and the responsibility for cuasi-delito or culpa aquiliana under the Civil Code, and has likewise
failed to give the importance to the latter type of civil action.

The defendant-petitioner also cites Francisco vs. Onrubia (46 Phil., 327). That case need not be
set forth. Suffice it to say that the question involved was also civil liability arising from a crime.
Hence, it is as inapplicable as the two cases above discussed.

The foregoing authorities clearly demonstrate the separate individuality of cuasi-delitos or culpa
aquiliana under the Civil Code. Specifically they show that there is a distinction between civil
liability arising from criminal negligence (governed by the Penal Code) and responsibility for fault
or negligence under articles 1902 to 1910 of the Civil Code, and that the same negligent act may
produce either a civil liability arising from a crime under the Penal Code, or a separate
responsibility for fault or negligence under articles 1902 to 1910 of the Civil Code. Still more
concretely, the authorities above cited render it inescapable to conclude that the employer — in
this case the defendant-petitioner — is primarily and directly liable under article 1903 of the Civil
Code.

The legal provisions, authors, and cases already invoked should ordinarily be sufficient to dispose
of this case. But inasmuch as we are announcing doctrines that have been little understood in the
past, it might not be inappropriate to indicate their foundations.

Firstly, the Revised Penal Code in article 365 punishes not only reckless but also simple
negligence. If we were to hold that articles 1902 to 1910 of the Civil Code refer only to fault or
negligence not punished by law, according to the literal import of article 1093 of the Civil Code,
the legal institution of culpa aquiliana would have very little scope and application in actual life.
Death or injury to persons and damage to property through any degree of negligence — even the
slightest — would have to be indemnified only through the principle of civil liability arising from a
crime. In such a state of affairs, what sphere would remain for cuasi-delito or culpa aquiliana? We
are loath to impute to the lawmaker any intention to bring about a situation so absurd and
anomalous. Nor are we, in the interpretation of the laws, disposed to uphold the letter that killeth
rather than the spirit that giveth life. We will not use the literal meaning of the law to smother and
render almost lifeless a principle of such ancient origin and such full-grown development as culpa
aquiliana or cuasi-delito, which is conserved and made enduring in articles 1902 to 1910 of the
Spanish Civil Code.

Secondly, to find the accused guilty in a criminal case, proof of guilt beyond reasonable doubt is
required, while in a civil case, preponderance of evidence is sufficient to make the defendant pay
in damages. There are numerous cases of criminal negligence which can not be shown beyond
reasonable doubt, but can be proved by a preponderance of evidence. In such cases, the
defendant can and should be made responsible in a civil action under articles 1902 to 1910 of the
Civil Code. Otherwise, there would be many instances of unvindicated civil wrongs. Ubi jus ibi
remedium.

Thirdly, to hold that there is only one way to make defendant's liability effective, and that is, to sue
the driver and exhaust his (the latter's) property first, would be tantamount to compelling the
plaintiff to follow a devious and cumbersome method of obtaining relief. True, there is such a
remedy under our laws, but there is also a more expeditious way, which is based on the primary
and direct responsibility of the defendant under article 1903 of the Civil Code. Our view of the law
is more likely to facilitate remedy for civil wrongs, because the procedure indicated by the
defendant is wasteful and productive of delay, it being a matter of common knowledge that
professional drivers of taxis and similar public conveyance usually do not have sufficient means
with which to pay damages. Why, then, should the plaintiff be required in all cases to go through
this roundabout, unnecessary, and probably useless procedure? In construing the laws, courts
have endeavored to shorten and facilitate the pathways of right and justice.

At this juncture, it should be said that the primary and direct responsibility of employers and their
presumed negligence are principles calculated to protect society. Workmen and employees
should be carefully chosen and supervised in order to avoid injury to the public. It is the masters
or employers who principally reap the profits resulting from the services of these servants and
employees. It is but right that they should guarantee the latter's careful conduct for the personnel
and patrimonial safety of others. As Theilhard has said, "they should reproach themselves, at
least, some for their weakness, others for their poor selection and all for their negligence." And
according to Manresa, "It is much more equitable and just that such responsibility should fall upon
the principal or director who could have chosen a careful and prudent employee, and not upon
the injured person who could not exercise such selection and who used such employee because
of his confidence in the principal or director." (Vol. 12, p. 622, 2nd Ed.) Many jurists also base this
primary responsibility of the employer on the principle of representation of the principal by the
agent. Thus, Oyuelos says in the work already cited (Vol. 7, p. 747) that before third persons the
employer and employee "vienen a ser como una sola personalidad, por refundicion de la del
dependiente en la de quien le emplea y utiliza." ("become as one personality by the merging of
the person of the employee in that of him who employs and utilizes him.") All these observations
acquire a peculiar force and significance when it comes to motor accidents, and there is need of
stressing and accentuating the responsibility of owners of motor vehicles.

Fourthly, because of the broad sweep of the provisions of both the Penal Code and the Civil Code
on this subject, which has given rise to the overlapping or concurrence of spheres already
discussed, and for lack of understanding of the character and efficacy of the action for culpa
aquiliana, there has grown up a common practice to seek damages only by virtue of the civil
responsibility arising from a crime, forgetting that there is another remedy, which is by invoking
articles 1902-1910 of the Civil Code. Although this habitual method is allowed by our laws, it has
nevertheless rendered practically useless and nugatory the more expeditious and effective
remedy based on culpa aquiliana or culpa extra-contractual. In the present case, we are asked to
help perpetuate this usual course. But we believe it is high time we pointed out to the harm done
by such practice and to restore the principle of responsibility for fault or negligence under articles
1902 et seq. of the Civil Code to its full rigor. It is high time we caused the stream of quasi-delict
or culpa aquiliana to flow on its own natural channel, so that its waters may no longer be diverted
into that of a crime under the Penal Code. This will, it is believed, make for the better safeguarding
of private rights because it re-establishes an ancient and additional remedy, and for the further
reason that an independent civil action, not depending on the issues, limitations and results of a
criminal prosecution, and entirely directed by the party wronged or his counsel, is more likely to
secure adequate and efficacious redress.

In view of the foregoing, the judgment of the Court of Appeals should be and is hereby affirmed,
with costs against the defendant-petitioner.

Yulo, C.J., Moran, Ozaeta and Paras, JJ., concur.

G.R. No. L-32599 June 29, 1979

EDGARDO E. MENDOZA, petitioner

vs.
HON. ABUNDIO Z. ARRIETA, Presiding Judge of Branch VIII, Court of First Instance of
Manila, FELINO TIMBOL, and RODOLFO SALAZAR, Respondents.

David G. Nitafan for petitioner.chanrobles virtual law library

Arsenio R. Reyes for respondent Timbol.chanrobles virtual law library

Armando M. Pulgado for respondent Salazar.

MELENCIO-HERRERA, J:
Petitioner, Edgardo Mendoza, seeks a review on certiorari of the Orders of respondent Judge in
Civil Case No. 80803 dismissing his Complaint for Damages based on quasi-delict against
respondents Felino Timbol and Rodolfo Salazar.chanrobles virtual law library

The facts which spawned the present controversy may be summarized as follows:

On October 22, 1969, at about 4:00 o'clock in the afternoon, a three- way vehicular accident
occurred along Mac-Arthur Highway, Marilao, Bulacan, involving a Mercedes Benz owned and
driven by petitioner; a private jeep owned and driven by respondent Rodolfo Salazar; and a gravel
and sand truck owned by respondent Felipino Timbol and driven by Freddie Montoya. As a
consequence of said mishap, two separate Informations for Reckless Imprudence Causing
Damage to Property were filed against Rodolfo Salazar and Freddie Montoya with the Court of
First Instance of Bulacan. The race against truck-driver Montoya, docketed as Criminal Case No.
SM-227, was for causing damage to the jeep owned by Salazar, in the amount of Pl,604.00, by
hitting it at the right rear portion thereby causing said jeep to hit and bump an oncoming car, which
happened to be petitioner's Mercedes Benz. The case against jeep-owner-driver Salazar,
docketed as Criminal Case No. SM 228, was for causing damage to the Mercedes Benz of
petitioner in the amount of P8,890.00

At the joint trial of the above cases, petitioner testified that jeep-owner- driver Salazar overtook
the truck driven by Montoya, swerved to the left going towards the poblacion of Marilao, and hit
his car which was bound for Manila. Petitioner further testified that before the impact, Salazar had
jumped from the jeep and that he was not aware that Salazar's jeep was bumped from behind by
the truck driven by Montoya. Petitioner's version of the accident was adopted by truck driver
Montoya. Jeep-owner-driver Salazar, on the other hand, tried to show that, after overtaking the
truck driven by Montoya, he flashed a signal indicating his intention to turn left towards the
poblacion of Marilao but was stopped at the intersection by a policeman who was directing traffic;
that while he was at a stop position, his jeep was bumped at the rear by the truck driven by
Montova causing him to be thrown out of the jeep, which then swerved to the left and hit
petitioner's car, which was coming from the opposite direction.chanrobles virtual law library

On July 31, 1970, the Court of First Instance of Bulacan, Branch V, Sta. Maria, rendered judgment,
stating in its decretal portion:

IN VIEW OF THE FOREGOING, this Court finds the accused Freddie Montoya GUILTY beyond
reasonable doubt of the crime of damage to property thru reckless imprudence in Crime. Case
No. SM-227, and hereby sentences him to pay a fine of P972.50 and to indemnify Rodolfo Salazar
in the same amount of P972.50 as actual damages, with subsidiary imprisonment in case of
insolvency, both as to fine and indemnity, with costs.chanrobles virtual law library

Accused Rodolfo Salazar is hereby ACQUITTED from the offense charged in Crime. Case No.
SM-228, with costs de oficio, and his bond is ordered canceled

SO ORDERED. 1

Thus, the trial Court absolved jeep-owner-driver Salazar of any liability, civil and criminal, in view
of its findings that the collision between Salazar's jeep and petitioner's car was the result of the
former having been bumped from behind by the truck driven by Montoya. Neither was petitioner
awarded damages as he was not a complainant against truck-driver Montoya but only against
jeep-owner-driver Salazar.chanrobles virtual law library
On August 22, 1970, or after the termination of the criminal cases, petitioner filed Civil Case No.
80803 with the Court of First Instance of Manila against respondents jeep-owner-driver Salazar
and Felino Timbol, the latter being the owner of the gravel and sand truck driven by Montoya, for
indentification for the damages sustained by his car as a result of the collision involving their
vehicles. Jeep-owner-driver Salazar and truck-owner Timbol were joined as defendants, either in
the alternative or in solidum allegedly for the reason that petitioner was uncertain as to whether
he was entitled to relief against both on only one of them.chanrobles virtual law library

On September 9, 1970, truck-owner Timbol filed a Motion to Dismiss Civil Case No. 80803 on the
grounds that the Complaint is barred by a prior judgment in the criminal cases and that it fails to
state a cause of action. An Opposition thereto was filed by petitioner.chanrobles virtual law library

In an Order dated September 12, 1970, respondent Judge dismissed the Complaint against truck-
owner Timbol for reasons stated in the afore- mentioned Motion to Dismiss On September 30,
1970, petitioner sought before this Court the review of that dismissal, to which petition we gave
due course.chanrobles virtual law library

On January 30, 1971, upon motion of jeep-owner-driver Salazar, respondent Judge also
dismissed the case as against the former. Respondent Judge reasoned out that "while it is true
that an independent civil action for liability under Article 2177 of the Civil Code could be
prosecuted independently of the criminal action for the offense from which it arose, the New Rules
of Court, which took effect on January 1, 1964, requires an express reservation of the civil action
to be made in the criminal action; otherwise, the same would be barred pursuant to Section 2,
Rule 111 ... 2 Petitioner's Motion for Reconsideration thereof was denied in the order dated
February 23, 1971, with respondent Judge suggesting that the issue be raised to a higher Court
"for a more decisive interpretation of the rule. 3

On March 25, 1971, petitioner then filed a Supplemental Petition before us, also to review the last
two mentioned Orders, to which we required jeep-owner-driver Salazar to file an Answer.

The Complaint against

truck-owner Timbol

We shall first discuss the validity of the Order, dated September 12, 1970, dismissing petitioner's
Complaint against truck-owner Timbol.chanrobles virtual law library

In dismissing the Complaint against the truck-owner, respondent Judge sustained Timbol's
allegations that the civil suit is barred by the prior joint judgment in Criminal Cases Nos. SM-227
and SM-228, wherein no reservation to file a separate civil case was made by petitioner and
where the latter actively participated in the trial and tried to prove damages against jeep-driver-
Salazar only; and that the Complaint does not state a cause of action against truck-owner Timbol
inasmuch as petitioner prosecuted jeep-owner-driver Salazar as the one solely responsible for
the damage suffered by his car.chanrobles virtual law library

Well-settled is the rule that for a prior judgment to constitute a bar to a subsequent case, the
following requisites must concur: (1) it must be a final judgment; (2) it must have been rendered
by a Court having jurisdiction over the subject matter and over the parties; (3) it must be a
judgment on the merits; and (4) there must be, between the first and second actions, Identity of
parties, Identity of subject matter and Identity of cause of action.chanrobles virtual law library
It is conceded that the first three requisites of res judicata are present. However, we agree with
petitioner that there is no Identity of cause of action between Criminal Case No. SM-227 and Civil
Case No. 80803. Obvious is the fact that in said criminal case truck-driver Montoya was not
prosecuted for damage to petitioner's car but for damage to the jeep. Neither was truck-owner
Timbol a party in said case. In fact as the trial Court had put it "the owner of the Mercedes Benz
cannot recover any damages from the accused Freddie Montoya, he (Mendoza) being a
complainant only against Rodolfo Salazar in Criminal Case No. SM-228. 4 And more importantly,
in the criminal cases, the cause of action was the enforcement of the civil liability arising from
criminal negligence under Article l of the Revised Penal Code, whereas Civil Case No. 80803 is
based on quasi-delict under Article 2180, in relation to Article 2176 of the Civil Code As held
in Barredo vs. Garcia, et al. 5

The foregoing authorities clearly demonstrate the separate in. individuality of cuasi-
delitos or culpa aquiliana under the Civil Code. Specifically they show that there is a distinction
between civil liability arising from criminal negligence (governed by the Penal Code) and
responsibility for fault or negligence under articles 1902 to 1910 of the Civil Code, and that the
same negligent act may produce either a civil liability arising from a crime under the Penal Code,
or a separate responsibility for fault or negligence under articles 1902 to 1910 of the Civil Code.
Still more concretely, the authorities above cited render it inescapable to conclude that the
employer in this case the defendant- petitioner is primarily and directly liable under article 1903
of the Civil Code.

That petitioner's cause of action against Timbol in the civil case is based on quasi-delict is evident
from the recitals in the complaint to wit: that while petitioner was driving his car along MacArthur
Highway at Marilao, Bulacan, a jeep owned and driven by Salazar suddenly swerved to his
(petitioner's) lane and collided with his car That the sudden swerving of Salazar's jeep was caused
either by the negligence and lack of skill of Freddie Montoya, Timbol's employee, who was then
driving a gravel and sand truck iii the same direction as Salazar's jeep; and that as a consequence
of the collision, petitioner's car suffered extensive damage amounting to P12,248.20 and that he
likewise incurred actual and moral damages, litigation expenses and attorney's fees. Clearly,
therefore, the two factors that a cause of action must consist of, namely: (1) plaintiff's primary
right, i.e., that he is the owner of a Mercedes Benz, and (2) defendant's delict or wrongful act or
omission which violated plaintiff's primary right, i.e., the negligence or lack of skill either of jeep-
owner Salazar or of Timbol's employee, Montoya, in driving the truck, causing Salazar's jeep to
swerve and collide with petitioner's car, were alleged in the Complaint. 6

Consequently, petitioner's cause of action being based on quasi-delict, respondent Judge

committed reversible error when he dismissed the civil suit against the truck-owner, as said case
may proceed independently of the criminal proceedings and regardless of the result of the latter.

Art. 31. When the civil action is based on an obligation not arising from the act or omission
complained of as a felony, such civil action may proceed independently of the criminal
proceedings and regardless of the result of the latter.

But it is truck-owner Timbol's submission (as well as that of jeep-owner-driver Salazar) that
petitioner's failure to make a reservation in the criminal action of his right to file an independent
civil action bars the institution of such separate civil action, invoking section 2, Rule 111, Rules of
Court, which says:
Section 2. - Independent civil action. - In the cases provided for in Articles 31, 32, 33, 34 and 2177
of the Civil Code of the Philippines, an independent civil action entirely separate and distinct from
the criminal action may be brought by the injured party during the pendency of the criminal case,
provided the right is reserved as required in the preceding section. Such civil action shau proceed
independently of the criminal prosecution, and shall require only a preponderance of evidence.

Interpreting the above provision, this Court, in Garcia vs. Florida 7 said:

As we have stated at the outset, the same negligent act causing damages may produce a civil
liability arising from crime or create an action for quasi-delict or culpa extra-contractual. The
former is a violation of the criminal law, while the latter is a distinct and independent negligence,
having always had its own foundation and individuality. Some legal writers are of the view that in
accordance with Article 31, the civil action based upon quasi-delict may proceed independently
of the criminal proceeding for criminal negligence and regardless of the result of the latter. Hence,
'the proviso in Section 2 of Rule 111 with reference to ... Articles 32, 33 and 34 of the Civil Code
is contrary to the letter and spirit of the said articles, for these articles were drafted ... and are
intended to constitute as exceptions to the general rule stated in what is now Section 1 of Rule
111. The proviso, which is procedural, may also be regarded as an unauthorized amendment of
substantive law, Articles 32, 33 and 34 of the Civil Code, which do not provide for the reservation
required in the proviso ... .

In his concurring opinion in the above case, Mr. Justice Antonio Barredo further observed that
inasmuch as Articles 2176 and 2177 of the Civil Code create a civil liability distinct and different
from the civil action arising from the offense of negligence under the Revised Penal Code, no
reservation, therefore, need be made in the criminal case; that Section 2 of Rule 111 is
inoperative, "it being substantive in character and is not within the power of the Supreme Court
to promulgate; and even if it were not substantive but adjective, it cannot stand because of its
inconsistency with Article 2177, an enactment of the legislature superseding the Rules of 1940."

We declare, therefore, that in so far as truck-owner Timbol is concerned, Civil Case No. 80803 is
not barred by the fact that petitioner failed to reserve, in the criminal action, his right to file an
independent civil action based on quasi-delict.

The suit against

jeep-owner-driver Salazar

The case as against jeep-owner-driver Salazar, who was acquitted in Criminal Case No. SM-228,
presents a different picture altogether.chanrobles virtual law library

At the outset it should be clarified that inasmuch as civil liability co-exists with criminal
responsibility in negligence cases, the offended party has the option between an action for
enforcement of civil liability based on culpa criminal under Article 100 of the Revised Penal Code,
and an action for recovery of damages based on culpa aquiliana under Article 2177 of the Civil
Code. The action for enforcement of civil liability based on culpa criminal under section 1 of Rule
111 of the Rules of Court is deemed simultaneously instituted with the criminal action, unless
expressly waived or reserved for separate application by the offended party. 8

The circumstances attendant to the criminal case yields the conclusion that petitioner had opted
to base his cause of action against jeep-owner-driver Salazar on culpa criminal and not on culpa
aquiliana as evidenced by his active participation and intervention in the prosecution of the
criminal suit against said Salazar. The latter's civil liability continued to be involved in the criminal
action until its termination. Such being the case, there was no need for petitioner to have reserved
his right to file a separate civil action as his action for civil liability was deemed impliedly instituted
in Criminal Case No. SM-228.chanrobles virtual law library

Neither would an independent civil action he. Noteworthy is the basis of the acquittal of jeep-
owner-driver Salazar in the criminal case, expounded by the trial Court in this wise:

In view of what has been proven and established during the trial, accused Freddie Montoya would
be held able for having bumped and hit the rear portion of the jeep driven by the accused Rodolfo
Salazar,

Considering that the collision between the jeep driven by Rodolfo Salazar and the car owned and
driven by Edgardo Mendoza was the result of the hitting on the rear of the jeep by the truck driven
by Freddie Montoya, this Court behaves that accused Rodolfo Salazar cannot be held able for
the damages sustained by Edgardo Mendoza's car. 9

Crystal clear is the trial Court's pronouncement that under the facts of the case, jeep-owner-driver
Salazar cannot be held liable for the damages sustained by petitioner's car. In other words, "the
fact from which the civil might arise did not exist. " Accordingly, inasmuch as petitioner's cause of
action as against jeep-owner-driver Salazar is ex- delictu, founded on Article 100 of the Revised
Penal Code, the civil action must be held to have been extinguished in consonance with Section
3(c), Rule 111 of the Rules of Court 10which provides:

Sec. 3. Other civil actions arising from offenses. - In all cases not included in the preceding section
the following rules shall be observed:

xxx xxx xxx

c) Extinction of the penal action does not carry with it extinction of the civil, unless the extinction
proceeds from a declaration in a final judgment that the fact from which the civil night arise did
not exist. ...

And even if petitioner's cause of action as against jeep-owner-driver Salazar were not ex-delictu,
the end result would be the same, it being clear from the judgment in the criminal case that
Salazar's acquittal was not based upon reasonable doubt, consequently, a civil action for
damages can no longer be instituted. This is explicitly provided for in Article 29 of the Civil Code
quoted here under:

Art. 29. When the accused in a criminal prosecution is acquitted on the ground that his guilt has
not been proved beyond reasonable doubt, a civil action for damages for the same act or omission
may be instituted. Such action requires only a preponderance of evidence ...chanrobles virtual
law library

If in a criminal case the judgment of acquittal is based upon reasonable doubt, the court shall so
declare. In the absence of any declaration to that effect, it may be inferred from the text of the
decision whether or not the acquittal is due to that ground.
In so far as the suit against jeep-owner-driver Salazar is concerned, therefore, we sustain
respondent Judge's Order dated January 30, 1971 dismissing the complaint, albeit on different
grounds.chanrobles virtual law library

WHEREFORE, 1) the Order dated September 12, 1970 dismissing Civil Case No. 80803 against
private respondent Felino Timbol is set aside, and respondent Judge, or his successor, hereby
ordered to proceed with the hearing on the merits; 2) but the Orders dated January 30, 1971 and
February 23, 1971 dismissing the Complaint in Civil Case No. 80803 against respondent Rodolfo
Salazar are hereby upheld.chanrobles virtual law library

No costs.chanrobles virtual law library

SO ORDERED.

G.R. No. 84698 February 4, 1992

PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION, JUAN D. LIM, BENJAMIN P.

PAULINO, ANTONIO M. MAGTALAS, COL. PEDRO SACRO and LT. M.
SORIANO, petitioners,
vs.
COURT OF APPEALS, HON. REGINA ORDOÑEZ-BENITEZ, in her capacity as Presiding
Judge of Branch 47, Regional Trial Court, Manila, SEGUNDA R. BAUTISTA and ARSENIA
D. BAUTISTA, respondents.

Balgos and Perez for petitioners.

Collantes, Ramirez & Associates for private respondents.

PADILLA, J.:

A stabbing incident on 30 August 1985 which caused the death of Carlitos Bautista while on the
second-floor premises of the Philippine School of Business Administration (PSBA) prompted the
parents of the deceased to file suit in the Regional Trial Court of Manila (Branch 47) presided over
by Judge (now Court of Appeals justice) Regina Ordoñez-Benitez, for damages against the said
PSBA and its corporate officers. At the time of his death, Carlitos was enrolled in the third year
commerce course at the PSBA. It was established that his assailants were not members of the
school's academic community but were elements from outside the school.

Specifically, the suit impleaded the PSBA and the following school authorities: Juan D. Lim
(President), Benjamin P. Paulino (Vice-President), Antonio M. Magtalas (Treasurer/Cashier), Col.
Pedro Sacro (Chief of Security) and a Lt. M. Soriano (Assistant Chief of Security). Substantially,
the plaintiffs (now private respondents) sought to adjudge them liable for the victim's untimely
demise due to their alleged negligence, recklessness and lack of security precautions, means
and methods before, during and after the attack on the victim. During the proceedings a quo, Lt.
M. Soriano terminated his relationship with the other petitioners by resigning from his position in
the school.
Defendants a quo (now petitioners) sought to have the suit dismissed, alleging that since they are
presumably sued under Article 2180 of the Civil Code, the complaint states no cause of action
against them, as jurisprudence on the subject is to the effect that academic institutions, such as
the PSBA, are beyond the ambit of the rule in the afore-stated article.

The respondent trial court, however, overruled petitioners' contention and thru an order dated 8
December 1987, denied their motion to dismiss. A subsequent motion for reconsideration was
similarly dealt with by an order dated 25 January 1988. Petitioners then assailed the trial court's
disposition before the respondent appellate court which, in a decision * promulgated on 10 June
1988, affirmed the trial court's orders. On 22 August 1988, the respondent appellate court
resolved to deny the petitioners' motion for reconsideration. Hence, this petition.

At the outset, it is to be observed that the respondent appellate court primarily anchored its
decision on the law of quasi-delicts, as enunciated in Articles 2176 and 2180 of the Civil
Code. 1 Pertinent portions of the appellate court's now assailed ruling state:

Article 2180 (formerly Article 1903) of the Civil Code is an adoption from the old
Spanish Civil Code. The comments of Manresa and learned authorities on its
meaning should give way to present day changes. The law is not fixed and flexible
(sic); it must be dynamic. In fact, the greatest value and significance of law as a
rule of conduct in (sic) its flexibility to adopt to changing social conditions and its
capacity to meet the new challenges of progress.

Construed in the light of modern day educational system, Article 2180 cannot be
construed in its narrow concept as held in the old case of Exconde
vs. Capuno 2 and Mercado vs. Court of Appeals; 3 hence, the ruling in
the Palisoc 4 case that it should apply to all kinds of educational institutions,
academic or vocational.

At any rate, the law holds the teachers and heads of the school staff liable unless
they relieve themselves of such liability pursuant to the last paragraph of Article
2180 by "proving that they observed all the diligence to prevent damage." This can
only be done at a trial on the merits of the case. 5

While we agree with the respondent appellate court that the motion to dismiss the complaint was
correctly denied and the complaint should be tried on the merits, we do not however agree with
the premises of the appellate court's ruling.

Article 2180, in conjunction with Article 2176 of the Civil Code, establishes the rule of in loco
parentis. This Court discussed this doctrine in the afore-cited cases of Exconde, Mendoza,
Palisoc and, more recently, in Amadora vs. Court of Appeals. 6 In all such cases, it had been
stressed that the law (Article 2180) plainly provides that the damage should have been caused or
inflicted by pupils or students of he educational institution sought to be held liable for the acts of
its pupils or students while in its custody. However, this material situation does not exist in the
present case for, as earlier indicated, the assailants of Carlitos were not students of the PSBA, for
whose acts the school could be made liable.

However, does the appellate court's failure to consider such material facts mean the exculpation
of the petitioners from liability? It does not necessarily follow.
When an academic institution accepts students for enrollment, there is established
a contract between them, resulting in bilateral obligations which both parties are bound to comply
with. 7 For its part, the school undertakes to provide the student with an education that would
presumably suffice to equip him with the necessary tools and skills to pursue higher education or
a profession. On the other hand, the student covenants to abide by the school's academic
requirements and observe its rules and regulations.

Institutions of learning must also meet the implicit or "built-in" obligation of providing their students
with an atmosphere that promotes or assists in attaining its primary undertaking of imparting
knowledge. Certainly, no student can absorb the intricacies of physics or higher mathematics or
explore the realm of the arts and other sciences when bullets are flying or grenades exploding in
the air or where there looms around the school premises a constant threat to life and limb.
Necessarily, the school must ensure that adequate steps are taken to maintain peace and order
within the campus premises and to prevent the breakdown thereof.

Because the circumstances of the present case evince a contractual relation between the PSBA
and Carlitos Bautista, the rules on quasi-delict do not really govern. 8 A perusal of Article 2176
shows that obligations arising from quasi-delicts or tort, also known as extra-contractual
obligations, arise only between parties not otherwise bound by contract, whether express or
implied. However, this impression has not prevented this Court from determining the existence of
a tort even when there obtains a contract. In Air France vs. Carrascoso (124 Phil. 722), the private
respondent was awarded damages for his unwarranted expulsion from a first-class seat aboard
the petitioner airline. It is noted, however, that the Court referred to the petitioner-airline's liability
as one arising from tort, not one arising from a contract of carriage. In effect, Air France is
authority for the view that liability from tort may exist even if there is a contract, for the act that
breaks the contract may be also a tort. (Austro-America S.S. Co. vs. Thomas, 248 Fed. 231).

This view was not all that revolutionary, for even as early as 1918, this Court was already of a
similar mind. In Cangco vs. Manila Railroad (38 Phil. 780), Mr. Justice Fisher elucidated thus:

The field of non-contractual obligation is much broader than that of contractual

obligation, comprising, as it does, the whole extent of juridical human relations.
These two fields, figuratively speaking, concentric; that is to say, the mere fact that
a person is bound to another by contract does not relieve him from extra-
contractual liability to such person. When such a contractual relation exists the
obligor may break the contract under such conditions that the same act which
constitutes a breach of the contract would have constituted the source of an extra-
contractual obligation had no contract existed between the parties.

Immediately what comes to mind is the chapter of the Civil Code on Human Relations, particularly
Article 21, which provides:

Any person who wilfully causes loss or injury to another in a manner that is
contrary to morals, good custom or public policy shall compensate the latter for the
damage. (emphasis supplied).

Air France penalized the racist policy of the airline which emboldened the petitioner's employee
to forcibly oust the private respondent to cater to the comfort of a white man who allegedly "had
a better right to the seat." In Austro-American, supra, the public embarrassment caused to the
passenger was the justification for the Circuit Court of Appeals, (Second Circuit), to award
damages to the latter. From the foregoing, it can be concluded that should the act which breaches
a contract be done in bad faith and be violative of Article 21, then there is a cause to view the act
as constituting a quasi-delict.

In the circumstances obtaining in the case at bar, however, there is, as yet, no finding that the
contract between the school and Bautista had been breached thru the former's negligence in
providing proper security measures. This would be for the trial court to determine. And, even if
there be a finding of negligence, the same could give rise generally to a breach of contractual
obligation only. Using the test of Cangco, supra, the negligence of the school would not be
relevant absent a contract. In fact, that negligence becomes material only because of the
contractual relation between PSBA and Bautista. In other words, a contractual relation is a
condition sine qua non to the school's liability. The negligence of the school cannot exist
independently of the contract, unless the negligence occurs under the circumstances set out in
Article 21 of the Civil Code.

This Court is not unmindful of the attendant difficulties posed by the obligation of schools, above-
mentioned, for conceptually a school, like a common carrier, cannot be an insurer of its students
against all risks. This is specially true in the populous student communities of the so-called
"university belt" in Manila where there have been reported several incidents ranging from gang
wars to other forms of hooliganism. It would not be equitable to expect of schools to
anticipate all types of violent trespass upon their premises, for notwithstanding the security
measures installed, the same may still fail against an individual or group determined to carry out
a nefarious deed inside school premises and environs. Should this be the case, the school may
still avoid liability by proving that the breach of its contractual obligation to the students was not
due to its negligence, here statutorily defined to be the omission of that degree of diligence which
is required by the nature of the obligation and corresponding to the circumstances of persons,
time and place. 9

As the proceedings a quo have yet to commence on the substance of the private respondents'
complaint, the record is bereft of all the material facts. Obviously, at this stage, only the trial court
can make such a determination from the evidence still to unfold.

WHEREFORE, the foregoing premises considered, the petition is DENIED. The court of origin
(RTC, Manila, Br. 47) is hereby ordered to continue proceedings consistent with this ruling of the
Court. Costs against the petitioners.

SO ORDERED
G.R. No. L-47745 April 15, 1988

JOSE S. AMADORA, LORETA A. AMADORA, JOSE A. AMADORA JR., NORMA A. YLAYA

PANTALEON A. AMADORA, JOSE A. AMADORA III, LUCY A. AMADORA, ROSALINDA A.
AMADORA, PERFECTO A. AMADORA, SERREC A. AMADORA, VICENTE A. AMADORA and
MARIA TISCALINA A. AMADORA, petitioners
vs.
HONORABLE COURT OF APPEALS, COLEGIO DE SAN JOSE-RECOLETOS, VICTOR
LLUCH SERGIO P. DLMASO JR., CELESTINO DICON, ANIANO ABELLANA, PABLITO
DAFFON thru his parents and natural guardians, MR. and MRS. NICANOR GUMBAN, and
ROLANDO VALENCIA, thru his guardian, A. FRANCISCO ALONSO, respondents.

Jose S. Amadora & Associates for petitioners.

Padilla Law Office for respondents.

CRUZ, J.:

Like any prospective graduate, Alfredo Amadora was looking forward to the commencement
exercises where he would ascend the stage and in the presence of his relatives and friends
receive his high school diploma. These ceremonies were scheduled on April 16, 1972. As it turned
out, though, fate would intervene and deny him that awaited experience. On April 13, 1972, while
they were in the auditorium of their school, the Colegio de San Jose-Recoletos, a classmate,
Pablito Damon, fired a gun that mortally hit Alfredo, ending all his expectations and his life as well.
The victim was only seventeen years old. 1

Daffon was convicted of homicide thru reckless imprudence . 2 Additionally, the herein petitioners,
as the victim's parents, filed a civil action for damages under Article 2180 of the Civil Code against
the Colegio de San Jose-Recoletos, its rector the high school principal, the dean of boys, and the
physics teacher, together with Daffon and two other students, through their respective parents.
The complaint against the students was later dropped. After trial, the Court of First Instance of
Cebu held the remaining defendants liable to the plaintiffs in the sum of P294,984.00,
representing death compensation, loss of earning capacity, costs of litigation, funeral expenses,
moral damages, exemplary damages, and attorney's fees .3 On appeal to the respondent court,
however, the decision was reversed and all the defendants were completely absolved .4

In its decision, which is now the subject of this petition for certiorari under Rule 45 of the Rules of
Court, the respondent court found that Article 2180 was not applicable as the Colegio de San
Jose-Recoletos was not a school of arts and trades but an academic institution of learning. It also
held that the students were not in the custody of the school at the time of the incident as the
semester had already ended, that there was no clear identification of the fatal gun and that in any
event the defendant, had exercised the necessary diligence in preventing the injury. 5

The basic undisputed facts are that Alfredo Amadora went to the San Jose-Recoletos on April 13,
1972, and while in its auditorium was shot to death by Pablito Daffon, a classmate. On the
implications and consequences of these facts, the parties sharply disagree.
The petitioners contend that their son was in the school to show his physics experiment as a
prerequisite to his graduation; hence, he was then under the custody of the private respondents.
The private respondents submit that Alfredo Amadora had gone to the school only for the purpose
of submitting his physics report and that he was no longer in their custody because the semester
had already ended.

There is also the question of the identity of the gun used which the petitioners consider important
because of an earlier incident which they claim underscores the negligence of the school and at
least one of the private respondents. It is not denied by the respondents that on April 7, 1972,
Sergio Damaso, Jr., the dean of boys, confiscated from Jose Gumban an unlicensed pistol but
later returned it to him without making a report to the principal or taking any further action . 6 As
Gumban was one of the companions of Daffon when the latter fired the gun that killed Alfredo,
the petitioners contend that this was the same pistol that had been confiscated from Gumban and
that their son would not have been killed if it had not been returned by Damaso. The respondents
say, however, that there is no proof that the gun was the same firearm that killed Alfredo.

Resolution of all these disagreements will depend on the interpretation of Article 2180 which, as
it happens, is invoked by both parties in support of their conflicting positions. The pertinent part
of this article reads as follows:

Lastly, teachers or heads of establishments of arts and trades shall be liable for
damages caused by their pupils and students or apprentices so long as they
remain in their custody.

Three cases have so far been decided by the Court in connection with the above-quoted provision,
to wit: Exconde v. Capuno 7 Mercado v. Court of Appeals, 8 and Palisoc v. Brillantes. 9 These will
be briefly reviewed in this opinion for a better resolution of the case at bar.

In the Exconde Case, Dante Capuno, a student of the Balintawak Elementary School and a Boy
Scout, attended a Rizal Day parade on instructions of the city school supervisor. After the parade,
the boy boarded a jeep, took over its wheel and drove it so recklessly that it turned turtle, resulting
in the death of two of its passengers. Dante was found guilty of double homicide with reckless
imprudence. In the separate civil action flied against them, his father was held solidarily liable with
him in damages under Article 1903 (now Article 2180) of the Civil Code for the tort committed by
the 15-year old boy.

This decision, which was penned by Justice Bautista Angelo on June 29,1957, exculpated the
school in an obiter dictum (as it was not a party to the case) on the ground that it was riot a school
of arts and trades. Justice J.B.L. Reyes, with whom Justices Sabino Padilla and Alex Reyes
concurred, dissented, arguing that it was the school authorities who should be held liable Liability
under this rule, he said, was imposed on (1) teachers in general; and (2) heads of schools of arts
and trades in particular. The modifying clause "of establishments of arts and trades" should apply
only to "heads" and not "teachers."

Exconde was reiterated in the Mercado Case, and with an elaboration. A student cut a classmate
with a razor blade during recess time at the Lourdes Catholic School in Quezon City, and the
parents of the victim sued the culprits parents for damages. Through Justice Labrador, the Court
declared in another obiter (as the school itself had also not been sued that the school was not
liable because it was not an establishment of arts and trades. Moreover, the custody requirement
had not been proved as this "contemplates a situation where the student lives and boards with
the teacher, such that the control, direction and influences on the pupil supersede those of the
parents." Justice J.B.L. Reyes did not take part but the other members of the court concurred in
this decision promulgated on May 30, 1960.

In Palisoc vs. Brillantes, decided on October 4, 1971, a 16-year old student was killed by a
classmate with fist blows in the laboratory of the Manila Technical Institute. Although the
wrongdoer — who was already of age — was not boarding in the school, the head thereof and
the teacher in charge were held solidarily liable with him. The Court declared through Justice
Teehankee:

The phrase used in the cited article — "so long as (the students) remain in their
custody" — means the protective and supervisory custody that the school and its
heads and teachers exercise over the pupils and students for as long as they are
at attendance in the school, including recess time. There is nothing in the law that
requires that for such liability to attach, the pupil or student who commits the
tortious act must live and board in the school, as erroneously held by the lower
court, and the dicta in Mercado (as well as in Exconde) on which it relied, must
now be deemed to have been set aside by the present decision.

This decision was concurred in by five other members, 10 including Justice J.B.L. Reyes, who
stressed, in answer to the dissenting opinion, that even students already of age were covered by
the provision since they were equally in the custody of the school and subject to its discipline.
Dissenting with three others,11 Justice Makalintal was for retaining the custody interpretation in
Mercado and submitted that the rule should apply only to torts committed by students not yet of
age as the school would be acting only in loco parentis.

In a footnote, Justice Teehankee said he agreed with Justice Reyes' dissent in the Exconde Case
but added that "since the school involved at bar is a non-academic school, the question as to the
applicability of the cited codal provision to academic institutions will have to await another case
wherein it may properly be raised."

This is the case.

Unlike in Exconde and Mercado, the Colegio de San Jose-Recoletos has been directly impleaded
and is sought to be held liable under Article 2180; and unlike in Palisoc, it is not a school of arts
and trades but an academic institution of learning. The parties herein have also directly raised the
question of whether or not Article 2180 covers even establishments which are technically not
schools of arts and trades, and, if so, when the offending student is supposed to be "in its custody."

After an exhaustive examination of the problem, the Court has come to the conclusion that the
provision in question should apply to all schools, academic as well as non-academic. Where the
school is academic rather than technical or vocational in nature, responsibility for the tort
committed by the student will attach to the teacher in charge of such student, following the first
part of the provision. This is the general rule. In the case of establishments of arts and trades, it
is the head thereof, and only he, who shall be held liable as an exception to the general rule. In
other words, teachers in general shall be liable for the acts of their students except where the
school is technical in nature, in which case it is the head thereof who shall be answerable.
Following the canon of reddendo singula singulis "teachers" should apply to the words "pupils and
students" and "heads of establishments of arts and trades" to the word "apprentices."
The Court thus conforms to the dissenting opinion expressed by Justice J.B.L. Reyes in Exconde
where he said in part:

I can see no sound reason for limiting Art. 1903 of the Old Civil Code to teachers
of arts and trades and not to academic ones. What substantial difference is there
between them insofar as concerns the proper supervision and vice over their
pupils? It cannot be seriously contended that an academic teacher is exempt from
the duty of watching that his pupils do not commit a tort to the detriment of third
Persons, so long as they are in a position to exercise authority and Supervision
over the pupil. In my opinion, in the phrase "teachers or heads of establishments
of arts and trades" used in Art. 1903 of the old Civil Code, the words "arts and
trades" does not qualify "teachers" but only "heads of establishments." The phrase
is only an updated version of the equivalent terms "preceptores y artesanos" used
in the Italian and French Civil Codes.

If, as conceded by all commentators, the basis of the presumption of negligence

of Art. 1903 in some culpa in vigilando that the parents, teachers, etc. are
supposed to have incurred in the exercise of their authority, it would seem clear
that where the parent places the child under the effective authority of the teacher,
the latter, and not the parent, should be the one answerable for the torts committed
while under his custody, for the very reason/that the parent is not supposed to
interfere with the discipline of the school nor with the authority and supervision of
the teacher while the child is under instruction. And if there is no authority, there
can be no responsibility.

There is really no substantial distinction between the academic and the non-academic schools
insofar as torts committed by their students are concerned. The same vigilance is expected from
the teacher over the students under his control and supervision, whatever the nature of the school
where he is teaching. The suggestion in the Exconde and Mercado Cases is that the provision
would make the teacher or even the head of the school of arts and trades liable for an injury
caused by any student in its custody but if that same tort were committed in an academic school,
no liability would attach to the teacher or the school head. All other circumstances being the same,
the teacher or the head of the academic school would be absolved whereas the teacher and the
head of the non-academic school would be held liable, and simply because the latter is a school
of arts and trades.

The Court cannot see why different degrees of vigilance should be exercised by the school
authorities on the basis only of the nature of their respective schools. There does not seem to be
any plausible reason for relaxing that vigilance simply because the school is academic in nature
and for increasing such vigilance where the school is non-academic. Notably, the injury subject
of liability is caused by the student and not by the school itself nor is it a result of the operations
of the school or its equipment. The injury contemplated may be caused by any student regardless
of the school where he is registered. The teacher certainly should not be able to excuse himself
by simply showing that he is teaching in an academic school where, on the other hand, the head
would be held liable if the school were non-academic.

These questions, though, may be asked: If the teacher of the academic school is to be held
answerable for the torts committed by his students, why is it the head of the school only who is
held liable where the injury is caused in a school of arts and trades? And in the case of the
academic or non- technical school, why not apply the rule also to the head thereof instead of
imposing the liability only on the teacher?

The reason for the disparity can be traced to the fact that historically the head of the school of
arts and trades exercised a closer tutelage over his pupils than the head of the academic school.
The old schools of arts and trades were engaged in the training of artisans apprenticed to their
master who personally and directly instructed them on the technique and secrets of their craft.
The head of the school of arts and trades was such a master and so was personally involved in
the task of teaching his students, who usually even boarded with him and so came under his
constant control, supervision and influence. By contrast, the head of the academic school was
not as involved with his students and exercised only administrative duties over the teachers who
were the persons directly dealing with the students. The head of the academic school had then
(as now) only a vicarious relationship with the students. Consequently, while he could not be
directly faulted for the acts of the students, the head of the school of arts and trades, because of
his closer ties with them, could be so blamed.

It is conceded that the distinction no longer obtains at present in view of the expansion of the
schools of arts and trades, the consequent increase in their enrollment, and the corresponding
diminution of the direct and personal contract of their heads with the students. Article 2180,
however, remains unchanged. In its present state, the provision must be interpreted by the Court
according to its clear and original mandate until the legislature, taking into account the charges in
the situation subject to be regulated, sees fit to enact the necessary amendment.

The other matter to be resolved is the duration of the responsibility of the teacher or the head of
the school of arts and trades over the students. Is such responsibility co-extensive with the period
when the student is actually undergoing studies during the school term, as contended by the
respondents and impliedly admitted by the petitioners themselves?

From a reading of the provision under examination, it is clear that while the custody requirement,
to repeat Palisoc v. Brillantes, does not mean that the student must be boarding with the school
authorities, it does signify that the student should be within the control and under the influence of
the school authorities at the time of the occurrence of the injury. This does not necessarily mean
that such, custody be co-terminous with the semester, beginning with the start of classes and
ending upon the close thereof, and excluding the time before or after such period, such as the
period of registration, and in the case of graduating students, the period before the
commencement exercises. In the view of the Court, the student is in the custody of the school
authorities as long as he is under the control and influence of the school and within its premises,
whether the semester has not yet begun or has already ended.

It is too tenuous to argue that the student comes under the discipline of the school only upon the
start of classes notwithstanding that before that day he has already registered and thus placed
himself under its rules. Neither should such discipline be deemed ended upon the last day of
classes notwithstanding that there may still be certain requisites to be satisfied for completion of
the course, such as submission of reports, term papers, clearances and the like. During such
periods, the student is still subject to the disciplinary authority of the school and cannot consider
himself released altogether from observance of its rules.

As long as it can be shown that the student is in the school premises in pursuance of a legitimate
student objective, in the exercise of a legitimate student right, and even in the enjoyment of a
legitimate student right, and even in the enjoyment of a legitimate student privilege, the
responsibility of the school authorities over the student continues. Indeed, even if the student
should be doing nothing more than relaxing in the campus in the company of his classmates and
friends and enjoying the ambience and atmosphere of the school, he is still within the custody
and subject to the discipline of the school authorities under the provisions of Article 2180.

During all these occasions, it is obviously the teacher-in-charge who must answer for his students'
torts, in practically the same way that the parents are responsible for the child when he is in their
custody. The teacher-in-charge is the one designated by the dean, principal, or other
administrative superior to exercise supervision over the pupils in the specific classes or sections
to which they are assigned. It is not necessary that at the time of the injury, the teacher be
physically present and in a position to prevent it. Custody does not connote immediate and actual
physical control but refers more to the influence exerted on the child and the discipline instilled in
him as a result of such influence. Thus, for the injuries caused by the student, the teacher and
not the parent shag be held responsible if the tort was committed within the premises of the school
at any time when its authority could be validly exercised over him.

In any event, it should be noted that the liability imposed by this article is supposed to fall directly
on the teacher or the head of the school of arts and trades and not on the school itself. If at all,
the school, whatever its nature, may be held to answer for the acts of its teachers or even of the
head thereof under the general principle of respondeat superior, but then it may exculpate itself
from liability by proof that it had exercised the diligence of a bonus paterfamilias.

Such defense is, of course, also available to the teacher or the head of the school of arts and
trades directly held to answer for the tort committed by the student. As long as the defendant can
show that he had taken the necessary precautions to prevent the injury complained of, he can
exonerate himself from the liability imposed by Article 2180, which also states that:

The responsibility treated of in this article shall cease when the Persons herein
mentioned prove that they observed all the diligence of a good father of a family to
prevent damages.

In this connection, it should be observed that the teacher will be held liable not only when he is
acting in loco parentis for the law does not require that the offending student be of minority age.
Unlike the parent, who wig be liable only if his child is still a minor, the teacher is held answerable
by the law for the act of the student under him regardless of the student's age. Thus, in the Palisoc
Case, liability attached to the teacher and the head of the technical school although the wrongdoer
was already of age. In this sense, Article 2180 treats the parent more favorably than the teacher.

The Court is not unmindful of the apprehensions expressed by Justice Makalintal in his dissenting
opinion in Palisoc that the school may be unduly exposed to liability under this article in view of
the increasing activism among the students that is likely to cause violence and resulting injuries
in the school premises. That is a valid fear, to be sure. Nevertheless, it should be repeated that,
under the present ruling, it is not the school that will be held directly liable. Moreover, the defense
of due diligence is available to it in case it is sought to be held answerable as principal for the acts
or omission of its head or the teacher in its employ.

The school can show that it exercised proper measures in selecting the head or its teachers and
the appropriate supervision over them in the custody and instruction of the pupils pursuant to its
rules and regulations for the maintenance of discipline among them. In almost all cases now, in
fact, these measures are effected through the assistance of an adequate security force to help
the teacher physically enforce those rules upon the students. Ms should bolster the claim of the
school that it has taken adequate steps to prevent any injury that may be committed by its
students.

A fortiori, the teacher himself may invoke this defense as it would otherwise be unfair to hold him
directly answerable for the damage caused by his students as long as they are in the school
premises and presumably under his influence. In this respect, the Court is disposed not to expect
from the teacher the same measure of responsibility imposed on the parent for their influence
over the child is not equal in degree. Obviously, the parent can expect more obedience from the
child because the latter's dependence on him is greater than on the teacher. It need not be
stressed that such dependence includes the child's support and sustenance whereas submission
to the teacher's influence, besides being coterminous with the period of custody is usually
enforced only because of the students' desire to pass the course. The parent can instill more las
discipline on the child than the teacher and so should be held to a greater accountability than the
teacher for the tort committed by the child.

And if it is also considered that under the article in question, the teacher or the head of the school
of arts and trades is responsible for the damage caused by the student or apprentice even if he
is already of age — and therefore less tractable than the minor — then there should all the more
be justification to require from the school authorities less accountability as long as they can prove
reasonable diligence in preventing the injury. After all, if the parent himself is no longer liable for
the student's acts because he has reached majority age and so is no longer under the former's
control, there is then all the more reason for leniency in assessing the teacher's responsibility for
the acts of the student.

Applying the foregoing considerations, the Court has arrived at the following conclusions:

1. At the time Alfredo Amadora was fatally shot, he was still in the custody of the authorities of
Colegio de San Jose-Recoletos notwithstanding that the fourth year classes had formally ended.
It was immaterial if he was in the school auditorium to finish his physics experiment or merely to
submit his physics report for what is important is that he was there for a legitimate purpose. As
previously observed, even the mere savoring of the company of his friends in the premises of the
school is a legitimate purpose that would have also brought him in the custody of the school
authorities.

2. The rector, the high school principal and the dean of boys cannot be held liable because none
of them was the teacher-in-charge as previously defined. Each of them was exercising only a
general authority over the student body and not the direct control and influence exerted by the
teacher placed in charge of particular classes or sections and thus immediately involved in its
discipline. The evidence of the parties does not disclose who the teacher-in-charge of the
offending student was. The mere fact that Alfredo Amadora had gone to school that day in
connection with his physics report did not necessarily make the physics teacher, respondent
Celestino Dicon, the teacher-in-charge of Alfredo's killer.

3. At any rate, assuming that he was the teacher-in-charge, there is no showing that Dicon was
negligent in enforcing discipline upon Daffon or that he had waived observance of the rules and
regulations of the school or condoned their non-observance. His absence when the tragedy
happened cannot be considered against him because he was not supposed or required to report
to school on that day. And while it is true that the offending student was still in the custody of the
teacher-in-charge even if the latter was physically absent when the tort was committed, it has not
been established that it was caused by his laxness in enforcing discipline upon the student. On
the contrary, the private respondents have proved that they had exercised due diligence, through
the enforcement of the school regulations, in maintaining that discipline.

4. In the absence of a teacher-in-charge, it is probably the dean of boys who should be held liable
especially in view of the unrefuted evidence that he had earlier confiscated an unlicensed gun
from one of the students and returned the same later to him without taking disciplinary action or
reporting the matter to higher authorities. While this was clearly negligence on his part, for which
he deserves sanctions from the school, it does not necessarily link him to the shooting of Amador
as it has not been shown that he confiscated and returned pistol was the gun that killed the
petitioners' son.

5. Finally, as previously observed, the Colegio de San Jose-Recoletos cannot be held directly
liable under the article because only the teacher or the head of the school of arts and trades is
made responsible for the damage caused by the student or apprentice. Neither can it be held to
answer for the tort committed by any of the other private respondents for none of them has been
found to have been charged with the custody of the offending student or has been remiss in the
discharge of his duties in connection with such custody.

In sum, the Court finds under the facts as disclosed by the record and in the light of the principles
herein announced that none of the respondents is liable for the injury inflicted by Pablito Damon
on Alfredo Amadora that resulted in the latter's death at the auditorium of the Colegio de San
Jose-Recoletos on April 13, 1972. While we deeply sympathize with the petitioners over the loss
of their son under the tragic circumstances here related, we nevertheless are unable to extend
them the material relief they seek, as a balm to their grief, under the law they have invoked.

WHEREFORE, the petition is DENIED, without any pronouncement as to costs. It is so ordered.

Yap, Narvasa, Paras, Feliciano, Gancayco, Bidin, Sarmiento, Cortes and Griño-Aquino, JJ.,
concur.

Fernan, Padilla and Teehankee, C.J., JJ, took no part.

Separate Opinions

MELENCIO-HERRERA, J., concurring and dissenting:

I concur, except with respect to the restricted meaning given the term "teacher" in Article 2180 of
the Civil Code as "teacher-in-charge." This would limit liability to occasions where there are
classes under the immediate charge of a teacher, which does not seem to be the intendment of
the law.

As I understand it, the philosophy of the law is that whoever stands in loco parentis will have the
same duties and obligations as parents whenever in such a standing. Those persons are
mandatorily held liable for the tortious acts of pupils and students so long as the latter remain in
their custody, meaning their protective and supervisory custody.
Thus Article 349 of the Civil Code enumerates the persons who stand in loco parentis and thereby
exercise substitute parental authority:

Art. 349 The following persons shall exercise substitute parental authority:

xxx xxx xxx

2) Teachers and professors

xxx xxx xxx

4) Directors of trade establishments, with regard to apprentices;'

Article 352 of the Civil Code further provides:

Art. 362. The relations between teacher and pupil, professor and student, are fixed
by government regulations and those of each school or institution....

But even such rules and regulations as may be fixed can not contravene the concept of substitute
parental authority.

The rationale of liability of school heads and teachers for the tortious acts of their pupils was
explained in Palisoc vs. Brillantes (41 SCRA 548), thus:

The protective custody of the school heads and teachers is mandatorily

substituted for that of the parents, and hence, it becomes their obligation as well
as that of the school itself to provide proper supervision of the students' activities
during the whole time that they are at attendance in the school, including recess
time, as well as to take the necessary precautions to protect the students in their
custody from dangers and hazards that would reasonably be anticipated, including
injuries that some students themselves may inflict wilfully or through negligence
on their fellow students. (Emphasis supplied)

Of course, as provided for in the same Article 2180, the responsibility treated of shall cease when
the persons mentioned prove that they observed all the diligence of a good father of a family to
prevent damage.

And while a school is, admittedly, not directly liable since Article 2180 speaks only of teachers
and schools heads, yet, by virtue of the same provision, the school, as their employer, may be
held liable for the failure of its teachers or school heads to perform their mandatory legal duties
as substitute parents (Sangco, Philippine Law on Torts & Damages, 1978 ed., p. 201). Again, the
school may exculpate itself from liability by proving that it had exercised the diligence of a good
father of the family.

Art. 2180. x x x

Employers shall be liable for the damages caused by their employees and
household helpers acting within the scope of their assigned tasks, even though the
former are not engaged in any business or industry.
 xxx xxx xxx

Parenthetically, from the enumeration in Article 349 of the Civil Code, supra, it is apparent that
the Code Commission had already segregated the classification of "teachers and professors" vis-
a-vis their pupils, from "directors of trade establishments, with regard to their apprentices."

GUTIERREZ, JR., J., concurring:

I concur in the Court's opinion so carefully analyzed and crafted by Justice Isagani A. Cruz.
However, I would like to stress the need for a major amendment to, if not a complete scrapping
of, Article 2180 of the Civil Code insofar as it refers to teachers or heads of establishments of arts
and trades in relation to pupils and students or apprentices. The seventh paragraph of Art. 2180
is a relic of the past and contemplates a situation long gone and out of date. In a Palisoc v.
Brillantes (41 SCRA 548) situation, it is bound to result in mischief and injustice.

First, we no longer have masters and apprentices toiling in schools of arts and trades. Students
in "technological" colleges and universities are no different from students in liberal arts or
professional schools. Apprentices now work in regular shops and factories and their relationship
to the employer is covered by laws governing the employment relationship and not by laws
governing the teacher—student relationship.

Second, except for kindergarten, elementary, and perhaps early high school students, teachers
are often no longer objects of veneration who are given the respect due to substitute parents.
Many students in their late teens or early adult years view some teachers as part of a bourgeois
or reactionary group whose advice on behaviour, deportment, and other non-academic matters
is not only resented but actively rejected. It ,seems most unfair to hold teachers liable on a
presumption juris tantum of negligence for acts of students even under circumstances where
strictly speaking there could be no in loco parentis relationship. Why do teachers have to prove
the contrary of negligence to be freed from solidary liability for the acts f bomb-throwing or pistol
packing students who would just as soon hurt them as they would other members of the so-called-
establishment.

The ordinary rules on quasi-delicta should apply to teachers and schools of whatever nature
insofar as grown up students are concerned. The provision of Art. 2180 of the Civil Code involved
in this case has outlived its purpose. The Court cannot make law. It can only apply the law with
its imperfections. However, the Court can suggest that such a law should be amended or
repealed.

Separate Opinions

MELENCIO-HERRERA, J., concurring and dissenting:

I concur, except with respect to the restricted meaning given the term "teacher" in Article 2180 of
the Civil Code as "teacher-in-charge." This would limit liability to occasions where there are
classes under the immediate charge of a teacher, which does not seem to be the intendment of
the law.
As I understand it, the philosophy of the law is that whoever stands in loco parentis will have the
same duties and obligations as parents whenever in such a standing. Those persons are
mandatorily held liable for the tortious acts of pupils and students so long as the latter remain in
their custody, meaning their protective and supervisory custody.

Thus Article 349 of the Civil Code enumerates the persons who stand in loco parentis and thereby
exercise substitute parental authority:

Art. 349 The following persons shall exercise substitute parental authority:

xxx xxx xxx

2) Teachers and professors

xxx xxx xxx

4) Directors of trade establishments, with regard to apprentices;'

Article 352 of the Civil Code further provides:

Art. 362. The relations between teacher and pupil, professor and student, are fixed
by government regulations and those of each school or institution....

But even such rules and regulations as may be fixed can not contravene the concept of substitute
parental authority.

The rationale of liability of school heads and teachers for the tortious acts of their pupils was
explained in Palisoc vs. Brillantes (41 SCRA 548), thus:

The protective custody of the school heads and teachers is mandatorily

substituted for that of the parents, and hence, it becomes their obligation as well
as that of the school itself to provide proper supervision of the students' activities
during the whole time that they are at attendance in the school, including recess
time, as well as to take the necessary precautions to protect the students in their
custody from dangers and hazards that would reasonably be anticipated, including
injuries that some students themselves may inflict wilfully or through negligence
on their fellow students. (Emphasis supplied)

Of course, as provided for in the same Article 2180, the responsibility treated of shall cease when
the persons mentioned prove that they observed all the diligence of a good father of a family to
prevent damage.

And while a school is, admittedly, not directly liable since Article 2180 speaks only of teachers
and schools heads, yet, by virtue of the same provision, the school, as their employer, may be
held liable for the failure of its teachers or school heads to perform their mandatory legal duties
as substitute parents (Sangco, Philippine Law on Torts & Damages, 1978 ed., p. 201). Again, the
school may exculpate itself from liability by proving that it had exercised the diligence of a good
father of the family.
 Art. 2180. x x x

Employers shall be liable for the damages caused by their employees and
household helpers acting within the scope of their assigned tasks, even though the
former are not engaged in any business or industry.

xxx xxx xxx

Parenthetically, from the enumeration in Article 349 of the Civil Code, supra, it is apparent that
the Code Commission had already segregated the classification of "teachers and professors" vis-
a-vis their pupils, from "directors of trade establishments, with regard to their apprentices."

GUTIERREZ, JR., J., concurring:

I concur in the Court's opinion so carefully analyzed and crafted by Justice Isagani A. Cruz.
However, I would like to stress the need for a major amendment to, if not a complete scrapping
of, Article 2180 of the Civil Code insofar as it refers to teachers or heads of establishments of arts
and trades in relation to pupils and students or apprentices. The seventh paragraph of Art. 2180
is a relic of the past and contemplates a situation long gone and out of date. In a Palisoc v.
Brillantes (41 SCRA 548) situation, it is bound to result in mischief and injustice.

First, we no longer have masters and apprentices toiling in schools of arts and trades. Students
in "technological" colleges and universities are no different from students in liberal arts or
professional schools. Apprentices now work in regular shops and factories and their relationship
to the employer is covered by laws governing the employment relationship and not by laws
governing the teacher—student relationship.

Second, except for kindergarten, elementary, and perhaps early high school students, teachers
are often no longer objects of veneration who are given the respect due to substitute parents.
Many students in their late teens or early adult years view some teachers as part of a bourgeois
or reactionary group whose advice on behaviour, deportment, and other non-academic matters
is not only resented but actively rejected. It ,seems most unfair to hold teachers liable on a
presumption juris tantum of negligence for acts of students even under circumstances where
strictly speaking there could be no in loco parentis relationship. Why do teachers have to prove
the contrary of negligence to be freed from solidary liability for the acts f bomb-throwing or pistol
packing students who would just as soon hurt them as they would other members of the so-called-
establishment.

The ordinary rules on quasi-delicta should apply to teachers and schools of whatever nature
insofar as grown up students are concerned. The provision of Art. 2180 of the Civil Code involved
in this case has outlived its purpose. The Court cannot make law. It can only apply the law with
its imperfections. However, the Court can suggest that such a law should be amended or
repealed.
 [G.R. No. 23769. September 16, 1925. ]

SONG FO & COMPANY, Plaintiff-Appellee, v. HAWAIIAN PHILIPPINE CO., Defendant-

Appellant.

Hilado & Hilado, Ross, Lawrence & Selph and Antonio T. Carrascoso, Jr., for Appellant.

Arroyo, Gurrea & Muller for Appellee.

SYLLABUS

1. CONTRACTS; SALES; INSTANT CASE. — The written contract examined and found to
provide for the delivery by the Hawaiian-Philippine Co. to Song Fo & Company of 300,000 gallons
of molasses.

2. ID.; ID,.; ID.; PAYMENT. — The terms of payment fixed by the parties are controlling. The time
of payment stipulated for in the contract should be treated as of the essence of the contract.

3. ID.; ID.; ID.; ID.; RESCISSION. — The general rule is that rescission will not be permitted for
a slight or casual breach of the contract, but only for such breaches as are so substantial and
fundamental as to defeat the object of the parties in making the agreement.

4. ID.; ID.; ID.; ID.; ID. — A delay in payment for a small quantity of molasses for some twenty
days is not such a violation of an essential condition of the contract as warrants rescission for
non-performance.

5. ID.; ID.; ID.; MEASURE OF DAMAGES FOR BREACH OF CONTRACT. — The facts examined
and Song Fo & Company allowed P3,000 on account of the greater expense to which it was put
in being compelled to secure molasses in the open market.

6. ID.; ID.; ID. — The facts examined and Song Fo & Company allowed nothing for lost profits on
account of the breach of the contract, because of failure of proof.

DECISION

MALCOLM, J. :

In the Court of First Instance of Iloilo, Song Fo & Company, plaintiff, presented a complaint with
two causes of action for breach of contract against the Hawaiian-Philippine Co., defendant, in
which judgment was asked for P70,369.50, with legal interest, and costs. In an amended
answer and cross-complaint, the defendant set up the special defense that since the plaintiff
had defaulted in the payment for the molasses delivered to it by the defendant under the
contract between the parties, the latter was compelled to cancel and rescind the said contract.
The case was submitted for decision on a stipulation of facts and the exhibits therein mentioned.
The judgment of the trial court condemned the defendant to pay for the plaintiff a total of
P35,317.93, with legal interest from the date of the presentation of the complaint, and with
costs.
From the judgment of the Court of First Instance the defendant only has appealed. In this court
it has made the following assignment of errors: "I. The lower court erred in finding that the
appellant had agreed to sell to the appellee 400,000, and not only 300,000, gallons of molasses.
II. The lower court erred in finding that the appellant rescinded without sufficient cause the
contract for the sale of molasses executed by it and the appellee. III. The lower court erred in
rendering judgment in favor of the appellee and not in favor of the appellant in accordance with
the prayer of its answer and cross-complaint. IV. The lower court erred in denying appellant’s
motion for a new trial." The specified errors raise three questions which we will consider in the
order suggested by the Appellant.

1. Did the defendant agree to sell to the plaintiff 400,000 gallons of molasses or 300,000 gallons
of molasses? The trial court found the former amount to be correct. The appellant contends that
the smaller amount was the basis of the agreement.

The contract of the parties is in writing. It is found principally in the documents, Exhibits F and
G. The first mentioned exhibit is a letter addressed by the administrator of the Hawaiian-
Philippine Co. to Song Fo & Company on December 13, 1922. It reads:jgc:chanrobles.com.ph

"SILAY, OCC. NEGROS, P. I.

"December 13, 1922.

"MESSRS. SONG FO AND CO.

"Iloilo, Iloilo.

"DEAR SIRS: Confirming our conversation we had today with your Mr. Song Fo, who visited this
Central, we wish to state as follows:jgc:chanrobles.com.ph

"He agreed to the delivery of 300,000 gallons of molasses at the same price as last year under
the same condition, and the same to start after the completion of our grinding season. He
requested if possible to let you have molasses during January, February and March or in other
words, while we are grinding, and we agreed with him that we would to the best of our ability,
altho we are somewhat handicapped. But we believe we can let you have 25,000 gallons during
each of the milling months, altho it interfere with the shipping of our own and planters sugars to
Iloilo. Mr. Song Fo also asked if we could supply him with another 100,000 gallons of molasses,
and we stated we believe that this is possible and will do our best to let you have these extra
100,000 gallons during the next year the same to be taken by you before November 1st, 1923,
along with the 300,000, making 400,000 gallons in all.

"Regarding the payment for our molasses, Mr. Song Fo gave us to understand that you would
pay us at the end of each month for molasses delivered to you.

"Hoping that this is satisfactorily and awaiting your answer regarding this matter, we remain.

"Yours very truly,

"HAWAIIAN-PHILIPPINE COMPANY

"By: R.C. PITCAIRN

"Administrator."cralaw virtua1aw library

Exhibit G is the answer of the manager of Song Fo & Company to the Hawaiian-Philippine Co.
on December 16, 1922. This letter reads:jgc:chanrobles.com.ph

"December 16th, 1922.

"MESSRS. HAWAIIAN-PHILIPPINE CO.,

"Silay, Neg. Occ., P. I.

"DEAR SIRS: We are in receipt of your favors dated the 9th and the 13th inst. and understood
all their contents.

"In connection to yours of the 13th inst, we regret to hear that you mentioned Mr. Song Fo the
one who visited your Central, but it was not for he was Mr. Song Heng, the representative and
the manager of Messrs. Song Fo & Co.

"With reference to the contents of your letter dated the 13th inst. we confirm all the
arrangements you have stated and in order to make the contract clear, we hereby quote below
our old contract as amended, as per our new arrangements.

"(a) Price, at 2 cents per gallon delivered at the central.

"(b) All handling charges and expenses at the central and at the dock at Mambaguid for our
account.

"(c) For services of one locomotive and flat cars necessary for our six tanks at the rate of P48
for the round trip dock to central and central to dock. This service to be restricted to one trip for
the six tanks.

"Yours very truly,

"SONG FO & COMPANY

"By__________________

"Manager."cralaw virtua1aw library

We agree with appellant that the above quoted correspondence is susceptible of but one
interpretation. The Hawaiian-Philippine Co. agreed to deliver to Song Fo & Company 300,000
gallons of molasses. The Hawaiian-Philippine Co. also believed it possible to accommodate
Song Fo & Company by supplying the latter company with an extra 100,000 gallons. But the
language used with reference to the additional 100,000 gallons was not a definite promise. Still
less did it constitute an obligation.

If Exhibit T relied upon by the trial court shows anything, it is simply that the defendant did not
consider itself obliged to deliver to the plaintiff molasses in any amount. On the other hand,
Exhibit A, a letter written by the manager of Song Fo & Company on October 17, 1922,
expressly mentions an understanding between the parties of a contract for 300,000 gallons of
molasses.
We sustain appellant’s point of view on the first question and rule that the contract between the
parties provided for the delivery by the Hawaiian-Philippine Co. to Song Fo & Company of
300,000 gallons of molasses.

2. Had the Hawaiian-Philippine Co. the right to rescind the contract of sale made with Song Fo
& Company? The trial judge answers No, the appellant Yes.

Turning to Exhibit F, we note this sentence: "Regarding the payment for our molasses, Mr. Song
Fo (Mr. Song Heng) gave us to understand that you would pay us at the end of each month for
molasses delivered to you." In Exhibit G, we find Song Fo & Company stating that they
understand the contents of Exhibit F, and that they "confirm all the arrangements you have
stated, and in order to make the contract clear, we hereby quote below our old contract as
amended, as per our new arrangements. (a) Price, at 2 cents per gallon delivered at the
central." In connection with the portion of the contract having reference to the payment for the
molasses, the parties have agreed on a table showing the date of delivery of the molasses, the
account and date thereof, the date of receipt of account by plaintiff, and date of payment. The
table mentioned is as follows:chanrob1es virtual 1aw library

Date of receipt

Date of delivery Account and date of account by Date of payment

thereof plaintiff

1922 1923 1923

Dec. 18 P206.16 Dec. 26/22 Jan. 5 Feb. 20

Dec. 29 206.16 Jan. 3/23 do Do.

1923

Jan. 5 206.16 Jan. 9/23 Mar. 7 or 8 Mar. 31

Feb. 12 206.16 Mar. 12/23 do Do.

Feb. 27 206.16 do do Do.

Mar. 5 206.16 do do Do.

Mar. 16 206.16 Mar. 20/23 Apr. 2/23 Apr. 19

Mar. 24 206.16 Mar. 31/23 do Do.

Mar. 29 206.16 do do Do.

Some doubt has risen as to when Song Fo & Company was expected to make payments for the
molasses delivered. Exhibit F speaks of payments "at the end of each month." Exhibit G is silent
on the point. Exhibit M, a letter of March 28, 1923, from Warner, Barnes & Co., Ltd., the agent of
the Hawaiian-Philippine Co. to Song Fo & Company, mentions "payment on presentation of bills
for each delivery." Exhibit O, another letter from Warner, Barnes & Co., Ltd. to Song Fo &
Company dated April 2, 1923, is of a similar tenor. Exhibit P, a communication sent direct by the
Hawaiian-Philippine Co. to Song Fo & Company on April 2, 1923, by which the Hawaiian-
Philippine Co. gave notice of the termination of the contract, gave as the reason for the
rescission, the breach of Song Fo & Company of this condition: "You will recall that under the
arrangements made for taking our molasses, you were to meet our accounts upon presentation
and at each delivery." Not far removed from this statement, is the allegation of plaintiff in its
complaint that "plaintiff agreed to pay defendant, at the end of each month upon presentation of
accounts."cralaw virtua1aw library

Resolving such ambiguity as exists and having in mind ordinary business practice, a reasonable
deduction is that Song Fo & Company was to pay the Hawaiian-Philippine Co. upon
presentation of accounts at the end of each month. Under this hypothesis, Song Fo & Company
should have paid for the molasses delivered in December, 1922, and for which accounts were
received by it on January 5, 1923, not later than January 31 of that year. Instead, payment was
not made until February 20, 1923. All the rest of the molasses was paid for either on time or
ahead of time.

The terms of payment fixed by the parties are controlling. The time of payment stipulated for in
the contract should be treated as of the essence of the contract. Theoretically, agreeable to
certain conditions which could easily be imagined, the Hawaiian-Philippine Co. would have had
the right to rescind the contract because of the breach of Song Fo & Company. But actually,
there is her present no outstanding fact which would legally sanction the rescission of the
contract by the Hawaiian-Philippine Co.

The general rule is that rescission will not be permitted for a slight or casual breach of the
contract, but only for such breaches as are so substantial and fundamental as to defeat the
object of the parties in making the agreement. A delay in payment for a small quantity of
molasses for some twenty days is not such a violation of an essential condition of the contract
as warrants rescission for non-performance. Not only this, but the Hawaiian-Philippine Co.
waived this condition when it arose by accepting payment of the overdue accounts and
continuing with the contract. Thereafter, Song Fo & Company was not in default in payment so
that the Hawaiian-Philippine Co. had in reality no excuse for writing its letter of April 2, 1923,
cancelling the contract. (Warner, Barnes & Co. v. Inza [1922], 43 Phil., 505.)

We rule that the appellant had no legal right to rescind the contract of sale because of the failure
of Song Fo & Company to pay for the molasses within the time agreed upon by the parties. We
sustain the finding of the trial judge in this respect.

3. On the basis first, of a contract for 300,000 gallons of molasses, and second, of a contract
imprudently breached by the Hawaiian-Philippine Co., what is the measure of damages? We
again turn to the facts as agreed upon by the parties.

The first cause of action of the plaintiff is based on the greater expense to which it was put in
being compelled to secure molasses from other sources. Three hundred thousand gallons of
molasses was the total of the agreement, as we have seen. As conceded by the plaintiff 55,006
gallons of molasses were delivered by the defendant to the plaintiff before the breach. This
leaves 244,994 gallons of molasses undelivered which the plaintiff had to purchase in the open
market. As expressly conceded by the plaintiff at page 25 of its brief 100,000 gallons of
molasses were secured from the Central North Negros Sugar Co., Inc., at two centavos a
gallon. As this is the same price specified in the contract between the plaintiff and the
defendant, the plaintiff accordingly suffered no material loss in having to make this purchase. So
244,994 gallons minus the 100,000 gallons just mentioned leaves as a result 144,994 gallons.
As to this amount, the plaintiff admits that it could have secured it and more than the Central
Victorias Milling Company one and one-half centavos per gallon. In other words, the plaintiff had
to pay the Central Victorias Milling Company one and one-half centavos a gallon more for the
molasses than it would have had to pay the Hawaiian-Philippine Co. Translated into pesos and
centavos, this meant a loss to the plaintiff of approximately P2,174.91. As the conditions
existing at the central of the Hawaiian-Philippine Co. may have been different than those found
at the Central North Negros Sugar Co., Inc., and the Central Victorias Milling Company, and as
not alone through the delay but through expenses of transportation and incidental expenses, the
plaintiff may have been put to greater cost in making the purchase of the molasses in the open
market, we would concede under the first cause of action in round figures P3,000.

The second cause of action relates to lost profits on account of the breach of the contract. The
only evidence in the record on this question is the stipulation of counsel to the effect that had
Mr. Song Heng, the manager of Song Fo & Company, been called as a witness, he would have
testified that the plaintiff would have realized a profit of P14,948.43, if the contract of December
13, 1922, had been fulfilled by the defendant. Indisputably, this statement falls far short of
presenting proof on which to make a finding as to damages.

In the first place, the testimony which Mr. Song Heng would have given undoubtedly would
follow the same line of thought as found in the decision of the trial court, which we have found to
be unsustainable. In the second place, had Mr. Song Heng taken the witness-stand and made
the statement attributed to him, it would have been insufficient proof of the allegations of the
complaint, and the fact that it is a part of the stipulation by counsel does not change this result.
And lastly, the testimony of the witness Song Heng, if we may dignify it as such, is a mere
conclusion, not a proven fact. As to what items make up the more than P14,000 of alleged lost
profits, whether loss of sales or loss of customers, or what not, we have no means of knowing.

We rule that the plaintiff is entitled to recover damages from the defendant for breach of contract
on the first cause of action in the amount of P3,000 and on the second cause of action in no
amount. Appellant’s assignments of error are accordingly found to be well in taken in part and
not well taken in part.

Agreeable to the foregoing, the judgment appealed from shall be modified and the plaintiff shall
have and recover from the defendant the sum of P3,000, with legal interest from October 2,
1923, until payment. Without special finding as to costs in either instance, it is ordered.
G.R. No. 108346 July 11, 2001

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners,

vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.

PANGANIBAN, J.:

A substantial breach of a reciprocal obligation, like failure to pay the price in the manner
prescribed by the contract, entitled the injured party to rescind the obligation. Rescission
abrogates the contract from its inception and requires a mutual restitution of benefits received.

The Case

Before us is a Petition for Review on Certiorari1 questioning the Decision2 of the Court of Appeals
(CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its Resolution3 dated December
29, 1992 denying petitioner's motion for reconsideration.4

The dispositive portion of the assailed Decision reads:

"WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE
and the Decision dated November 14, 1990 dismissing the [C]omplaint is RESINSTATED.
The bonds posted by plaintiffs-appellees and defendants-appellants are hereby
RELEASED."5

The Facts

The factual antecedents of the case, as found by the CA, are as follows:

"x x x. David Raymundo [herein private respondent] is the absolute and registered owner
of a parcel of land, together with the house and other improvements thereon, located at
1918 Kamias St., Dasmariñas Village, Makati and covered by TCT No. 142177. Defendant
George Raymundo [herein private petitioners] is David's father who negotiated with
plaintiffs Avelina and Mariano Velarde [herein petitioners] for the sale of said property,
which was, however, under lease (Exh. '6', p. 232, Record of Civil Case No. 15952).

"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh. '1', pp.
11-12, Record) was executed by defendant David Raymundo, as vendor, in favor of
plaintiff Avelina Velarde, as vendee, with the following terms and conditions:

'x x x xxx xxx

'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND

PESOS (P800,000.00), Philippine currency, receipt of which in full is hereby
acknowledged by the VENDOR from the VENDEE, to his entire and complete
satisfaction, by these presents the VENDOR hereby SELLS, CEDES,
TRANSFERS, CONVEYS AND DELIVERS, freely and voluntarily, with full
warranty of a legal and valid title as provided by law, unto the VENDEE, her heirs,
 successors and assigns, the parcel of land mentioned and described above,
together with the house and other improvements thereon.

'That the aforesaid parcel of land, together with the house and other improvements
thereon, were mortgaged by the VENDOR to the BANK OF THE PHILIPPINE
ISLANDS, Makati, Metro Manila to secure the payment of a loan of ONE MILLION
EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, as
evidenced by a Real Estate Mortgage signed and executed by the VENDOR in
favor of the said Bank of the Philippine Islands, on _____ and which Real Estate
Mortgage was ratified before Notary Public for Makati, _____, as Doc. No. ______,
Page No. _____, Book No. ___, Series of 1986 of his Notarial Register.

'That as part of the consideration of this sale, the VENDEE hereby assumes to pay
the mortgage obligations on the property herein sold in the amount of ONE
MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine
currency, in favor of Bank of Philippine Islands, in the name of the VENDOR, and
further agrees to strictly and faithfully comply with all the terms and conditions
appearing in the Real Estate Mortgage signed and executed by the VENDOR in
favor of BPI, including interests and other charges for late payment levied by the
Bank, as if the same were originally signed and executed by the VENDEE.

'It is further agreed and understood by the parties herein that the capital gains tax
and documentary stamps on the sale shall be for the account of the VENDOR;
whereas, the registration fees and transfer tax thereon shall be the account of the
VENDEE.' (Exh. 'A', pp. 11-12, Record).'

"On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the
consent of her husband, Mariano, executed an Undertaking (Exh. 'C', pp. 13-14, Record).'

'x x x xxx xxx

'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr. David A.
Raymundo the sum of EIGHT HUNDRED THOUSAND PESOS (P800,000.00),
Philippine currency, and assume the mortgage obligations on the property with the
Bank of the Philippine Islands in the amount of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, in accordance with the
terms and conditions of the Deed of Real Estate Mortgage dated _____, signed
and executed by Mr. David A. Raymundo with the said Bank, acknowledged before
Notary Public for Makati, _____, as Doc. No. _____, Page No. _____, Book No.
_____, Series of 1986 of his Notarial Register.

'WHEREAS, while my application for the assumption of the mortgage obligations

on the property is not yet approved by the mortgagee Bank, I have agreed to pay
the mortgage obligations on the property with the Bank in the name of Mr. David
A. Raymundo, in accordance with the terms and conditions of the said Deed of
Real Estate Mortgage, including all interests and other charges for late payment.

'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo,

for purposes of attesting and confirming our private understanding concerning the
said mortgage obligations to be assumed.
 'NOW, THEREFORE, for and in consideration of the foregoing premises, and the
assumption of the mortgage obligations of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, with the bank of the
Philippine Islands, I, Mrs, Avelina D, Velarde with the consent of my husband,
Mariano Z. Velardo, do hereby bind and obligate myself, my heirs, successors and
assigns, to strictly and faithfully comply with the following terms and conditions:

'1. That until such time as my assumption of the mortgage obligations on the
property purchased is approved by the mortgagee bank, the Bank of the Philippine
Islands, I shall continue to pay the said loan in accordance with the terms and
conditions of the Deed of Real Estate Mortgage in the name of Mr. David A.
Raymundo, the original Mortgagor.

'2. That, in the event I violate any of the terms and conditions of the said Deed of
Real Estate Mortgage, I hereby agree that my downpayment of P800,000.00, plus
all payments made with the Bank of the Philippine Islands on the mortgage loan,
shall be forfeited in favor of Mr. David A. Raymundo, as and by way of liquidated
damages, without necessity of notice or any judicial declaration to that effect, and
Mr. David A. Raymundo shall resume total and complete ownership and
possession of the property sold by way of Deed of Sale with Assumption of
Mortgage, and the same shall be deemed automatically cancelled and be of no
further force or effect, in the same manner as it (the) same had never been
executed or entered into.

'3. That I am executing the Undertaking for purposes of binding myself, my heirs,
successors and assigns, to strictly and faithfully comply with the terms and
conditions of the mortgage obligations with the Bank of the Philippine Islands, and
the covenants, stipulations and provisions of this Undertaking.

'That, David A. Raymundo, the vendor of the property mentioned and identified
above, [does] hereby confirm and agree to the undertakings of the Vendee
pertinent to the assumption of the mortgage obligations by the Vendee with the
Bank of the Philippine Islands. (Exh. 'C', pp. 13-14, Record).'

"This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.

"It appears that the negotiated terms for the payment of the balance of P1.8 million was
from the proceeds of a loan that plaintiffs were to secure from a bank with defendant's
help. Defendants had a standing approved credit line with the Bank of the Philippine
Islands (BPI). The parties agreed to avail of this, subject to BPI's approval of an application
for assumption of mortgage by plaintiffs. Pending BPI's approval o[f] the application,
plaintiffs were to continue paying the monthly interests of the loan secured by a real estate
mortgage.

"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured
by the aforementioned mortgage for three (3) months as follows: September 19, 1986 at
P27,225.00; October 20, 1986 at P23,000.00; and November 19, 1986 at P23,925.00
(Exh. 'E', 'H' & 'J', pp. 15, 17and 18, Record).
 "On December 15, 1986, plaintiffs were advised that the Application for Assumption of
Mortgage with BPI, was not approved (Exh. 'J', p. 133, Record). This prompted plaintiffs
not to make any further payment.

"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that
their non-payment to the mortgage bank constitute[d] non-performance of their obligation
(Exh. '3', p. 220, Record).

"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:

'This is to advise you, therefore, that our client is willing to pay the balance in cash
not later than January 21, 1987 provided: (a) you deliver actual possession of the
property to her not later than January 15, 1987 for her immediate occupancy; (b)
you cause the re- lease of title and mortgage from the Bank of P.I. and make the
title available and free from any liens and encumbrances; and (c) you execute an
absolute deed of sale in her favor free from any liens or encumbrances not later
than January 21, 1987.' (Exhs. 'k', '4', p. 223, Record).

"On January 8, 1987 defendants sent plaintiffs a notarial notice of cancellation/rescission

of the intended sale of the subject property allegedly due to the latter's failure to comply
with the terms and conditions of the Deed of Sale with Assumption of Mortgage and the
Undertaking (Exh. '5', pp. 225-226, Record)."6

Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for
specific performance, nullity of cancellation, writ of possession and damages. This was docketed
as Civil Case No. 15952 at the Regional Trial Court of Makati, Branch 149. The case was tried
and heard by then Judge Consuelo Ynares-Santiago (now an associate justice of this Court), who
dismissed the Complaint in a Decision dated November 14, 1990.7 Thereafter, petitioners filed a
Motion for Reconsideration.8

Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge
Salvador S. A. Abad Santos was assigned to the sala she vacated. In an Order dated May 15,
1991,9 Judge Abad Santos granted petitioner's Motion for Reconsideration and directed the
parties to proceed with the sale. He instructed petitioners to pay the balance of P1.8 million to
private respondents who, in turn, were ordered to execute a deed of absolute sale and to
surrender possession of the disputed property to petitioners.

Private respondents appealed to the CA.

Ruling of the Court of Appeal

The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiago's
earlier Decision dismissing petitioners' Complaint. Upholding the validity of the rescission made
by private respondents, the CA explained its ruling in this wise:

"In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of the
consideration of this sale, the VENDEE (Velarde)' would assume to pay the mortgage
obligation on the subject property in the amount of P 1.8 million in favor of BPI in the name
of the Vendor (Raymundo). Since the price to be paid by the Vendee Velarde includes the
downpayment of P800,000.00 and the balance of Pl.8 million, and the balance of Pl.8
million cannot be paid in cash, Vendee Velarde, as part of the consideration of the sale,
had to assume the mortgage obligation on the subject property. In other words, the
assumption of the mortgage obligation is part of the obligation of Velarde, as vendee,
under the contract. Velarde further agreed 'to strictly and faithfully comply with all the terms
and conditions appearing in the Real Estate Mortgage signed and executed by the
VENDOR in favor of BPI x x x as if the same were originally signed and executed by the
Vendee. (p. 2, thereof, p. 12, Record). This was reiterated by Velarde in the document
entitled 'Undertaking' wherein the latter agreed to continue paying said loan in accordance
with the terms and conditions of the Deed of Real Estate Mortgage in the name of
Raymundo. Moreover, it was stipulated that in the event of violation by Velarde of any
terms and conditions of said deed of real estate mortgage, the downpayment of
P800,000.00 plus all payments made with BPI or the mortgage loan would be forfeited
and the [D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby be Cancelled
automatically and of no force and effect (pars. 2 & 3, thereof, pp 13-14, Record).

"From these 2 documents, it is therefore clear that part of the consideration of the sale
was the assumption by Velarde of the mortgage obligation of Raymundo in the amount of
Pl.8 million. This would mean that Velarde had to make payments to BPI under the [D]eed
of [R]eal [E]state [M]ortgage the name of Raymundo. The application with BPI for the
approval of the assumption of mortgage would mean that, in case of approval, payment
of the mortgage obligation will now be in the name of Velarde. And in the event said
application is disapproved, Velarde had to pay in full. This is alleged and admitted in
Paragraph 5 of the Complaint. Mariano Velarde likewise admitted this fact during the
hearing on September 15, 1997 (p. 47, t.s.n., September 15, 1987; see also pp. 16-26,
t.s.n., October 8, 1989). This being the case, the non-payment of the mortgage obligation
would result in a violation of the contract. And, upon Velarde's failure to pay the agreed
price, the[n] Raymundo may choose either of two (2) actions - (1) demand fulfillment of
the contract, or (2) demand its rescission (Article 1191, Civil Code).

"The disapproval by BPI of the application for assumption of mortgage cannot be used as
an excuse for Velarde's non-payment of the balance of the purchase price. As borne out
by the evidence, Velarde had to pay in full in case of BPI's disapproval of the application
for assumption of mortgage. What Velarde should have done was to pay the balance of
P1.8 million. Instead, Velarde sent Raymundo a letter dated January 7, 1987 (Exh. 'K', '4')
which was strongly given weight by the lower court in reversing the decision rendered by
then Judge Ynares-Santiago. In said letter, Velarde registered their willingness to pay the
balance in cash but enumerated 3 new conditions which, to the mind of this Court, would
constitute a new undertaking or new agreement which is subject to the consent or approval
of Raymundo. These 3 conditions were not among those previously agreed upon by
Velarde and Raymundo. These are mere offers or, at most, an attempt to novate. But then
again, there can be no novation because there was no agreement of all the parties to the
new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).

"It was likewise agreed that in case of violation of the mortgage obligation, the Deed of
Sale with Assumption of Mortgage would be deemed 'automatically cancelled and of no
further force and effect, as if the same had never been executed or entered into.' While it
is true that even if the contract expressly provided for automatic rescission upon failure to
pay the price, the vendee may still pay, he may do so only for as long as no demand for
rescission of the contract has been made upon him either judicially or by a notarial act
(Article 1592, Civil Code). In the case at bar, Raymundo sent Velarde notarial notice dated
 January 8, 1987 of cancellation/rescission of the contract due to the latter's failure to
comply with their obligation. The rescission was justified in view of Velarde's failure to pay
the price (balance) which is substantial and fundamental as to defeat the object of the
parties in making the agreement. As adverted to above, the agreement of the parties
involved a reciprocal obligation wherein the obligation of one is a resolutory condition of
the obligation of the other, the non-fulfillment of which entitles the other party to rescind
the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage
obligation by appellees Velarde would create a right to demand payment or to rescind the
contract, or to criminal prosecution (Edca Publishing & Distribution Corporation vs. Santos,
184 SCRA 614). Upon appellee's failure, therefore, to pay the balance, the contract was
properly rescinded (Ruiz vs. IAC, 184 SCRA 720). Consequently, appellees Velarde
having violated the contract, they have lost their right to its enforcement and hence, cannot
avail of the action for specific performance (Voysaw vs. Interphil Promotions, Inc., 148
SCRA 635)."10

Hence, this appeal. 11

The Issues

Petitioners, in their Memorandum,12 interpose the following assignment of errors:

"I.

The Court of Appeals erred in holding that the non-payment of the mortgage obligation
resulted in a breach of the contract.

"II

The Court of Appeals erred in holding that the rescission (resolution) of the contract by
private respondents was justified.

"III

The Court of Appeals erred in holding that petitioners' January 7, 1987 letter gave three
'new conditions' constituting mere offers or an attempt to novate necessitating a new
agreement between the parties."

The Court's Ruling

The Petition is partially meritorious.

First Issue:

Breach of Contract

Petitioner aver that their nonpayment of private respondents' mortgage obligation did not
constitute a breach of contract, considering that their request to assume the obligation had been
disapproved by the mortgagee bank. Accordingly, payment of the monthly amortizations ceased
to be their obligation and, instead, it devolved upon private respondents again.
However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay
the balance of the purchase price. As admitted by both parties, their agreement mandated that
petitioners should pay the purchase price balance of P1.8 million to private respondents in case
the request to assume the mortgage would be disapproved. Thus, on December 15, 1986, when
petitioners received notice of the bank's disapproval of their application to assume respondents'
mortgage, they should have paid the balance of the P1.8 million loan.

Instead of doing so, petitioners sent a letter to private respondents offering to make such payment
only upon the fulfillment of certain conditions not originally agreed upon in the contract of sale.
Such conditional offer to pay cannot take the place of actual payment as would discharge the
obligation of a buyer under a contract of sale.

In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a
determinate things, and the buyer to pay therefor a price certain in money or its equivalent. 13

Private respondents had already performed their obligation through the execution of the Deed of
Sale, which effectively transferred ownership of the property to petitioner through constructive
delivery. Prior physical delivery or possession is not legally required, and the execution of the
Deed of Sale is deemed equivalent to delivery.14

Petitioners, on the other hand, did not perform their correlative obligation of paying the contract
price in the manner agreed upon. Worse, they wanted private respondents to perform obligations
beyond those stipulated in the contract before fulfilling their own obligation to pay the full purchase
price.

Second Issue

Validity of the Rescission

Petitioners likewise claim that the rescission of the contract by private respondents was not
justified, inasmuch as the former had signified their willingness to pay the balance of the purchase
price only a little over a month from the time they were notified of the disapproval of their
application for assumption of mortgage. Petitioners also aver that the breach of the contract was
not substantial as would warrant a rescission. They cite several cases15 in which this Court
declared that rescission of a contract would not be permitted for a slight or casual breach. Finally,
they argue that they have substantially performed their obligation in good faith, considering that
they have already made the initial payment of P800,000 and three (3) monthly mortgage
payments.

As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of
the mortgage obligations, as their nonperformance of their reciprocal obligation to pay the
purchase price under the contract of sale. Private respondents' right to rescind the contract finds
basis in Article 1191 of the Civil Code, which explicitly provides as follows:

"Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him.

The injured party may choose between fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission even after he has
chosen fulfillment, if the latter should become impossible."
The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated
on a breach of faith by the other party who violates the reciprocity between them.16 The breach
contemplated in the said provision is the obligor's failure to comply with an existing
obligation.17 When the obligor cannot comply with what is incumbent upon it, the obligee may
seek rescission and, in the absence of any just cause for the court to determine the period of
compliance, the court shall decree the rescission.18

In the present case, private respondents validly exercised their right to rescind the contract,
because of the failure of petitioners to comply with their obligation to pay the balance of the
purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of
sale, a violation that consequently gave rise to private respondent's right to rescind the same in
accordance with law.

True, petitioners expressed their willingness to pay the balance of the purchase price one month
after it became due; however, this was not equivalent to actual payment as would constitute a
faithful compliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on
the performance by private respondents of additional burdens that had not been agreed upon in
the original contract. Thus, it cannot be said that the breach committed by petitioners was merely
slight or casual as would preclude the exercise of the right to rescind.

Misplaced is petitioners' reliance on the cases19 they cited, because the factual circumstances in
those cases are not analogous to those in the present one. In Song Fo there was, on the part of
the buyer, only a delay of twenty (20) days to pay for the goods delivered. Moreover, the buyer's
offer to pay was unconditional and was accepted by the seller.

In Zepeda, the breach involved a mere one-week delay in paying the balance of 1,000 which was
actually paid.

In Tan, the alleged breach was private respondent's delay of only a few days, which was for the
purpose of clearing the title to the property; there was no reference whatsoever to the nonpayment
of the contract price.

In the instant case, the breach committed did not merely consist of a slight delay in payment or
an irregularity; such breach would not normally defeat the intention of the parties to the contract.
Here, petitioners not only failed to pay the P1.8 million balance, but they also imposed upon
private respondents new obligations as preconditions to the performance of their own obligation.
In effect, the qualified offer to pay was a repudiation of an existing obligation, which was legally
due and demandable under the contract of sale. Hence, private respondents were left with the
legal option of seeking rescission to protect their own interest.

Mutual Restitution

Required in Rescission

As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal
obligation, not a violation of the terms and conditions of the mortgage contract. Therefore, the
automatic rescission and forfeiture of payment clauses stipulated in the contract does not apply.
Instead, Civil Code provisions shall govern and regulate the resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual
restitution is required to bring back the parties to their original situation prior to the inception of
the contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage
payments in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by
petitioners should be returned by private respondents, lest the latter unjustly enrich themselves
at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can be carried out only
when the one who demands rescission can return whatever he may be obliged to restore.20 To
rescind is to declare a contract void at its inception and to put an end to it as though it never was.
It is not merely to terminate it and release the parties from further obligations to each other, but
to abrogate it from the beginning and restore the parties to their relative positions as if no contract
has been made.21

Third Issue

Attempt to Novate

In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third
issue raised by petitioners. Suffice it to say that the three conditions appearing on the January 7,
1987 letter of petitioners to private respondents were not part of the original contract. By that time,
it was already incumbent upon the former to pay the balance of the sale price. They had no right
to demand preconditions to the fulfillment of their obligation, which had become due.

WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that private
respondents are ordered to return to petitioners the amount of P874,150, which the latter paid as
a consequence of the rescinded contract, with legal interest thereon from January 8, 1987, the
date of rescission. No pronouncement as to costs.

SO ORDERED.1âwphi1.nêt
G.R. No. L-4811 July 31, 1953

CHARLES F. WOODHOUSE, plaintiff-appellant,

vs.
FORTUNATO F. HALILI, defendant-appellant.

Tañada, Pelaez & Teehankee for defendant and appellant.

Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.

LABRADOR, J.:

On November 29, 1947, the plaintiff entered on a written agreement, Exhibit A, with the defendant,
the most important provisions of which are (1) that they shall organize a partnership for the bottling
and distribution of Mision soft drinks, plaintiff to act as industrial partner or manager, and the
defendant as a capitalist, furnishing the capital necessary therefor; (2) that the defendant was to
decide matters of general policy regarding the business, while the plaintiff was to attend to the
operation and development of the bottling plant; (3) that the plaintiff was to secure the Mission
Soft Drinks franchise for and in behalf of the proposed partnership; and (4) that the plaintiff was
to receive 30 per cent of the net profits of the business. The above agreement was arrived at after
various conferences and consultations by and between them, with the assistance of their
respective attorneys. Prior to entering into this agreement, plaintiff had informed the Mission Dry
Corporation of Los Angeles, California, U.S.A., manufacturers of the bases and ingridients of the
beverages bearing its name, that he had interested a prominent financier (defendant herein) in
the business, who was willing to invest half a million dollars in the bottling and distribution of the
said beverages, and requested, in order that he may close the deal with him, that the right to
bottle and distribute be granted him for a limited time under the condition that it will finally be
transferred to the corporation (Exhibit H). Pursuant for this request, plaintiff was given "a thirty-
days" option on exclusive bottling and distribution rights for the Philippines" (Exhibit J). Formal
negotiations between plaintiff and defendant began at a meeting on November 27, 1947, at the
Manila Hotel, with their lawyers attending. Before this meeting plaintiff's lawyer had prepared the
draft of the agreement, Exhibit II or OO, but this was not satisfactory because a partnership,
instead of a corporation, was desired. Defendant's lawyer prepared after the meeting his own
draft, Exhibit HH. This last draft appears to be the main basis of the agreement, Exhibit A.

The contract was finally signed by plaintiff on December 3, 1947. Plaintiff did not like to go to the
United States without the agreement being not first signed. On that day plaintiff and defendant
went to the United States, and on December 10, 1947, a franchise agreement (Exhibit V) was
entered into the Mission Dry Corporation and Fortunato F. Halili and/or Charles F. Woodhouse,
granted defendant the exclusive right, license, and authority to produce, bottle, distribute, and sell
Mision beverages in the Philippines. The plaintiff and the defendant thereafter returned to the
Philippines. Plaintiff reported for duty in January, 1948, but operations were not begun until the
first week of February, 1948. In January plaintiff was given as advance, on account of profits, the
sum of P2,000, besides the use of a car; in February, 1948, also P2,000, and in March only
P1,000. The car was withdrawn from plaintiff on March 9, 1948.

When the bottling plant was already on operation, plaintiff demanded of defendant that the
partnership papers be executed. At first defendant executed himself, saying there was no hurry.
Then he promised to do so after the sales of the product had been increased to P50,000. As
nothing definite was forthcoming, after this condition was attained, and as defendant refused to
give further allowances to plaintiff, the latter caused his attorneys to take up the matter with the
defendant with a view to a possible settlement. as none could be arrived at, the present action
was instituted.

In his complaint plaintiff asks for the execution of the contract of partnership, an accounting of the
profits, and a share thereof of 30 per cent, as well as damages in the amount of P200,000. In his
answer defendant alleges by way of defense (1) that defendant's consent to the agreement,
Exhibit A, was secured by the representation of plaintiff that he was the owner, or was about to
become owner of an exclusive bottling franchise, which representation was false, and plaintiff did
not secure the franchise, but was given to defendant himself; (2) that defendant did not fail to
carry out his undertakings, but that it was plaintiff who failed; (3) that plaintiff agreed to contribute
the exclusive franchise to the partnership, but plaintiff failed to do so. He also presented a counter-
claim for P200,000 as damages. On these issues the parties went to trial, and thereafter the Court
of First Instance rendered judgment ordering defendant to render an accounting of the profits of
the bottling and distribution business, subject of the action, and to pay plaintiff 15 percent thereof.
it held that the execution of the contract of partnership could not be enforced upon the parties,
but it also held that the defense of fraud was not proved. Against this judgment both parties have
appealed.

The most important question of fact to be determined is whether defendant had falsely
represented that he had an exclusive franchise to bottle Mission beverages, and whether this
false representation or fraud, if it existed, annuls the agreement to form the partnership. The trial
court found that it is improbable that defendant was never shown the letter, Exhibit J, granting
plaintiff had; that the drafts of the contract prior to the final one can not be considered for the
purpose of determining the issue, as they are presumed to have been already integrated into the
final agreement; that fraud is never presumed and must be proved; that the parties were
represented by attorneys, and that if any party thereto got the worse part of the bargain, this fact
alone would not invalidate the agreement. On this appeal the defendant, as appellant, insists that
plaintiff did represent to the defendant that he had an exclusive franchise, when as a matter of
fact, at the time of its execution, he no longer had it as the same had expired, and that, therefore,
the consent of the defendant to the contract was vitiated by fraud and it is, consequently, null and
void.

Our study of the record and a consideration of all the surrounding circumstances lead us to believe
that defendant's contention is not without merit. Plaintiff's attorney, Mr. Laurea, testified that
Woodhouse presented himself as being the exclusive grantee of a franchise, thus:

A. I don't recall any discussion about that matter. I took along with me the file of the office
with regards to this matter. I notice from the first draft of the document which I prepared
which calls for the organization of a corporation, that the manager, that is, Mr. Woodhouse,
is represented as being the exclusive grantee of a franchise from the Mission Dry
Corporation. . . . (t.s.n., p.518)

As a matter of fact, the first draft that Mr. Laurea prepared, which was made before the Manila
Hotel conference on November 27th, expressly states that plaintiff had the exclusive franchise.
Thus, the first paragraph states:

Whereas, the manager is the exclusive grantee of a franchise from the Mission Dry
Corporation San Francisco, California, for the bottling of Mission products and their sale
to the public throughout the Philippines; . . . .
 3. The manager, upon the organization of the said corporation, shall forthwith transfer to
the said corporation his exclusive right to bottle Mission products and to sell them
throughout the Philippines. . . . .

(Exhibit II; emphasis ours)

The trial court did not consider this draft on the principle of integration of jural acts. We find that
the principle invoked is inapplicable, since the purpose of considering the prior draft is not to vary,
alter, or modify the agreement, but to discover the intent of the parties thereto and the
circumstances surrounding the execution of the contract. The issue of fact is: Did plaintiff
represent to defendant that he had an exclusive franchise? Certainly, his acts or statements prior
to the agreement are essential and relevant to the determination of said issue. The act or
statement of the plaintiff was not sought to be introduced to change or alter the terms of the
agreement, but to prove how he induced the defendant to enter into it — to prove the
representations or inducements, or fraud, with which or by which he secured the other party's
consent thereto. These are expressly excluded from the parol evidence rule. (Bough and Bough
vs. Cantiveros and Hanopol, 40 Phil., 209; port Banga Lumber Co. vs. Export & Import Lumber
Co., 26 Phil., 602; III Moran 221,1952 rev. ed.) Fraud and false representation are an incident to
the creation of a jural act, not to its integration, and are not governed by the rules on integration.
Were parties prohibited from proving said representations or inducements, on the ground that the
agreement had already been entered into, it would be impossible to prove misrepresentation or
fraud. Furthermore, the parol evidence rule expressly allows the evidence to be introduced when
the validity of an instrument is put in issue by the pleadings (section 22, par. (a), Rule 123, Rules
of Court),as in this case.

That plaintiff did make the representation can also be easily gleaned from his own letters and his
own testimony. In his letter to Mission Dry Corporation, Exhibit H, he said:.

. . . He told me to come back to him when I was able to speak with authority so that we
could come to terms as far as he and I were concerned. That is the reason why the cable
was sent. Without this authority, I am in a poor bargaining position. . .

I would propose that you grant me the exclusive bottling and distributing rights for a limited
period of time, during which I may consummate my plants. . . .

By virtue of this letter the option on exclusive bottling was given to the plaintiff on October 14,
1947. (See Exhibit J.) If this option for an exclusive franchise was intended by plaintiff as an
instrument with which to bargain with defendant and close the deal with him, he must have used
his said option for the above-indicated purpose, especially as it appears that he was able to
secure, through its use, what he wanted.

Plaintiff's own version of the preliminary conversation he had with defendant is to the effect that
when plaintiff called on the latter, the latter answered, "Well, come back to me when you have the
authority to operate. I am definitely interested in the bottling business." (t. s. n., pp. 60-61.) When
after the elections of 1949 plaintiff went to see the defendant (and at that time he had already the
option), he must have exultantly told defendant that he had the authority already. It is improbable
and incredible for him to have disclosed the fact that he had only an option to the exclusive
franchise, which was to last thirty days only, and still more improbable for him to have disclosed
that, at the time of the signing of the formal agreement, his option had already expired. Had he
done so, he would have destroyed all his bargaining power and authority, and in all probability
lost the deal itself.

The trial court reasoned, and the plaintiff on this appeal argues, that plaintiff only undertook in the
agreement "to secure the Mission Dry franchise for and in behalf of the proposed partnership."
The existence of this provision in the final agreement does not militate against plaintiff having
represented that he had the exclusive franchise; it rather strengthens belief that he did actually
make the representation. How could plaintiff assure defendant that he would get the franchise for
the latter if he had not actually obtained it for himself? Defendant would not have gone into the
business unless the franchise was raised in his name, or at least in the name of the partnership.
Plaintiff assured defendant he could get the franchise. Thus, in the draft prepared by defendant's
attorney, Exhibit HH, the above provision is inserted, with the difference that instead of securing
the franchise for the defendant, plaintiff was to secure it for the partnership. To show that the
insertion of the above provision does not eliminate the probability of plaintiff representing himself
as the exclusive grantee of the franchise, the final agreement contains in its third paragraph the
following:

. . . and the manager is ready and willing to allow the capitalists to use the exclusive
franchise . . .

and in paragraph 11 it also expressly states:

1. In the event of the dissolution or termination of the partnership, . . . the franchise from
Mission Dry Corporation shall be reassigned to the manager.

These statements confirm the conclusion that defendant believed, or was made to believe, that
plaintiff was the grantee of an exclusive franchise. Thus it is that it was also agreed upon that the
franchise was to be transferred to the name of the partnership, and that, upon its dissolution or
termination, the same shall be reassigned to the plaintiff.

Again, the immediate reaction of defendant, when in California he learned that plaintiff did not
have the exclusive franchise, was to reduce, as he himself testified, plaintiff's participation in the
net profits to one half of that agreed upon. He could not have had such a feeling had not plaintiff
actually made him believe that he (plaintiff) was the exclusive grantee of the franchise.

The learned trial judge reasons in his decision that the assistance of counsel in the making of the
contract made fraud improbable. Not necessarily, because the alleged representation took place
before the conferences were had, in other words, plaintiff had already represented to defendant,
and the latter had already believed in, the existence of plaintiff's exclusive franchise before the
formal negotiations, and they were assisted by their lawyers only when said formal negotiations
actually took place. Furthermore, plaintiff's attorney testified that plaintiff had said that he had the
exclusive franchise; and defendant's lawyer testified that plaintiff explained to him, upon being
asked for the franchise, that he had left the papers evidencing it.(t.s.n., p. 266.)

We conclude from all the foregoing that plaintiff did actually represent to defendant that he was
the holder of the exclusive franchise. The defendant was made to believe, and he actually
believed, that plaintiff had the exclusive franchise. Defendant would not perhaps have gone to
California and incurred expenses for the trip, unless he believed that plaintiff did have that
exclusive privilege, and that the latter would be able to get the same from the Mission Dry
Corporation itself. Plaintiff knew what defendant believed about his (plaintiff's) exclusive franchise,
as he induced him to that belief, and he may not be allowed to deny that defendant was induced
by that belief. (IX Wigmore, sec. 2423; Sec. 65, Rule 123, Rules of Court.)

We now come to the legal aspect of the false representation. Does it amount to a fraud that would
vitiate the contract? It must be noted that fraud is manifested in illimitable number of degrees or
gradations, from the innocent praises of a salesman about the excellence of his wares to those
malicious machinations and representations that the law punishes as a crime. In consequence,
article 1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the causal fraud,
which may be a ground for the annulment of a contract, and the incidental deceit, which only
renders the party who employs it liable for damages. This Court had held that in order that fraud
may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo
causante), inducement to the making of the contract. (Article 1270, Spanish Civil Code; Hill vs.
Veloso, 31 Phil. 160.) The record abounds with circumstances indicative that the fact that the
principal consideration, the main cause that induced defendant to enter into the partnership
agreement with plaintiff, was the ability of plaintiff to get the exclusive franchise to bottle and
distribute for the defendant or for the partnership. The original draft prepared by defendant's
counsel was to the effect that plaintiff obligated himself to secure a franchise for the defendant.
Correction appears in this same original draft, but the change is made not as to the said obligation
but as to the grantee. In the corrected draft the word "capitalist"(grantee) is changed to
"partnership." The contract in its final form retains the substituted term "partnership." The
defendant was, therefore, led to the belief that plaintiff had the exclusive franchise, but that the
same was to be secured for or transferred to the partnership. The plaintiff no longer had the
exclusive franchise, or the option thereto, at the time the contract was perfected. But while he had
already lost his option thereto (when the contract was entered into), the principal obligation that
he assumed or undertook was to secure said franchise for the partnership, as the bottler and
distributor for the Mission Dry Corporation. We declare, therefore, that if he was guilty of a false
representation, this was not the causal consideration, or the principal inducement, that led plaintiff
to enter into the partnership agreement.

But, on the other hand, this supposed ownership of an exclusive franchise was actually the
consideration or price plaintiff gave in exchange for the share of 30 percent granted him in the net
profits of the partnership business. Defendant agreed to give plaintiff 30 per cent share in the net
profits because he was transferring his exclusive franchise to the partnership. Thus, in the draft
prepared by plaintiff's lawyer, Exhibit II, the following provision exists:

3. That the MANAGER, upon the organization of the said corporation, shall
forthwith transfer to the said corporation his exclusive right to bottle Mission products and
to sell them throughout the Philippines. As a consideration for such transfer, the
CAPITALIST shall transfer to the Manager fully paid non assessable shares of the said
corporation . . . twenty-five per centum of the capital stock of the said corporation. (Par. 3,
Exhibit II; emphasis ours.)

Plaintiff had never been a bottler or a chemist; he never had experience in the production or
distribution of beverages. As a matter of fact, when the bottling plant being built, all that he
suggested was about the toilet facilities for the laborers.

We conclude from the above that while the representation that plaintiff had the exclusive franchise
did not vitiate defendant's consent to the contract, it was used by plaintiff to get from defendant a
share of 30 per cent of the net profits; in other words, by pretending that he had the exclusive
franchise and promising to transfer it to defendant, he obtained the consent of the latter to give
him (plaintiff) a big slice in the net profits. This is the dolo incidente defined in article 1270 of the
Spanish Civil Code, because it was used to get the other party's consent to a big share in the
profits, an incidental matter in the agreement.

El dolo incidental no es el que puede producirse en el cumplimiento del contrato sino que
significa aqui, el que concurriendoen el consentimiento, o precediendolo, no influyo para
arrancar porsi solo el consentimiento ni en la totalidad de la obligacion, sinoen algun
extremo o accidente de esta, dando lugar tan solo a una accion para reclamar
indemnizacion de perjuicios. (8 Manresa 602.)

Having arrived at the conclusion that the agreement may not be declared null and void, the
question that next comes before us is, May the agreement be carried out or executed? We find
no merit in the claim of plaintiff that the partnership was already a fait accompli from the time of
the operation of the plant, as it is evident from the very language of the agreement that the parties
intended that the execution of the agreement to form a partnership was to be carried out at a later
date. They expressly agreed that they shall form a partnership. (Par. No. 1, Exhibit A.) As a matter
of fact, from the time that the franchise from the Mission Dry Corporation was obtained in
California, plaintiff himself had been demanding that defendant comply with the agreement. And
plaintiff's present action seeks the enforcement of this agreement. Plaintiff's claim, therefore, is
both inconsistent with their intention and incompatible with his own conduct and suit.

As the trial court correctly concluded, the defendant may not be compelled against his will to carry
out the agreement nor execute the partnership papers. Under the Spanish Civil Code, the
defendant has an obligation to do, not to give. The law recognizes the individual's freedom or
liberty to do an act he has promised to do, or not to do it, as he pleases. It falls within what Spanish
commentators call a very personal act (acto personalismo), of which courts may not compel
compliance, as it is considered an act of violence to do so.

Efectos de las obligaciones consistentes en hechos personalismo.—Tratamos de la

ejecucion de las obligaciones de hacer en el solocaso de su incumplimiento por parte del
deudor, ya sean los hechos personalisimos, ya se hallen en la facultad de un tercero;
porque el complimiento espontaneo de las mismas esta regido por los preceptos relativos
al pago, y en nada les afectan las disposiciones del art. 1.098.

Esto supuesto, la primera dificultad del asunto consiste en resolver si el deudor puede ser
precisado a realizar el hecho y porque medios.

Se tiene por corriente entre los autores, y se traslada generalmente sin observacion el
principio romano nemo potest precise cogi ad factum. Nadie puede ser obligado
violentamente a haceruna cosa. Los que perciben la posibilidad de la destruccion deeste
principio, añaden que, aun cuando se pudiera obligar al deudor, no deberia hacerse,
porque esto constituiria una violencia, y noes la violenciamodo propio de cumplir las
obligaciones (Bigot, Rolland, etc.). El maestro Antonio Gomez opinaba lo mismo
cuandodecia que obligar por la violencia seria infrigir la libertad eimponer una especie de
esclavitud.

xxx xxx xxx

En efecto; las obligaciones contractuales no se acomodan biencon el empleo de la fuerza

fisica, no ya precisamente porque seconstituya de este modo una especie de esclavitud,
 segun el dichode Antonio Gomez, sino porque se supone que el acreedor tuvo encuenta
el caracter personalisimo del hecho ofrecido, y calculo sobre laposibilidad de que por
alguna razon no se realizase. Repugna,ademas, a la conciencia social el empleo de la
fuerza publica, mediante coaccion sobre las personas, en las relaciones puramente
particulares; porque la evolucion de las ideas ha ido poniendo masde relieve cada dia el
respeto a la personalidad humana, y nose admite bien la violencia sobre el individuo la
cual tiene caracter visiblemente penal, sino por motivos que interesen a la colectividad de
ciudadanos. Es, pues, posible y licita esta violencia cuando setrata de las obligaciones
que hemos llamado ex lege, que afectanal orden social y a la entidad de Estado, y
aparecen impuestas sinconsideracion a las conveniencias particulares, y sin que por
estemotivo puedan tampoco ser modificadas; pero no debe serlo cuandola obligacion
reviste un interes puramente particular, como sucedeen las contractuales, y cuando, por
consecuencia, paraceria salirseel Estado de su esfera propia, entrado a dirimir, con apoyo
dela fuerza colectiva, las diferencias producidas entre los ciudadanos. (19 Scaevola 428,
431-432.)

The last question for us to decide is that of damages,damages that plaintiff is entitled to receive
because of defendant's refusal to form the partnership, and damages that defendant is also
entitled to collect because of the falsity of plaintiff's representation. (Article 1101, Spanish Civil
Code.) Under article 1106 of the Spanish Civil Code the measure of damages is the actual loss
suffered and the profits reasonably expected to be received, embraced in the terms daño
emergente and lucro cesante. Plaintiff is entitled under the terms of the agreement to 30 per cent
of the net profits of the business. Against this amount of damages, we must set off the damage
defendant suffered by plaintiff's misrepresentation that he had obtained a very high percentage
of share in the profits. We can do no better than follow the appraisal that the parties themselves
had adopted.

When defendant learned in Los Angeles that plaintiff did not have the exclusive franchise which
he pretended he had and which he had agreed to transfer to the partnership, his spontaneous
reaction was to reduce plaintiff's share form 30 per cent to 15 per cent only, to which reduction
defendant appears to have readily given his assent. It was under this understanding, which
amounts to a virtual modification of the contract, that the bottling plant was established and plaintiff
worked as Manager for the first three months. If the contract may not be considered modified as
to plaintiff's share in the profits, by the decision of defendant to reduce the same to one-half and
the assent thereto of plaintiff, then we may consider the said amount as a fair estimate of the
damages plaintiff is entitled to under the principle enunciated in the case of Varadero de Manila
vs. Insular Lumber Co., 46 Phil. 176. Defendant's decision to reduce plaintiff's share and plaintiff's
consent thereto amount to an admission on the part of each of the reasonableness of this amount
as plaintiff's share. This same amount was fixed by the trial court. The agreement contains the
stipulation that upon the termination of the partnership, defendant was to convey the franchise
back to plaintiff (Par. 11, Exhibit A). The judgment of the trial court does not fix the period within
which these damages shall be paid to plaintiff. In view of paragraph 11 of Exhibit A, we declare
that plaintiff's share of 15 per cent of the net profits shall continue to be paid while defendant uses
the franchise from the Mission Dry Corporation.

With the modification above indicated, the judgment appealed from is hereby affirmed. Without
costs.
G.R. No. 108253 February 23, 1994

LYDIA L. GERALDEZ, petitioner,

vs.
HON. COURT OF APPEALS and KENSTAR TRAVEL CORPORATION, respondents.

Natividad T. Perez for petitioner.

Bito, Lozada, Ortega & Castillo for private respondent.

REGALADO, J.:

Our tourism industry is not only big business; it is a revenue support of the nation's economy. It
has become a matter of public interest as to call for its promotion and regulation on a cabinet
level. We have special laws and policies for visiting tourists, but such protective concern has not
been equally extended to Filipino tourists going abroad. Thus, with the limited judicial relief
available within the ambit of present laws, our tourists often prefer who fail to deliver on their
undertakings. This case illustrates the recourse of one such tourist who refused to forget.

An action for damages by reason of contractual breach was filed by petitioner Lydia L. Geraldez
against private respondent Kenstar Travel Corporation, docketed as Civil Case No. Q-90-4649 of
the Regional Trial Court of Quezon City, Branch 80.1 After the parties failed to arrive at an
amicable settlement, trial on the merits ensued.

Culling from the records thereof, we find that sometime in October, 1989, Petitioner came to know
about private respondent from numerous advertisements in newspapers of general circulation
regarding tours in Europe. She then contacted private respondent by phone and the latter sent its
representative, Alberto Vito Cruz, who gave her the brochure for the tour and later discussed its
highlights. The European tours offered were classified into four, and petitioner chose the
classification denominated as "VOLARE 3" covering a 22-day tour of Europe for $2,990.00. She
paid the total equivalent amount of P190,000.00 charged by private respondent for her and her
sister, Dolores.

Petitioner claimed that, during the tour, she was very uneasy and disappointed when it turned out
that, contrary to what was stated in the brochure, there was no European tour manager for their
group of tourists, the hotels in which she and the group were bullited were not first-class, the UGC
Leather Factory which was specifically added as a highlight of the tour was not visited, and the
Filipino lady tour guide by private respondent was a first timer, that is, she was performing her
duties and responsibilities as such for the first time.2

In said action before the Regional Trial Court of Quezon City, petitioner likewise moved for the
issuance of a writ of preliminary attachment against private respondent on the ground that it
committed fraud in contracting an obligation, as contemplated in Section 1(d), Rule 57 of the
Rules of Court, to which no opposition by the latter appears on the record. This was granted by
the court a quo3 but the preliminary attachment was subsequently lifted upon the filing by private
respondent of a counterbond amounting to P990,000.00.4
During the pendency of said civil case for damages, petitioner also filed other complaints before
the Department of Tourism in DOT Case No. 90-121 and the Securities and Exchange
Commission in PED Case No. 90-3738,5 wherein, according to petitioner, herein private
respondent was meted out a fine of P10,000.00 by the Commission and P5,000.00 by the
Department,6 which facts are not disputed by private respondent in its comment on the present
petition.

On July 9, 1991, the court a quo rendered its decision7 ordering private respondent to pay
petitioner P500.000.00 as moral damages, P200,000.00 as nominal damages, P300,000.00 as
exemplary damages, P50,000.00 as and for attorney's fees, and the costs of the suit.8 On appeal,
respondent court9 deleted the award for moral and exemplary damages, and reduced the awards
for nominal damages and attorney's fees to P30,000.00 and P10,000.00, respectively. 10

Hence, the instant petition from which, after sifting through the blades of contentions alternately
thrust and parried in the exchanges of the parties, the pivotal issue that emerges is whether or
not private respondent acted in bad faith or with gross negligence in discharging its obligations
under the contract.

Both the respondent court and the court a quo agree that private respondent failed to comply
faithfully with its commitments under the Volare 3 tour program, more particularly in not providing
the members of the tour group with a European tour manger whose duty, inter alia, was to explain
the points of interest of and familiarize the tour group with the places they would visit in Europe,
and in assigning instead a first timer Filipino tour guide, in the person of Rowena Zapanta, 11 to
perform that role which definitely requires experience and knowledge of such places. It is likewise
undisputed that while the group was able to pay a visit to the site of the UGC Leather Factory,
they were brought there at a very late hour such that the factory was already closed and they
were unable to make purchases at supposedly discounted prices. 12 As to the first-class hotels,
however, while the court a quo found that the hotels were not fist-class, respondent court believed
otherwise, or that, at least, there was substantial compliance with such a representation.

While clearly there was therefore a violation of the rights of petitioner under the aforementioned
circumstances, respondent court, contrary to the findings of the trial court, ruled that no malice or
bad faith could be imputed to private respondent, hence there is no justification for the award of
moral and exemplary damages. Furthermore, it held that while petitioner is entitled to nominal
damages, the amount awarded by the trial court was unconscionable since petitioner did not
suffer actual or substantial damage from the breach of contract, 13 hence its reduction of such
award as hereinbefore stated.

After thorough and painstaking scrutiny of the case records of both the trial and appellate courts,
we are satisfactorily convinced, and so hold, that private respondent did commit fraudulent
misrepresentations amounting to bad faith, to the prejudice of petitioner and the members of the
tour group.

By providing the Volare 3 tourist group, of which petitioner was a member, with an inexperienced
and a first timer tour escort, private respondent manifested its indifference to the convenience,
satisfaction and peace of mind of its clients during the trip, despite its express commitment to
provide such facilities under the Volare 3 Tour Program which had the grandiose slogan "Let your
heart sing. 14
Evidently, an inexperienced tour escort, who admittedly had not even theretofore been to
Europe, 15 cannot effectively acquaint the tourists with the interesting areas in the cities and
places included in the program, or to promptly render necessary assistance, especially where the
latter are complete strangers thereto, like witnesses Luz Sui Haw and her husband who went to
Europe for their honeymoon. 16

We agree with petitioner that the selection of Zapanta as the group's tour guide was deliberate
and conscious choice on the part of private respondent in order to afford her an on-the-job training
and equip her with the proper opportunities so as to later qualify her as an "experienced" tour
guide and eventually be an asset of respondent corporation. 17 Unfortunately, this resulted in a
virtual project experimentation with petitioner and the members of the tour as the unwitting
participants.

We are, therefore, one with respondent court in faulting private respondent's choice of Zapanta
as a qualified tour guide for the Volare 3 tour package. It brooks no argument that to be true to its
undertakings, private respondent should have selected an experienced European tour guide, or
it could have allowed Zapanta to go merely as an understudy under the guidance, control and
supervision of an experienced and competent European or Filipino tour guide, 18 who could give
her the desired training.

Moreover, a tour guide is supposed to attend to the routinary needs of the tourists, not only when
the latter ask for assistance but at the moment such need becomes apparent. In other words, the
tour guide, especially by reason of her experience in previous tours, must be able to anticipate
the possible needs and problems of the tourists instead of waiting for them to bring it to her
attention. While this is stating the obvious, it is her duty to see to it that basic personal necessities
such as soap, towels and other daily amenities are provided by the hotels. It is also expected of
her to see to it that the tourists are provided with sanitary surroundings and to actively arrange for
medical attention in case of accidents, as what befell petitioner's sister and wherein the siblings
had to practically fend for themselves since, after merely calling for an ambulance, Zapanta left
with the other tour participants. 19

Zapanta fell far short of the performance expected by the tour group, her testimony in open court
being revelatory of her inexperience even on the basic function of a tour guide, to wit:

Q Now, are you aware that there were times that the tourists under
the "Volare 3" were not provided with soap and towels?

A They did not tell me that but I was able to ask them later on but
then nobody is complaining. 20 . . . .

The inability of the group to visit the leather factory is likewise reflective of the neglect and
ineptness of Zapanta in attentively following the itinerary of the day. This incompetence must
necessarily be traced to the lack of due diligence on the part of private respondent in the selection
of its employees. It is true that among the thirty-two destinations, which included twenty-three
cities and special visits to nine tourist spots, this was the only place that was not visited. 21 It must
be noted, however, that the visit to the UGC Leather Factory was one of the highlights 22 of the
Volare 3 program which even had to be specifically inserted in the itinerary, hence it was
incumbent upon the organizers of the tour to take special efforts to ensure the same. Besides,
petitioner did expect much from the visit to that factory since it was represented by private
respondent that quality leather goods could be bought there at lower prices. 23
Private respondent represents Zapanta's act of making daily overseas calls to Manila as an
exercise of prudence and diligence on the latter's part as a tour guide. 24 It further claims that
these calls were needed so that it could monitor the progress of the tour and respond to any
problem immediately. 25 We are not persuaded. The truth of the matter is that Zapanta, as an
inexperienced trainee-on-the-job, was required to make these calls to private respondent for the
latter to gauge her ability in coping with her first assignment and to provide instructions to her. 26

Clearly, therefore, private respondent's choice of Zapanta as the tour guide is a manifest disregard
of its specific assurances to the tour group, resulting in agitation and anxiety on their part, and
which deliberate omission is contrary to the elementary rules of good faith and fair play. It is
extremely doubtful if any group of Filipino tourists would knowingly agree to be used in effect as
guinea pigs in an employees' training program of a travel agency, to be conducted in unfamiliar
European countries with their diverse cultures, lifestyles and languages.

On the matter of the European tour manager, private respondent's advertisement in its tour
contract declares and represents as follows:

FILIPINO TOUR ESCORT!

He will accompany you throughout Europe. He speaks your language, shares your
culture and feels your excitement.

He won't be alone because you will also be accompanied by a . . .

EUROPEAN TOUR MANAGER!

You get the best of both worlds. Having done so may tours in the past with people
like you, he knows your sentiments, too. So knowledgeable about Europe, there is
hardly a question he can't answer. 27

Private respondent contends that the term "European Tour Manager" does not refer to an
individual but to an organization, allegedly the Kuoni Travel of Switzerland which supposedly
prepared the itinerary for its "Volare Europe Tour," negotiated with all the hotels in Europe,
selected tourist spots and historical places to visit, and appointed experienced local tour guides
for the tour group. 28

We regret this unseemly quibbling which perforce cannot be allowed to pass judicial muster.

A cursory reading of said advertisement will readily reveal the express representation that the
contemplated European tour manager is a natural person, and not a juridical one as private
respondent asserts. A corporate entity could not possibly accompany the members of the tour
group to places in Europe; neither can it answer questions from the tourists during the tour. Of
course, it is absurd that if a tourist would want to know how he could possibly go to the nearest
store or supermarket, he would still have to call Kuoni Travel of Switzerland.

Furthermore, both lower courts observed, and we uphold their observations, that indeed private
respondent had the obligation to provide the tour group not only with a European tour manger,
but also with local European tour guides. The latter, parenthetically, were likewise never made
available. 29 Zapanta claims that she was accompanied by a European local tour guide in most of
the major cities in Europe. We entertain serious doubts on, and accordingly reject, this pretension
for she could not even remember the name of said European tour guide. 30 If such a guide really
existed, it is incredible why she could not even identify the former when she testified a year later,
despite the length of their sojourn and the duration of their association.

As to why the word "he" was used in the aforequoted advertisement, private respondent maintains
that the pronoun "he" also includes the word "it," as where it is used as a "nominative case form
in general statements (as in statutes) to include females, fictitious persons (as
corporations)." 31 We are constrained to reject this submission as patently strained and untenable.
As already demonstrated, it is incredible that the word "he" was used by private respondent to
denote an artificial or corporate being. From its advertisement, it is beyond cavil that the import of
the word "he" is a natural and not a juridical person. There is no need for further interpretation
when the wordings are clear. The meaning that will determine the legal effect of a contract is that
which is arrived at by objective standards; one is bound, not by what he subjectively intends, but
by what he leads others reasonably to think he intends. 32

In an obvious but hopeless attempt to arrive at a possible justification, private respondent further
contends that it explained the concept of a European tour manager to its clients at the pre-
departure briefing, which petitioner did not attend. 33 Significantly, however, private respondent
failed to present even one member of the tour group to substantiate its claim. It is a basic rule of
evidence that a party must prove his own affirmative allegations. 34 Besides, if it was really its
intention to provide a juridical European tour manager, it could not have kept on promising its
tourists during the tour that a European tour manager would come, 35 supposedly to join and assist
them.

Veering to another line of defense, private respondent seeks sanctuary in the delimitation of its
responsibility as printed on the face of its brochure on the Volare 3 program, to wit:

RESPONSIBILITIES: KENSTAR TRAVEL CORPORATION, YOUR TRAVEL

AGENT, THEIR EMPLOYEES OR SUB-AGENTS SHALL BE RESPONSIBLE
ONLY FOR BOOKING AND MAKING ARRANGEMENTS AS YOUR
AGENTS. Kenstar Travel Corporation, your travel Agent, their employees or sub-
agents assume no responsibility or liability arising out of or in connection with the
services or lack of services, of any train, vessel, other conveyance or station
whatsoever in the performance of their duty to the passengers or guests, neither
will they be responsible for any act, error or omission, or of any damages, injury,
loss, accident, delay or irregularity which may be occasioned by reason (of) or any
defect in . . . lodging place or any facilities . . . . (Emphasis by private
respondent.) 36

While, generally, the terms of a contract result from the mutual formulation thereof by the parties
thereto, it is of common knowledge that there are certain contracts almost all the provisions of
which have been drafted by only one party, usually a corporation. Such contracts are called
contracts of adhesion, because the only participation of the party is the affixing of his signature or
his "adhesion" thereto. 37 In situations like these, when a party imposes upon another a ready-
made form of contract, 38 and the other is reduced to the alternative of taking it or leaving it, giving
no room for negotiation and depriving the latter of the opportunity to bargain on equal footing, a
contract of adhesion results. While it is true that an adhesion contract is not necessarily void, it
must nevertheless be construed strictly against the one who drafted the same. 39 This is especially
true where the stipulations are printed in fine letters and are hardly legible as is the case of the
tour contract 40 involved in the present controversy.
Yet, even assuming arguendo that the contractual limitation aforequoted is enforceable, private
respondent still cannot be exculpated for the reason that responsibility arising from fraudulent
acts, as in the instant case, cannot be stipulated against by reason of public policy. Consequently,
for the foregoing reasons, private respondent cannot rely on its defense of "substantial
compliance" with the contract.

Private respondent submits likewise that the tour was satisfactory, considering that only petitioner,
out of eighteen participants in the Volare 3 Tour Program, actually complained. 41 We cannot
accept this argument. Section 28, Rule 130 of the Rules of Court declares that the rights of a
party cannot be prejudiced by an act, declaration, or omission of another, a statutory adaptation
of the first branch of the hornbook rule of res inter alios acta 42 which we do not have to belabor
here.

Besides, it is a commonly known fact that there are tourists who, although the tour was far from
what the tour operator undertook under the contract, choose to remain silent and forego recourse
to a suit just to avoid the expenses, hassle and rancor of litigation, and not because the tour was
in accord with was promised. One does not relish adding to the bitter memory of a misadventure
the unpleasantness of another extended confrontation. Furthermore, contrary to private
respondent's assertion, not only petitioner but two other members of the tour group, Luz Sui Haw
and Ercilla Ampil, confirmed petitioner's complaints when they testified as witnesses for her as
plaintiff in the court below. 43

Private respondent likewise committed a grave misrepresentation when it assured in its Volare 3
tour package that the hotels it had chosen would provide the tourists complete amenities and
were conveniently located along the way for the daily itineraries. 44 It turned out that some of the
hotels were not sufficiently equipped with even the basic facilities and were at a distance from the
cities covered by the projected tour. Petitioner testified on her disgust with the conditions and
locations of the hotels, thus:

Q And that these bathrooms ha(ve) bath tub(s) and hot and cold
shower(s)?

A Not all, sir.

Q Did they also provide soap and towels?

A Not all, sir, some (had) no toilet paper. 45

Q Which one?

A The 2 stars, the 3 stars and some 4 stars (sic) hotels.

Q What I am saying . . .

A You are asking a question? I am answering you. 2 stars, 3 stars

and some 4 stars (sic) hotels, no soap, toilet paper and (the) bowl
stinks. . . .

xxx xxx xxx

 Q And that except for the fact that some of these four star hotels
were outside the city they provided you with the comfort?

A Not all, sir.

Q Can you mention some which did not provide you that comfort?

A For example, if Ramada Hotel Venezia is in Quezon City, our

hotel is in Meycauayan. And if Florence or Ferenze is in manila, our
hotel is in Muntinlupa. 46

xxx xxx xxx

A One more hotel, sir, in Barcelona, Hotel Saint Jacques is also

outside the city. Suppose Barcelona is in Quezon City, our hotel is
in Marilao. We looked for this hotel inside the city of Barcelona for
three (3) hours. We wasted our time looking for almost all the hotels
and places where to eat. That is the kind of tour that you have. 47

Luz Sui Haw, who availed of the Volare 3 tour package with her husband for their honeymoon,
shared the sentiments of petitioner and testified as follows:

Q . . . Will you kindly tell us why the hotels where you stayed are
not considered first class hotels?

A Because the hotels where we went, sir, (are) far from the City and
the materials used are not first class and at times there were no
towels and soap. And the two (2) hotels in Nevers and Florence the
conditions (are) very worse (sic). 48

Q Considering that you are honeymooners together with your

husband, what (were) your feelings when you found out that the
condition were not fulfilled by the defendant?

A I would like to be very honest. I got sick when I reached Florence

and half of my body got itch (sic). I think for a honeymooner I would
like to emphasize that we should enjoy that day of our life and it
seems my feet kept on itching because of the condition of the hotel.
And I was so dissatisfied because the European Tour Manager was
not around there (were) beautiful promises. They kept on telling us
that a European Tour Manager will come over; until our Paris tour
was ended there was no European tour manager. 49

xxx xxx xxx

Q You will file an action against the defendant because there was
a disruption of your happiness, in your honeymoon, is that correct?
 A That is one of my causes of (sic) coming up here. Secondly, i was
very dissatisfied (with) the condition. Thirdly, that Volare 89 it says
it will let your heart sing. That is not true. There was no European
tour (manager) and the highlights of the tour (were) very poor. The
hotels were worse (sic) hotels. 50

Q All the conditions of the hotels as you . . .

A Not all but as stated in the brochure that it is first class hotel. The
first class hotels state that all things are beautiful and it is neat and
clean with complete amenities and I encountered the Luxembourg
hotel which is quite very dilapidated because of the flooring when
you step on the side "kumikiring" and the cabinets (are) antiques
and as honeymooners we don't want to be disturbed or seen. 51

xxx xxx xxx

Q None of these are first class hotels?

A Yes, sir.

Q So, for example Ramada Hotel Venezia which according to Miss

Geraldez is first class hotel is not first class hotel?

A Yes, sir.

Q You share the opinion of Miss Geraldez?

A Yes, sir.

Q The same is true with Grand Hotel Palatino which is not a first
class hotel?

A Yes, sir.

Q And Hotel Delta Florence is not first class hotel?

A That is how I got my itch, sir. Seven (7) days of itch.

Q How about Hotel Saint-Jacquez, Paris?

A It is far from the city. It is not first class hotel.

Q So with Hotel Le Prieure Du Coeur de Jesus neither a first class

hotel?

A Yes, sir.

Q Hotel De Nevers is not a first class hotel?

 A Yes, sir.

Q Hotel Roc Blanc Andorra is not a first class hotel?

A Yes, sir.

Q Saint Just Hotel, Barcelona is not a first class hotel?

A Yes, sir.

Q Hotel Pullman Nice neither is not a first class hotel?

A Yes, sir.

Q Hotel Prinz Eugen and Austrotel are not first class hotels?

A Yes, sir. 52

Private respondent cannot escape responsibility by seeking refuge under the listing of first-class
hotels in publications like the "Official Hotel and Resort Guide" and Worldwide Hotel
Guide." 53 Kuoni Travel, its tour operator, 54 which prepared the hotel listings, is a European-
based travel agency 55 and, as such, could have easily verified the matter of first-class
accommodations. Nor can it logically claim that the first-class hotels in Europe may not
necessarily be the first-class hotels here in the Philippines. 56 It is reasonable for petitioner to
assume that the promised first-class hotels are equivalent to what are considered first-class hotels
in Manila. Even assuming arguendo that there is indeed a difference in classifications, it cannot
be gainsaid that a first-class hotel could at the very least provide basic necessities and sanitary
accommodations. We are accordingly not at all impressed by private respondent's attempts to
trivialize the complaints thereon by petitioner and her companions.

In a last ditch effort to justify its choice of the hotels, private respondent contends that it merely
provided such "first class" hotels which are commensurate to the tourists budget, or which were,
under the given circumstances, the "best for their money." It postulated that it could not have
offered better hostelry when the consideration paid for hotel accommodations by the tour
participants was only so much,57 and the tour price of $2,990.00 covers a European tour for 22
days inclusive of lower room rates and meals. 58 this is implausible, self-serving and borders on
sophistry.

The fact that the tourists were to pay a supposedly lower amount, such that private respondent
allegedly retained hardly enough as reasonable profit, 59 does not justify a substandard form of
service in return. It was private respondent, in the first place, which fixed the charges for the
package tour and determined the services that could be availed of corresponding to such price.
Hence, it cannot now be heard to complain that it only made a putative marginal profit out of the
transaction. if it could not provide the tour participants with first-class lodgings on the basis of the
amount that they paid, it could and should have instead increased the price to enable it to arrange
for the promised first-class accommodations.

On the foregoing considerations, respondent court erred in deleting the award for moral and
exemplary damages. Moral damages may be awarded in breaches of contract where the obligor
acted fraudulently or in bad faith. 60 From the facts earlier narrated, private respondent can be
faulted with fraud in the inducement, which is employed by a party to a contract in securing the
consent of the other.

This fraud or dolo which is present or employed at the time of birth or perfection of a contract may
either be dolo causante or dolo incidente. The first, or causal fraud referred to in Article 1338, are
those deceptions or misrepresentations of a serious character employed by one party and without
which the other party would not have entered into the contract. Dolo incidente, or incidental fraud
which is referred to in Article 1344, are those which are not serious in character and without which
the other party would still have entered into the contract. 61 Dolo causante determines or is the
essential cause of the consent, while dolo incidente refers only to some particular or accident of
the
obligations. 62 The effects of dolo causante are the nullity of the contract and the indemnification
of damages, 63 and dolo incidente also obliges the person employing it to pay damages. 64

In either case, whether private respondent has committed dolo causante or dolo incidente by
making misrepresentations in its contracts with petitioner and other members of the tour group,
which deceptions became patent in the light of after-events when, contrary to its representations,
it employed an inexperienced tour guide, housed the tourist group in substandard hotels, and
reneged on its promise of a European tour manager and the visit to the leather factory, it is
indubitably liable for damages to petitioner.

In the belief that an experienced tour escort and a European tour manager would accompany
them, with the concomitant reassuring and comforting thought of having security and assistance
readily at hand, petitioner was induced to join the Volare 3 tourists, instead of travelling
alone 65 She likewise suffered serious anxiety and distress when the group was unable to visit the
leather factory and when she did not receive first-class accommodations in their lodgings which
were misrepresented as first-class hotels. These, to our mind, justify the award for moral
damages, which are in the category of an award designed to compensate the claimant for that
injury which she had suffered, and not as a penalty on the wrongdoer, 66 we believe that an award
of P100,000.00 is sufficient and reasonable.

When moral damages are awarded, especially for fraudulent conduct, exemplary damages may
also be decreed. Exemplary damages are imposed by way of example or correction for the public
good, in addition to moral, temperate, liquidated or compensatory damages. According to the
code Commission, exemplary damages are required by public policy, for wanton acts must be
suppressed. 67 An award, therefore, of P50,000.00 is called for to deter travel agencies from
resorting to advertisements and enticements with the intention of realizing considerable profit at
the expense of the public, without ensuring compliance with their express commitments. While,
under the present state of the law, extraordinary diligence is not required in travel or tour contracts,
such as that in the case at bar, the travel agency acting as tour operator must nevertheless be
held to strict accounting for contracted services, considering the public interest in tourism, whether
in the local or in the international scene. Consequently, we have to likewise reject the theory of
private respondent that the promise it made in the tour brochure may be regarded only as
"commendatory trade talk." 68

With regard to the honorarium for counsel as an item of damages, since we are awarding moral
and exemplary damages, 69 and considering the legal importance of the instant litigation and the
efforts of counsel evident from the records of three levels of the judicial hierarchy, we favorably
consider the amount of P20,000.00 therefor.
WHEREFORE, premises considered, the decision of respondent Court of Appeals is hereby SET
ASIDE, and another one rendered, ordering private respondent Kenstar Travel Corporation to pay
petitioner Lydia L. Geraldez the sums of P100,000.00 by way of moral damages, P50,000.00 as
exemplary damages, and P20,000.00 as and for attorney's fees, with costs against private
respondent. The award for nominal damages is hereby deleted.

Padilla, Nocon and Puno, JJ., concur.

Narvasa, C.J., took no part.

G.R. No. 34840 September 23, 1931

NARCISO GUTIERREZ, plaintiff-appellee,

vs.
BONIFACIO GUTIERREZ, MARIA V. DE GUTIERREZ, MANUEL GUTIERREZ, ABELARDO
VELASCO, and SATURNINO CORTEZ, defendants-appellants.

L.D. Lockwood for appellants Velasco and Cortez.

San Agustin and Roxas for other appellants.
Ramon Diokno for appellee.

MALCOLM, J.:

This is an action brought by the plaintiff in the Court of First Instance of Manila against the five
defendants, to recover damages in the amount of P10,000, for physical injuries suffered as a
result of an automobile accident. On judgment being rendered as prayed for by the plaintiff, both
sets of defendants appealed.

On February 2, 1930, a passenger truck and an automobile of private ownership collided while
attempting to pass each other on the Talon bridge on the Manila South Road in the municipality
of Las Piñas, Province of Rizal. The truck was driven by the chauffeur Abelardo Velasco, and was
owned by Saturnino Cortez. The automobile was being operated by Bonifacio Gutierrez, a lad 18
years of age, and was owned by Bonifacio's father and mother, Mr. and Mrs. Manuel Gutierrez.
At the time of the collision, the father was not in the car, but the mother, together will several other
members of the Gutierrez family, seven in all, were accommodated therein. A passenger in the
autobus, by the name of Narciso Gutierrez, was en route from San Pablo, Laguna, to Manila. The
collision between the bus and the automobile resulted in Narciso Gutierrez suffering a fracture
right leg which required medical attendance for a considerable period of time, and which even at
the date of the trial appears not to have healed properly.

It is conceded that the collision was caused by negligence pure and simple. The difference
between the parties is that, while the plaintiff blames both sets of defendants, the owner of the
passenger truck blames the automobile, and the owner of the automobile, in turn, blames the
truck. We have given close attention to these highly debatable points, and having done so, a
majority of the court are of the opinion that the findings of the trial judge on all controversial
questions of fact find sufficient support in the record, and so should be maintained. With this
general statement set down, we turn to consider the respective legal obligations of the
defendants.
In amplification of so much of the above pronouncement as concerns the Gutierrez family, it may
be explained that the youth Bonifacio was in incompetent chauffeur, that he was driving at an
excessive rate of speed, and that, on approaching the bridge and the truck, he lost his head and
so contributed by his negligence to the accident. The guaranty given by the father at the time the
son was granted a license to operate motor vehicles made the father responsible for the acts of
his son. Based on these facts, pursuant to the provisions of article 1903 of the Civil Code, the
father alone and not the minor or the mother, would be liable for the damages caused by the
minor.

We are dealing with the civil law liability of parties for obligations which arise from fault or
negligence. At the same time, we believe that, as has been done in other cases, we can take
cognizance of the common law rule on the same subject. In the United States, it is uniformly held
that the head of a house, the owner of an automobile, who maintains it for the general use of his
family is liable for its negligent operation by one of his children, whom he designates or permits
to run it, where the car is occupied and being used at the time of the injury for the pleasure of
other members of the owner's family than the child driving it. The theory of the law is that the
running of the machine by a child to carry other members of the family is within the scope of the
owner's business, so that he is liable for the negligence of the child because of the relationship of
master and servant. (Huddy On Automobiles, 6th ed., sec. 660; Missell vs. Hayes [1914], 91 Atl.,
322.) The liability of Saturnino Cortez, the owner of the truck, and of his chauffeur Abelardo
Velasco rests on a different basis, namely, that of contract which, we think, has been sufficiently
demonstrated by the allegations of the complaint, not controverted, and the evidence. The reason
for this conclusion reaches to the findings of the trial court concerning the position of the truck on
the bridge, the speed in operating the machine, and the lack of care employed by the chauffeur.
While these facts are not as clearly evidenced as are those which convict the other defendant,
we nevertheless hesitate to disregard the points emphasized by the trial judge. In its broader
aspects, the case is one of two drivers approaching a narrow bridge from opposite directions, with
neither being willing to slow up and give the right of way to the other, with the inevitable result of
a collision and an accident.

The defendants Velasco and Cortez further contend that there existed contributory negligence on
the part of the plaintiff, consisting principally of his keeping his foot outside the truck, which
occasioned his injury. In this connection, it is sufficient to state that, aside from the fact that the
defense of contributory negligence was not pleaded, the evidence bearing out this theory of the
case is contradictory in the extreme and leads us far afield into speculative matters.

The last subject for consideration relates to the amount of the award. The appellee suggests that
the amount could justly be raised to P16,517, but naturally is not serious in asking for this sum,
since no appeal was taken by him from the judgment. The other parties unite in challenging the
award of P10,000, as excessive. All facts considered, including actual expenditures and damages
for the injury to the leg of the plaintiff, which may cause him permanent lameness, in connection
with other adjudications of this court, lead us to conclude that a total sum for the plaintiff of P5,000
would be fair and reasonable. The difficulty in approximating the damages by monetary
compensation is well elucidated by the divergence of opinion among the members of the court,
three of whom have inclined to the view that P3,000 would be amply sufficient, while a fourth
member has argued that P7,500 would be none too much.

In consonance with the foregoing rulings, the judgment appealed from will be modified, and the
plaintiff will have judgment in his favor against the defendants Manuel Gutierrez, Abelardo
Velasco, and Saturnino Cortez, jointly and severally, for the sum of P5,000, and the costs of both
instances.

Avanceña, C.J., Johnson, Street, Villamor, Ostrand, Romualdez, and Imperial, JJ., concur.