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Article 1157 first part of this opinion. A move to reconsider failed.

Hence,
this appeal.

Ruling: The court disagrees with the lower court.


ABELARDO BAUTISTA and ROBERTO TAN TING VS
FEDERICO O. BORROMEO, INC vs. FEDERICO O. 3. Even on the merits, petitioners' case must fall.
BORROMEO, INC., HONORABLE CESAR C. CRUZ,
Borromeo paid the widow of its employee, Quintin Delgado,
compensation (death benefit) and funeral expenses for the
latter's death while in the course of employment. This
Facts: On September 15, 1964, the Ford truck of petitioner
obligation arises from law — Section 2 of the Workmen's
Roberto Tan Ting driven by Abelardo Bautista, the other Compensation Act. The same law in its Section 6 also
petitioner, and the Volkswagen delivery panel truck owned
provides that "[i]n case an employee suffers an injury for
by respondent Federico O. Borromeo, Inc. were involved in a which compensation is due under this Act by any other
traffic accident along EDSA. In said traffic accident, Quintin
person besides his employer, it shall be optional with such
Delgado, a helper in Borromeo's delivery panel truck,
injured employee either to claim compensation from his
sustained injuries which resulted in his instantaneous death.
employer, under this Act, or sue such other person for
Borromeo had to pay Delgado's widow the sum of P4,444
damages, in accordance with law; and in case compensation
representing the compensation (death benefit) and funeral
is claimed and allowed in accordance with this Act, the
expenses due Delgado under the Workmen's Compensation
employer who paid such compensation or was found liable
Act.
to pay the same, shall succeed the injured employee to the
On June 17, 1965, upon the averment that the said vehicular right of recovering from such person what he paid: ..."
accident was caused by petitioners' negligence, Borromeo
It is evident from the foregoing that "if compensation is
started suit in the MTC of Mandaluyong, Rizal to recover from
claimed and awarded, and the employer pays it, the
petitioners the compensation and funeral expenses it paid to
employer becomes subrogated to and acquires, by
the widow of Quintin Delgado. At the scheduled hearing of
operation of law, the worker's rights against the tortfeasor."
the case on July 23, 1965, neither petitioners nor their
counsel appeared. Borromeo was thus allowed to present its No need then there is to establish any contractual
evidence ex parte. On the same day, July 23, 1965, the relationship between Quintin Delgado and herein petitioners.
municipal court rendered judgment in favor of Borromeo and Indeed, there is none. The cause of action of respondent
against the petitioners in the principal sum of P4,444, and corporation is one which does not spring from a creditor-
P500 attorney's fees, and costs. Respondents aver that this debtor relationship. It arises by virtue of its subrogation to
judgment has been executed and satisfied. the right of Quintin Delgado to sue the guilty party. Such
subrogation is sanctioned by the Workmen's Compensation
Nothing was done by petitioners until October 26, 1965,
Law aforesaid. It is as a subrogee to the rights of its
when they lodged a petition for relief from the inferior court's
deceased employee, Quintin Delgado, that Borromeo filed a
judgment in the Court of First Instance of Rizal.2 They there
suit against petitioners in the Municipal Court of
claimed excusable negligence for the failure of petitioners' Mandaluyong, Rizal.
counsel to appear in the July 23, 1965 hearing at the
municipal court and asserted that they had a good and
substantial defense in that "there was no contractual
Obligations ex delicto
relationship between the parties, whether express or
implied." They sought preliminary injunction, prayed for trial
de novo on the merits. A restraining order was at first issued
by the court; but the prayer for preliminary injunction was PEOPLE'S CAR INC., VS COMMANDO SECURITY
eventually denied. SERVICE AGENCY

Respondents' answer contended that the petition for relief Facts: On April 5, 1970 at around 1:00 A.M., defendant’s
was filed out of time; that petitioners' counsel's failure to security guard on duty at plaintiff’s premises, "without any
attend the hearing of July 23, 1965 does not constitute authority, consent, approval, knowledge or orders of the
excusable negligence; and that the affidavits attached to the plaintiff and/or defendant brought out of the compound of
petition do not show good and substantial defense. the People’s Car a car belonging to its customer, and drove
Petitioners thereafter moved for judgment on the pleadings. said car for a place or places unknown, abandoning his post
No objection thereto was interposed by respondents. The as such security guard on duty inside the plaintiff’s
lower court then rendered the judgment mentioned in the compound, and while so driving said car in one of the City
streets lost control of said car, causing the same to fall into
a ditch along J.P. Laurel St., Davao City by reason of which customer’s car, lost control of it on the highway causing it
the plaintiff’s complaint for qualified theft against said driver, to fall into a ditch, thereby directly causing plaintiff to incur
was blottered in the office of the Davao City Police actual damages in the total amount of P8,489.10.
Department."
Defendant is therefore undoubtedly liable to indemnify
As a result of these wrongful acts of defendant’s security People’s Car for the entire damages thus incurred, since
guard, the car of People’s Car’s customer, Joseph Luy, which under paragraph 5 of their contract it "assumed the
had been left with People’s Car for servicing and maintenance, responsibility for the proper performance by the guards
"suffered extensive damage in the total amount of P7,07910" employed of their duties and (contracted to) be solely
besides the car rental value "chargeable to defendant" in the responsible for the acts done during their watch hours" and
sum of P1,410.00 for a car that plaintiff had to rent and make "specifically released (plaintiff) from any and all liabilities . . .
available to its said customer to enable him to pursue his to the third parties arising from the acts or omissions done
business and occupation for the period of forty-seven (47) by the guards during their tour of duty." As plaintiff had duly
days (from April 25 to June 10, 1970) that it took plaintiff to discharged its liability to the third party, its customer,
repair the damaged car, 7 or total actual damages incurred Joseph Luy, for the undisputed damages of P8,489.10
by plaintiff in the sum of P8,489.10. caused said customer, due to the wanton and unlawful act
of defendant’s guard, defendant in turn was clearly liable
People’s Car claimed that defendant was liable for the entire under the terms of paragraph 5 of their contract to
amount under paragraph 5 of their contract whereunder
indemnify plaintiff in the same amount.
defendant assumed "sole responsibility for the acts done
during their watch hours" by its guards, whereas defendant The trial court’s approach that "had People’s Car understood
contended, without questioning the amount of the actual the liability of the defendant to fall under paragraph 5, it
damages incurred by plaintiff, that its liability "shall not should have told Joseph Luy, owner of the car, that under
exceed (P1,000.00) pesos per guard post" under paragraph the Guard Service Contract, it was not liable for the damage
4 of their contract. The parties thus likewise stipulated on this but the defendant and had Luy insisted on the liability of
sole issue submitted by them for adjudication, as People’s Car, the latter should have challenged him to bring
"Interpretation of the contract, ad to the extent of the liability the matter to court. If Luy accepted the challenge and
of the defendant to the plaintiff by reason of the acts of the instituted an action against People’s Car, it should have filed
employees of the defendant is the only issue to be resolved. a third-party complaint against Commando Security Service
Agency. But if Luy instituted the action against the People’s
"The defendant relies on Par. 4 of the contract to support its
Car and the defendant, People’s Car should have filed a
contention while the People’s Car relies on Par. 5 of the same
crossclaim against Commando," was unduly technical and
contract in support of its claims against the defendant.
unrealistic and untenable.

People’s Car was in law liable to its customer for the


Ruling: damages caused the customer’s car, which had been
entrusted into its custody. People’s Car therefore was in law
Paragraph 4 of the contract, which limits-defendant’s liability justified in making good such damages and relying in turn
for the amount of loss or damage to any property of plaintiff on defendant to honor its contract and indemnify it for such
to "P1,000.00 per guard post," is by its own terms applicable undisputed damages, which had been caused directly by the
only for loss or damage "through the negligence of its unlawful and wrongful acts of defendant’s security guard in
guards . . . during the watch hours" provided that the same breach of their contract. As ordained in Article 1159, Civil
is duly reported by plaintiff within 24 hours of the occurrence Code, "obligations arising from contracts have the force of
and the guard’s negligence is verified after proper law between the contracting parties and should be complied
investigation with the attendance of both contracting parties. with in good faith."
Said paragraph is manifestly inapplicable to the stipulated
facts of record, which involve neither property of plaintiff that People’s Car in law could not tell its customer, as per the
has been lost or damaged at its premises nor mere trial court’s view, that "under the Guard Service Contract it
negligence of defendant’s security guard on duty. was not liable for the damage but the defendant" — since
the customer could not hold defendant to account for the
Here, instead of defendant, through its assigned security damages as he had no privity of contract with defendant.
guards, complying with its contractual undertaking "to Such an approach of telling the adverse party to go to court,
safeguard and protect the business premises of (plaintiff) notwithstanding his plainly valid claim, aside from its ethical
from theft, robbery, vandalism and all other unlawful acts of deficiency among others, could hardly create any goodwill
any person or persons," defendant’s own guard on duty for plaintiff’s business, in the same way that defendant’s
unlawfully and wrongfully drove out of plaintiff’s premises a baseless attempt to evade fully discharging its contractual
liability to plaintiff cannot be expected to have brought it otherwise they can not be enforced by processes of law;
more business. Worse, the administration of justice is and it is for the legislature to provide for their payment in
prejudiced, since the court dockets are unduly burdened with such manner as it sees fit.
unnecessary litigation.
A second infirmity of the decision under appeal originates
ACCORDINGLY, the judgment appealed from is hereby from its ignoring the fact that the initial complaint against
reversed and judgment is hereby rendered sentencing the Irrigation Service Unit was that it had induced the
defendant-appellee to pay plaintiff-appellant the sum of Handong Irrigation Association, Inc., to invade and occupy
P8,489.10 as and by way of reimbursement of the stipulated the land of the plaintiff Ildefonso Ortiz. The ISU liability thus
actual damages and expenses, as well as the costs of suit in arose from tort and not from contract; and it is a well-
both instances. entrenched rule in this jurisdiction, embodied in Article 2180
of the Civil Code of the Philippines, that the State is liable
only for torts caused by its special agents, specially
Obligations from quasi delicts commissioned to carry out the acts complained of outside
of such agent's regular duties (Merritt vs. Insular
REPUBLIC OF THE PHILIPPINES, vs. HON. PERFECTO Government, supra; Rosete vs. Auditor General, 81 Phil.
R. PALACIO 453). There being no proof that the making of the tortious
inducement was authorized, neither the State nor its funds
Facts: Ildefonso Ortiz instituted a civil action against the
can be made liable therefor.
Handog Irrigation Association, Inc, a corporation, and the
irrigation Service Unit, an office under the Department of The order of garnishment issued by the Sheriff of Manila on
Public Works and Communications to recover possession, the Pump Irrigation Trust Fund in the account of the
with damages, a 958 sqm lot which the Irrigation Association Irrigation Service Unit, with the Philippine National Bank, is
allegedly entered and occupied. For failure to answer, the hereby declared null and void.
defendants were declared in default. Later, The Republic,
through the Solicitor General, moved for the dismissal of the
complaint on the ground that the Irrigation Service Unit (ISU)
Defense of fortuitous events (Art 1174)
has no juridical entity to sue and be sued. The motion was
denied on the ground that defendant is engaged in the
business of selling irrigation pumps on installment plan. A writ
Republic vs Luzon Stevedoring Corporation (GR No.
of execution was issued and later on a writ of garnishment
L-21749, September 29, 1967)
was issued against the deposit/trust fund of the ISU with
Philippine National Bank. The Solicitor General moved for the *can be found at Jurado
lifting of the order on the ground that the trust fund is a public
fund exempt from garnishment. On appeal, the CA sustained Facts: A barge being towed by tugboats "Bangus" and
the validity of the writ. "Barbero" all owned by Luzon Stevedoring Corp. rammed
one of the wooden piles of the Nagtahan Bailey Bridge due
ISSUE: Whether or not the ISU may be sued and the trust to the swollen current of the Pasig after heavy rains days
fund be the subject of garnishment & Whether or not the ISU before. The Republic sued Luzon Stevedoring for actual and
liability arose from tort and not from contract consequential damages. Luzon Stevedoring claimed it had
exercised due diligence in the selection and supervision of
its employees; that the damages to the bridge were caused
RULING: No. The Court ruled that the ISU is a by force majeure; that plaintiff has no capacity to sue; and
government agency engaged in the administration of that the Nagtahan bailey bridge is an obstruction to
irrigation system to promote an economic policy of sustaining navigation.
development and growth in agriculture. Aside from being an
Issue: Whether or not the collision of appellant's barge with
agency of the government pursuing a governmental function,
the supports or piers of the Nagtahan bridge was in law
the fact that it is collecting payment for irrigation pumps will
not make the ISU one engaged in business. The installment caused by fortuitous event or force majeure.
payment being collected is not for profit but merely for the Held: There is a presumption of negligence on part of the
purpose of financing the cost of the pump and its employees of Luzon Stevedoring, as the Nagtahan Bridge is
maintenance and administration. stationary. Considering that the Nagtahan bridge was an
immovable and stationary object and uncontrovertedly
Judgments against a state, in cases where it has consented
provided with adequate openings for the passage of water
to be sued, generally operate merely to liquidate and
craft, including barges like of appellant's, it is undeniable
establish plaintiff's claim in the absence of express provision;
that the unusual event that the barge, exclusively controlled CFI of Batangas. Found guilty, he was sentenced to suffer
by appellant, rammed the bridge supports raises a imprisonment and to indemnify the heirs of the deceased in
presumption of negligence on the part of appellant or its the sum of P6,000. Antonia Maranan, the mother of the
employees manning the barge or the tugs that towed it. For victim filed an action in the court of First Instance of
in the ordinary course of events, such a thing does not Batangas to recover damages from Perez who is the carrier
happen if proper care is used. In Anglo American and Valenzuela, who is the suspect found guilty of homicide
Jurisprudence, the inference arises by what is known as the for the death of Rogelio Corachea, her son. In defense of
"res ipsa loquitur" rule. Perez claimed that deceased was killed in self-defense
because he was the first who assaulted the driver. In
The appellant strongly stresses the precautions taken by it on
addition to that, the defendant claimed that the death was
the day in question: that it assigned two of its most powerful caso foruito which means Perez, the carrier is not liable for
tugboats to tow down river its barge L-1892; that it assigned
the damages done. In the end, the lower court adjudged
to the task the more competent and experienced among its
the defendant carrier liable pursuant to Article 1759 of the
patrons, had the towlines, engines and equipment double-
Civil Code. Defendant-appellant relies solely on the ruling
checked and inspected; that it instructed its patrons to take
enunciated in Gillaco v. Manila Railroad Co., 97 Phil. 884,
extra precautions; and concludes that it had done all it was
that the carrier is under no absolute liability for assaults of
called to do, and that the accident, therefore, should be held
its employees upon the passengers.
due to force majeure or fortuitous event. These very
precautions, however, completely destroy the appellant's
defense. For caso fortuito or force majeure (which in law are
Issues: Whether the carrier did not partake on the crime
identical in so far as they exempt an obligor from liability) by
scene, is responsible for the protection of the passengers?
definition, are extraordinary events not foreseeable or
Whether the carrier is not involve in that event, is
avoidable, "events that could not be foreseen, or which,
responsible for the action of his employees? Whether it
though foreseen, were inevitable" (Art. 1174, Civ. Code of
is not the fault of the carrier committing the crime, is liable
the Philippines). It is, therefore, not enough that the event
due to the fact that he hired the employee who failed
should not have been foreseen or anticipated, as is commonly
believed, but it must be one impossible to foresee or to avoid. transporting the passenger to safety? Whether it's the
employee's fault, the carrier will bear the risk of wrongful
The mere difficulty to foresee the happening is not
impossibility to foresee the same: "un hecho no constituye acts or negligence of the carrier's employees against
passengers?
caso fortuito por la sola circunstancia de que su existencia
haga mas dificil o mas onerosa la accion diligente del
presento ofensor" (Peirano Facio, Responsibilidad Extra-
contractual, p. 465; Mazeaud Trait de la Responsibilite Civil, Ruling: The lower court rightly adjudged the defendant
Vol. 2, sec. 1569). The very measures adopted by appellant carrier liable pursuant to Art. 1759 of the Civil Code. The
prove that the possibility of danger was not only foreseeable, dismissal of the claim against the defendant driver was also
but actually foreseen, and was not caso fortuito. correct. Plaintiff's action was predicated on breach of
contract of carriage and the cab driver was not a party
Otherwise stated, the appellant, Luzon Stevedoring thereto. His civil liability is covered in the criminal case
Corporation, knowing and appreciating the perils posed by wherein he was convicted by final judgment.
the swollen stream and its swift current, voluntarily entered
into a situation involving obvious danger; it therefore assured
the risk, and can not shed responsibility merely because the
the killing was perpetrated by the driver of the very cab
precautions it adopted turned out to be insufficient. Hence,
transporting the passenger, in whose hands the carrier had
the lower Court committed no error in holding it negligent in
entrusted the duty of executing the contract of carriage. In
not suspending operations and in holding it liable for the
other words, unlike the Gillaco case, the killing of the
damages caused.
passenger here took place in the course of duty of the guilty
employee and when the employee was acting within the
scope of his duties.

Moreover, the Gillaco case was decided under the provisions


ANTONIA MARANAN, vs. PASCUAL PEREZ, ET AL., of the Civil Code of 1889 which, unlike the present Civil Code,
did not impose upon common carriers absolute liability for
Facts: Rogelio Corachea, on October 18, 1960, was a
the safety of passengers against wilful assaults or negligent
passenger in a taxicab owned and operated by Pascual Perez
acts committed by their employees. . Unlike the old Civil
when he was stabbed and killed by the driver, Simeon
Valenzuela. Valenzuela was prosecuted for homicide in the Code, the new Civil Code of the Philippines expressly makes
the common carrier liable for intentional assaults committed
by its employees upon its passengers – regardless of whether
such acts are beyond the scope of their authority or in
violation of the orders of the common carriers.

The Civil Code provisions on the subject of Common Carriers MERCEDES M. TEAGUE, vs. ELENA FERNANDEZ, et al.
are new and were taken from Anglo-American Law.
FACTS: The Realistic Institute owned and operated by
There, the basis of the carrier's liability for assaults on Mercedes M. Teague was a vocational school for hair and
passengers committed by its drivers rests either on beauty culture situated on the second floor of the Gil-Armi
(1) the doctrine of respondeat,which is the minority view: Building, a two-storey, semi-concrete edifice located at the
corner of Quezon Boulevard and Soler Street, Quiapo,
the carrier is liable only when the act of the employee is
within the scope of his authority and duty. It is not sufficient Manila. The said second floor was unpartitioned, had a total
area of about 400 square meters, and although it had only
that the act be within the course of employment only.
one stairway, of about 1.50 meters in width, it had eight
windows, each of which was provided with two fire-escape
ladders and the presence of each of said fire-exits was
(2) second view, upheld by the majority and also by the later
indicated on the wall.
cases : the principle that it is the carrier's implied duty to
transport the passenger safely. It is enough that the assault At about four o'clock in the afternoon of October 24, 1955,
happens within the course of the employee's duty. It is no a fire broke out in a store for surplus materials located about
defense for the carrier that the act was done in excess of ten meters away from the institute. Soler Street lay between
authority or in disobedience of the carrier's orders. The that store and the institute. Upon seeing the fire, some of
carrier's liability here is absolute in the sense that it practically the students in the Realistic Institute shouted 'Fire! Fire!'
secures the passengers from assaults committed by its own and thereafter, a panic ensued. Four instructresses and six
employees. assistant instructress of the Institute were present and they,
together with the registrar, tried to calm down the students,
who numbered about 180 at the time, telling them not to
As can be gleaned from Art. 1759, the Civil Code of the be afraid because the Gil-Armi Building would not get
Philippines evidently follows the rule based on the second burned as it is made of concrete, and that the fire was
view. At least three very cogent reasons underlie this rule. As anyway, across the street. They told the students not to
explained in Texas Midland R.R. v. Monroe, 110 Tex. 97, 216 rush out but just to go down the stairway two by two, or to
S.W. 388, 389-390, and Haver v. Central Railroad Co., 43 LRA use the fire-escapes. Mrs. Justitia Prieto, one of the
84, 85: (1) the special undertaking of the carrier requires that instructresses, took to the microphone so as to convey to
it furnish its passenger that full measure of protection the students the above admonitions more effectively, and
afforded by the exercise of the high degree of care prescribed she even slapped three students in order to quiet them
by the law, inter alia from violence and insults at the hands down. Miss Frino Meliton, the registrar, whose desk was
of strangers and other passengers, but above all, from the near the stairway, stood up and tried with outstretched
acts of the carrier's own servants charged with the arms to stop the students from rushing and pushing their
passenger's safety; (2) said liability of the carrier for the way to the stairs. The panic, however, could not be subdued
servant's violation of duty to passengers, is the result of the and the students, with the exception of the few who made
formers confiding in the servant's hands the performance of use of fire-escapes kept on rushing and pushing their way
his contract to safely transport the passenger, delegating through the stairs, thereby causing stampede therein. No
therewith the duty of protecting the passenger with the part of the Gil-Armi Building caught fire. But, after the panic
utmost care prescribed by law; and (3) as between the carrier was over, four students, including Lourdes Fernandez, a
and the passenger, the former must bear the risk of wrongful sister of plaintiffs-appellants, were found dead and several
acts or negligence of the carrier's employees against others injured on account of the stampede.
passengers, since it, and not the passengers, has power to
The deceased's five brothers and sisters filed an action for
select and remove them.
damages against Mercedes M. Teague as owner and
Accordingly, it is the carrier's strict obligation to select its operator of Realistic Institute. The CFI of Manila found for
drivers and similar employees with due regard not only to the defendant and dismissed the case. The plaintiffs
their technical competence and physical ability, but also, no thereupon appealed to the CA, which by a divided vote of 3
less important, to their total personality, including their to 2 (a special division of five members having been
patterns of behavior, moral fibers, and social attitude. constituted) rendered a judgment of reversal and sentenced
the defendant to pay damages to the plaintiffs in the sum
of P11,000.00, plus interest at the legal rate from the date mentioned in the ordinance — for instance as a school,
the complaint was filed. which the Realistic Institute precisely was — then the
building is within the coverage of the ordinance.

It was the use of the building for school purposes which


ISSUE: W/N petitioner is liable.
brought the same within the coverage of the ordinance; and
it was the petitioner and not the owners who was
responsible for such use thus the obligation to comply with
RULING: The decision of the appellate court declared that the ordinance is not purely devolved upon the owners of the
Teague was negligent and that such negligence was the building
proximate cause of the death of Lourdes Fernandez. This
finding of negligence is based primarily on the fact that the Petitioners cannot argue that "the events of fire, panic and
provision of Section 491 Of the Revised Ordinances of the stampede were independent causes with no causal
City of Manila had not been complied with in connection with connection at all with the violation of the ordinance." The
the construction and use of the Gil-Armi building where the weakness in the argument springs from a faulty
petitioner's vocational school was housed. The alleged juxtaposition of the events which formed a chain and
violation of the ordinance consisted in the fact that the resulted in the injury. It is true that the petitioner's non-
second storey of the Gil-Armi building had only one stairway, compliance with the ordinance in question was ahead of and
1.5 meters wide, instead of two of at least 1.2 meters each, prior to the other events in point of time, in the sense that
although at the time of the fire the owner of the building had it was coetaneous with its occupancy of the building. But
a second stairway under construction. the violation was a continuing one, since the ordinance was
a measure of safety designed to prevent a specific situation
The mere fact of violation of a statute is not sufficient basis which would pose a danger to the occupants of the building.
for an inference that such violation was the proximate cause That situation was undue overcrowding in case it should
of the injury complained. However, if the very injury has become necessary to evacuate the building, which, it could
happened which was intended to be prevented by the statute, be reasonably foreseen, was bound to happen under
it has been held that violation of the statute will be deemed emergency conditions if there was only one stairway
to be proximate cause of the injury. available. It is true that in this particular case there would
have been no overcrowding in the single stairway if there
The generally accepted view is that violation of a statutory
had not been a fire in the neighborhood which caused the
duty constitutes negligence, negligence as a matter or law,
students to panic and rush headlong for the stairs in order
or, according to the decisions on the question, negligence per
to go down. But it was precisely such contingencies or event
se for the reason that non-observance of what the legislature
that the authors of the ordinance had in mind, for under
has prescribed as a suitable precaution is failure to observe
normal conditions one stairway would be adequate for the
that care which an ordinarily prudent man would observe,
occupants of the building.
and, when the state regards certain acts as so liable to injure
others as to justify their absolute prohibition, doing the
forbidden act is a breach of duty with respect to those who
may be injured thereby. When the standard of care is fixed
by law, failure to conform to such standard is negligence,
negligence per se or negligence in and of itself, in the
absence of a legal excuse. According to this view it is
immaterial, where a statute has been violated, whether the
act or omission constituting such violation would have been
regarded as negligence in the absence of any statute on the USURY
subject or whether there was, as a matter of fact, any reason
to anticipate that injury would result from such violation. PHILIPPINE NATIONAL BANK, vs, THE HON. COURT
OF APPEALS and AMBROSIO PADILLA,
The contention that Section 491 refers to public buildings and
hence did not apply to the Gil-Armi building which was of
private ownership is incorrect. It will be noted from the text FACTS: Private respondent (PR) Ambrosio Padilla, applied
of the ordinance, however, that it is not ownership which for and was granted a credit line of 321.8 million, by
determines the character of buildings subject to its petitioner PNB. This was for a term of 2 years at 18%
requirements, but rather the use or the purpose for which a interest per annum and was secured by real estate
particular building is utilized. Thus the same may be privately mortgage and 2 promissory notes executed in favor of
owned, but if it is devoted to any one of the purposes Petitioner by PR. The credit agreement and the promissory
notes, in effect, provide that PR agrees to be bound by Increase on the stipulated interest rates made by PNB also
“increases to the interest rate stipulated, provided it is within contravenes Art. 1956. It provides that, “no interest shall be
the limits provided for by law”. due unless it has been expressly stipulated in writing”. PR
never agreed in writing to pay interest imposed by PNB in
Conflict in this case arose when Petitioner unilaterally
excess of 24% per annum. Interest rate imposed by PNB,
increased the interest rate from 18% to: (1) 32% [July 1984];
as correctly found by CA, is indubitably excessive.
(2) 41% [October 1984]; and (3) 48% [November 1984], or
3 times within the span of a single year. This was done BANCO FILIPINO SAVINGS AND MORTGAGE BANK,
despite the numerous letters of request made by PR that the vs.JUANITA B. YBAÑEZ, CHARLES B. YBAÑEZ,
interest rate be increased only to 21% or 24%. JOSEPH B. YBAÑEZ and JEROME B. YBAÑEZ,

PR filed a complaint against Petitioner with the RTC. The Facts: On March 7, 1978, respondents obtained a loan
latter dismissed the case for lack of merit. Appeal by PR to secured by a Deed of Real Estate Mortgage over Transfer
CA resulted in his favor. Hence the petition for certiorari Certificate of Title (TCT) No. 69836 from petitioner bank.
under Rule 45 of ROC filed by PNB with SC. The loan was used for the construction of a commercial
building in Cebu City. On October 25, 1978, respondents
ISSUE: Despite the removal of the Usury Law ceiling on
obtained an additional loan from the petitioner thus
interest, may the bank validly increase the stipulated interest
increasing their obligation to one million pesos. A
rate on loans contracted with third persons as often as
corresponding Amendment of Real Estate Mortgage was
necessary and against the protest of such persons.
thereafter executed.
HELD: NO
On December 24, 1982, the loan was again re-structured,
increasing the loan obligation to P1,225,000 and the Real
RATIO: Although under Sec. 2 of PD 116, the Monetary
Estate Mortgage was again amended. Respondents
Board is authorized to prescribe the maximum rate of interest
for loans and to change such rates whenever warranted by executed a Promissory Note for the sum of P1,225,000
prevailing economic and social conditions, by express payable in fifteen years, with a stipulated interest of 21%
provision, it may not do so “oftener than once every 12 per annum, and stipulating monthly payments of P22,426.
months”. If the Monetary Board cannot, much less can PNB, The note also stipulated that in case of default in the
effect increases on the interest rates more than once a year. payment of any of the monthly amortization and interest,
Based on the credit agreement and promissory notes respondents shall pay a penalty equivalent to 3% of the
executed between the parties, although PR did agree to amount due each month.
increase on the interest rates allowed by law, no law was
passed warranting Petitioner to effect increase on the interest Respondents’ total payment from 1983 to 1988 amounted
rates on the existing loan of PR for the months of July to to P1,455,385.07. From 1989 onwards, respondents did not
November of 1984. Neither there being any document pay a single centavo. They aver that Banco Filipino had
executed and delivered by PR to effect such increase. ceased operations and/or was not allowed to continue
business, having been placed under liquidation by the
For escalation clauses to be valid and warrant the increase of Central Bank.
the interest rates on loans, there must be: (1) increase was
made by law or by the Monetary Board; (2) stipulation must Issue: Is the rate of interest set at 21% per annum legal?
include a clause for the reduction of the stipulated interest Ruling :
rate in the event that the maximum interest is lowered by law
or by the Monetary board. In this case, PNB merely relied on Petitioner contends that the 21% annual interest was freely
its own Board Resolutions, which are not laws nor resolutions and voluntarily agreed upon by the parties, and that it was
of the Monetary Board. neither excessive nor violative of the Usury Law. On the
other hand, respondents state that the rate of 21% was
Despite the suspension of the Usury Law, imposing a ceiling usurious because the loan was incurred on December 24,
on interest rates, this does not authorize banks to unilaterally 1982, before the de facto repeal of the Usury Law on
and successively increase interest rates in violation of Sec. 2 January 1, 1983.15 Respondents add that the normal rate
PD 116. by which petitioner charges its borrowers at that time was
Increases unilaterally effected by PNB was in violation of the only 17%, or 4% lower than the rate it gave to respondents.
Mutuality of Contracts under Art. 1308. This provides that the It is an elementary rule of contracts that the contracting
validity and compliance of the parties to the contract cannot parties are free to stipulate the terms of their contract for
be left to the will of one of the contracting parties. Increases as long as the terms are not contrary to law, morals, good
made are therefore void. customs, public policy, public order, and national interests.
Laws in force at the time the contract was made generally
govern its interpretation and application. The loan agreement imposed by the Usury Law. Said surcharge of 3% monthly
between petitioner and respondents specifies the obligation must be declared null and void.
of the debtor to pay interest. In principle said stipulation is
binding between the parties.
(1) the interest rate at 21% per annum is hereby declared
We note that at the time the parties entered into the said
loan agreement, the pertinent law, Act No. 2655, already VALID; (2) the 3% monthly surcharge is NULLIFIED for
being violative of the Usury Law at the time; and (3)
provided that the rate of interest for the forbearance of
respondents are ORDERED to pay petitioner the amount of
money when secured by a mortgage upon real estate should
P2,581,294.93 within 30 days from receipt of this Decision.
not be more than 12% per annum or the maximum rate
No pronouncement as to costs.
prescribed by the Monetary Board and in force at the time
the loan was granted. On December 1, 1979, the Monetary
Board of the Central Bank of the Philippines18 had issued CBP
Circular No. 705-79.19 On loan transactions with maturities SPOUSES FLORANTE and LAARNI BAUTISTA, vs.
of more than 730 days, it fixed the effective rate of interest PILAR DEVELOPMENT CORPORATION
at 21% per annum for both secured and unsecured loans.
Facts : In 1978, petitioner spouses Florante and Laarni
Since the loan in question has fixed 15 years for its maturity,
Bautista purchased a house and lot in Pilar Village, Las Pinas,
it fell within the coverage of said CBP Circular. Thus, we agree
Metro Manila. To partially finance the purchase, they
that the 21% interest is not violative of the Usury Law as it
obtained from the Apex Mortgage & Loan Corporation (Apex)
stood at the time of the loan transaction.
a loan in the amount of P100,180.00. They executed a
As to the monthly surcharge, petitioner relies on CBP Circular promissory note on December 22, 1978 obligating
No. 905-82.20 The ceiling on interest rates prescribed by the themselves, jointly and severally, to pay the "principal sum
Usury Law, according to petitioner, were expressly removed. of P100,180.00 with interest rate of 12% and service charge
Petitioner argues that the said circular had retroactive effect of 3%" for a period of 240 months, or twenty years, from
since it is merely procedural in nature. Hence according to date, in monthly installments of P1,378.83.3 Late payments
petitioner, the imposition of 3% monthly surcharge by the were to be charged a penalty of one and one-half per cent
bank against the borrower is legal. (1 1/2%) of the amount due. In the same promissory note,
petitioners authorized Apex to "increase the rate of interest
On this matter, we disagree with petitioner. CBP Circular No. and/or service charges" without notice to them in the event
905-82, which was effective January 1, 1983, did not repeal that a law, Presidential Decree or any Central Bank
nor in any way amend the Usury Law. The Circular simply regulation should be enacted increasing the lawful rate of
suspended the effectivity of the Usury Law. A Central Bank interest and service charges on the loan.4Payment of the
Circular cannot repeal a law. Only a law can repeal another promissory note was secured by a second mortgage on the
law. Thus, the retroactive application of a CBP Circular cannot, house and lot purchased by petitioners.
and should not, be presumed. The loan was entered into on
December 24, 1982, but CBP Circular No. 905-82 was given Petitioner spouses failed to pay several installments. On
force and effect only on January 1, 1983. Thus, CBP Circular September 20, 1982, they executed another promissory
No. 905-82 could not be made applicable to the loan note in favor of Apex. This time there was an increased
agreement in this case, and petitioner could not rely on this interest rate of 21% per annum with penalty of 11/2 for late
Circular for its imposition of 3% monthly surcharge. payment payable for 196 months. Petitioners retained the
authorization to increase/decrease the rate of interest.
Petitioner also argues that the 3% monthly surcharge
partakes of the nature of a penalty clause.22 A penal clause
is an accessory undertaking to assume greater liability in case
In November 1983, petitioners again failed to pay
of breach and is attached to an obligation in order to secure
installments. On June 06, 1984, Apex assigned the second
its performance.23 The penalty shall substitute the indemnity
promissory note to respondent Pilar Development
for damages and the payment of interests in case of non-
Corporation, a successor-in-interest. The latter then
compliance.24 But if such stipulation is found contrary to law
instituted against petitioner spouses before the RTC
for being usurious, it can be nullified by the courts without
collection for the unpaid balance as of November 23, 1983
affecting the principal obligation.25
including the internal rate of 21%. RTC rendered judgment
In the loan agreement between the parties in this case, the ordering petitioners to pay balance with interest of 12%. CA
total interest and other charges exceed the prescribed 21% reversed the trial court by applying 21% per annum
ceiling. Hence, the imposition of the 3% monthly surcharge, amounting to 142,346.42php. However, it was reversed to
as the penal clause to the obligation, violated the limit 140,515.11, initial decision of RTC, after the denial for
motion to reconsider.
P60,560.00, to be paid every 15 days starting January 1984
until fully paid. Private respondents failed to make any
Issue: WON the escalation of the interest rate from 12% to
payment notwithstanding repeated demands by petitioner,
21% per annum is unlawful
causing the latter to file said action. In their answer with
counterclaim, private respondents denied having received
the amount of P60,560.00 from petitioner. The claimed that
Ruling: The escalation of the interest rate from 12% to 21% they had been previously borrowing from petitioner and for
per annum is lawful the purpose of reconciling their outstanding accounts of
P20,000.00 at 10% interest per month, and P7,000.00 at
At the time the parties executed the first promissory note in
12% interest per month, the said deed of sale was executed.
1978, the interest of 12% was the maximum rate fixed by
However, it was understood by the parties that the amount
the Usury Law for loans secured by a mortgage upon
of P60,560.00 represented their outstanding account of
registered real estate. On December 1, 1979, the Monetary
P27,000.00 plus 10% interest per month. Private
Board of the Central Bank of the Philippines issued Circular
respondents further argued that petitioner charged usurious
No. 705 which fixed the effective rate of interest on loan
interest rates of 10% to 12% per month in contravention of
transactions with maturities of more than 730 days to twenty-
the Usury Law. They sought the recovery of P12,490.00
one per cent (21%) per annum for both secured and
representing overpayment of interest, damages and
unsecured loans. On January 28, 1980, The Monetary Board
attorney's fees.
issued Circular No. 712 reiterating the effective interest rate
of 21% on said loan transactions. On January 1, 1983, CB The trial court found that the Deed of Sale with Right to
Circular No. 905, series of 1982, took effect. This Circular Repurchase was the culmination of a series of loan
declared that the rate of interest on any loan or forbearance transactions entered into by the parties. Of the P60,650.00
of any money, goods or credits, regardless of maturity and consideration, the actual amount received by private
whether secured or unsecured, "shall not be subject to any respondents by way of loan was P22,000.00 with the
ceiling prescribed under or pursuant to the Usury Law, as balance of P38,560.00 representing interest. It ruled that
amended. In short, Circular No. 905 removed the ceiling on the usurious interest rates were incorporated to the main
interest rates for secured and unsecured loans, regardless of consideration of P60,650.00 to circumvent the laws against
maturity. usury. Considering that at the time the loans were entered
into, the Usury Law was still in effect and beyond the scope
When the second promissory note was executed on
of Central Bank (CB) Circular No. 905, January 1, 1983,
September 20, 1982, Central Bank Circulars Nos. 705 and 712
which lifted the ceiling on interest rates prescribed under
were already in effect. These Circulars fixed the effective
the Usury Law, it held that the contract of loan was valid as
interest rate for secured loan transactions with maturities of
to the loan but avoid as to the usurious interest
more than 730 days, i.e., two (2) years, at 21% per annum.
The interest rate of 21% provided in the second promissory Issue: Whether or not the Deed of Sale with Right to
note was therefore authorized under these Circulars. Repurchase cannot be enforced against private respondent
Herminia Patinio notwithstanding the effectivity of CB
The question of whether the escalation clauses in the second
Circular No. 905
promissory note are valid is irrelevant. Respondent
corporation has signified that it is collecting petitioners' debt
only at the fixed interest rate of 21% per annum, as expressly
agreed upon in the second promissory note, not at the Ruling: The petition is bereft of merit and merely raises
escalated rates authorized under the escalation clauses. The factual issues, the determination of which is best left to the
Court of Appeals therefore did not err in applying the interest trial court. The Court saw now reason to depart from the
rate of 21% to petitioner's loan under the second promissory findings of the Court of Appeals.
note.
The appellate court explained that the loans were obtained
by private respondents before the promulgation of CB
Circular No. 905, thus:. . . While Deed of Sale with Right to
Repurchase, was executed on November 17, 1983, the
same was a consolidation or carry over of previous loan
transactions in February, 1982 (Exhibit 1), November, 1982
WILFREDO VERDEJO, , v. HONORABLE COURT OF (Exhibit 2), and November-December, 1982 (Exhibit 1),
APPEALS, HERMINIA PATINIO and JOHN DOE, before the "open ceiling policy" of the Central Bank Circular
No. 905 took effect. At the time the transactions took place
Facts: Hermina Patinio, Respondents executed in his favor a per Exhibits 1, 2 and 3, the Usury Law was still in effect,
Deed of Sale with Right to Repurchase for the sum of
and Exhibit A, which was merely a carry over of transactions
in Exhibits 1, 2 and 3 could not legalize previous unlawful
loan transactions. The Court of Appeals denied petitioner's
motion for reconsideration in its Resolution dated June 23,
1992 (Rollo, p. 111).

CA ruled that Plaintiff Wilfredo Verdejo should be ordered to


refund defendant Herminia Patinio the amount of P15,990.00
instead of P13,890.00 as found by the lower court.
LEANA DR. MACALINAO, vs.BANK OF THE PHILIPPINE We find for petitioner. We are of the opinion that the
ISLANDS, interest rate and penalty charge of 3% per month should
be equitably reduced to 2% per month or 24% per annum.
Indeed, in the Terms and Conditions Governing the
Facts: Petitioner Ileana Macalinao was an approved Issuance and Use of the BPI Credit Card, there was a
cardholder of BPI Mastercard, one of the credit card facilities stipulation on the 3% interest rate. Nevertheless, it should
of respondent Bank of the Philippine Islands (BPI).3 be noted that this is not the first time that this Court has
Petitioner Macalinao made some purchases through the use considered the interest rate of 36% per annum as excessive
of the said credit card and defaulted in paying for said and unconscionable. We held in Chua vs. Timan:
purchases. She subsequently received a letter dated January
The stipulated interest rates of 7% and 5% per month
5, 2004 from respondent BPI, demanding payment of the
imposed on respondents’ loans must be equitably reduced
amount PhP 141,518.34.
to 1% per month or 12% per annum. We need not unsettle
Under the Terms and Conditions Governing the Issuance and the principle we had affirmed in a plethora of cases that
Use of the BPI Credit and BPI Mastercard, the charges or stipulated interest rates of 3% per month and higher are
balance thereof remaining unpaid after the payment due date excessive, iniquitous, unconscionable and exorbitant. Such
indicated on the monthly Statement of Accounts shall bear stipulations are void for being contrary to morals, if not
interest at the rate of 3% per month and an additional against the law. While C.B. Circular No. 905-82, which took
penalty fee equivalent to another 3% per month. effect on January 1, 1983, effectively removed the ceiling
on interest rates for both secured and unsecured loans,
For failure of petitioner Macalinao to settle her obligations, regardless of maturity, nothing in the said circular could
respondent BPI filed with the Metropolitan Trial Court (MeTC) possibly be read as granting carte blanche authority to
of Makati City a complaint for a sum of money against her lenders to raise interest rates to levels which would either
and her husband, Danilo SJ. Macalinao. enslave their borrowers or lead to a hemorrhaging of their
assets. (Emphasis supplied.)
In its Complaint, respondent BPI originally imposed the
interest and penalty charges at the rate of 9.25% per month Since the stipulation on the interest rate is void, it is as if
or 111% per annum. This was declared as unconscionable by there was no express contract thereon. Hence, courts may
the lower courts for being clearly excessive, and was thus reduce the interest rate as reason and equity demand.
reduced to 2% per month or 24% per annum. On appeal, the
CA modified the rate of interest and penalty charge and The same is true with respect to the penalty charge. Notably,
increased them to 3% per month or 36% per annum based under the Terms and Conditions Governing the Issuance
on the Terms and Conditions Governing the Issuance and Use and Use of the BPI Credit Card, it was also stated therein
of the BPI Credit Card, which governs the transaction that respondent BPI shall impose an additional penalty
between petitioner Macalinao and respondent BPI. charge of 3% per month. Pertinently, Article 1229 of the
Civil Code states:
In the instant petition, Macalinao claims that the interest rate
and penalty charge of 3% per month imposed by the CA is Art. 1229. The judge shall equitably reduce the penalty
iniquitous as the same translates to 36% per annum or thrice when the principal obligation has been partly or irregularly
the legal rate of interest. On the other hand, respondent BPI complied with by the debtor. Even if there has been no
asserts that said interest rate and penalty charge are performance, the penalty may also be reduced by the courts
reasonable as the same are based on the Terms and if it is iniquitous or unconscionable.
Conditions Governing the Issuance and Use of the BPI Credit
Card.
In exercising this power to determine what is iniquitous and
unconscionable, courts must consider the circumstances of
Issue: WON the reduction of interest rate, from 9.25% to 2%, each case since what may be iniquitous and unconscionable
should be upheld since the stipulated rate of interest was in one may be totally just and equitable in another.
unconscionable and iniquitous, and thus illegal.
In the instant case, the records would reveal that petitioner
Ruling: The petition is partly meritorious. Macalinao made partial payments to respondent BPI, as
indicated in her Billing Statements.20 Further, the stipulated
The Interest Rate and Penalty Charge of 3% Per Month or penalty charge of 3% per month or 36% per annum, in
36% Per Annum Should Be Reduced to 2% Per Month or 24% addition to regular interests, is indeed iniquitous and
Per Annum unconscionable.
Thus, under the circumstances, the Court finds it equitable to Again, on December 6, 1961, another memorandum was
reduce the interest rate pegged by the CA at 1.5% monthly issued by the same President and General Manager
to 1% monthly and penalty charge fixed by the CA at 1.5% instructing the Assistant Chief Chemist Ricardo Francisco, to
monthly to 1% monthly or a total of 2% per month or 24% recall all daily employees who are connected in the
per annum in line with the prevailing jurisprudence and in production of Mafran Sauce and also some additional daily
accordance with Art. 1229 of the Civil Code. employees for the production of Porky Pops.

On December 29, 1960, another memorandum was issued


by the President and General Manager instructing Ricardo
UNIVERSAL FOOD CORPORATION, vs.THE COURT OF
Francisco, as Chief Chemist, and Porfirio Zarraga, as Acting
APPEALS, MAGDALO V. FRANCISCO, SR., and
Superintendent, to produce Mafran Sauce and Porky Pops
VICTORIANO N. FRANCISCO,.
in full swing starting January 2, 1961 with further
instructions to hire daily laborers in order to cope with the
full blast operation. Magdalo V. Francisco, Sr. received his
FACTS: salary as Chief Chemist in the amount of P300.00 a month
only until his services were terminated on November 30,
In 1938, plaintiff Magdalo V. Francisco, Sr. discovered a
1960. On January 9 and 16, 1961, UFC, acting thru its
formula for the manufacture of a foodseasoning (sauce)
President and General Manager, authorized Porfirio Zarraga
derived from banana fruits popularly known as MAFRAN
and Paula de Bacula to look for a buyer of the corporation
sauce. It was used commercially since 1942, and in the same
including its trademarks, formula and assets at a price of
year plaintiff registered his trademark in his name as owner
not less than P300,000.00. Due to these successive
and inventor with the Bureau of Patents. However, due to
memoranda, without plaintiff Magdalo V. Francisco, Sr.
lack of sufficient capital to finance the expansion of the
being recalled back to work, he filed the present action on
business, in 1960, said plaintiff secured the financial
February 14, 1961. Then in a letter dated March 20, 1961,
assistance of Tirso T. Reyes who, after a series of
UFC requested said plaintiff to report for duty, but the latter
negotiations, formed with others defendant Universal Food
declined the request because the present action was already
Corporation eventually leading to the execution on May 11,
filed in court.
1960 of the aforequoted "Bill of Assignment" (Exhibit A or 1).
ISSUE:2. Was petitioner’s contention that Magdalo
On May 31, 1960, Magdalo Francisco entered into contract
Francisco is not entitled to rescission valid?
with UFC stipulating among other things that he be the Chief
Chemist and Second Vice-President of UFC and shall have RULING: No. Petitioner’s contention that Magdalo
absolute control and supervision over the laboratory Francisco’s petition for rescission should be denied because
assistants and personnel and in the purchase and under Article 1383 of the Civil Code of the Philippines
safekeeping of the chemicals used in the preparation of said rescission can not be demanded except when the party
Mafran sauce and that said positions are permanent in nature. suffering damage has no other legal means to obtain
reparation, was of no merit because “it is predicated on a
In line with the terms and conditions of the Bill of Assignment,
failure to distinguish between a rescission for breach of
Magdalo Francisco was appointed Chief Chemist with a salary
contract under Article 1191 of the Civil Code and a rescission
of P300.00 a month. Magdalo Francisco kept the formula of
by reason of lesion or economic prejudice, under Article
the Mafran sauce secret to himself. Thereafter, however, due
1381, et seq.” This was a case of reciprocal obligation.
to the alleged scarcity and high prices of raw materials, on
Article 1191 may be scanned without disclosing anywhere
November 28, 1960, Secretary-Treasurer Ciriaco L. de
that the action for rescission thereunder was subordinated
Guzman of UFC issued a Memorandum duly approved by the
to anything other than the ulpable reach of his obligations
President and General Manager Tirso T. Reyes that only
by the defendant. Hence, the reparation of damages for the
Supervisor Ricardo Francisco should be retained in the factory
breach was purely secondary. Simply put, unlike Art. 1383,
and that the salary of plaintiff Magdalo V. Francisco, Sr.,
Art. 1191 allows both the rescission and the payment for
should be stopped for the time being until the corporation
damages. Rescission is not given to the party as a last resort,
should resume its operation. On December 3, 1960, President
hence, it is not subsidiary in nature.
and General Manager Tirso T. Reyes, issued a memorandum
to Victoriano Francisco ordering him to report to the factory
and produce "Mafran Sauce" at the rate of not less than 100
cases a day so as to cope with the orders of the corporation's REYES, J.B.L., J., concurring:
various distributors and dealers, and with instructions to take
I concur with the opinion penned by Mr. Justice Fred Ruiz
only the necessary daily employees without employing
Castro, but I would like to add that the argument of
permanent employees. petitioner, that the rescission demanded by the respondent-
appellee, Magdalo Francisco, should be denied because
under Article 1383 of the Civil Code of the Philippines
rescission can not be demanded except when the party
suffering damage has no other legal means to obtain
reparation, is predicated on a failure to distinguish between
a rescission for breach of contract under Article 1191 of the
Civil Code and a rescission by reason of lesion or economic
prejudice, under Article 1381, et seq. The rescission on
account of breach of stipulations is not predicated on injury
to economic interests of the party plaintiff but on the breach
of faith by the defendant, that violates the reciprocity
between the parties. It is not a subsidiary action, and Article
1191 may be scanned without disclosing anywhere that the
action for rescission thereunder is subordinated to anything
other than the culpable breach of his obligations by the
defendant. This rescission is in principal action retaliatory in
character, it being unjust that a party be held bound to fulfill
his promises when the other violates his. As expressed in the
old Latin aphorism: "Non servanti fidem, non est fides
servanda." Hence, the reparation of damages for the breach
is purely secondary.

On the contrary, in the rescission by reason of lesion or


economic prejudice, the cause of action is subordinated to
the existence of that prejudice, because it is the raison d'etre
as well as the measure of the right to rescind. Hence, where
the defendant makes good the damages caused, the action
cannot be maintained or continued, as expressly provided in
Articles 1383 and 1384. But the operation of these two
articles is limited to the cases of rescission for lesion
enumerated in Article 1381 of the Civil Code of the Philippines,
and does not, apply to cases under Article 1191.

It is probable that the petitioner's confusion arose from the


defective technique of the new Code that terms both
instances as rescission without distinctions between them;
unlike the previous Spanish Civil Code of 1889, that
differentiated "resolution" for breach of stipulations from
"rescission" by reason of lesion or damage.1 But the
terminological vagueness does not justify confusing one case
with the other, considering the patent difference in causes
and results of either action.
UNIVERSITY OF THE PHILIPPINES, vs. Judge the injured party to resort to court for rescission of the
WALFRIDO DE LOS ANGELES, contract.”

FACTS: On November 2, 1960, UP and ALUMCO entered into It must be understood that the act of party in treating a
a logging agreement under which the latter was granted contract as cancelled or resolved on account of infractions
exclusive authority, for a period starting from the date of the by the other contracting party must be made known to the
agreement to 31 December 1965, extendible for a further other and is always provisional, being ever subject to
period of five (5) years by mutual agreement, to cut, collect scrutiny and review by the proper court. If the other party
and remove timber from the Land Grant, in consideration of denies that rescission is justified, it is free to resort to
payment to UP of royalties, forest fees, etc.; judicial action in its own behalf, and bring the matter to
court. Then, should the court, after due hearing, decide that
That ALUMCO cut and removed timber therefrom but, as of
the resolution of the contract was not warranted, the
8 December 1964, it had incurred an unpaid account of
responsible party will be sentenced to damages; in the
P219,362.94, which, despite repeated demands, it had failed
contrary case, the resolution will be affirmed, and the
to pay;
consequent indemnity awarded to the party prejudiced.
that after it had received notice that UP would
rescind or terminate the logging agreement, ALUMCO
executed an instrument, entitled "Acknowledgment of Debt
and Proposed Manner of Payments," dated 9 December 1964,
which was approved by the president of UP, which expressly
states that, upon default by the debtor ALUMCO, the creditor
(UP) has “the right and the power to consider the Logging
Agreement as rescinded without the necessity of any judicial
suit.”

ALUMCO continued its logging operations, but again incurred


an unpaid account. On July 19, 1965, petitioner UP informed
respondent ALUMCO that it had, as of that date, considered
as rescinded and of no further legal effect the logging
agreement that they had entered in 1960. UP filed a
complaint against ALUMCO for the collection or payment of
the herein before stated sums of money and it prayed for and
obtained an order for preliminary attachment and preliminary
injunction restraining ALUMCO from continuing its logging
operations in the Land Grant. Respondent ALUMCO
contended that it is only after a final court decree declaring
the contract rescinded for violation of its terms that U.P.
could disregard ALUMCO's rights under the contract and treat
the agreement as breached and of no force or effect.

ISSUE: Whether or not petitioner U.P. can treat its contract


with ALUMCO rescinded and may disregard the same before
any judicial pronouncement to that effect.

HELD: UP and ALUMCO had expressly stipulated in the


"Acknowledgment of Debt and Proposed Manner of
Payments" that, upon default by the debtor ALUMCO, the
creditor (UP) has "the right and the power to consider, the
Logging Agreement as rescinded without the necessity of any
judicial suit." In connection with Article 1191 of the Civil Code,
the Court stated in Froilan vs. Pan Oriental Shipping Co that
“there is nothing in the law that prohibits the parties from
entering into agreement that violation of the terms of the
contract would cause cancellation thereof, even without court
intervention. In other words, it is not always necessary for

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