[ G. R. No.
L-30736, July 11, 1975 ] skill in its desperate effort to find a 'valid cause' for that wrongful breach. The very
LIRAG TEXTILE MILLS, INC. AND FELIX K. LIRAG, PETITIONERS, VS. COURT
OF APPEALS AND CRISTAN ALCANTARA, RESPONDENTS.
RESOLUTION
ESGUERRA, J.:
The issues raised in the petitioners' motion for reconsideration having been
extensively discussed in the decision, this Court pronounces with definite certainty
that the provisions of Republic Act 1052, as amended, are not applicable to the case
at bar. The reason is simple and obvious. There is an express agreement between
petitioner Lirag Textile Mills, Inc. and private respondent Cristan Alcantara as to
the period of the latter's employment in the former's firm, that definite period starting
from Alcantara's employment up to the time Alcantara may voluntarily resign or when
petitioner Lirag Textile Mills may remove Alcantara for a valid cause or causes. It is
clear that the duration of the employment agreed upon extends from the time when
the employment of Alcantara commenced up to the time when he voluntarily resigns
or up to the time Alcantara by his act or acts creates a valid cause or causes which
would justify petitioner Lirag Textile Mills in terminating his employment.
Here petitioner Lirag Textile Mills, Inc. terminated private respondent Alcantara's
employment, without a valid cause because its contention of "serious reverses, both
in terms of pecuniary loss and in market opportunities" was found by both the trial
and appellate courts and by Us as false and alleged in bad faith. It thereby
committed a breach of contract which made it liable to Alcantara for damages (Art.
1170 of the Civil Code).
We clearly stated in the decision that the original nature of the complaint in this case
was for damages and that petitioner Lirag Textile Mills, Inc. acted in bad faith when it
committed that breach of contract because it "tried its very best both in the trial court
and in the respondent Appellate Court to convince both courts that it suffered 'serious
losses both in terms of pecuniary loss and in market opportunities' as a valid cause
for the termination of private respondent Alcantara's employment, said petitioners
knowing fully well that such was not the truth as said allegation was a falsehood".
As this Courts said:
"Its bad faith in committing the breach of the contract of employment was
compounded when petitioners as appellants in the respondent Appellate Court tried to
raise for the first time the question of private respondent Alcantara's alleged lack of
act of petitioners in trying to pull the wool over the eyes of both the trial court and
the respondent Appellate Court as to its true financial condition in its attempt to
establish a false 'valid cause' for its wrongful act is not only indicative of fraud and
bad faith but likewise highly reprehensible because it is a deliberate distortion of the
truth to subvert the ends of justice.'' (Italics supplied).
As to the belated contention that the award in the decision of the trial court, which
has been affirmed by the Appellate Court and by Us, of "P500.00 a month until the
whole amounts due the private respondent are fully paid and settled by petitioner" is
in the "nature of a penalty founded exclusively on delay in making payment of the
amounts awarded and in the context of attending circumstances is oppressive and
unconscionable, aside from being a penalty on the right to litigate", it is enough to
say that the trial court awarded that amount in the concept of actual damages for
salaries not received because of the wrongful act or breach of contract committed by
petitioner Lirag Textile Mills Inc. and Felix Lirag as defendants in that case. It is to be
noted that although the trial court awarded in addition moral damages and attorney's
fees to respondent Alcantara, the respective amounts of P5,000 and P3,000 given to
him are nominal, considering the nature and extent of the breach of contract
perpetrated in had faith by petitioner Lirag Textile Mills, Inc. It is significant also that
no award of exemplary damage was awarded, although it was proper to give it. We
1
do not consider the award as oppressive and unconscionable, nor a penalty on the
right to litigate because the amount given is reasonable taking into account the
character of the breach of obligation and the damage incurred by private respondent
Alcantara who gave up a permanent job upon inducement of petitioner Felix Lirag,
only to suffer later by the wrongful act of the employer.
The award of damages is just to compensate, by a close approximation as far as
human calculation may permit, the adverse effects of the wrong done to the victim.
It cannot be considered as imposing a penalty on the right to litigate because the
entity under obligation to pay the award has been clearly shown by the evidence to
be liable. If that circumstance notwithstanding the entity still persisted in sustaining
this litigation, then its persistence would but show its readiness to assume the risk
and bear the consequences of its tenacity in refusing to give the adverse party its just
due.
WHEREFORE, the motion for reconsideration is denied and this denial is final and
conclusive.
Castro, (Chairman), Makasiar, Munoz Palma, and Martin, JJ., concur.
Teehankee, J., is on leave.
[ G.R. No. 207348, August 20, 2014 ]
ROWENA R. SOLANTE, PETITIONER, VS. COMMISSION ON AUDIT,
CHAIRPERSON MA. GRACIA PULIDO-TAN, COMMISSIONER JUANITO G.
ESPINO, JR., COMMISSIONER HEIDI L. MENDOZA, AND FORTUNATA M.
RUBICO, DIRECTOR IV, COA COMMISSION SECRETARIAT, in their official
capacities, RESPONDENTS.
DECISION
VELASCO JR., J.:
The Case
This is a petition for review filed under Rule 64 assailing the February 15, 2008
Decision[1] and November 5, 2012 Resolution,[2] denominated as Decision Nos. 2008-
018 and 2012-190, respectively, of the Commission on Audit (COA). The assailed
issuances affirmed the Notice of Disallowance No. (ND) 2000-002-101(97) dated
November 14, 2001 issued by Rexy M. Ramos, COA State Auditor IV, pursuant to
COA Assignment Order No. 2000-63.[3]
The Facts
On April 26, 1989, the City of Mandaue and F.F. Cruz and Co., Inc. (F.F. Cruz)
entered into a Contract of Reclamation[4] in which F.F. Cruz, in consideration of a
defined land sharing formula thus stipulated, agreed to undertake, at its own
expense, the reclamation of 180 hectares, more or less, of foreshore and submerged
lands from the Cabahug Causeway in that city. The timetables, i.e., commencement
of the contract and project completion, are provided in paragraphs 2 and 15 of the
Contract which state:
2. COMMENCEMENT. Work on the reclamation shall commence not later than [July
1989], after this contract shall be ratified by the Sanggunian Panlungsod;
xxxx
15. CONTRACT DURATION. The project is estimated to be completed in six (6)
years: (3 years for the dredge-filling and seawall construction and 3 years for the
infrastructures completion). However, if all the infrastructures within the OWNERS’
share of the project are already completed within the six (6) year period agreed upon,
any extension of time for works to be done within the share of the DEVELOPERS, shall
be at the discretion of the DEVELOPERS, as a growing city, changes in requirements
of the lot buyers are inevitable.
On a best effort basis, the construction of roadways, drainage system and open
spaces in the area designated as share of the City of Mandaue, shall be completed not
later than December 31, 1991. (emphasis supplied)
Subsequently, the parties inked in relation to the above project a Memorandum of
Agreement (MOA) dated October 24, 1989[5] whereby the City of Mandaue allowed
F.F. Cruz to put up structures on a portion of a parcel of land owned by the city for
the use of and to house F.F. Cruz personnel assigned at the project site, subject to
terms particularly provided in paragraphs 3, 4 and 5 of the MOA:
3) That [F.F. Cruz] desires to use a portion of a parcel of land of the [City of
Mandaue] described under paragraph 1 hereof to the extent of 495 square meters x x
x to be used by them in the construction of their offices to house its personnel to
supervise the Mandaue City Reclamation Project x x x.
xxxx
4) That the [City of Mandaue] agrees to the desire of [F.F. Cruz] to use a portion of
2
the parcel of land described under paragraph 1 by [F.F. Cruz] for the latter to use for
the construction of their offices to house its personnel to supervise the said Mandaue
City Reclamation Project with no rental to be paid by [F.F. Cruz] to the [City of
Mandaue].
5) That the [City of Mandaue] and [F.F. Cruz] have agreed that upon the
completion of the Mandaue City Reclamation Project, all improvements
introduced by [F.F. Cruz] to the portion of the parcel of land owned by the
[City of Mandaue] as described under paragraph 3 hereof existing upon the
completion of the said Mandaue City Reclamation Project shall ipso facto belong
to the [City of Mandaue] in ownership as compensation for the use of said parcel
of land by [F.F. Cruz] without any rental whatsoever. (emphasis supplied)
Pursuant to the MOA, F.F. Cruz proceeded to construct the contemplated housing
units and other facilities which included a canteen and a septic tank.
Later developments saw the City of Mandaue undertaking the Metro Cebu
Development Project II (MCDP II), part of which required the widening of the Plaridel
Extension Mandaue Causeway. However, the structures and facilities built by F.F.
Cruz subject of the MOA stood in the direct path of the road widening project. Thus,
the Department of Public Works and Highways (DPWH) and Samuel B. Darza, MCDP
II project director, entered into an Agreement to Demolish, Remove and Reconstruct
Improvement dated July 23, 1997[6] with F.F. Cruz whereby the latter would demolish
the improvements outside of the boundary of the road widening project and, in
return, receive the total amount of PhP 1,084,836.42 in compensation.
Accordingly, petitioner Rowena B. Rances (now Rowena Rances-Solante), Human
Resource Management Officer III, prepared and, with the approval of Samuel B.
Darza (Darza), then issued Disbursement Voucher (DV) No. 102-07-88-97 dated July
24, 1997[7] for PhP 1,084,836.42 in favor of F.F. Cruz. In the voucher, Solante
certified that the expense covered by it was “necessary, lawful and incurred
under my direct supervision.”
Thereafter, Darza addressed a letter-complaint to the Office of the Ombudsman,
Visayas, inviting attention to several irregularities regarding the implementation of
MCDP II. The letter was referred to the COA which then issued Assignment Order No.
2000-063 for a team to audit the accounts of MCDP II. Following an audit, the audit
team issued Special Audit Office (SAO) Report No. 2000-28, par. 5 of which states:
F.F. Cruz and Company, Inc. was paid P1,084,836.42 for the cost of the property
affected by the widening of Plaridel Extension, Mandaue Causeway. However, under
Section 5 of its MOA with Mandaue City, the former was no longer the lawful owner of
the properties at the time the payment was made.[8]
Based on the above findings, the SAO audit team, through Rexy Ramos, issued the
adverted ND 2000-002-101-(97)[9] disallowing the payment of PhP 1,084,836.42 to
F.F. Cruz and naming that company, Darza and Solante liable for the transaction.
Therefrom, Solante sought reconsideration, while F.F. Cruz appealed, but the motion
for reconsideration and the appeal were jointly denied in Legal and Adjudication Office
(LAO) Local Decision No. 2004-040 dated March 5, 2004, which F.F. Cruz in time
appealed to COA Central.
In the meantime, the adverted letter-complaint of Darza was upgraded as an
Ombudsman case, docketed as OMB-V-C-03-0173-C, against Solante, et al., albeit
the Ombudsman, by Resolution of June 29, 2006, [10] would subsequently dismiss the
same for lack of merit.
The Ruling of the Commission on Audit
In its February 15, 2008 Decision,[11] the COA, as indicated at the outset, affirmed ND
2000-002-101-97 on the strength of the following premises:
From the above provision of the MOA, it is clear that the improvements introduced by
F.F. Cruz x x x would be owned by the City upon completion of the project which
under the Contract of reclamation should have been in 1995. However, the project
was not completed in 1995 and even in 1997 when MDCP paid for these
improvements. The fact that the reclamation project had not yet been
completed or turned over to the City of Mandaue by F.F. Cruz in 1997 or two
years after it should have been completed, does not negate the right over
such improvements by the City x x x. Clearly, the intention of the stipulation
is for F.F. Cruz x x x to compensate the government for the use of the land
on which the office, pavement, canteen, extension shed, house and septic
tank were erected. Thus, to make the government pay for the cost of the
demolished improvements will defeat the intention of parties as regards
compensation due from the contractor for its use of [the] subject land. Under
Article 1315 of the Civil Code, from the moment a contract is perfected, the parties
are bound to the fulfillment to what has been expressly stipulated and all the
consequences which according to their nature, may be in keeping with good faith,
usage and law. Thus, even if the contractual stipulations may turn out to be
financially disadvantageous to any party, such will not relieve any or both parties
from their contractual obligations.[12] (emphasis supplied)
From such decision, Solante filed a Motion for Reconsideration dated June 28, 2010
3
purportedly with Audit Team Leader, Leila Socorro P. Domantay. This motion was
denied by the COA in a Resolution dated November 5, 2012[13] wherein the
commission held:
x x x The arguments of Ms. Solante that as long as the Project has not yet been
turned over, the ownership of the said improvements would not be acquired yet by
the City would put the entire contract at the mercy of F.F. Cruz & Co., Inc., thus,
negating the mutuality of contracts principle expressed in Article 1308 of the New
Civil Code, which states:
Art. 1308. The contracts must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.
On February 15, 2013, Solante received a Notice of Finality of Decision
(NFD)[14] stating that the COA Decision dated February 15, 2008 and Resolution dated
November 5, 2012 have become final and executory, a copy of the Resolution having
been served on the parties on November 9, 2012 by registered mail. Notably, Solante
never received a copy of the COA Resolution. She came to get one only on May 8,
2013 after inquiring from the Cebu Central Post Office, which, in a Certification of
Delivery dated May 8, 2013,[15] stated that the registered mail containing said copy
was in fact not delivered.

Hence, the instant petition.
The Issue
The resolution of the present controversy rests on the determination of a sole issue:
who between the City of Mandaue and F.F. Cruz owned during the period material the
properties that were demolished.
The Court’s Ruling
The petition is meritorious. The COA and its audit team obviously misread the
relevant stipulations of the MOA in relation to the provisions on project completion
and termination of contract of the Mandaue-F.F. Cruz reclamation contract.
Essentially, the COA is alleging that the Contract of Reclamation establishes an
obligation on the part of F.F. Cruz to finish the project within the allotted period of six
(6) years from contract execution in August 1989. Prescinding from this premise, the
COA would conclude that after the six (6)-year period, F.F. Cruz is automatically
deemed to be in delay, the contract considered as completed, and the ownership of
the structures built in accordance with the MOA transferred to the City of Mandaue.
COA’s basic position and the arguments holding it together is untenable.
On this point, the Civil Code provision on obligations with a period is relevant. Article
1193 thereof provides:
Article 1193. Obligations for whose fulfillment a day certain has been fixed,
shall be demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon arrival of
the day certain.
A day certain is understood to be that which must necessarily come,
although it may not be known when.
If the uncertainty consists in whether the day will come or not, the obligation is
conditional, and it shall be regulated by the rules of the preceding Section. (emphasis
supplied)
A plain reading of the Contract of Reclamation reveals that the six (6)-year period
provided for project completion, or, with like effect, termination of the contract was a
mere estimate and cannot be considered a period or a “day certain” in the context of
the aforequoted Art. 1193. To be clear, par. 15 of the Contract of Reclamation states:
“[T]he project is estimated to be completed in six (6) years.” As such, the lapse of six
(6) years from the perfection of the contract did not, by itself, make the obligation to
finish the reclamation project demandable, such as to put the obligor in a state of
actionable delay for its inability to finish. Thus, F.F. Cruz cannot be deemed to be in
delay. Parenthetically, the Ombudsman, in a Resolution of June 29, 2006 in OMB-V-C-
03-0173-C, espoused a similar view in dismissing the complaint against Solante,
thus:
A careful reading of the pertinent section of the Contract of Reclamation between F.F.
Cruz and Mandaue City, however, would confirm respondents Rances-Solante[’s] and
Sungahid’s view that herein respondent Cruz was still the owner of the subject
properties at the time these were demolished. Indeed, the Contract specifies that the
six (6)-year period was no more than an estimate of the project completion. It was
not a fixed period agreed upon. Being so, the mere lapse of six (6) years
from the execution of the Contract, did not by itself deem the reclamation
project completed, much less bring about the fulfillment of the condition
stipulated in the MOA (on the shift of ownership over the demolished
properties). Herein respondent Cruz, and/or his company, at least on this
particular regard, can be said to be still the owner of the structures along
4
Plaridel Extension x x x, when these were demolished to give way to road
widening. It was nothing but equitable that they get compensated for the
damages caused by the demolition.[16] (emphasis supplied)
Put a bit differently, the lapse of six (6) years from the perfection of the subject
reclamation contract, without more, could not have automatically vested Mandaue
City, under the MOA, with ownership of the structures.
Moreover, even if we consider the allotted six (6) years within which F.F. Cruz was
supposed to complete the reclamation project, the lapse thereof does not
automatically mean that F.F. Cruz was in delay. As may be noted, the City of
Mandaue never made a demand for the fulfillment of its obligation under the Contract
of Reclamation. Article 1169 of the Civil Code on the interaction of demand and delay
and the exceptions to the requirement of demand relevantly states:
Article 1169. Those obliged to deliver or to do something incur in delay from
the time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may
exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his
power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or
is not ready to comply in a proper manner with what is incumbent upon him. From
the moment one of the parties fulfills his obligation, delay by the other begins.
Thus, in J Plus Asia Development Corporation v. Utility Assurance Corporation,[17] the
Court has held:
In this jurisdiction, the following requisites must be present in order that the debtor
may be in default: (1) that the obligation be demandable and already liquidated; (2)
that the debtor delays performance; and (3) that the creditor requires the
performance judicially or extrajudicially. (emphasis supplied)
In the instant case, the records are bereft of any document whence to deduce that
the City of Mandaue exacted from F.F. Cruz the fulfillment of its obligation under the
reclamation contract. And to be sure, not one of the exceptions to the requisite
demand under Art. 1169 is established, let alone asserted. On the contrary, the then
city mayor of Mandaue, no less, absolved F.F. Cruz from incurring under the premises
in delay. In his affidavit dated July 9, 2004,[18] then Mayor Ouano stated:
That although x x x the reclamation was estimated to be completed in six years
ending in 1995, the said project however, was not fully completed when the
demolition of the mentioned improvements of [F.F. Cruz] was made x x x [and in
fact] up to now the said Mandaue Reclamation Project has not yet been fully
completed and turned over to the City of Mandaue.
x x x [S]ince at the time of the demolition the said improvements actually belonged
to [F.F. Cruz] and the City of Mandaue has no claim whatsoever on the said payment
x x x for the demolished improvements. (emphasis supplied)
As it were, the Mandaue-F.F.Cruz MOA states that the structures built by F.F. Cruz on
the property of the city will belong to the latter only upon the completion of the
project. Clearly, the completion of the project is a suspensive condition that has yet
to be fulfilled. Until the condition arises, ownership of the structures properly pertains
to F.F. Cruz.
To be clear, the MOA does not state that the structures shall inure in ownership to the
City of Mandaue after the lapse of six (6) years from the execution of the Contract of
Reclamation. What the MOA does provide is that ownership of the structures shall
vest upon, or ipso facto belong to, the City of Mandaue when the Contract of
Reclamation shall have been completed. Logically, before such time, or until the
agreed reclamation project is actually finished, F.F. Cruz owns the structures. The
payment of compensation for the demolition thereof is justified. The disallowance of
the payment is without factual and legal basis. COA then gravely abused its discretion
when it decreed the disallowance.
WHEREFORE, the instant petition is GRANTED. Accordingly, the assailed February
15, 2008 Decision, November 5, 2012 Resolution, and Notice of Disallowance No.
2000-002-101(97) dated November 14, 2001 issued by the Commission on Audit are
hereby REVERSED and SET ASIDE.
No costs.
SO ORDERED. 5
[ G.R. No. L-22558, May 31, 1967 ]
GREGORIO ARANETA, INC., PETITIONER, VS. THE PHILIPPINE SUGAR
ESTATES DEVELOPMENT CO., LTD., RESPONDENT.
DECISION
REYES, J.B.L., J.:
Petition for certiorari to review a judgment of the Court of Appeals, in its CA-G.R. No.
28249-R, affirming with modification, an amendatory decision of the Court of First
Instance of Manila, in its Civil Case No. 36303, entitled "Philippine Sugar Estates
Development Co., Ltd., plaintiff, versus J.M. Tuason & Co., Inc. and Gregorio Araneta,
Inc., defendants".
As found by the Court of Appeals, the facts of this case are:
J.M. Tuason & Co., Inc. is the owner of a big tract of land situated in Quezon City,
otherwise known as the Sta. Mesa Heights Subdivision, and covered by a Torrens title
in its name. On July 28, 1950, through Gregorio Araneta, Inc., it (Tuason & Co.) sold
a portion thereof with an area of 43,034.4 square meters, more or less, for the sum
of P430,514.00, to Philippine Sugar Estates Development Co., Ltd. The parties
stipulated, among others, in the contract of purchase and sale with mortgage, that
the buyer will -
"Build on the said parcel of land the Sto Domingo Church and Convent;"
while the seller for its part will -
"Construct streets on the NE and NW and SW sides of the land herein sold so that the
latter will be a block surrounded by streets on all four sides; and the street on the NE
side shall be named 'Sto. Domingo Avenue';"
The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction
of Sto. Domingo Church and Convent, but the seller, Gregorio Araneta, Inc., which
began constructing the streets, is unable to finish the construction of the street in the
Northeast side (named Sto. Domingo Avenue) because a certain third party, by the
name of Manuel Abundo, who has been physically occupying a middle part thereof,
refused to vacate the same; hence, on May 7, 1958, Philippine Sugar Estates
Development Co., Ltd. filed its complaint against J.M. Tuason & Co., Inc. and
Gregorio Araneta, Inc., in the above stated court of first instance, seeking to compel
the latter to comply with their obligation, as stipulated in the above-mentioned deed
of sale, and/or to pay damages in the event they failed or refused to perform said
obligation.
Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the
complaint, the latter particularly setting up the principal defense that the action was
premature since its obligation to construct the streets in question was without a
definite period which needs to be fixed first by the court in a proper suit for that
purpose before a complaint for specific performance will prosper.
The issues having been joined, the lower court proceeded with the trial, and upon its
termination, it dismissed plaintiff's complaint (in a decision dated May 31, 1960),
upholding the defenses interposed by defendant Gregorio Araneta, Inc.
Plaintiff moved to reconsider and modify the above decision, praying that the court fix
a period within which defendants will comply with their obligation to construct the
streets in question.
Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's
complaint did not expressly or impliedly allege and pray for the fixing of a period to
comply with its obligation and that the evidence presented at the trial was insufficient
to warrant the fixing of such a period.
On July 16, 1960, the lower court, after finding that "the proven facts precisely
warrants the fixing of such a period", issued an order granting plaintiff's motion for
reconsideration and amending the dispositve portion of the decision of May 31, 1960,
to read as follows:
"WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta, Inc.,
a period of Two (2) Years from notice hereof, within which to comply with its
obligation under the contract, Annex A."
Defendant Gregorio Araneta, Inc. presented a motion to reconsider the above quoted
order, which motion, plaintiff opposed.
On August 16, 1960, the lower court denied defendant Gregorio Araneta, Inc.'s
motion; and the latter perfected its appeal to the Court of Appeals.
In said appellate court, defendant-appellant Gregorio Araneta, Inc. contended mainly
that the relief granted, i.e., fixing of a period, under the amendatory decision of July
16, 1960, was not justified by the pleadings and not supported by the facts submitted
at the trial of the case in the court below and that the relief granted in effect allowed
a change of theory after the submission of the case for decision.
Ruling on the above contention, the appellate court declared that the fixing of a 6
period was within the pleadings and that there was no true change of theory after the
submission of the case for decision since defendant-appellant Gregorio Araneta, Inc.
itself squarely placed said issue by alleging in paragraph 7 of the affirmative defenses
contained in its answer which reads -
"7. Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a
reasonable time within which to comply with its obligations to construct and complete
the streets on the NE, NW and SW sides of the lot in question; that under the
circumstances, said reasonable time has not elapsed;
Disposing of the other issues raised by appellant which were ruled as not meritorious
and which are not decisive in the resolution of the legal issues posed in the instant
appeal before us, said appellate court rendered its decision dated December 27,
1963, the dispositive part of which reads -
“IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant
is given Two (2) years from the date of finality of this decision to comply with the
obligation to construct streets on the NE, NW and SW sides of the land sold to plaintiff
so that the same would be a block surrounded by streets on all four sides."
Unsuccessful in having the above decision reconsidered, defendant-appellant
Gregorio Araneta, Inc. resorted to a petition for review by certiorari to this Court. We
gave it due course.
We agree with the petitioner that the decision of the Court of Appeals, affirming that
of the Court of First Instance is legally untenable. The fixing of a period by the courts
under Article 1197 of the Civil Code of the Philippines is sought to be justified on the
basis that petitioner (defendant below) placed the absence of a period in issue by
pleading in its answer that the contract with respondent Philippine Sugar Estates
Development Co., Ltd. gave petitioner Gregorio Araneta, Inc. "reasonable time within
which to comply with its obligation to construct and complete the streets." Neither of
the courts below seems to have noticed that, on the hypothesis stated, what the
answer put in issue was not whether the court should fix the time of performance, but
whether or not the parties agreed that the petitioner should have reasonable time to
perform its part of the bargain. If the contract so provided, then there was a period
fixed, a "reasonable time"; and all that the court should have done was to determine
if that reasonable time had already elapsed when suit was filed. If it had passed,
then the court should declare that petitioner had breached the contract, as averred in
the complaint, and fix the resulting damages. On the other hand, if the reasonable
time had not yet elapsed, the court perforce was bound to dismiss the action for
being premature. But in no case can it be logically held that under the plea above
quoted, the intervention of the court to fix the period for performance was warranted,
for Article 1197 is precisely predicated on the absence of any period fixed by the
parties.
Even on the assumption that the court should have found that no reasonable time or
no period at all had been fixed (and the trial court's amended decision nowhere
declared any such fact) still, the complaint not having sought that the Court should
set a period, the court could not proceed to do so unless the complaint was first
amended; for the original decision is clear that the complaint proceeded on the theory
that the period for performance had already elapsed, that the contract had been
breached and defendant was already answerable in damages.
Granting, however, that it lay within the Court's power to fix the period of
performance, still the amended decision is defective in that no basis is stated to
support the conclusion that the period should be set at two years after finality of the
judgment. The last paragraph of Article 1197 is clear that the period can not be set
arbitrarily. The law expressly prescribes that -
"the Courts shall determine such period as may under the circumstances have
been probably contemplated by the parties."
All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this
respect is that "the proven facts precisely warrant the fixing of such a period", a
statement manifestly insufficient to explain how the two-year period given to
petitioner herein was arrived at.
It must be recalled that Article 1197 of the Civil Code involves a two-step
process. The Court must first determine that "the obligation does not fix a period" (or
that the period is made to depend upon the will of the debtor)," but from the nature
and the circumstances it can be inferred that a period was intended" (Art. 1197, pars.
1 and 2). This preliminary point settled, the Court must then proceed to the second
step, and decide what period was "probably contemplated by the parties" (Do., par.
3). So that, ultimately, the Court can not fix a period merely because in its opinion it
is or should be reasonable, but must set the time that the parties are shown to have
intended. As the record stands, the trial Court appears to have pulled the two-year
period set in its decision out of thin air, since no circumstances are mentioned to
support it. Plainly, this is not warranted by the Civil Code.
In this connection, it is to be borne in mind that the contract shows that the parties
were fully aware that the land described therein was occupied by squatters, because
the fact is expressly mentioned therein (Rec. on Appeal, Petitioner's Appendix B, pp.
12-13). As the parties must have known that they could not take the law into their
own hands, but must resort to legal processes in evicting the squatters, they must
have realized that the duration of the suits to be brought would not be under their
control nor could the same be determined in advance. The conclusion is thus forced
that the parties must have intended to defer the performance of the obligations under
the contract until the squatters were duly evicted, as contended by the petitioner
Gregorio Araneta, Inc.
7
The Court of Appeals objected to this conclusion that it would render the date of
performance indefinite. Yet, the circumstances admit no other reasonable view; and
this very indefiniteness is what explains why the agreement did not specify any exact
periods or dates of performance.
It follows that there is no justification in law for the setting of the date of performance
at any other time than that of the eviction of the squatters occupying the land in
question; and in not so holding, both the trial Court and the Court of Appeals
committed reversible error. It is not denied that the case against one of the
squatters, Abundo, was still pending in the Court of Appeals when its decision in this
case was rendered.
IN VIEW OF THE FOREGOING, the decision appealed from is reversed, and the
time for the performance of the obligations of petitioner Gregorio Araneta, Inc. is
hereby fixed at the date that all the squatters on affected areas are finally
evicted therefrom.
Costs against respondent Philippine Sugar Estates Development, Co., Ltd.
SO ORDERED.
[ G.R. Nos. 154391-92, September 30, 2004 ]
SPOUSES ISMAEL AND TERESITA MACASAET, PETITIONERS, VS. SPOUSES
VICENTE AND ROSARIO MACASAET, RESPONDENTS.
DECISION
PANGANIBAN, J.:
The present case involves a dispute between parents and children. The children were
invited by the parents to occupy the latter’s two lots, out of parental love and a desire
to foster family solidarity. Unfortunately, an unresolved conflict terminated this
situation. Out of pique, the parents asked them to vacate the premises. Thus, the
children lost their right to remain on the property. They have the right, however, to
be indemnified for the useful improvements that they constructed thereon in good
faith and with the consent of the parents. In short, Article 448 of the Civil Code
applies.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, assailing the
March 22, 2002 Decision[2] and the June 26, 2002 Resolution[3] of the Court of
Appeals (CA) in CA-GR SP Nos. 56205 & 56467. The challenged Decision disposed as
follows:
“WHEREFORE, the assailed Decision is AFFIRMED with the
following MODIFICATIONS:
‘1. Vicente and Rosario should reimburse Ismael and Teresita one-half of the value of
the useful improvements introduced in the premises prior to demand, which is
equivalent to P475,000.00. In case the former refuse to reimburse the said amount,
the latter may remove the improvements, even though the land may suffer damage
thereby. They shall not, however, cause any more impairment upon the property
leased than is necessary.
‘2. The award of attorney’s fees is DELETED.
‘3. The records of these consolidated cases are REMANDED to the Court of origin for
further proceedings to determine the option to be taken by Vicente and Rosario and
to implement the same with dispatch.”[4]
The assailed Resolution denied petitioners’ Motion for Reconsideration.
The Facts
Petitioners Ismael and Teresita[5] Macasaet and Respondents Vicente and Rosario
Macasaet are first-degree relatives. Ismael is the son of respondents, and Teresita is
his wife.[6]
On December 10, 1997, the parents filed with the Municipal Trial Court in Cities
(MTCC) of Lipa City an ejectment suit against the children. [7] Respondents alleged
that they were the owners of two (2) parcels of land covered by Transfer Certificate of
Title (TCT) Nos. T-78521 and T-103141, situated at Banay-banay, Lipa City; that by
way of a verbal lease agreement, Ismael and Teresita occupied these lots in March
1992 and used them as their residence and the situs of their construction business;
and that despite repeated demands, petitioners failed to pay the agreed rental
of P500 per week.[8]
Ismael and Teresita denied the existence of any verbal lease agreement. They
claimed that respondents had invited them to construct their residence and business
on the subject lots in order that they could all live near one other, employ Marivic
(the sister of Ismael), and help in resolving the problems of the family. [9] They added
that it was the policy of respondents to allot the land they owned as an advance grant
of inheritance in favor of their children. Thus, they contended that the lot covered by
TCT No. T-103141 had been allotted to Ismael as advance inheritance. On the other
hand, the lot covered by TCT No. T-78521 was allegedly given to petitioners as
8
payment for construction materials used in the renovation of respondents’ house. [10]
The MTCC[11] ruled in favor of respondents and ordered petitioners to vacate the
premises. It opined that Ismael and Teresita had occupied the lots, not by virtue of a
verbal lease agreement, but by tolerance of Vicente and Rosario. [12] As their stay was
by mere tolerance, petitioners were necessarily bound by an implied promise to
vacate the lots upon demand.[13] The MTCC dismissed their contention that one lot
had been allotted as an advance inheritance, on the ground that successional rights
were inchoate. Moreover, it disbelieved petitioners’ allegation that the other parcel
had been given as payment for construction materials. [14]
On appeal, the regional trial court[15] (RTC) upheld the findings of the MTCC.
However, the RTC allowed respondents to appropriate the building and other
improvements introduced by petitioners, after payment of the indemnity provided for
by Article 448 in relation to Articles 546 and 548 of the Civil Code. [16] It added that
respondents could oblige petitioners to purchase the land, unless its value was
considerably more than the building. In the latter situation, petitioners should pay
rent if respondents would not choose to appropriate the building. [17]
Upon denial of their individual Motions for Reconsideration, the parties filed with the
CA separate Petitions for Review, which were later consolidated. [18]
Ruling of the Court of Appeals
The CA sustained the finding of the two lower courts that Ismael and Teresita had
been occupying the subject lots only by the tolerance of Vicente and Rosario. [19] Thus,
possession of the subject lots by petitioners became illegal upon their receipt of
respondents’ letter to vacate it. [20]
Citing Calubayan v. Pascual,[21] the CA further ruled that petitioners’ status was
analogous to that of a lessee or a tenant whose term of lease had expired, but whose
occupancy continued by tolerance of the owner.[22] Consequently, in ascertaining the
right of petitioners to be reimbursed for the improvements they had introduced on
respondents’ properties,[23] the appellate court applied the Civil Code’s provisions on
lease. The CA modified the RTC Decision by declaring that Article 448 of the Civil
Code was inapplicable. The CA opined that under Article 1678 of the same Code,
Ismael and Teresita had the right to be reimbursed for one half of the value of the
improvements made.[24]
Not satisfied with the CA’s ruling, petitioners brought this recourse to this Court. [25]
The Issues
Petitioners raise the following issues for our consideration:
“1. a) Whether or not Section 17[,] Rule 70 of the Rules of Court on Judgment should
apply in the rendition of the decision in this case;
b) Whether or not the Complaint should have been dismissed;
c) Whether or not damages including attorney’s fees should have been awarded to
herein petitioners;
“2. a) Whether or not the rule on appearance of parties during the Pretrial should
apply on appearance of parties during Preliminary Conference in an unlawful detainer
suit;
b) Whether or not the case of Philippine Pryce Assurance Corporation vs. Court of
Appeals (230 SCRA 164) is applicable to appearance of parties in an unlawful detainer
suit;
“3. Whether or not Article 1678 of the Civil Code should apply to the case on the
matters of improvements, or is it Article 447 of the Civil Code in relation to the Article
453 and 454 thereof that should apply, if ever to apply the Civil Code;
“4. Whether or not the [D]ecision of the Court of Appeals is supported by evidence,
appropriate laws, rules and jurisprudence;
“5. Whether or not Assisting Judge Norberto Mercado of the MTCC Lipa City should be
held accountable in rendering the MTCC [D]ecision;
“6. Whether or not Atty. Glenn Mendoza and Atty. Andrew Linatoc of the same [l]aw
office should be held accountable for pursuing the [e]jectment case[.]”[26]
The Court’s Ruling
The Petition is partly meritorious.
First Issue:
Ejectment
Who is entitled to the physical or material possession of the premises? At the outset,
we stress that this is the main issue in ejectment proceedings. [27] In the present case,
petitioners failed to justify their right to retain possession of the subject lots, which 9
respondents own. Since possession is one of the attributes of
ownership,[28] respondents clearly are entitled to physical or material possession.
Allegations of the Complaint
Petitioners allege that they cannot be ejected from the lots, because respondents
based their Complaint regarding the nonpayment of rentals on a verbal lease
agreement, which the latter failed to prove. [29] Petitioners contend that the lower
courts erred in using another ground (tolerance of possession) to eject them.
In actions for unlawful detainer, possession that was originally lawful becomes
unlawful upon the expiration or termination of the defendant’s right to possess,
arising from an express or implied contract.[30] In other words, the plaintiff’s cause of
action comes from the expiration or termination of the defendant’s right to continue
possession.[31] The case resulting therefrom must be filed within one year from the
date of the last demand.
To show a cause of action in an unlawful detainer, an allegation that the defendant is
illegally withholding possession from the plaintiff is sufficient. The complaint may lie
even if it does not employ the terminology of the law, provided the said pleading is
couched in a language adequately stating that the withholding of possession or the
refusal to vacate has become unlawful. [32] It is equally settled that the jurisdiction of
the court, as well as the nature of the action, is determined from the averments of
the complaint.[33]
In the present case, the Complaint alleged that despite demands, petitioners “refused
to pay the accrued rentals and [to] vacate the leased premises.”[34] It prayed that
judgment be rendered “[o]rdering [petitioners] and all those claiming rights under
them to vacate the properties x x x and remove the structures x x x constructed
thereon.”[35] Effectively then, respondents averred that petitioners’ original lawful
occupation of the subject lots had become unlawful.
The MTCC found sufficient cause to eject petitioners. While it disbelieved the
existence of a verbal lease agreement, it nevertheless concluded that petitioners’
occupation of the subject lots was by mere tolerance of respondents. Basing its
conclusion on the fact that the parties were close relatives, the MTCC ruled thus:
“x x x [T]he parties herein are first degree relatives. Because of this relationship, this
Court takes judicial notice of the love, care, concern and protection imbued upon the
parents towards their [children], i.e., in the instant case, the love, care, concern and
protection of the [respondents] to the [petitioners]. With this in mind, this Court is
inclined to believe the position of the [petitioners] that there was no such verbal lease
agreement between the parties herein that took place in 1992. x x x.
“From the allegations of the [petitioners], this Court is convinced that their stay and
occupancy of the subject premises was by mere tolerance of the [respondents], and
not by virtue of a verbal lease agreement between them.”[36]
Having found a cause of action for unlawful detainer, the MTCC (as well as the RTC
and the CA) did not err in ordering the ejectment of petitioners as prayed for by
respondents. There was no violation of Section 17 of Rule 70[37] of the Rules of
Court. As earlier explained, unlawful detainer was sufficiently alleged in the
Complaint and duly proven during the trial. Significantly, the issue of whether there
was enough ground to eject petitioners was raised during the preliminary
conference.[38]
Not Merely Tolerated
Possession
Petitioners dispute the lower courts’ finding that they occupied the subject lots on the
basis of mere tolerance. They argue that their occupation was not under such
condition, since respondents had invited, offered and persuaded them to use those
properties.[39]
This Court has consistently held that those who occupy the land of another at the
latter’s tolerance or permission, without any contract between them, are necessarily
bound by an implied promise that the occupants will vacate the property upon
demand.[40] A summary action for ejectment is the proper remedy to enforce this
implied obligation.[41] The unlawful deprivation or withholding of possession is to be
counted from the date of the demand to vacate. [42]
Toleration is defined as “the act or practice of permitting or enduring something not
wholly approved of.”[43] Sarona v. Villegas[44] described what tolerated acts means, in
this language:
“Professor Arturo M. Tolentino states that acts merely tolerated are ‘those which by
reason of neighborliness or familiarity, the owner of property allows his neighbor or
another person to do on the property; they are generally those particular services or
benefits which one’s property can give to another without material injury or prejudice
to the owner, who permits them out of friendship or courtesy.’ x x x. And, Tolentino
continues, even though ‘this is continued for a long time, no right will be acquired by
prescription.” x x x. Further expounding on the concept, Tolentino writes: ‘There is
tacit consent of the possessor to the acts which are merely tolerated. Thus, not every
case of knowledge and silence on the part of the possessor can be considered mere
tolerance. By virtue of tolerance that is considered as an authorization, permission or
license, acts of possession are realized or performed. The question reduces itself to
the existence or non-existence of the permission.”[45]
10
We hold that the facts of the present case rule out the finding of possession by mere
tolerance. Petitioners were able to establish that respondents had invited them to
occupy the subject lots in order that they could all live near one other and help in
resolving family problems.[46] By occupying those lots, petitioners demonstrated their
acceptance of the invitation. Hence, there was a meeting of minds, and an
agreement regarding possession of the lots impliedly arose between the parties.
The occupancy of the subject lots by petitioners was not merely “something not
wholly approved of” by respondents. Neither did it arise from what Tolentino refers to
as “neighborliness or familiarity.” In point of fact, their possession was upon the
invitation of and with the complete approval of respondents, who desired that their
children would occupy the premises. It arose from familial love and a desire for
family solidarity, which are basic Filipino traits.
Right to Use the Lots Terminated
That Ismael and Teresita had a right to occupy the lots is therefore clear. The issue is
the duration of possession. In the absence of a stipulation on this point, Article 1197
of the Civil Code allows the courts to fix the duration or the period.
“Article 1197. If the obligation does not fix a period, but from its nature and the
circumstances it can be inferred that a period was intended, the courts may fix the
duration thereof.
“The courts shall also fix the duration of the period when it depends upon the will of
the debtor.
“In every case the courts shall determine such period as may under the
circumstances have been probably contemplated by the parties. Once fixed by the
courts, the period cannot be changed by them.”
Article 1197, however, applies to a situation in which the parties intended a period.
Such qualification cannot be inferred from the facts of the present case.
To repeat, when Vicente and Rosario invited their children to use the lots, they did so
out of parental love and a desire for solidarity expected from Filipino parents. No
period was intended by the parties. Their mere failure to fix the duration of their
agreement does not necessarily justify or authorize the courts to do so.[47]
Based on respondents’ reasons for gratuitously allowing petitioners to use the lots,
it can be safely concluded that the agreement subsisted as long as the parents and
the children mutually benefited from the arrangement. Effectively, there is a
resolutory condition in such an agreement.[48] Thus, when a change in the condition
existing between the parties occurs --like a change of ownership, necessity, death of
either party or unresolved conflict or animosity -- the agreement may be deemed
terminated. Having been based on parental love, the agreement would end upon the
dissipation of the affection.
When persistent conflict and animosity overtook the love and solidarity between the
parents and the children, the purpose of the agreement ceased.[49] Thus, petitioners
no longer had any cause for continued possession of the lots. Their right to use the
properties became untenable. It ceased upon their receipt of the notice to vacate.
And because they refused to heed the demand, ejectment was the proper remedy
against them. Their possession, which was originally lawful, became unlawful when
the reason therefor -- love and solidarity -- ceased to exist between them.
No Right to Retain
Possession
Petitioners have not given this Court adequate reasons to reverse the lower courts’
dismissal of their contention that Lots T-78521 and T-103141, respectively, were
allegedly allotted to them as part of their inheritance and given in consideration for
past debts.
The right of petitioners to inherit from their parents is merely inchoate and is vested
only upon the latters’ demise. Indisputably, rights of succession are transmitted only
from the moment of death of the decedent. [50] Assuming that there was an
“allotment” of inheritance, ownership nonetheless remained with respondents.
Moreover, an intention to confer title to certain persons in the future is not
inconsistent with the owners’ taking back possession in the meantime for any reason
deemed sufficient.[51] Other than their self-serving testimonies and their affidavits,
petitioners offered no credible evidence to support their outlandish claim of
inheritance “allocation.”
We also agree with the lower courts that petitioners failed to prove the allegation
that, through a dation in payment, Lot T-78521 had been transferred to the latter as
payment for respondents’ debts.[52] The evidence presented by petitioners related
only to the alleged indebtedness of the parents arising from the latter’s purported
purchases and advances.[53] There was no sufficient proof that respondents had
entered into a contract of dation to settle the alleged debt. Petitioners even stated
that there was a disagreement in the accounting of the purported debt, [54] a fact that
disproves a meeting of the minds with the parents.
Petitioners also admitted that a portion of the alleged debt is the subject matter of a
collection case against respondents (Civil Case No. 0594-96).[55] Thus, the former’s
allegation that the indebtedness has been paid through a dation cannot be given
credence, inconsistent as it is with their action to recover the same debt. 11
Despite their protestations, petitioners recognized the right of the parents to recover
the premises when they admitted in their Position Paper filed with the MTCC that
respondents had a title to the lots.
“The [respondents] want to get their property because the title is theirs, the
[petitioners] do not object but what is due the [petitioners] including the reparation
for the tarnish of their dignity and honor must be given the [petitioners] for the
benefits of their children before the premises will be turned over.”[56]
As a rule, the right of ownership carries with it the right of possession.
Second Issue:
Appearance at the Preliminary Conference
Section 8 of Rule 70 of the Rules of Court requires the appearance of the plaintiff and
the defendant during the preliminary conference. On the basis of this provision,
petitioners claim that the MTCC should have dismissed the case upon the failure of
respondents to attend the conference. However, petitioners do not dispute that an
attorney-in-fact with a written authorization from respondents appeared during the
preliminary conference.[57] The issue then is whether the rules on ejectment allow a
representative to substitute for a party’s personal appearance.
Unless inconsistent with Rule 70, the provisions of Rule 18 on pretrial applies to the
preliminary conference.[58] Under Section 4 of this Rule, the nonappearance of a party
may be excused by the showing of a valid cause; or by the appearance of a
representative, who has been fully authorized in writing to enter into an amicable
settlement, to submit to alternative modes of dispute resolution, and to enter into
stipulations or admissions of facts and of documents. [59]
Section 4 of Rule 18 may supplement Section 8 of Rule 70. Thus, the spirit behind
the exception to personal appearance under the rules on pretrial is applicable to the
preliminary conference. If there are valid reasons or if a representative has a “special
authority,” a party’s appearance may be waived. As petitioners are challenging only
the applicability of the rules on pretrial to the rule on preliminary conference, the
written authorization from respondents can indeed be readily considered as a “special
authorization.”
Third Issue:
Rights of a Builder in Good Faith
As applied to the present case, accession refers to the right of the owner to
everything that is incorporated or attached to the property. [60] Accession industrial --
building, planting and sowing on an immovable -- is governed by Articles 445 to 456
of the Civil Code.
Articles 447 and 1678 of the
Civil Code Inapplicable
To buttress their claim of reimbursement for the improvements introduced on the
property, petitioners cite Article 447.[61] They allege that the CA erred in applying
Article 1678, since they had no lease agreement with respondents.
We clarify. Article 447 is not applicable, because it relates to the rules that apply
when the owner of the property uses the materials of another. It does not refer to
the instance when a possessor builds on the property of another, which is the factual
milieu here.
In view of the unique factual setting of the instant case, the contention of petitioners
regarding the inapplicability of Article 1678 deserves attention. The CA applied the
provisions on lease, because it found their possession by mere tolerance comparable
with that of a lessee, per the pronouncement in Calubayan v. Pascual,[62] from which
we quote:
“x x x. It has been held that a person who occupies the land of another at the latter’s
tolerance or permission, without any contract between them, is necessarily bound by
an implied promise that he will vacate upon demand, failing which a summary action
for ejectment is the proper remedy against them. The status of defendant is
analogous to that of a lessee or tenant whose term of lease has expired but whose
occupancy continued by tolerance of the owner. In such a case, the unlawful
deprivation or withholding of possession is to be counted from the date of the demand
to vacate.”[63] (Emphasis in the original.)
As explained earlier, Ismael and Teresita’s possession of the two lots was not by mere
tolerance, a circumstance that negates the applicability of Calubayan.
Article 448 Applicable
On the other hand, when a person builds in good faith on the land of another, the
applicable provision is Article 448, which reads:[64]
“Article 448. The owner of the land on which anything has been built, sown or
planted in good faith, shall have the right to appropriate as his own the works, sowing
or planting, after payment of the indemnity provided for in Articles 546 and 548, or to
oblige the one who built or planted to pay the price of the land, and the one who
sowed, the proper rent. However, the builder or planter cannot be obliged to buy the
land if its value is considerably more than that of the building or trees. In such case,
he shall pay reasonable rent, if the owner of the land does not choose to appropriate
the building or trees after proper indemnity. The parties shall agree upon the terms
12
of the lease and in case of disagreement, the court shall fix the terms thereof.”
This Court has ruled that this provision covers only cases in which the builders,
sowers or planters believe themselves to be owners of the land or, at least, to have a
claim of title thereto.[65] It does not apply when the interest is merely that of a holder,
such as a mere tenant, agent or usufructuary. [66] From these pronouncements, good
faith is identified by the belief that the land is owned; or that -- by some title -- one
has the right to build, plant, or sow thereon. [67]
However, in some special cases, this Court has used Article 448 by recognizing good
faith beyond this limited definition. Thus, in Del Campo v. Abesia,[68] this provision
was applied to one whose house -- despite having been built at the time he was still
co-owner -- overlapped with the land of another.[69] This article was also applied to
cases wherein a builder had constructed improvements with the consent of the
owner. The Court ruled that the law deemed the builder to be in good
faith.[70] In Sarmiento v. Agana,[71] the builders were found to be in good faith despite
their reliance on the consent of another, whom they had mistakenly believed to be
the owner of the land.[72]
Based on the aforecited special cases, Article 448 applies to the present factual
milieu. The established facts of this case show that respondents fully consented to
the improvements introduced by petitioners. In fact, because the children occupied
the lots upon their invitation, the parents certainly knew and approved of the
construction of the improvements introduced thereon.[73] Thus, petitioners may be
deemed to have been in good faith when they built the structures on those lots.
The instant case is factually similar to Javier v. Javier.[74] In that case, this Court
deemed the son to be in good faith for building the improvement (the house) with the
knowledge and consent of his father, to whom belonged the land upon which it was
built. Thus, Article 448[75] was applied.
Rule on Useful Expenses
The structures built by petitioners were “useful” improvements, because they
augmented the value or income of the bare lots. [76] Thus, the indemnity to be paid by
respondents under Article 448 is provided for by Article 546, which we quote:
“Art. 546. Necessary expenses shall be refunded to every possessor; but only the
possessor in good faith may retain the thing until he has been reimbursed therefor.
“Useful expenses shall be refunded only to the possessor in good faith with the same
right of retention, the person who has defeated him in the possession having the
option of refunding the amount of the expenses or of paying the increase in value
which the thing may have acquired by reason thereof.”
Consequently, respondents have the right to appropriate -- as their own -- the
building and other improvements on the subject lots, but only after (1) refunding the
expenses of petitioners or (2) paying the increase in value acquired by the properties
by reason thereof. They have the option to oblige petitioners to pay the price of the
land, unless its value is considerably more than that of the structures -- in which
case, petitioners shall pay reasonable rent.
In accordance with Depra v. Dumlao,[77] this case must be remanded to the trial court
to determine matters necessary for the proper application of Article 448 in relation to
Article 546. Such matters include the option that respondents would take and the
amount of indemnity that they would pay, should they decide to appropriate the
improvements on the lots. We disagree with the CA’s computation of useful
expenses, which were based only on petitioners’ bare allegations in their Answer. [78]
Ruling on Improvement Justified
While, ordinarily, the jurisdiction of the MTCC on ejectment proceedings is limited to
the issue of physical or material possession of the property in question, this Court
finds it necessary to abbreviate the issue on the improvements in relation to Article
448. First, the determination of the parties’ right to those improvements is intimately
connected with the MTCC proceedings in the light of the ejectment of
petitioners. Second, there is no dispute that while they constructed the
improvements, respondents owned the land. Third, both parties raised no objection
when the RTC and the CA ruled accordingly on this matter.
Equitable considerations compel us to settle this point immediately, pro hoc vice, to
avoid needless delay. Both parties have already been heard on this issue; to
dillydally or equivocate would not serve the cause of substantial justice.
Other Issues Raised
Given the foregoing rulings, it is no longer necessary to address petitioners’ allegation
that the MTCC judge and respondents’ lawyers should be respectively held personally
accountable for the Decision and for filing the case. [79] The insinuation of petitioners
that the lawyers manipulated the issuance of a false barangay certification is
unavailing.[80] Their contention that respondents did not attend the barangay
conciliation proceedings was based solely on hearsay, which has little or no probative
value.[81]
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals
are AFFIRMED with the following MODIFICATIONS:
13
1. The portion requiring Spouses Vicente and Rosario Macasaet to reimburse
one half of the value of the useful improvements, amounting to P475,000,
and the right of Spouses Ismael and Rosita Macasaet to remove those
improvements (if the former refuses to reimburse) is DELETED.
2. The case is REMANDED to the court of origin for further proceedings to
determine the facts essential to the proper application of Articles 448 and
546 of the Civil Code, specifically to the following matters:
a. Spouses Vicente and Rosario Macasaet’s option to appropriate -- as
their own -- the improvements on the lots, after paying the
indemnity, as provided under Article 546 in relation to Article 448 of
the Civil Code; or in requiring Spouses Ismael and Rosita Macasaet
to pay for the value of the lots, unless it is considerably more than
that of the improvements, in which case petitioners shall pay
reasonable rent based upon the terms provided under the Civil Code
 b. The value of the useful expenses incurred by Spouses Ismael and
Rosita Macasaet in the construction of the improvements on the lots
c. The increase in value acquired by the lots by reason of the useful
improvements
d. Spouses Vicente and Rosario Macasaet’s choice of type of indemnity
to be paid (whether b or c)
e. Whether the value of the lots is considerably more than that of the
improvements built thereon
No pronouncement as to costs.
SO ORDERED.
[ G.R. No. 142378, March 07, 2002 ]
LL AND COMPANY DEVELOPMENT AND AGRO-INDUSTRIAL CORPORATION,
PETITIONER, VS. HUANG CHAO CHUN AND YANG TUNG FA, RESPONDENTS.
DECISION
PANGANIBAN, J.:
A stipulation in a lease contract stating that its five-year term is subject to “an option
to renew” shall be interpreted to be reciprocal in character. Unless the language
shows an intent to allow the lessee to exercise it unilaterally, such option shall be
deemed to benefit both the lessor and the lessee who must both consent to the
extension or renewal, as well as to its specific terms and conditions.
Statement of the Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the
October 29, 1999 Decision[1] and the March 9, 2000 Resolution[2] of the Court of
Appeals[3] (CA) in CA-GR SP No. 50618. The decretal portion of the Decision reads as
follows:
“WHEREFORE, the petition for review is hereby DISMISSED for lack of merit.” [4]
The assailed Resolution denied petitioner’s Motion for Reconsideration.
The CA sustained the Decision of the Regional Trial Court (RTC) of Quezon City
(Branch 217), which had disposed as follows:
“WHEREFORE, premises considered, the Decision appealed from is AFFIRMED insofar
as it dismissed the complaint and it extended the lease contract up to September 16,
2001; and is MODIFIED such that, defendants-appellees are ordered to pay plaintiff-
appellant the amount of P444,800.00 less 5% as withholding tax, as their rentals on
subject premises from July 16, 1994 to November 13, 1994.
“Costs against the plaintiff-appellant.”[5]
The Facts
The factual antecedents of the case are summarized by the Court of Appeals as 14
follows:
“[The present case] originated from an unlawful detainer case filed by petitioner
before the Metropolitan Trial Court of Quezon City on October 9, 1996 which was
docketed as Civil Case No. 16349.
“In its Complaint, petitioner alleged that respondents Huang Chao Chun and Yang
Tung Fa violated their amended lease contract over a 1,112 square meter lot it owns,
designated as Lot No. 1-A-1, when they did not pay the monthly rentals thereon in
the total amount of P4,322,900.00. It also alleged that the amended lease contract
already expired on September 16, 1996 but respondents refused to surrender
possession thereof plus the improvements made thereon, and pay the rental
arrearages despite repeated demands.
“The amended lease contract was entered into by the parties sometime in August,
1991. [Exact day is not mentioned in amended contract]. The same amended the
lease contract previously entered into by the parties on August 8, 1991. The amended
contract contains the following provisions:
‘1. That the LESSOR agrees as by the[se] presents hereby agreed to change the lot
from LOT 1-A-2 with an area of 1,091 sq. meters, to LOT 1-A-1 with an area of 1,112
sq. meters, covered by the same TCT No. 219417 and located at the same address at
No. 2 Scout Chuatuco Street, Quezon City, Metro Manila.

‘2. The monthly rental shall be the same at P100.00 per square meters and/or
P111,200.00 per month, Philippine Currency. All other terms and conditions are the
same for strict compliance thereof’.
“The terms and conditions referred to in paragraph 2 above are the following:
‘1. x x x It is expressly agreed and understood that the payment of the rental herein
stipulated shall be made without the necessity of express demand and without delay
on any ground whatsoever.
‘2. The term of this lease is FIVE (5) YEARS from the effectivity of said lease, and
with the option to renew, specifically shall commence from September 15, 1991 and
shall expire on September 16, 1996, and maybe adjusted depending upon the
ejectment of tenants.
‘3. The LESSEES shall have the option to reconstruct and/or renovate the
improvement found thereon at the expense of the LESSEES, and whatever
improvement introduced therein by the LESSEES in the premises the ownership of it
shall become the property of the LESSOR without extra compensation of the same.
‘4. Upon signing of this Contract of Lease, the LESSEES shall make a one (1) year
deposit to be paid unto the LESSOR as follows:
‘50% percent upon signing of this Contract of Lease;
‘50% percent as payment in full of the one (1) year deposit. Payment of which shall
be made unto the LESSOR on the day of the effectivity date of the Contract of Lease,
said deposit shall be refundable 30 days prior to the termination of the same.
‘5. The monthly rental is subject to increase, said increase shall be based upon the
imposition of Real Estate Tax for every two (2) years upon presentation of the
increased real estate tax to the Le[ssees], but said increase shall not be less than
25% percent.
“x x x xxx xxx
‘9. The parties agree as by these presents have agreed to strictly observe the terms
and conditions of the Contract of Lease. Violation by the Lessees of any of the terms
and condition of said contract is equivalent to forfeitures of the deposit in favor of the
Lessor, furthermore the Lessees agreed to vacate the lease[d] premises for any
violation of the terms and condition of said contract, without going to court.’
“Respondent were joined by the Tsai Chun International Resources Inc. in their
answer to the Complaint, wherein they alleged that the actual lessee over Lot No. 1-
A-1 is the corporation.
“Respondents and the corporation denied petitioner’s allegations, claiming instead
that:
“1. The amended lease contract did not reflect the true intention of the parties
because it did not contemplate an obsolete building that can no longer be renovated,
such that petitioner did not become the owner of the new P24,000,000.00 two-storey
building they introduced on Lot No. 1-A-1 when their contract expired.
“2. Their failure to pay the monthly rentals on the property was due to petitioner’s
fault when it attempted to increase the amount of rent in violation of their contract;
and
“3. They are entitled to a renewal of their contract in view of the provision therein
providing for automatic renewal, and also in view of the P24,000,000.00 worth of
improvements they introduced on the leased premises.
“After the parties were accorded their respective rights to due process of law, Branch
32 of the MTC rendered decision on June 23, 1998, the decretal portion of which
15
reads:
‘WHEREFORE, premises considered, the Court hereby orders the dismissal of this
case, without pronouncement as to costs.
‘SO ORDERED.’
“The aforequoted decision was premised on the resolution of two issues:
‘(a) ‘Whether or not the Contract of Lease dated August 8, 1991 had expired;’ and
‘(b) ‘Did defendants and/or the corporation incur rental arrearages.’
“The MTC ruled that the contract entered into by the parties may be extended by the
lessees for reasons of justice and equity, citing as its legal bases the case of ‘Legarda
Koh v. Ongsi[a]co’ (36 Phil. [185]) and ‘Cruz v. Alberto’ (39 Phil. 991). It also ruled
that the corporation’s failure to pay the monthly rentals as they fell due was justified
by the fact that petitioner ‘refused to honor the basis of the rental increase as stated
in their Lease Agreement.”[6] (Citations omitted)
Ruling of the Trial Court

The RTC affirmed the Decision of the Metropolitan Trial Court (MeTC) dismissing the
unlawful detainer case. The RTC likewise agreed that the Contract of Lease entered
into by the parties could be extended unilaterally by the lessees for another five years
or until September 16, 2001, on the basis of justice and equity.
It also held that the parties had a reciprocal obligation: unless and until petitioner
presented “the increased realty tax,” private respondents were not under any
obligation to pay the increased monthly rental. [7]
In addition, the RTC ruled that petitioner was not entitled to legal interest, and that
the 25 percent increase provided in the Contract of Lease should be based on the
imposed real estate tax, not on the monthly rental.
Ruling of the Court of Appeals
The Court of Appeals affirmed in toto the RTC’s dismissal of the unlawful detainer
case and extension of the lease period for another five years, holding that the errors
raised had already been fully taken into account by the two courts below.
It also reasoned that “[t]he elliptical construction of paragraph 5 of the Lease
Contract made it awkward to the point of being ambiguous.” There being no
agreement on the “proven rent,” an ejectment suit based on “the non-payment of
rents that were not agreed upon x x x will not lie.”
Hence, this Petition.[8]
Issues
In its Memorandum, petitioner raises the following issues for the Court’s
consideration:
I In the case before us, the Contract of Lease provided for a fixed period of five (5)
“Whether the court could still extend the term of the lease, after its expiration. Is
expiration of the lease a proper ground in [a] case of unlawful detainer[?]
II
“Whether non-payment of rentals is a ground to eject, in an unlawful detainer. Is
refusal of the lessor to accept or collect rentals a valid reason for non-payment of
rentals[?]
III
“May the court allow the introduction of issues other than the elements of a case for
ejectment[?]”[9]
This Court’s Ruling
The Petition is meritorious.
First Issue:
Extension of Lease Period
Petitioner contends that because the Contract, as amended, had already expired, the
MTC had no power to extend the lease period. We are convinced.
In general, the power of the courts to fix a longer term for a lease is discretionary. 16
Such power is to be exercised only in accordance with the particular circumstances of
a case: a longer term to be granted where equities demanding extension come into
play; to be denied where none appear -- always with due deference to the parties’
freedom to contract.[10] Thus, courts are not bound to extend the lease. [11]
Article 1675 of the Civil Code excludes cases falling under Article 1673 from those
under Article 1687. Article 1673 provides among others, that the lessor may
judicially eject the lessee upon the expiration of “the period agreed upon or that
which is fixed for the duration of the leases.” Where no period has been fixed by the
parties,[12] the courts, pursuant to Article 1687, have the potestative authority to set
a longer period of lease.[13]
years -- “specifically” from September 16, 1991 to September 15, 1996. Because the
lease period was for a determinate time, it ceased, by express provision of Article
1669 of the Civil Code, “on the day fixed, without need of a demand.”[14] Here, the
five-year period expired on September 15, 1996, whereas the Complaint for
ejectment was filed on October 6, 1996. Because there was no longer any lease that
could be extended, the MeTC, in effect, made a new contract for the parties, a power
it did not have.[15] Early on, in Bacolod-Murcia Milling v. Banco Nacional Filipino,[16] we
said that a court could not supply material stipulations to a contract, as follows:
“It is not the province of the court to alter a contract by construction or to make a
new contract for the parties; its duty is confined to the interpretation of the one which
they have made for themselves, without regard to its wisdom or folly, as the court
cannot supply material stipulations or read into contract words which it does not
contain.”
Furthermore, the extension of a lease contract must be made before the term of the
agreement expires, not after.[17] Upon the lapse of the stipulated period, courts
cannot belatedly extend or make a new lease for the parties, [18] even on the basis of
equity.[19] Because the Lease Contract ended on September 15, 1996, without the
parties reaching any agreement for renewal, respondents can be ejected from the
premises.[20]
On the other hand, respondents and the lower courts argue that the Contract of Lease
provided for an automatic renewal of the lease period. We are not persuaded.
Citing Koh v. Ongsiaco[21] and Cruz v. Alberto,[22] the MeTC -- upheld by the RTC and
the CA -- ruled that the stipulation in the Contract of Lease providing an option to
renew should be construed in favor of and for the benefit of the lessee.[23] This ruling
has however, been expressly reversed in Fernandez v. CA, from which we quote:[24]
“It is also important to bear in mind that in a reciprocal contract like a lease, the
period of the lease must be deemed to have been agreed upon for the benefit of both
parties, absent language showing that the term was deliberately set for the benefit of
the lessee or lessor alone. We are not aware of any presumption in law that the term
of a lease is designed for the benefit of the lessee alone. Koh and Cruz in effect rested
upon such a presumption. But that presumption cannot reasonably be indulged in
casually in an era of rapid economic change, marked by, among other things, volatile
costs of living and fluctuations in the value of the domestic currency. The longer the
period the more clearly unreasonable such a presumption would be. In an age like
that we live in, very specific language is necessary to show an intent to grant a
unilateral faculty to extend or renew a contract of lease to the lessee alone, or to the
lessor alone for that matter. We hold that the above-quoted rulings in Koh v.
Ongsiaco and Cruz v. Alberto should be and are overruled.”[25]
The foregoing doctrine was recently reiterated in Heirs of Amando Dalisay v. Court of
Appeals.[26] Thus, pursuant to Fernandez, Dalisay and Article 1196[27] of the Civil
Code, the period of the lease contract is deemed to have been set for the benefit of
both parties. Its renewal may be authorized only upon their mutual agreement or at
their joint will.[28] Its continuance, effectivity or fulfillment cannot be made to depend
exclusively upon the free and uncontrolled choice of just one party. While the lessee
has the option to continue or to stop paying the rentals, the lessor cannot be
completely deprived of any say on the matter.[29] Absent any contrary stipulation in a
reciprocal contract, the period of lease is deemed to be for the benefit of both
parties.[30]
In the instant case, there was nothing in the aforesaid stipulation or in the actuation
of the parties that showed that they intended an automatic renewal or extension of
the term of the contract.[31] First, demonstrating petitioner’s disinterest in renewing
the contract was its letter[32] dated August 23, 1996, demanding that respondents
vacate the premises for failure to pay rentals since 1993. As a rule, the owner-lessor
has the prerogative to terminate the lease upon its expiration. [33] Second, in the
present case, the disagreement of the parties over the increased rental rate and
private respondents’ failure to pay it precluded the possibility of a mutual
renewal. Third, the fact that the lessor allowed the lessee to introduce improvements
on the property was indicative, not of the former’s intention to extend the contract
automatically,[34] but merely of its obedience to its express terms allowing the
improvements. After all, at the expiration of the lease, those improvements were to
“become its property.”
As to the contention that it is not fair to eject respondents from the premises after
only five years, considering the value of the improvements they introduced therein,
suffice it to say that they did so with the knowledge of the risk -- the contract had
plainly provided for a five-year lease period.
Parties are free to enter into any contractual stipulation, provided it is not illegal or
17
contrary to public morals. When such agreement, freely and voluntarily entered into,
turns out to be disadvantageous to a party, the courts cannot rescue it without
crossing the constitutional right to contract. They are not authorized to extricate
parties from the necessary consequences of their acts, and the fact that the
contractual stipulations may turn out to be financially disadvantageous will not relieve
the latter of their obligations.[35]
Second Issue:
Non-Payment of Rentals
Petitioner further argues that respondents should be ejected for nonpayment of the
new rental rates. On the other hand, the latter counter that they did not agree to
these new rates. True, mere failure to pay rentals does not make possession
unlawful, but when a valid demand to vacate the premises is made by the lessor, the
lessee’s continued withholding of possession becomes unlawful. [36] Well-settled is the
rule that the failure of the owners/lessors to collect or their refusal to accept the
rentals is not a valid defense.[37]
Respondents justify their nonpayment of rentals on the ground that petitioners
refused to accept their payments. Article 1256 of the Civil Code, however, provides
that “if the creditor to whom tender of payment has been made refuses without just
cause to accept it, the debtor shall be released from responsibility by the consignation
of the thing or sum.” This provision is more explicit under the Rent Control
Law,[38] the pertinent portions of which are similar to the prevailing law -- the Rental
Reform Act of 2002[39] -- which we reproduce hereunder:
“Section 7. Grounds for Judicial Ejectment.-Ejectment shall be allowed on the
following grounds:
“(a) Assignment of lease or subleasing of residential units in whole or in part,
including the acceptance of boarders or bedspacers, without the written consent of
the owner/lessor.
“(b) Arrears in payment of rent for a total of three (3) months: Provided, That in
the case of refusal by the lessor to accept payment of the rental agreed upon, the
lessee may either deposit, by way of consignation, the amount in court, or with the
city or municipal treasurer, as the case may be, or in a bank in the name of and with
notice to the lessor, within one month after the refusal of the lessor to accept
payment.
“The lessee shall thereafter deposit the rental within ten days of every current
month. Failure to deposit the rentals for three (3) months shall constitute a ground
for ejectment. If an ejectment case is already pending, the court upon proper motion
may order the lessee or any person or persons claiming under him to immediately
vacate the leased premises without prejudice to the continuation of the ejectment
proceedings. At any time, the lessor may, upon authority of the court, withdraw the
rentals deposited.
“The lessor, upon authority of the court in case of consignation or upon joint affidavit
by him and the lessee to be submitted to the city or municipal treasurer and to the
bank where deposit was made, shall be allowed to withdraw the deposits.
xxx xxx xxx
“(e) Expiration of the period of the lease contract.”[40]
On the other hand, the Civil Code provides as follows:
“Art. 1673. The lessor may judicially eject the lessee for any of the following causes:
“(1) When the period agreed upon, or that which is fixed for the duration of lease
under Articles 1682 and 1687, has expired;
“(2) Lack of payment of the price stipulated;
“(3) Violation of any of the conditions agreed upon in the contract;
“(4) When the lessee devotes the thing leased to any use or service not stipulated
which causes the deterioration thereof; or if he does not observe the requirement in
No. 2 of Article 1657, as regards the use thereof.
“The ejectment of tenants of agricultural lands is governed by special laws.”
Based on the foregoing, respondents should have deposited in a bank or with judicial
authorities the rent based on the previous rate.[41] In the instant case, respondents
failed to pay the rent from October 1993 to March 1998 or for four (4) years and
three (3) months. They should remember that Article 1658 of the Civil Code provides
only two instances in which the lessee may suspend payment of rent; namely, in case
the lessor fails to make the necessary repairs or to maintain the lessee in peaceful
and adequate enjoyment of the property leased. [42] None of these is present in the
case at bar.
Moreover, the mere subsequent payment of rentals by the lessee and the receipt
thereof by the lessor does not, absent any other circumstance that may dictate a
contrary conclusion, legitimize the unlawful character of the possession. The lessor
may still pursue the demand for ejectment.[43]
18
Having said that, we cannot, on the other hand, authorize a unilateral increase in the
rental rate, considering that (1) the option to renew is reciprocal and, thus, the terms
and conditions thereof -- including the rental rate -- must likewise be reciprocal; and
(2) the contracted clause authorizing an increase -- “upon presentation of the
increased real estate tax to lessees” -- has not been complied with by petitioner.
Third Issue:
Issues on Ejectment
Petitioner proceeds to argue that the MeTC should not have allowed the intervention
of the Tsai Chun International Resources, Inc., allegedly the real lessor of the leased
premises. In view of our foregoing discussion, there is no more need to rule on this
issue.
WHEREFORE, the Petition is GRANTED and the assailed Decision SET ASIDE.
Respondents and all persons claiming rights under them are hereby ORDERED TO
VACATE the subject premises and to restore peaceful possession thereof to
petitioner. They are also DIRECTED TO PAY the accrued rentals (based on the
stipulated rent) from October 1993 until such time that they vacate the subject
property, with interest thereon at the legal rate. No pronouncement as to costs.

SO ORDERED.
[ G.R. No. 206806, June 25, 2014 ]
ARCO PULP AND PAPER CO., INC. AND CANDIDA A. SANTOS, PETITIONERS,
VS. DAN T. LIM, DOING BUSINESS UNDER THE NAME AND STYLE OF QUALITY
PAPERS & PLASTIC PRODUCTS ENTERPRISES, RESPONDENT.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to extinguish an obligation. It
cannot be presumed and may be implied only if the old and new contracts are
incompatible on every point.
Before us is a petition for review on certiorari [1] assailing the Court of Appeals’
decision[2] in CA-G.R. CV No. 95709, which stemmed from a complaint[3] filed in the
Regional Trial Court of Valenzuela City, Branch 171, for collection of sum of money.
The facts are as follows:
Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw
materials, under the name Quality Paper and Plastic Products, Enterprises, to
factories engaged in the paper mill business.[4] From February 2007 to March 2007,
he delivered scrap papers worth P7,220,968.31 to Arco Pulp and Paper Company, Inc.
(Arco Pulp and Paper) through its Chief Executive Officer and President, Candida A.
Santos.[5] The parties allegedly agreed that Arco Pulp and Paper would either pay Dan
T. Lim the value of the raw materials or deliver to him their finished products of
equivalent value.[6]
Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper
issued a post-dated check dated April 18, 2007[7] in the amount of P1,487,766.68 as
partial payment, with the assurance that the check would not bounce. [8] When he
deposited the check on April 18, 2007, it was dishonored for being drawn against a
closed account.[9]
On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum
of agreement[10] where Arco Pulp and Paper bound themselves to deliver their finished
products to Megapack Container Corporation, owned by Eric Sy, for his account.
According to the memorandum, the raw materials would be supplied by Dan T. Lim,
through his company, Quality Paper and Plastic Products. The memorandum of
agreement reads as follows:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs.
Candida A. Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175
GSM, full width 76 inches at the price of P18.50 per kg. to Megapack Container for
Mr. Eric Sy’s account. Schedule of deliveries are as follows:
....
It has been agreed further that the Local OCC materials to be used for the production
of the above Test Liners will be supplied by Quality Paper & Plastic Products Ent., total
of 600 Metric Tons at P6.50 per kg. (price subject to change per advance notice).
Quantity of Local OCC delivery will be based on the quantity of Test Liner delivered to
Megapack Container Corp. based on the above production schedule.[11]
On May 5, 2007, Dan T. Lim sent a letter[12] to Arco Pulp and Paper demanding
payment of the amount of ?7,220,968.31, but no payment was made to him. [13]
Dan T. Lim filed a complaint[14] for collection of sum of money with prayer for
attachment with the Regional Trial Court, Branch 171, Valenzuela City, on May 28,
19
2007. Arco Pulp and Paper filed its answer[15] but failed to have its representatives
attend the pre-trial hearing. Hence, the trial court allowed Dan T. Lim to present his
evidence ex parte.[16]
On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and
Paper and dismissed the complaint, holding that when Arco Pulp and Paper and Eric
Sy entered into the memorandum of agreement, novation took place, which
extinguished Arco Pulp and Paper’s obligation to Dan T. Lim. [17]
Dan T. Lim appealed[18] the judgment with the Court of Appeals. According to him,
novation did not take place since the memorandum of agreement between Arco Pulp
and Paper and Eric Sy was an exclusive and private agreement between them. He
argued that if his name was mentioned in the contract, it was only for supplying the
parties their required scrap papers, where his conformity through a separate contract
was indispensable.[19]
On January 11, 2013, the Court of Appeals[20] rendered a decision[21] reversing and
setting aside the judgment dated September 19, 2008 and ordering Arco Pulp and
Paper to jointly and severally pay Dan T. Lim the amount of P7,220,968.31 with
interest at 12% per annum from the time of demand; P50,000.00 moral damages;
P50,000.00 exemplary damages; and P50,000.00 attorney’s fees. [22]
The appellate court ruled that the facts and circumstances in this case clearly showed
the existence of an alternative obligation.[23] It also ruled that Dan T. Lim was entitled
to damages and attorney’s fees due to the bad faith exhibited by Arco Pulp and Paper
in not honoring its undertaking.[24]
Its motion for reconsideration[25] having been denied,[26] Arco Pulp and Paper and its
President and Chief Executive Officer, Candida A. Santos, bring this petition for review
on certiorari.
On one hand, petitioners argue that the execution of the memorandum of agreement
constituted a novation of the original obligation since Eric Sy became the new debtor
of respondent. They also argue that there is no legal basis to hold petitioner Candida
A. Santos personally liable for the transaction that petitioner corporation entered into
with respondent. The Court of Appeals, they allege, also erred in awarding moral and
exemplary damages and attorney’s fees to respondent who did not show proof that
he was entitled to damages. [27]
Respondent, on the other hand, argues that the Court of Appeals was correct in ruling
that there was no proper novation in this case. He argues that the Court of Appeals
was correct in ordering the payment of ?7,220,968.31 with damages since the debt of
petitioners remains unpaid.[28] He also argues that the Court of Appeals was correct in
holding petitioners solidarily liable since petitioner Candida A. Santos was “the prime
mover for such outstanding corporate liability.”[29]
In their reply, petitioners reiterate that novation took place since there was nothing in
the memorandum of agreement showing that the obligation was alternative. They
also argue that when respondent allowed them to deliver the finished products to Eric
Sy, the original obligation was novated. [30]
A rejoinder was submitted by respondent, but it was noted without action in view of
A.M. No. 99-2-04-SC dated November 21, 2000.[31]
The issues to be resolved by this court are as follows:
1. Whether the obligation between the parties was extinguished by novation
2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.
3. Whether moral damages, exemplary damages, and attorney’s fees can be awarded
The petition is denied.
The obligation between the
parties was an alternative
obligation
The rule on alternative obligations is governed by Article 1199 of the Civil Code,
which states:
Article 1199. A person alternatively bound by different prestations shall completely
perform one of them.
The creditor cannot be compelled to receive part of one and part of the other
undertaking.
“In an alternative obligation, there is more than one object, and the fulfillment of one
is sufficient, determined by the choice of the debtor who generally has the right of
election.”[32] The right of election is extinguished when the party who may exercise
that option categorically and unequivocally makes his or her choice known. [33] The
choice of the debtor must also be communicated to the creditor who must receive
notice of it since:
The object of this notice is to give the creditor . . . opportunity to express his consent,
or to impugn the election made by the debtor, and only after said notice shall the
20
election take legal effect when consented by the creditor, or if impugned by the latter,
when declared proper by a competent court. [34]
According to the factual findings of the trial court and the appellate court, the original
contract between the parties was for respondent to deliver scrap papers worth
P7,220,968.31 to petitioner Arco Pulp and Paper. The payment for this delivery
became petitioner Arco Pulp and Paper’s obligation. By agreement, petitioner Arco
Pulp and Paper, as the debtor, had the option to either (1) pay the price or (2) deliver
the finished products of equivalent value to respondent. [35]
The appellate court, therefore, correctly identified the obligation between the parties
as an alternative obligation, whereby petitioner Arco Pulp and Paper, after receiving
the raw materials from respondent, would either pay him the price of the raw
materials or, in the alternative, deliver to him the finished products of equivalent
value.
When petitioner Arco Pulp and Paper tendered a check to respondent in partial
payment for the scrap papers, they exercised their option to pay the price.
Respondent’s receipt of the check and his subsequent act of depositing it constituted
his notice of petitioner Arco Pulp and Paper’s option to pay.
This choice was also shown by the terms of the memorandum of agreement, which
was executed on the same day. The memorandum declared in clear terms that the
delivery of petitioner Arco Pulp and Paper’s finished products would be to a third
person, thereby extinguishing the option to deliver the finished products of equivalent
value to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of the memorandum of agreement
constituted a novation of the contract between the parties. When petitioner Arco Pulp
and Paper opted instead to deliver the finished products to a third person, it did not
novate the original obligation between the parties.
The rules on novation are outlined in the Civil Code, thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
Article 1292. In order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point incompatible with each other.
(1204)
Article 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the
latter, but not without the consent of the creditor. Payment by the new debtor gives
him the rights mentioned in Articles 1236 and 1237. (1205a)
Novation extinguishes an obligation between two parties when there is a substitution
of objects or debtors or when there is subrogation of the creditor. It occurs only when
the new contract declares so “in unequivocal terms” or that “the old and the new
obligations be on every point incompatible with each other.”[36]
Novation was extensively discussed by this court in Garcia v. Llamas:[37]
Novation is a mode of extinguishing an obligation by changing its objects or
principal obligations, by substituting a new debtor in place of the old one, or
by subrogating a third person to the rights of the creditor. Article 1293 of the
Civil Code defines novation as follows:
“Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the
latter, but not without the consent of the creditor. Payment by the new debtor gives
him rights mentioned in articles 1236 and 1237.”
In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion. In expromision, the initiative for the change does
not come from — and may even be made without the knowledge of — the debtor,
since it consists of a third person’s assumption of the obligation. As such, it logically
requires the consent of the third person and the creditor. In delegacion, the debtor
offers, and the creditor accepts, a third person who consents to the substitution and
assumes the obligation; thus, the consent of these three persons are necessary. Both
modes of substitution by the debtor require the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new one that takes the place of the
former. It is merely modificatory when the old obligation subsists to the extent that it
remains compatible with the amendatory agreement. Whether extinctive or
modificatory, novation is made either by changing the object or the principal
21
conditions, referred to as objective or real novation; or by substituting the person of
the debtor or subrogating a third person to the rights of the creditor, an act known as
subjective or personal novation. For novation to take place, the following
requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new obligation
declares in unequivocal terms that the old obligation is extinguished. It is implied
when the new obligation is incompatible with the old one on every point. The test of
incompatibility is whether the two obligations can stand together, each one
with its own independent existence.[38] (Emphasis supplied)
Because novation requires that it be clear and unequivocal, it is never presumed,
thus:
In the civil law setting, novatio is literally construed as to make new. So it is deeply
rooted in the Roman Law jurisprudence, the principle — novatio non
praesumitur — that novation is never presumed. At bottom, for novation to be a
jural reality, its animus must be ever present, debitum pro debito — basically
extinguishing the old obligation for the new one. [39] (Emphasis supplied)
There is nothing in the memorandum of agreement that states that with its execution,
the obligation of petitioner Arco Pulp and Paper to respondent would be extinguished.
It also does not state that Eric Sy somehow substituted petitioner Arco Pulp and
Paper as respondent’s debtor. It merely shows that petitioner Arco Pulp and Paper
opted to deliver the finished products to a third person instead.
The consent of the creditor must also be secured for the novation to be valid:
Novation must be expressly consented to. Moreover, the conflicting intention and
acts of the parties underscore the absence of any express disclosure or circumstances
with which to deduce a clear and unequivocal intent by the parties to novate the old
agreement.[40] (Emphasis supplied)
In this case, respondent was not privy to the memorandum of agreement, thus, his
conformity to the contract need not be secured. This is clear from the first line of the
memorandum, which states:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs.
Candida A. Santos and Mr. Eric Sy. . . .[41]
If the memorandum of agreement was intended to novate the original agreement
between the parties, respondent must have first agreed to the substitution of Eric Sy
as his new debtor. The memorandum of agreement must also state in clear and
unequivocal terms that it has replaced the original obligation of petitioner Arco Pulp
and Paper to respondent. Neither of these circumstances is present in this case.
Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also
conflicts with their alleged intent to pass on their obligation to Eric Sy. When
respondent sent his letter of demand to petitioner Arco Pulp and Paper, and not to
Eric Sy, it showed that the former neither acknowledged nor consented to the latter
as his new debtor. These acts, when taken together, clearly show that novation did
not take place.
Since there was no novation, petitioner Arco Pulp and Paper’s obligation to
respondent remains valid and existing. Petitioner Arco Pulp and Paper, therefore,
must still pay respondent the full amount of P7,220,968.31.
Petitioners are liable for damages
Under Article 2220 of the Civil Code, moral damages may be awarded in case of
breach of contract where the breach is due to fraud or bad faith:
Art. 2220. Willfull injury to property may be a legal ground for awarding moral
damages if the court should find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract where the defendant
acted fraudulently or in bad faith. (Emphasis supplied)
Moral damages are not awarded as a matter of right but only after the party claiming
it proved that the breach was due to fraud or bad faith. As this court stated:
Moral damages are not recoverable simply because a contract has been breached.
They are recoverable only if the party from whom it is claimed acted fraudulently or in
bad faith or in wanton disregard of his contractual obligations. The breach must be
wanton, reckless, malicious or in bad faith, and oppressive or abusive. [42]
Further, the following requisites must be proven for the recovery of moral damages:
22
An award of moral damages would require certain conditions to be met, to wit:
(1) first, there must be an injury, whether physical, mental or psychological, clearly
sustained by the claimant; (2) second, there must be culpable act or omission
factually established; (3) third, the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) fourth, the award of
damages is predicated on any of the cases stated in Article 2219 of the Civil Code. [43]
Here, the injury suffered by respondent is the loss of P7,220,968.31 from his
business. This has remained unpaid since 2007. This injury undoubtedly was caused
by petitioner Arco Pulp and Paper’s act of refusing to pay its obligations.
When the obligation became due and demandable, petitioner Arco Pulp and Paper not
only issued an unfunded check but also entered into a contract with a third person in
an effort to evade its liability. This proves the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages
may be awarded in the following instances:
Article 2219. Moral damages may be recovered in the following and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not specified within this
enumeration. When a party breaches a contract, he or she goes against Article 19 of
the Civil Code, which states:
Article 19. Every person must, in the exercise of his rights and in the performance of
his duties, act with justice, give everyone his due, and observe honesty and good
faith.
Persons who have the right to enter into contractual relations must exercise that right
with honesty and good faith. Failure to do so results in an abuse of that right, which
may become the basis of an action for damages. Article 19, however, cannot be its
sole basis:
Article 19 is the general rule which governs the conduct of human relations. By itself,
it is not the basis of an actionable tort. Article 19 describes the degree of care
required so that an actionable tort may arise when it is alleged together with Article
20 or Article 21.[44]
Article 20 and 21 of the Civil Code are as follows:
Article 20. Every person who, contrary to law, wilfully or negligently causes damage
to another, shall indemnify the latter for the same.
Article 21. Any person who wilfully causes loss or injury to another in a manner that
is contrary to morals, good customs or public policy shall compensate the latter for
the damage.
To be actionable, Article 20 requires a violation of law, while Article 21 only concerns
with lawful acts that are contrary to morals, good customs, and public policy:
Article 20 concerns violations of existing law as basis for an injury. It allows recovery
should the act have been willful or negligent. Willful may refer to the intention to do
the act and the desire to achieve the outcome which is considered by the plaintiff in
tort action as injurious. Negligence may refer to a situation where the act was
consciously done but without intending the result which the plaintiff considers as
injurious.
Article 21, on the other hand, concerns injuries that may be caused by acts which are
not necessarily proscribed by law. This article requires that the act be willful, that is,
that there was an intention to do the act and a desire to achieve the outcome. In
cases under Article 21, the legal issues revolve around whether such outcome should
be considered a legal injury on the part of the plaintiff or whether the commission of
the act was done in violation of the standards of care required in Article 19. [45]
When parties act in bad faith and do not faithfully comply with their obligations under
contract, they run the risk of violating Article 1159 of the Civil Code:
Article 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
Article 2219, therefore, is not an exhaustive list of the instances where moral
damages may be recovered since it only specifies, among others, Article 21. When a
party reneges on his or her obligations arising from contracts in bad faith, the act is
23
not only contrary to morals, good customs, and public policy; it is also a violation of
Article 1159. Breaches of contract become the basis of moral damages, not only
under Article 2220, but also under Articles 19 and 20 in relation to Article 1159.
Moral damages, however, are not recoverable on the mere breach of the contract.
Article 2220 requires that the breach be done fraudulently or in bad faith. In Adriano
v. Lasala:[46]
To recover moral damages in an action for breach of contract, the breach must be
palpably wanton, reckless and malicious, in bad faith, oppressive, or abusive. Hence,
the person claiming bad faith must prove its existence by clear and convincing
evidence for the law always presumes good faith.
Bad faith does not simply connote bad judgment or negligence. It imports a
dishonest purpose or some moral obliquity and conscious doing of a wrong, a
breach of known duty through some motive or interest or ill will that
partakes of the nature of fraud. It is, therefore, a question of intention,
which can be inferred from one’s conduct and/or contemporaneous
statements.[47] (Emphasis supplied)
Since a finding of bad faith is generally premised on the intent of the doer, it requires
an examination of the circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in partial payment of its
obligation to respondent, it was presumably with the knowledge that it was being
drawn against a closed account. Worse, it attempted to shift their obligations to a
third person without the consent of respondent.
Petitioner Arco Pulp and Paper’s actions clearly show “a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of known duty through
some motive or interest or ill will that partakes of the nature of fraud.”[48] Moral
damages may, therefore, be awarded.
Exemplary damages may also be awarded. Under the Civil Code, exemplary damages
are due in the following circumstances:
Article 2232. In contracts and quasi-contracts, the court may award exemplary
damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner.
Article 2233. Exemplary damages cannot be recovered as a matter of right; the court
will decide whether or not they should be adjudicated.
Article 2234. While the amount of the exemplary damages need not be proven, the
plaintiff must show that he is entitled to moral, temperate or compensatory damages
before the court may consider the question of whether or not exemplary damages
should be awarded.
In Tankeh v. Development Bank of the Philippines,[49] we stated that:
The purpose of exemplary damages is to serve as a deterrent to future and
subsequent parties from the commission of a similar offense. The case
of People v. Rante citing People v. Dalisay held that:
Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective
damages are intended to serve as a deterrent to serious wrong doings, and
as a vindication of undue sufferings and wanton invasion of the rights of an
injured or a punishment for those guilty of outrageous conduct. These terms
are generally, but not always, used interchangeably. In common law, there is
preference in the use of exemplary damages when the award is to account for injury
to feelings and for the sense of indignity and humiliation suffered by a person as a
result of an injury that has been maliciously and wantonly inflicted, the theory being
that there should be compensation for the hurt caused by the highly reprehensible
conduct of the defendant—associated with such circumstances as willfulness,
wantonness, malice, gross negligence or recklessness, oppression, insult or fraud or
gross fraud—that intensifies the injury. The terms punitive or vindictive damages are
often used to refer to those species of damages that may be awarded against a
person to punish him for his outrageous conduct. In either case, these damages are
intended in good measure to deter the wrongdoer and others like him from similar
conduct in the future.[50] (Emphasis supplied; citations omitted)
The requisites for the award of exemplary damages are as follows:
(1) they may be imposed by way of example in addition to compensatory damages,
and only after the claimant's right to them has been established;
(2) that they cannot be recovered as a matter of right, their determination depending
upon the amount of compensatory damages that may be awarded to the
claimant; and
(3) the act must be accompanied by bad faith or done in a wanton, fraudulent,
oppressive or malevolent manner.[51]
Business owners must always be forthright in their dealings. They cannot be allowed 24
to renege on their obligations, considering that these obligations were freely entered
into by them. Exemplary damages may also be awarded in this case to serve as a
deterrent to those who use fraudulent means to evade their liabilities.
Since the award of exemplary damages is proper, attorney’s fees and cost of the suit
may also be recovered. Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded[.]
Petitioner Candida A. Santos
is solidarily liable with petitioner
corporation
Petitioners argue that the finding of solidary liability was erroneous since no evidence
was adduced to prove that the transaction was also a personal undertaking of
petitioner Santos. We disagree.
In Heirs of Fe Tan Uy v. International Exchange Bank, [52] we stated that:
Basic is the rule in corporation law that a corporation is a juridical entity which is
vested with a legal personality separate and distinct from those acting for and in its
behalf and, in general, from the people comprising it. Following this principle,
obligations incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities. A director, officer or employee of a corporation
is generally not held personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be disregarded if it is used as a
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate issues.
....
Before a director or officer of a corporation can be held personally liable for
corporate obligations, however, the following requisites must concur: (1) the
complainant must allege in the complaint that the director or officer
assented to patently unlawful acts of the corporation, or that the officer was
guilty of gross negligence or bad faith; and (2) the complainant must clearly
and convincingly prove such unlawful acts, negligence or bad faith.
While it is true that the determination of the existence of any of the circumstances
that would warrant the piercing of the veil of corporate fiction is a question of fact
which cannot be the subject of a petition for review on certiorari under Rule 45, this
Court can take cognizance of factual issues if the findings of the lower court are not
supported by the evidence on record or are based on a misapprehension of
facts.[53] (Emphasis supplied)
As a general rule, directors, officers, or employees of a corporation cannot be held
personally liable for obligations incurred by the corporation. However, this veil of
corporate fiction may be pierced if complainant is able to prove, as in this case, that
(1) the officer is guilty of negligence or bad faith, and (2) such negligence or bad faith
was clearly and convincingly proven.
Here, petitioner Santos entered into a contract with respondent in her capacity as the
President and Chief Executive Officer of Arco Pulp and Paper. She also issued the
check in partial payment of petitioner corporation’s obligations to respondent on
behalf of petitioner Arco Pulp and Paper. This is clear on the face of the check bearing
the account name, “Arco Pulp & Paper, Co., Inc.”[54] Any obligation arising from these
acts would not, ordinarily, be petitioner Santos’ personal undertaking for which she
would be solidarily liable with petitioner Arco Pulp and Paper.
We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger
Philippines:[55]
Piercing the veil of corporate fiction is an equitable doctrine developed to address
situations where the separate corporate personality of a corporation is abused or used
for wrongful purposes. Under the doctrine, the corporate existence may be
disregarded where the entity is formed or used for non-legitimate purposes,
such as to evade a just and due obligation, or to justify a wrong, to shield or
perpetrate fraud or to carry out similar or inequitable considerations, other
unjustifiable aims or intentions, in which case, the fiction will be disregarded
and the individuals composing it and the two corporations will be treated as
identical.[56] (Emphasis supplied)
According to the Court of Appeals, petitioner Santos was solidarily liable with
petitioner Arco Pulp and Paper, stating that:
In the present case, We find bad faith on the part of the [petitioners] when they
unjustifiably refused to honor their undertaking in favor of the [respondent]. After the
check in the amount of P1,487,766.68 issued by [petitioner] Santos was dishonored
for being drawn against a closed account, [petitioner] corporation denied any privity
with [respondent]. These acts prompted the [respondent] to avail of the remedies
provided by law in order to protect his rights.[57]
25
We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide
behind the corporate veil. When petitioner Arco Pulp and Paper’s obligation to
respondent became due and demandable, she not only issued an unfunded check but
also contracted with a third party in an effort to shift petitioner Arco Pulp and Paper’s
liability. She unjustifiably refused to honor petitioner corporation’s obligations to
respondent. These acts clearly amount to bad faith. In this instance, the corporate
veil may be pierced, and petitioner Santos may be held solidarily liable with petitioner
Arco Pulp and Paper.
The rate of interest due on
the obligation must be reduced
in view of Nacar v. Gallery
Frames[58]
In view, however, of the promulgation by this court of the decision dated August 13,
2013 in Nacar v. Gallery Frames,[59] the rate of interest due on the obligation must be
modified from 12% per annum to 6% per annum from the time of demand.
Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of
Appeals,[60] and we have laid down the following guidelines with regard to the rate of
legal interest:
To recapitulate and for future guidance, the guidelines laid down in the case
of Eastern Shipping Lines are accordingly modified to embody BSP-MB
Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on “Damages” of the Civil Code govern in
determining the measure of recoverable damages.
According to these guidelines, the interest due on the obligation of P7,220,968.31
should now be at 6% per annum, computed from May 5, 2007, when respondent sent
his letter of demand to petitioners. This interest shall continue to be due from the
finality of this decision until its full satisfaction.
WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709
is AFFIRMED.

II. With regard particularly to an award of interest in the concept of actual and Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered
compensatory damages, the rate of interest, as well as the accrual thereof, is solidarily to pay respondent Dan T. Lim the amount of P7,220,968.31 with interest of
imposed, as follows: 6% per annum at the time of demand until finality of judgment and its full
satisfaction, with moral damages in the amount of P50,000.00, exemplary damages
1. When the obligation is breached, and it consists in the payment of a sum in the amount of P50,000.00, and attorney’s fees in the amount of P50,000.00.
of money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached,

26
an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.

And, in addition to the above, judgments that have become final and executory prior
to July 1, 2013, shall not be disturbed and shall continue to be implemented applying
the rate of interest fixed therein.[61] (Emphasis supplied; citations omitted.)