ORIENT FREIGHT INTERNATIONAL, INC., PETITIONER, V.

KEIHIN-EVERETT
FORWARDING COMPANY, INC., RESPONDENT.

DECISION
LEONEN, J.:
Article 2176 of the Civil Code does not apply when the party's negligence occurs in the performance of an obligation.
The negligent act would give rise to a quasi-delict only when it may be the basis for an independent action were the
parties not otherwise bound by a contract.
This resolves a Petition for Review[1] on Certiorari under Rule 45 of the Rules of Court, assailing the January 21, 2010
Decision[2] and April 21, 2010 Resolution[3] of the Court of Appeals, which affirmed the Regional Trial Court February
27, 2008 Decision.[4] The Regional Trial Court found that petitioner Orient Freight International, Inc.'s (Orient Freight)
negligence caused the cancellation of Keihin-Everett Forwarding Company, Inc.'s (Keihin-Everett) contract with
Matsushita Communication Industrial Corporation of the Philippines (Matsushita).[5]
On October 16, 2001, Keihin-Everett entered into a Trucking Service Agreement with Matsushita. Under the Trucking
Service Agreement, Keihin-Everett would provide services for Matsushita's trucking requirements. These services
were subcontracted by Keihin-Everett to Orient Freight, through their own Trucking Service Agreement executed on
the same day.[6]
When the Trucking Service Agreement between Keihin-Everett and Matsushita expired on December 31, 2001,
Keihin-Everett executed an In-House Brokerage Service Agreement for Matsushita's Philippine Economic Zone
Authority export operations. Keihin-Everett continued to retain the services of Orient Freight, which sub-contracted its
work to Schmitz Transport and Brokerage Corporation.[7]
In April 2002, Matsushita called Keihin-Everett's Sales Manager, Salud Rizada, about a column in the April 19, 2002
issue of the tabloid newspaper Tempo. This news narrated the April 17, 2002 interception by Caloocan City police of
a stolen truck filled with shipment of video monitors and CCTV systems owned by Matsushita.[8]
When contacted by Keihin-Everett about this news, Orient Freight stated that the tabloid report had blown the incident
out of proportion. They claimed that the incident simply involved the breakdown and towing of the truck, which was
driven by Ricky Cudas (Cudas), with truck helper, Rubelito Aquino[9] (Aquino). The truck was promptly released and
did not miss the closing time of the vessel intended for the shipment.[10]
Keihin-Everett directed Orient Freight to investigate the matter. During its April 20, 2002 meeting with Keihin-Everett
and Matsushita, as well as in its April 22, 2002 letter addressed to Matsushita, Orient Freight reiterated that the truck
merely broke down and had to be towed.[11]
However, when the shipment arrived in Yokohama, Japan on May 8, 2002, it was discovered that 10 pallets of the
shipment's 218 cartons, worth US$34,226.14, were missing.[12]
Keihin-Everett independently investigated the incident. During its investigation, it obtained a police report from the
Caloocan City Police Station. The report stated, among others, that at around 2:00 p.m. on April 17, 2002,
somewhere in Plaza Dilao, Paco Street, Manila, Cudas told Aquino to report engine trouble to Orient Freight. After
Aquino made the phone call, he informed Orient Freight that the truck had gone missing. When the truck was
intercepted by the police along C3 Road near the corner of Dagat-Dagatan Avenue in Caloocan City, Cudas escaped
and became the subject of a manhunt.[13]
When confronted with Keihin-Everett's findings, Orient Freight wrote back on May 15, 2002 to admit that its previous
report was erroneous and that pilferage was apparently proven.[14]
In its June 6, 2002 letter, Matsushita terminated its In-House Brokerage Service Agreement with Keihin-Everett,
effective July 1, 2002. Matsushita cited loss of confidence for terminating the contract, stating that Keihin-Everett's
way of handling the April 17, 2002 incident and its nondisclosure of this incident's relevant facts "amounted to fraud
and signified an utter disregard of the rule of law."[15]
Keihin-Everett, by counsel, sent a letter dated September 16, 2002 to Orient Freight, demanding P2,500,000.00 as
indemnity for lost income. It argued that Orient Freight's mishandling of the situation caused the termination of Keihin-
Everett's contract with Matsushita.[16]
When Orient Freight refused to pay, Keihin-Everett filed a complaint dated October 24, 2002 for damages with
Branch 10, Regional Trial Court, Manila. The case was docketed as Civil Case No. 02-105018.[17] In its complaint,
Keihin-Everett alleged that Orient Freight's "misrepresentation, malice, negligence and fraud" caused the termination
of its In-House Brokerage Service Agreement with Matsushita. Keihin-Everett prayed for compensation for lost
income, with legal interest, exemplary damages, attorney's fees, litigation expenses, and the costs of the suit.[18]
In its December 20, 2002 Answer, Orient Freight claimed, among others, that its initial ruling of pilferage was in good
faith as manifested by the information from its employees and the good condition and the timely shipment of the
cargo. It also alleged that the contractual termination was a prerogative of Matsushita. Further, by its own Audited
Financial Statements on file with the Securities and Exchange Commission, Keihin-Everett derived income
substantially less than what it sued for. Along with the dismissal of the complaint, Orient Freight also asserted
counterclaims for compensatory and exemplary damages, attorney's fees, litigation expenses, and the costs of the
suit.[19]

1
The Regional Trial Court rendered its February 27, 2008 Decision,[20] in favor of Keihin-Everett. It found that Orient
Freight was "negligent in failing to investigate properly the incident and make a factual report to Keihin[-Everett] and
Matsushita," despite having enough time to properly investigate the incident.[21]
The trial court also ruled that Orient Freight's failure to exercise due diligence in disclosing the true facts of the
incident to Keihin-Everett and Matsushita caused Keihin-Everett to suffer income losses due to Matsushita's
cancellation of their contract.[22] The trial court ordered Orient Freight "to pay [Keihin-Everett] the amount of [P]
1,666,667.00 as actual damages representing net profit loss incurred" and P50,000.00 in attorney's fees.[23] However,
it denied respondent's prayer for exemplary damages, finding that petitioner did not act with gross negligence.[24]
Orient Freight appealed the Regional Trial Court Decision to the Court of Appeals. On January 21, 2010, the Court of
Appeals issued its Decision[25] affirming the trial court's decision. It ruled that Orient Freight "not only had knowledge
of the foiled hijacking of the truck carrying the . . . shipment but, more importantly, withheld [this] information from
[Keihin-Everett]."[26]
The Court of Appeals ruled that the oral and documentary evidence has established both the damage suffered by
Keihin-Everett and Orient Freight's fault or negligence. Orient Freight was negligent in not reporting and not
thoroughly investigating the April 17, 2002 incident despite Keihin-Everett's instruction to do so.[27] It further ruled that
while Keihin-Everett sought to establish its claim for lost income of P2,500,000.00 by submitting its January 2002 to
June 2002 net income statement,[28] this was refuted by Orient Freight by presenting Keihin-Everett's own audited
financial statements. The Court of Appeals held that the trial court correctly arrived at the amount of P1,666,667.00
as the award of lost income.[29]
The Court of Appeals denied Orient Freight's Motion for Reconsideration in its April 21, 2010 Resolution.[30]
On June 9, 2010, Orient Freight filed this Petition for Review on Certiorari under Rule 45 with this Court, arguing that
the Court of Appeals incorrectly found it negligent under Article 2176 of the Civil Code.[31] As there was a subsisting
Trucking Service Agreement between Orient Freight itself and Keihin-Everett, petitioner avers that there was a pre-
existing contractual relation between them, which would preclude the application of the laws on quasi-delicts.[32]
Applying the test in Far East Bank and Trust Company v. Court of Appeals,[33] petitioner claims that its failure to
inform respondent Keihin-Everett about the hijacking incident could not give rise to a quasi-delict since the Trucking
Service Agreement between the parties did not include this obligation. It argues that there being no obligation under
the Trucking Service Agreement to inform Keihin-Everett of the hijacking incident, its report to Keihin-Everett was
done in good faith and did not constitute negligence. Its representations regarding the hijacking incident were a sound
business judgment and not a negligent act.[34] Finally, it claims that the Court of Appeals incorrectly upheld the award
of damages, as the trial court had based its computation on, among others, Keihin-Everett's profit and loss statement.
[35]

On August 2, 2010, Keihin-Everett filed its Comment,[36] arguing that the petition does not contain the names of the
parties in violation of Rule 45, Section 4 of the Rules of Court. It contends that the issues and the arguments raised in
this petition are the same issues it raised in the Regional Trial Court and the Court of Appeals.[37] It claims that the
findings of fact and law of the Court of Appeals are in accord with this Court's decisions.[38]
On October 7, 2010, Orient Freight filed its Reply.[39] It notes that a cursory reading of the petition would readily show
the parties to the case. It claims that what is being contested and appealed is the application of the law on negligence
by lower courts and, while the findings of fact by the lower courts are entitled to great weight, the exceptions granted
by jurisprudence apply to this case. It reiterates that the pre-existing contractual relation between the parties should
bar the application of the principles of quasi-delict. Because of this, the terms and conditions of the contract between
the parties must be applied. It also claimed that the Regional Trial Court's computation of the award included figures
from respondent's Profit and Loss Statement, which the trial court had allegedly rejected. It rendered the computation
unreliable.[40]
This Court issued a Resolution[41] dated February 16, 2011, requiring petitioner to submit a certified true copy of the
Regional Trial Court February 27, 2008 Decision.
On March 31, 2011, petitioner filed its Compliance,[42] submitting a certified true copy of the Regional Trial Court
Decision.
The issues for this Court's resolution are:

First, whether the failure to state the names of the parties in this Petition for Review, in accordance with Rule 45,
Section 4 of the Rules of Court, is a fatal defect;

Second, whether the Court of Appeals, considering the existing contracts in this case, erred in applying Article 2176
of the Civil Code;

Third, whether Orient Freight, Inc. was negligent for failing to disclose the facts surrounding the hijacking incident on
April 17, 2002, which led to the termination of the Trucking Service Agreement between Keihin-Everett Forwarding
Co., Inc. and Matsushita Communication Industrial Corporation of the Philippines; and

2
Finally, whether the trial court erred in the computation of the awarded actual and pecuniary loss by basing it on,
among others, the Profit and Loss Statement submitted by Keihin-Everett Forwarding Co., Inc.

The petition is denied.

I
The petition does not violate Rule 45, Section 4 of the Rules of Court[43] for failing to state the names of the parties in
the body. The names of the parties are readily discernable from the caption of the petition, clearly showing the
appealing party as the petitioner and the adverse party as the respondent. The Court of Appeals had also been
erroneously impleaded in the petition. However, this Court in Aguilar v. Court of Appeals, et al.[44] ruled that
inappropriately impleading the lower court as respondent does not automatically mean the dismissal of the appeal.
This is a mere formal defect.[45]
II
Negligence may either result in culpa aquiliana or culpa contractual.[46] Culpa aquiliana is the "the wrongful or
negligent act or omission which creates a vinculum juris and gives rise to an obligation between two persons not
formally bound by any other obligation,"[47] and is governed by Article 2176 of the Civil Code:
Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to
pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties,
is called a quasi-delict and is governed by the provisions of this Chapter.

Negligence in culpa contractual, on the other hand, is "the fault or negligence incident in the performance of an
obligation which already-existed, and which increases the liability from such already existing obligation."[48] This is
governed by Articles 1170 to 1174 of the Civil Code:[49]
Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof, are liable for damages.

Article 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud
is void.

Article 1172. Responsibility arising from negligence in the performance of every kind of obligation is also
demandable, but such liability may be regulated by the courts, according to the circumstances.

Article 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the
nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When
negligence shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply.

If the law or contract does not state the diligence which is to be observed in the performance, that which is expected
of a good father of a family shall be required.

Article 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when
the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which
could not be foreseen, or which, though foreseen, were inevitable.

Actions based on contractual negligence and actions based on quasi-delicts differ in terms of conditions, defenses,
and proof. They generally cannot co-exist.[50] Once a breach of contract is proved, the defendant is presumed
negligent and must prove not being at fault. In a quasi-delict, however, the complaining party has the burden of
proving the other party's negligence.[51] In Huang v. Phil. Hoteliers, Inc.:[52]
[T]his Court finds it significant to take note of the following differences between quasi-delict (culpa aquilina) and
breach of contract (culpa contractual). In  quasi-delict, negligence is direct, substantive and independent, while in
breach of contract, negligence is merely incidental to the performance of the contractual obligation; there is a pre-
existing contract or obligation, In quasi-delict, the defense of "good father of a family" is a complete and proper
defense insofar as parents, guardians and employers are concerned, while in breach of contract, such is not a
complete and proper defense in the selection and supervision of employees. In  quasi-delict, there is no presumption
of negligence and it is incumbent upon the injured party to prove the negligence of the defendant, otherwise, the
former's complaint will be dismissed, while in breach of contract, negligence is presumed so long as it can be proved
that there was breach of the contract and the burden is on the defendant to prove that there was no negligence in the
carrying out of the terms of the contract; the rule of respondeat superior  is followed.[53] (Emphasis in the original,
citations omitted)

3
In  Government Service Insurance System v. Spouses Labung-Deang,[54] since the petitioner's obligation arose from a
contract, this Court applied the Civil Code provisions on contracts, instead of those of Article 2176:
The trial court and the Court of Appeals treated the obligation of GSIS as one springing from quasi-delict. We do not
agree. Article 2176 of the Civil Code defines quasi-delict as follows:
"Whoever by act or omission causes damages to another, there being fault or negligence, is obliged to pay for the
damage done. Such fault or negligence,  if there is no pre-existing contractual relation between the parties, is called
a  quasi-delict and is governed by the provisions of this Chapter (italics ours)."
Under the facts, there was a pre-existing contract between the parties. GSIS and the spouses Deang had a loan
agreement secured by a real estate mortgage. The duty to return the owner's duplicate copy of title arose as soon as
the mortgage was released. GSIS insists that it was under no obligation to return the owner's duplicate copy of the
title immediately. This insistence is not warranted. Negligence is obvious as the owners' duplicate copy could not be
returned to the owners. Thus, the more applicable provisions of the Civil Code are:

"Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those
who in any manner contravene the tenor thereof are liable for damages."

"Article 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable
shall be those that are the natural and probable consequences of the breach of the obligation, and which the parties
have foreseen or could have reasonably foreseen at the time the obligation was constituted . .."

Since good faith is presumed and bad faith is a matter of fact which should be proved, we shall treat GSIS as a party
who defaulted in its obligation to return the owners' duplicate copy of the title. As an obligor in good faith, GSIS is
liable for all the "natural and probable consequences of the breach of the obligation." The inability of the spouses
Deang to secure another loan and the damages they suffered thereby has its roots in the failure of the GSIS to return
the owners' duplicate copy of the title.[55] (Citations omitted)
Similarly, in Syquia v. Court of Appeals,[56] this Court ruled that private respondent would have been held liable for a
breach of its contract with the petitioners, and not for quasi-delict, had it been found negligent:
With respect to herein petitioners' averment that private respondent has committed culpa aquiliana, the Court of
Appeals found no negligent act on the part of private respondent to justify an award of damages against it. Although a
pre-existing contractual relation between the parties does not preclude the existence of a culpa aquiliana, We find no
reason to disregard the respondent's Court finding that there was no negligence.
....

In this case, it has been established that the Syquias and the Manila Memorial Park Cemetery, Inc., entered into a
contract entitled "Deed of Sale and Certificate of Perpetual Care" on August 27, 1969. That agreement governed the
relations of the parties and defined their respective rights and obligations. Hence, had there been actual negligence
on the part of the Manila Memorial Park Cemetery, Inc., it would be held liable not for a  quasi-delict or  culpa
aquiliana, but for culpa contractual as provided by Article 1170 of the Civil Code[.][57]
However, there are instances when Article 2176 may apply even when there is a pre-existing contractual relation. A
party may still commit a tort or quasi-delict against another, despite the existence of a contract between them.[58]
In Cangco v. Manila Railroad,[59] this Court explained why a party may be held liable for either a breach of contract or
an extra-contractual obligation for a negligent act:
It is evident, therefore, that in its decision in the Yamada case, the court treated plaintiff's action as though founded in
tort rather than as based upon the breach of the contract of carriage, and an examination of the pleadings and of the
briefs shows that the questions of law were in fact discussed upon this theory. Viewed from the standpoint of the
defendant the practical result must have been the same in any event. The proof disclosed beyond doubt that the
defendant's servant was grossly negligent and that his negligence was the proximate cause of plaintiff's injury. It also
affirmatively appeared that defendant had been guilty of negligence in its failure to exercise proper discretion in the
direction of the servant. Defendant was, therefore, liable for the injury suffered by plaintiff, whether the breach of the
duty were to be regarded as constituting culpa aquilina or culpa contractual. As Manresa points out . . . whether
negligence occurs as an incident in the course of the performance of a contractual undertaking or is itself (he source
of an extra-contractual obligation, its essential characteristics are identical. There is always an act or omission
productive of damage due to carelessness or inattention on the part of the defendant. Consequently, when the court
holds that a defendant is liable in damages for having failed to exercise due care, either directly, or in failing to
exercise proper care in the selection and direction of his servants, the practical result is identical in either case . . ,
The true explanation of such cases is to be found by directing the attention to the relative spheres of contractual and
extra-contractual obligations. The field of non-contractual obligation is much more broader [sic] than that of
contractual obligation, comprising, as it does, the whole extent of juridical human relations. These two fields,
figuratively speaking, concentric; that is to say, the mere fact that a person is bound to another by contract does not
relieve him from extra-contractual liability to such person. When such a contractual relation exists the obligor may

4
break the contract under such conditions that the same act which constitutes a breach of the contract would have
constituted the source of an extra-contractual obligation had no contract existed between the parties.[60] (Emphasis
supplied, citation omitted)
If a contracting party's act that breaches the contract would have given rise to an extra-contractual liability had there
been no contract, the contract would be deemed breached by a tort,[61] and the party may be held liable under Article
2176 and its related provisions.[62]
In  Singson v. Bank of the Philippine Islands,[63] this Court upheld the petitioners' claim for damages based on a quasi-
delict, despite the parties' relationship being contractual in nature:
After appropriate proceedings, the Court of First Instance of Manila rendered judgment dismissing the complaint upon
the ground that plaintiffs cannot recover from the defendants upon the basis of a quasi-delict, because the relation
between the parties is contractual in nature; because this case does not fall under Article 2219 of our Civil Code,
upon which plaintiffs rely; and because plaintiffs have not established the amount of damages allegedly sustained by
them.

The lower court held that plaintiffs' claim for damages cannot be based upon a tort or quasi-delict, their relation with
the defendants being contractual in nature. We have repeatedly held, however, that the existence of a contract
between the parties does not bar the commission of a tort by the one against the order and the consequent recovery
of damages therefor. Indeed, this view has been in effect, reiterated in a comparatively recent case. Thus, in Air
France vs. Carrascoso, involving an airplane passenger who, despite his first-class ticket, had been illegally ousted
from his first-class accommodation, and compelled to take a seat in the tourist compartment, was held entitled to
recover damages from the air-carrier, upon the ground of tort on the latter's part, for, although the relation between a
passenger and the carrier is "contractual both in origin and nature . . . the act that breaks the contract may also be a
tort".[64] (Citations omitted)
However, if the act complained of would not give rise to a cause of action for a quasi-delict independent of the
contract, then the provisions on quasi-delict or tort would be inapplicable.[65]
In Philippine School of Business Administration v. Court of Appeals,[66] petitioner's obligation to maintain peace and
order on campus was based on a contract with its students. Without this contract, the obligation does not exist.
Therefore, the private respondents' cause of action must be founded on the breach of contract and cannot be based
on Article 2176:
Because the circumstances of the present case evince a contractual relation between the PSBA and Carlitos
Bautista, the rules on quasi-delict do not really govern. A perusal of Article 2176 shows that obligations arising from
quasi-delicts or tort, also known as extra-contractual obligations, arise only between parties not otherwise bound by
contract, whether express or implied. However, this impression has not prevented this Court from determining the
existence of a tort even when there obtains a contract. In Air France vs. Carroscoso (124 Phil. 722), the private
respondent was awarded damages for his unwarranted expulsion from a first-class seat aboard the petitioner airline.
It is noted, however, that the Court referred to the petitioner-airline's liability as one arising from tort, not one arising
from a contract of carriage. In effect, Air France is authority for the view that liability from tort may exist even if there is
a contract, for the act that breaks the contract may be also a tort. (Austro-America S.S. Co. vs. Thomas, 248 Fed.
231).
This view was not all that revolutionary, for even as early as 1918, this Court was already of a similar mind.
In Cangco vs. Manila Railroad (38 Phil. 780), Mr. Justice Fisher elucidated thus:
"The field of non-contractual obligation is much more broader [sic] than that of contractual obligation, comprising, as it
does, the whole extent of juridical human relations. These two fields, figuratively speaking, concentric; that is to say,
the mere fact that a person is bound to another by contract does not relieve him from extra-contractual liability to such
person. When such a contractual relation exists the obligor may break the contract under such conditions that the
same act which constitutes a breach of the contract would have constituted the source of an extra-contractual
obligation had no contract existed between the parties."
Immediately what comes to mind is the chapter of the Civil Code on Human Relations, particularly Article 21, which
provides:

"Any person who wilfully causes loss or injury to another in a manner  that is contrary to morals, good customs or
public policy shall compensate the latter for the damage." (Italics supplied)
Air France penalized the racist policy of the airline which emboldened the petitioner's employee to forcibly oust the
private respondent to cater to the comfort of a white man who allegedly "had a better right to the seat." In Austro-
American, supra, the public embarrassment caused to the passenger was the justification for the Circuit Court of
Appeals, (Second Circuit), to award damages to the latter. From the foregoing, it can be concluded that should the
act which breaches a contract be done in bad faith and be violative of Article 21, then there is a cause to view the act
as constituting a quasi-delict.
In the circumstances obtaining in the case at bar, however, there is, as yet, no finding that the contract between the
school and Bautista had been breached thru the former's negligence in providing proper security measures. This
would be for the trial court to determine. And, even if there be a finding of negligence, the same could give rise

5
generally to a breach of contractual obligation only. Using the test of Cangco, supra, the negligence of the school
would not be relevant absent a contract. In fact, that negligence becomes material only because of the contractual
relation between PSBA and Bautista. In other words, a contractual relation is a condition sine qua non to the school's
liability. The negligence of the school cannot exist independently on the contract, unless the negligence occurs under
the circumstances set out in Article 21 of the Civil Code.[67] (Citations omitted)
In situations where the contractual relation is indispensable to hold a party liable, there must be a finding that the act
or omission complained of was done in bad faith and in violation of Article 21 of the Civil Code to give rise to an
action based on tort.[68]
In Far East Bank and Trust Company v. Court of Appeals,[69] as the party's claim for damages was based on a
contractual relationship, the provisions on quasi-delict generally did not apply. In this case, this Court did not award
moral damages to the private respondent because the applicable Civil Code provision was Article 2220,[70] not Article
21, and neither fraud nor bad faith was proved:
We are not unaware of the previous rulings of this Court, such as in American Express International, Inc. vs.
Intermediate Appellate Court  (167 SCRA 209) and Bank of [the] Philippine Islands vs. Intermediate Appellate
Court (206 SCRA 408), sanctioning the application of Article 21, in relation to Article 2217 and Article 2219 of the Civil
Code to a contractual breach similar to the case at bench. Article 21 states:
"Art. 21. Any person who willfully 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."

Article 21 of the Code, it should be observed, contemplates a conscious act to cause harm. Thus, even if we are to
assume that the provision could properly relate to a breach of contract, its application can be warranted only when
the defendant's disregard of his contractual obligation is so deliberate as to approximate a degree of misconduct
certainly no less worse [sic] than fraud or bad faith. Most importantly, Article 21 is a mere declaration of a general
principle in human relations that clearly must, in any case, give way to the specific provision of Article 2220 of the
Civil Code authorizing the grant of moral damages in culpa contractual solely when the breach is due to fraud or bad
faith.
....

The Court has not in the process overlooked another rule that a quasi-delict can be the cause for breaching a
contract that might thereby permit the application of applicable principles on tort even where there is a pre-existing
contract between the plaintiff and the defendant (Phil. Airlines vs. Court of Appeals, 106 SCRA 143; Singson vs.
Bank of the Phil. Islands, 23 SCRA 1117; and Air France vs. Carrascoso, 18 SCRA 155). This doctrine, unfortunately,
cannot improve private respondents' case for it can aptly govern only where the act or omission complained of would
constitute an actionable tort independently of the contract. The test (whether a quasi-delict can be deemed to underlie
the breach of a contract) can be stated thusly: Where, without a pre-existing contract between two parties, an act or
omission can nonetheless amount to an actionable tort by itself, the fact that the parties are contractually bound is no
bar to the application of quasi-delict provisions to the case. Here, private respondents' damage claim is predicated
solely on their contractual relationship; without such agreement, the act or omission complained of cannot by itself be
held to stand as a separate cause of action or as an independent actionable tort.[71] (Citations omitted)
Here, petitioner denies that it was obliged to disclose the facts regarding the hijacking incident since this was not
among the provisions of its Trucking Service Agreement with respondent. There being no contractual obligation,
respondent had no cause of action against petitioner:

Applying said test, assuming for the sake of argument that petitioner indeed failed to inform respondent of the
incident where the truck was later found at the Caloocan Police station, would an independent action prosper based
on such omission? Assuming that there is no contractual relation between the parties herein, would petitioner's
omission of not informing respondent that the truck was impounded gives [sic] rise to a quasi-delict? Obviously not,
because the obligation, if there is any in the contract, that is to inform plaintiff of said incident, could have been
spelled out in the very contract itself duly executed by the parties herein specifically in the Trucking Service
Agreement. It is a fact that no such obligation or provision existed in the contract. Absent said terms and obligations,
applying the principles on tort as a cause for breaching a contract would therefore miserably fail as the lower Court
erroneously did in this case.[72]
The obligation to report what happened during the hijacking incident, admittedly, does not appear on the plain text of
the Trucking Service Agreement. Petitioner argues that it is nowhere in the agreement. Respondent does not dispute
this claim. Neither the Regional Trial Court nor the Court of Appeals relied on the provisions of the Trucking Service
Agreement to arrive at their respective conclusions. Breach of the Trucking Service Agreement was neither alleged
nor proved.

While petitioner and respondent were contractually bound under the Trucking Service Agreement and the events at
the crux of this controversy occurred during the performance of this contract, it is apparent that the duty to investigate

6
and report arose subsequent to the Trucking Service Agreement. When respondent discovered the news report on
the hijacking incident, it contacted petitioner, requesting information on the incident.[73] Respondent then requested
petitioner to investigate and report on the veracity of the news report. Pursuant to respondent's request, petitioner
met with respondent and Matsushita on April 20, 2002 and issued a letter dated April 22, 2002, addressed to
Matsushita.[74] Respondent's claim was based on petitioner's negligent conduct when it was required to investigate
and report on the incident:
The defendant claimed that it should not be held liable for damages suffered by the plaintiff considering that the
proximate cause of the damage done to plaintiff is the negligence by employees of Schmitz trucking. This argument is
untenable because the defendant is being sued in this case not for the negligence of the employees of Schmitz
trucking but based on defendant's own negligence in failing to disclose the true facts of the hijacking incident to
plaintiff Keihin and Matsushita.[75]
Both the Regional Trial Court and Court of Appeals erred in finding petitioner's negligence of its obligation to report to
be an action based on a quasi-delict Petitioner's negligence did not create the vinculum juris or legal relationship with
the respondent, which would have otherwise given rise to a quasi-delict. Petitioner's duty to respondent existed prior
to its negligent act. When respondent contacted petitioner regarding the news report and asked it to investigate the
incident, petitioner's obligation was created. Thereafter, petitioner was alleged to have performed its obligation
negligently, causing damage to respondent.
The doctrine "the act that breaks the contract may also be a tort," on which the lower courts relied, is inapplicable
here. Petitioner's negligence, arising as it does from its performance of its obligation to respondent, is dependent on
this obligation. Neither do the facts show that Article 21 of the Civil Code applies, there being no finding that
petitioner's act was a conscious one to cause harm, or be of such a degree as to approximate fraud or bad faith:

To be sure, there was inaction on the part of the defendant which caused damage to the plaintiff, but there is nothing
to show that the defendant intended to conceal the truth or to avoid liability. When the facts became apparent to
defendant, the latter readily apologized to Keihin and Matsushita for their mistake.[76]
Consequently, Articles 1170, 1172, and 1173 of the Civil Code on negligence in the performance of an obligation
should apply.

III
Under Article 1170 of the Civil Code, liability for damages arises when those in the performance of their obligations
are guilty of negligence, among others. Negligence here has been defined as "the failure to observe that degree of
care, precaution and vigilance that the circumstances just demand, whereby that other person suffers injury."[77] If the
law or contract does not provide for the degree of diligence to be exercised, then the required diligence is that of a
good father of a family.[78] The test to determine a party's negligence is if the party used "the reasonable care and
caution which an ordinarily prudent person would have used in the same situation"[79] when it performed the negligent
act. If the party did not exercise reasonable care and caution, then it is guilty of negligence.
In this case, both the Regional Trial Court and the Court of Appeals found that petitioner was negligent in failing to
adequately report the April 17, 2002 hijacking incident to respondent and not conducting a thorough investigation
despite being directed to do so. The trial court's factual findings, when affirmed by the Court of Appeals, are binding
on this Court and are generally conclusive.[80]
The Regional Trial Court found that petitioner's conduct showed its negligent handling of the investigation and its
failure to timely disclose the facts of the incident to respondent and Matsushita:

[Orient Freight] was clearly negligent in failing to investigate properly the incident and make a factual report to Keihin
and Matsushita. [Orient Freight] claimed that it was pressed for time considering that they were given only about one
hour and a half to investigate the incident before making the initial report. They claimed that their employees had no
reason to suspect that the robbery occurred considering that the seal of the van remained intact. Moreover, the
priority they had at that time was to load the cargo to the carrying vessel on time for shipment on April 19, 200[2].
They claimed that they made arrangement with the Caloocan Police Station for the release of the truck and the cargo
and they were able to do that and the objective was achieved. This may be true but the Court thinks that [Orient
Freight] had enough time to investigate properly the incident. The hijacking incident happened on April 17, 200[2] and
the tabloid Tempo published the hijacking incident only on April 19, 200[2]. This means that [Orient Freight] had about
two (2) days to conduct a diligent inquiry about the incident. It took them until May 15, 200[2] to discover that a
robbery indeed occurred resulting in the loss of ten pallets or 218 cartons valued at US $34,226.14. They even
denied that there was no police report only to find out that on May 15, 200[2] that there was such a report. It was
[Orient Freight] 's duty to inquire from the Caloocan Police Station and to find out if they issued a police report, Yet, it
was plaintiff Keihin which furnished them a copy of the police report. The failure of [Orient Freight] to investigate
properly the incident and make a timely report constitutes negligence. Evidently, [Orient Freight] failed to exercise
due diligence in disclosing the true facts of the incident to plaintiff Keihin and Matsushita. As a result, plaintiff Keihin
suffered income losses by reason of Matsushita's cancellation of their contract which primarily was caused by the
negligence of [Orient Freight].[81]

7
The Court of Appeals affirmed the trial court's finding of negligence:

From the foregoing account, it is evident that [Orient Freight] not only had knowledge of the foiled hijacking of the
truck carrying the subject shipment but, more importantly, withheld said information from [Keihin-Everett], Confronted
with the April 19, 2002 tabloid account thereof, [Orient Freight] appears to have further compounded its omission by
misleading [Keihin-Everett] and Matsu[s]hita into believing that the subject incident was irresponsibly reported and
merely involved a stalled vehicle which was towed to avoid obstruction of traffic. Given that the police report
subsequently obtained by [Keihin-Everett] was also dated April 17, 2002, [Orient Freight's insistence on its good faith
on the strength of the information it gathered from its employees as well as the timely shipment and supposed good
condition of the cargo clearly deserve scant consideration.[82]
Petitioner's argument that its acts were a "sound business judgment which the court cannot supplant or question nor
can it declare as a negligent act"[83] lacks merit. The Regional Trial Court found that the circumstances should have
alerted petitioner to investigate the incident in a more circumspect and careful manner:
On this score, [Orient Freight] itself presented the circumstances which should have alerted [Orient Freight] that there
was more to the incident than simply a case of mechanical breakdown or towing of the container truck to the police
station. [Orient Freight] pointed to specific facts that would naturally arouse suspicion that something was wrong
when the container was found in the premises of the Caloocan Police Station and that driver Ricky Cudas was
nowhere to be found. The police does [sic] not ordinarily impound a motor vehicle if the problem is merely a traffic
violation. More important, driver Ricky Cudas disappeared and was reported missing. When the Caloocan Police
chanced upon the container van, it was found straying at C-3 which is outside its usual route. All these circumstances
should have been enough for [Orient Freight] to inquire deeper on the real circumstances of the incident.

....

[Orient Freight] talked to Rubelito Aquino and apparently failed to listen closely to the statement given by their truck
helper to the Caloocan Police. The truck helper recounted how the engine of the truck stalled and the driver was able
to start the engine but thereafter, he was nowhere to be seen. By this circumstance alone, it should have become
apparent to [Orient Freight] that the truck driver gypped the truck helper into calling the company and had a different
intention which was to run away with the container van. It readily shows that Ricky Cudas intended to hijack the
vehicle by feigning or giving the false appearance of an engine breakdown. Yet, [Orient Freight] dismissed the
incident as a simple case of a unit breakdown and towing of vehicle allegedly due to traffic violation. Under the
circumstances, therefore, the defendant failed to exercise the degree of care, precaution and vigilance which the
situation demands.[84]
Despite the circumstances which would have cautioned petitioner to act with care while investigating and reporting
the hijacking incident, petitioner failed to do so. Petitioner is responsible for the damages that respondent incurred
due to the former's negligent performance of its obligation.

IV
Articles 2200 and 2201 of the Civil Code provide for the liability for damages in contractual obligations:

Article 2200. Indemnification for damages shall comprehend not only the value of the loss suffered, but also that of
the profits which the obligee failed to obtain.

Article 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable
shall be those that are the natural and probable consequences of the breach of the obligation, and which the parties
have foreseen or could have reasonably foreseen at the time the obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be
reasonably attributed to the non-performance of the obligation.

In Central Bank of the Philippines v. Court of Appeals,[85] this Court explained the principles underlying Articles 2200
and 2201:
Construing these provisions, the following is what this Court held in Cerrano vs. Tan Chuco, 38 Phil. 392:
"... Article 1106 (now 2200) of the Civil Code establishes the rule that prospective profits may be recovered as
damages, while article 1107 (now 2201) of the same Code provides that the damages recoverable for the breach of
obligations not originating in fraud (dolo) are those which were or might have been foreseen at the time the contract
was entered into. Applying these principles to the facts in this case, we think that it is unquestionable that defendant
must be deemed to have foreseen at the time he made the contract that in the event of his failure to perform it, the
plaintiff would be damaged by the loss of the profit he might reasonably have expected to derive from its use.

8
"When the existence of a loss is established, absolute certainty as to its amount is not required. The benefit to be
derived from a contract which one of the parties has absolutely failed to perform is of necessity to some extent, a
matter of speculation, but the injured party is not to be denied all remedy for that reason alone. He must produce the
best evidence of which his case is susceptible and if that evidence warrants the inference that he has been damaged
by the loss of profits which he might with reasonable certainty have anticipated but for the defendant's wrongful act,
he is entitled to recover. As stated in Sedgwick on Damages (Ninth Ed., par. 177):

'The general rule is, then, that a plaintiff may recover compensation for any gain which he can make it appear with
reasonable certainty the defendant's wrongful act prevented him from acquiring, . . .' (See also Algarra vs. Sandejas,
27 Phil. Rep., 284, 289; Hicks vs. Manila Hotel Co., 28 Phil, Rep., 325.)" (At pp. 398-399.)[86]
The lower courts established that petitioner's negligence resulted in Matsushita's cancellation of its contract with
respondent. The Regional Trial Court found:

In the letter dated June 6, 2002, Matsushita pre-terminated its In-House Brokerage Service Agreement with plaintiff
Keihin for violation of the terms of said contract. Its President, KenGo Toda, stated that because of the incident that
happened on April 17, 2002 involving properties which the plaintiff failed to inform them, Matsushita has lost
confidence in plaintiff's capability to handle its brokerage and forwarding requirements. There was clearly a breach of
trust as manifested by plaintiff's failure to disclose facts when it had the duty to reveal them and it constitutes fraud.
Moreover, the negligence of plaintiff personnel cannot be tolerated as Matsushita is bound to protect the integrity of
the company.[87]
It could be reasonably foreseen that the failure to disclose the true facts of an incident, especially when it turned out
that a crime might have been committed, would lead to a loss of trust and confidence in the party which was bound to
disclose these facts. Petitioner caused the loss of trust and confidence when it misled respondent and Matsushita into
believing that the incident had been irresponsibly reported and merely involved a stalled truck.[88] Thus, petitioner is
liable to respondent for the loss of profit sustained due to Matsushita's termination of the In-House Brokerage Service
Agreement.
As regards the amount of damages, this Court cannot rule on whether the Regional Trial Court erred in using the
Profit and Loss Statement submitted by respondent for its computation. The amount of the award of damages is a
factual matter generally not reviewable in a Rule 45 petition,[89] The damages awarded by the Regional Trial Court, as
affirmed by the Court of Appeals, were supported by documentary evidence such as respondent's audited financial
statement. The trial court clearly explained how it reduced the respondent's claimed loss of profit and arrived at the
damages to be awarded:
The difference between the total gross revenue of plaintiff for 2002 as reported in the monthly profit and loss
statement of [P]14,801,744.00 and the audited profit and loss statement of the amount of [P]10,434,144.00
represents 1/3 of the total gross revenues of the plaintiff for the six months period. Accordingly, the net profit loss of
[P]2.5 million pesos as reported in the monthly profit and loss statement of the plaintiff should be reduced by 1/3 or
the amount of [P]833,333.33. Therefore, the net profit loss of the plaintiff for the remaining period of six months
should only be the amount of [P] 1,666,667.70 and not [P]2.5 million as claimed.[90]
Petitioner has not sufficiently shown why the computation made by the trial court should be disturbed.

WHEREFORE, the petition is DENIED. The January 21, 2010 Decision and April 21, 2010 Resolution of the Court of
Appeals in CA-G.R. CV No. 91889 are AFFIRMED.
SO ORDERED.

9
G.R. No. 167519               January 14, 2015

THE WELLEX GROUP, INC., Petitioner,

vs.
U-LAND AIRLINES, CO., LTD., Respondent.

DECISION

LEONEN, J.:

This is a Petition  for Review on Certiorari under Rule 45 of the Rules of Court. The Wellex Group,
1

Inc. (Wellex) prays that the Decision  dated July 30, 2004 of the Court of Appeals in CA-GR. CV No.
2

74850 be reversed and set aside. 3

The Court of Appeals affirmed the Decision  of the Regional Trial Court, Branch 62 of Makati City in
4

Civil Case No. 99-1407. The Regional Trial Court rendered judgment in favor of U-Land Airlines,
Co., Ltd. (ULand) and ordered the rescission of the Memorandum of Agreement  between Wellex
5

and U-Land. 6

Wellex is a corporation established under Philippine law and it maintains airline operations in the
Philippines.  It owns shares of stock in several corporations including Air Philippines International
7

Corporation (APIC), Philippine Estates Corporation (PEC), and Express Savings Bank
(ESB).  Wellex alleges that it owns all shares of stock of Air Philippines Corporation (APC).
8 9

U-Land Airlines Co. Ltd. (U-Land) "is a corporation duly organized and existing under the laws of
Taiwan, registered to do business . . . in the Philippines."  It is engaged in the business of air
10

transportation in Taiwan and in other Asian countries. 11

On May 16, 1998, Wellex and U-Land entered into a Memorandum of Agreement  (First 12

Memorandum of Agreement) to expand their respective airline operations in Asia. 13

Terms of the First Memorandum of Agreement

The preambular clauses of the First Memorandum of Agreement state:

WHEREAS, U-LAND is engaged in the business of airline transportation in Taiwan, Philippines

and/or in other countries in the Asian region, and desires to expand its operation and increase its
market share by, among others, pursuing a long-term involvement in the growing Philippine airline
industry;

WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its
majority-owned subsidiary Air Philippines International Corporation and the latter’s subsidiary, Air
Philippines Corporation, and in like manner also desires to expand its operation in the Asian regional
markets, a Memorandum of Agreement on ______, a certified copy of which is attached hereto as
Annex "A" and is hereby made an integral part hereof, which sets forth, among others, the basis for
WELLEX’s present ownership of shares in Air Philippines International Corporation. WHEREAS, the
parties recognize the opportunity to develop a long-term profitable relationship by combining such of
their respective resources in an expanded airline operation as well as in property development and
in other allied business activities in the Philippines, and desire to set forth herein the basic premises
and their understanding with respect to their joint cooperation and undertakings. 14

10
In the First Memorandum of Agreement, Wellex and U-Land agreed to develop a long-term business
relationship through the creation of joint interest in airline operations and property development
projects in the Philippines.  This long-term business relationship would be implemented through the
15

following transactions, stated in Section 1 of the First Memorandum of Agreement:

(a) U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES
INTERNATIONAL CORPORATION ("APIC") equivalent to at least 35% of the outstanding
capital stock of APIC, but in any case, not less than 1,050,000,000 shares . . . [;]

(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE ESTATES
CORPORATION ("PEC") equivalent to at least 35% of the outstanding capital stock of PEC,
but in any case, not less than 490,000,000 shares . . . [;]

(c) U-LAND shall enter into a joint development agreement with PEC . . . [; and]

(d) U-LAND shall be given the option to acquire from WELLEX shares of stock of EXPRESS
SAVINGS BANK ("ESB") up to 40% of the outstanding capital stock of ESB . . . under terms
to be mutually agreed. 16

I. Acquisition of APIC and PEC shares

The First Memorandum of Agreement stated that within 40 days from its execution date, Wellex and
U-Land would execute a share purchase agreement covering U-Land’s acquisition of the shares of
stock of both APIC (APIC shares) and PEC (PEC shares).  In this share purchase agreement, U-
17

Land would purchase from Wellex its APIC shares and PEC shares. 18

Wellex and U-Land agreed to an initial purchase price of P0.30 per share of APIC and 0.65 per
share of PEC. However, they likewise agreed that the final price of the shares of stock would be
reflected in the actual share purchase agreement. 19

Both parties agreed that the purchase price of APIC shares and PEC shares would be paid upon the
execution of the share purchase agreement and Wellex’s delivery of the stock certificates covering
the shares of stock. The transfer of APIC shares and PEC shares to U-Land was conditioned on the
full remittance of the final purchase price as reflected in the share purchase agreement. Further, the
transfer was conditioned on the approval of the Securities and Exchange Commission of the
issuance of the shares of stock and the approval by the Taiwanese government of U-Land’s
acquisition of these shares of stock.
20

Thus, Section 2 of the First Memorandum of Agreement reads:

2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless extended
by mutual agreement), U-LAND and WELLEX shall execute a Share Purchase Agreement ("SHPA")
covering the acquisition by U-LAND of the APIC Shares and PEC Shares (collectively, the "Subject
Shares"). Without prejudice to any subsequent agreement between the parties, the purchase price
for the APIC Shares to be reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per share
and that for the PEC Shares at SIXTY FIVE CENTAVOS (P0.65) per share.

The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full upon
execution of the SHPA against delivery of the Subject Shares. The parties may agree on such other
terms and conditions governing the acquisition of the Subject Shares to be provided in a separate
instrument.

11
The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the purchase price
reflected in the SHPA has been fully paid; (ii) the Philippine Securities & Exchange Commission
(SEC) shall have approved the issuance of the Subject Shares; and (iii) any required approval by the
Taiwanese government of the acquisition by U-LAND of the Subject Shares shall likewise have been
obtained.21

II. Operation and management of APIC/PEC/APC

U-Land was "entitled to a proportionate representation in the Board of Directors of APIC and PEC in
accordance with Philippine law."  Operational control of APIC and APC would be exercised jointly by
22

Wellex and U-Land "on the basis of mutual agreement and consultations."  The parties intended that
23

U-Land would gain primary control and responsibility for the international operations of APC.  Wellex
24

manifested that APC is a subsidiary of APIC in the second preambular clause of the First
Memorandum of Agreement. 25

Section 3 of the First Memorandum of Agreement reads:

3. Operation/Management of APIC/APC. - U-LAND shall be entitled to a proportionate

representation in the Board of Directors of APIC and PEC in accordance with Philippine law. For this
purpose, WELLEX shall cause the resignation of its nominated Directors in APIC and PEC to
accommodate U-LAND’s pro rata number of Directors. Subject to applicable Philippine law and
regulations, operational control of APIC and Air Philippines Corporation ("APC") shall be lodged
jointly to WELLEX and U-LAND on the basis of mutual agreement and consultations. Further, U-
LAND may second technical and other consultants into APIC and/or APC with the view to increasing
service, productivity and efficiency, identifying and implementing profit-service opportunities,
developing technical capability and resources, and installing adequate safety systems and
procedures. In addition, U-LAND shall arrange for the lease by APC of at least three (3) aircrafts
owned by ULAND under such terms as the parties shall mutually agree upon. It is the intent of the
parties that U-LAND shall have primary control and responsibility for APC’s international operations. 26

III. Entering into and funding a joint development agreement

Wellex and U-Land also agreed to enter into a joint development agreement simultaneous with the
execution of the share purchase agreement. The joint development agreement shall cover housing
and other real estate development projects. 27

U-Land agreed to remit the sum ofUS$3 million not later than May 22, 1998. This sum was to serve
as initial funding for the development projects that Wellex and U-Land were to undertake pursuant to
the joint development agreement. In exchange for the US$3 million, Wellex would deliver stock
certificates covering 57,000,000 PEC shares to U-Land. 28

The execution of a joint development agreement was also conditioned on the execution of a share
purchase agreement. 29

Section 4 of the First Memorandum of Agreement reads:

4. Joint Development Agreement with PEC. – Simultaneous with the execution of the SHPA, U-
LAND and PEC shall execute a joint development agreement ("JDA") to pursue property
development projects in the Philippines. The JDA shall cover specific housing and other real estate
development projects as the parties shall agree. All profits derived from the projects covered by the
JDA shall be shared equally between ULAND and PEC. U-LAND shall, not later than May 22, 1998,

12
remit the sum of US$3.0 million as initial funding for the aforesaid development projects against
delivery by WELLEX of 57,000,000 shares of PEC as security for said amount in accordance with
Section 9 below.30

In case of conflict between the provisions of the First Memorandum of Agreement and the provisions
of the share purchase agreement or its implementing agreements, the terms of the First
Memorandum of Agreement would prevail, unless the parties specifically stated otherwise or the
context of any agreement between the parties would reveal a different intent.  Thus, in Section 6 of
31

the First Memorandum of Agreement:

6. Primacy of Agreement. – It is agreed that in case of conflict between the provisions of this
Agreement and those of the SHPA and the implementing agreements of the SHPA, the provisions of
this Agreement shall prevail, unless the parties specifically state otherwise, or the context clearly
reveal a contrary intent.
32

Finally, Wellex and U-Land agreed that if they were unable to agree on the terms of the share
purchase agreement and the joint development agreement within 40 days from signing, then the
First Memorandum of Agreement would cease to be effective. 33

In case no agreements were executed, the parties would be released from their respective
undertakings, except that Wellex would be required to refund within three (3) days the US$3 million
given as initial funding by U-Land for the development projects. If Wellex was unable to refund the
US$3 million to U-Land, U-Land would have the right to recover on the 57,000,000 PEC shares that
would be delivered to it.  Section 9 of the First Memorandum of Agreement reads:
34

9. Validity. - In the event the parties are unable to agree on the terms of the SHPA and/or the JDA
within forty (40) days from date hereof (or such period as the parties shall mutually agree), this
Memorandum of Agreement shall cease to be effective and the parties released from their
respective undertakings herein, except that WELLEX shall refund the US$3.0 million provided under
Section 4 within three (3) days therefrom, otherwise U-LAND shall have the right to recover on the
57,000,000 PEC shares delivered to U-LAND under Section 4. 35

The First Memorandum of Agreement was signed by Wellex Chairman and President William T.
Gatchalian (Mr. Gatchalian) and U-Land Chairman Ker Gee Wang (Mr. Wang) on May 16, 1998. 36

Annex "A" or the Second Memorandum of Agreement

Attached and made an integral part of the First Memorandum of Agreement was Annex "A," as
stated in the second preambular clause. It is a document denoted as a "Memorandum of
Agreement" entered into by Wellex, APIC, and APC. 37

The Second Memorandum of Agreement states:

This Memorandum of Agreement, made and executed this ___th day of ______ at Makati City, by
and between:

THE WELLEX GROUP, INC., a corporation duly organized and existing under the laws of the
Philippines, with offices at 22F Citibank Tower, 8741 Paseo de Roxas, Makati City (hereinafter
referred to as "TWGI"),

13
AIR PHILIPPINES INTERNATIONAL CORPORATION (formerly FORUM PACIFIC, INC.), likewise a
corporation duly organized and existing under the laws of the Philippines, with offices at 8F Rufino
Towers, Ayala Avenue, Makati City (hereinafter referred to as "APIC"),

- and –

AIR PHILIPPINES CORPORATION, corporation duly organized and existing under the laws of the
Philippines, with offices at Multinational Building, Ayala Avenue, Makati City (hereinafter referred to
as "APC").

W I T N E S S E T H: That -

WHEREAS, TWGI is the registered and beneficial owner, or has otherwise acquired _____ (illegible
in rollo) rights to the entire issued and outstanding capital stock (the "APC SHARES") of AIR
PHILIPPINES CORPORATION ("APC") and has made stockholder advances to APC for the _____
(illegible in rollo) of aircraft, equipment and for working capital used in the latter’s operations (the
"_____ (illegible in rollo) ADVANCES").

WHEREAS, APIC desires to obtain full ownership and control of APC, including all of _____ (illegible
in rollo) assets, franchise, goodwill and operations, and for this purpose has offered to acquire the
_____ (illegible in rollo) 302SHARES of TWGI in APC, including the APC ADVANCES due to TWGI
from APC, with _____ (illegible in rollo) of acquiring all the assets, franchise, goodwill and operations
of APC; and TWGI has _____ (illegible in rollo) to the same in consideration of the conveyance by
APIC to TWGI of certain investments, _____ (illegible in rollo) issuance of TWGI of shares of stock
of APIC in exchange for said APC SHARES and the _____ (illegible in rollo) ADVANCES, as more
particularly described hereunder.

NOW, THEREFORE, the parties agree as follows:

1. TWGI agrees to transfer the APC ADVANCES in APIC in exchange for the _____
(illegible in rollo) by APIC to TWGI of investment shares of APIC in Express Bank,
Petro Chemical _____ (illegible in rollo) of Asia Pacific, Republic Resources &
Development Corporation and Philippine _____ (illegible in rollo) Corporation (the
"APIC INVESTMENTS").

2. TWGI likewise agrees to transfer the APC SHARES to APIC in exchange solely
_____ (illegible in rollo) the issuance by APIC of One Billion Seven Hundred Ninety-
Seven Million Eight Hundred Fifty Seven Thousand Three Hundred Sixty Four
(1,797,857,364) shares of its capital stock of a _____ (illegible in rollo) value of ₱1.00
per share (the "APIC SHARES"), taken from the currently authorized but _____
(illegible in rollo) shares of the capital stock of APIC, as well as from the increase in
the authorized capital _____ (illegible in rollo) of APIC from ₱2.0 billion to ₱3.5
billion.

3. It is the basic understanding of the parties hereto that the transfer of the APC
_____ (illegible in rollo) as well as the APC ADVANCES to APIC shall be intended to
enable APIC to obtain _____ (illegible in rollo) and control of APC, including all of
APC’s assets, franchise, goodwill and _____ (illegible in rollo).

4. Unless the parties agree otherwise, the effectivity of this Agreement and transfers
_____ (illegible in rollo) APC ADVANCES in exchange for the APIC INVESTMENTS,

14
 and the transfer of the _____ (illegible in rollo) SHARES in exchange for the
issuance of new APIC SHARES, shall be subject to _____ (illegible in rollo) due
diligence as the parties shall see fit, and the condition subsequent that the _____
(illegible in rollo) for increase in the authorized capital stock of the APIC from ₱2.0
billion to ₱3.5 _____ (illegible in rollo) shall have been approved by the Securities
and Exchange Commission.

IN WITNESS WHEREOF, the parties have caused these presents to be signed on

the date _____ (illegible in rollo) first above written.  (Emphasis supplied)
38

This Second Memorandum of Agreement was allegedly incorporated into the First Memorandum of
Agreement as a "disclosure to [U-Land] [that] . . . [Wellex] was still in the process of acquiring and
consolidating its title to shares of stock of APIC."  It "included the terms of a share swap whereby
39

[Wellex] agreed to transfer to APIC its shareholdings and advances to APC in exchange for the
issuance by APIC of shares of stock to [Wellex]." 40

The Second Memorandum of Agreement was signed by Mr. Gatchalian, APIC President Salud,  and 41

APC President Augustus C. Paiso.  It was not dated, and no place was indicated as the place of
42

signing.  It was not notarized either, and no other witnesses signed the document.
43 44

The 40-day period lapsed on June 25, 1998.  Wellex and U-Land were not able to enter into any
45

share purchase agreement although drafts were exchanged between the two.

Despite the absence of a share purchase agreement, U-Land remitted to Wellex a total of
US$7,499,945.00.  These were made in varying amounts and through the issuance of post-dated
46

checks.  The dates of remittances were the following:

47

Date Amount (in US$)

June 30, 1998 990,000.00
July 2, 1998 990,000.00
  20,000.00
July 30, 1998 990,000.00
  490,000.00
  490,000.00
August 1, 1998 990,000.00
  490,000.00
  490,000.00
August 3, 1998 990,000.00
  70,000.00
September 25, 1998 399,972.50
  99, 972.50
Total US$7,499,945.00 48

15
Wellex acknowledged the receipt of these remittances in a confirmation letter addressed to U-Land
dated September 30, 1998. 49

According to Wellex, the parties agreed to enter into a security arrangement. If the sale of the shares
of stock failed to push through, the partial payments or remittances U-Land made were to be
secured by these shares of stock and parcels of land.  This meant that U-Land could recover the
50

amount it paid to Wellex by selling these shares of stock and land titles or using them to generate
income.

Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land stock certificates
representing 60,770,000 PEC shares and 72,601,000 APIC shares.  These were delivered to U-
51

Land on July 1, 1998, September 1, 1998, and October 1, 1998. 52

In addition, Wellex delivered to U-Land Transfer Certificates of Title (TCT) Nos. T-216769, T-
216771, T-228231, T-228227, T-211250, and T-216775 covering properties owned by Westland
Pacific Properties Corporation in Bulacan; and TCT Nos. T-107306, T-115667, T-105910, T-120250,
T-1114398, and T-120772 covering properties owned by Rexlon Realty Group, Inc.  On October 1, 53

1998,  U-Land received a letter from Wellex, indicating a list of stock certificates that the latter was
54

giving to the former by way of "security."55

Despite these transactions, Wellex and U-Land still failed to enter into the share purchase
agreement and the joint development agreement.

In the letter  dated July 22, 1999, 10 months  after the last formal communication between the two
56 57

parties, U-Land, through counsel, demanded the return of the US$7,499,945.00.  This letter was 58

sent 14 months after the signing of the First Memorandum of Agreement.

Counsel for U-Land claimed that "[Wellex] ha[d] unjustifiably refused to enter into the. . . Share
Purchase Agreement."  As far as U-Land was concerned, the First Memorandum of Agreement was
59

no longer in effect, pursuant to Section 9.  As such, U-Land offered to return all the stock certificates
60

covering APIC shares and PEC shares as well as the titles to real property given by Wellex as
security for the amount remitted by U-Land. 61

Wellex sent U-Land a letter  dated August 2, 1999, which refuted U-Land’s claims. Counsel for
62

Wellex stated that the two parties carried out several negotiations that included finalizing the terms
of the share purchase agreement and the terms of the joint development agreement. Wellex
asserted that under the joint development agreement, U-Land agreed to remit the sum of US$3
million by May 22,1998 as initial funding for the development projects. 63

Wellex further asserted that it conducted extended discussions with U-Land in the hope of arriving at
the final terms of the agreement despite the failure of the remittance of the US$3 million on May 22,
1998.  That remittance pursuant to the joint development agreement "would have demonstrated [U-
64

Land’s] good faith in finalizing the agreements." 65

Wellex averred that, "[s]ave for a few items, [Wellex and U-Land] virtually agreed on the terms of
both [the share purchase agreement and the joint development agreement.]"  Wellex believed that
66

the parties had already "gone beyond the ‘intent’ stage of the [First Memorandum of Agreement] and
[had already] effected partial implementation of an over-all agreement."  U-Land even delivered a
67

total of 12 post-dated checks to Wellex as payment for the APIC shares and PEC shares.  "[Wellex] 68

on the other hand, had [already] delivered to[U-Land] certificates of stock of APEC [sic] and PEC as
well as various land titles to cover actual remittances."  Wellex alleged that the agreements were not
69

16
finalized because U-Land was "forced to suspend operations because of financial problems
spawned by the regional economic turmoil." 70

Thus, Wellex maintained that "the inability of the parties to execute the [share purchase agreement]
and the [joint development agreement] principally arose from problems at [U-Land’s] side, and not
due to [Wellex’s] ‘unjustified refusal to enter into [the] [share purchase agreement][.]’" 71

On July 30, 1999, U-Land filed a Complaint  praying for rescission of the First Memorandum of
72

Agreement and damages against Wellex and for the issuance of a Writ of Preliminary
Attachment.  From U-Land’s point of view, its primary reason for purchasing APIC shares from
73

Wellex was APIC’s majority ownership of shares of stock in APC (APC shares).  After verification 74

with the Securities and Exchange Commission, U-Land discovered that "APIC did not own a single
share of stock in APC."  U-Land alleged that it repeatedly requested that the parties enter into the
75

share purchase agreement.  U-Land attached the demand letter dated July 22, 1999 to the
76

Complaint.  However, the 40-day period lapsed, and no share purchase agreement was finalized.
77 78

U-Land alleged that, as of the date of filing of the Complaint, Wellex still refused to return the amount
of US$7,499,945.00 while refusing to enter into the share purchase agreement.  U-Land stated that 79

it was induced by Wellex to enter into and execute the First Memorandum of Agreement, as well as
release the amount of US$7,499,945.00. 80

In its Answer with Compulsory Counterclaim,  Wellex countered that U-Land had no cause of
81

action.  Wellex maintained that under the First Memorandum of Agreement, the parties agreed to
82

enter into a share purchase agreement and a joint development agreement.  Wellex alleged that to
83

bring the share purchase agreement to fruition, it would have to acquire the corresponding shares in
APIC.  It claimed that U-Land was fully aware that the former "still ha[d] to consolidate its title over
84

these shares."  This was the reason for Wellex’s attachment of the Second Memorandum of
85

Agreement to the First Memorandum of Agreement. Wellex attached the Second Memorandum of
Agreement as evidence to refute U-Land’s claim of misrepresentation. 86

Wellex further alleged that U-Land breached the First Memorandum of Agreement since the
payment for the shares was to begin during the 40-day period, which began on May 16, 1998.  In 87

addition, U-Land failed to remit the US$3 million by May 22, 1998 that would serve as initial funding
for the development projects.  Wellex claimed that the remittance of the US$3 million on May 22,
88

1998 was a mandatory obligation on the part of U-Land.  Wellex averred that it presented draft
89

versions of the share purchase agreement, which were never finalized.  Thus, it believed that there
90

was an implied extension of the 40-day period within which to enter into the share purchase
agreement and the joint development agreement since U-Land began remitting sums of money in
partial payment for the purchase of the shares of stock. 91

In its counterclaim against U-Land, Wellex alleged that it had already set in motion building and
development of real estate projects on four (4) major sites in Cavite, Iloilo, and Davao. It started
initial construction on the basis of its agreement with U-Land to pursue real estate development
projects. 92

Wellex claims that, had the development projects pushed through, the parties would have shared
equally in the profits of these projects.  These projects would have yielded an income of
93

₱2,404,948,000.00, as per the study Wellex conducted, which was duly recognized by U-Land.  Half 94

of that amount, ₱1,202,474,000.00, would have redounded to Wellex.  Wellex, thus, prayed for the
95

rescission of the First Memorandum of Agreement and the payment of ₱1,202,474,000 in damages
for loss of profit.  It prayed for the payment of moral damages, exemplary damages, attorney’s fees,
96

and costs of suit. 97

17
In its Reply,  U-Land denied that there was an extension of the 40-day period within which to enter
98

into the share purchase agreement and the joint development agreement. It also denied requesting
for an extension of the 40-day period. It further raised that there was no provision in the First
Memorandum of Agreement that required it to remit payments for Wellex’s shares of stock in APIC
and PEC within the 40-day period. Rather, the remittances were supposed to begin upon the
execution of the share purchase agreement. 99

As for the remittance of the US$3 million, U-Land stated that the issuance of this amount on May 22,
1998 was supposed to be simultaneously made with Wellex’s delivery of the stock certificates for
57,000,000 PEC shares. These stock certificates were not delivered on that date. 100

With regard to the drafting of the share purchase agreement, U-Land denied that it was Wellex that
presented versions of the agreement. U-Land averred that it was its own counsel who drafted
versions of the share purchase agreement and the joint development agreement, which Wellex
refused to sign. 101

U-Land specifically denied that it had any knowledge prior to or during the execution of the First
Memorandum of Agreement that Wellex still had to "consolidate its title over" its shares in APIC. U-
Land averred that it relied on Wellex’s representation that it was a majority owner of APIC shares
and that APIC owned a majority of APC shares. 102

Moreover, U-Land denied any knowledge of the initial steps that Wellex undertook to pursue the
development projects and denied any awareness of a study conducted by Wellex regarding the
potential profit of these projects. 103

The case proceeded to trial.

U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief Executive Officer, as its sole
witness.  Mr. Tseng testified that "[s]ometime in 1997, Mr. William Gatchalian who was in Taiwan
104

invited [U-Land] to join in the operation of his airline company[.]"  U-Land did not accept the offer at
105

that time.  During the first quarter of 1998, Mr. Gatchalian "went to Taiwan and invited [U-Land] to
106

invest in Air Philippines[.]"  This time, U-Land alleged that subsequent meetings were held where
107

Mr. Gatchalian, representing Wellex, "claimed ownership of a majority of the shares of APIC and
ownership by APIC of a majority of the shares of [APC,] a domestic carrier in the
Philippines."  Wellex, through Mr. Gatchalian, offered to sell to U-Land PEC shares as well.
108 109

According to Mr. Tseng, the parties agreed to enter into the First Memorandum of Agreement after
their second meeting.  Mr. Tseng testified that under this memorandum of agreement, the parties
110

would enter into a share purchase agreement "within forty (40) days from its execution which [would]
put into effect the sale of the shares [of stock] of APIC and PEC[.]"  However, the "[s]hare
111

[p]urchase [a]greement was not executed within the forty-day period despite the draft . . . given [by
U-Land to Wellex]." 112

Mr. Tseng further testified that it was only after the lapse of the 40-day period that U-Land
discovered that Wellex needed money for the transfer of APC shares to APIC. This allegedly
shocked U-Land since under the First Memorandum of Agreement, APIC was supposed to own a
majority of APC shares. Thus, U-Land remitted to Wellex a total of US$7,499,945.00 because of its
intent to become involved in the aviation business in the Philippines. These remittances were
confirmed by Wellex through a confirmation letter. Despite the remittance of this amount, no share
purchase agreement was entered into by the parties. 113

18
Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice President of Wellex. She admitted
her knowledge of the First Memorandum of Agreement as she was involved in its drafting. She
testified that the First Memorandum of Agreement made reference, under its second preambular
clause, to the Second Memorandum of Agreement entered into by Wellex, APIC, and APC. She
testified that under the First Memorandum of Agreement, U-Land’s purchase of APIC shares and
PEC shares from Wellex would take place within 40 days, with the execution of a share purchase
agreement. 114

According to Ms. Ting, after the 40-day period lapsed, U-Land Chairman Mr. Wang requested
sometime in June of 1998 for an extension for the execution of the share purchase agreement and
the remittance of the US$3 million. As proof that Mr. Wang made this request, Ms. Ting testified that
Mr. Wang sent several post-dated checks to cover the payment of the APIC shares and PEC shares
and the initial funding of US$3 million for the joint development agreement. She testified that Mr.
Wang presented a draft of the share purchase agreement, which Wellex rejected. Wellex drafted a
new version of the share purchase agreement.  However, the share purchase agreement was not
115

executed because during the period of negotiation, Wellex learned from other sources that U-Land
"encountered difficulties starting October of 1998."  Ms. Ting admitted that U-Land made the
116

remittances to Wellex in the amount of US$7,499,945.00. 117

Ms. Ting testified that U-Land was supposed to make an initial payment of US$19 million under the
First Memorandum of Agreement. However, U-Land only paid US$7,499,945.00. The total payments
should have amounted to US$41 million. 118

Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a meeting to thresh out the
problems of the First Memorandum of Agreement, but U-Land did not reply. Instead, Wellex only
received communication from U-Land regarding their subsequent negotiations through the latter’s
demand letter dated July 22, 1999. In response, Wellex wrote to U-Land requesting another meeting
to discuss the demands. However, U-Land already filed the Complaint for rescission and caused the
attachment against the properties of Wellex, causing embarrassment to Wellex. 119

In the Decision dated April 10, 2001, the Regional Trial Court of Makati City held that rescission of
the First Memorandum of Agreement was proper:

The first issue must be resolved in the negative. Preponderance of evidence leans in favor of plaintiff
that it is entitled to the issuance of the writ of preliminary attachment. Plaintiff’s evidence establishes
the facts that it is engaged in the airline business in Taiwan, was approached by defendant, through
its Chairman William Gatchalian, and was invited by the latter to invest in an airline business in the
Philippines, Air Philippines Corporation (APC); that plaintiff became interested in the invitation of
defendant; that during the negotiations between plaintiff and defendant, defendant induced plaintiff
to buy shares in Air Philippines International Corporation (APIC) since it owns majority of the shares
of APC; that defendant also induced plaintiff to buy shares of APIC in Philippine Estates Corporation
(PEC); that the negotiations between plaintiff and defendant culminated into the parties executing a
MOA (Exhs. "C" to "C-3", also Exh. "1"); that in the second "Whereas" clause of the MOA, defendant
represented that it has a current airline operation through its majority-owned subsidiary APIC, that
under the MOA, the parties were supposed to enter into a Share Purchase Agreement (SPA) within
forty (40) days from May 16, 1998, the date the MOA in order to effect the transfer of APIC and PEC
shares of defendant to plaintiff; that plaintiff learned from defendant that APIC does not actually own
a single share in APC; that plaintiff verified with the Securities and Exchange Commission (SEC), by
obtaining a General Information Sheet therefrom (Exh. "C-Attachment"); that APIC does not in fact
own APC; that defendant induced plaintiff to still remit its investment to defendant, which plaintiff did
as admitted by defendant per its Confirmation Letter (Exh. "D") in order that APC shares could be
transferred to APIC; that plaintiff remitted a total of US$7,499,945.00 to defendant; and that during

19
the forty-day period stipulated in the MOA and even after the lapse of the said period, defendant has
not entered into the SPA, nor has defendant caused the transfer of APC shares to APIC.

In the second "Whereas" clause of the MOA (Exh. "C"), defendant’s misrepresentation that APIC
owns APC is made clear, as follows:

"WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its
majority-owned subsidiary Air Philippines International Corporation (Exh. "C") and the latter’s
subsidiary, Air Philippines Corporation, and in like manner also desires to expand its operation in the
Asian regional markets; x x x" (Second Whereas of Exh. "C")

On the other hand, defendant’s evidence failed to disprove plaintiff’s evidence. The testimony of
defendant’s sole witness Elvira Ting, that plaintiff knew at the time of the signing of the MOA that
APIC does not own a majority of the shares of APC because another Memorandum of Agreement
was attached to the MOA (Exh "1") pertaining to the purchase of APC shares by APIC is unavailing.
The second "Whereas" clause of the MOA leaves no room for interpretation. . . . The second MOA
purportedly attached as Annex "A" of this MOA merely enlightens the parties on the manner by
which APIC acquired the shares of APC. Besides, . . . the second MOA was not a certified copy and
did not contain a marking that it is an Annex "A" when it was supposed to be an Annex "A" and a
certified copy per the MOA between plaintiff and defendant. As can be also gathered from her
testimony, Ms. Ting does not have personal knowledge that plaintiff was not informed that APIC did
not own shares of APC during the negotiations as she was not present during the negotiations
between plaintiff and defendant’s William Gatchalian. Her participation in the agreement between the
parties [was] merely limited to the preparation of the documents to be signed. Ms. Ting testified, as
follows:

"Q During the negotiation, you did not know anything about that?"

A I was not involved in the negotiation, sir.

Q And you are just making your statement that U-Land knew about the intended transfer of shares
from APC to APIC because of this WHEREAS CLAUSE and the Annex to this Memorandum of
Agreement?

A Yes, it was part of the contract."

(TSN, Elvira Ting, June 6, 2000, pp. 8-10)

Defendant’s fraud in the performance of its obligation under the MOA is further revealed when Ms.
Ting testified on cross-examination that notwithstanding the remittances made by plaintiff in the total
amountn [sic] of US$7,499, 945.00 to partially defray the cost of transferring APC shares to APIC
even as of the year 2000, as follows:

"Q Ms. Ting, can you please tell the Court if you know who owns shares of Air Philippines
Corporation at this time?

A Air Philippines Corporation right now is own [sic] by Wellex Group and certain individual.

Q How much shares of Air Philippines Corporation is owned by Wellex Group?

A Around twenty...at this moment around twenty five percent (25%).

20
Q Can you tell us if you know who are the other owners of the shares of Air Philippines?

A There are several individual owners, I cannot recall the names.

Q Could [sic] you know if Air Philippines Int’l. Corporation is one of the owners?

A As of this moment, no sir."

(lbid, p. 16)

That defendant represented to plaintiff that it needed the remittances of plaintiff, even if no SPA was
executed yet between the parties, to effect the transfer of APC shares to APIC is admitted by its
same witness also in this wise:

"Q You said that remittances were made to the Wellex Group, Incorporated by plaintiff for the period
from June 1998 to September 1998[,] is that correct?

A Yes, Sir.

Q During all these times, that remittances were made in the total amount of more than seven million
dollars, did you ever know if plaintiff asked for evidence from your company that AIR PHILIPPINES
INTERNATIONAL CORPORATION has already acquired shares of AIR PHILIPPINES
CORPORATION?

A There were queries on the matter.

Q And what was your answer to those queries, Madam Witness?

A We informed them that the decision was still in the process.

Q Even up to the time that plaintiff U-Land stopped the remittances sometime in September 1998
you have not effected the transfer of shares of AIR PHILIPPINES CORPORATION to AIR
PHILIPPINES INTERNATIONCAL [sic] CORPORATION[,] am I correct?

A APC to APIC, well at that time it’s still in the process.

Q In fact, Madam Witness, is it not correct for me to say that one of the reasons why U-Land
Incorporated was convinced to remit the amounts of money totalling seven million dollars plus,

was that your company said that it needed funds to effect these transfers, is that correct?

A Yes, sir."

(lbid, pp. 25-29)

As the evidence adduced by the parties stand, plaintiff has established the fact that it had made
remittances in the total amount of US$7,499,945.00 to defendant in order that defendant will make
good its representation that APC is a subsidiary of APIC. The said remittances are admitted by
defendant.

21
Notwithstanding the said remittances, APIC does not own a single share of APC. On the other hand,
defendant could not even satisfactorily substantiate its claim that at least it had the intention to
cause the transfer of APC shares to APIC. [D]efendant obviously did not enter into the stipulated
SPA because it did not have the shares of APC transferred to APIC despite its representations.
Under the circumstances, it is clear that defendant fraudulently violated the provisions of the
MOA.  (Emphasis supplied)
120

On appeal, the Court of Appeals affirmed the ruling of the Regional Trial Court.  In its July 30, 2004
121

Decision, the Court of Appeals held that the Regional Trial Court did not err in granting the
rescission:

Records show that in the answer filed by defendant-appellant, the latter itself asked for the
rescission of the MOA. Thus, in effect, it prays for the return of what has been given or paid under
the MOA, as the law creates said obligation to return the things which were the object of the
contract, and the same could be carried out only when he who demands rescission can return
whatever he may be obliged to restore. The law says:

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

Appellant, therefore, cannot ask for rescission of the MOA and yet refuse to return what has been
paid to it. Further, appellant’s claim that the lower court erred in ruling for the rescission of the MOA
is absurd and ridiculous because rescission thereof is prayed for by the former. . . . This Court
agrees with the lower court that appellee is the injured party in this case, and therefore is entitled to
rescission, because the rescission referred to here is predicated on the breach of faith by the
appellant which breach is violative of the reciprocity between the parties. It is noted that appellee has
partly complied with its own obligation, while the appellant has not. It is, therefore, the right of the
injured party to ask for rescission because the guilty party cannot ask for rescission.

The lower court . . . correctly ruled that:

". . . This Court agrees with plaintiff that defendant’s misrepresentations regarding APIC’s not owning
shares in APC vitiates its consent to the MOA. Defendant’s continued misrepresentation that it will
cause the transfer of APC shares in APIC inducing plaintiff to remit money despite the lapse of the
stipulated forty day period, further establishes plaintiff’s right to have the MOA rescinded.

Section 9 of the MOA itself provides that in the event of the non-execution of an SPA within the 40
day period, or within the extensions thereof, the payments made by plaintiff shall be returned to it, to
wit:

"9 Validity.- In the event that the parties are unable to agree on the terms of the SHPA and/or JDA
within forty (40) days from the date hereof (or such period as the parties shall mutually agree), this
Memorandum of Agreement shall cease to be effective and the parties released from their
respective undertakings herein, except that WELLEX shall refund the US$3.0 million under Section 4
within three (3) days therefrom, otherwise U-LAND shall have the right to recover the 57,000,000
PEC shares delivered to ULAND under Section 4."

Clearly, the parties were not able to agree on the terms of the SPA within and even after the lapse of
the stipulated 40 day period. There being no SPA entered into by and between the plaintiff and
defendant, defendant’s return of the remittances [of] plaintiff in the total amount of US$7,499,945 is

22
only proper, in the same vein, plaintiff should return to defendant the titles and certificates of stock
given to it by defendant.  (Citations omitted)
122

Hence, this Petition was filed.

Petitioner’s Arguments

Petitioner Wellex argues that contrary to the finding of the Court of Appeals, respondent U-Land was
not entitled to rescission because the latter itself violated the First Memorandum of Agreement.
Petitioner Wellex states that respondent U-Land was actually bound to pay US$17.5 million for all of
APIC shares and PEC shares under the First Memorandum of Agreement and the US$3 million to
pursue the development projects under the joint development agreement. In sum, respondent U-
Land was liable to petitioner Wellex for the total amount of US$20.5 million. Neither the Court of
Appeals nor the Regional Trial Court made any mention of the legal effect of respondent U-Land’s
failure to pay the full purchase price. 123

On the share purchase agreement, petitioner Wellex asserts that its obligation to deliver the totality
of the shares of stock would become demandable only upon remittance of the full purchase price of
US$17.5 million.  The full remittance of the purchase price of the shares of stock was a suspensive
124

condition for the execution of the share purchase agreement and delivery of the shares of stock.
Petitioner Wellex argues that the use of the term "upon" in Section 2 of the First Memorandum of
Agreement clearly provides that the full payment of the purchase price must be given
"simultaneously" or "concurrent" with the execution of the share purchase agreement. 125

Petitioner Wellex raises that the Court of Appeals erred in saying that the rescission of the First
Memorandum of Agreement was proper because petitioner Wellex itself asked for this in its Answer
before the trial court.  It asserts that "there can be no rescission of a non-existent obligation, such
126

as [one] whose suspensive condition has not yet happened[,]"  as held in Padilla v. Spouses
127

Paredes.  Citing Villaflor v. Court of Appeals  and Spouses Agustin v. Court of Appeals,  it argues
128 129 130

that "the vendor. . . has no obligation to deliver the thing sold. . . if the buyer. . . fails to fully pay the
price as required by the contract."  In this case, petitioner Wellex maintains that respondent U-
131

Land’s remittance of US$7,499,945.00 constituted mere partial performance of a reciprocal

obligation.  Thus, respondent U-Land was not entitled to rescission. The nature of this reciprocal
132

obligation requires both parties’ simultaneous fulfillment of the totality of their reciprocal obligations
and not only partial performance on the part of the allegedly injured party.

As to the finding of misrepresentations, petitioner Wellex raises that a seller may sell a thing not yet
belonging to him at the time of the transaction, provided that he will become the owner at the time of
delivery so that he can transfer ownership to the buyer. Contrary to the finding of the lower courts,
petitioner Wellex was obliged to be the owner of the shares only when the time came to deliver
these to respondent U-Land and not during the perfection of the contract itself. 133

Finally, petitioner Wellex argues that respondent U-Land could have recovered through the
securities given to the latter.  Petitioner Wellex invokes Suria v. Intermediate Appellate
134

Court,  which held that an "action for rescission is not a principal action that is retaliatory in
135

character [under Article 1191 of the Civil Code, but] a subsidiary one which. . . is available only in the
absence of any other legal remedy [under Article 1384 of the Civil Code]."  Respondent’s
136

Arguments

Respondent U-Land argues that it was the execution of the share purchase agreement that would
result in its purchase of the APIC shares and PEC shares.  It was not the full remittance of the
137

purchase price of the shares of stock as indicated in the First Memorandum of Agreement, as

23
alleged by petitioner Wellex.  Respondent U-Land asserts that the First Memorandum of Agreement
138

provides that the exact number of APIC shares and PEC shares to be purchased under the share
purchase agreement and the final price of these shares were not yet determined by the parties. 139

Respondent U-Land reiterates that it was petitioner Wellex that requested for the remittances
amounting to US$7,499,945.00 to facilitate APIC’s purchase of APC shares.  Thus, it was petitioner
140

Wellex’s refusal to enter into the share purchase agreement that led to respondent U-Land
demanding rescission of the First Memorandum of Agreement and the return of the
US$7,499,945.00.  Respondent U-Land further argues before this court that petitioner Wellex failed
141

to present evidence as to how the money was spent, stating that Ms. Ting admitted that the Second
Memorandum of Agreement "was not consummated at any time."  Respondent U-Land raises that
142

petitioner Wellex was guilty of fraud by making it appear that APC was a subsidiary of APIC.  It 143

reiterates that, as an airline company, its primary reason for entering into the First Memorandum of
Agreement was to acquire management of APC, another airline company.  Under Article 1191 of
144

the Civil Code, respondent U-Land, as the injured party, was entitled to rescission due to the fatal
misrepresentations committed by petitioner Wellex. 145

Respondent U-Land further asserts that the "shareholdings in APIC and APC were never in
question."  Rather, it was petitioner Wellex’s misrepresentation that APIC was a majority
146

shareholder of APC that compelled it to enter into the agreement. 147

As for Suria, respondent U-land avers that this case was inapplicable because the pertinent
provision in Suria was not Article 1191 but rescission under Article 1383 of the Civil Code.  The
148

"rescission" referred to in Article 1191 referred to "resolution" of a contract due to a breach of a

mutual obligation, while Article 1384 spoke of "rescission" because of lesion and damage.  Thus,
149

the rescission that is relevant to the present case is that of Article 1191, which involves breach in a
reciprocal obligation. It is, in fact, resolution, and not rescission as a result of fraud or lesion, as
found in Articles 1381, 1383, and 1384 of the Civil Code. 150

The Issue

The question presented in this case is whether the Court of Appeals erred in affirming the Decision
of the Regional Trial Court that granted the rescission of the First Memorandum of Agreement
prayed for by U-Land.

The Petition must be denied.

The requirement of a share

purchase agreement

The Civil Code provisions on the interpretation of contracts are controlling to this case, particularly
Article 1370, which reads:

ART. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over
the former.

24
In Norton Resources and Development Corporation v. All Asia Bank Corporation: 151

The cardinal rule in the interpretation of contracts is embodied in the first paragraph of Article 1370
of the Civil Code: "[i]f the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control." This provision is akin to the
"plain meaning rule" applied by Pennsylvania courts, which assumes that the intent of the parties to
an instrument is "embodied in the writing itself, and when the words are clear and unambiguous the
intent is to be discovered only from the express language of the agreement." It also resembles the
"four corners" rule, a principle which allows courts in some cases to search beneath the semantic
surface for clues to meaning. A court's purpose in examining a contract is to interpret the intent of
the contracting parties, as objectively manifested by them. The process of interpreting a contract
requires the court to make a preliminary inquiry as to whether the contract before it is ambiguous. A
contract provision is ambiguous if it is susceptible of two reasonable alternative interpretations.
Where the written terms of the contract are not ambiguous and can only be read one way, the court
will interpret the contract as a matter of law. If the contract is determined to be ambiguous, then the
interpretation of the contract is left to the court, to resolve the ambiguity in the light of the intrinsic
evidence.  (Emphasis supplied)
152

As held in Norton, this court must first determine whether a provision or stipulation contained in a
contract is ambiguous. Absent any ambiguity, the provision on its face will be read as it is written and
treated as the binding law of the parties to the contract.

The parties have differing interpretations of the terms of the First Memorandum of Agreement.
Petitioner Wellex even admits that "the facts of the case are fairly undisputed [and that] [i]t is only the
parties’ respective [understanding] of these facts that are not in harmony." 153

The second preambular clause of the First Memorandum of Agreement reads:

WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its
majority-owned subsidiary Air Philippines International Corporation and the latter’s subsidiary, Air
Philippines Corporation, and in like manner also desires to expand its operation in the Asian regional
markets; a Memorandum of Agreement on ______, a certified copy of which is attached hereto as
Annex "A" and is hereby made an integral part hereof, which sets forth, among others, the basis for
WELLEX’s present ownership of shares in Air Philippines International Corporation.  (Emphasis154

supplied)

Section 1 of the First Memorandum of Agreement reads:

I. Basic Agreement. - The parties agree to develop a long-term business relationship initially through
the creation of joint interest in airline operations as well as in property development projects in the
Philippines to be implemented as follows:

(a) U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES
INTERNATIONAL CORPORATION ("APIC") equivalent to at least 35% of the outstanding
capital stock of APIC, but in any case, not less than 1,050,000,000 shares (the "APIC
Shares").

(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE ESTATES
CORPORATION ("PEC") equivalent to at least 35% of the outstanding capital stock of PEC,
but in any case, not less than 490,000,000 shares (the "PEC Shares").

25
 (c) U-LAND shall enter into a joint development agreement with PEC to jointly pursue
property development projects in the Philippines.

(d) U-LAND shall be given the option to acquire from WELLEX shares of stock of EXPRESS
SAVINGS BANK ("ESB") up to 40% of the outstanding capital stock of ESB (the "ESB
Shares") under terms to be mutually agreed. 155

The First Memorandum of Agreement contained the following stipulations regarding the share
purchase agreement:

2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless extended
by mutual agreement), U-LAND and WELLEX shall execute a Share Purchase Agreement ("SHPA")
covering the acquisition by U-LAND of the APIC Shares and PEC Shares (collectively, the "Subject
Shares"). Without prejudice to any subsequent agreement between the parties, the purchase price
for the APIC Shares to be reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per share
and that for the PEC Shares at SIXTY FIVE CENTAVOS (P0.65) per share.

The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full upon
execution of the SHPA against delivery of the Subject Shares. The parties may agree on such other
terms and conditions governing the acquisition of the Subject Shares to be provided in a separate
instrument.

The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the purchase price
reflected in the SHPA has been fully paid; (ii) the Philippine Securities & Exchange Commission
(SEC) shall have approved the issuance of the Subject Shares; and (iii) any required approval by the
Taiwanese government of the acquisition by U-LAND of the Subject Shares shall likewise have been
obtained.  (Emphasis supplied)
156

As for the joint development agreement, the First Memorandum of Agreement contained the
following stipulation:

4. Joint Development Agreement with PEC. – Simultaneous with the execution of the SHPA, U-
LAND and PEC shall execute a joint development agreement ("JDA") to pursue property
development projects in the Philippines. The JDA shall cover specific housing and other real estate
development projects as the parties shall agree. All profits derived from the projects covered by the
JDA shall be shared equally between ULAND and PEC. U-LAND shall, not later than May 22, 1998,
remit the sum of US$3.0 million as initial funding for the aforesaid development projects against
delivery by WELLEX of 57,000,000 shares of PEC as security for said amount in accordance with
Section 9 below.  (Emphasis provided)
157

Finally, the parties included the following stipulation in case of a failure to agree on the terms of the
share purchase agreement or the joint development agreement:

9. Validity. - In the event the parties are unable to agree on the terms of the SHPA and/or the JDA
within forty (40) days from date hereof (or such period as the parties shall mutually agree), this
Memorandum of Agreement shall cease to be effective and the parties released from their
respective undertakings herein, except that WELLEX shall refund the US$3.0 million provided under
Section 4 within three (3) days therefrom, otherwise U-LAND shall have the right to recover on the
57,000,000 PEC shares delivered to U-LAND under Section 4. 158

26
Section 2 of the First Memorandum of Agreement clearly provides that the execution of a share
purchase agreement containing mutually agreeable terms and conditions must first be accomplished
by the parties before respondent U-Land purchases any of the shares owned by petitioner Wellex. A
perusal of the stipulation on its face allows for no other interpretation.

The need for a share purchase agreement to be entered into before payment of the full purchase
price can further be discerned from the other stipulations of the First Memorandum of Agreement.

In Section 1, the parties agreed to enter into a joint business venture, through entering into two (2)
agreements: a share purchase agreement and a joint development agreement. However, Section 1
provides that in the share purchase agreement, "U-LAND shall acquire from WELLEX, shares of
stock of AIR PHILIPPINES INTERNATIONAL CORPORATION (‘APIC’) equivalent to at least 35% of
the outstanding capital stock of APIC, but in any case, not less than 1,050,000,000 shares (the
‘APIC Shares’)." 159

As for the PEC shares, Section 1 provides that respondent U-Land shall purchase from petitioner
Wellex "shares of stock of PHILIPPINE ESTATES CORPORATION (‘PEC’) equivalent to at least
35% of the outstanding capital stock of PEC, but in any case, not less than 490,000,000 shares(the
‘PEC Shares’)." 160

The use of the terms "at least 35% of the outstanding capital stock of APIC, but in any case, not less
than 1,050,000,000 shares" and "at least 35% of the outstanding capital stock of PEC, but in any
case, not less than 490,000,000 shares" means that the parties had yet to agree on the number of
shares of stock to be purchased.

The need to execute a share purchase agreement before payment of the purchase price of the
shares is further shown by the clause, "[w]ithout prejudice to any subsequent agreement between
the parties, the purchase price for the APIC Shares to be reflected in the [share purchase
agreement] shall be... P0.30 per share and that for the PEC Shares at... P0.65 per share."  This
161

phrase clearly shows that the final price of the shares of stock was to be reflected in the share
purchase agreement. There being no share purchase agreement executed, respondent U-Land was
under no obligation to begin payment or remittance of the purchase price of the shares of stock.

Petitioner Wellex argues that the use of "upon" in Section 2  of the First Memorandum of Agreement
162

means that respondent U-Land must pay the purchase price of the shares of stock in its entirety
when they are transferred. This argument has no merit.

Article 1373 of the Civil Code provides:

ART. 1373. If some stipulation of any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render it effectual.

It is necessary for the parties to first agree on the final purchase price and the number of shares of
stock to be purchased before respondent U-Land is obligated to pay or remit the entirety of the
purchase price. Thus, petitioner Wellex’s argument cannot be sustained since the parties to the First
Memorandum of Agreement were clearly unable to agree on all the terms concerning the share
purchase agreement. It would be absurd for petitioner Wellex to expect payment when respondent
U-Land did not yet agree to the final amount to be paid for the totality of an indeterminate number of
shares of stock.

27
The third paragraph of Section 2  provides that the "transfer of the Subject Shares" shall take place
163

upon the fulfillment of certain conditions, such as full payment of the purchase price "as reflected in
the [share purchase agreement]." The transfer of the shares of stock is different from the execution
of the share purchase agreement. The transfer of the shares of stock requires full payment of the
final purchase price. However, that final purchase price must be reflected in the share purchase
agreement. The execution of the share purchase agreement will require the existence of a final
agreement.

In its Answer with counterclaim before the trial court, petitioner Wellex argued that the payment of
the shares of stock was to begin within the 40-day period. Petitioner Wellex’s claim is not in any of
the stipulations of the contract. Its subsequent claim that respondent U-Land was actually required to
remit a total of US$20.5 million is likewise bereft of basis since there was no final purchase price of
the shares of stock that was agreed upon, due to the failure of the parties to execute a share
purchase agreement. In addition, the parties had yet to agree on the final number of APIC shares
and PEC shares that respondent U-Land would acquire from petitioner Wellex.

Therefore, the understanding of the parties captured in the First Memorandum of Agreement was to
continue their negotiation to determine the price and number of the shares to be purchased. Had it
been otherwise, the specific number or percentage of shares and its price should already have been
provided clearly and unambiguously. Thus, they agreed to a 40-day period of negotiation.

Section 9 of the First Memorandum of Agreement explicitly provides that:

In the event the parties are unable to agree on the terms of the SHPA and/or the JDA within forty
(40)days from date hereof (or such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their respective undertakings
herein . . .
164

The First Memorandum of Agreement was, thus, an agreement to enter into a share purchase
agreement. The share purchase agreement should have been executed by the parties within 40
days from May 16, 1998, the date of the signing of the First Memorandum of Agreement.

When the 40-day period provided for in Section 9 lapsed, the efficacy of the First Memorandum of
Agreement ceased. The parties were "released from their respective undertakings." Thus, from June
25, 1998, the date when the 40-day period lapsed, the parties were no longer obliged to negotiate
with each other in order to enter into a share purchase agreement.

However, Section 9 provides for another period within which the parties could still be required to
negotiate. The clause "or such period as the parties shall mutually agree" means that the parties
should agree on a period within which to continue negotiations for the execution of an agreement.
This means that after the 40-day period, the parties were still allowed to negotiate, provided that they
could mutually agree on a new period of negotiation.

Based on the records and the findings of the lower courts, the parties were never able to arrive at a
specific period within which they would bind themselves to enter into an agreement. There being no
other period specified, the parties were no longer under any obligation to negotiate and enter into a
share purchase agreement. Section 9 clearly freed them from this undertaking.

II

28
 There was no express or implied
novation of the First Memorandum
of Agreement

The subsequent acts of the parties after the 40-day period were, therefore, independent of the First
Memorandum of Agreement.

In its Appellant’s Brief before the Court of Appeals, petitioner Wellex mentioned that there was an
"implied partial objective or real novation"  of the First Memorandum of Agreement. Petititoner did
165

not raise this argument of novation before this court. In Gayos v. Gayos,  this court held that "it is a
166

cherished rule of procedure that a court should always strive to settle the entire controversy in a
single proceeding leaving no root or branch to bear the seeds of future litigation[.]"
167

Articles 1291 and 1292 of the Civil Code provides how obligations may be modified:

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.

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.

In Arco Pulp and Paper Co. v. Lim,  this court discussed the concept of novation:
168

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."

....

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

29
obligations can stand together, each one with its own independent existence. (Emphasis from the
original omitted)

Because novation requires that it be clear and unequivocal, it is never presumed, thus:

In the civil law setting, novatiois 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.  (Emphasis from the original
169

omitted, citations omitted)

Applying Arco, it is clear that there was no novation of the original obligation.

After the 40-day period, the parties did not enter into any subsequent written agreement that was
couched in unequivocal terms. The transaction of the First Memorandum of Agreement involved
large amounts of money from both parties. The parties sought to participate in the air travel industry,
which has always been highly regulated and subject to the strictest commercial scrutiny. Both parties
admitted that their counsels participated in the crafting and execution of the First Memorandum of
Agreement as well as in the efforts to enter into the share purchase agreement. Any subsequent
agreement would be expected to be clearly agreed upon with their counsels’ assistance and in
writing, as well.

Given these circumstances, there was no express novation.

There was also no implied novation of the original obligation. In Quinto v. People: 170

[N]o specific form is required for an implied novation, and all that is prescribed by law would be an
incompatibility between the two contracts. While there is really no hard and fast rule to determine
what might constitute to be a sufficient change that can bring about novation, the touchstone for
contrariety, however, would be an irreconcilable incompatibility between the old and the new
obligations.

....

. . . The test of incompatibility is whether or not the two obligations can stand together, each one
having its independent existence. If they cannot, they are incompatible and the latter obligation
novates the first. Corollarily, changes that breed incompatibility must be essential in nature and not
merely accidental. The incompatibility must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be
merely modificatory in nature and insufficient to extinguish the original obligation.  (Citations
171

omitted)

There was no incompatibility between the original terms of the First Memorandum of Agreement and
the remittances made by respondent U-Land for the shares of stock. These remittances were
actually made with the view that both parties would subsequently enter into a share purchase
agreement. It is clear that there was no subsequent agreement inconsistent with the provisions of
the First Memorandum of Agreement.

Thus, no implied novation took place. In previous cases,  this court has consistently ruled that
172

presumed novation or implied novation is not deemed favorable. In United Pulp and Paper Co., Inc.
v. Acropolis Central Guaranty Corporation: 173

30
Neither can novation be presumed in this case. As explained in Duñgo v. Lopena:

"Novation by presumption has never been favored. To be sustained, it need be established that the
old and new contracts are incompatible in all points, or that the will to novate appears by express
agreement of the parties or in acts of similar import."  (Emphasis supplied)
174

There being no novation of the First Memorandum of Agreement, respondent U-Land is entitled to
the return of the amount it remitted to petitioner Wellex. Petitioner Wellex is likewise entitled to the
return of the certificates of shares of stock and titles of land it delivered to respondent U-Land. This
is simply an enforcement of Section 9 of the First Memorandum of Agreement. Pursuant to Section
9, only the execution of a final share purchase agreement within either of the periods contemplated
by this stipulation will justify the parties’ retention of what they received or would receive from each
other.

III

Applying Article 1185 of the Civil

Code, the parties are obligated to
return to each other all they have
received

Article 1185 of the Civil Code provides that:

ART. 1185. The condition that some event will not happen at a determinate time shall render the
obligation effective from the moment the time indicated has elapsed, or if it has become evident that
the event cannot occur.

If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably
been contemplated, bearing in mind the nature of the obligation.

Article 1185 provides that if an obligation is conditioned on the nonoccurrence of a particular event at
a determinate time, that obligation arises (a) at the lapse of the indicated time, or(b) if it has become
evident that the event cannot occur.

Petitioner Wellex and respondent U-Land bound themselves to negotiate with each other within a
40-day period to enter into a share purchase agreement. If no share purchase agreement was
entered into, both parties would be freed from their respective undertakings.

It is the non-occurrence or non-execution of the share purchase agreement that would give rise to
the obligation to both parties to free each other from their respective undertakings. This includes
returning to each other all that they received in pursuit of entering into the share purchase
agreement.

At the lapse of the 40-day period, the parties failed to enter into a share purchase agreement. This
lapse is the first circumstance provided for in Article 1185 that gives rise to the obligation. Applying
Article 1185, the parties were then obligated to return to each other all that they had received in
order to be freed from their respective undertakings.

However, the parties continued their negotiations after the lapse of the 40-day period. They made
subsequent transactions with the intention to enter into the share purchase agreement. Despite that,

31
they still failed to enter into a share purchase agreement. Communication between the parties
ceased, and no further transactions took place.

It became evident that, once again, the parties would not enter into the share purchase agreement.
This is the second circumstance provided for in Article 1185. Thus, the obligation to free each other
from their respective undertakings remained.

As such, petitioner Wellex is obligated to return the remittances made by respondent U-Land, in the
same way that respondent U-Land is obligated to return the certificates of shares of stock and the
land titles to petitioner Wellex.

IV

Respondent U-Land is praying for

rescission or resolution under
Article 1191, and not rescission
under Article 1381

The arguments of the parties generally rest on the propriety of the rescission of the First
Memorandum of Agreement. This requires a clarification of rescission under Article 1191, and
rescission under Article 1381 of the Civil Code.

Article 1191 of the Civil Code provides:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.

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

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

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

Articles 1380 and 1381, on the other hand, provide an enumeration of rescissible contracts: ART.
1380. Contracts validly agreed upon may be rescinded in the cases established by law. ART. 1381.
The following contracts are rescissible:

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

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

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

32
 (4) Those which refer to things under litigation if they have been entered into by the
defendant without the knowledge and approval of the litigants or of competent judicial
authority;

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

Article 1383 expressly provides for the subsidiary nature of rescission:

ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same.

Rescission itself, however, is defined by Article 1385:

ART. 1385. Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be carried out
only when he who demands rescission can return whatever he may be obliged to restore. Neither
shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss. Gotesco
Properties v. Fajardo175 categorically stated that Article 1385 is applicable to Article 1191:

At this juncture, it is noteworthy to point out that rescission does not merely terminate the contract
and release the parties from further obligations to each other, but abrogates the contract from its
inception and restores the parties to their original positions as if no contract has been made.
Consequently, mutual restitution, which entails the return of the benefits that each party may have
received as a result of the contract, is thus required. To be sure, it has been settled that the effects
of rescission as provided for in Article 1385 of the Code are equally applicable to cases under Article
1191, to wit:

xxxx

Mutual restitution is required in cases involving rescission under Article 1191. This means bringing
the parties back to their original status prior to the inception of the contract. Article 1385 of the Civil
Code provides, thus:

ART. 1385. Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be carried out
only when he who demands rescission can return whatever he may be obligated to restore. Neither
shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

This Court has consistently ruled that this provision applies to rescission under Article 1191: [S]ince
Article 1385 of the Civil Code expressly and clearly states that "rescission creates the obligation to
return the things which were the object of the contract, together with their fruits, and the price with its
interest," the Court finds no justification to sustain petitioners’ position that said Article 1385 does not
apply to rescission under Article 1191. x x x  (Emphasis from the original, citations omitted)
176

33
Rescission, as defined by Article 1385, mandates that the parties must return to each other
everything that they may have received as a result of the contract. This pertains to rescission or
resolution under Article 1191, as well as the provisions governing all forms of rescissible contracts.

For Article 1191 to be applicable, however, there must be reciprocal prestations as distinguished
from mutual obligations between or among the parties. A prestation is the object of an obligation,
and it is the conduct required by the parties to do or not to do, or to give.  Parties may be mutually
177

obligated to each other, but the prestations of these obligations are not necessarily reciprocal. The
reciprocal prestations must necessarily emanate from the same cause that gave rise to the
existence of the contract. This distinction is best illustrated by an established authority in civil law,
the late Arturo Tolentino:

This article applies only to reciprocal obligations. It has no application to every case where two
persons are mutually debtor and creditor of each other. There must be reciprocity between them.
Both relations must arise from the same cause, such that one obligation is correlative to the other.
Thus, a person may be the debtor of another by reason of an agency, and his creditor by reason of a
loan. They are mutually obligated, but the obligations are not reciprocal. Reciprocity arises from
identity of cause, and necessarily the two obligations are created at the same time.  (Citation
178

omitted)

Ang Yu Asuncion v. Court of Appeals  provides a clear necessity of the cause in perfecting the
179

existence of an obligation:

An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation
is constituted upon the concurrence of the essential elements thereof, viz: (a) The vinculum juris or
juridical tie which is the efficient cause established by the various sources of obligations (law,
contracts, quasi-contracts, delicts and quasi-delicts); (b) the object which is the prestation or
conduct, required to be observed (to give, to do or not to do); and (c) the subject-persons who,
viewed from the demandability of the obligation, are the active (obligee) and the passive (obligor)
subjects.180

The cause is the vinculum juris or juridical tie that essentially binds the parties to the obligation. This
linkage between the parties is a binding relation that is the result of their bilateral actions, which gave
rise to the existence of the contract.

The failure of one of the parties to comply with its reciprocal prestation allows the wronged party to
seek the remedy of Article 1191. The wronged party is entitled to rescission or resolution under
Article 1191, and even the payment of damages. It is a principal action precisely because it is a
violation of the original reciprocal prestation.

Article 1381 and Article 1383, on the other hand, pertain to rescission where creditors or even third
persons not privy to the contract can file an action due to lesion or damage as a result of the
contract. In Ong v. Court of Appeals,  this court defined rescission:
181

Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by
law to the contracting parties and even to third persons, to secure the reparation of damages caused
to them by a contract, even if this should be valid, by restoration of things to their condition at the
moment prior to the celebration of the contract. It implies a contract, which even if initially valid,
produces a lesion or a pecuniary damage to someone.  (Citations omitted)
182

Ong elaborated on the confusion between "rescission" or resolution under Article 1191 and
rescission under Article 1381:

34
On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal
obligations. Reciprocal obligations are those which arise from the same cause, and in which each
party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the
obligation of the other. They are to be performed simultaneously such that the performance of one is
conditioned upon the simultaneous fulfillment of the other. Rescission of reciprocal obligations under
Article 1191 of the New Civil Code should be distinguished from rescission of contracts under Article
1383. Although both presuppose contracts validly entered into and subsisting and both require
mutual restitution when proper, they are not entirely identical.

While Article 1191 uses the term "rescission," the original term which was used in the old Civil Code,
from which the article was based, was "resolution." Resolution is a principal action which is based on
breach of a party, while rescission under Article 1383 is a subsidiary action limited to cases of
rescissionfor lesion under Article 1381 of the New Civil Code, which expressly enumerates the
following rescissible contracts:

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

2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in
the preceding number;

3. Those undertaken in fraud of creditors when the latter cannot in any manner collect the
claims due them;

4. Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority; [and]

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

183

omitted)

When a party seeks the relief of rescission as provided in Article 1381, there is no need for
reciprocal prestations to exist between or among the parties. All that is required is that the contract
should be among those enumerated in Article 1381 for the contract to be considered rescissible.
Unlike Article 1191, rescission under Article 1381 must be a subsidiary action because of Article
1383.

Contrary to petitioner Wellex’s argument, this is not rescission under Article 1381 of the Civil Code.
This case does not involve prejudicial transactions affecting guardians, absentees, or fraud of
creditors. Article 1381(3) pertains in particular to a series of fraudulent actions on the part of the
debtor who is in the process of transferring or alienating property that can be used to satisfy the
obligation of the debtor to the creditor. There is no allegation of fraud for purposes of evading
obligations to other creditors. The actions of the parties involving the terms of the First Memorandum
of Agreement do not fall under any of the enumerated contracts that may be subject of rescission.

Further, respondent U-Land is pursuing rescission or resolution under Article 1191, which is a
principal action. Justice J.B.L. Reyes’ concurring opinion in the landmark case of Universal Food
Corporation v. Court of Appeals  gave a definitive explanation on the principal character of
184

resolution under Article 1191 and the subsidiary nature of actions under Article 1381:

The rescission on account of breach of stipulations is not predicated on injury to economic interests
of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between

35
the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing
anywhere that the action for rescission thereunder is subordinated to anything other than the
culpable breach of his obligations by the defendant. This rescission is a principal action retaliatory in
character, it being unjust that a party be held bound to fulfill his promises when the other violates his.
As expressed in the old Latin aphorism: "Non servanti fidem, non est fides servanda." Hence, the
reparation of damages for the breach is purely secondary.

On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison detre as well as the measure
of the right to rescind. Hence, where the defendant makes good the damages caused, the action
cannot be maintained or continued, as expressly provided in Articles 1383 and 1384. But the
operation of these two articles is limited to the cases of rescission for lesión enumerated in Article
1381 of the Civil Code of the Philippines, and does not apply to cases under Article 1191. 185

Rescission or resolution under Article 1191, therefore, is a principal action that is immediately
available to the party at the time that the reciprocal prestation was breached. Article 1383 mandating
that rescission be deemed a subsidiary action cannot be applicable to rescission or resolution under
Article 1191. Thus, respondent U-Land correctly sought the principal relief of rescission or resolution
under Article 1191.

The obligations of the parties gave rise to reciprocal prestations, which arose from the same cause:
the desire of both parties to enter into a share purchase agreement that would allow both parties to
expand their respective airline operations in the Philippines and other neighboring countries.

The jurisprudence relied upon by

petitioner Wellex is not applicable

The cases that petitioner Wellex cited to advance its arguments against respondent U-Land’s right to
rescission are not in point.

Suria v. Intermediate Appellate Court is not applicable. In that case, this court specifically stated that
the parties entered into a contract of sale, and their reciprocal obligations had already been fulfilled:186

There is no dispute that the parties entered into a contract of sale as distinguished from a contract to
sell.

By the contract of sale, the vendor obligates himself to transfer the ownership of and to deliver a
determinate thing to the buyer, who in turn, is obligated to pay a price certain in money or its
equivalent (Art. 1458, Civil Code). From the respondents’ own arguments, we note that they have
fully complied with their part of the reciprocal obligation. As a matter of fact, they have already parted
with the title as evidenced by the transfer certificate of title in the petitioners’ name as of June 27,
1975.

The buyer, in turn, fulfilled his end of the bargain when he executed the deed of mortgage. The
payments on an installment basis secured by the execution of a mortgage took the place of a cash
payment. In other words, the relationship between the parties is no longer one of buyer and seller
because the contract of sale has been perfected and consummated. It is already one of a mortgagor
and a mortgagee. In consideration of the petitioners’ promise to pay on installment basis the sum
they owe the respondents, the latter have accepted the mortgage as security for the obligation.

36
The situation in this case is, therefore, different from that envisioned in the cited opinion of Justice
J.B.L. Reyes. The petitioners’ breach of obligations is not with respect to the perfected contract of
sale but in the obligations created by the mortgage contract. The remedy of rescission is not a
principal action retaliatory in character but becomes a subsidiary one which by law is available only
in the absence of any other legal remedy. (Art. 1384, Civil Code). Foreclosure here is not only a
remedy accorded by law but, as earlier stated, is a specific provision found in the contract between
the parties.  (Emphasis supplied)
187

In Suria, this court clearly applied rescission under Article 1384 and not rescission or resolution
under Article 1191. In addition, the First Memorandum of Agreement is not a contract to sell shares
of stock. It is an agreement to negotiate with the view of entering into a share purchase agreement.

Villaflor v. Court of Appealsis not applicable either. In Villaflor, this court held that non-payment of
consideration of contracts only gave rise to the right to sue for collection, but this non-payment
cannot serve as proof of a simulated contract.  The case did not rule that the vendor has no
188

obligation to deliver the thing sold if the buyer fails to fully pay the price required by the contract. In
Villaflor:

Petitioner insists that nonpayment of the consideration in the contracts proves their simulation. We
disagree. Nonpayment, at most, gives him only the right to sue for collection. Generally, in a contract
of sale, payment of the price is a resolutory condition and the remedy of the seller is to exact
fulfillment or, in case of a substantial breach, to rescind the contract under Article 1191 of the Civil
Code. However, failure to pay is not even a breach, but merely an event which prevents the vendor’s
obligation to convey title from acquiring binding force.  (Citations omitted) This court’s statement in
189

Villaflor regarding rescission under Article 1191 was a mere obiter dictum. In Land Bank of the
Philippines v. Suntay,  this court discussed the nature of an obiter dictum:
190

An obiter dictum has been defined as an opinion expressed by a court upon some question of law
that is not necessary in the determination of the case before the court. It is a remark made, or
opinion expressed, by a judge, in his decision upon a cause by the way, that is, incidentally or
collaterally, and not directly upon the question before him, or upon a point not necessarily involved in
the determination of the cause, or introduced by way of illustration, or analogy or argument. It does
not embody the resolution or determination of the court, and is made without argument, or full
consideration of the point. It lacks the force of an adjudication, being a mere expression of an
opinion with no binding force for purposes of res judicata.  (Citations omitted)
191

Petitioner Wellex’s reliance on Padilla v. Spouses Paredes and Spouses Agustin v. Court of Appeals
is also misplaced. In these cases, this court held that there can be no rescission for an obligation
that is nonexistent, considering that the suspensive condition that will give rise to the obligation has
not yet happened. This is based on an allegation that the contract involved is a contract to sell. In a
contract to sell, the failure of the buyer to pay renders the contract without effect. A suspensive
condition is one whose non-fulfillment prevents the existence of the obligation.  Payment of the
192

purchase price, therefore, constitutes a suspensive condition in a contract to sell. Thus, this court
held that non-remittance of the full price allowed the seller to withhold the transfer of the thing to be
sold.

In this case, the First Memorandum of Agreement is not a contract to sell. Entering into the share
purchase agreement or the joint development agreement remained a stipulation that the parties
themselves agreed to pursue in the First Memorandum of Agreement.

Based on the First Memorandum of Agreement, the execution of the share purchase agreement was
necessary to put into effect respondent U-Land’s purchase of the shares of stock. This is the

37
stipulation indicated in this memorandum of agreement. There was no suspensive condition of full
payment of the purchase price needed to execute either the share purchase agreement or the joint
development agreement. Upon the execution of the share purchase, the obligation of petitioner
Wellex to transfer the shares of stock and of respondent U-Land to pay the price of these shares
would have arisen.

Enforcement of Section 9 of the First Memorandum of Agreement has the same effect as rescission
or resolution under Article 1191 of the Civil Code. The parties are obligated to return to each other all
that they may have received as a result of the breach by petitioner Wellex of the reciprocal
obligation. Therefore, the Court of Appeals did not err in affirming the rescission granted by the trial
court.

VI

Petitioner Wellex was not guilty of

fraud but of violating Article 1159
of the Civil Code

In the issuance of the Writ of Preliminary Attachment, the lower court found that petitioner Wellex
committed fraud by inducing respondent U-Land to purchase APIC shares and PEC shares and by
leading the latter to believe that APC was a subsidiary of APIC.

Determining the existence of fraud is not necessary in an action for rescission or resolution under
Article 1191. The existence of fraud must be established if the rescission prayed for is the rescission
under Article 1381.

However, the existence of fraud is a question that the parties have raised before this court. To settle
this question with finality, this court will examine the established facts and determine whether
petitioner Wellex indeed defrauded respondent U-Land.

In Tankeh v. Development Bank of the Philippines,  this court enumerated the relevant provisions of
193

the Civil Code on fraud:

Fraud is defined in Article 1338 of the Civil Code as:

x x x fraud when, through insidious words or machinations of one of the contracting parties, the other
is induced to enter into a contract which, without them, he would not have agreed to.

This is followed by the articles which provide legal examples and illustrations of fraud.

....

Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the
facts, are not in themselves fraudulent. (n)

Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the
other party has relied on the former’s special knowledge. (n)

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual. (n)

38
Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n) The
distinction between fraud as a ground for rendering a contract voidable or as basis for an award of
damages is provided in Article 1344:

In order that fraud may make a contract voidable, it should be serious and should not have been
employed by both contracting parties.

Incidental fraud only obliges the person employing it to pay damages. (1270) 194

Tankeh further discussed the degree of evidence needed to prove the existence of fraud:

[T]he standard of proof required is clear and convincing evidence. This standard of proof is derived
from American common law. It is less than proof beyond reasonable doubt (for criminal cases) but
greater than preponderance of evidence (for civil cases). The degree of believability is higher than
that of an ordinary civil case. Civil cases only require a preponderance of evidence to meet the
required burden of proof. However, when fraud is alleged in an ordinary civil case involving
contractual relations, an entirely different standard of proof needs to be satisfied. The imputation of
fraud in a civil case requires the presentation of clear and convincing evidence. Mere allegations will
not suffice to sustain the existence of fraud. The burden of evidence rests on the part of the plaintiff
or the party alleging fraud. The quantum of evidence is such that fraud must be clearly and
convincingly shown. 195

To support its allegation of fraud, Mr. Tseng, respondent U-Land’s witness before the trial court,
testified that Mr. Gatchalian approached respondent U-Land on two (2) separate meetings to
propose entering into an agreement for joint airline operations in the Philippines. Thus, the parties
entered into the First Memorandum of Agreement. Respondent U-Land primarily anchors its
allegation of fraud against petitioner Wellex on the existence of the second preambular clause of the
First Memorandum of Agreement.

In its Appellant’s Brief before the Court of Appeals, petitioner Wellex admitted that "[t]he amount of
US$7,499,945.00 was remitted for the purchase of APIC and PEC shares."  In that brief, it argued
196

that the parties were already in the process of partially executing the First Memorandum of
Agreement.

As held in Tankeh, there must be clear and convincing evidence of fraud. Based on the established
facts, respondent U-Land was unable to clearly convince this court of the existence of fraud.

Respondent U-Land had every reasonable opportunity to ascertain whether APC was indeed a
subsidiary of APIC. This is a multimillion dollar transaction, and both parties admitted that the share
purchase agreement underwent several draft creations. Both parties admitted the participation of
their respective counsels in the drafting of the First Memorandum of Agreement. Respondent U-
Land had every opportunity to ascertain the ownership of the shares of stock. Respondent U-Land
itself admitted that it was not contesting petitioner Wellex’s ownership of the APIC shares or APC
shares; hence, it was not contesting the existence of the Second Memorandum of Agreement. Upon
becoming aware of petitioner Wellex’s representations concerning APIC’s ownership or control of
APC as a subsidiary, respondent U-Land continued to make remittances totalling the amount sought
to be rescinded. It had the option to opt out of negotiations after the lapse of the 40-day period.
However, it proceeded to make the remittances to petitioner Wellex and proceed with negotiations.

Respondent U-Land was not defrauded by petitioner Wellex to agree to the First Memorandum of
Agreement.  To constitute fraud under Article 1338, the words and machinations must have been so
1awp++i1

insidious or deceptive that the party induced to enter into the contract would not have agreed to be

39
bound by its terms if that party had an opportunity to be aware of the truth.  Respondent U-Land
197

was already aware that APC was not a subsidiary of APIC after the 40-day period. Still, it agreed to
be bound by the First Memorandum of Agreement by making the remittances from June 30 to
September 25, 1998.  Thus, petitioner Wellex’s failure to inform respondent U-Land that APC was
198

not a subsidiary of APIC when the First Memorandum of Agreement was being executed did not
constitute fraud.

However, the absence of fraud does not mean that petitioner Wellex is free of culpability. By failing
to inform respondent U-Land that APC was not yet a subsidiary of APIC at the time of the execution
of the First Memorandum of Agreement, petitioner Wellex violated Article 1159 of the Civil Code.
Article 1159 reads:

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

In Ochoa v. Apeta,  this court defined good faith:

199

Good faith is an intangible and abstract quality with no technical meaning or statutory definition, and
it encompasses, among other things, an honest belief, the absence of malice and the absence of
design to defraud or to seek an unconscionable advantage. It implies honesty of intention, and
freedom from knowledge of circumstances which ought to put the holder upon inquiry. The essence
of good faith lies in an honest belief in the validity of one’s right, ignorance of a superior claim and
absence of intention to overreach another.  (Citations omitted)
200

It was incumbent upon petitioner Wellex to negotiate the terms of the pending share purchase
agreement in good faith. This duty included providing a full disclosure of the nature of the ownership
of APIC in APC. Unilaterally compelling respondent U-Land to remit money to finalize the
transactions indicated in the Second Memorandum of Agreement cannot constitute good faith.

The absence of fraud in a transaction does not mean that rescission under Article 1191 is not
proper. This case is not an action to declare the First Memorandum of Agreement null and void due
to fraud at the inception of the contract or dolo causante. This case is not an action for fraud based
on Article 1381 of the Civil Code. Rescission or resolution under Article 1191 is predicated on the
failure of one of the parties in a reciprocal obligation to fulfill the prestation as required by that
obligation. It is not based on vitiation of consent through fraudulent misrepresentations.

VII

Respondent U-Land was not bound

to pay the US$3 million under the
joint development agreement

The alleged failure of respondent U-Land to pay the amount of US$3 million to petitioner Wellex
does not justify the actions of the latter in refusing to return the US$7,499,945.00.

Article 1374 of the Civil Code provides that:

ART. 1374. The various stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly.

40
The execution of the joint development agreement was contingent on the execution of the share
purchase agreement.  This is provided for in Section 4 of the First Memorandum of Agreement,
1âwphi1

which stated that the execution of the two agreements is "[s]imultaneous."  Thus, the failure of the
201

share purchase agreement’s execution would necessarily mean the failure of the joint development
agreement’s execution.

Section 9 of the First Memorandum of Agreement provides that should the parties fail to execute the
agreement, they would be released from their mutual obligations. Had respondent U-Land paid the
US$3 million and petitioner Wellex delivered the 57,000,000 PEC shares for the purpose of the joint
development agreement, they would have been obligated to return these to each other.

Section 4 and Section 9 of the First Memorandum of Agreement must be interpreted together. Since
the parties were unable to agree on a final share purchase agreement and there was no exchange
of money or shares of stock due to the continuing negotiations, respondent U-Land was no longer
obliged to provide the money for the real estate development projects. The payment of the US$3
million was for pursuing the real estate development projects under the joint development
agreement. There being no joint development agreement, the obligation to deliver the US$3 million
and the delivery of the PEC shares for that purpose were no longer incumbent upon the parties.

VIII

Respondent U-Land was not

obligated to exhaust the "securities"
given by petitioner Wellex

Contrary to petitioner Wellex’s assertion, there is no obligation on the part of respondent U-Land to
exhaust the "securities" given by petitioner Wellex. No such meeting of the minds to create a
guarantee or surety or any other form of security exists. The principal obligation is not a loan or an
obligation subject to the conditions of sureties or guarantors under the Civil Code. Thus, there is no
need to exhaust the securities given to respondent U-Land, and there is no need for a legal condition
where respondent U-Land should pursue other remedies.

Neither petitioner Wellex nor respondent U-Land stated that there was already a transfer of
ownership of the shares of stock or the land titles. Respondent U-Land itself maintained that the
delivery of the shares of stock and the land titles were not in the nature of a pledge or mortgage.  It202

received the certificates of shares of stock and the land titles with an understanding that the parties
would subsequently enter a share purchase agreement. There being no share purchase agreement,
respondent U-Land is obligated to return the certificates of shares of stock and the land titles to
petitioner Wellex.

The parties are bound by the 40-day period provided for in the First Memorandum of Agreement.
Adherence by the parties to Section 9 of the First Memorandum of Agreement has the same effect
as the rescission or resolution prayed for and granted by the trial court.

Informal acts are prone to ambiguous legal interpretation. This will be based on the say-so of each
party and is a fragile setting for good business transactions. It will contribute to the unpredictability of
the market as it would provide courts with extraordinary expectations to determine the business
actor's intentions. The parties appear to be responsible businessmen who know that their
expectations and obligations should be clearly articulated between them. They have the resources to
engage legal representation. Indeed, they have reduced their agreement in writing.

41
Petitioner Wellex now wants this court to define obligations that do not appear in these instruments.
We cannot do so. This court cannot interfere in the bargains, good or bad, entered into by the
parties. Our duty is to affirm legal expectations, not to guarantee good business judgments.

WHEREFORE, the petition is DENIED. The Decision of the Regional Trial Court in Civil Case No.
99-1407 and the Decision of the Court of Appeals in CA-G.R. CV No. 74850 are AFFIRMED. Costs
against petitioner The Wellex Group, Inc.

SO ORDERED.

MARVIC M.V.F. LEONEN

Associate Justice

42
G.R. No. 190512, June 20, 2018 - D.M. RAGASA ENTERPRISES, INC., Petitioner, v.
BANCO DE ORO, INC. (FORMERLY EQUITABLE PCI BANK, INC.), Respondent.

SECOND DIVISION

G.R. No. 190512, June 20, 2018

D.M. RAGASA ENTERPRISES, INC., Petitioner, v. BANCO DE ORO, INC.

(FORMERLY EQUITABLE PCI BANK, INC.), Respondent.

DECISION

CAGUIOA, J.:

Before the Court is a Petition for Review1 on Certiorari (Petition) under Rule 45 of the

Rules of Court (Rules) filed by petitioner D.M. Ragasa Enterprises, Inc., (Ragasa)
against respondent Banco de Oro, Inc.,2 formerly Equitable PCI Bank, Inc. (bank),
assailing the Decision3 dated March 27, 2009 (questioned Decision) and
Resolution4 dated November 25, 2009, both of the Court of Appeals (CA) Special
Thirteenth (13th) Division and Former Special Thirteenth Division, respectively, in CA-
G.R. CV. No. 88322.

The CA reversed and set aside the rulings in favor of Ragasa of the Regional Trial Court
(RTC) of Quezon City, Branch 216, in its Decision dated April 4, 2006 5 and Order dated
October 3, 20066 (denying the corresponding Motion for Reconsideration) in Civil Case
No. Q-02-46341.

The Facts

On January 30, 1998, Ragasa and then Equitable Banking Corporation (Equitable Bank)
executed a Contract of Lease7 (Lease Contract), as lessor and lessee, respectively, over
the ground and second floors of a commercial building located at 175 Tomas Morato
Avenue corner Scout Castor, Quezon City (subject premises), for a period of five years,
commencing on February 1, 19988 up to January 31, 20039, with a monthly rental of
P122,607.00.10 The pertinent provisions of the Lease Contract state, viz.:

2. The TERM of this Lease shall be for a period of five (5) years, commencing on
February 1, 1998. x x x

3. The TENANT shall pay a monthly rental of ONE HUNDRED TWENTY TWO THOUSAND
SIX HUNDRED SEVEN (122,607) pesos based on P463.16 per square meter per month

43
inclusive of Value Added Tax and withholding tax and payable in advance in the first
five days of the month, that is 1st to 5th of every month. An annual increase of 10%
shall be applied during the term of the lease.

4. The failure to pay two consecutive monthly rentals within the first five (5) days of
any month, as stated in No. 3, shall automatically terminate this Contract, without need
of any further notice to the TENANT. The LESSOR is hereby authorized, and has the
right to show the premises to prospective tenants, and within five (5) days following
the last day of the grace period stated in No. 3, the TENANT shall vacate the premises
without the need of the usual judicial proceedings, and/or the LESSOR shall padlock the
premises until the TENANT settles his obligations. The TENANT agrees to this
padlocking as a sign of his good faith in his compliance with No. 3 of this Contract and
the LESSOR is not liable or answerable for any damage that the TENANT may incur or
suffer due to his non-entrance to the premises, or the LESSOR may confiscate any
property found in the premises equivalent to the unpaid rental, penalty, and interests
thereto, as guaranty and/or pledge, and can be retrieved anytime upon full payment of
his accounts but must not be for more than three (3) months from the date of default
[;] otherwise, the confiscated property or properties shall become permanently owned
by the LESSOR as partial payment of his unpaid rentals, penalties and interests, and in
case of any unpaid balance, the TENANT is still liable.

xxxx

7. The parties hereby covenant and agree upon the signing of this Contract of Lease
that [the] TENANT shall pay to the LESSOR or his representative, the amount of SEVEN
HUNDRED THIRTY FIVE THOUSAND SIX HUNDRED FORTY TWO (P735,642) pesos,
Philippine Currency, P367,821 as three months advanced rental, and P367,821 as three
months deposit, which deposit shall be refunded to the TENANT only upon termination
of this Lease, that is, after expiration of the lease, paid occupancy of the said premises,
and after vacating the same and also after deducting the unpaid water bills[,] if any,
electric bills, extraordinary wear and tear of the premises, losses and breakages of the
premises, and other damages sustained by the LESSOR.

8. The TENANT voluntarily binds himself and agrees to the following without any
coercion or force by the LESSOR;

xxxx

m) The full deposit shall be forfeited in favor of the LESSOR upon non-compliance of
the Term of the Contract of Lease by the TENANT, and cannot be applied to Rental;

n) To pay a penalty of 3% of the monthly rental, for every month of delay of payment
of the monthly rental, [with] a fraction of the month x x x considered [as] one month;

p) Breach or non-compliance of any of the provisions of this Contract, especially non-

payment of two consecutive monthly rentals on time, shall mean the termination of this
Contract, and within five (5) days from the date of breach, non-compliance, or default,
the TENANT shall vacate the premises quietly and peacefully without need of the
required judicial proceedings. If he does not vacate the premises, the TENANT has
agreed that the LESSOR has no liability whatsoever due to the padlocking of the same;

44
xxxx

10. In the event that a Court Litigation has been resorted to by the LESSOR or LESSEE,
due to non-compliance of any of the foregoing provisions, the aggrieved party shall be
paid by the other party, no less than fifteen thousand (P15,000) pesos, Philippine
Currency, for Attorney's fees, and other damages that the honorable court may allow;
the cost of litigations shall be born[e] or paid by the party in fault, or in default. All
unpaid accounts and obligations of the TENANT shall earn interest or bear interest at
the rate of 14% per annum or at the allowable rate of interest from the date of default.
The legal suits shall be brought in the town of Quezon City. 11

Pursuant to the Lease Contract, Equitable Bank paid the amounts of P367,821.00
representing three months advance rentals, and P367,821.00 representing three
months rentals as security deposit.12

Meanwhile, Equitable Bank entered into a merger with Philippine Commercial

International Bank (PCI Bank) thereby forming Equitable PCI Bank, Inc. 13 The latter
would eventually, pending the present case, merge with Banco de Oro, Inc. to form the
respondent bank.14

As a result of the merger, the bank closed and joined the branches of its constituent
banks which were in close proximity with each other as maintaining said branches
would be impractical.15 One of the branches which had to be closed is the branch
located in the subject premises.16

For this reason, the bank sent a notice dated May 28, 2001, informing Ragasa that the
former was pre-terminating their Lease Contract effective June 30, 2001 (Notice of Pre-
termination)17. Ragasa responded with a demand letter dated June 20, 2001 18 for
payment of monthly rentals for the remaining term of the Lease Contract from July 1,
2001 to January 31, 2003 totaling P3,146,596.42, inasmuch as there is no express
provision in the Lease Contract allowing pre-termination. 19 The bank countered, through
a letter dated June 26, 2001,20 that its only liability for pre-terminating the contract is
the forfeiture of its security deposit pursuant to item 8(m) of the Lease Contract. 21 On
June 30, 2001, the bank vacated the subject premises without heeding Ragasa's
demand for payment.

After sending two more reiterative demand letters, 22 which were both ignored by the
bank, Ragasa finally filed on March 11, 2002 with the RTC the Complaint for Collection
of Sum of Money (amounting to P3,146,596.42 representing the monthly rentals under
the Lease Contract for the period July 1, 2001 to January 31, 2003) and Damages.
Ragasa argued that under the Lease Contract, the forfeiture of the bank's security
deposit does not exempt it from payment of the rentals for the remaining term of the
lease because the bank's act of pre-terminating the contract was a major breach of its
terms. Moreover, item 8(m) expressly provides that the security deposit shall not be
applied to the rentals.

In its Answer filed on April 26, 2002, the bank argued, in gist, that item 8(m) of the
Lease Contract is actually a penalty clause which, in line with Article 1226 23 of the Civil
Code, takes the place of damages and interests in case of breach. Hence, for breaching
the Lease Contract by pre-terminating the same, the bank is liable to forfeit its security

45
deposit in favor of Ragasa but would not be liable for rentals corresponding to the
remaining life of the Contract. Moreover, the bank is not liable for the penalty at the
rate of 3% under item 8(n) of the Lease Contract because the bank paid the due rentals
up to the time it pre-terminated the same.24

Ruling of the RTC

The RTC ruled in Ragasa's favor in a Decision dated April 4, 2006, the dispositive
portion of which reads:

WHEREFORE, the Court finds that plaintiff has established its case against defendant by
preponderance of evidence and judgment is hereby rendered ordering defendant
Equitable PCI Bank, Inc. to pay plaintiff the following:

1. The amount of Php 3,146,596.42 Philippine Currency, representing the

monthly rentals from July 1, 2001 to January 31, 2003;

2. A penalty of 3% of the monthly rental for every month of delay;

3. An interest of 14% per annum on the full amount due until fully paid;

4. Attorney's fees in the amount of Php 30,000.00; and

5. Costs of litigation.

Defendant's Counterclaim is dismissed.

SO ORDERED.25

The RTC held that the bank may not unilaterally pre-terminate the Lease Contract;
hence, it is still liable to pay the rentals for the remaining duration of the said contract.
Likewise, in addition to item 8(m) of the Lease Contract providing for the forfeiture of
the bank's security deposit, item 8(n), another penalty clause providing for additional
3% of the monthly rental for each month of delay in payment, also applies. Finally,
pursuant to Section 10, an interest of 14% per annum on the amount due was
awarded.

The bank filed a Motion for Reconsideration which was denied by the RTC in its Order
dated October 3, 2006.26

On October 23, 2006, the bank filed a Notice of Appeal to the CA, arguing that the
Lease Contract was automatically terminated by the act of the bank in pre-terminating
the lease or based on the provisions of the Lease Contract, and that upon termination
of the lease, the bank has been released from its future contractual obligations
including the payment of "future rentals."27

Ruling of the CA

46
In the questioned Decision dated March 27, 2009, the CA granted the bank's appeal
and reversed and set aside the RTC's ruling, disposing of the case as follows:

WHEREFORE, the appeal is hereby GRANTED. The ruling of the trial court is hereby
REVERSED and SET ASIDE. The complaint is dismissed for lack of legal basis.

SO ORDERED.28

The CA ruled that the bank's failure to continue the Lease Contract until its expiration
constituted a breach of its provision. As such, the Lease Contract was automatically
terminated by virtue of item 8(p) thereof providing for its outright termination in case
of breach of any of its provisions. Hence, there is no legal basis to hold the bank liable
for payment of rentals for the unexpired period of the contract. However, the bank is
liable to forfeit its security deposit pursuant to the penalty clause under item 8(m) of
the contract. The CA ruled that to allow Ragasa to collect the value of the unexpired
term of the lease plus penalty would constitute unjust enrichment.

Ragasa filed a Motion for Reconsideration of the questioned Decision, which the CA
denied for lack of merit, in its Resolution dated November 25, 2009. 29

Refusing to concede, Ragasa filed the present Petition on January 21, 2010 raising four
main issues, namely:

Issues

1.) WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED IN LAW IN

GRANTING THE APPEAL OF RESPONDENT BANK AND IN DENYING THE MOTION FOR
RECONSIDERATION OF THE PETITIONER WHICH IS CONTRARY TO ARTICLES 1170 AND
1308 OF THE NEW CIVIL CODE[.]

2.) WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED IN LAW IN RULING
THAT THE PENALTY CLAUSE APPLICABLE IN THE CASE IS ITEM NO. 8(m) OF THE
CONTRACT, AND NOT ITEM 8(n) OF THE SAME CONTRACT[.]

3.) WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED IN LAW IN RULING
THAT THE SUBJECT CONTRACT HAD BEEN TERMINATED[.]

4.) WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED IN LAW IN RULING
THAT THE PETITIONER IS GUILTY OF UNJUST ENRICHMENT[.] 30

The fundamental issue that the Court is called upon to resolve is: What is the liability of
the bank, if any, for its act of pre-terminating the Lease Contract?

At the outset, it is well to remember that a contract is the law between the
parties.31 Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith. 32 The parties are allowed
by law33 to enter into stipulations, clauses, terms and conditions they may deem
convenient which bind the parties as long as they are not contrary to law, morals, good
customs, public order or public policy. 34

47
The pertinent provisions of the Lease Contract are as follows:

2. The TERM of this Lease shall be for a period of five (5) years, commencing on
February 1, 1998. x x x

xxxx

7. The parties hereby covenant and agree upon the signing of this Contract of Lease
that [the] TENANT shall pay to the LESSOR or his representative, the amount of SEVEN
HUNDRED THIRTY FIVE THOUSAND SIX HUNDRED FORTY TWO (P735,642) pesos,
Philippine Currency, P367,821 as three months advanced rental, and P367,821 as three
months deposit, which deposit shall be refunded to the TENANT only upon termination
of this Lease, that is, after expiration of the lease, paid occupancy of the said premises,
and after vacating the same and also after deducting the unpaid water bills[,] if any,
electric bills, extraordinary wear and tear of the premises, losses and breakages of the
premises, and other damages sustained by the LESSOR.

8. The TENANT voluntarily binds himself and agrees to the following without any
coercion or force by the LESSOR;

xxxx

m) The full deposit shall be forfeited in favor of the LESSOR upon non-compliance of
the Term of the Contract of Lease by the TENANT, and cannot be applied to Rental;

xxxx

p) Breach or non-compliance of any of the provisions of this Contract, especially non-

payment of two consecutive monthly rentals on time, shall mean the termination of this
Contract, and within five (5) days from the date of breach, non-compliance, or default,
the TENANT shall vacate the premises quietly and peacefully without need of the
required judicial proceedings. If he does not vacate the premises, the TENANT has
agreed that the LESSOR has no liability whatsoever due to the padlocking of the same;

xxxx

10. In the event that a Court Litigation has been resorted to by the LESSOR or LESSEE,
due to non-compliance of any of the foregoing provisions, the aggrieved party shall be
paid by the other party, no less than fifteen thousand (P15,000) pesos, Philippine
Currency, for Attorney's fees, and other damages that the honorable court may allow;
the cost of litigations shall be born[e] or paid by the party in fault, or in default. All
unpaid accounts and obligations of the TENANT shall earn interest or bear interest at
the rate of 14% per annum or at the allowable rate of interest from the date of default.
The legal suits shall be brought in the town of Quezon City. 35 (Underscoring supplied)

The foregoing stipulations are clear and show no contravention of law, morals, good
customs, public order or public policy. As such, they are valid, and the parties' rights
shall be adjudicated according to them, being the primary law between them. When the

48
terms of the contract are clear and leave no doubt as to the intention of the contracting
parties, the rule is settled that the literal meaning of its stipulations should control. 36

In the case at bar, there is no question that the bank breached the Lease Contract.
When it served upon Ragasa the Notice of Pre-termination effective June 30, 2001 and
when it, indeed, vacated the subject premises on said date, the bank, in effect,
breached item 2 of the Lease Contract, providing for a five-year term. It must be noted
that the Lease Contract does not contain a pre-termination clause.

The Lease Contract has a specific provision in case of non-compliance of its "Term" —
"a period of five (5) years, commencing on February 1, 1998," to wit:

8. The TENANT voluntarily binds himself and agrees to the following without any
coercion or force by the LESSOR;

xxxx

m) The full deposit shall be forfeited in favor of the LESSOR upon non-compliance of
the Term of the Contract of Lease by the TENANT, and cannot be applied to Rental; 37

The word "term" appears only in three instances, but in three forms, in the five-page
Lease Contract. Firstly, "TERM" (a defined word as the letters are all capitalized) is used
in item 2, as quoted above, to indicate the five-year period of the lease. Secondly,
"Term" is used in item 8(m), as quoted above, and being with a capitalized initial letter
it also indicates that it is a defined word. Lastly, it is provided in item 8(g) that the
lessee voluntarily binds itself and agrees: "To pay from time to time, during the term of
this Lease, all expenses such as salaries, wages, etc., if for business, all charges for
telephone if any, and/or any such other services in the Leased Premises." 38

Given the fact that in item 2 and item 8(g), the words "TERM" and "term" definitely
refer to the period of the lease, the word "Term" in item 8(m) should likewise be
understood to have the same meaning.

The word "Term" could not mean stipulation, provision, condition, covenant or clause as
the word "term" can also be understood. In the default clauses of the Lease
Contract, i.e., items 8(p) and 10, the word employed is "provisions." It is the word
"provisions" which the parties intended to refer to any stipulation, condition, covenant
or clause and not the word "term."

Consequently, the correct interpretation of the word "Term" in item 8(m) is that it
refers to the period of the lease, and not to any other provision of the Lease Contract.

Article 1170 of the Civil Code mandates that those who, in the performance of their
obligations, are guilty of fraud, negligence, or delay, and those who, in any
manner, contravene the tenor thereof, are liable for damages.

Thus, having contravened the tenor of the Lease Contract regarding its term or period,
the bank should be liable for damages. However, how much in damages should the
bank be liable?

49
Generally, if the lessor or the lessee should not comply with their obligations, the
aggrieved party may ask for either the rescission of the contract and indemnification for
damages, or only the latter, allowing the contract to remain in force. 39

In the present case, there is an express stipulation in item 8(p) of the Lease Contract
that "[b]reach or non-compliance of any of the provisions of this Contract, especially
non-payment of two consecutive monthly rentals on time, shall mean the termination of
this Contract."40

The validity of an automatic termination clause such as the one quoted above is well-
settled.

In Manila Bay Club Corp. v. Court of Appeals41 (Manila Bay Club Corp.), the lease period
agreed upon was from March 4, 1988 to March 4, 1998 but was short-lived because the
private respondents therein unilaterally terminated the lease with the request that
petitioner therein vacate the leased premises and peacefully surrender its possession
for the failure, among others, to insure the leased building in violation of paragraph 22
of the lease contract between the parties therein. 42 The private respondents therein
invoked the "Special Clause" as found in paragraph 19 of the said lease contract to
justify their actions, to wit:

19. If the rental herein stipulated or any part thereof at any time, shall be in arrears or
unpaid, or if the tenant shall at any time fail or neglect to perform or comply with any
of the covenants, conditions, agreements or restrictions stipulated or if the tenant shall
become bankrupt or insolvent or shall compound with his creditors, then and in any of
such above cases, this lease contract shall become automatically terminated and
cancelled and the said premises shall be peacefully vacated by the LESSEE for the
LESSOR to hold and enjoy henceforth as if these presents have not been made and it
shall be lawful for the LESSOR or any person duly authorized in his behalf, without any
formal notice or demand to enter into and upon said leased premises or any part
thereof without prejudice on the part of the LESSOR to exercise all rights on the
contract of lease and those given by law. And upon such cancellation of the contract,
the LESSEE hereby grants the LESSOR the legal right to enter into and take possession
of the leased premises as though the term of the leased contract has expired. 43

The Court justified the validity of the above automatic termination clause, thus:

Certainly, there is nothing wrong if the parties to the lease contract agreed on certain
mandatory provisions concerning their respective rights and obligations, such as the
procurement of the insurance and rescission clause. For it is well to recall that contracts
are respected as the law between the contracting parties, and may establish such
stipulations, clauses, terms and conditions as they may want to include. As long as such
agreements are not contrary to law, morals, good customs, public policy or public order
they shall have the force of law between them.44

In Riesenbeck v. Spouses Silvino Maceren, Jr. and Patricia Maceren 45 (Riesenbeck), the
Court observed:

The Contract of Lease was called off by respondents in virtue of Clauses No. 10 46 and
No. 1347 thereof to which the parties voluntarily bound themselves. In Manila Bay Club

50
Corp. v. Court of Appeals,48 this Court interpreted as requiring mandatory compliance
by the parties a provision in a lease contract that failure or neglect to perform or
comply with any of the covenants, conditions, agreements or restrictions
stipulated  shall result in the automatic termination and cancellation of the lease.

In accord with this ruling is Peoples Industrial and Commercial Corp. v. Court of
Appeals49 where the Court held that there is nothing wrong if the parties to a lease
contract agreed on certain mandatory provisions concerning their respective rights and
obligations, such as the procurement of insurance and the rescission clause. Thus –

[I]t is well to recall that contracts are respected as the law between the contracting
parties, and they may establish such stipulations, clauses, terms and conditions as they
may want to include. As long as such agreements are not contrary to law, morals, good
customs, public policy or public order they shall have the force of law between them.

The foregoing legal truism finds equal potency in the case at bar. No doubt, the pre-
termination was properly resorted to by respondents pursuant to Clause 10 of the
Contract of Lease. Indeed, the law on obligations and contracts does not prohibit
parties from entering into agreement providing that a violation of the terms of the
contract would cause its cancellation even without judicial intervention. 50 This is what
petitioner and respondents entered into, a lease contract with a stipulation that the
contract is rescinded upon violation of its substantial provisions, which petitioner, does
not deny having violated.51

Pursuant to the automatic termination clause of the Lease Contract, which is in

furtherance of the autonomy characteristic of contracts, the Lease Contract was
terminated upon its unauthorized pre-termination by the bank on June 30, 2001.
Ragasa is, thus, precluded from availing of the second option which is to claim damages
by reason of the breach and allow the lease to remain in force. With the lease having
been automatically resolved or terminated by agreement of the parties, Ragasa is
entitled only to indemnification for damages.

To force either party to continue with a contract that is automatically terminated in case
of its breach by either party (pursuant to its express provision) is not in furtherance of
or sanctioned by the contract. Rather, it is a contravention thereof and it negates the
autonomy characteristic of contracts.

Is the claim of Ragasa that it is entitled to damages in the amount of P3,146,596.42,

representing the monthly rentals from July 1, 2001 to January 31, 2003, or the
unexpired period of the lease, valid?

Entitlement to rentals after the termination of the lease pursuant to an automatic

rescission or termination clause is possible in the case where the lessor invokes the
clause and the lessee refuses to vacate the leased premises. The lessee will be liable for
damages equivalent to the rentals for the duration of its possession from the
termination of the lease until he vacates the premises. This was in effect the ruling of
the Court in Manila Bay Club Corp. when it affirmed the award of the monthly rental
equivalent to P 250,000.00, which was the valuation of the trial court as affirmed by
the CA, viz.:

51
Petitioner in its third assignment of error assails the P250,000.00 monthly rental
adjudged against it by the trial court and as affirmed by respondent Court of Appeals,
claiming that there was no basis for such finding.

Again, we disagree. In reaching that amount, the trial court took into consideration the
following factors: 1) prevailing rates in the vicinity; 2) location of the property; 3) use
of the property; 4) inflation rate; and 5) the testimony of private respondent Modesta
Sabeniano that she was offered by a Japanese-Filipino investor a monthly rental of
P400,000.00 for the leased premises then occupied by petitioner. 52 Petitioner for its
part should have presented its controverting evidence below to support what it believes
to be the fair rental value of the leased building since the burden of proof to show that
the rental demanded is unconscionable or exorbitant rests upon the lessee. 53 But
petitioner failed to do so. Hence, the valuation by the trial court, as affirmed by
respondent Court of Appeals, stands.

It is worth stressing at this juncture that the trial court had the authority to fix the
reasonable value for the continued use and occupancy of the leased premises after the
termination of the lease contract, and that it was not bound by the stipulated rental in
the contract of lease since it is equally settled that upon termination or expiration of the
contract of lease, the rental stipulated therein may no longer be the reasonable value
for the use and occupation of the premises as a result or by reason of the change or
rise in values.54 Moreover, the trial court can take judicial notice of the general increase
in rentals of real estate especially of business establishments 55 like the leased building
owned by private respondents.56

That is, however, not the situation here. The bank did not continue to possess the
Leased Premises after its automatic termination, as it vacated the same on June 30,
2001.

As explained above, the provision or clause that is applicable in case of non-compliance

of the Term or period of the Lease Contract is item 8(m) which mandates that the full
deposit of P367,821.00 or the equivalent of three months rentals shall be forfeited with
the proviso that the deposit cannot be applied to rental. This proviso as to non-
application to rental of the deposit means that the forfeiture is without prejudice to the
payment of any unpaid rental at the time of the non-compliance or breach of the Term
or period of the Lease Contract. Since the bank had no unpaid rental as of June 30,
2001, the proviso finds no application in the present case.

What is the nature of item 8(m) of the Lease Contract: "The full deposit shall be
forfeited in favor of the LESSOR upon non-compliance of the Term of the Contract of
Lease by the TENANT, and cannot be applied to Rental"?

The Court believes and so holds that item No. 8(m) is a penalty or penal clause.

A penal clause is an accessory obligation which the parties attach to a principal

obligation for the purpose of insuring the performance thereof by imposing on the
debtor a special prestation (generally consisting in the payment of a sum of money) in
case the obligation is not fulfilled or is irregularly or inadequately fulfilled. 57 Quite
common in lease contracts, this clause functions to strengthen the coercive force of the

52
obligation and to provide, in effect, for what would be the liquidated damages resulting
from a breach.58

A penal clause has a three-fold purpose: (1) a coercive purpose or one of guarantee —
this is to urge the debtor to the fulfillment of the main obligation under pain of paying
the penalty; (2) to serve as liquidated damages — this is to evaluate in advance the
damages that may be occasioned by the non-compliance of the obligation; and (3) a
strictly penal purpose — this is to punish the debtor for non-fulfillment of the main
obligation.59 While the first purpose is always present, the second purpose is presumed
and the third purpose must be expressly agreed upon. 60

Stated otherwise, the purposes of penalty or penal clause are: (1) funcion coercitiva o
de guarantia or to insure the performance of the obligation; (2) funcion liquidatoria or
to liquidate the amount of damages to be awarded to the injured party in case of
breach of the principal obligation; and (3) funcion estrictamente penal or to punish the
obligor in case of breach of the principal obligation, in certain exceptional cases. 61 The
second is evidently compensatory and the third is punitive in character, while the first is
the general purpose regardless of whether the penalty is compensatory or punitive. 62

Evidently, the penal clause may be considered either reparation, compensation or

substitute for damages, on one hand, or as a punishment in case of breach of the
obligation, on the other. When considered as reparation or compensation, the question
as to the appropriate amount of damages is resolved once and for all because the
stipulated indemnity represents a legitimate estimate made by the contracting parties
of the damages caused by the nonfulfillment or breach of the obligation. Proof of actual
damages is, consequently, not necessary in order that the stipulated penalty may be
demanded. When considered as a punishment, the question of damages is not yet
resolved inasmuch as the right to damages, besides the penalty, still subsists. Thus, if
the injured party desires to recover the damages actually suffered by him in addition to
the penalty, he must prove such damages.63

Penal clause may be classified into: (1) according to source: (a) legal (when it is
provided by law) and (b) conventional (when it is provided for by stipulation of the
parties); (2) according to demandability: (a) subsidiary (when only the penalty may be
enforced) and (b) complementary (when both the principal obligation and the penalty
may be enforced); and (3) according to purpose: (a) cumulative (when damages may
be collected in addition to penalty) and (b) reparatory (when the penalty substitutes
indemnity for damages).64

Item 8(m) of the Lease Contract is an accessory obligation or prestation to the principal
obligation of lease. It specifies the stipulated amount of liquidated damages — the full
deposit — to be awarded to the injured party in case of breach of the Term or period of
the principal obligation. Hence, as to source, it is conventional.

As defined, liquidated damages are those agreed upon by the parties to a contract, to
be paid in case of breach thereof.65 The amount of the liquidated damages is purely
contractual between the parties; and the courts will intervene only to equitably reduce
the liquidated damages, whether intended as an indemnity or a penalty, if they are
iniquitous or unconscionable, pursuant to Articles 2227 and 1229 66 of the Civil Code.

53
Also, proof of actual damages suffered by the creditor is not necessary in order that the
penalty may be demanded.67

Item 8(m) seeks to insure or guarantee the completion of the lease period since its
non-compliance shall be met with a penalty. The degree of the coercive effect or impact
of the penalty to insure or guarantee the performance of the principal obligation
depends largely on the stipulated amount of the liquidated damages. If the amount is
substantial, then the compulsion to perform may be greater. The obligor may not,
however, be willing to accept a very stiff penalty. As expressed earlier, the amount is
purely discretionary on the parties provided that it will pass the test of unconscionability
or excessiveness. Since the herein parties have agreed on a specific amount of penalty,
P367,821.00 or the full deposit, the Court will not even second guess whether it is
substantial enough to insure the compliance of the lease period. The Court will simply
rule that it is reasonable.

As to the effect of the penal clause, Article 1226 of the Civil Code provides:

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity
for damages and the payment of interests in case of noncompliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to
pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.

From the first paragraph of Article 1226, it is evident that, as a rule, the penalty is fixed
by the contracting parties as a compensation or substitute for damages in case of
breach of the obligation; and it is, therefore, clear that the penalty in its compensatory
aspect is the general rule, while the penalty in its strictly penal aspect is the
exception.68

It is also clear from paragraph 1 of Article 1226 that when an obligation or a contract
contains a penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of noncompliance with or breach of the principal obligation.
This general rule, however, admits three exceptions, namely: (1) when there is a
stipulation to the contrary; (2) when the obligor or debtor is sued for refusal to pay the
agreed penalty; and (3) when the obligor or debtor is guilty of fraud. In these
exceptions, it is evident that the purpose of the penalty is to punish since the obligee or
creditor can recover from the obligor or debtor not only the penalty, but also the
damages or interests resulting from the breach of the principal obligation. 69

Is item 8(m) intended by the parties for a strictly penal purpose or a punishment on the
guilty party? If it is, then item 8(m) is both complementary and cumulative. If it is not,
then it is subsidiary and reparatory.

As earlier observed, the third purpose of a penal clause, which is strictly penal, must be
expressly agreed upon. This is in consonance with the first sentence of Article 1226 —
"the penalty shall substitute the indemnity for damages and interests in case of
noncompliance, if there is no stipulation to the contrary." Thus, the contract must

54
expressly provide that in addition to the penalty, the guilty party shall be liable for
damages or interests resulting from the breach of the principal obligation.

Item 8(m) does not expressly make a reservation for an additional claim for damages
and interests occasioned by the breach of the lease period. There is, however, another
provision of the Lease Contract that is triggered by a default in item 8(m), to wit:

10. In the event that a Court Litigation has been resorted to by the LESSOR or
LESSEE, due to non-compliance of any of the foregoing provisions, the aggrieved party
shall be paid by the other party, no less than fifteen thousand (P15,000) pesos,
Philippine Currency, for Attorney's fees, and other damages that the honorable court
may allow; the cost of litigations shall be born[e] or paid by the party in fault, or in
default. All unpaid accounts and obligations of the TENANT shall earn interest or bear
interest at the rate of 14% per annum or at the allowable rate of interest from the date
of default. The legal suits shall be brought in the town of Quezon City. 70 (Underscoring
supplied)

Being provisions on default, item 8(m) and item 10 must be applied jointly and
simultaneously. Thus, aside from the forfeiture of the full deposit, the party at fault or
in default is liable, pursuant to item 10 of the Lease Contract, for the payment of
attorney's fees in an amount which is not less than P15,000.00, other damages that the
court may allow, cost of litigation, and 14% interest per annum on unpaid accounts and
obligations.

Can item 10 pass as the "stipulation to the contrary" or the express agreement required
in Article 1226? A careful reading of all the pertinent provisions leads the Court to
believe that when item 10 provides that "other damages that the court may allow" are
recoverable in case of noncompliance of any provision of the Lease Contract, this only
means what it says, that the aggrieved party can be awarded damages in addition to
the forfeiture of the deposit that is provided in item 8(m). In fine, item 8(m) and item
10, construed together, form a complementary and cumulative penal clause; and it is a
punishment or strictly penal.

From the foregoing, the Court accordingly rules that the bank is liable for the forfeiture
of the deposit and attorney's fees in the amount of P15,000.00 and such other damages
which Ragasa suffered by reason of the breach of the lease period by the bank.

Clearly, the requisites for the demandability of the penal clause are present in this case.
These are: (1) that the total non-fulfillment of the obligation or the defective fulfillment
is chargeable to the fault of the debtor; and (2) that the penalty may be enforced in
accordance with the provisions of law. As to the second requisite, the penalty is
demandable when the debtor is in mora in regard to obligations that are positive (to
give and to do) where demand may be necessary unless it is excused; and with regard
to negative obligations, when an act is done contrary to that which is prohibited. 71

In the present case, the bank pre-terminated the Lease Contract which is not expressly
allowed therein. For not complying with its Term or period, the bank did an act contrary
to what is not allowed in the Lease Contract.

55
Additionally, the bank cannot insist on paying only the penalty. This is proscribed under
Article 1227, to wit:

Art. 1227. The debtor cannot exempt himself from the performance of the obligation by
paying the penalty, save in the case where this right has been expressly reserved for
him. Neither can the creditor demand the fulfillment of the obligation and the
satisfaction of the penalty at the same time, unless this right has been clearly granted
him. However, if after the creditor has decided to require the fulfillment of the
obligation, the performance thereof should become impossible without his fault, the
penalty may be enforced.

There is nothing in the Lease Contract which provides that the bank can exempt itself
from the performance of any provision therein, including the Term or period, by simply
paying the penalty. Items 8(m) and 10 do not contain any such exemption.

As discussed above, Ragasa cannot insist on the performance of the lease, i.e., for the
lease to continue until expiration of its term, because the lease has been automatically
terminated when the bank breached it by pre-terminating its terms. Thus, Ragasa is
only entitled to damages.

That said, that is, even as items 8(m) and 10 are considered strictly penal or
punishment, Ragasa, as the injured party, is nonetheless required to prove the "other
damages" that it actually suffered before it can be entitled thereto. However, a review
of the records shows that Ragasa presented nothing. Ragasa simply insisted that the
bank should be liable for the amount representing the monthly rentals from July 1,
2001 up to January 31, 2003 or the unexpired term of the Lease Contract, equivalent to
P3,146,596.42. Ragasa did not adduce any evidence to support its claim that it actually
suffered damages of such amount in terms of lost income. In this regard, it must be
emphasized that Ragasa could have leased the Leased Premises as early as July 1,
2001 because the bank had completely vacated the same as of June 30, 2001. That
Ragasa chose not to lease the Leased Premises and not earn any rental therefrom in
the meantime that its complaint for damages against the bank was being litigated was
its own decision and doing.

Article 2203 of the Civil Code provides that "[t]he party suffering loss or injury must
exercise the diligence of a good father of a family to minimize the damages resulting
from the act or omission." Ragasa likewise failed in this respect.

In conclusion, the Court rules that Ragasa is not entitled to the rental for the unexpired
period of the Lease Contract, and it is only entitled to the forfeiture of the full deposit
pursuant to item 8(m) and P15,000.00 as attorney's fees pursuant to item 10.

WHEREFORE, premises considered, the instant petition for review is hereby

partly GRANTED. The Decision dated March 27, 2009 and the Resolution dated
November 25, 2009 of the CA are AFFIRMED WITH MODIFICATION, awarding
attorney's fees in the amount of P15,000.00 in favor of petitioner D.M. Ragasa
Enterprises, Inc.

SO ORDERED.

56
G.R. No. 185891               June 26, 2013

CATHAY PACIFIC AIRWAYS, Petitioner,

vs.
JUANITA REYES, WILFREDO REYES, MICHAEL ROY REYES, SIXTA LAPUZ, and
SAMPAGUITA TRAVEL CORP., Respondents.

DECISION

PEREZ, J.:

Assailed in this petition for review are the Decision1 dated 22 October 2008 in CA-G.R. CV. No.
86156 and the 6 January 2009 Resolution 2 in the same case of the Court of Appeals.

This case started as a complaint for damages tiled by respondents against Cathay Pacific Airways
(Cathay Pacific) and Sampaguita Travel Corp. (Sampaguita Travel), now joined as a respondent.
The factual backdrop leading to the filing of the complaint is as follows:

Sometime in March 1997, respondent Wilfredo Reyes (Wilfredo) made a travel reservation with
Sampaguita Travel for his family’s trip to Adelaide, Australia scheduled from 12 April 1997 to 4 May
1997. Upon booking and confirmation of their flight schedule, Wilfredo paid for the airfare and was
issued four (4) Cathay Pacific round-trip airplane tickets for Manila-HongKong-Adelaide-HongKong-
Manila with the following record locators:
1âwphi1

Name of Passenger PNR OR RECORD LOCATOR NOS.3

Reyes, Wilfredo J76TH
Reyes, Juanita HDWC3
Reyes, Michael H9VZF
Roy
Lapuz, Sixta HTFMG4

On 12 April 1997, Wilfredo, together with his wife Juanita Reyes (Juanita), son Michael Roy Reyes
(Michael) and mother-in-law Sixta Lapuz (Sixta), flew to Adelaide, Australia without a hitch.

One week before they were scheduled to fly back home, Wilfredo reconfirmed his family’s return
flight with the Cathay Pacific office in Adelaide. They were advised that the reservation was "still
okay as scheduled."

On the day of their scheduled departure from Adelaide, Wilfredo and his family arrived at the airport
on time. When the airport check-in counter opened, Wilfredo was informed by a staff from Cathay
Pacific that the Reyeses did not have confirmed reservations, and only Sixta’s flight booking was
confirmed. Nevertheless, they were allowed to board the flight to HongKong due to adamant pleas
from Wilfredo. When they arrived in HongKong, they were again informed of the same problem.
Unfortunately this time, the Reyeses were not allowed to board because the flight to Manila was fully
booked. Only Sixta was allowed to proceed to Manila from HongKong. On the following day, the
Reyeses were finally allowed to board the next flight bound for Manila.

57
Upon arriving in the Philippines, Wilfredo went to Sampaguita Travel to report the incident. He was
informed by Sampaguita Travel that it was actually Cathay Pacific which cancelled their bookings.

On 16 June 1997, respondents as passengers, through counsel, sent a letter to Cathay Pacific
advising the latter of the incident and demanding payment of damages.

After a series of exchanges and with no resolution in sight, respondents filed a Complaint for
damages against Cathay Pacific and Sampaguita Travel and prayed for the following relief: a)
₱1,000,000.00 as moral damages; b) ₱300,000.00 as actual damages; c) ₱100,000.00 as
exemplary damages; and d) ₱100,000.00 as attorney’s fees.5

In its Answer, Cathay Pacific alleged that based on its computerized booking system, several and
confusing bookings were purportedly made under the names of respondents through two (2) travel
agencies, namely: Sampaguita Travel and Rajah Travel Corporation. Cathay Pacific explained that
only the following Passenger Name Records (PNRs) appeared on its system: PNR No. H9V15, PNR
No. HTFMG, PNR No. J9R6E, PNR No. J76TH, and PNR No. H9VSE. Cathay Pacific went on to
detail each and every booking, to wit:

1. PNR No. H9V15

Agent: Sampaguita Travel Corp.

Party: Ms. J Reyes, Mr. M R Reyes, Mr. W Reyes

Itinerary: CX902/CX105 MNL/HKG/ADL 12 APR.

The itinerary listed above was confirmed booking. However, the itinerary did not include booking for
the return flights. From information retrieved from ABACUS (the booking system used by agents),
the agent has, on 10 April, added segments CX104/CX905 ADL/HKG/MNL 04 MAY on MK status,
which was not a confirmed booking. MK function is used for synchronizing records or for ticketing
purposes only. It does not purport to be a real booking. As a result, no booking was transmitted into
CPA’s system.

2. PNR No. HTFMG

Agent: Sampaguita Travel Corp.

Party: Mrs. Sixta Lapuz

Itinerary: CX902/CX105 MNL/HKG/ADL 12 APR, CX104/CX907 ADL/HKG/MNL 04/05 MAY.

The above itinerary is the actual itinerary that the passenger has flown. However, for the return
sector, HKG/MNL, the original booking was on CX905 of 04 May. This original booking was
confirmed on 21 Mar. and ticketed on 11 Apr.

This booking was cancelled on 04 May at 9:03 p.m. when CX905 was almost scheduled to leave at
the behest of the passenger and she was re-booked on CX907 of 05 May at the same time.

3. PNR No. J9R6E

Agent: Rajah Travel Corp.

58
Party: Mrs. Julieta Gaspar, Mrs. Sixta Lapuz, Mrs. Juanita Reyes,

Mr. Michael Roy Reyes, Mr. Wilfredo Reyes.

Itinerary: CX900 & CX902 MNL/HKG 12 APR, CX105 HKG/ADL 12 APR, CX104/CX905
ADL/HKG/MNL 04 MAY & 07 MAY

The party was confirmed initially on CX900/12 Apr, CX105/12 Apr, CX104/CX9095 07 May and on
waiting list for CX902/12 Apr, CX104/CX905 04 May.

However, on 31 Mar., the booking was cancelled by the agent.

4. PNR No. J76TH

Agent: Sampaguita Travel Corp.

Party: Mr. W Reyes

Itinerary: CX104/CX905 ADL/HKG/MNL 04 MAY.

The booking on the above itinerary was confirmed initially. When the agent was asked for the ticket
number as the flight CX905 04 May was very critical, the agent has inputted the ticket number on 10
Apr. but has removed the record on 11 April. Since the booking was reflected as not ticketed, the
booking was cancelled on 18 Apr. accordingly.

This PNR was split from another PNR record, H9VSE.

5. PNR No. H9VSE

Agent: Sampaguita Travel Corp.

Party: Ms. R Lapuz, Mr. R Lapuz, Mr. A Samson, originally Mr. W Reyes was included in this party
as well

Itinerary: CX104/CX905 ADL/HKG/MNL 04 MAY.

The booking was confirmed initially but were not ticketed by 11 Apr. and was cancelled accordingly.
However, the PNR of Mr. W Reyes who was originally included in this party was split to a separate
record of J76TH.6

Cathay Pacific asserted that in the case of Wilfredo with PNR No. J76TH, no valid ticket number was
inputted within a prescribed period which means that no ticket was sold. Thus, Cathay Pacific had
the right to cancel the booking. Cathay Pacific found that Sampaguita Travel initially inputted a ticket
number for PNR No. J76TH and had it cancelled the following day, while the PNR Nos. HDWC3 and
HTFMG of Juanita and Michael do not exist.

The Answer also contained a cross-claim against Sampaguita Travel and blamed the same for the
cancellation of respondents’ return flights. Cathay Pacific likewise counterclaimed for payment of
attorney’s fees.

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On the other hand, Sampaguita Travel, in its Answer, denied Cathay Pacific’s claim that it was the
cause of the cancellation of the bookings. Sampaguita Travel maintained that it made the necessary
reservation with Cathay Pacific for respondents’ trip to Adelaide. After getting confirmed bookings
with Cathay Pacific, Sampaguita Travel issued the corresponding tickets to respondents. Their
confirmed bookings were covered with the following PNRs:

PASSENGER NAME PNR No.

Lapuz, Sixta H9V15/ J76TH
Reyes, Wilfredo H9V15/HDWC3
Reyes, Michael Roy H9V15/H9VZF
Reyes, Juanita HTFMG7

Sampaguita Travel explained that the Reyeses had two (2) PNRs each because confirmation from
Cathay Pacific was made one flight segment at a time. Sampaguita Travel asserted that it only
issued the tickets after Cathay Pacific confirmed the bookings. Furthermore, Sampaguita Travel
exonerated itself from liability for damages because respondents were claiming for damages arising
from a breach of contract of carriage. Sampaguita Travel likewise filed a cross-claim against Cathay
Pacific and a counterclaim for damages.

During the pre-trial, the parties agreed on the following stipulation of facts:

1. That the plaintiffs did not deal directly with Cathay Pacific Airways;

2. That the plaintiffs did not make their bookings directly with Cathay Pacific Airways;

3. That the plaintiffs did not purchase and did not get their tickets from Cathay Pacific
Airways;

4. That Cathay Pacific Airways has promptly replied to all communications sent by the
plaintiffs through their counsel;

5. That the plane tickets issued to plaintiffs were valid, which is why they were able to depart
from Manila to Adelaide, Australia and that the reason why they were not able to board their
return flight from Adelaide was because of the alleged cancellation of their booking by
Cathay Pacific Airways at Adelaide, save for that of Sixta Lapuz whose booking was
confirmed by Cathay Pacific Airways;

6. That several reservations and bookings for the plaintiffs were done by defendant
Sampaguita Travel Corporation through the computer reservation system and each of such
request was issued a PNR;

7. That, as a travel agent, defendant Sampaguita Travel Corporation merely acts as a

booking/sales/ticketing arm for airline companies and it has nothing to do with the airline
operations;

8. That in the travel industry, the practice of reconfirmation of return flights by passengers is
coursed or done directly with the airline company and not with the travel agent, which has no
participation, control or authority in making such reconfirmations.

60
 9. That in the travel industry, the practice of cancellation of flights is within the control of the
airline and not of the travel agent, unless the travel agent is requested by the passengers to
make such cancellations; and,

10. That defendant Cathay Pacific Airways has advertised that "there is no need to confirm
your flight when travelling with us", although Cathay Pacific Airways qualifies the same to the
effect that in some cases there is a need for reconfirmations. 8

After trial on the merits, the Regional Trial Court (RTC) rendered a Decision, 9 the dispositive part of
which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the defendants and
against the herein plaintiff. Accordingly, plaintiffs’ complaint is hereby ordered DISMISSED for lack
of merit. Defendants’ counterclaims and cross-claims are similarly ordered dismissed for lack of
merit. No pronouncement as to cost.10

The trial court found that respondents were in possession of valid tickets but did not have confirmed
reservations for their return trip to Manila. Additionally, the trial court observed that the several PNRs
opened by Sampaguita Travel created confusion in the bookings. The trial court however did not find
any basis to establish liability on the part of either Cathay Pacific or Sampaguita Travel considering
that the cancellation was not without any justified reason. Finally, the trial court denied the claims for
damages for being unsubstantiated.

Respondents appealed to the Court of Appeals. On 22 October 2008, the Court of Appeals ordered
Cathay Pacific to pay ₱25,000.00 each to respondents as nominal damages.

Upon denial of their motion for reconsideration, Cathay Pacific filed the instant petition for review
assigning the following as errors committed by the Court of Appeals:

A.

WHETHER OR NOT THE COURT OF APPEALS COMMITTED A CLEAR AND

REVERSIBLE ERROR IN HOLDING THAT CATHAY PACIFIC AIRWAYS IS LIABLE FOR
NOMINAL DAMAGES FOR ITS ALLEGED INITIAL BREACH OF CONTRACT WITH THE
PASSENGERS EVEN THOUGH CATHAY PACIFIC AIRWAYS WAS ABLE TO PROVE
BEYOND REASONABLE DOUBT THAT IT WAS NOT AT FAULT FOR THE
PREDICAMENT OF THE RESPONDENT PASSENGERS.

B.

WHETHER OR NOT THE COURT OF APPEALS COMMITTED A CLEAR AND

REVERSIBLE ERROR IN RELYING ON MATTERS NOT PROVED DURING THE TRIAL
AND NOT SUPPORTED BY THE EVIDENCE AS BASIS FOR HOLDING CATHAY PACIFIC
AIRWAYS LIABLE FOR NOMINAL DAMAGES.

C.

WHETHER OR NOT THE COURT OF APPEALS COMMITTED A CLEAR AND

REVERSIBLE ERROR IN HOLDING CATHAY PACIFIC AIRWAYS LIABLE FOR NOMINAL
DAMAGES TO RESPONDENT SIXTA LAPUZ.

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 D.

WHETHER OR NOT THE COURT OF APPEALS COMMITTED A CLEAR AND

REVERSIBLE ERROR IN NOT HOLDING SAMPAGUITA TRAVEL CORP. LIABLE TO
CATHAY PACIFIC AIRWAYS FOR WHATEVER DAMAGES THAT THE AIRLINE
COMPANY WOULD BE ADJUDGED THE RESPONDENT PASSENGERS.

E.

ALTERNATIVELY, WHETHER OR NOT THE COURT OF APPEALS COMMITTED A

CLEAR AND REVERSIBLE ERROR WHEN IT FAILED TO APPLY THE DOCTRINE OF
STARE DECISIS IN FIXING THE AMOUNT OF NOMINAL DAMAGES TO BE AWARDED.11

Cathay Pacific assails the award of nominal damages in favor of respondents on the ground that its
action of cancelling the flight bookings was justifiable. Cathay Pacific reveals that upon investigation,
the respondents had no confirmed bookings for their return flights. Hence, it was not obligated to
transport the respondents. In fact, Cathay Pacific adds, it exhibited good faith in accommodating the
respondents despite holding unconfirmed bookings.

Cathay Pacific also scores the Court of Appeals in basing the award of nominal damages on the
alleged asthmatic condition of passenger Michael and old age of Sixta. Cathay Pacific points out that
the records, including the testimonies of the witnesses, did not make any mention of Michael’s
asthma. And Sixta was in fact holding a confirmed booking but she refused to take her confirmed
seat and instead stayed in HongKong with the other respondents.

Cathay Pacific blames Sampaguita Travel for negligence in not ensuring that respondents had
confirmed bookings for their return trips.

Lastly, assuming arguendo that the award of nominal damages is proper, Cathay Pacific contends
that the amount should be reduced to ₱5,000.00 for each passenger.

At the outset, it bears pointing out that respondent Sixta had no cause of action against Cathay
Pacific or Sampaguita Travel. The elements of a cause of action consist of: (1) a right existing in
favor of the plaintiff, (2) a duty on the part of the defendant to respect the plaintiff’s right, and (3) an
act or omission of the defendant in violation of such right. 12 As culled from the records, there has
been no violation of any right or breach of any duty on the part of Cathay Pacific and Sampaguita
Travel. As a holder of a valid booking, Sixta had the right to expect that she would fly on the flight
and on the date specified on her airplane ticket. Cathay Pacific met her expectations and Sixta was
indeed able to complete her flight without any trouble. The absence of any violation to Sixta’s right
as passenger effectively deprived her of any relief against either Cathay Pacific or Sampaguita
Travel.

With respect to the three remaining respondents, we rule as follows:

The determination of whether or not the award of damages is correct depends on the nature of the
respondents’ contractual relations with Cathay Pacific and Sampaguita Travel. It is beyond dispute
that respondents were holders of Cathay Pacific airplane tickets and they made the booking through
Sampaguita Travel.

Respondents’ cause of action against Cathay Pacific stemmed from a breach of contract of carriage.
A contract of carriage is defined as one whereby a certain person or association of persons obligate

62
themselves to transport persons, things, or news from one place to another for a fixed price. 13 Under
Article 1732 of the Civil Code, this "persons, corporations, firms, or associations engaged in the
business of carrying or transporting passengers or goods or both, by land, water, or air, for
compensation, offering their services to the public" is called a common carrier.

Respondents entered into a contract of carriage with Cathay Pacific. As far as respondents are
concerned, they were holding valid and confirmed airplane tickets. The ticket in itself is a valid
written contract of carriage whereby for a consideration, Cathay Pacific undertook to carry
respondents in its airplane for a round-trip flight from Manila to Adelaide, Australia and then back to
Manila. In fact, Wilfredo called the Cathay Pacific office in Adelaide one week before his return flight
to re-confirm his booking. He was even assured by a staff of Cathay Pacific that he does not need to
reconfirm his booking.

In its defense, Cathay Pacific posits that Wilfredo’s booking was cancelled because a ticket number
was not inputted by Sampaguita Travel, while bookings of Juanita and Michael were not honored for
being fictitious. Cathay Pacific clearly blames Sampaguita Travel for not finalizing the bookings for
the respondents’ return flights. Respondents are not privy to whatever misunderstanding and
confusion that may have transpired in their bookings. On its face, the airplane ticket is a valid written
contract of carriage. This Court has held that when an airline issues a ticket to a passenger
confirmed on a particular flight, on a certain date, a contract of carriage arises, and the passenger
has every right to expect that he would fly on that flight and on that date. If he does not, then the
carrier opens itself to a suit for breach of contract of carriage. 14

As further elucidated by the Court of Appeals:

Now, Article 1370 of the Civil Code mandates that "if the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall
control." Under Section 9, Rule 130 of the Rules of Court, once the terms of an agreement have
been reduced to writing, it is deemed to contain all the terms agreed upon by the parties and no
evidence of such terms other than the contents of the written agreement shall be admissible. The
terms of the agreement of appellants and appellee Cathay Pacific embodied in the tickets issued by
the latter to the former are plain – appellee Cathay Pacific will transport appellants to Adelaide,
Australia from Manila via Hongkong on 12 April 1991 and back to Manila from Adelaide, Australia
also via Hongkong on 4 May 1997. In addition, the tickets reveal that all appellants have confirmed
bookings for their flight to Adelaide, Australia and back to Manila as manifested by the words "Ok"
indicated therein. Arlene Ansay, appellee Cathay Pacific’s Reservation Supervisor, validated this fact
in her testimony saying that the return flights of all appellants to the Philippines on 4 May 1997 were
confirmed as appearing on the tickets. Indubitably, when appellee Cathay Pacific initially refused to
transport appellants to the Philippines on 4 May 1997 due to the latter’s lack of reservation, it has, in
effect, breached their contract of carriage. Appellants, however, were eventually accommodated and
transported by appellee Cathay Pacific to Manila. 15

Cathay Pacific breached its contract of carriage with respondents when it disallowed them to board
the plane in Hong Kong going to Manila on the date reflected on their tickets. Thus, Cathay Pacific
opened itself to claims for compensatory, actual, moral and exemplary damages, attorney’s fees and
costs of suit.

In contrast, the contractual relation between Sampaguita Travel and respondents is a contract for
services. The object of the contract is arranging and facilitating the latter’s booking and ticketing. It
was even Sampaguita Travel which issued the tickets.

63
Since the contract between the parties is an ordinary one for services, the standard of care required
of respondent is that of a good father of a family under Article 1173 of the Civil Code. This connotes
reasonable care consistent with that which an ordinarily prudent person would have observed when
confronted with a similar situation. The test to determine whether negligence attended the
performance of an obligation is: did the defendant in doing the alleged negligent act use that
reasonable care and caution which an ordinarily prudent person would have used in the same
situation? If not, then he is guilty of negligence. 16

There was indeed failure on the part of Sampaguita Travel to exercise due diligence in performing its
obligations under the contract of services. It was established by Cathay Pacific, through the
generation of the PNRs, that Sampaguita Travel failed to input the correct ticket number for
Wilfredo’s ticket. Cathay Pacific even asserted that Sampaguita Travel made two fictitious bookings
for Juanita and Michael.

The negligence of Sampaguita Travel renders it also liable for damages.

For one to be entitled to actual damages, it is necessary to prove the actual amount of loss with a
reasonable degree of certainty, premised upon competent proof and the best evidence obtainable by
the injured party. To justify an award of actual damages, there must be competent proof of the actual
amount of loss. Credence can be given only to claims which are duly supported by receipts. 17

We echo the findings of the trial court that respondents failed to show proof of actual damages.
Wilfredo initially testified that he personally incurred losses amounting to ₱300,000.00 which
represents the amount of the contract that he was supposedly scheduled to sign had his return trip
not been cancelled. During the cross-examination however, it appears that the supposed contract-
signing was a mere formality and that an agreement had already been hatched beforehand. Hence,
we cannot fathom how said contract did not materialize because of Wilfredo’s absence, and how
Wilfredo incurred such losses when he himself admitted that he entered into said contract on behalf
of Parsons Engineering Consulting Firm, where he worked as construction manager. Thus, if indeed
there were losses, these were losses suffered by the company and not by Wilfredo. Moreover, he
did not present any documentary evidence, such as the actual contract or affidavits from any of the
parties to said contract, to substantiate his claim of losses. With respect to the remaining
passengers, they likewise failed to present proof of the actual losses they suffered.

Under Article 2220 of the Civil Code of the Philippines, an award of moral damages, in breaches of
contract, is in order upon a showing that the defendant acted fraudulently or in bad faith. 18 What the
law considers as bad faith which may furnish the ground for an award of moral damages would be
bad faith in securing the contract and in the execution thereof, as well as in the enforcement of its
terms, or any other kind of deceit. In the same vein, to warrant the award of exemplary damages,
defendant must have acted in wanton, fraudulent, reckless, oppressive, or malevolent manner. 19

In the instant case, it was proven by Cathay Pacific that first, it extended all possible
accommodations to respondents.  They were promptly informed of the problem in their bookings
1âwphi1

while they were still at the Adelaide airport. Despite the non-confirmation of their bookings,
respondents were still allowed to board the Adelaide to Hong Kong flight. Upon arriving in Hong
Kong, they were again informed that they could not be accommodated on the next flight because it
was already fully booked. They were however allowed to board the next available flight on the
following day. Second, upon receiving the complaint letter of respondents, Cathay Pacific
immediately addressed the complaint and gave an explanation on the cancellation of their flight
bookings.

64
The Court of Appeals is correct in stating that "what may be attributed to x x x Cathay Pacific is
negligence concerning the lapses in their process of confirming passenger bookings and
reservations, done through travel agencies. But this negligence is not so gross so as to amount to
bad faith."20 Cathay Pacific was not motivated by malice or bad faith in not allowing respondents to
board on their return flight to Manila. It is evident and was in fact proven by Cathay Pacific that its
refusal to honor the return flight bookings of respondents was due to the cancellation of one booking
and the two other bookings were not reflected on its computerized booking system.

Likewise, Sampaguita Travel cannot be held liable for moral damages. True, Sampaguita Travel was
negligent in the conduct of its booking and ticketing which resulted in the cancellation of flights. But
its actions were not proven to have been tainted with malice or bad faith. Under these
circumstances, respondents are not entitled to moral and exemplary damages.  With respect to
1âwphi1

attorney’s fees, we uphold the appellate court’s finding on lack of factual and legal justification to
award attorney’s fees.

We however sustain the award of nominal damages in the amount of ₱25,000.00 to only three of the
four respondents who were aggrieved by the last-minute cancellation of their flights. Nominal
damages are recoverable where a legal right is technically violated and must be vindicated against
an invasion that has produced no actual present loss of any kind or where there has been a breach
of contract and no substantial injury or actual damages whatsoever have been or can be
shown.21 Under Article 2221 of the Civil Code, nominal damages may be awarded to a plaintiff
whose right has been violated or invaded by the defendant, for the purpose of vindicating or
recognizing that right, not for indemnifying the plaintiff for any loss suffered.

Considering that the three respondents were denied boarding their return flight from HongKong to
Manila and that they had to wait in the airport overnight for their return flight, they are deemed to
have technically suffered injury. Nonetheless, they failed to present proof of actual damages.
Consequently, they should be compensated in the form of nominal damages.

The amount to be awarded as nominal damages shall be equal or at least commensurate to the
injury sustained by respondents considering the concept and purpose of such damages. The amount
of nominal damages to be awarded may also depend on certain special reasons extant in the case. 22

The amount of such damages is addressed to the sound discretion of the court and taking into
account the relevant circumstances,23 such as the failure of some respondents to board the flight on
schedule and the slight breach in the legal obligations of the airline company to comply with the
terms of the contract, i.e., the airplane ticket and of the travel agency to make the correct bookings.
We find the award of ₱25,000.00 to the Reyeses correct and proper.

Cathay Pacific and Sampaguita Travel acted together in creating the confusion in the bookings
which led to the erroneous cancellation of respondents’ bookings. Their negligence is the proximate
cause of the technical injury sustained by respondents. Therefore, they have become joint
tortfeasors, whose responsibility for quasi-delict, under Article 2194 of the Civil Code, is solidary.

Based on the foregoing, Cathay Pacific and Sampaguita Travel are jointly and solidarily liable for
nominal damages awarded to respondents Wilfredo, Juanita and Michael Roy.

WHEREFORE, the Petition is DENIED. The 22 October 2008 Decision of the Court of Appeals is
AFFIRMED with MODIFICATION that Sampaguita Travel is held to be solidarily liable with Cathay
Pacific in the payment of nominal damages of ~25,000.00 each for Wilfredo Reyes, Juanita Reyes,
and Michael Rox Reyes. The complaint of respondent Sixta

65
Lapuz is DISMISSED for lack of cause of action.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice

66
G.R. No. 173292               September 1, 2010

MEMORACION Z. CRUZ, represented by EDGARDO Z. CRUZ, Petitioner,

vs.
OSWALDO Z. CRUZ, Respondent.

DECISION

CARPIO, J.:

The Case

This is a petition for review1 of the Court of Appeals’ (CA) Decision2 dated 20 December 2005 and
Resolution dated 21 June 2006 in CA-G.R. CV No. 80355. The CA affirmed with modification the
Order3 dated 2 June 1997 of the Regional Trial Court of the National Capital Judicial Region, Branch
30, Manila (RTC).

The Antecedent Facts

The undisputed facts, as summarized by the Court of Appeals, are as follows:

On October 18, 1993, Memoracion Z. Cruz filed with the Regional Trial Court in Manila a Complaint
against her son, defendant-appellee Oswaldo Z. Cruz, for "Annulment of Sale, Reconveyance and
Damages."

Memoracion claimed that during her union with her common-law husband (deceased) Architect
Guido M. Cruz, she acquired a parcel of land located at Tabora corner Limay Streets, Bo. Obrero,
Tondo Manila; that the said lot was registered in her name under TCT No. 63467 at the Register of
Deeds of Manila; that sometime in July 1992, she discovered that the title to the said property was
transferred by appellee and the latter’s wife in their names in August 1991 under TCT No. 0-199377
by virtue of a Deed of Sale dated February 12, 1973; that the said deed was executed through fraud,
forgery, misrepresentation and simulation, hence, null and void; that she, with the help of her
husband’s relatives, asked appellee to settle the problem; that despite repeated pleas and demands,
appellee refused to reconvey to her the said property; that she filed a complaint against appellee
before the office of the Barangay having jurisdiction over the subject property; and that since the
matter was unsettled, the barangay x x x issued x x x a certification to file [an] action in court, now
the subject of controversy.

After Memoracion x x x finished presenting her evidence in chief, she died on October 30, 1996.
Through a Manifestation, Memoracion’s counsel, Atty. Roberto T. Neri, notified the trial court on
January 13, 1997 of the fact of such death, evidenced by a certificate thereof.

For his part, appellee filed a Motion to Dismiss on the grounds that (1) the plaintiff’s reconveyance
action is a personal action which does not survive a party’s death, pursuant to Section 21, Rule 3 of
the Revised Rules of Court, and (2) to allow the case to continue would result in legal absurdity
whereby one heir is representing the defendant [and is a] co-plaintiff in this case.

On June 2, 1997, the trial court issued the appealed Order in a disposition that reads:

"Wherefore, in view of the foregoing, this case is ordered dismissed without prejudice to the
prosecution thereof in the proper estate proceedings."

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On October 17, 1997, Memoracion’s son-heir, Edgardo Z. Cruz, manifested to the trial court that he
is retaining the services of Atty. Neri for the plaintiff. Simultaneously, Atty. Neri filed a Motion for
Reconsideration of the June 2, 1997 Order. However, the said motion was subsequently denied by
Acting Presiding Judge Cielito N. Mindaro-Grulla [on October 31, 2000].

Thereafter, Edgardo Cruz, as an heir of Memoracion Cruz, filed a notice of appeal in behalf of the
deceased plaintiff, signed by Atty. Neri, but the appeal was dismissed by Judge Mindaro-Grulla,
[stating that] the proper remedy being certiorari under Rule 65 of the Rules of Court. On appellant’s
motion for reconsideration, Judge Lucia Pena Purugganan granted the same, stating that the
remedy under the circumstances is ordinary appeal.4

The Court of Appeals’ Ruling

Petitioner Memoracion Z. Cruz, represented by Edgardo Z. Cruz, filed with the Court of Appeals a
Petition for Review under Rule 45 of the 1997 Revised Rules of Civil Procedure. On 20 December
2005, the CA rendered judgment affirming with modification the RTC decision. We quote the
dispositive portion of the CA’s decision below.

WHEREFORE, the appealed Order is AFFIRMED, with MODIFICATION. The trial court’s directive

as to the prosecution of the action in the proper estate proceedings is DELETED.

SO ORDERED.5

Petitioner’s Motion for Reconsideration was denied by the CA in its Resolution of 21 June 2006. 6

Hence, this appeal.

The Issues

The issues for resolution in this case are:

1. Whether the Court of Appeals erred in ruling that Memoracion Z. Cruz’s Petition for
Annulment of Deed of Sale, Reconveyance and Damages is a purely personal action which
did not survive her death; and

2. Whether the Court of Appeals erred in affirming with modification the RTC Order
dismissing the Petition for Annulment of Deed of Sale, Reconveyance and Damages.

The Court’s Ruling

We find the appeal meritorious.

The Petition for Annulment of Sale, Reconveyance

and Damages survived the death of petitioner

The criterion for determining whether an action survives the death of a petitioner was elucidated in
Bonilla v. Barcena,7 to wit:

The question as to whether an action survives or not depends on the nature of the action and the
damage sued for. In the causes of action which survive, the wrong complained [of] affects primarily
and principally property and property rights, the injuries to the person being merely incidental, while

68
in the causes of action which do not survive, the injury complained of is to the person, the property
and rights of property affected being incidental. 8

If the case affects primarily and principally property and property rights, then it survives the death of
the plaintiff or petitioner. In Sumaljag v. Literato,9 we held that a Petition for Declaration of Nullity of
Deed of Sale of Real Property is one relating to property and property rights, and therefore, survives
the death of the petitioner. Accordingly, the instant case for annulment of sale of real property merits
survival despite the death of petitioner Memoracion Z. Cruz.

The CA erred in affirming RTC’s dismissal of the

Petition for Annulment of Deed of Sale,
Reconveyance and Damages

When a party dies during the pendency of a case, Section 16, Rule 3 of the 1997 Revised Rules of
Civil Procedure necessarily applies, viz:

Sec. 16. Death of party; duty of counsel. - Whenever a party to a pending action dies, and the claim
is not thereby extinguished, it shall be the duty of his counsel to inform the court within thirty (30)
days after such death of the fact thereof, and to give the name and address of his legal
representative or representatives. Failure of counsel to comply with this duty shall be a ground for
disciplinary action.

The heirs of the deceased may be allowed to be substituted for the deceased, without requiring the
appointment of an executor or administrator and the court may appoint a guardian ad litem for the
minor heirs.

The court shall forthwith order said legal representative or representatives to appear and be
substituted within a period of thirty (30) days from notice.

If no legal representative is named by the counsel for the deceased party, or if the one so named
shall fail to appear within the specified period, the court may order the opposing party, within a
specified time, to procure the appointment of an executor or administrator for the estate of the
deceased and the latter shall immediately appear for and on behalf of the deceased. The court
charges in procuring such appointment, if defrayed by the opposing party, may be recovered as
costs.

The foregoing section is a revision of Section 17, Rule 3 of the old Rules of Court:

SEC. 17. Death of party. - After a party dies and the claim is not thereby extinguished, the court shall
order, upon proper notice, the legal representative of the deceased to appear and to be substituted
for the deceased, within a period of thirty (30) days, or within such time as may be granted. If the
legal representative fails to appear within said time, the court may order the opposing party to
procure the appointment of a legal representative of the deceased within a time to be specified by
the court, and the representative shall immediately appear for and on behalf of the interest of the
deceased. The court charges involved in procuring such appointment, if defrayed by the opposing
party, may be recovered as costs. The heirs of the deceased may be allowed to be substituted for
the deceased, without requiring the appointment of an executor or administrator and the court may
appoint guardian ad litem for the minor heirs.

69
If the action survives despite death of a party, it is the duty of the deceased’s counsel to inform the
court of such death, and to give the names and addresses of the deceased’s legal representatives.
The deceased may be substituted by his heirs in the pending action. As explained in Bonilla:

x x x Article 777 of the Civil Code provides "that the rights to the succession are transmitted from the
moment of the death of the decedent." From the moment of the death of the decedent, the heirs
become the absolute owners of his property, subject to the rights and obligations of the decedent,
and they cannot be deprived of their rights thereto except by the methods provided for by law. The
moment of death is the determining factor when the heirs acquire a definite right to the inheritance
whether such right be pure or contingent. The right of the heirs to the property of the deceased vests
in them even before judicial declaration of their being heirs in the testate or intestate proceedings.
When [plaintiff], therefore, died[,] her claim or right to the parcels of land x x x was not extinguished
by her death but was transmitted to her heirs upon her death. Her heirs have thus acquired interest
in the properties in litigation and became parties in interest in the case. There is, therefore, no
reason for the respondent Court not to allow their substitution as parties in interest for the deceased
plaintiff.10

If no legal representative is named by the counsel of the deceased, or the legal representative fails
to appear within a specified period, it is the duty of the court where the case is pending to order the
opposing party to procure the appointment of an executor or administrator for the estate of the
deceased. The reason for this rule is to protect all concerned who may be affected by the intervening
death, particularly the deceased and his estate.111avvphi1

In the instant case, petitioner (plaintiff) Memoracion Z. Cruz died on 30 October 1996. Her counsel,
Atty. Roberto T. Neri, notified the trial court of such death on 13 January 1997, through a
Manifestation stating thus:

COMES NOW the undersigned counsel and to this Honorable Court respectfully gives notice that
the plaintiff, Memoracion Z. Cruz, died on October 30, 1996, in Manila as shown by a Certificate of
Death, a certified true copy of which is hereto attached as Annex "A" hereof.

The legal representative of the deceased plaintiff is her son EDGARDO CRUZ whose address is at
No. 3231-E Tabora St., Bo. Obrero, Tondo, Manila.

x x x x12

On 24 January 1997, respondent (defendant) Oswaldo Z. Cruz moved to dismiss the case alleging
that it did not survive Memoracion’s death. The RTC granted the motion to dismiss in the assailed
Order dated 2 June 1997.

We rule that it was error for the RTC to dismiss the case. As mentioned earlier, the petition for
annulment of deed of sale involves property and property rights, and hence, survives the death of
petitioner Memoracion. The RTC was informed, albeit belatedly, 13 of the death of Memoracion, and
was supplied with the name and address of her legal representative, Edgardo Cruz. What the RTC
could have done was to require Edgardo Cruz to appear in court and substitute Memoracion as party
to the pending case, pursuant to Section 16, Rule 3 of the 1997 Revised Rules of Civil Procedure,
and established jurisprudence.

We note that on 17 October 1997, Edgardo Cruz filed with the RTC a Manifestation, stating that he
is retaining the services of Atty. Roberto T. Neri. We quote: 14

70
UNDERSIGNED HEIR of the late Memoracion Z. Cruz respectfully manifests that he is retaining the
services of ATTY. ROBERTO T. NERI as counsel for the plaintiff.

(Sgd.) EDGARDO Z. CRUZ

Plaintiff

Consistent with our ruling in Heirs of Haberer v. Court of Appeals,15 we consider such Manifestation,
signed by Memoracion’s heir, Edgardo Cruz, and retaining Atty. Neri’s services as counsel, a formal
substitution of deceased Memoracion by her heir, Edgardo Cruz. It also needs mention that Oswaldo
Cruz, although also an heir of Memoracion, should be excluded as a legal representative in the case
for being an adverse party therein.16

WHEREFORE, we GRANT the petition. We REVERSE the Court of Appeals’ Decision dated 20

December 2005 and Resolution dated 21 June 2006 in CA-G.R. CV No. 80355. We REMAND this
case to the Regional Trial Court of the National Capital Judicial Region, Branch 30, Manila, for
further proceedings.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

71
G.R. No. 118248             April 5, 2000

DKC HOLDINGS CORPORATION,petitioner,

vs.
COURT OF APPEALS, VICTOR U. BARTOLOME and REGISTER OF DEEDS FOR METRO
MANILA, DISTRICT III, respondents.

YNARES-SANTIAGO, J.:

This is a petition for review on certiorari seeking the reversal of the December 5, 1994 Decision of
the Court of Appeals in CA-G.R. CV No. 40849 entitled "DKC Holdings Corporation vs. Victor U.
Bartolome, et al.", affirming in toto the January 4, 1993 Decision of the Regional Trial Court of
1 

Valenzuela, Branch 172, which dismissed Civil Case No. 3337-V-90 and ordered petitioner to pay
2 

P30,000.00 as attorney's fees.

The subject of the controversy is a 14,021 square meter parcel of land located in Malinta,
Valenzuela, Metro Manila which was originally owned by private respondent Victor U. Bartolome's
deceased mother, Encarnacion Bartolome, under Transfer Certificate of Title No. B-37615 of the
Register of Deeds of Metro Manila, District III. This lot was in front of one of the textile plants of
petitioner and, as such, was seen by the latter as a potential warehouse site.

On March 16, 1988, petitioner entered into a Contract of Lease with Option to Buy with Encarnacion
Bartolome, whereby petitioner was given the option to lease or lease with purchase the subject land,
which option must be exercised within a period of two years counted from the signing of the
Contract. In turn, petitioner undertook to pay P3,000.00 a month as consideration for the reservation
of its option. Within the two-year period, petitioner shall serve formal written notice upon the lessor
Encarnacion Bartolome of its desire to exercise its option. The contract also provided that in case
petitioner chose to lease the property, it may take actual possession of the premises. In such an
event, the lease shall be for a period of six years, renewable for another six years, and the monthly
rental fee shall be P15,000.00 for the first six years and P18,000.00 for the next six years, in case of
renewal.

Petitioner regularly paid the monthly P3,000.00 provided for by the Contract to Encarnacion until her
death in January 1990. Thereafter, petitioner coursed its payment to private respondent Victor
Bartolome, being the sole heir of Encarnacion. Victor, however, refused to accept these payments.

Meanwhile, on January 10, 1990, Victor executed an Affidavit of Self-Adjudication over all the
properties of Encarnacion, including the subject lot. Accordingly, respondent Register of Deeds
cancelled Transfer Certificate of Title No. B-37615 and issued Transfer Certificate of Title No. V-
14249 in the name of Victor Bartolome.

On March 14, 1990, petitioner served upon Victor, via registered mail, notice that it was exercising
its option to lease the property, tendering the amount of P15,000.00 as rent for the month of March.

72
Again, Victor refused to accept the tendered rental fee and to surrender possession of the property
to petitioner.

Petitioner thus opened Savings Account No. 1-04-02558-I-1 with the China Banking Corporation,
Cubao Branch, in the name of Victor Bartolome and deposited therein the P15,000.00 rental fee for
March as well as P6,000.00 reservation fees for the months of February and March.

Petitioner also tried to register and annotate the Contract on the title of Victor to the property.
Although respondent Register of Deeds accepted the required fees, he nevertheless refused to
register or annotate the same or even enter it in the day book or primary register. 1âwphi1.nêt

Thus, on April 23, 1990, petitioner filed a complaint for specific performance and damages against
Victor and the Register of Deeds, docketed as Civil Case No. 3337-V-90 which was raffled off to
3 

Branch 171 of the Regional Trial Court of Valenzuela. Petitioner prayed for the surrender and
delivery of possession of the subject land in accordance with the Contract terms; the surrender of
title for registration and annotation thereon of the Contract; and the payment of P500,000.00 as
actual damages, P500,000.00 as moral damages, P500,000.00 as exemplary damages and
P300,000.00 as attorney's fees.

Meanwhile, on May 8, 1990, a Motion for Intervention with Motion to Dismiss was filed by one
4 

Andres Lanozo, who claimed that he was and has been a tenant-tiller of the subject property, which
was agricultural riceland, for forty-five years. He questioned the jurisdiction of the lower court over
the property and invoked the Comprehensive Agrarian Reform Law to protect his rights that would
be affected by the dispute between the original parties to the case.

On May 18, 1990, the lower court issued an Order referring the case to the Department of Agrarian
5 

Reform for preliminary determination and certification as to whether it was proper for trial by said
court.

On July 4, 1990, the lower court issued another Order referring the case to Branch 172 of the RTC
6 

of Valenzuela which was designated to hear cases involving agrarian land, after the Department of
Agrarian Reform issued a letter-certification stating that referral to it for preliminary determination is
no longer required.

On July 16, 1990, the lower court issued an Order denying the Motion to Intervene, holding that 7 

Lanozo's rights may well be ventilated in another proceeding in due time.

After trial on the merits, the RTC of Valenzuela, Branch 172 rendered its Decision on January 4,
1993, dismissing the Complaint and ordering petitioner to pay Victor P30,000.00 as attorney's fees.
On appeal to the CA, the Decision was affirmed in toto.

Hence, the instant Petition assigning the following errors:

(A)

FIRST ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PROVISION ON

THE NOTICE TO EXERCISE OPTION WAS NOT TRANSMISSIBLE.

(B)

73
 SECOND ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE NOTICE OF

OPTION MUST BE SERVED BY DKC UPON ENCARNACION BARTOLOME
PERSONALLY.

(C)

THIRD ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE CONTRACT

WAS ONE-SIDED AND ONEROUS IN FAVOR OF DKC.

(D)

FOURTH ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE EXISTENCE OF

A REGISTERED TENANCY WAS FATAL TO THE VALIDITY OF THE CONTRACT.

(E)

FIFTH ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PLAINTIFF-

APPELLANT WAS LIABLE TO DEFENDANT-APPELLEE FOR ATTORNEY'S FEES. 8

The issue to be resolved in this case is whether or not the Contract of Lease with Option to Buy
entered into by the late Encarnacion Bartolome with petitioner was terminated upon her death or
whether it binds her sole heir, Victor, even after her demise.

Both the lower court and the Court of Appeals held that the said contract was terminated upon the
death of Encarnacion Bartolome and did not bind Victor because he was not a party thereto.

Art. 1311 of the Civil Code provides, as follows —

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in
case where the rights and obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the
property he received from the decedent.

x x x           x x x          x x x

The general rule, therefore, is that heirs are bound by contracts entered into by their predecessors-
in-interest except when the rights and obligations arising therefrom are not transmissible by (1) their
nature, (2) stipulation or (3) provision of law.

In the case at bar, there is neither contractual stipulation nor legal provision making the rights and
obligations under the contract intransmissible. More importantly, the nature of the rights and
obligations therein are, by their nature, transmissible.

74
The nature of intransmissible rights as explained by Arturo Tolentino, an eminent civilist, is as
follows:

Among contracts which are intransmissible are those which are purely personal, either by
provision of law, such as in cases of partnerships and agency, or by the very nature of the
obligations arising therefrom, such as those requiring special personal qualifications of the
obligor. It may also be stated that contracts for the payment of money debts are not
transmitted to the heirs of a party, but constitute a charge against his estate. Thus, where the
client in a contract for professional services of a lawyer died, leaving minor heirs, and the
lawyer, instead of presenting his claim for professional services under the contract to the
probate court, substituted the minors as parties for his client, it was held that the contract
could not be enforced against the minors; the lawyer was limited to a recovery on the basis
of quantum meruit. 9

In American jurisprudence, "(W)here acts stipulated in a contract require the exercise of special
knowledge, genius, skill, taste, ability, experience, judgment, discretion, integrity, or other personal
qualification of one or both parties, the agreement is of a personal nature, and terminates on the
death of the party who is required to render such service."  10

It has also been held that a good measure for determining whether a contract terminates upon the
death of one of the parties is whether it is of such a character that it may be performed by the
promissor's personal representative. Contracts to perform personal acts which cannot be as well
performed by others are discharged by the death of the promissor. Conversely, where the service or
act is of such a character that it may as well be performed by another, or where the contract, by its
terms, shows that performance by others was contemplated, death does not terminate the contract
or excuse nonperformance.  11

In the case at bar, there is no personal act required from the late Encarnacion Bartolome. Rather,
the obligation of Encarnacion in the contract to deliver possession of the subject property to
petitioner upon the exercise by the latter of its option to lease the same may very well be performed
by her heir Victor.

As early as 1903, it was held that "(H)e who contracts does so for himself and his heirs."  In 1952, it
12 

was ruled that if the predecessor was duty-bound to reconvey land to another, and at his death the
reconveyance had not been made, the heirs can be compelled to execute the proper deed for
reconveyance. This was grounded upon the principle that heirs cannot escape the legal
consequence of a transaction entered into by their predecessor-in-interest because they have
inherited the property subject to the liability affecting their common ancestor. 13

It is futile for Victor to insist that he is not a party to the contract because of the clear provision of
Article 1311 of the Civil Code. Indeed, being an heir of Encarnacion, there is privity of interest
between him and his deceased mother. He only succeeds to what rights his mother had and what is
valid and binding against her is also valid and binding as against him.  This is clear from Parañaque
14 

Kings Enterprises vs. Court of Appeals,  where this Court rejected a similar defense —
15 

With respect to the contention of respondent Raymundo that he is not privy to the lease
contract, not being the lessor nor the lessee referred to therein, he could thus not have
violated its provisions, but he is nevertheless a proper party. Clearly, he stepped into the
shoes of the owner-lessor of the land as, by virtue of his purchase, he assumed all the
obligations of the lessor under the lease contract. Moreover, he received benefits in the form
of rental payments. Furthermore, the complaint, as well as the petition, prayed for the
annulment of the sale of the properties to him. Both pleadings also alleged collusion between

75
 him and respondent Santos which defeated the exercise by petitioner of its right of first
refusal.

In order then to accord complete relief to petitioner, respondent Raymundo was a necessary,
if not indispensable, party to the case. A favorable judgment for the petitioner will necessarily
affect the rights of respondent Raymundo as the buyer of the property over which petitioner
would like to assert its right of first option to buy.

In the case at bar, the subject matter of the contract is likewise a lease, which is a property right. The
death of a party does not excuse nonperformance of a contract which involves a property right, and
the rights and obligations thereunder pass to the personal representatives of the deceased.
Similarly, nonperformance is not excused by the death of the party when the other party has a
property interest in the subject matter of the contract. 
16

Under both Article 1311 of the Civil Code and jurisprudence, therefore, Victor is bound by the subject
Contract of Lease with Option to Buy.

That being resolved, we now rule on the issue of whether petitioner had complied with its obligations
under the contract and with the requisites to exercise its option. The payment by petitioner of the
reservation fees during the two-year period within which it had the option to lease or purchase the
property is not disputed. In fact, the payment of such reservation fees, except those for February and
March, 1990 were admitted by Victor.  This is clear from the transcripts, to wit —
17 

ATTY. MOJADO:

One request, Your Honor. The last payment which was allegedly made in January 1990 just
indicate in that stipulation that it was issued November of 1989 and postdated January 1990
and then we will admit all.

COURT:

All reservation fee?

ATTY. MOJADO:

Yes, Your Honor.

COURT:

All as part of the lease?

ATTY. MOJADO:

Reservation fee, Your Honor. There was no payment with respect to payment of rentals.  18

Petitioner also paid the P15,000.00 monthly rental fee on the subject property by depositing the
same in China Bank Savings Account No. 1-04-02558-I-1, in the name of Victor as the sole heir of
Encarnacion Bartolome,  for the months of March to July 30, 1990, or a total of five (5) months,
19 

despite the refusal of Victor to turn over the subject property. 

20

76
Likewise, petitioner complied with its duty to inform the other party of its intention to exercise its
option to lease through its letter dated Match 12, 1990,  well within the two-year period for it to
21 

exercise its option. Considering that at that time Encarnacion Bartolome had already passed away, it
was legitimate for petitioner to have addressed its letter to her heir.
1âwphi1

It appears, therefore, that the exercise by petitioner of its option to lease the subject property was
made in accordance with the contractual provisions. Concomitantly, private respondent Victor
Bartolome has the obligation to surrender possession of and lease the premises to petitioner for a
period of six (6) years, pursuant to the Contract of Lease with Option to Buy.

Coming now to the issue of tenancy, we find that this is not for this Court to pass upon in the present
petition. We note that the Motion to Intervene and to Dismiss of the alleged tenant, Andres Lanozo,
was denied by the lower court and that such denial was never made the subject of an appeal. As the
lower court stated in its Order, the alleged right of the tenant may well be ventilated in another
proceeding in due time.

WHEREFORE, in view of the foregoing, the instant Petition for Review is GRANTED. The Decision
of the Court of Appeals in CA-G.R. CV No. 40849 and that of the Regional Trial Court of Valenzuela
in Civil Case No. 3337-V-90 are both SET ASIDE and a new one rendered ordering private
respondent Victor Bartolome to:

(a) surrender and deliver possession of that parcel of land covered by Transfer Certificate of
Title No. V-14249 by way of lease to petitioner and to perform all obligations of his
predecessor-in-interest, Encarnacion Bartolome, under the subject Contract of Lease with
Option to Buy;

(b) surrender and deliver his copy of Transfer Certificate of Title No. V-14249 to respondent
Register of Deeds for registration and annotation thereon of the subject Contract of Lease
with Option to Buy;

(c) pay costs of suit.

Respondent Register of Deeds is, accordingly, ordered to register and annotate the subject Contract
of Lease with Option to Buy at the back of Transfer Certificate of Title No. V-14249 upon submission
by petitioner of a copy thereof to his office.

SO ORDERED. 1âwphi1.nêt

77
G.R. No. 188661               April 11, 2012

ESTELITA VILLAMAR, Petitioner,
vs.
BALBINO MANGAOIL, Respondent.

DECISION

REYES, J.:

The Case

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Estelita
1 

Villamar (Villamar) to assail the Decision rendered by the Court of Appeals (CA) on February 20,
2 

2009 in CA-G.R. CV No. 86286, the dispositive portion of which reads:

WHEREFORE, the instant appeal is DISMISSED. The assailed decision is AFFIRMED in toto.

SO ORDERED. 3

The resolution issued by the CA on July 8, 2009 denied the petitioner's motion for reconsideration to
4 

the foregoing.

The ruling of Branch 23, Regional Trial Court (RTC) of Roxas, Isabela, which was affirmed by the
5 

CA in the herein assailed decision and resolution, ordered the (1) rescission of the contract of sale of
real property entered into by Villamar and Balbino Mangaoil (Mangaoil); and (2) return of the down
payment made relative to the said contract.

Antecedents Facts

The CA aptly summarized as follows the facts of the case prior to the filing by Mangaoil of the
complaint for rescission of contract before the RTC:
6 

Villamar is the registered owner of a 3.6080 hectares parcel of land [hereinafter referred as the
subject property] in San Francisco, Manuel, Isabela covered by Transfer Certificate of Title (TCT)
No. T-92958-A. On March 30, 1998, she entered into an Agreement with Mangaoil for the purchase
and sale of said parcel of land, under the following terms and conditions:

"1. The price of the land is ONE HUNDRED AND EIGHTY THOUSAND (180,000.00)
PESOS per hectare but only the 3.5000 hec. shall be paid and the rest shall be given free,
so that the total purchase or selling price shall be [₱]630,000.00 only;

2. ONE HUNDRED EIGHTY FIVE THOUSAND (185,000.00) PESOS of the total price was
already received on March 27, 1998 for payment of the loan secured by the certificate of
title covering the land in favor of the Rural Bank of Cauayan, San Manuel Branch, San
Manuel, Isabela [Rural Bank of Cauayan], in order that the certificate of title thereof be

78
withdrawn and released from the said bank, and the rest shall be for the payment of the
mortgag[e]s in favor of Romeo Lacaden and Florante Parangan;

3. After the release of the certificate of title covering the land subject-matter of this
agreement, the necessary deed of absolute sale in favor of the PARTY OF THE SECOND
PART shall be executed and the transfer be immediately effected so that the latter can apply
for a loan from any lending institution using the corresponding certificate of title as collateral
therefor, and the proceeds of the loan, whatever be the amount, be given to the PARTY OF
THE FIRST PART;

4. Whatever balance left from the agreed purchase price of the land subject matter hereof
after deducting the proceed of the loan and the [₱]185,000.00 already received as above-
mentioned, the PARTY OF THE SECOND PART shall pay unto the PARTY OF THE FIRST
PART not later than June 30, 1998 and thereafter the parties shall be released of any
obligations for and against each other; xxx"

On April 1, 1998, the parties executed a Deed of Absolute Sale whereby Villamar

(then Estelita Bernabe) transferred the subject parcel of land to Mangaoil for and in
consideration of [₱]150,000.00.

In a letter dated September 18, 1998, Mangaoil informed Villamar that he was
backing out from the sale agreed upon giving as one of the reasons therefor:

"3. That the area is not yet fully cleared by incumbrances as there are tenants who
are not willing to vacate the land without giving them back the amount that they
mortgaged the land."

Mangaoil demanded refund of his [₱]185,000.00 down payment. Reiterating said

demand in another letter dated April 29, 1999, the same, however, was unheeded. x 7 

x x (Citations omitted)

On January 28, 2002, the respondent filed before the RTC a complaint for rescission
8 

of contract against the petitioner. In the said complaint, the respondent sought the
return of ₱185,000.00 which he paid to the petitioner, payment of interests thereon to
be computed from March 27, 1998 until the suit's termination, and the award of
damages, costs and ₱20,000.00 attorney's fees. The respondent's factual allegations
were as follows:

5. That as could be gleaned the "Agreement" (Annex "A"), the plaintiff [Mangaoil] handed to
the defendant [Villamar] the sum of [₱]185,000.00 to be applied as follows; [₱]80,000 was for
the redemption of the land which was mortgaged to the Rural Bank of Cauayan, San Manuel
Branch, San Manuel, Isabela, to enable the plaintiff to get hold of the title and register the
sale x x x and [₱]105,000.00 was for the redemption of the said land from private mortgages
to enable plaintiff to posses[s] and cultivate the same;

6. That although the defendant had already long redeemed the said land from the said bank
and withdrawn TCT No. T-92958-A, she has failed and refused, despite repeated demands,
to hand over the said title to the plaintiff and still refuses and fails to do so;

79
 7. That, also, the plaintiff could not physically, actually and materially posses[s] and cultivate
the said land because the private mortgage[e]s and/or present possessors refuse to vacate
the same;

xxxx

11. That on September 18, 1998, the plaintiff sent a letter to the defendant demanding a
return of the amount so advanced by him, but the latter ignored the same, x x x;

12. That, again, on April 29, 1999, the plaintiff sent to the defendant another demand letter
but the latter likewise ignored the same, x x x;

13. That, finally, the plaintiff notified the defendant by a notarial act of his desire and intention
to rescind the said contract of sale, xxx;

x x x x. (Citations omitted)
9 

In the respondent’s answer to the complaint, she averred that she had complied with her obligations
to the respondent. Specifically, she claimed having caused the release of TCT No. T-92958-A by the
Rural Bank of Cauayan and its delivery to a certain "Atty. Pedro C. Antonio" (Atty. Antonio). The
petitioner alleged that Atty. Antonio was commissioned to facilitate the transfer of the said title in the
respondent's name. The petitioner likewise insisted that it was the respondent who unceremoniously
withdrew from their agreement for reasons only the latter knew.

The Ruling of the RTC

On September 9, 2005, the RTC ordered the rescission of the agreement and the deed of absolute
sale executed between the respondent and the petitioner. The petitioner was, thus directed to return
to the respondent the sum of ₱185,000.00 which the latter tendered as initial payment for the
purchase of the subject property. The RTC ratiocinated that:

There is no dispute that the defendant sold the LAND to the plaintiff for [₱]630,000.00 with down
payment of [₱]185,000.00. There is no evidence presented if there were any other partial payments
made after the perfection of the contract of sale.

Article 1458 of the Civil Code provides:

"Art. 1458. By the contract of sale[,] one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay therefore a
price certain in money or its equivalent."

As such, in a contract of sale, the obligation of the vendee to pay the price is correlative of the
obligation of the vendor to deliver the thing sold. It created or established at the same time, out of
the same course, and which result in mutual relations of creditor and debtor between the parties.

The claim of the plaintiff that the LAND has not been delivered to him was not refuted by the
defendant. Considering that defendant failed to deliver to him the certificate of title and of the
possession over the LAND to the plaintiff, the contract must be rescinded pursuant to Article 1191 of
the Civil Code which, in part, provides:

80
"Art. 1191. The power of rescind obligations is implied in reciprocal ones in case one of the
obligors should not comply with what is incumbent upon him." 10

The petitioner filed before the CA an appeal to challenge the foregoing. She ascribed error on the
part of the RTC when the latter ruled that the agreement and deed of sale executed by and between
the parties can be rescinded as she failed to deliver to the respondent both the subject property and
the certificate of title covering the same.

The Ruling of the CA

On February 20, 2009, the CA rendered the now assailed decision dismissing the petitioner’s appeal
based on the following grounds:

Burden of proof is the duty of a party to prove the truth of his claim or defense, or any fact in issue
necessary to establish his claim or defense by the amount of evidence required by law. In civil
cases, the burden of proof is on the defendant if he alleges, in his answer, an affirmative
defense, which is not a denial of an essential ingredient in the plaintiff's cause of action, but is one
which, if established, will be a good defense – i.e., an "avoidance" of the claim, which prima facie,
the plaintiff already has because of the defendant's own admissions in the pleadings.

Defendant-appellant Villamar's defense in this case was an affirmative defense. She did not deny
plaintiff-appellee’s allegation that she had an agreement with plaintiff-appellee for the sale of the
subject parcel of land. Neither did she deny that she was obliged under the contract to deliver the
certificate of title to plaintiff-appellee immediately after said title/property was redeemed from the
bank. What she rather claims is that she already complied with her obligation to deliver the
title to plaintiff-appellee when she delivered the same to Atty. Antonio as it was plaintiff-
appellee himself who engaged the services of said lawyer to precisely work for the immediate
transfer of said title in his name. Since, however, this affirmative defense as alleged in defendant-
appellant's answer was not admitted by plaintiff-appellee, it then follows that it behooved
the defendant-appellant to prove her averments by preponderance of evidence.

Yet, a careful perusal of the record shows that the defendant-appellant failed to sufficiently prove
said affirmative defense. She failed to prove that in the first place, "Atty. Antonio" existed to
receive the title for and in behalf of plaintiff-appellee. Worse, the defendant-appellant failed to
prove that Atty. Antonio received said title "as allegedly agreed upon."

We likewise sustain the RTC's finding that defendant-appellant V[i]llamar failed to deliver

possession of the subject property to plaintiff-appellee Mangaoil. As correctly observed by the RTC
- "[t]he claim of the plaintiff that the land has not been delivered to him was not refuted by the
defendant." Not only that. On cross-examination, the defendant-appellant gave Us insight on why no
such delivery could be made, viz.:

"x x x x

Q: So, you were not able to deliver this property to Mr. Mangaoil just after you redeem the
property because of the presence of these two (2) persons, is it not?

xxx

A: Yes, sir.

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Q: Forcing you to file the case against them and which according to you, you have won, is it not?

A: Yes, sir.

Q: And now at present[,] you are in actual possession of the land?

A: Yes, sir. x x x"

With the foregoing judicial admission, the RTC could not have erred in finding that defendant-
[appellant] failed to deliver the possession of the property sold, to plaintiff-appellee.

Neither can We agree with defendant-appellant in her argument that the execution of the Deed of
Absolute Sale by the parties is already equivalent to a valid and constructive delivery of the
property to plaintiff-appellee. Not only is it doctrinally settled that in a contract of sale, the vendor
is bound to transfer the ownership of, and to deliver the thing that is the object of the sale,
the way Article 1547 of the Civil Code is worded, viz.:

"Art. 1547. In a contract of sale, unless a contrary intention appears, there is:

(1) An implied warranty on the part of the seller that he has a right to sell the thing at the
time when the ownership is to pass, and that the buyer shall from that time have and
enjoy the legal and peaceful possession of the thing;

(2) An implied warranty that the thing shall be free from any hidden defaults or defects, or
any change or encumbrance not declared or known to the buyer.

x x x."

shows that actual, and not mere constructive delivery is warrantied by the seller to the buyer.
"(P)eaceful possession of the thing" sold can hardly be enjoyed in a mere constructive
delivery.

The obligation of defendant-appellant Villamar to transfer ownership and deliver possession of the
subject parcel of land was her correlative obligation to plaintiff-appellee in exchange for the latter's
purchase price thereof. Thus, if she fails to comply with what is incumbent upon her, a correlative
right to rescind such contract from plaintiff-appellee arises, pursuant to Article 1191 of the Civil
Code. x x x (Citations omitted)
11 

The Issues

Aggrieved, the petitioner filed before us the instant petition and submits the following issues for
resolution:

I.

WHETHER THE FAILURE OF PETITIONER-SELLER TO DELIVER THE CERTIFICATE OF TITLE

OVER THE PROPERTY TO RESPONDENT-BUYER IS A BREACH OF OBLIGATION IN A
CONTRACT OF SALE OF REAL PROPERTY THAT WOULD WARRANT RESCISSION OF THE
CONTRACT;

II.

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WHETHER PETITIONER IS LIABLE FOR BREACH OF OBLIGATION IN A CONTRACT OF SALE
FOR FAILURE OF RESPONDENT[-]BUYER TO IMMEDIATELY TAKE ACTUAL POSSESSION OF
THE PROPERTY NOTWITHSTANDING THE ABSENCE OF ANY STIPULATION IN THE
CONTRACT PROVIDING FOR THE SAME;

III.

WHETHER THE EXECUTION OF A DEED OF SALE OF REAL PROPERTY IN THE PRESENT

CASE IS ALREADY EQUIVALENT TO A VALID AND CONSTRUCTIVE DELIVERY OF THE
PROPERTY TO THE BUYER;

IV.

WHETHER OR NOT THE CONTRACT OF SALE SUBJECT MATTER OF THIS CASE SHOULD BE
RESCINDED ON SLIGHT OR CASUAL BREACH;

V.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE
RTC ORDERING THE RESCISSION OF THE CONTRACT OF SALE[.] 12

The Petitioner's Arguments

The petitioner avers that the CA, in ordering the rescission of the agreement and deed of sale, which
she entered into with the respondent, on the basis of her alleged failure to deliver the certificate of
title, effectively imposed upon her an extra duty which was neither stipulated in the contract nor
required by law. She argues that under Articles 1495 and 1496 of the New Civil Code (NCC), the
13  14 

obligation to deliver the thing sold is complied with by a seller who executes in favor of a buyer an
instrument of sale in a public document. Citing Chua v. Court of Appeals, she claims that there is a
15 

distinction between transferring a certificate of title in the buyer's name, on one hand, and
transferring ownership over the property sold, on the other. The latter can be accomplished by the
seller's execution of an instrument of sale in a public document. The recording of the sale with the
Registry of Deeds and the transfer of the certificate of title in the buyer's name are necessary only to
bind third parties to the transfer of ownership.
16

The petitioner contends that in her case, she had already complied with her obligations under the
agreement and the law when she had caused the release of TCT No. T-92958-A from the Rural
Bank of Cauayan, paid individual mortgagees Romeo Lacaden (Lacaden) and Florante Parangan
(Paranga), and executed an absolute deed of sale in the respondent's favor. She adds that before T-
92958-A can be cancelled and a new one be issued in the respondent's favor, the latter decided to
withdraw from their agreement. She also points out that in the letters seeking for an outright
rescission of their agreement sent to her by the respondent, not once did he demand for the delivery
of TCT.

The petitioner insists that the respondent's change of heart was due to (1) the latter's realization of
the difficulty in determining the subject property's perimeter boundary; (2) his doubt that the property
he purchased would yield harvests in the amount he expected; and (3) the presence of mortgagees
who were not willing to give up possession without first being paid the amounts due to them. The
petitioner contends that the actual reasons for the respondent's intent to rescind their agreement did
not at all constitute a substantial breach of her obligations.

83
The petitioner stresses that under Article 1498 of the NCC, when a sale is made through a public
instrument, its execution is equivalent to the delivery of the thing which is the contract's object,
unless in the deed, the contrary appears or can be inferred. Further, in Power Commercial and
Industrial Corporation v. CA, it was ruled that the failure of a seller to eject lessees from the property
17 

he sold and to deliver actual and physical possession, cannot be considered a substantial breach,
when such failure was not stipulated as a resolutory or suspensive condition in the contract and
when the effects and consequences of the said failure were not specified as well. The execution of a
deed of sale operates as a formal or symbolic delivery of the property sold and it already authorizes
the buyer to use the instrument as proof of ownership. 18

The petitioner argues that in the case at bar, the agreement and the absolute deed of sale contains
no stipulation that she was obliged to actually and physically deliver the subject property to the
respondent. The respondent fully knew Lacaden's and Parangan's possession of the subject
property. When they agreed on the sale of the property, the respondent consciously assumed the
risk of not being able to take immediate physical possession on account of Lacaden's and
Parangan's presence therein.

The petitioner likewise laments that the CA allegedly misappreciated the evidence offered before it
when it declared that she failed to prove the existence of Atty. Antonio. For the record, she
emphasizes that the said lawyer prepared and notarized the agreement and deed of absolute sale
which were executed between the parties. He was also the petitioner’s counsel in the proceedings
before the RTC. Atty. Antonio was also the one asked by the respondent to cease the transfer of the
title over the subject property in the latter's name and to return the money he paid in advance.

The Respondent's Contentions

In the respondent's comment, he seeks the dismissal of the instant petition. He invokes Articles
19 

1191 and 1458 to argue that when a seller fails to transfer the ownership and possession of a
property sold, the buyer is entitled to rescind the contract of sale. Further, he contends that the
execution of a deed of absolute sale does not necessarily amount to a valid and constructive
delivery. In Masallo v. Cesar, it was ruled that a person who does not have actual possession of real
20 

property cannot transfer constructive possession by the execution and delivery of a public document
by which the title to the land is transferred. In Addison v. Felix and Tioco, the Court was emphatic
21 

that symbolic delivery by the execution of a public instrument is equivalent to actual delivery only
when the thing sold is subject to the control of the vendor.

Our Ruling

The instant petition is bereft of merit.

There is only a single issue for resolution in the instant petition, to wit, whether or not the failure of
the petitioner to deliver to the respondent both the physical possession of the subject property and
the certificate of title covering the same amount to a substantial breach of the former's obligations to
the latter constituting a valid cause to rescind the agreement and deed of sale entered into by the
parties.

We rule in the affirmative.

The RTC and the CA both found that the petitioner failed to comply with her obligations to deliver to
the respondent both the possession of the subject property and the certificate of title covering the
same.

84
Although Articles 1458, 1495 and 1498 of the NCC and case law do not generally require the
seller to deliver to the buyer the physical possession of the property subject of a contract of
sale and the certificate of title covering the same, the agreement entered into by the
petitioner and the respondent provides otherwise. However, the terms of the agreement
cannot be considered as violative of law, morals, good customs, public order, or public
policy, hence, valid.

Article 1458 of the NCC obliges the seller to transfer the ownership of and to deliver a determinate
thing to the buyer, who shall in turn pay therefor a price certain in money or its equivalent. In addition
thereto, Article 1495 of the NCC binds the seller to warrant the thing which is the object of the sale.
On the other hand, Article 1498 of the same code provides that when the sale is made through a
public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the
object of the contract, if from the deed, the contrary does not appear or cannot clearly be inferred.

In the case of Chua v. Court of Appeals, which was cited by the petitioner, it was ruled that "when
22 

the deed of absolute sale is signed by the parties and notarized, then delivery of the real property is
deemed made by the seller to the buyer." The transfer of the certificate of title in the name of the
23 

buyer is not necessary to confer ownership upon him.

In the case now under our consideration, item nos. 2 and 3 of the agreement entered into by the
petitioner and the respondent explicitly provide:

2. ONE HUNDRED EIGHTY FIVE THOUSAND (₱185,000.00) PESOS of the total price was
already received on March 27, 1998 for payment of the loan secured by the certificate of title
covering the land in favor of the Rural Bank of Cauayan, San Manuel Branch, San Manuel,
Isabela, in order that the certificate of title thereof be withdrawn and released from the said
bank, and the rest shall be for the payment of the mortgages in favor of Romeo Lacaden and
Florante Parangan;

3. After the release of the certificate of title covering the land subject-matter of this
agreement, the necessary deed of absolute sale in favor of the PARTY OF THE SECOND
PART shall be executed and the transfer be immediately effected so that the latter can apply
for a loan from any lending institution using the corresponding certificate of title as
collateral therefor, and the proceeds of the loan, whatever be the amount, be given to the
PARTY OF THE FIRST PART; (underlining supplied)
24 

As can be gleaned from the agreement of the contending parties, the respondent initially paid the
petitioner ₱185,000.00 for the latter to pay the loan obtained from the Rural Bank of Cauayan and to
cause the release from the said bank of the certificate of title covering the subject property. The rest
of the amount shall be used to pay the mortgages over the subject property which was executed in
favor of Lacaden and Parangan. After the release of the TCT, a deed of sale shall be executed and
transfer shall be immediately effected so that the title covering the subject property can be used as a
collateral for a loan the respondent will apply for, the proceeds of which shall be given to the
petitioner.

Under Article 1306 of the NCC, the contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order or public policy.

While Articles 1458 and 1495 of the NCC and the doctrine enunciated in the case of Chua do not
impose upon the petitioner the obligation to physically deliver to the respondent the certificate of title
covering the subject property or cause the transfer in the latter's name of the said title, a stipulation

85
requiring otherwise is not prohibited by law and cannot be regarded as violative of morals, good
customs, public order or public policy. Item no. 3 of the agreement executed by the parties expressly
states that "transfer [shall] be immediately effected so that the latter can apply for a loan from any
lending institution using the corresponding certificate of title as collateral therefore." Item no. 3 is
literal enough to mean that there should be physical delivery of the TCT for how else can the
respondent use it as a collateral to obtain a loan if the title remains in the petitioner’s possession. We
agree with the RTC and the CA that the petitioner failed to prove that she delivered the TCT
covering the subject property to the respondent. What the petitioner attempted to establish was that
she gave the TCT to Atty. Antonio whom she alleged was commissioned to effect the transfer of the
title in the respondent's name. Although Atty. Antonio's existence is certain as he was the petitioner’s
counsel in the proceedings before the RTC, there was no proof that the former indeed received the
TCT or that he was commissioned to process the transfer of the title in the respondent's name.

It is likewise the petitioner’s contention that pursuant to Article 1498 of the NCC, she had already
complied with her obligation to deliver the subject property upon her execution of an absolute deed
of sale in the respondent’s favor. The petitioner avers that she did not undertake to eject the
mortgagors Parangan and Lacaden, whose presence in the premises of the subject property was
known to the respondent.

We are not persuaded.

In the case of Power Commercial and Industrial Corporation cited by the petitioner, the Court ruled
25 

that the failure of the seller to eject the squatters from the property sold cannot be made a ground for
rescission if the said ejectment was not stipulated as a condition in the contract of sale, and when in
the negotiation stage, the buyer's counsel himself undertook to eject the illegal settlers.

The circumstances surrounding the case now under our consideration are different. In item no. 2 of
the agreement, it is stated that part of the ₱185,000.00 initially paid to the petitioner shall be used to
pay the mortgagors, Parangan and Lacaden. While the provision does not expressly impose upon
the petitioner the obligation to eject the said mortgagors, the undertaking is necessarily implied.
Cessation of occupancy of the subject property is logically expected from the mortgagors upon
payment by the petitioner of the amounts due to them.

We note that in the demand letter dated September 18, 1998, which was sent by the respondent to
26 

the petitioner, the former lamented that "the area is not yet fully cleared of incumbrances as there
are tenants who are not willing to vacate the land without giving them back the amount that they
mortgaged the land." Further, in the proceedings before the RTC conducted after the complaint for
rescission was filed, the petitioner herself testified that she won the ejectment suit against the
mortgagors "only last year". The complaint was filed on September 8, 2002 or more than four years
27 

from the execution of the parties' agreement. This means that after the lapse of a considerable
period of time from the agreement's execution, the mortgagors remained in possession of the
subject property.

Notwithstanding the absence of stipulations in the agreement and absolute deed of sale
entered into by Villamar and Mangaoil expressly indicating the consequences of the former's
failure to deliver the physical possession of the subject property and the certificate of title
covering the same, the latter is entitled to demand for the rescission of their contract
pursuant to Article 1191 of the NCC.

We note that the agreement entered into by the petitioner and the respondent only contains three
items specifying the parties' undertakings. In item no. 5, the parties consented "to abide with all the
terms and conditions set forth in this agreement and never violate the same." 28

86
Article 1191 of the NCC is clear that "the power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him." The respondent
cannot be deprived of his right to demand for rescission in view of the petitioner’s failure to abide
with item nos. 2 and 3 of the agreement. This remains true notwithstanding the absence of express
stipulations in the agreement indicating the consequences of breaches which the parties may
commit. To hold otherwise would render Article 1191 of the NCC as useless.

Article 1498 of the NCC generally considers the execution of a public instrument as
constructive delivery by the seller to the buyer of the property subject of a contract of sale.
The case at bar, however, falls among the exceptions to the foregoing rule since a mere
presumptive and not conclusive delivery is created as the respondent failed to take material
possession of the subject property.

Further, even if we were to assume for argument's sake that the agreement entered into by the
contending parties does not require the delivery of the physical possession of the subject property
from the mortgagors to the respondent, still, the petitioner's claim that her execution of an absolute
deed of sale was already sufficient as it already amounted to a constructive delivery of the thing sold
which Article 1498 of the NCC allows, cannot stand.

In Philippine Suburban Development Corporation v. The Auditor General, we held:

29 

When the sale of real property is made in a public instrument, the execution thereof is equivalent to
the delivery of the thing object of the contract, if from the deed the contrary does not appear or
cannot clearly be inferred.1âwphi1

In other words, there is symbolic delivery of the property subject of the sale by the execution of the
public instrument, unless from the express terms of the instrument, or by clear inference therefrom,
this was not the intention of the parties. Such would be the case, for instance, x x x where the
vendor has no control over the thing sold at the moment of the sale, and, therefore, its material
delivery could not have been made. (Underlining supplied and citations omitted)
30 

Stated differently, as a general rule, the execution of a public instrument amounts to a constructive
delivery of the thing subject of a contract of sale. However, exceptions exist, among which is when
mere presumptive and not conclusive delivery is created in cases where the buyer fails to take
material possession of the subject of sale. A person who does not have actual possession of the
thing sold cannot transfer constructive possession by the execution and delivery of a public
instrument.

In the case at bar, the RTC and the CA found that the petitioner failed to deliver to the respondent
the possession of the subject property due to the continued presence and occupation of Parangan
and Lacaden. We find no ample reason to reverse the said findings. Considered in the light of either
the agreement entered into by the parties or the pertinent provisions of law, the petitioner failed in
her undertaking to deliver the subject property to the respondent.

IN VIEW OF THE FOREGOING, the instant petition is DENIED. The February 20, 2009 Decision
and July 8, 2009 Resolution of the Court of Appeals, directing the rescission of the agreement and
absolute deed of sale entered into by Estelita Villamar and Balbino Mangaoil and the return of the
down payment made for the purchase of the subject property, are AFFIRMED. However, pursuant to
our ruling in Eastern Shipping Lines, Inc. v. CA, an interest of 12% per annum is imposed on the
31 

sum of ₱185,000.00 to be returned to Mangaoil to be computed from the date of finality of this
Decision until full satisfaction thereof.

87
SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

88