SECOND DIVISION

[G.R. No. 135639. February 27, 2002]

TERMINAL FACILITIES AND SERVICES CORPORATION, petitioner, vs. PHILIPPINE
PORTS AUTHORITY and PORT MANAGER, and PORT DISTRICT OFFICER OF
DAVAO CITY, respondents.
[G.R. No. 135826. February 27, 2002]
PHILIPPINE PORTS AUTHORITY and PORT MANAGER, and PORT DISTRICT OFFICER
OF DAVAO CITY, petitioners, vs. TERMINAL FACILITIES AND SERVICES
CORPORATION, respondent.
D E C I S I O N
DE LEON, JR., J.:
Before us are two (2) consolidated petitions for review, one filed by the
Terminal Facilities and Services Corporation (TEFASCO) (G.R. No. 135639) and the
other by the Philippine Ports Authority (PPA) (G.R. No. 135826), of the Amended
Decision
[1]
dated September 30, 1998 of the former Special Second Division of the
Court of Appeals in CA-G.R. CV No. 47318 ordering the PPA to pay TEFASCO: (1)
Fifteen Million Eight Hundred Ten Thousand Thirty-Two Pesos and Seven Centavos
(P15,810,032.07) representing fifty percent (50%) wharfage dues and Three
Million Nine Hundred Sixty-One Thousand Nine Hundred Sixty-Four Pesos and Six
Centavos (P3,961,964.06) representing thirty percent (30%) berthing fees from
1977 to 1991, which amounts TEFASCO could have earned had not PPA illegally
imposed one hundred percent (100%) wharfage and berthing fees, and (2) the sum
of Five Hundred Thousand Pesos (P500,000.00) as attorneys fees. No
pronouncement was made as to costs of suit.
In G.R. No. 135639 TEFASCO assails the declaration of validity of the
government share and prays for reinstatement in toto of the decision of the trial
court. In G.R. No. 135826 PPA impugns the Amended Decision for awarding the
said two (2) amounts for loss of private port usage fees as actual damages, plus
attorney's fees.
TEFASCO is a domestic corporation organized and existing under the laws of
the Philippines with principal place of business at Barrio Ilang, Davao City. It is
engaged in the business of providing port and terminal facilities as well as arrastre,
stevedoring and other port-related services at its own private port at Barrio Ilang.
Sometime in 1975 TEFASCO submitted to PPA a proposal for the construction
of a specialized terminal complex with port facilities and a provision for port
services in Davao City. To ease the acute congestion in the government ports at
Sasa and Sta. Ana, Davao City, PPA welcomed the proposal and organized an inter-
agency committee to study the plan. The committee recommended approval
thereof and its report stated that -
TEFASCO Terminal is a specialized terminal complex. The specialized matters
intended to be captured are: (a) bananas in consideration of the rate of spoilage;
(b) sugar; (c) fertilizers; (d) specialized movement of beer in pallets containerized
handling lumber and plywood.
3.2 Limitations of the government facilities -
The government port facilities are good for general cargoes only. Both ports are
not equipped to handle specialized cargoes like bananas and container cargoes.
Besides the present capacity, as well as the planned improvements, cannot cope
with the increasing volume of traffic in the area. Participation of the private sector,
therefore, involving private financing should be encouraged in the area.
3.3 Project Viability -
3.3.1 Technical Aspect - From the port operations point of view, the project is
technically feasible. It is within a well-protected harbor and it has a sufficient depth
of water for berthing the ships it will service. The lack of back up area can be
supplied by the 21-hectare industrial land which will be established out of the hilly
land area which is to be scrapped and leveled to be used to fill the area for
reclamation.
3.3.2 Economic Aspect - The international port of Sasa and the
domestic port of Sta. Ana are general cargo type ports. They are facing serious ship
and cargo congestion problems brought about mainly by the faster growth of
shipping industry than the development of the ports. They do not possess the
special cargo handling facilities which TFSC plans to put up at the proposed
terminal.
xxx The proposed project expects to get a 31% market slice. It will service domestic
and foreign vessels. Main products to be handled initially will be bananas in the
export trade and beer in the domestic traffic. Banana exporters in Davao, like
Stanfilco and Philippine Packing Corporation have signified their intentions to use
the port. Negotiations between TFSC and banana exporters on whether the former
or the latter should purchase the mechanical loading equipment have not yet been
formed up xxx.
Easing the problems at these two ports would result in savings on cost of the
operation as cargo storage and on damages and losses. It would also give relief to
passengers from time-delay, inconvenience and exposure to hazards in commuting
between the pier and ship at anchor.
Furthermore, it would redound to better utilization of the government piers,
therefore greater revenue from port operations.
At the bigger scale, more economic benefits in terms of more employment, greater
productivity, increased per capita income in the Davao region, and in light of the
limited financial resources of the government for port development the TFSC
proposal would be beneficial to the country.
On April 21, 1976 the PPA Board of Directors passed Resolution No. 7
accepting and approving TEFASCO's project proposal. PPA resolved to -
xxx [a]pprove, xxx the project proposal of the Terminal Facilities and Services
Corporation, Inc. for the construction of specialized port facilities and provision of
port services in Davao City, subject to the terms and conditions set forth in the
report of the Technical Committee created by the Board in its meeting of January
30, 1975, and to the usual government rules and regulations.
PPA relayed its acceptance of the project terms and conditions to TEFASCO in
the letter
[2]
dated May 7, 1976 of Acting General Manager Mariano Nicanor which
affirmed that -
We are pleased to inform you that the Board of Directors, Philippine Ports
Authority, approved the project proposal of the Terminal Facilities and Services
Corporation to construct a specialized port facilities and provision of port services
in Davao City as follows:
1) Docking Facilities for Ocean Going and Interisland vessels with
containerized cargo.
2) Stevedoring and Arrastre for above.
3) Warehousing;
4) Container yard and warehouse for containerizing cargoes or
breaking up cargoes for containers.
5) Bulk handling and silos for corn, in cooperation with the NGA.
6) Bulk handling for fertilizer.
7) Bulk handling or conveyor system for banana exports.
8) Bulk handling for sugar.
9) Bonded warehousing.
The approval is subject to the terms and conditions set forth at enclosure.
You are hereby authorized to start work immediately taking into account national
and local laws and regulations pertaining to the project construction and operation.
The enclosure referred to in the letter above-quoted stipulated the "Terms
and Conditions of PPA Board Approval of the Project Proposal,"
[3]
particularly -
(1) That all fees and/or permits pertinent to the construction and operation of
the proposed project shall be paid to and/or secured from the proper
authorities.
(2) That the plans shall not be altered without the prior approval of the Bureau of
Public Works in coordination with the PPA.
(3) That [any] damage to public and private property arising from the
construction and operation of the project shall be the sole responsibility of
the applicant-company.
(4) That the Director of Public Works shall be notified five (5) days before the
start of the construction works and that the Director of Public Works or his
representative shall be authorized to inspect the works and premises while
the work is in progress and even after the completion thereof.
(5) That the applicant shall construct and complete the structure under the
proposed project within eighteen (18) months after the approval of the
permit, otherwise the permit shall be null and void.
(6) That the facility shall handle general cargoes that are loaded as filler cargoes
on bulk/container ships calling at the facility.
(7) That the applicant shall build up its banana export traffic to replace the
probable loss of its container traffic five (5) years from now because of the
plan of PPA to put up a common user type container terminal at the port of
Sasa.
(8) That all charges payable to the Bureau of Customs will continue to apply upon
take over of port operations by the PPA of the Port of Davao from the
Bureau of Customs and direct control and regulations of operations of
private port facilities in the general area of that port.
Under the foregoing terms and conditions, TEFASCO contracted dollar loans
from private commercial institutions abroad to construct its specialized terminal
complex with port facilities and thereafter poured millions worth of investments in
the process of building the port. Long after TEFASCO broke ground with massive
infrastructure work, the PPA Board curiously passed onOctober 1, 1976 Resolution
No. 50 under which TEFASCO, without asking for one, was compelled to submit an
application for construction permit. Without the consent of TEFASCO, the
application imposed additional significant conditions -
(1) This Permit to Construct (PTC) will entitle the applicant to operate the facility for
a period of fifteen (15) years, without jeopardy to negotiation for a renewal for a
period not exceeding ten (10) years. At the expiration of the permit, all
improvements shall automatically become the property of the
Authority. Thereafter, any interested party, including the applicant, may lease it
under new conditions; (2) In the event that the Foreshore Lease Application expires
or is disapproved/canceled, this permit shall also be rendered null and void; xxx (7)
All other fees and/or permits pertinent to the construction and operation of the
proposed project shall be paid to and/or secured from the proper authorities; xxx
(9) Unless specifically authorized, no general cargo shall be handled through the
facility; (10) All rates and charges to be derived from the use of said facility or
facilities shall be approved by the Authority; xxx (12) An application fee in the
amount of one-tenth or one percent of the total estimated cost of the proposed
improvement/structure shall be paid upon advice; (13) Other requirements of the
law shall be complied by the applicant.
NOTE: Subject further to the terms and conditions as approved by PPA Board under
Resolution No. 7 of 21 April 1976, except that PPA shall take over the role of the
Bureau of Public Works and of the Bureau of Customs stipulated in the said
approval.
TEFASCO played along with this needless exercise as PPA approved the
awkward application in a letter stating -
We are returning herewith your application for Permit to Construct No. 77-19 dated
18 October 1977, duly approved (validation of the original permit to construct
approved by the PPA Board under Resolution No. 7 of 21 April 1976), for the
construction of your port facilities in Bo. Ilang, Davao City, subject to the conditions
stipulated under the approved permit and in accordance with the attached
approved set of plans and working drawings.
It is understood that this permit is still subject to the terms and conditions under
the original permit except that this Authority takes over the role of the Bureau of
Public Works and of the Bureau of Customs as stipulated thereon.
The series of PPA impositions did not stop there. Two (2) years after the
completion of the port facilities and the commencement of TEFASCO's port
operations, or on June 10, 1978, PPA again issued to TEFASCO another permit,
designated as Special Permit No. CO/CO-1-067802, under which more onerous
conditions were foisted on TEFASCOs port operations.
[4]
In the purported permit
appeared for the first time the contentious provisions for ten percent (10%)
government share out of arrastre and stevedoring gross income and one hundred
percent (100%) wharfage and berthing charges, thus -
Pursuant to the provisions of Presidential Decree No. 857, otherwise known as the
Revised Charter of the Philippine Ports Authority, and upon due consideration of
the formal written application and its enclosures in accordance with PPA
Memorandum Order No. 21 dated May 27, 1977, PPA Administrative Order No. 22-
77 dated December 9, 1977, and other pertinent policies and guidelines, a Special
Permit is hereby granted to TERMINAL FACILITIES AND SERVICES CORPORATION
(TEFASCO), with address at Slip 3, Pier 4, North Harbor, Manila to provide its
arrastre/stevedoring services at its own private wharf located at Barrio Ilang, Davao
City, subject to the following conditions: xxx xxx xxx
2. Grantee shall render arrastre/stevedoring services on cargoes of vessels
under the agency of Retla Shipping/Transcoastal Shipping, Solid Shipping,
Sea Transport and other commercial vessels which cannot be
accommodated in government piers at PMU-Davao due to port congestion
which shall be determined by the Port Manager/Harbor Master/Port
Operations Officer whose decision shall be conclusive;
3. Grantee shall promptly submit its latest certified financial statement and all
statistical and other data required by the Authority from time to time;
4. Grantee shall strictly comply with all applicable PPA rules and regulations
now in force or to be promulgated hereafter and other pertinent rules and
regulations promulgated by other agency of the government and other
applicable laws, orders or decrees;
5. Grantee shall remit to the government an amount equivalent to ten (10%)
percentum of the handling rates chargeable on similar cargo in
government piers/wharves within the jurisdiction of PMU-Davao on or
before the 5th working day of every month provided, however, that in case
of delay, grantee shall pay a penalty of one (1%) percentum of the
accumulated total amount due for every day of delay; provided, further,
that said rate shall be reasonably adjusted if and when warranted by the
financial conditions of the Grantee;
6. Grantee shall settle with the Authority its back accounts on the 10%
government share from the start of its arrastre/stevedoring operation plus
6% legal interest per annum as provided by law;
7. That cargoes and vessels diverted to TEFASCO wharf shall be subject to
100% wharfage and berthing charges respectively;
8. Grantee shall hold the Authority free from any liability arising out of the
maintenance and operation thereof;
9. Grantee shall not in any manner pose a competition with any port or port
facility owned by the government. Rates of charges shall in no case be
lower than those prevailing at the Government Port of Davao.
xxx xxx xxx
This Special Permit is non-transferable and shall remain valid from the date of
issuance hereof until December 31, 1978; provided, however, that at any time prior
to the expiration thereof, the same may be revoked for violation of any of the
conditions herein set forth or for cause at the discretion of the PPA General
Manager or his duly authorized representative.
Subsequent exactions of PPA included: (a) Admin. Order 09-81, s.
1981,
[5]
notifying all arrastre and stevedoring operators, whether they do business
in government owned port facilities, that special services income be subjected to
"government share" equivalent to ten percent (10%) thereof; and, (b) Memo. Circ.
36-82, s. 1982,
[6]
mandating an assessment of one hundred percent (100%)
wharfage dues on commercial and third-party cargoes regardless of extent of use of
private port facilities and one hundred percent (100%) berthing charges on every
foreign vessel docking at private wharves loading or discharging commercial or
third-party cargoes. TEFASCO repeatedly asked PPA for extensions to pay these
additional obligations and for reduction in the rates. But the PPA's response was
final and non-negotiable statements of arrears and current accounts and threats of
business closure in case of failure to pay them.
[7]
The trial court summed up the
documentary evidence on this point -
xxx [w]hen TEFASCO requested for the structuring of its account of P3.5 million,
resulting to a memorandum, issued by PPA General Manager to its internal control,
to verify the specific assessment of TEFASCO, coming out in the specific amount of
P3,143,425.67 which became a subject of TEFASCO various and series of letters-
protest to PPA, for reconsideration of its ultimatum, to enforce TEFASCOs back
account, dated June 1, 1983, marked Exh. 32 for defendant, after a series of
letters for reconsideration of TEFASCO and reply of PPA, marked Exh. 26 to 31
for the defendants, an ultimatum letter of PPA was issued followed by another
series of letters of protest, reconsideration and petition of TEFASCO and reply of
PPA, correspondingly marked Exh. 40 51 for the defendants, until ultimately,
the execution of a memorandum of agreement, marked Exh. 52 for the
defendant, dated February 10, 1984.
Most alarming was the receipt of defendants communication by TEFASCO, in its
letter dated June 1, 1983, a cease and desist order of PPA for TEFASCO, to stop its
commercial port operation xxx.
[8]

On February 10, 1984 TEFASCO and PPA executed a Memorandum of
Agreement (MOA) providing among others for (a) acknowledgment of TEFASCO's
arrears in government share at Three Million Eight Hundred Seven Thousand Five
Hundred Sixty-Three Pesos and Seventy-Five Centavos (P3,807,563.75) payable
monthly, with default penalized by automatic withdrawal of its commercial private
port permit and permit to operate cargo handling services; (b) reduction of
government share from ten percent (10%) to six percent (6%) on all cargo handling
and related revenue (or arrastre and stevedoring gross income); (c) opening of its
pier facilities to all commercial and third-party cargoes and vessels for a period
coterminous with its foreshore lease contract with the National Government; and,
(d) tenure of five (5) years extendible by five (5) more years for TEFASCO's permit to
operate cargo handling in its private port facilities. In return PPA promised to issue
the necessary permits for TEFASCOs port activities. TEFASCO complied with the
MOA and paid the accrued and current government share.
[9]

On August 30, 1988 TEFASCO sued PPA and PPA Port Manager, and Port
Officer in Davao City for refund of government share it had paid and for damages as
a result of alleged illegal exaction from its clients of one hundred percent (100%)
berthing and wharfage fees. The complaint also sought to nullify the February 10,
1984 MOA and all other PPA issuances modifying the terms and conditions of
the April 21, 1976 Resolution No. 7 above-mentioned.
[10]

The RTC, Branch 17, Davao City, in its decision dated July 15, 1992 in Civil Case
No. 19216-88, ruled for TEFASCO, (a) nullifying the MOA and all PPA issuances
imposing government share and one hundred percent (100%) berthing and
wharfage fees or otherwise modifying PPA Resolution No. 7, and, (b) awarding Five
Million Ninety-Five Thousand Thirty Pesos and Seventeen Centavos (P5,095,030.17)
for reimbursement of government share and Three Million Nine Hundred Sixty-One
Thousand Nine Hundred Sixty-Four Pesos and Six Centavos (P3,961,964.06) for
thirty percent (30%) berthing charges and Fifteen Million Eight Hundred Ten
Thousand Thirty-Two Pesos and Seven Centavos (P15,810,032.07) for fifty percent
(50%) wharfage fees which TEFASCO could have earned as private port usage fee
from 1977 to 1991 had PPA not collected one hundred percent (100%) of these
fees; Two Hundred Forty-Eight Thousand Seven Hundred Twenty-Seven Pesos
(P248,727.00) for dredging and blasting expenses; One Million Pesos
(P1,000,000.00) in damages for blatant violation of PPA Resolution No. 7; and, Five
Hundred Thousand Pesos (P500,000.00) for attorneys fees, with twelve percent
(12%) interest per annum on the total amount awarded.
[11]

PPA appealed the decision of the trial court to the Court of Appeals. The
appellate court in its original decision recognized the validity of the impositions and
reversed in toto the decision of the trial court.
[12]
TEFASCO moved for
reconsideration which the Court of Appeals found partly meritorious. Thus the
Court of Appeals in its Amended Decision partially affirmed the RTC decision only in
the sense that PPA was directed to pay TEFASCO (1) the amounts of Fifteen Million
Eight Hundred Ten Thousand Thirty-Two Pesos and Seven Centavos
(P15,810,032.07) representing fifty percent (50%) wharfage fees and Three Million
Nine Hundred Sixty-One Thousand Nine Hundred Sixty-Four Pesos and Six Centavos
(P3,961,964.06) representing thirty percent (30%) berthing fees which TEFASCO
could have earned as private port usage fee from 1977 to 1991 had PPA
not illegally imposed and collected one hundred percent (100%) of wharfage and
berthing fees and (2) Five Hundred Thousand Pesos (P500,000.00) for attorneys
fees. The Court of Appeals held that the one hundred percent (100%) berthing and
wharfage fees were unenforceable because they had not been approved by the
President under Secs. 19 and 20, P.D. No. 857, and discriminatory since much lower
rates were charged in other private ports as shown by PPA issuances effective 1995
to 1997. Both PPA and TEFASCO were unsatisfied with this disposition hence these
petitions.
In G.R. No. 135639 TEFASCO prays to reinstate in toto the decision of the trial
court. Its grounds are: (a) PPA Resolution No. 7 and the terms and conditions
thereunder constitute a contract that PPA could not change at will; (b) the MOA
between PPA and TEFASCO indicating the schedule of TEFASCO arrears and
reducing the rate of government share is void for absence of consideration; and, (c)
government share is neither authorized by PPA Resolution No. 7 nor by any law,
and in fact, impairs the obligation of contracts.
In G.R. No. 135826 PPA seeks to set aside the award of actual damages for
wharfage and berthing fees and for attorneys fees. PPA anchors its arguments on
the following: (a) that its collection of one hundred percent (100%) wharfage and
berthing fees is authorized by Secs. 6 (b, ix) and 39 (a), P.D. No. 857, under which
the imposable rates for such fees are within the sole power and authority of PPA;
(b) that absence of evidentiary relevance of PPA issuances effective 1995 to 1997
reducing wharfage, berthing and port usage fees in private ports; (c) that TEFASCO's
lack of standing to claim alleged overpayments of wharfage and berthing fees; and,
(d) that lack of legal basis for the award of fifty percent (50%) wharfage and thirty
percent (30%) berthing fees as actual damages in favor of TEFASCO for the
period from 1977 to 1991, and for attorneys fees.
In a nutshell, the issues in the two (2) consolidated petitions are centered on:
(a) the character of the obligations between TEFASCO and PPA; (b) the validity of
the collection by PPA of one hundred percent (100%) wharfage fees and berthing
charges; (c) the propriety of the award of fifty percent (50%) wharfage fees and
thirty percent (30%) berthing charges as actual damages in favor of TEFASCO for
the period from 1977 to 1991; (d) the legality of the imposed
government share and the MOA stipulating a schedule of TEFASCO's arrears for
and imposing a reduced rate of government share; and, (e) the propriety of the
award of attorneys fees and damages.
Firstly, it was not a mere privilege that PPA bestowed upon TEFASCO to
construct a specialized terminal complex with port facilities and provide port
services in Davao City under PPA Resolution No. 7 and the terms and conditions
thereof. Rather, the arrangement was envisioned to be mutually beneficial, on one
hand, to obtain business opportunities for TEFASCO, and on the other, enhance
PPA's services -
The international port of Sasa and the domestic port of Sta. Ana are general cargo
type ports. They are facing serious ship and cargo congestion problems brought
about mainly by the faster growth of shipping industry than the development of the
ports. They do not possess the special cargo handling facilities which TFSC plans to
put up at the proposed terminal.
[13]

It is true that under P.D. No. 857 (1975) as amended,
[14]
the construction and
operation of ports are subject to licensing regulations of the PPA as public
utility.
[15]
However, the instant case did not arise out of pure beneficence on the
part of the government where TEFASCO would be compelled to pay ordinary license
and permit fees. TEFASCO accepted and performed definite obligations requiring
big investments that made up the valuable consideration of the project. The inter-
agency committee report that recommended approval of TEFASCO port
construction and operation estimated investments at Sixteen Million Pesos
(P16,000,000.00) (1975/1976 price levels) disbursed within a construction period of
one year
[16]
and covered by foreign loans of Two Million Four Hundred Thirty-Four
Thousand US Dollars (US$2,434,000.00) with interests of up to Ten Million Nine
Hundred Sixty-Five Thousand Four Hundred Sixty-Five Pesos (P10,965,465.00) for
the years 1979 to 1985.
[17]
In 1987 the total investment of TEFASCO in the project
was valued at One Hundred Fifty-Six Million Two Hundred Fifty-One Thousand
Seven Hundred Ninety-Eight Pesos (P156,251,798.00).
[18]
The inter-agency
committee report also listed the costly facilities TEFASCO would build, and which in
fact it has already built -
xxx The terminal complex will provide specialized mechanical cargo handling
facilities for bananas, sugar, beer, grain and fertilizer, and containerized cargo
operations. The marginal wharf could accommodate two ocean-going ships and
one inter-island vessel at a time. The essential structures and facilities to be
provided are: (1) 400-meter concrete wharf; (2) Back-up area (3.8 hectare
reclaimed area plus a 21-hectare inland industrial zone); (3) Two warehouses with
total floor area of 5,000 sq. meters; (4) mechanized banana loading equipment; (5)
container yard.
[19]

With such considerable amount of money spent in reliance upon the promises
of PPA under Resolution No. 7 and the terms and conditions thereof, the
authorization for TEFASCO to build and operate the specialized terminal complex
with port facilities assumed the character of a truly binding contract between the
grantor and the grantee.
[20]
It was a two-way advantage for both TEFASCO and PPA,
that is, the business opportunities for the former and the decongestion of port
traffic in Davao City for the latter, which is also the cause of consideration for the
existence of the contract. The cases of Ramos v. Central Bank of
the Philippines
[21]
and Commissioner of Customs v. Auyong Hian
[22]
are deemed
precedents. In Ramos, the Central Bank (CB) committed itself to support the
Overseas Bank of Manila (OBM) and avoid its liquidation in exchange for the
execution of a voting trust agreement turning over the management of OBM to CB
and a mortgage of its properties to CB to cover OBMs overdraft balance. This
agreement was reached in CBs capacity as the regulatory agency of banking
operations. After OBM accepted and performed in good faith its obligations, we
deemed as perfected contract the relation between CB and OBM from which CB
could not retreat and in the end prejudice OBM and its depositors and creditors -
Bearing in mind that the communications, xxx as well as the voting trust agreement
xxx had been prepared by the CB, and the well-known rule that ambiguities therein
are to be construed against the party that caused them, the record becomes clear
that, in consideration of the execution of the voting trust agreement by the
petitioner stockholders of OBM, and of the mortgage or assignment of their
personal properties to the CB, xxx the CB had agreed to announce its readiness to
support the new management in order to allay the fears of depositors and
creditors xxx and to stave off liquidation by providing adequate funds for the
rehabilitation, normalization and stabilization of the OBM, in a manner similar to
what the CB had previously done with the Republic Bank xxx. While no express
terms in the documents refer to the provision of funds by CB for the purpose, the
same is necessarily implied, for in no other way could it rehabilitate, normalize and
stabilize a distressed bank. xxx
The deception practiced by the Central Bank, not only on petitioners but on its own
management team, was in violation of Articles 1159 and 1315 of the Civil Code of
the Philippines:
Art. 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
Art. 1315. Contracts are perfected by mere consent, and from that moment the
parties are bound not only to the fulfillment of what has been expressly stipulated
but also to all the consequences which, according to their nature, may be in keeping
with good faith, usage and law.
[23]

Auyong Hian involved an importation of old newspapers in four (4) shipments
under a "no-dollar" arrangement pursuant to a license issued by the Import Control
Commission. When the last shipment arrived in Manila, the customs authorities
seized the importation on the ground that it was made without the license required
by Central Bank Circular No. 45. While the seizure proceedings were pending
before the Collector of Customs, the President of the Philippines through its Cabinet
canceled the aforesaid license for the reason that it was illegally issued "in that no
fixed date of expiration is stipulated." On review, this Court held -
xxx [W]hile the Cabinet, acting for the President, can pass on the validity of a license
issued by the Import Control Commission, that power cannot be arbitrarily
exercised. The action must be founded on good ground or reason and must not be
capricious or whimsical. This principle is so clear to require further elaboration.
xxx In fact, if the cancellation were to prevail, the importer would stand to lose the
license fee he paid amounting to P12,000.00, plus the value of the shipment
amounting to P21,820.00. This is grossly inequitable. Moreover, "it has been held in
a great number of cases that a permit or license may not arbitrarily be revoked xxx
where, on the faith of it, the owner has incurred material expense."
It has also been held that where the licensee has acted under the license in good
faith, and has incurred expense in the execution of it, by making valuable
improvements or otherwise, it is regarded in equity as an executed contract and
substantially an easement, the revocation of which would be a fraud on the
licensee, and therefore the licensor is estopped to revoke it xxx It has also been
held that the license cannot be revoked without reimbursing the licensee for his
expenditures or otherwise placing him in status quo.
[24]

For a regulatory permit to be impressed with contractual character we held
in Batchelder v. Central Bank
[25]
that the administrative agency in issuing the permit
must have assumed such obligation on itself. The facts certainly bear out the
conclusion that PPA passed Resolution No. 7 and the terms and conditions thereof
with a view to decongesting port traffic in government ports in Davao City and
engaging TEFASCO to infuse its own funds and skills to operate another port
therein. As acceptance of these considerations and execution thereof immediately
followed, it is too late for PPA to change the rules of engagement with TEFASCO as
expressed in the said Resolution and other relevant documents.
The terms and conditions binding TEFASCO are only those enumerated or
mentioned in the inter-agency committee report, PPA Resolution No. 7 and PPA
letter dated May 7, 1976 and its enclosure. With due consideration for the policy
that laws of the land are written into every contract,
[26]
the said documents stand to
be the only source of obligations between the parties. That being the case, it was
arbitrary, unreasonable and unfair for PPA to add new burdens and uncertainties
into their agreement of which TEFASCO had no prior knowledge even in the context
of regulation.
Lowell v. Archambault
[27]
is persuasive on this issue. In that case, the
defendant was engaged in the business of an undertaker who wanted to erect on
his land a stable to be used in connection therewith. He then applied to the board
of health for a license to permit him to occupy and use the building when
completed for the stabling of eight (8) horses. His application was granted and a
license was issued to him permitting the exercise of this privilege. Upon receiving
it, he at once had plans prepared and began the erection of a stable on a site from
which he had, at a pecuniary loss, removed another building. After the work had
begun but before its completion, the board of health acting on a petition of
residents in the immediate vicinity rescinded their former vote and canceled the
license. The court held -
xxxUpon application for permission to erect a stable, which, in the absence of a
restricting statute, would be a legitimate improvement in the enjoyment of his
property, the applicant is entitled to know the full measure of immunity that can be
granted to him before making the expenditure of money required to carry out his
purpose. A resort to the general laws relating to the subject, or to ordinances or
regulations made pursuant to them, should furnish him with the required
information. When this has been obtained, he has a right to infer that he can safely
act, with the assurance that, so long as he complies with the requirements under
which it is proposed to grant the privilege, he has a constitutional claim to
protection, until the legislature further restricts or entirely abolishes the right
bestowed. A license should not be subjected to the uncertainties that constantly
would arise if unauthorized limitations, of which he can have no knowledge, are
subsequently and without notice to be read into his license, at the pleasure of the
licensing board. Besides, all reasonable police regulations enacted for the
preservation of the public health or morality, where a penalty is provided for their
violation, while they may limit or prevent the use or enjoyment of property except
under certain restrictions, and are constitutional, create statutory misdemeanors,
which are not to be extended by implication. xxx. It was not within the power of
the board of health, even after a hearing, in the absence of an authority conferred
upon them by legislative sanction, to deprive him of the privilege they had
unreservedly granted.
[28]

The record shows that PPA made express representations to TEFASCO that it
would authorize and support its port project under clear and categorical terms and
conditions of an envisioned contract. TEFASCO complied with its obligation which
ultimately resulted to the benefit of PPA. And the PPA accepted the project as
completed and authorized TEFASCO to operate the same. Under these
circumstances, PPA is estopped from reneging on its commitments and covenants
as exclusively contained in the inter-agency committee report, PPA Resolution No. 7
and PPA letter dated May 7, 1976 and its enclosure. As this Court explained
in Ramos v. Central Bank of the Philippines -
[29]

xxx[A]n estoppel may arise from the making of a promise even though without
consideration, if it was intended that the promise should be relied upon and in fact
it was relied upon, and if a refusal to enforce it would be virtually to sanction the
perpetration of fraud or would result in other injustice. In this respect, the reliance
by the promisee is generally evidenced by action or forbearance on his part, and the
idea has been expressed that such action or forbearance would reasonably have
been expected by the promisor. xxx
But even assuming arguendo that TEFASCO relied upon a mere privilege
granted by PPA, still the terms and conditions between them as written in the
documents approving TEFASCO's project proposal should indubitably remain the
same. Under traditional form of property ownership, recipients of privileges or
largesses from the government could be said to have no property rights because
they possessed no traditionally recognized proprietary interest therein. The cases
of Vinco v. Municipality of Hinigaran
[30]
and Pedro v. Provincial Board of
Rizal
[31]
holding that a license to operate cockpits would be a mere privilege
belonged to this vintage. But the right-privilege dichotomy came to an end when
courts realized that individuals should not be subjected to the unfettered whims of
government officials to withhold privileges previously given them.
[32]
Indeed to
perpetuate such distinction would leave the citizens at the mercy of State
functionaries, and worse, threaten the liberties protected by the Bill of
Rights. Thus in Kisner v. Public Service Commission
[33]
wherein the US Public Service
Commission reduced the number of vehicles which appellant Kisner was authorized
to operate under his certificate of convenience and necessity when no limit was
stipulated therein, it was ruled -
It appears from the record in this case that after the issuance of the initial
certificate the appellant took steps to procure vehicles in addition to the one he
already owned. He changed his position in reliance upon the original certificate
authorizing him to operate an unlimited number of vehicles. xxx For the purpose of
due process analysis, a property interest includes not only the traditional notions
of real and personal property, but also extends to those benefits to which an
individual may be deemed to have a legitimate claim of entitlement under existing
rules and regulations. xxx The right of the appellant in the case at bar to operate
more than one vehicle under the certificate of convenience and necessity, as
originally issued, clearly constituted a benefit to the appellant and that benefit may
be deemed to be a legitimate claim of entitlement under existing rules and
regulations.
Even if PPA granted TEFASCO only a license to construct and operate a
specialized complex terminal with port facilities, the fact remains that PPA cannot
unilaterally impose conditions that find no basis in the inter-agency committee
report, PPA Resolution No. 7 and PPA letter dated May 7, 1976 and its enclosure.
Secondly, we hold that PPA's imposition of one hundred percent (100%)
wharfage fees and berthing charges is void. It is very clear from P.D. No. 857 as
amended that wharfage and berthing rates collectible by PPA "upon the coming
into operation of this Decree shall be those now provided under Parts 1, 2, 3 and 6
of Title VII of Book II of The Tariff and Customs Code, until such time that the
President upon recommendation of the Board may order that the adjusted
schedule of dues are in effect."
[34]
PPA cannot unilaterally peg such rates but must
rely on either The Tariff and Customs Code or the quasi-legislative
issuances of the President in view of the legislative prerogative of rate-fixing.
[35]

Accordingly, P.D. No. 441 (1974) amending The Tariff and Customs Code fixed
wharfage dues at fixed amounts per specified quantity brought into or
involving national ports or at fifty percent (50%) of the rates provided for herein in
case the articles imported or exported from or transported within the Philippines
are loaded or unloaded offshore, in midstream, or in private wharves where no
loading or unloading facilities are owned and maintained by the
government. Inasmuch as the TEFASCO port is privately owned and maintained, we
rule that the applicable rate for imported or exported articles loaded or unloaded
thereat is not one hundred percent (100%) but only fifty percent (50%) of the rates
specified in P.D. No. 441.
As regard berthing charges, this Court has ruled in Commissioner of Customs v.
Court of Tax Appeals
[36]
that "subject vessels, not having berthed at a national port
but at the Port of Kiwalan, which was constructed, operated, and continues to be
maintained by private respondent xxx are not subject to berthing charges, and
petitioner should refund the berthing fees paid by private respondent." The
berthing facilities at Port of Kiwalan were constructed, improved, operated and
maintained solely by and at the expense of a private corporation, the Iligan
Express. On various dates, vessels using the berthing facilities therein were
assessed berthing fees by the Collector of Customs which were paid by private
respondent under protest. We nullified the collection and ordered their refund -
The only issue involved in this petition for review is: Whether a vessel engaged in
foreign trade, which berths at a privately owned wharf or pier, is liable to the
payment of the berthing charge under Section 2901 of the Tariff and Customs Code,
which, as amended by Presidential Decree No. 34, reads:
Sec. 2901. Definition. - Berthing charge is the amount assessed against a vessel for
mooring or berthing at a pier, wharf, bulk-head-wharf, river or channel marginal
wharf at any national port in the Philippines; or for mooring or making fast to a
vessel so berthed; or for coming or mooring within any slip, channel, basin, river or
canal under the jurisdiction of any national port of the Philippines: Provided,
however, That in the last instance, the charge shall be fifty (50%) per cent of rates
provided for in cases of piers without cargo shed in the succeeding sections. The
owner, agent, operator or master of the vessel is liable for this charge.
Petitioner Commissioner of Customs contends that the government has the
authority to impose and collect berthing fees whether a vessel berths at a private
pier or at a national port. On the other hand, private respondent argues that the
right of the government to impose berthing fees is limited to national ports only.
The governing law classifying ports into national ports and municipal ports is
Executive Order No. 72, Series of 1936 (O.G. Vol. 35, No. 6, pp. 65-
66). A perusal of said executive order discloses the absence of
the portof Kiwalan in the list of national ports mentioned therein.
Furthermore, Paragraph 1 of Executive Order No. 72 expressly provides that the
improvement and maintenance of national ports shall be financed by the
Commonwealth Government, and their administration and operation shall be under
the direct supervision and control of the Insular Collector of Customs. It is
undisputed that the port of Kiwalan was constructed and improved and is operated
and maintained solely by and at the expense of the Iligan Express Corporation, and
not by the National Government of the Republic or any of its agencies or
instrumentalities. xxx The port of Kiwalan not being included in the list of national
ports appended to Customs Memorandum Circular No. 33-73 nor in Executive
Order No. 72, it follows inevitably as a matter of law and legal principle that this
Court may not properly consider said port as a national port. To do otherwise would
be to legislate on our part and to arrogate unto ourselves powers not conferred on
us by the Constitution. xxx
Plainly, therefore, the port of Kiwalan is not a national port. xxx
Section 2901 of the Tariff and Customs Code prior to its amendment and said
section as amended by Presidential Decree No. 34 are hereunder reproduced with
the amendments duly highlighted:
Sec. 2901. Definition. - Berthing charge is the amount assessed against a vessel for
mooring or berthing at a pier, wharf, bulkhead-wharf, river or channel marginal
wharf at any port in the Philippines; or for mooring or making fast to a vessel so
berthed; or for coming or mooring within any slip, channel, basin, river or canal
under the jurisdiction of any port of the Philippines (old TCC).
Sec. 2901. Definition. - Berthing charge is the amount assessed a vessel for mooring
or berthing at a pier, wharf, bulkhead-wharf, river or channel marginal wharf AT
ANY NATIONAL PORT IN THE PHILIPPINES; for mooring or making fast to a vessel so
berthed; or for coming or mooring within any slip, channel, basin, river or canal
under the jurisdiction of ANY NATIONAL port of the Philippines; Provided,
HOWEVER, THAT IN THE LAST INSTANCE, THE CHARGE SHALL BE FIFTY (50%) PER
CENT OF RATES PROVIDED FOR IN CASES OF PIERS WITHOUT CARGO SHED IN THE
SUCCEEDING SECTIONS. (emphasis in the original).
It will thus be seen that the word national before the word port is inserted in
the amendment. The change in phraseology by amendment of a provision of law
indicates a legislative intent to change the meaning of the provision from that it
originally had (Agpalo, supra, p. 76). The insertion of the word national before the
word port is a clear indication of the legislative intent to change the meaning of
Section 2901 from what it originally meant, and not a mere surplusage as
contended by petitioner, in the sense that the change merely affirms what
customs authorities had been observing long before the law was amended (p. 18,
Petition). It is the duty of this Court to give meaning to the amendment. It is,
therefore, our considered opinion that under Section 2901 of The Tariff and
Customs Code, as amended by Presidential Decree No. 34, only vessels berthing at
national ports are liable for berthing fees. It is to be stressed that there are
differences between national ports and municipal ports, namely: (1) the
maintenance of municipal ports is borne by the municipality, whereas that of the
national ports is shouldered by the national government; (2) municipal ports are
created by executive order, while national ports are usually created by legislation;
(3) berthing fees are not collected by the government from vessels berthing at
municipal ports, while such berthing fees are collected by the government from
vessels moored at national ports. The berthing fees imposed upon vessels berthing
at national ports are applied by the national government for the maintenance and
repair of said ports. The national government does not maintain municipal ports
which are solely maintained by the municipalities or private entities which
constructed them, as in the case at bar. Thus, no berthing charges may be collected
from vessels moored at municipal ports nor may berthing charges be imposed by a
municipal council xxx.
[37]

PPA has not cited - nor have we found - any law creating the TEFASCO Port as
a national port or converting it into one. Hence, following case law, we rule that
PPA erred in collecting berthing fees from vessels that berthed at the privately
funded port of petitioner TEFASCO.
It also bears stressing that one hundred percent (100%) wharfage dues and
berthing charges are void for failing to comply with Sec. 19, P.D. No. 857
[38]
as
amended, requiring presidential approval of any increase or decrease of such dues.
In Philippine Interisland Shipping Association of the Philippines v. CA
[39]
we
ruled that PPA cannot override the statutory rates for dues by lowering rates of
pilotage fees and leaving the fees to be paid for pilotage to agreement of parties,
and further stated that -
There is, therefore, no legal basis for PPA's intransigence, after failing to get the
new administration of President Aquino to revoke the order by issuing its own
order in the form of A.O. NO. 02-88. It is noteworthy that if President Marcos had
legislative power under Amendment No. 6 of the 1973 Constitution so did President
Aquino under the Provisional (Freedom) Constitution who could, had she thought
E.O. No. 1088 to be a mere political gimmick, have just as easily revoked her
predecessor's order. It is tempting to ask if the administrative agency would have
shown the same act of defiance of the President's order had there been no change
of administration. What this Court said in La Perla Cigar and Cigarette Factory v.
Capapas, mutatis mutandis, - may be applied to the cases at bar:
Was it within the powers of the then Collector Ang-angco to refuse to collect the
duties that must be paid? That is the crucial point of inquiry. We hold that it was
not.
Precisely, he had to give the above legal provisions, quite explicit in character, force
and effect. His obligation was to collect the revenue for the government in
accordance with existing legal provisions, executive agreements and executive
orders certainly not excluded. He would not be living up to his official designation if
he were permitted to act otherwise. He was not named Collector of Customs for
nothing
Certainly, if the President himself were called upon to execute the laws faithfully, a
Collector of Customs, himself a subordinate executive official, cannot be considered
as exempt in any wise from such an obligation of fealty. Similarly, if the President
cannot suspend the operation of any law, it would be presumptuous in the extreme
for one in the position of then Collector Ang-angco to consider himself as possessed
of such a prerogative
[40]

Thirdly, PPA argues that the courts a quo wrongly awarded to TEFASCO fifty
percent (50%) and thirty percent (30%) of the wharfage dues and berthing charges,
respectively, as actual damages representing private port usage fees from 1977 to
1991. It claims that TEFASCO has no cause of action to ask for a portion of these
fees since they were collected from "the owner, agent, operator or master of the
vessel" for the berthing charge and "the owner or consignee of the article, or the
agent of either" for the wharfage dues.
We find no merit in this argument. The cause of action of TEFASCO is the
injury it suffered as a result of the illegal imposition on its clientele of such dues and
charges that should have otherwise gone to it as private port usage fee. TEFASCO is
asserting injury to its right to collect valuable consideration for the use of its
facilities and wrongdoing on the part of PPA prejudicing such right. This is
especially true in the light of PPAs practice of collecting one hundred percent
(100%) of the wharfage and berthing dues by cornering the cargoes and vessels, as
it were, even before they were landed and berthed at TEFASCOs privately owned
port. It is aggravated by the fact that these unlawful rates were collected by PPA
long after the port facilities of TEFASCO had been completed and
functioning. Considering these pleaded facts, TEFASCOs cause of action has been
sufficiently alleged and proven. We quote with approval the following ruling of the
Court of Appeals -
xxx As earlier stated, TEFASCO is only trying to recover income it has to forego
because of the excessive collections imposed by PPA. By doing what it was
prohibited to do under an existing law, PPA cannot be allowed to enjoy the fruits of
its own illegal act. To be sure, TEFASCO suffered real damage as a result of such
illegal act requiring indemnification xxx.
[41]

There is also no basis for PPAs assertion that there was lack of evidence to
support the award in favor of TEFASCO of Fifteen Million Eight Hundred Ten
Thousand Thirty-Two Pesos and Seven Centavos (P15,810,032.07) representing fifty
percent (50%) wharfage dues and Three Million Nine Hundred Sixty-One Thousand
Nine Hundred Sixty-Four Pesos and Six Centavos (P3,961,964.06) for thirty percent
(30%) berthing charges from 1977 to 1991. According to the appellate court, the
determination was based on the "actual summarized list of cargoes and vessels
which went through TEFASCOs port, which were under obligation to pay usage
fees, multiplied by the applicable tariff rates."
[42]
The trial court explained in more
detail the preponderant evidence for the judgment -
Another harassment is the issuance of Memorandum Circular No. 36-82,
authorizing collection of 100% wharfage fees, instead of only 50% and also 100%
berthing fees, instead of only 70% as provided for in PD 441, marked Exh. LL for
plaintiff, and a copy of Letter of Instruction No. 8001-A, marked Exh. NN for
plaintiff, in the process, the total collection of PPA for wharfage fees, amounted
to P10,582,850.00 and berthing fee, amounted to P6,997,167.00 in the latter case,
berthing fee collected was marked Exh. PP for plaintiff, otherwise if PPA collected
only 70% as provided, it could have collected only P4,898,018.03, equally TEFASCO
could have earned the remainder of P2,099,150.90 while in the case of wharfage
fee, if PPA collected only 50%, TEFASCO would have earned the other half
of P5,291,042.00, 50% by way of rentals. xxx
In cases of berthing and wharfage fees prior to the issuance of the injunction order
from this court, PPA charges 100% the totality or summary of claims from PPA, from
1977 to 1991, was shown and marked Exhibit KKK and submarkings, showing
TEFASCO is supposed to collect, if PPA collects only 50% wharfage, the other 50%
goes with TEFASCO in case of berthing 70%, the remainder of 30% could have been
collected by TEFASCO.
[43]

Under Arts. 2199 and 2200 of the Civil Code, actual or compensatory damages
are those awarded in satisfaction of or in recompense for loss or injury
sustained.
[44]
They proceed from a sense of natural justice and are designed to
repair the wrong done. In Producers Bank of the Philippines v. CA
[45]
we succinctly
explain the kinds of actual damages, thus-
There are two kinds of actual or compensatory damages: one is the loss of what a
person already possesses, and the other is the failure to receive as a benefit that
which would have pertained to him x x x. In the latter instance, the familiar rule is
that damages consisting of unrealized profits, frequently referred as ganacias
frustradas or lucrum cessans, are not to be granted on the basis of mere
speculation, conjecture, or surmise, but rather by reference to some reasonably
definite standard such as market value, established experience, or direct inference
from known circumstances xxx.
It is not necessary to prove with absolute certainty the amount of ganacias
frustradas or lucrum cessans. In Producers Bank of the Philippines we ruled that -
xxx 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 for this 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 defendants wrongful act, he is
entitled to recover.
[46]

Applying the test aforequoted, we find that TEFASCO has proved with clear
and convincing evidence its loss of wharfage and berthing fees. There was basis
for the courts a quo in awarding to TEFASCO, as actual damages, the sums
equivalent to fifty percent (50%) and thirty percent (30%) of the wharfage dues and
berthing charges, respectively. It has not been denied that TEFASCO was forced to
reluctantly let go of such fees to avoid the unwise business practice of financially
overburdening the users of its port by requiring them to pay beyond one hundred
percent (100%) of such dues. It has not also been disproved that this loss of
TEFASCO was the direct result of the collection of one hundred percent (100%)
wharfage and berthing dues by PPA, an imposition that left nothing more for
TEFASCO to charge for the use of its port and terminal facilities. Consequently,
there is merit in TEFASCO's claim that had the PPA imposition been limited to the
fifty percent (50%) wharfage dues and seventy percent (70%) berthing charges,
TEFASCO could have received the remainder as port usage fees since the amounts
were disbursed by its clients for that purpose. Significantly, in regard to berthing
charges, TEFASCO's cause of action and evidence presented before the trial
court as well as its assigned error on appeal on that point were limited to thirty
percent (30%) of such charges.
Fourthly, we also declare void the imposition by PPA of ten percent (10%),
later reduced to six percent (6%), government share out of arrastre and stevedoring
gross income of TEFASCO. This exaction was never mentioned in the contract,
much less is it a binding prestation, between TEFASCO and PPA. What was clearly
stated in the terms and conditions appended to PPA Resolution No. 7 was for
TEFASCO to pay and/or secure from the proper authorities "all fees and/or permits
pertinent to the construction and operation of the proposed project." The
government share demanded and collected from the gross income of TEFASCO
from its arrastre and stevedoring activities in TEFASCO's wholly owned port is
certainly not a fee or in any event a proper condition in a regulatory
permit. Rather it is an onerous "contractual stipulation"
[47]
which finds no root or
basis or reference even in the contract aforementioned.
We stress that the cause of the contract between TEFASCO and PPA was, on
the part of the former, to engage in the business of operating its privately owned
port facilities, and for the latter, to decongest port traffic in Davao City and
concomitantly to enhance regional trade. The records of the project acceptance
made by PPA indicate that the contract was executed not to earn income for PPA or
the government as justification for the subsequent and unfair imposition of
government share in the arrastre and stevedoring gross income of TEFASCO. Hence
this charge was obviously an after-thought conceived by PPA only after the
TEFASCO port had already begun its operations. The sharing scheme only meant
that PPA would piggy back unreasonably on the substantial investment and labor of
TEFASCO. As the scheme was subsequently stipulated on percentage of gross
income, it actually penalized TEFASCO for its hand work and substantial capital
expenditures in the TEFASCO port and terminal.
Moreover, PPA is bereft of any authority to impose whatever amount it
pleases as government share in the gross income of TEFASCO from its arrastre and
stevedoring operations. As an elementary principle of law, license taxation must
not be "so unreasonable to show a purpose to prohibit a business which is not itself
injurious to public health or morals."
[48]
In the case at bar, the absurd and
confiscatory character of government share is convincingly proved by PPA's decision
itself to abandon the disadvantageous scheme through Administrative Order No.
06-95 dated 4 December 1995, Liberalized Regulation on Private Ports Construction,
Development, and Operation.
[49]
The PPA issuance scrapped government share in
the income of private ports where no government facilities had been installed and
in place thereof imposed a one-time privilege fee of P20,000.00 per annum for
commercial ports and P10,000.00 yearly for non-commercial ports. In passing, we
believe that this impost is more in consonance with the description of government
share as consideration for the "supervision inherent in the upgrading and
improvement of port operations, of which said services are an integral part."
[50]

We do not also agree that TEFASCO subsequently acceded to paying the
government share in its gross income from its arrastre and stevedoring operations,
and in recognizing arrears for such charge. The Memorandum of Agreement (MOA)
which it subsequently signed with PPA did not give TEFASCO any benefit so that we
cannot conclude that there was indeed a voluntary settlement between
them. Rather it could be described aptly as an imposition under actual threats of
closure of TEFASCO's port. Verily the MOA was meant to cloak semblance of
validity upon that particular charge since there was nothing in the original
TEFASCO-PPA contract authorizing the PPA to collect any share in the gross income
of TEFASCO in its arrastre and stevedoring operations.
The MOA is invalid for want of consideration and consent.
[51]
As such, it is an
invalid novation
[52]
of the original agreement between TEFASCO and PPA as
embodied in the inter-agency committee report, PPA Resolution No. 7 and PPA
letter dated May 7, 1976 and its enclosure. Truly, the MOA was a set of
stipulations executed under undue pressure on TEFASCO of permanent closure of
its port and terminal. As the TEFASCO investment was worth millions of dollars in
loans and equities, PPA's posture of prohibiting it from engaging in the bulk of its
business presented it with no reasonable freedom of choice but to accept and sign
the MOA. Furthermore, the MOA suffers from utter want of consideration since
nothing more could have been stipulated in the agreement when every detail of
port operation had already been previously spelled out and sanctioned in the
original contract. The belated MOA citations of PPAs recognition of TEFASCO's
facility as a private port and provision of arrastre and stevedoring and repair
services were all part of the agreement from 1976 when the project proposal was
approved by the PPA Board. Under these circumstances, it cannot be said that
TEFASCO embraced voluntarily the unfair imposition in the MOA that inevitably
would cause, as it did, its own bankruptcy.
In sum, TEFASCO is entitled to Five Million Ninety-Five Thousand Thirty Pesos
and Seventeen Centavos (P5,095,030.17) for reimbursement of what PPA illegally
collected as "government share" in the gross income of TEFASCO's arrastre and
stevedoring operations for 1977 to 1991.
Fifthly, we affirm the award of Five Hundred Thousand Pesos (P500,000.00) as
attorneys fees. Attorneys fees may be awarded when a party is compelled to
litigate or incur expenses to protect his interest by reason of an unjustified act of
the other party.
[53]
In the instant case, attorneys fees were warranted by PPA's
unfair exaction of exorbitant wharfage and berthing dues from TEFASCO and
threats to close its port. These adverse actions correctly drove the latter to
institute the present proceedings to protect its rights and remedy the unfair
situation.
However, we set aside the award of Two Hundred Forty-Eight Thousand Seven
Hundred Twenty-Seven Pesos (P248,727.00) for dredging and blasting
expenses. The trial court justified the award on the ground that this activity was
allegedly the responsibility of PPA under Sec. 37 of P.D. No. 857
[54]
as amended
which TEFASCO in good faith undertook. This is not correct. More precisely, the
law obliged PPA to fund construction and dredging works only in "public ports
vested in the Authority." Clearly the construction of the TEFASCO port was not the
responsibility of the PPA and does not fall under Sec. 37 of P.D. No. 857. The
dredging and blasting done by TEFASCO augmented the viability of its port, and
therefore the same were part and parcel of the contractual obligations it agreed to
undertake when it accepted the terms and conditions of the project.
It is also erroneous to set legal interest on the damages awarded herein at
twelve percent (12%) yearly computed from the filing of the complaint. In Crismina
Garments, Inc. v. CA
[55]
, it was held that interest on damages, other than loan or
forbearance of money, is six percent (6%) annually computed from determination
with reasonable certainty of the amount demanded. Thus, applying that rule in the
case at bar, the interest would be six percent (6%) per annum from the date of
promulgation of the decision of the trial court in Civil Cases Nos. 19216-
88 on July 15, 1992.
To recapitulate: PPA is liable to TEFASCO for Fifteen Million Eight Hundred Ten
Thousand Thirty-Two Pesos and Seven Centavos (P15,810,032.07) representing fifty
percent (50%) wharfage fees and Three Million Nine Hundred Sixty-One Thousand
Nine Hundred Sixty-Four Pesos and Six Centavos (P3,961,964.06) for thirty percent
(30%) berthing charges from 1977 to 1991 and Five Million Ninety-Five Thousand
Thirty Pesos and Seventeen Centavos (P5,095,030.17) for reimbursement of the
unlawfully collected government share in TEFASCOs gross income from its arrastre
and stevedoring operations during the same period. The said principal amounts
herein ordered shall earn interest at six percent (6%) annually from July 15, 1992,
date of promulgation of the Decision of the Regional Trial Court of Davao in Civil
Cases Nos. 19216-88. The PPA shall also pay TEFASCO the amount of Five Hundred
Thousand Pesos (P500,000.00) for and as attorneys fees.
Henceforth, PPA shall collect only such dues and charges as are duly
authorized by the applicable provisions of The Tariff and Customs Code and
presidential issuances pursuant to Sec. 19, P.D. No. 857. PPA shall strictly observe
only the legally imposable rates. Furthermore, PPA has no authority to charge
government share in the gross income of TEFASCO from its arrastre and
stevedoring operations within its subject private port in Davao City.
TEFASCO's port operations including cargo handling services shall be co-
terminous with its foreshore lease contract with the National Government and any
extension of the said foreshore lease contract shall similarly lengthen the duration
of its port operations. It is clear from the inter-agency committee report, PPA
Resolution No. 7 and PPA letter dated May 7, 1976 and its enclosure that the
intention of the parties under their contract is to integrate port operations of
TEFASCO so that all services therein, including arrastre and stevedoring operations,
shall end at the same time. The subsequent and onerous MOA did not change the
tenure of its port operations, there being no clear and convincing showing of
TEFASCO's free and voluntary amenability thereto. In no case, however, shall such
port operations of TEFASCO exceed fifty (50) years which is the maximum period of
foreshore lease contracts with the National Government.
WHEREFORE, the Amended Decision of the Court of Appeals
dated September 30, 1998 in case CA-G.R. CV No. 47318 is MODIFIED as follows:
1. The Philippine Ports Authority (PPA) is held liable and hereby ordered to pay
and reimburse to Terminal Facilities and Services Corporation (TEFASCO) the
amounts of Fifteen Million Eight Hundred Ten Thousand Thirty-Two Pesos and
Seven Centavos (P15,810,032.07) and Three Million Nine Hundred Sixty-One
Thousand Nine Hundred Sixty-Four Pesos and Six Centavos (P3,961,964.06)
representing fifty percent (50%) wharfage fees and thirty percent (30%) berthing
charges respectively, from 1977 to 1991, and the sum of Five Million Ninety-Five
Thousand Thirty Pesos and Seventeen Centavos (P5,095,030.17) representing PPAs
unlawfully collected government share in the gross income of TEFASCO's arrastre
and stevedoring operations during the said period;
2. The said principal amounts herein ordered to be paid by PPA to TEFASCO shall
earn interest at six percent (6%) per annum from July 15, 1992, date of
promulgation of the Decision of the Regional Trial Court, Branch 17 of Davao City in
Civil Case No. 19216-88; and
3. The PPA is also ordered to pay TEFASCO the sum of Five Hundred Thousand
Pesos (P500,000.00) for and as attorneys fees.
Costs against the Philippine Ports Authority.
SO ORDERED.

[1]
Penned by Associate Justice Angelina Sandoval-Gutierrez (now Associate Justice
of the Supreme Court) and concurred in by Associate Justices Omar U.
Amin and Roberto A. Barrios. Rollo in G.R. No. 135639, pp. 70-96; Rolloin
G.R. No. 135826, pp. 54-80.
[15]
This is the revised Charter of the PPA. The relevant provisions are: Sec. 6.
Corporate Powers and Duties - (a) the corporate duties of the Authority
shall be: x x x (iii) To prescribe rules and regulations, procedures, and
guidelines governing the establishment, construction, maintenance, and
operation of all other ports, including private ports in the country; (iv) To
license, control, regulate, supervise any construction or structure within
any Port District; (v) To provide services (whether on its own, by contract,
or otherwise) within the Port Districts and the approaches thereof,
including but not limited to berthing, towing, mooring, moving, slipping, or
docking any vessel; loading or discharging any vessel; sorting, weighting,
measuring, storing, warehousing, or otherwise handling goods; Sec. 39.
Bureau of Customs. - The Tariff and Customs Code is hereby modified or
amended to the extent that all the powers, duties and jurisdictions of the
Bureau of Customs concerning the following matters shall be transferred
to matters and affairs that pertain to the operation of the issuance of
permits or licenses to construct ports, ports facilities, warehouses, and
other facilities within port districts; Sec. 40. Other Laws. - Any and all
other powers and rights, duties and functions and jurisdiction vested
pertaining to every matter concerning ports facilities, port operations, or
port works shall be transferred to and be vested in the Authority; Sec.
43. Penalties. - x x x (b) Any license, franchise, authority or permit to
exercise any right or privilege, which may have been issued by the
Authority in accordance with this Decree or the rules and regulations
issued or promulgated pursuant to this Decree, shall be deemed
withdrawn and revoke upon conviction of the holder thereof.
[20]
In Victorias Milling v. CA, 153 SCRA 317, 324 (1987), we affirmed that a permit
would be binding as a contract when we said, *t+his 10% government
share of earnings of arrastre and stevedoring operators is in the nature of
contractual compensation to which a person desiring to operate arrastre
service must agree as a condition to the grant of the permit to operate.
[38]
Sec. 19. Dues. - The President of the Philippines may upon recommendation of
the Authority increase or decrease such dues, collectible by the Authority
to protect the interest of the Government and to provide a satisfactory
return on the Authority's assets, and may adjust the schedule of such dues
so as to reflect the costs of providing the services; Provided, however, that
the rates of dues on all the ports of the Philippines upon the coming into
operation of this Decree shall be those now provided under Parts 1, 2, 3,
and 6 of the Title VII of Book II of the Tariff and Customs Code, until such
time that the President upon recommendation of the Board may order
that the adjusted schedule of dues are in effect.
[44]
Art. 2199. Except as provided by law or by stipulation one is entitled to an
adequate compensation only for such pecuniary loss suffered by him as he
has duly proved. Such compensation is referred to as actual or
compensatory damages. Art. 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.
[52]
One of the requisites for novation is the validity of the ensuing obligation.
[54]
Sec. 37. Construction and Dredging Works. - a) The Bureau of Public Works shall
be the executing agency of the Authority for the detailed design, contract
document preparation and advertisement, construction supervision of port
terminal facilities and port works, and the dredging of public ports vested
in the Authority; Provided, That when there are no qualified bidders and
for projects less than two hundred thousand pesos (P200,000.00), the
Bureau of Public Works may undertake the construction through force
account; Provided, further, That the Authority shall perform rehabilitation
or maintenance works (including maintenance dredging) by its own
personnel or private contractor, whichever arrangement is more
advantageous to port and shipping operations.

SECOND DIVISION
[G.R. No. 182148, June 08, 2011]
SIME DARBY PILIPINAS, INC., PETITIONER, VS. GOODYEAR
PHILIPPINES, INC. AND MACGRAPHICS CARRANZ INTERNATIONAL
CORPORATION, RESPONDENTS.
[G.R. NO. 183210]
GOODYEAR PHILIPPINES, INC., PETITIONER, VS. SIME DARBY
PILIPINAS, INC. AND MACGRAPHICS CARRANZ INTERNATIONAL
CORPORATION, RESPONDENTS.

D E C I S I O N
MENDOZA, J.:
This disposition covers two petitions for review filed separately by
Sime Darby Pilipinas, Inc. (Sime Darby) and Goodyear Philippines,
Inc. (Goodyear) assailing the February 13, 2008 Decision
[1]
of the Court of
Appeals (CA) and its March 13, 2008
[2]
and May 28, 2008
[3]
Resolutions in CA-
G.R. CV No. 86032. The assailed issuances affirmed the November 8, 2004
Decision
[4]
and the July 20, 2005 Order
[5]
of the Regional Trial Court, Branch
61, Makati City (RTC), in Civil Case No. 97-561 entitledGoodyear Philippines,
Inc. v. Sime Darby Pilipinas, Inc., and/or Macgraphics Carranz International
Corporation, for Partial Rescission of a Deed of Assignment plus Damages and
which essentially:
[1]
granted Goodyear's complaint for partial rescission
against Sime Darby; and
[2]
ordered Goodyear to pay respondent Macgraphics
Carranz International Corporation (Macgraphics) attorney's fees with legal
interest thereon.

The Facts:
Macgraphics owned several billboards across Metro Manila and other
surrounding municipalities, one of which was a 35' x 70' neon billboard located
at the Magallanes Interchange in Makati City. The Magallanes billboard
was leased by Macgraphics to Sime Darby in April 1994 at a monthly rental of
P120,000.00.
[6]
The lease had a term of four years and was set to expire on
March 30, 1998. Upon signing of the contract, Sime Darby paid Macgraphics a
total of P1.2 million representing the ten-month deposit which the latter would
apply to the last ten months of the lease. Thereafter, Macgraphics configured
the Magallanes billboard to feature Sime Darby's name and logo.
On April 22, 1996, Sime Darby executed a Memorandum of
Agreement
[7]
(MOA) with Goodyear, whereby it agreed to sell its tire
manufacturing plants and other assets to the latter for a total of P1.5 billion.
Just a day after, on April 23, 1996, Goodyear improved its offer to buy
the assets of Sime Darby from P1.5 billion to P1.65 billion. The increase of the
purchase price was made in consideration, among others, of the assignment by
Sime Darby of the receivables in connection with its billboard advertising in
Makati City and Pulilan, Bulacan.
On May 9, 1996, Sime Darby and Goodyear executed a deed entitled
"Deed of Assignment in connection with Microwave Communication Facility and
in connection with Billboard Advertising in Makati City and Pulilan,
Bulacan" (Deed of Assignment),
[8]
through which Sime Darby assigned, among
others, its leasehold rights and deposits made to Macgraphics pursuant to its
lease contract over the Magallanes billboard.
Sime Darby then notified Macgraphics of the assignment of the
Magallanes billboard in favor of Goodyear through a letter-notice
[9]
dated May
3, 1996.
After submitting a new design for the Magallanes billboard to feature
its name and logo, Goodyear requested that Macgraphics submit its proposed
quotation for the production costs of the new design. In a letter
[10]
dated June
21, 1996 Macgraphics informed Goodyear that the monthly rental of the
Magallanes billboard is P250,000.00 and explained that the increase in rental
was in consideration of the provisions and technical aspects of the submitted
design.
Goodyear replied on July 8, 1996 stating that due to budget
constraints, it could not accept Macgraphics' offer to integrate the cost of
changing the design to the monthly rental. Goodyear stated that it intended to
honor the P120,000.00 monthly rental rate given by Macgraphics to Sime
Darby. It then requested that Macgraphics send its quotation for the simple
background repainting and re-lettering of the neon tubing for the Magallanes
billboard.
[11]

Macgraphics then sent a letter
[12]
to Sime Darby, dated July 11, 1996,
informing the latter that it could not give its consent to the assignment of lease
to Goodyear. Macgraphics explained that the transfer of Sime Darby's
leasehold rights to Goodyear would necessitate drastic changes to the design
and the structure of the neon display of the Magallanes billboard and would
entail the commitment of manpower and resources that it did not foresee at
the inception of the lease.
Attaching a copy of this letter to a correspondence
[13]
dated July 15,
1996, Macgraphics advised Goodyear that any advertising service it intended
to get from them would have to wait until after the expiration or valid pre-
termination of the lease then existing with Sime Darby.
On September 23, 1996, due to Macgraphics' refusal to honor the
Deed of Assignment, Goodyear sent Sime Darby a letter,
[14]
via facsimile,
demanding partial rescission of the Deed of Assignment and the refund of
P1,239,000.00, the pro-rata value of Sime Darby's leasehold rights over the
Magallanes billboard.
As Sime Darby refused to accede to Goodyear's demand for partial
rescission, the latter commenced Civil Case No. 97-561 with the RTC. In its
complaint,
[15]
Goodyear alleged that Sime Darby
[1]
was unable to deliver the
object of the Deed of Assignment and
[2]
was in breach of its warranty under
Title VII, Section B, paragraph 2 of the MOA, stating that "no consent of any
third party with whom Sime Darby has a contractual relationship is required in
connection with the execution and delivery of the MOA, or the consummation
of the transactions contemplated therein."
[16]

Including Macgraphics as an alternative defendant, Goodyear argued
that should the court find the partial rescission of the Deed of Assignment not
proper, it must be declared to have succeeded in the rights and interest of
Sime Darby in the contract of lease and Macgraphics be ordered to pay it the
amount of P1,239,000.00.
After trial and the submission of the parties of their respective
memoranda, the RTC rendered its decision and disposed the case in the
following manner:
WHEREFORE, premises considered, the Deed of Assignment of
Receivables (Exh. "C") is hereby partially rescinded and defendant Sime Darby
Pilipinas, Inc. is directed to pay plaintiff Goodyear Philippines, Inc. the amount
of P1,239,000.00 with legal interest thereon from June 1996 until fully paid.
Plaintiff Goodyear Philippines, Inc. is directed to pay defendant Macgraphics
the amount of P50,000.00 as attorney's fees with legal interest thereon from
the filing of the complaint until fully paid.
SO ORDERED.
The trial court was of the considered view that Sime Darby should
have secured the consent of Macgraphics to the assignment of the lease before
it could be effective against the latter. The trial court noted that the contract of
lease between Sime Darby and Macgraphics made no mention of any clause
that would grant Sime Darby the right to unilaterally assign the lease. Thus,
following Article 1649 of the New Civil Code,
[17]
the trial court ruled that
absent any stipulation to the contrary, the assignment of the lease without the
consent of Macgraphics was not valid. The RTC also stated that as far as
Macgraphics was concerned, its relationship with Goodyear was that of a new
client.
With Sime Darby's failure to secure the consent of Macgraphics, the
trial court considered that it failed to deliver the object of the Deed of
Assignment. The RTC, thus, ruled that following Article 1191 of the New Civil
Code,
[18]
Goodyear was entitled to demand rescission of the assignment of the
lease over the billboard.
Granting the counterclaim of Macgraphics, the trial court found that
Goodyear had no legal basis to file the complaint against it. According to the
trial court, the consent of Macgraphics was required before any assignment of
the lease over the billboard could be effective against it, there being no
stipulation allowing Sime Darby to do otherwise.
Not satisfied, both Goodyear and Sime Darby sought partial
reconsideration of the decision. Their respective pleas, however, were denied
by the RTC in its July 20, 2005 Order.
[19]

Sime Darby and Goodyear thereafter sought relief from the CA. In its
February 13, 2008 Decision, however, the CA echoed the findings and
conclusions of the trial court and affirmed its decision in toto. The decretal
portion of the decision reads:
WHEREFORE, premises considered, the reliefs prayed for in the instant
appeal are hereby DENIED. Accordingly, the assailed Decision of the Court a
quo dated 08 November 2004 and Order dated 20 July 2005, respectively,
STAND.
SO ORDERED.
Both Sime Darby and Goodyear sought partial reconsideration of the
CA decision, but their motions were denied.
Unable to seek relief from the CA, Sime Darby and Goodyear filed their
respective petitions before the Court. Sime Darby's petition was docketed as
G.R. No. 182148, while Goodyear's petition was docketed as G.R. No. 183210.
On July 8, 2008, G.R. No. 182148 and G.R. No. 183210 were consolidated.
In its Memorandum,
[20]
Sime Darby insists that Goodyear has no right
to rescind the Deed of Assignment as Macgraphics impliedly consented to the
assignment of the lease. It argues that Macgraphics, after being notified of the
assignment, entertained Goodyear's request for a quotation on the cost of a
new design for the Magallanes billboard. The fact that there was a negotiation,
Sime Darby posits, means that Macgraphics did not really care who the lessee
was for as long as it got paid for the lease of the Magallanes billboard.
Sime Darby also asserts that Macgraphics, despite refusing to give its
consent to the assignment, still entertained Goodyear's request to have its logo
featured in the Magallanes billboard. In fact, on July 23, 1996, it sent
Goodyear another quotation
[21]
of the cost to make changes on the billboard
design.
Further, Sime Darby argues that Macgraphics' delay of 69 days before
its July 11, 1996 letter declining to give its consent to the assignment is
unreasonably long. Considering also the lack of explanation on the part of
Macgraphics for the reason of the delay, Sime Darby claims that laches has set
in.
On the other hand, both Goodyear and Macgraphics pray for the
affirmance of the decisions of the courts below that rescission is proper. In
addition, Goodyear assails the petition of Sime Darby claiming that it raises
only questions of fact since the petition essentially revolves around the truth or
falsity of the findings of the courts below that Macgraphics never consented to
the assignment of Sime Darby's leasehold rights. Goodyear also insists that it
is entitled to attorneys' fees due to the unjustified refusal of Sime Darby to
rescind the Deed of Assignment.
Goodyear, however, asserts that it should not be held liable for the
attorney's fees in favor of Macgraphics because it merely impleaded the latter
when Sime Darby argued that fault and liability lie with it (Macgraphics).
Synthesized, the issues proffered by the two petitions are:
[1] Whether partial rescission of the Deed of Assignment is proper; and
[2] Whether Macgraphics is entitled to an award of attorney's fees.
The Court finds no merit in the petitions.
Well-settled is the rule that a petition for review on certiorari under
Rule 45 of the Rules of Court should only include questions of law since
questions of fact are not reviewable. A question of law arises when there is
doubt as to what the law is on a certain state of facts, while a question of fact
exists when the doubt arises as to the truth or falsity of the alleged facts. For a
question to be one of law, it must not involve an examination of the probative
value of the evidence presented by any of the litigants. The resolution of the
issue must rest solely on what the law provides under a given set of
circumstances. Once it is clear that the issue invites a review of the evidence
presented, then the question posed is one of fact. Thus, the test of whether a
question is one of law or of fact is not the appellation given to such question by
the party raising the same; rather, it is whether the appellate court resolve the
questionraised without reviewing or evaluating the evidence, in which case, it
is a question of law; otherwise it is a question of fact.
[22]

Likewise well-settled is the principle that absent grave abuse of
discretion, the Court will not disturb the factual findings of the CA. The Court
will only exercise its power of review in known exceptions such as gross
misappreciation of evidence or a total void of evidence.
[23]

Whether Macgraphics gave its consent to the assignment of leasehold
rights of Sime Darby is a question of fact. It is not reviewable. On this score
alone, the petition of Sime Darby fails.
Even if the Court should sidestep this otherwise fatal miscue, the
petition of Sime Darby remains bereft of any merit. Article 1649 of the New
Civil Code provides:
Art. 1649. The lessee cannot assign the lease without the consent of
the lessor, unless there is a stipulation to the contrary. (n)
In an assignment of a lease, there is a novation by the substitution of
the person of one of the parties - the lessee.
[24]
The personality of the lessee,
who dissociates from the lease, disappears. Thereafter, a new juridical relation
arises between the two persons who remain - the lessor and the assignee who
is converted into the new lessee. The objective of the law in prohibiting the
assignment of the lease without the lessor's consent is to protect the owner or
lessor of the leased property.
[25]

Broadly, a novation may either be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the creation of a new
obligation that takes the place of the former; it is merely modificatory when
the old obligation subsists to the extent it remains compatible with the
amendatory agreement. An extinctive novation results either by changing the
object or principal conditions (objective or real), or by substituting the person
of the debtor or subrogating a third person in the rights of the creditor
(subjective or personal). Under this mode, novation would have dual functions-
-one to extinguish an existing obligation, the other to substitute a new one in
its place. This requires a conflux of four essential requisites: (1) a previous
valid obligation; (2) an agreement of all parties concerned to a new contract;
(3) the extinguishment of the old obligation; and (4) the birth of a valid new
obligation.
[26]

While there is no dispute that the first requisite is present, the Court,
after careful consideration of the facts and the evidence on record, finds that
the other requirements of a valid novation are lacking. A review of the lease
contract between Sime Darby and Macgraphics discloses no stipulation that
Sime Darby could assign the lease without the consent of Macgraphics.
Moreover, contrary to the assertions of Sime Darby, the records are
bereft of any evidence that clearly shows that Macgraphics consented to the
assignment of the lease. As aptly found by the RTC and the CA, Macgraphics
was never part of the negotiations between Sime Darby and Goodyear. Neither
did it give its conformity to the assignment after the execution of the Deed of
Assignment.
The consent of the lessor to an assignment of lease may indeed be
given expressly or impliedly. It need not be given simultaneously with that of
the lessee and of the assignee. Neither is it required to be in any specific or
particular form.
[27]
It must, however, be clearly given. In this case, it cannot
be said that Macgraphics gave its implied consent to the assignment of lease.
As aptly explained by the CA in its decision:xxx
Neither are We convinced with Appellant SIME DARBY's argument that
Appellee MACGRAPHICS impliedly consented to the questioned assignment
when it negotiated with Appellant GOODYEAR for the redesigning of Magallanes
billboard. In fact, thru its letter dated 11 July 1996 to Appellant SIME DARBY,
the Appellee made formal its refusal to give consent to the transfer/assignment
to Appellant GOODYEAR of its right in the lease over the billboard located in
Magallanes, Makati. The letter reads: xxx
RE: Your BILLBOARD LEASE
We refer to your letter dated May 23, 1996 notifying us of the
assignment and transfer to Goodyear Philippines, Inc. of all your rights in the
lease over the billboard located at Wells Photo Building, Magallanes, Makati
City.
As anticipated, the transfer of your rights over the lease will
necessitate drastic changes to the design and structure of the neon
spectacular display advertised in the billboard, which would thus entail
commitment of manpower and resources which we did not foresee at
the inception of the lease. Much as we would like to accommodate you,
these reasons constrained us to decline giving consent to the transfer.
We hope that you will understand our position. (Emphasis included)
On 15 July 1996, the Appellee likewise sent a letter to Appellant
GOODYEAR informing the latter of its refusal to the assignment of the subject
lease. The letter essentially states: xxx

ATTENTION: MR. CARLOS Q. CARBALLO
Manager

Distribution, Development & Advertising
Gentlemen:
In response to your letter dated July 08, 1996, we are furnishing you
with a copy of the letter we sent to Sime Darby Pilipinas, Inc., the content of
which is self-explanatory.
We look forward to servicing your advertising needs at the billboards
presently leased to Sime Darby but only after the latter's existing lease thereon
has expired or been validly pre-terminated. Until then, we are bound to abide
by the terms of the existing lease contract.
Should you desire, we have other choice locations which might suit
your needs. Please let us know. xxx
In the assertion of implied consent allegedly made by the Appellee to
the assignment, the Court a quo ratiocinated in this wise: xxx
On the issue of whether or not the negotiations between Macgraphics
and Goodyear is a separate negotiation or still included in the lease, the Court
rules that from the very start of the negotiations between Goodyear and
Macgraphics, the relationship between them, as far as Macgraphics is
concerned, was that of Goodyear as a new client. Nonetheless, whether the
negotiations is separate or included in the lease between Sime Darby and
Macgraphics, the fact remains that Macgraphics did not give its consent to the
assignment of the lease.xxx
Clearly, there is no implied consent based on the factual backdrop of
this case. Evidently, what transpired between Appellant GOODYEAR and the
Appellee was a negotiation between a willing service provider and a probable
new client. On this regard, the president of the Appellee, ALVIN M. CARRANZA
(hereinafter CARRANZA), confirmed on direct examination the contents of his
judicial affidavit submitted before the Court a quo in lieu of direct examination.
The said judicial affidavit pertinently states viz: xxx
Q: Do you know plaintiff?
A: Yes.
Q: How do you know the plaintiff?
A: I know the plaintiff Goodyear because after Sime Darby sent us the
letter dated 03 May 1996, Goodyear requested for a price quote on the cost of
changing the billboard design on the Magallanes Interchange. They asked how
much the cost would be if Sime Darby's billboard were changed and
Goodyear's advertisement displayed instead.
Q: What was your reaction to this request?
A: Goodyear is a big company, so we tried to be as accommodating as possible
in order to attract it as a client. (Underlining supplied) xxx
As aptly pointed out by Appellant GOODYEAR in its Brief filed in
response to the appeal filed by the Appellant SIME DARBY, the fact that the
Appellee dealt with Appellant GOODYEAR as a new client is corroborated by the
testimony of APOLLO DE GALA (hereinafter DE GALA), Acting Manager for
Advertising of Appellant GOODYEAR, to wit:
Re-direct examination
Q: You mentioned during cross-examination that you started negotiating
with Macgraphics Carranz for the make-over of the billboard in Magallanes, is it
not?
A: Yes, sir.
Q: And this negotiation was without the participation of Sime Darby?
A: Yes, sir.
Q: Now, why did you not include Sime Darby in the negotiation?
A: I do not really have any reason to include them that time, because
considering that it was just a change over, we were willing to pay for the
change over. The thing that included Sime Darby was that Carranz refused to
honor. Well, Carranz proposed another scheme for the billboard. In fact, they
proposed to us that we do the whole thing over, sir. A new set not considering
the Sime Darby logo and Sime Darby agreement, Carranz and Sime Darby. To
Carranz, it was already new set of client. xxx
(Underlining supplied)
Indeed, Macgraphics and Goodyear never came to terms as to the
conditions that would govern their relationship. While it is true, that
Macgraphics and Goodyear exchanged proposals, there was never a meeting of
minds between them. Contrary to the assertions of Sime Darby, the
negotiations between Macgraphics and Goodyear did not translate to its
(Macgraphics') consent to the assignment. Negotiations is just a part or a
preliminary phase to the birth of an obligation.
"In general, contracts undergo three distinct stages, to wit:
negotiation; perfection or birth; and consummation. Negotiation begins from
the time the prospective contracting parties manifest their interest in the
contract and ends at the moment of agreement of the parties. Perfection or
birth of the contract takes place when the parties agree upon the essential
elements of the contract. Consummation occurs when the parties fulfill or
perform the terms agreed upon in the contract, culminating in the
extinguishment thereof."
[28]

Regarding laches, it is an issue raised by Sime Darby for the first time
only in this Court. Basic is the rule that issues not raised below cannot be
raised for the first time on appeal. Points of law, theories, issues and
arguments not brought to the attention of the lower court need not be, and
ordinarily will not be, considered by the reviewing court, as they cannot be
raised for the first time at that late stage. Basic considerations of due process
impel the adoption of this rule.
[29]

Notwithstanding, the Court finds that the doctrine of laches cannot be
applied in this case.
Laches is the failure or neglect, for an unreasonable and unexplained
length of time, to do that which, by exercising due diligence, could or should
have been done earlier; it is negligence or omission to assert a right within a
reasonable time, warranting the presumption that the party entitled to assert it
either has abandoned or declined to assert it.
[30]
There is no absolute rule as
to what constitutes laches or staleness of demand; each case is to be
determined according to its particular circumstances, with the question of
laches addressed to the sound discretion of the court. Because laches is an
equitable doctrine, its application is controlled by equitable considerations and
should not be used to defeat justice or to perpetuate fraud or injustice.
[31]

From the records, it appears that Macgraphics first learned of the
assignment when Sime Darby sent its letter-notice dated May 3, 1996. From
the letters sent by Macgraphics to Goodyear, it is apparent that Macgraphics
had to study and determine both the legal and practical implications of
entertaining Goodyear as a client. After review, Macgraphics found that
consenting to the assignment would entail the commitment of manpower and
resources that it did not foresee at the inception of the lease. It thereafter
communicated its non-conformity to the assignment. To the mind of the Court,
there was never a delay.
In sum, it is clear that by its failure to secure the consent of
Macgraphics to the assignment of lease, Sime Darby failed to perform what
was incumbent upon it under the Deed of Assignment. The rescission of the
Deed of Assignment pursuant to Article 1191 of the New Civil Code is, thus,
justified.
With regard to the two issues raised by Goodyear on attorney's fees,
the Court agrees with the CA which correctly proferred the following
ratiocination:
The award of attorney's fees is the exception rather than the rule, and
it must have some factual, legal and equitable bases. Nevertheless, Art. 2208
of the Civil Code authorizes an award of attorney's fees and expenses of
litigation, other than judicial costs, when as in this case the plaintiff's act or
omission has compelled the defendant to litigate and to incur expenses of
litigation to protect her interest (par. 2), and where the Court deems it just
and equitable that attorney's fees and expenses of litigation should be
recovered (par. 11).

In the case at bar, even before the filing of the instant case before the
Court a quo, it was clear that Appellee MACGRAPHICS was not part of the Deed
of Assignment being assailed by the Appellant GOODYEAR. It was also
established during the trial that the consent of Appellee MACGRAPHICS was not
secured prior to the execution of the subject deed between the Appellants.
Thus, it is only equitable that Appellant GOODYEAR be made liable for
the unnecessary attorney's fees spent by Appellee MACGRAPHICS to
protect its rights and interest due to the filing of a baseless complaint by
Appellant GOODYEAR. To stress, attorney's fees may be awarded when a party
is compelled to litigate or to incur expenses to protect its interest by reason of
an unjustified act by the other.
As to the claim of Appellant GOODYEAR that Appellant SIME DARBY be
made liable to pay the former attorney's fees, We rule to deny the same.
The grant of attorney's fees depends on the circumstances of each
case and lies within the discretion of the court. We are of the view that
although the Court a quo was correct in ordering the partial rescission of the
deed of assignment, it does not necessarily follow that the award of attorney's
fees is a natural consequence. They are not awarded every time a party wins a
suit. In the absence of a stipulation, attorney's fees are ordinarily not
recoverable; otherwise a premium shall be placed on the right to
litigate. Since the Appellant GOODYEAR's claim from Appellant SIME
DARBY, to deliver its leasehold rights with Appellee MACGRAPHICS
cannot altogether be considered as demandable claim due to latter's
lack of consent, Appellant SIME DARBY cannot be made liable to
answer for attorney's fees. [Emphases supplied]
In view of all the foregoing, the Court finds no legal, factual, or
equitable justification to disturb the findings and conclusions of the courts
below.
WHEREFORE, the petitions are hereby DENIED.
SO ORDERED.

[1]
Penned by Associate Justice Myrna Dimaranan Vidal with Associate Justices
Jose L. Sabio and Jose C. Reyes, Jr., concurring; CA rollo, pp. 194-210.
[17]
Art. 1649. The lessee cannot assign the lease without the consent of the
lessor, unless there is a stipulation to the contrary. (n)
[18]
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. (1124)



SECOND DIVISION
KINGS PROPERTIES
CORPORATION, Petitioner,
- versus - CANUTO A.
GALIDO, Respondent.
G.R. No. 170023
Present: CARPIO, J., Chairperson,
LEONARDO-DE CASTRO,
*

BRION, DEL CASTILLO, and
ABAD, JJ.
Promulgated:
November 27, 2009
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
D E C I S I O N
CARPIO, J.:
The Case
Kings Properties Corporation (petitioner) filed this Petition for Review on
Certiorari
[1]
assailing the Court of Appeals Decision
[2]
dated 20 December 2004 in
CA-G.R. CV No. 68828 as well as the Resolution
[3]
dated 10 October 2005 denying
the Motion for Reconsideration. In the assailed decision, the Court of Appeals
reversed the Regional Trial Courts Decision
[4]
dated 4 July 2000. This case involves
an action for cancellation of certificates of title, registration of deed
of sale and issuance of certificates of title filed by Canuto A. Galido (respondent)
before Branch 71 of the Regional Trial Court of Antipolo City (trial court).
The Facts
On 18 April 1966, the heirs of Domingo Eniceo, namely Rufina Eniceo and
Maria Eniceo, were awarded with Homestead Patent No. 112947 consisting of four
parcels of land located in San Isidro, Antipolo, Rizal (Antipolo property) and
particularly described as follows:
1. Lot No. 1 containing an area of 96,297 square meters;
Lot No. 3 containing an area of 25,170 square meters;
Lot No. 4 containing an area of 26,812 square meters; and
Lot No. 5 containing an area of 603 square meters.
The Antipolo property with a total area of 14.8882 hectares was registered
under Original Certificate of Title (OCT) No. 535.
[5]
The issuance of the homestead
patent was subject to the following conditions:
To have and to hold the said tract of land, with the appurtenances
thereunto of right belonging unto the said Heirs of Domingo Eniceo and to his heir
or heirs and assigns forever, subject to the provisions of sections 118, 121, 122 and
124 of Commonwealth Act No. 141, as amended, which provide that except in
favor of the Government or any of its branches, units or institutions, the land
hereby acquired shall be inalienable and shall not be subject to incumbrance for a
period of five (5) years next following the date of this patent, and shall not be liable
for the satisfaction of any debt contracted prior to the expiration of that period;
that it shall not be alienated, transferred or conveyed after five (5) years and before
twenty-five (25) years next following the issuance of title, without the approval of
the Secretary of Agriculture and Natural Resources; that it shall not be incumbered,
alienated, or transferred to any person, corporation, association, or partnership not
qualified to acquire public lands under the said Act and its amendments; x x x
[6]

On 10 September 1973, a deed of sale covering the Antipolo property was
executed between Rufina Eniceo and Maria Eniceo as vendors and respondent as
vendee. Rufina Eniceo and Maria Eniceo sold the Antipolo property to respondent
for P250,000.
[7]
A certain Carmen Aldana delivered the owners duplicate copy of
OCT No. 535 to respondent.
[8]

Petitioner alleges that when Maria Eniceo died in June 1975, Rufina Eniceo and
the heirs of Maria Eniceo (Eniceo heirs),
[9]
who continued to occupy the Antipolo
property as owners, thought that the owners duplicate copy of OCT No. 535 was
lost.
[10]

On 5 April 1988, the Eniceo heirs registered with the Registry of Deeds of
Marikina City (Registry of Deeds) a Notice of Loss dated 2 April 1988 of the owners
copy of OCT No. 535. The Eniceo heirs also filed a petition for the issuance of a new
owners duplicate copy of OCT No. 535 with Branch 72 of the Regional Trial Court
(RTC) of Antipolo, Rizal. The case was docketed as LRC Case No. 584-A.
[11]

On 31 January 1989, the RTC rendered a decision finding that the certified true
copy of OCT No. 535 contained no annotation in favor of any person, corporation or
entity. The RTC ordered the Registry of Deeds to issue a second owners copy of
OCT No. 535 in favor of the Eniceo heirs and declared the original owners copy of
OCT NO. 535 cancelled and considered of no further value.
[12]

On 6 April 1989, the Registry of Deeds issued a second owners copy of OCT
No. 535 in favor of the Eniceo heirs.
[13]

Petitioner states that as early as 1991, respondent knew of the RTC decision in
LRC Case No. 584-A because respondent filed a criminal case against Rufina Eniceo
and Leonila Bolinas (Bolinas) for giving false testimony upon a material fact during
the trial of LRC Case No. 584-A.
[14]

Petitioner alleges that sometime in February 1995, Bolinas came to the office
of Alberto Tronio Jr. (Tronio), petitioners general manager, and offered to sell the
Antipolo property. During an on-site inspection, Tronio saw a house and
ascertained that the occupants were Bolinas relatives. Tronio also went to the
Registry of Deeds to verify the records on file. Tronio ascertained that OCT No. 535
was clean and had no lien and encumbrances. After the necessary verification,
petitioner decided to buy the Antipolo property.
[15]

On 14 March 1995, respondent caused the annotation of his adverse claim in
OCT No. 535.
[16]

On 20 March 1995, the Eniceo heirs executed a deed of absolute sale in favor
of petitioner covering lots 3 and 4 of the Antipolo property for P500,000.
[17]

On the same date, Transfer Certificate of Title (TCT) Nos. 277747 and 277120
were issued. TCT No. 277747 covering lots 1 and 5 of the Antipolo property was
registered in the names of Rufina Eniceo, Ambrosio Eniceo, Rodolfo Calove,
Fernando Calove and Leonila Calove Bolinas.
[18]
TCT No. 277120 covering lots 3
and 4 of the Antipolo property was registered in the name of petitioner.
[19]

On 5 April 1995, the Eniceo heirs executed another deed of sale in favor of
petitioner covering lots 1 and 5 of the Antipolo property for P1,000,000. TCT No.
278588 was issued in the name of petitioner and TCT No. 277120 was cancelled.
[20]

On 17 August 1995, the Secretary of the Department of Environment and
Natural Resources (DENR Secretary) approved the deed of sale between the Eniceo
heirs and respondent.
[21]

On 16 January 1996, respondent filed a civil complaint with the trial court
against the Eniceo heirs and petitioner. Respondent prayed for the cancellation of
the certificates of title issued in favor of petitioner, and the registration of the deed
of sale and issuance of a new transfer certificate of title in favor of respondent.
[22]

On 4 July 2000, the trial court rendered its decision dismissing the case for lack
of legal and factual basis.
[23]

Respondent appealed to the Court of Appeals (CA). On 20 December 2004,
the CA rendered a decision reversing the trial courts decision.
[24]
Respondent filed
a motion for reconsideration, which the CA denied in its Resolution dated 10
October 2005.
Aggrieved by the CAs decision and resolution, petitioner elevated the case
before this Court.
The Ruling of the Trial Court
The trial court stated that although respondent claims that the Eniceo heirs
sold to him the Antipolo property, respondent did not testify in court as to the
existence, validity and genuineness of the purported deed of sale and his
possession of the duplicate owners copy of OCT No. 535. The trial court stated that
as owner of a property consisting of hectares of land, respondent should have come
to court to substantiate his claim and show that the allegations of the Eniceo heirs
and petitioner are mere fabrications.
[25]

The trial court noticed that respondent did not register the deed of sale with
the Register of Deeds immediately after its alleged execution on 10 September
1973. Further, respondent waited for 22 long years before he had the sale approved
by the DENR Secretary. The trial court declared that respondent slept on his
rights. The trial court concluded that respondents failure to register the sale and
secure the cancellation of OCT No. 535 militates against his claim of ownership. The
trial court believed that respondent has not established the preponderance of
evidence necessary to justify the relief prayed for in his complaint.
[26]

The trial court stated that Bolinas was able to prove that the Eniceo heirs have
remained in actual possession of the land. The filing of a petition for the issuance of
a new owners duplicate copy requires the posting of the petition in three different
places which serves as a notice to the whole world. Respondents failure to oppose
this petition can be deemed as a waiver of his right, which is fatal to his cause.
[27]

The trial court noted that petitioner is a buyer in good faith and for value
because petitioner has exercised due diligence in inspecting the property and
verifying the title with the Register of Deeds.
[28]

The trial court held that even if the court were to believe that the deed of sale
in favor of respondent were genuine, still it could not be considered a legitimate
disposition of property, but merely an equitable mortgage. The trial court stated
that respondent never obtained possession of the Antipolo property at any given
time and a buyer who does not take possession of a property sold to him is
presumed to be a mortgagee only and not a vendee.
[29]


The Ruling of the Court of Appeals
The CA ruled that the deed of sale in favor of respondent, being a notarized
document, has in its favor the presumption of regularity and carries the evidentiary
weight conferred upon it with respect to its due execution. The CA added that
whoever asserts forgery has the burden of proving it by clear, positive and
convincing evidence because forgery can never be presumed. The CA found that
petitioner and the Eniceo heirs have not substantiated the allegation of forgery.
[30]

The CA pointed out that laches has not set in. One of the requisites of laches,
which is injury or prejudice to the defendant in the event relief is accorded to the
complainant or the suit is not held to be barred, is wanting in the instant case. The
CA added that unrecorded sales of land brought under the Torrens system are valid
between parties because registration of the instrument is merely intended to bind
third persons.
[31]

The CA declared that petitioners contention regarding the validity of the
questioned deed on the ground that it was executed without the approval of the
DENR Secretary is untenable. The DENR Secretary approved the deed of sale on 17
August 1995. However, even supposing that the sale was not approved, the
requirement for the DENR Secretarys approval is merely directory and its absence
does not invalidate any alienation, transfer or conveyance of the homestead after 5
years and before 25 years from the issuance of the title which can be complied
with at any time in the future.
[32]

The CA ruled that petitioner is a buyer in bad faith because it purchased the
disputed properties from the Eniceo heirs after respondent had caused the
inscription on OCT No. 535 of an adverse claim. Registration of the adverse claim
serves as a constructive notice to the whole world. Petitioner cannot feign
ignorance of facts which should have put it on guard and then claim that it acted
under the honest belief that there was no defect in the title of the vendors.
Knowing that an adverse claim was annotated in the certificates of title of the
Eniceo heirs, petitioner was forewarned that someone is claiming an interest in the
disputed properties.
[33]

The CA found no merit in petitioners contention that the questioned deed of
sale is an equitable mortgage. The CA stated that for the presumption of an
equitable mortgage to arise, one must first satisfy the requirement that the parties
entered into a contract denominated as a contract of sale and that their intention
was to secure an existing debt by way of mortgage.
[34]

The CA stated that the execution of the notarized deed of sale, even without
actual delivery of the disputed properties, transferred ownership from the Eniceo
heirs to respondent. The CA held that respondents possession of the owners
duplicate copy of OCT No. 535 bolsters the contention that the Eniceo heirs sold the
disputed properties to him by virtue of the questioned deed.
[35]

The CA reversed the trial courts decision. The dispositive portion of the CA
decision reads:
WHEREFORE, the appealed decision of the Regional Trial
Court of Rizal (Antipolo, Branch 71) is REVERSED and SET ASIDE
and another rendered as follows:
1. DECLARING NULL AND VOID TRANSFER
CERTIFICATES OF TITLES NOS. 277747, 277120 AND
278588 OF THE REGISTRY OF DEEDS OF MARIKINA
CITY (THE LAST TWO IN THE NAME OF DEFENDANT-
APPELLEE KINGS PROPERTIES CORPORATION), THE
DERIVATIVE TITLES THEREOF AND THE INSTRUMENTS
WHICH WERE THE BASES OF THE ISSUANCE OF SAID
CERTIFICATES OF TITLE; AND
2. DECLARING PLAINTIFF-APPELLANT CANUTO A.
GALIDO THE OWNER OF FEE SIMPLE OF LOT NOS. 1,
3, 4, 5 FORMERLY REGISTERED UNDER ORIGINAL
CERTIFICATE OF TITLE NO. 535 IN THE NAME OF THE
HEIRS OF DOMINGO ENICEO, REPRESENTED BY
RUFINA ENICEO, AND ORDERING THE REGISTER OF
DEEDS OF MARIKINA CITY TO ISSUE NEW TRANSFER
CERTIFICATES OF TITLE FOR SAID PARCELS OF LAND
IN THE NAME OF PLAINTIFF-APPELLANT CANUTO A.
GALIDO, UPON PAYMENT OF THE PROPER FEES AND
PRESENTATION OF THE DEED OF SALE DATED
SEPTEMBER 10, 1973 EXECUTED BY RUFINA ENICEO
AND MARIA ENICEO, AS SOLE HEIRS OF THE LATE
DOMINGO ENICEO, IN FAVOR OF THE LATTER.
[36]

The Issues
Petitioner raises two issues in this petition:
1. Whether the adverse claim of respondent over the Antipolo property
should be barred by laches;
[37]
and
2. Whether the deed of sale delivered to respondent should be
presumed an equitable mortgage pursuant to Article 1602(2) and
1604 of the Civil Code.
[38]

The Ruling of the Court
Validity of the deed of sale to respondent
The contract between the Eniceo heirs and respondent executed on 10
September 1973 was a perfected contract of sale. A contract is perfected once
there is consent of the contracting parties on the object certain and on the cause of
the obligation.
[39]
In the present case, the object of the sale is the Antipolo property
and the price certain is P250,000.
The contract of sale has also been consummated because the vendors and
vendee have performed their respective obligations under the contract. In a
contract of sale, the seller obligates himself to transfer the ownership of the
determinate thing sold, and to deliver the same to the buyer, who obligates himself
to pay a price certain to the seller.
[40]
The execution of the notarized deed of sale
and the delivery of the owners duplicate copy of OCT No. 535 to respondent is
tantamount to a constructive delivery of the object of the sale. In Navera v. Court of
Appeals, the Court ruled that since the sale was made in a public instrument, it was
clearly tantamount to a delivery of the land resulting in the symbolic possession
thereof being transferred to the buyer.
[41]

Petitioner alleges that the deed of sale is a forgery. The Eniceo heirs also
claimed in their answer that the deed of sale is fake and spurious.
[42]
However, as
correctly held by the CA, forgery can never be presumed. The party alleging forgery
is mandated to prove it with clear and convincing evidence.
[43]
Whoever alleges
forgery has the burden of proving it. In this case, petitioner and the Eniceo heirs
failed to discharge this burden.
Petitioner invokes the belated approval by the DENR Secretary, made within
25 years from the issuance of the homestead, to nullify the sale of the Antipolo
property. The sale of the Antipolo property cannot be annulled on the ground that
the DENR Secretary gave his approval after 21 years from the date the deed of sale
in favor of respondent was executed. Section 118 of Commonwealth Act No. 141 or
the Public Land Act (CA 141), as amended by Commonwealth Act No. 456,
[44]
reads:
EFRS OORS EAFEN.S TPS 1XE1.S 11S .CES
1EE.PTEP.S1.SXPNS11ST.SF.XPFCERSTPT.RS1.S
TP.T.T.T1PRS 1.S NEXNNN F1P.T.T.EOS
FXPRTPS F1.N1.X.T1PRS NXPOS XFGTT.EOS
TPOE.S 1.EES NX.EP.S 1.S C1TE.EXOS N.1ETT1PS
CXNNS P1.S FES TFOEF.S .1S EPFTTF.XPFES 1.S
XNTEPX.T1PS 1.1TS .CES OX.ES 11S .CES XNN.1EXNS 11S
.CES XNNNTFX.T1PS XPOS 11.S XS .E.TS 11S 1TEES NEX.S
1.1TS XPOS X1.E.S .CES OX.ES 11S .CES TTX PFES 11S
.CESNX.EP.S1.S.XP.SASASA
No alienation, transfer, or conveyance of any homestead after five years and
before twenty-five years after the issuance of title shall be valid without the
approval of the Secretary of Agriculture and Natural Resources,
[45]
which approval
shall not be denied except on constitutional and legal grounds.
In Spouses Alfredo v. Spouses Borras,
[46]
the Court explained the implications of
Section 118 of CA 141. Thus:
AkngmeeAhkArhelmensekArlAikhrrdrmesAmkhAnregnmrgA
mhAnAikronmeAr gsrorsnnAnAngsAkngmAprmrrgAmroeAnenklAmkhAmreA
mreA mrnmA mreA inmegmA hkA kngmA rlA rllnesoA A orhnmrhgA hmA mrrlA
ikhrrdrmrhgAkegseklAnAlneAohrsoAhrrl, however, expires on the
fifth year. From then on until the next 20 years, the land grant
may be alienated provided the Secretary of Agriculture and
Natural Resources approves the alienation. The Secretary is
required to approve the alienation unless there are
constitutional and legal grounds to deny the approval. In this
case, there are no apparent or legal grounds for the Secretary to
disapprove the sale of the Subject Land.
The Iailure to secure the approval oI the Secretary does
notipso factomake a sale void. The absence oI approval by the
Secretary does nota sale made after the expiration of the 5-year
period, for in such event the requirement of Section 118 of the
Public Land Act becomes merely directory or a formality. The
approval may be secured later, producing the eIIect oI ratiIying
previously and adopting the transaction as iI the sale had been
.authorized (Underscoring supplied)
Equitable Mortgage
Petitioner contends that the deed of sale in favor of respondent is an equitable
mortgage because the Eniceo heirs remained in possession of the Antipolo property
despite the execution of the deed of sale.
An equitable mortgage is one which although lacking in some formality, or
form or words, or other requisites demanded by a statute, nevertheless reveals the
intention of the parties to charge real property as security for a debt, and contains
nothing impossible or contrary to law.
[47]
The essential requisites of an equitable
mortgage are:
1. The parties entered into a contract denominated as a
contract of sale; and
2. Their intention was to secure existing debt by way of a
mortgage.
[48]

In Lim v. Calaguas,
[49]
the Court held that in order for the presumption of
equitable mortgage to apply, there must be: (1) something in the language of the
contract; or (2) in the conduct of the parties which shows clearly and beyond doubt
that they intended the contract to be a mortgage and not a pacto de
retro sale.
[50]
Proof by parol evidence should be presented in court. Parol evidence
is admissible to support the allegation that an instrument in writing, purporting on
its face to transfer the absolute title to property, was in truth and in fact given
merely as security for the payment of a loan. The presumption of equitable
mortgage under Article 1602 of the Civil Code is not conclusive. It may be rebutted
by competent and satisfactory proof of the contrary.
[51]

Petitioner claims that an equitable mortgage can be presumed because the
Eniceo heirs remained in possession of the Antipolo property. Apart from the fact
that the Eniceo heirs remained in possession of the Antipolo property, petitioner
has failed to substantiate its claim that the contract of sale was intended to secure
an existing debt by way of mortgage. In fact, mere tolerated possession is not
enough to prove that the transaction was an equitable mortgage.
[52]

Furthermore, petitioner has not shown any proof that the Eniceo heirs were
indebted to respondent. On the contrary, the deed of sale executed in favor of
respondent was drafted clearly to convey that the Eniceo heirs sold and transferred
the Antipolo property to respondent. The deed of sale even inserted a provision
about defrayment of registration expenses to effect the transfer of title to
respondent.
In any event, as pointed out by respondent in his Memorandum, this defense
of equitable mortgage is available only to petitioners predecessors-in-interest who
should have demanded, but did not, for the reformation of the deed of sale.
[53]
A
perusal of the records shows that the Eniceo heirs never presented the defense of
equitable mortgage before the trial court. In their Answer
[54]
and
Memorandum
[55]
filed before the trial court, the Eniceo heirs claimed that the
alleged deed of sale dated 10 September 1973 between Rufina Eniceo and Maria
Eniceo was fake and spurious. The Eniceo heirs contended that even assuming
there was a contract, no consideration was involved. It was only in the Appellees
Brief
[56]
filed before the CA that the Eniceo heirs claimed as an alternative defense
that the deed should be presumed as an equitable mortgage.
IN PHILIPPINE PORTS AUTHORITY V. CITY OF ILOILO,
[57]
WE RULED THAT A
PARTY WHO ADOPTS A CERTAIN THEORY UPON WHICH THE CASE IS TRIED AND
DECIDED BY THE LOWER COURT WILL NOT BE PERMITTED TO CHANGE THE THEORY
ON APPEAL. A THEORY OF THE CASE NOT BROUGHT TO THE ATTENTION OF THE
LOWER COURT WILL NOT BE CONSIDERED BY A REVIEWING COURT, AS A NEW
THEORY CANNOT BE RAISED FOR THE FIRST TIME AT SUCH LATE STAGE.
ALTHOUGH PETITIONER RAISED THE DEFENSE OF EQUITABLE MORTGAGE IN
THE LOWER COURT, HE CANNOT CLAIM THAT THE DEED WAS AN EQUITABLE
MORTGAGE BECAUSE PETITIONER WAS NOT A PRIVY TO THE DEED OF SALE DATED
10 SEPTEMBER 1973. PETITIONER MERELY STEPPED INTO THE SHOES OF THE
ENICEO HEIRS. PETITIONER, WHO MERELY ACQUIRED ALL THE RIGHTS OF ITS
PREDECESSORS, CANNOT ESPOUSE A THEORY THAT IS CONTRARY TO THE THEORY
OF THE CASE CLAIMED BY THE ENICEO HEIRS.
The Court notes that the Eniceo heirs have not appealed the CAs decision,
hence, as to the Eniceo heirs, the CAs decision that the contract was a sale and not
an equitable mortgage is now final. Since petitioner merely assumed the rights of
the Eniceo heirs, petitioner is now estopped from questioning the deed of sale
dated 10 September 1973.
Petitioner is not a buyer in good faith
Petitioner maintains that the subsequent sale must be upheld because
petitioner is a buyer in good faith, having exercised due diligence by inspecting the
property and the title sometime in February 1995.
In Agricultural and Home Extension Development Group v. Court of
Appeals,
[58]
a buyer in good faith is defined as one who buys the property of
another without notice that some other person has a right to or interest in such
property and pays a full and fair price for the same at the time of such purchase or
before he has notice of the claim or interest of some other person in the property.
In Balatbat v. Court of Appeals,
[59]
the Court held that in the realm of double
sales, the registration of an adverse claim places any subsequent buyer of the
registered land in bad faith because such annotation was made in the title of the
property before the Register of Deeds and he could have discovered that the
subject property was already sold.
[60]
The Court explained further, thus:
A inkrnlekA hmA nA onnesA ireeA hmA ikhiekmnA ngghmA rnlmA
hleA rrlA enelA mhA mnmlA prrrA lrhnsA inmA nA kenlhgndeA ngA
nihgA rrlA nnksA ngsA mregA nrA mrnmA reA nmesA rgA hhsA mnrmrA
ngsAngsekAmreAderemAmrnmAmrekeApekeAghAsememArgAmreAmrmeAhmA
mr eA oegshkoA geA prhA inkrnlelA kenA elmnmeA prmrA ghpeseA
hmAnAsememAhkAnAhmAmrmeArgArrlAoegshkAngghmAnrAmrnmAreA
rnlA njnrkesA mrmeA mrekemhA rgA hhsA mnrmrA nlA nnrglmA mreA mkneA
hpgekA hmA mreA ngsA hkA hmA ngA rgmekelmA mrekergaA ngsA mreA lneA
kneA nlmA deA niir esA mhA hgeA prhA rnlA ghpeseA hmA mnmlA
prrrA lrhnsA rnoeA inmA rrA nihgA lnrA rgjnrknA ngsA
rgoelmrnmrhgAnlbe necessary to acquaint him with the defects in
the title of his vendor.
[61]
A
Petitioner does not dispute that respondent registered his adverse claim with
the Registry of Deeds on 14 March 1995. The registration of the adverse claim
constituted, by operation of law, notice to the whole world.
[62]
From that date
onwards, subsequent buyers were deemed to have constructive notice of
respondents adverse claim.
PETITIONER PURCHASED THE ANTIPOLO PROPERTY ONLY ON 20 MARCH 1995
AND 5 APRIL 1995 AS SHOWN BY THE DATES IN THE DEEDS OF SALE. ON THE SAME
DATES, THE REGISTRY OF DEEDS ISSUED NEW TCTS IN FAVOR OF PETITIONER WITH
THE ANNOTATED ADVERSE CLAIM. CONSEQUENTLY, THE ADVERSE CLAIM
REGISTERED PRIOR TO THE SECOND SALE CHARGED PETITIONER WITH
CONSTRUCTIVE NOTICE OF THE DEFECT IN THE TITLE OF ENICEO HEIRS. THEREFORE,
PETITIONER CANNOT BE DEEMED AS A PURCHASER IN GOOD FAITH WHEN THEY
BOUGHT AND REGISTERED THE ANTIPOLO PROPERTY.
IN CARBONELL V. COURT OF APPEALS,
[63]
THIS COURT RULED THAT IN DOUBLE
SALES, THE FIRST BUYER ALWAYS HAS PRIORITY RIGHTS OVER SUBSEQUENT BUYERS
OF THE SAME PROPERTY. BEING THE FIRST BUYER, HE IS NECESSARILY IN GOOD
FAITH COMPARED TO SUBSEQUENT BUYERS. THE GOOD FAITH OF THE FIRST BUYER
REMAINS ALL THROUGHOUT DESPITE HIS SUBSEQUENT ACQUISITION OF
KNOWLEDGE OF THE SUBSEQUENT SALE. ON THE OTHER HAND, THE SUBSEQUENT
BUYER, WHO MAY HAVE ENTERED INTO A CONTRACT OF SALE IN GOOD FAITH,
WOULD BECOME A BUYER IN BAD FAITH BY HIS SUBSEQUENT ACQUISITION OF
ACTUAL OR CONSTRUCTIVE KNOWLEDGE OF THE FIRST SALE.
[64]
THE SEPARATE
OPINION OF THEN JUSTICE TEEHANKEE IS INSTRUCTIVE, THUS:
The governing principle here isprius tempore, potior
jure ) Iirst in time, stronger in right). Knowledge gained by the Iirst
buyer oI the second sale cannot deIeat the Iirst buyer`s rights
except only as provided by theCode and that is where the second
buyer first registers in good faith the second sale ahead of the
first. Such knowledge of the first buyer does bar her from availing
of her rights under the law, among them, to first her purchase as
against the second buyer. But in converso knowledge gained by
the second buyer of the first sale defeats his rights even if he is
first to register the second sale, since such knowledge taints his
prior registration with bad faith.
This is the price exacted by Article 1544 of the Civil Code
for the second buyer being able to displace the first buyer: that
before the second buyer can obtain priority over the first, he must
show that he acted in good faith throughout (i.e., in ignorance of
the first sale and of the first buyers rights) from the time of
acquisition until the title is transferred to him by registration or
failing registration, by delivery of possession. The second buyer
must show continuing good faith and innocence or lack of
knowledge of the first sale until his contract ripens into full
ownership through prior registration as provided by law.
[65]

Laches
PETITIONER CONTENDS THAT RESPONDENT IS GUILTY OF LACHES BECAUSE HE
SLEPT ON HIS RIGHTS BY FAILING TO REGISTER THE SALE OF THE ANTIPOLO
PROPERTY AT THE EARLIEST POSSIBLE TIME. PETITIONER CLAIMS THAT DESPITE
RESPONDENTS KNOWLEDGE OF THE SUBSEQUENT SALE IN 1991, RESPONDENT
STILL FAILED TO HAVE THE DEED OF SALE REGISTERED WITH THE REGISTRY OF
DEEDS.
The essence of laches is the failure or neglect, for an unreasonable and
unexplained length of time, to do that which, through due diligence, could have
been done earlier, thus giving rise to a presumption that the party entitled to assert
it had either abandoned or declined to assert it.
[66]

Respondent discovered in 1991 that a new owners copy of OCT No. 535 was
issued to the Eniceo heirs. Respondent filed a criminal case against the Eniceo heirs
for false testimony. When respondent learned that the Eniceo heirs were planning
to sell the Antipolo property, respondent caused the annotation of an adverse
claim. On 16 January 1996, when respondent learned that OCT No. 535 was
cancelled and new TCTs were issued, respondent filed a civil complaint with the trial
court against the Eniceo heirs and petitioner. Respondents actions negate
petitioners argument that respondent is guilty of laches.
True, unrecorded sales of land brought under Presidential Decree No. 1529
or the Property Registration Decree (PD 1529) are effective between and binding
only upon the immediate parties. The registration required in Section 51 of PD 1529
is intended to protect innocent third persons, that is, persons who, without
knowledge of the sale and in good faith, acquire rights to the
property.
[67]
Petitioner, however, is not an innocent purchaser for value.
WHEREFORE, we DENY the petition. We AFFIRM the 20 December 2004
Decision and 10 October 2005 Resolution of the Court of Appeals in CA-G.R. CV No.
68828.
SO ORDERED.
[9]
Id. at 81-82. The heirs of Eniceo were represented by Rufina Eniceo, daughter of
Domingo Eniceo and Leonila Bolinas, granddaughter of Domingo Eniceo
and daughter of Maria Eniceo.
[39]
Article 1318 of the Civil Code.
[40]
Article 1458 of the Civil Code.
[53]
Rollo, p. 218. Article 1605 of the Civil Code provides: In the cases referred to in
Articles 1602 and 1604, the apparent vendor may ask for reformation of the
instrument.
[54]
Records, p. 175. (Answer with Affirmative Defense and Compulsory
Counterclaim)
[62]
Section 52 of the Property Registration Decree (PD No. 1529) provides as
follows: Constructive notice upon registration. Every x x x instrument or
entry affecting registered land shall, if registered, filed or entered in the
Office of the Register of Deeds for the province or city where the land to
which it relates lies, be constructive notice to all persons from the time of
such registering, filing or entering.



FIRST DIVISION

MELANIE M. MESINA, DANILO M.
MESINA, and SIMEON M. MESINA,
Petitioners,




- versus -




GLORIA C. GARCIA,
Respondent.

G.R. No. 168035


Present:

PANGANIBAN, C.J.
Chairperson,
YNARES-SANTIAGO,
AUSTRIA-MARTINEZ,
CALLEJO, SR., and
CHICO-NAZARIO, JJ.

Promulgated:

November 30, 2006
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
D E C I S I O N
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the
1997 Revised Rules of Civil Procedure, seeking to reverse and set aside the Court of
Appeals Decision
[1]
in C.A.G.R. CV No. 79646 entitled, Gloria C. Garcia
v. Melanie M. Mesina, Danilo M. Mesina and Simeon M. Mesina, dated 6 January
2005, which affirmed the Decision
[2]
of the Regional Trial Court (RTC) of Cabanatuan
City, dated 6 January 2003, ordering petitioners to issue the necessary Deed of
Absolute Sale over the parcel of land, subject matter of this case in favor of
respondent.
The controversy of the present case arose from the following facts, as
summarized by the RTC and the Court of Appeals:
Atty. Honorio Valisno Garcia and Felicisima Mesina, during
their lifetime, or on 26 April 1977, to be exact entered into a Contract to
Sell over a lot consisting of 235 square meters, situated at Diversion Road,
Sangitan, Cabanatuan City, covered and embraced by [Transfer Certificate of
Title] TCT No. T-31643 in the name of Felicisima Mesina which title was
eventually cancelled and TCT No. T-78881 was issued in the name of herein
[petitioners]. Atty. Honorio Valisno Garcia is the deceased husband of [herein
respondent Gloria C. Garcia] while the late Felicisima Mesina is the mother of
[petitioners] Danilo, Simeon, and Melanie, all surnamed Mesina.
The Contract to Sell provides that the cost of the lot is P70.00 per
square meter for a total amount of P16,450.00; payable within a period not to
exceed seven (7) years at an interest rate of 12% per annum, in successive
monthly installments of P260.85 per month, starting May 1977. Thereafter,
the succeeding monthly installments are to be paid within the first week of
every month, at the residence of the vendor at Quezon City, with all unpaid
monthly installments earning an interest of one percent (1%) per month.
The Contract [to Sell] also stipulated, among others, that: Should
the [spouses Garcia] fail to pay five (5) successive monthly installments,
[Felicisima Mesina] shall have a right to rescind this [C]ontract to [S]ell. All
paid installments to be recomputed as rental for usage of lot shall be at the
rate of [P100.00] a month and that [Felicisima Mesina] shall have the further
option to return the downpayment (sic) plus whatever balance [spouses
Garcia] paid, thereby rescinding the Contract to Sell. Upon rescission of the
Contract to Sell, [spouses Garcia] agrees (sic) to remove all the improvements
built on the lot within three (3) months from rescission of this contract,
[spouses Garcia] shouldering all expenses of said removal.
[3]

Instituting this case at bar, [respondent] asserts that despite the
full payment made on 7 February 1984 for the consideration of the subject
lot, [petitioners] refused to issue the necessary Deed of Sale to effect the transfer
of the property to her, for which reason she was constrained to secure the
services of a counsel at an agreed attorneys fees of P150,000.00 in addition to
P3,000.00 per court appearance.
[Respondent] prays that the Court renders judgment in [her] favor
and against [herein petitioners], viz:
1. Ordering the [petitioners] to issue a [D]eed of
[A]bsolute [S]ale pertaining to the property in question;
2. Ordering the [petitioners] to pay to the [respondent]
moral damages (sic) P1,000,000.00;
3. Ordering the [petitioners] to pay the [respondent]
exemplary damages of P150,000.00;
4. Ordering the [petitioners] to pay to the [respondent]
attorneys fees of P150,000.00 plus P3,000.00 per court
appearance;
5. To pay the costs of this suit.
On the other hand, through the lone testimony of Atty. Caesar
Augustus P. Blanco, the [petitioners] sought to establish that [they] agreed to
pay P300,000.00 attorneys fees to the Carag, Caballes, Jamora and Somera
Law Office, and appearance fee in accordance with the standard hourly
charge of P2,500.00 per hour.
As of 20 December 1999, up to present, their law firm had rendered a
total of 113 hours computed at an hourly rate of P2,500.00 per hour, or a total
of P282,500.00. The [petitioners] have made partial payments in the total sum
of P71,725.00. Atty. Blanco presented a Statement of Account dated 15
January 2002 (Exhibit 1) of the expenses incurred by *petitioners+ as of 20
December 1996.
Records show that none of the [petitioners] was presented to give
their respective testimony.
[4]

After trial, the court a quo rendered a Decision dated 6 January
2003. The decretal portion of which reads, thus:
WHEREFORE, premises considered, judgment is hereby rendered:
1. ordering the [petitioners] MELANIE MESINA, DANILO MESINA,
and SIMEON MESINA to issue the necessary [D]eed of [A]bsolute [S]ale in favor of
the [respondent] GLORIA C. GARCIA over the property, more particularly described
as follows:
A parcel of land portion of Lot 314-A-2 (LRC) PSD-179247 situated
in the District of Magsaysay, Cabanatuan City. Bounded in the NE. & SE.
by Lot 317, Cabanatuan City; on the SW., by Lot 314-A-1 (LRC) PSD-179247
(Atty. R.Z. Annang); on the W., by National Road; and on the NW., by Lot 314-
A-2 (LRC) PSD-179247 (portion). Containing an area of 235 sq. meters more
or less.
2. ordering the [respondent] GLORIA C. GARCIA to vacate and return
the excess of the 235 square meter area subject of the Contract to
Sell, or, pay compensation therefore at the present prevailing current
market value to the [petitioners]; and
3. Parties claim for damages and attorneys fees are DISMISSED.
No pronouncement as to costs.
[5]

Petitioners sought reconsideration of the above-mentioned Decision on 10
February 2003 but the same was denied by the court a quo in its Order, dated 21
March 2003.
Petitioners appealed the aforesaid Decision of the RTC to the Court of
Appeals. Nonetheless, on 6 January 2005, the Court of Appeals rendered a Decision
dismissing the appeal for lack of merit; thereby affirming the Decision of
the RTC dated 6 January 2003. The dispositive portion of which reads as follows:
WHEREFORE, PREMISES CONSIDERED, this Appeal is DISMISSED for
lack of merit. Accordingly, the Decision of the Regional Trial Court, Third Judicial
Region, Branch 24, Cabanatuan City in Civil Case No. 2549 (AF) is
hereby AFFIRMED.
[6]

Petitioners filed a Motion for Reconsideration of the Court of Appeals
Decision on 27 January 2005, but it was denied in a Resolution
[7]
dated 5 May 2005.
Hence, this Petition.
Petitioners submit that the Court of Appeals committed a reversible error in
rendering its Decision dated 6 January 2005, which was based on the inadmissible,
incompetent, and unreliable testimonies of respondents witnesses. Hence,
petitioners presented before this Court the following issues:
I. Whether or not respondents cause of action had already prescribed.
II. Whether or not petitioners are in estoppel.
III. Whether or not the Court of Appeals failed to consider the fact that no
competent evidence had been adduced by respondent tending to prove her cause
of action.
Petitioners aver that the respondents cause of action had already
prescribed. They further contend that the series of extra-judicial demands made
by the respondent could never have worked to interrupt the prescriptive period
following the exception laid down in Article 1155
[8]
of the Civil Code as the
exception in Article 1155 refers only to an extra-judicial demand made by a creditor
not by a debtor. Hence, herein respondent, being a debtor, does not qualify under
the said exception. Therefore, there could be no interruption in the prescriptive
period of this present case. Consequently, the case should have been dismissed
outright for having been filed out of time.
Petitioners likewise argue that the principle of estoppel does not apply in the
case at bar because respondent was never induced to believe that she already
owned the subject property by making full payment. Furthermore, respondent
cannot say that she has been led by petitioners to have validly effected full
payment in view of the fact that petitioners repeatedly denied her requests for
execution of a Deed of Absolute Sale. In fact, petitioners made it clear to
respondent that they have not accepted her late payments, and that they will not
execute the Deed of Absolute Sale in her favor.
Petitioners also claim that respondent failed to prove the fact of full payment
of the subject property because there were no reliable and credible evidence
adduced by respondent to support her unfounded claims that she completely paid
the purchase price of the subject property.
The Petition is bereft of merit.
The Civil Code provides that an action based on a written contract, an
obligation created by law, and a judgment must be brought within 10 years from
the time the right of action accrues.
[9]

In the case at bar, as pointed out by the Court of Appeals, the right of action
of the respondent accrued on the date that the full and final payment of the
contract price was made. Accordingly, as the full payment of the purchase price on
the subject Contract to Sell had been effected on 7 February 1984
[10]
thus,
respondent had from said date until 7 February 1994 within which to bring an
action to enforce the written contract, i.e., the Contract to Sell. It was then the
contention of the petitioners that when the respondent instituted her Complaint
for Specific Performance with Damages on 20 January 1997, the same had already
been barred by prescription. The contention of the petitioners is untenable. Article
1155 of the Civil Code is explicit that the prescriptive period is interrupted when an
action has been filed in court; when there is a written extrajudicial demand made
by the creditors; and when there is any written acknowledgment of the debt by the
debtor.
In the present case it cannot be gainsaid that respondent made a series of
written extrajudicial demands for the petitioners to execute the Deed of Absolute
Sale in her favor. The records reveal that starting 19 April 1986 until 2 January
1997 respondent continuously demanded from the petitioners the execution of the
said Deed of Absolute Sale but the latter conjured many reasons and excuses not to
execute the same. Respondent even filed a Complaint before the Housing and Land
Use Regulatory Board (HLURB) way back in June, 1986, to enforce her rights and to
compel the mother of herein petitioners, who was still alive at that time, to execute
the necessary Deed of Absolute Sale for the transfer of title in her name. The
HLURB rendered a Decision
[11]
on 14 January 1988 in favor of the respondent;
however, via a Petition for Review filed by the late Felicisima Mesina, the HLURB
rendered a Decision
[12]
dated 7 February 1989 setting aside its 14 January
1988 Decision for lack of jurisdiction.
After the aforesaid incident, respondent executed an Affidavit of Adverse
Claim
[13]
on 4 December 1996, which was duly registered before the Register of
Deeds of Cabanatuan City, on 5 December 1996. In the said Affidavit, she stated
that after the reversal by the HLURB of its 14 January 1988 Decision, either
petitioner Simeon or Melaniegave her assurances that as soon as their
mother, Felicisima Mesina, recovered from her ailment, the Deed of Sale shall be
issued in her favor. Unfortunately, it did not happen.
On 2 January 1997, respondent, through her counsel, sent a final demand
letter
[14]
to the petitioners for the execution of the Deed of Absolute Sale, but still
to no avail. Consequently, because of utter frustration of the respondent, she finally
lodged a formal Complaint for Specific Performance with Damages before the trial
court on 20 January 1997.
Hence, from the series of written extrajudicial demands made by respondent
to have the execution of the Deed of Absolute Sale in her favor, the prescriptive
period of 10 years has been interrupted. Therefore, it cannot be said that the cause
of action of the respondent has already been prescribed.
Anent petitioners argument that since Article 1155 of the Civil Code is clear
that only creditors who execute a written extrajudicial demand can toll the period
of prescription of actions, respondent, being a debtor, does not qualify under the
said exception. This Court finds said argument indefensible.
Both the trial court and the Court of Appeals upheld the right of the
respondent to have the Deed of Absolute Sale issued in her favor. It is understood,
then, that the purchase price of the subject property had already been paid in
full. Hence, at the time of full payment of the purchase price, the respondent was
no longer the debtor of petitioners deceased mother Felicisima Mesina because
respondent already performed her obligation to the latter. Upon the full payment
of the purchase price, respondents right to demand the execution of the Deed of
Absolute Sale begins and Felicisima Mesinas (now survived by petitioners)
obligation to execute the said deed to respondent commenced. At that point,
respondent ceased to be the debtor of petitioners
mother Felicisima Mesina. Hence, it would be the height of injustice to deny to
respondent the benefit of Article 1155 upon the assumption that respondent being
a debtor is not qualified under the exception mentioned in the aforesaid provision
of the Civil Code. In all, we hold that the series of written extrajudicial demands
made by herein respondent interrupted the running of the 10-year prescriptive
period, thereby preventing prescription to bar the cause of action of the
respondent against herein petitioners.
With respect to the issue on estoppel, this Court, upon reviewing the
records of the case at bar, finds no reason to overturn the findings of the appellate
court that, indeed, petitioners are estopped from avowing that they never had
knowledge as to the acceptance of the delayed payments made by the respondent,
and that they never induced respondent to believe that she had validly effected full
payment.
Under the doctrine of estoppel, an admission or representation is rendered
conclusive upon the person making it, and cannot be denied or disproved as against
the person relying thereon. A party, having performed affirmative acts upon which
another person based his subsequent actions, cannot thereafter refute his acts or
renege on the effects of the same, to the prejudice of the latter.
[15]

As aptly observed by the Court of Appeals in its Decision rendered on 6
January 2005, evidence on record show that petitioners can no longer deny having
accepted the late payments made by the respondent because in a letter
[16]
dated 10
April 1986 sent to petitioner Simeon Mesina by Engineer Danilo Angeles, who is the
husband of petitioners authorized collection agent Angelina Angeles, he told
petitioner Simeon Mesina that the title and the Deed of Sale were both ready for
their signature, and respondent was willing and ready to pay for the excess area.
Hence, if petitioners did not accept the late payments of the respondent, and if
they did not consider such as full payment of the purchase price on the subject
property as they claimed it to be, the title as well as the Deed of Sale could not have
been prepared for their signature. In the same way, respondent could not have
sent a demand letter to ask for the execution of those documents had they not
been induced to believe that the late payments were validly accepted and that the
purchase price had already been paid in full.
Moreover, as the Court of Appeals mentioned in its Decision, petitioners in
their Petition for Review filed before the HLURB in connection with a case docketed
as HLURB Case No. REM-072186-2915, and stated under oath, thus:
x x x After his death, the heirs of Atty. Garcia began to make
sporadic payments to one Angelina Angeles in 1984. Mrs. Angeles apparently
acted as the agent of the [petitioners], but this was done without the knowledge
of the [petitioners] Mesinas. Eventually, the late payments were accepted by
the [petitioners] but the [petitioners] Mesinas reiterated the obligation of
the [respondent] to survey and title the portion of the land subject of the
[C]ontract to [S]ell at their expense. x x x
[17]

Likewise, in an Affidavit
[18]
executed by petitioner Simeon Mesina, dated 15
February 1988, he affirmed that:
10. By reason of such incident, *petitioner Simeon Mesina+
requested Mrs. Angelina Angeles to tell [respondent] that as a further concession to
their family, [petitioner Simeon Mesina] would recommend the acceptance of
the late payment that she collected, but with the condition that the [respondent]
would shoulder all the expenses for the transfer of the title and for the separation
of the lot from the mother title, subject matter of the installment sale;
11. That sometime in 1985, a draft of deed of absolute sale was
presented to the [petitioner Simeon Mesina] by Mrs. Angelina Angeles to
*petitioners mother, the late Felicisima Mesina+ for the latters
signature. However, [petitioner Simeon Mesina] noticed that the area of the lot
was increased from x x x;
12. For such reason, the [petitioner Simeon Mesina] requested
their collector, Mrs. Angelina Angeles, to relay to [respondent] that this was not
the area agreed upon, with the request that the area actually agreed upon
should be stated in the Deed of [Absolute] Sale.
[19]

Based on the foregoing statements, which were made under oath, it is crystal
clear that the late payments were accepted by the petitioners, and that the
payments corresponded to the purchase value of the subject property; therefore,
petitioners cannot deny the fact that the full payment of the purchase value of the
lot in question had in fact been made by the respondent.
Furthermore, in the Affidavit of Adverse Claim
[20]
made by the respondent
which has been properly recorded before the Register of Deeds of Cabanatuan City,
respondent declared therein that she and the rest of her family were given
assurances by the Mesinas that as soon as their mother, Felicisima Mesina,
recovered from her ailment, the corresponding Deed of Absolute Sale would be
issued in her favor. But, petitioners reneged on such promise made to the
respondent.
All the foregoing incidents proved that petitioners made an admission or
representation that respondent already paid in full the purchase value of the
subject property. Petitioners are already estopped from claiming otherwise. As the
respondent relied vehemently on such representation or admission of the
petitioners, it will be highly prejudicial on her part if the bare denial of the
petitioners will be allowed to defeat her established right over the subject property
and to have the Deed of Absolute Sale issued in her favor.
Finally, we cannot lend ourselves to concede to the contention of the
petitioners that respondent failed to prove the fact of full payment of the subject
property as there were no reliable and credible evidence adduced by the latter to
support her unfounded claims.
All the evidence presented by the respondent before the trial court as
sustained by the appellate court, i.e., the receipts of payment issued by petitioners
mother during her lifetime, as well as the receipts issued by their authorized
collection agent, the Affidavit of Adverse Claim executed by the respondent, which
has been properly recorded before the Register of Deeds, and which remains
unquestioned, and the series of demand letters sent to petitioners by the
respondent with nary a challenge from the petitioners, are all proofs that
respondent had truly completed the performance of her obligation, which is the
payment in full of the purchase price of the subject property.
In sum, the Court of Appeals committed no reversible error in sustaining the
cause of action of the respondent because the evidence on record properly
supported it.
WHEREFORE, premises considered, the instant Petition for Review is
hereby DENIED. The Decision of the Court of Appeals dated 6 January 2005, which
upheld the Decision of RTC of Cabanatuan City date 6 January 2003 is
hereby AFFIRMED. Costs against petitioners.
SO ORDERED.

[8]
Article 1155. The prescription of actions is interrupted when they are
filed before the court, when there is a written extrajudicial demand by the
creditors, and when there is any written acknowledgement of the debt by the
debtor.

THIRD DIVISION
[G.R. No. 156403. March 31, 2005]
JOSEPHINE PAHAMOTANG and ELEANOR PAHAMOTANG-BASA, petitioners, vs.
THE PHILIPPINE NATIONAL BANK (PNB) and the HEIRS OF ARTURO
ARGUNA, respondents.
D E C I S I O N
GARCIA, J.:
Assailed and sought to be set aside in this appeal by way of a petition for
review on certiorari under Rule 45 of the Rules of Court are the following issuances
of the Court of Appeals in CA-G.R. CV No. 65290, to wit:
1. Decision dated March 20, 2002,
[1]
granting the appeal and reversing
the appealed August 7, 1998 decision of the Regional Trial Court at
Davao City; and
2. Resolution dated November 20, 2002, denying herein petitioners'
motion for reconsideration.
[2]

The factual background:
On July 1, 1972, Melitona Pahamotang died. She was survived by her
husband Agustin Pahamotang, and their eight (8) children, namely: Ana, Genoveva,
Isabelita, Corazon, Susana, Concepcion and herein
petitioners Josephine and Eleonor, all surnamed Pahamotang.
On September 15, 1972, Agustin filed with the then Court of First Instance of
Davao City a petition for issuance of letters administration over the estate of his
deceased wife. The petition, docketed as Special Case No. 1792, was raffled to
Branch VI of said court, hereinafter referred to as the intestate court.
In his petition, Agustin identified petitioners Josephine and Eleonor as among
the heirs of his deceased spouse. It appears that Agustin was appointed petitioners'
judicial guardian in an earlier case - Special Civil Case No. 1785 also of the CFI of
Davao City, Branch VI.
On December 7, 1972, the intestate court issued an order granting Agustins
petition.
On July 6, 1973, respondent Philippine National Bank (PNB) and Agustin
executed an Amendment of Real and Chattel Mortgages with Assumption of
Obligation. It appears that earlier, or on December 14, 1972, the intestate court
approved the mortgage to PNB of certain assets of the estate to secure an
obligation in the amount of P570,000.00. Agustin signed the document in behalf of
(1) the estate of Melitona; (2) daughters Ana and Corazon; and (3) a logging
company named Pahamotang Logging Enterprises, Inc. (PLEI) which appeared to
have an interest in the properties of the estate. Offered as securities are twelve
(12) parcels of registered land, ten (10) of which are covered by transfer certificates
of title (TCT) No. 2431, 7443, 8035, 11465, 21132, 4038, 24327, 24326, 31226 and
37786, all of the Registry of Deeds of Davao City, while the remaining two (2)
parcels by TCTs No. (3918) 1081 and (T-2947) 562 of the Registry of Deeds of Davao
del Norte and Davao del Sur, respectively.
On July 16, 1973, Agustin filed with the intestate court a Petition for Authority
To Increase Mortgage on the above mentioned properties of the estate.
In an Order dated July 18, 1973, the intestate court granted said petition.
On October 5, 1974, Agustin again filed with the intestate court another
petition, Petition for Declaration of Heirs And For Authority To Increase
Indebtedness, whereunder he alleged the necessity for an additional loan from PNB
to capitalize the business of the estate, the additional loan to be secured by
additional collateral in the form of a parcel of land covered by Original Certificate of
Title (OCT) No. P-7131 registered in the name of Heirs of Melitona Pahamotang. In
the same petition, Agustin prayed the intestate court to declare him and Ana,
Genoveva, Isabelita, Corazon, Susana, Concepcion and herein petitioners Josephine
and Eleonor as the only heirs of Melitona.
In an Order of October 19, 1974, the intestate court granted Agustin authority
to seek additional loan from PNB in an amount not exceeding P5,000,000.00 to be
secured by the land covered by OCT No. P-7131 of the Registry of Deeds of Davao
Oriental, but denied Agustins prayer for declaration of heirs for being premature.
On October 22, 1974, a real estate mortgage contract for P4,500,000.00 was
executed by PNB and Agustin in his several capacities as: (1) administrator of the
estate of his late wife; (2) general manager of PLEI; (3) attorney-in-fact of spouses
Isabelita Pahamotang and Orlando Ruiz, and spouses Susana Pahamotang and
Octavio Zamora; and (4) guardian of daughters Concepcion and Genoveva and
petitioners Josephine and Eleonor. Offered as securities for the additional loan are
three (3) parcels of registered land covered by TCTs No. T-21132, 37786 and 43264.
On February 19, 1980, Agustin filed with the intestate court a Petition
(Request for Judicial Authority To Sell Certain Properties of the Estate), therein
praying for authority to sell toArturo Arguna the properties of the estate covered
by TCTs No. 7443, 8035, 11465, 24326 and 31226 of the Registry of Deeds of Davao
City, and also TCT No. (T-3918) T-1081 of the Registry of Deeds of Davao del Norte.
On February 27, 1980, Agustin yet filed with the intestate court another
petition, this time a Petition To Sell the Properties of the Estate, more specifically
referring to the property covered by OCT No. P-7131, in favor of PLEI.
In separate Orders both dated February 25, 1980, the intestate court granted
Agustin authority to sell estate properties, in which orders the court also required
all the heirs of Melitona to give their express conformity to the disposal of the
subject properties of the estate and to sign the deed of sale to be submitted to the
same court. Strangely, the two (2) orders were dated two (2) days earlier than
February 27, 1980, the day Agustin supposedly filed his petition.
In a motion for reconsideration, Agustin prayed the intestate court for the
amendment of one of its February 25, 1980 Orders by canceling the requirement of
express conformity of the heirs as a condition for the disposal of the aforesaid
properties.
In its Order of January 7, 1981, the intestate court granted Agustins prayer.
Hence, on March 4, 1981, estate properties covered by TCTs No. 7443,11465,
24326, 31226, 8035, (T-2947) 662 and (T-3918) T-1081, were sold to
respondent Arturo Arguna, while the property covered by OCT No. P-7131 was sold
to PLEI. Consequent to such sales, vendees Arguna and PLEI filed witt the intestate
court a motion for the approval of the corresponding deeds of sale in their favor.
And, in an Order dated March 9, 1981, the intestate court granted the motion.
Thereafter, three (3) daughters of Agustin, namely, Ana, Isabelita and Corazon
petitioned the intestate court for the payment of their respective shares from the
sales of estate properties, which was granted by the intestate court.
Meanwhile, the obligation secured by mortgages on the subject properties of
the estate was never satisfied. Hence, on the basis of the real estate mortgage
contracts dated July 6, 1973 andOctober 22, 1974, mortgagor PNB filed a petition
for the extrajudicial foreclosure of the mortgage.
Petitioner Josephine filed a motion with the intestate court for the issuance of
an order restraining PNB from extrajudicially foreclosing the mortgage. In its Order
dated August 19, 1983, the intestate court denied Josephines motion. Hence, PNB
was able to foreclose the mortgage in its favor.
Petitioners Josephine and Eleanor, together with their sister Susana
Pahamatong-Zamora, filed motions with the intestate court to set aside its Orders
of December 14, 1972 [Note: the order dated July 18, 1973 contained reference to
an order dated December 14, 1972 approving the mortgage to PNB of certain
properties of the estate], July 18, 1973, October 19, 1974 andFebruary 25, 1980.
In an Order dated September 5, 1983, the intestate court denied the motions,
explaining:
"Carefully analyzing the aforesaid motions and the grounds relied upon, as well as
the opposition thereto, the Court holds that the supposed defects and/or
irregularities complained of are mainly formal or procedural and not substantial, for
which reason, the Court is not persuaded to still disturb all the orders, especially
that interests of the parties to the various contracts already authorized or approved
by the Orders sought to be set aside will be adversely affected.
[3]

Such was the state of things when, on March 20, 1984, in the Regional Trial
Court at Davao City, petitioners Josephine and Eleanor, together with their sister
Susana, filed their complaint forNullification of Mortgage Contracts and
Foreclosure Proceedings and Damages against Agustin, PNB, Arturo Arguna, PLEI,
the Provincial Sheriff of Mati, Davao Oriental, the Provincial Sheriff of Tagum, Davao
del Norte and the City Sheriff of Davao City. In their complaint, docketed as Civil
Case No. 16,802 which was raffled to Branch 12 of the court, the sisters Josephine,
Eleanor and Susana prayed for the following reliefs:
"1.) The real estate mortgage contracts of July 6, 1973 and that of October 2,
1974, executed by and between defendants PNB AND PLEI be declared
null and void ab initio;
2.) Declaring the foreclosure proceedings conducted by defendants-sheriffs,
insofar as they pertain to the assets of the estate of Melitona L.
Pahamotang, including the auction sales thereto, and any and all
proceedings taken thereunder, as null and void ab initio;
3.) Declaring the Deed of Absolute Sale, Doc. No. 473; Page No.96; Book
No.VIII, Series of 1981 of the Notarial Registry of Paquito G. Balasabas
of Davao City evidencing the sale/transfer of the real properties
described therein to defendant Arturo S. Arguna, as null and void ab
initio;
4.) Declaring the Deed of Absolute Sale, Doc. No. 474; Page No. 96, Book
No. VIII, series of 1981 of the Notarial Registry of Paquito G. Balasabas
of Davao City, evidencing the sale/transfer of real properties to PLEI as
null and void ab initio;
5.) For defendants to pay plaintiffs moral damages in such sums as may be
found to be just and equitable under the premises;
6.) For defendants to pay plaintiffs, jointly and severally, the expenses
incurred in connection with this litigation;
7.) For defendants to pay plaintiffs, jointly and severally attorney's fees in
an amount to be proven during the trial;
8.) For defendants to pay the costs of the suit.
[4]

PNB moved to dismiss the complaint, which the trial court granted in its Order
of January 11, 1985.
However, upon motion of the plaintiffs, the trial court reversed itself and
ordered defendant PNB to file its answer.
Defendant PNB did file its answer with counterclaim, accompanied by a cross-
claim against co-defendants Agustin and PLEI.
During the ensuing pre-trial conference, the parties submitted the following
issues for the resolution of the trial court, to wit:
"1. Whether or not the Real Estate Mortgage contracts executed on July 6,
1973 and October 2, 1974 (sic) by and between defendants Pahamotang
Logging Enterprises, Inc. and the Philippine National Bank are null and
void?
2. Whether or not the foreclosure proceedings conducted by defendants-
Sheriffs, insofar as they affect the assets of the Estate of Melitona
Pahamotang, including the public auction sales thereof, are null and
void?
3. Whether or not the Deed of Absolute Sale in favor of defendant Arturo
Arguna entered as Doc. No. 473; Page No. 96; Book No. VIII, series of
1981 of the Notarial Register of Notary Public Paquito Balasabas is null
and void?
4. Whether or not the Deed of Absolute Sale in favor of defendant
Pahamotang Logging Enterprises, Inc. entered as Doc. No. 474; Page No.
96; Book No. VIII, series of 1981 of the Notarial Register of Notary Public
Paquito Balasabas is null and void?
5. On defendant PNB's cross-claim, in the event the mortgage contracts and
the foreclosure proceedings are declared null and void, whether or not
defendant Pahamotang Logging Enterprises, Inc. is liable to the PNB?
6. Whether or not the defendants are liable to the plaintiffs for damages?
7. Whether or not the plaintiffs are liable to the defendants for damages?
[5]

With defendant Arturo Argunas death on October 31, 1990, the trial court
ordered his substitution by his heirs: Heirs of Arturo Alguna.
In a Decision dated August 7, 1998, the trial court in effect rendered judgment
for the plaintiffs. We quote the decisions dispositive portion:
"WHEREFORE, in view of all the foregoing, judgment is hereby rendered as follows:
1. Declaring the Mortgage Contracts of July 6, 1973 and October 22, 1974, as
well as the foreclosure proceedings, void insofar as it affects the share, interests
and property rights of the plaintiffs in the assets of the estate of Melitona
Pahamotang, but valid with respect to the other parties;
2. Declaring the deeds of sale in favor of defendants Pahamotang Logging
Enterprises, Inc. and Arturo Arguna as void insofar as it affects the shares, interests
and property rights of herein plaintiffs in the assets of the estate of Melitona
Pahamotang but valid with respect to the other parties to the said deeds of sale.
3. Denying all the other claims of the parties for lack of strong, convincing and
competent evidence.
No pronouncement as to costs.
SO ORDERED.
[6]

From the aforementioned decision of the trial court, PNB, PLEI and the Heirs
of Arturo Arguna went on appeal to the Court of Appeals in CA-G.R. CV No. 65290.
While the appeal was pending, the CA granted the motion of Susana Pahamatong-
Zamora to withdraw from the case.
As stated at the threshold hereof, the Court of Appeals, in its Decision dated
March 20, 2002,
[7]
reversed the appealed decision of the trial court and dismissed
the petitioners complaint in Civil Case No. 16,802, thus:
WHEREFORE, the appeal is hereby GRANTED. The assailed August 07, 1998 Decision
rendered by the Regional Trial Court of Davao City, Branch 12, is
hereby REVERSED and SET ASIDE and a new one is entered DISMISSING the
complaint filed in Civil Case No. 16,802.
SO ORDERED.
The appellate court ruled that petitioners, while ostensibly questioning the
validity of the contracts of mortgage and sale entered into by their father Agustin,
were essentially attacking collaterally the validity of the four (4) orders of the
intestate court in Special Case No. 1792, namely:
1. Order dated July 18, 1973, granting Agustins Petition for Authority to
Increase Mortgage;
2. Order dated October 19, 1974, denying Agustins petition for declaration
of heirs but giving him authority to seek additional loan from PNB;
3. Order dated February 25, 1980, giving Agustin permission to sell
properties of the estate to Arturo Arguna and PLEI; and
4. Order dated January 7, 1981, canceling the requirement of express
conformity by the heirs as a condition for the disposal of estate
properties.
To the appellate court, petitioners committed a fatal error of mounting a collateral
attack on the foregoing orders instead of initiating a direct action to annul them.
Explains the Court of Appeals:
"A null and void judgment is susceptible to direct as well as collateral attack. A
direct attack against a judgment is made through an action or proceeding the main
object of which is to annul, set aside, or enjoin the enforcement of such judgment,
if not carried into effect; or if the property has been disposed of, the aggrieved
party may sue for recovery. A collateral attack is made when, in another action to
obtain a different relief, an attack on the judgment is made as an incident in said
action. This is proper only when the judgment, on its fact, is null and void, as where
it is patent that the court which rendered such judgment has no jurisdiction. A
judgment void on its face may also be attacked directly.
xxx xxx xxx
Perusing the above arguments and comparing them with the settled ruling, the
plaintiffs-appellees [now petitioners], we believe had availed themselves of the
wrong remedy before the trial court. It is clear that they are collaterally attacking
the various orders of the intestate court in an action for the nullification of the
subject mortgages, and foreclosure proceedings in favor of PNB, and the deeds of
sale in favor of Arguna. Most of their arguments stemmed from their allegations
that the various orders of the intestate court were issued without a notification
given to them. An examination, however, of the July 18, 1973 order shows that the
heirs of Melitona have knowledge of the petition to increase mortgage filed by
Agustin, thus:
`The petitioner testified that all his children including those who are of age have no
objection to this petition and, as matter of fact, Ana Pahamotang, one of the heirs
of Melitona Pahamotang, who is the vice-president of the logging corporation, is
the one at present negotiating for the increase of mortgage with the Philippine
National Bank.'
The presumption arising from those statements of the intestate court is that the
heirs were notified of the petition for the increase of mortgage.
The same can be seen in the October 19, 1974 order:
`The records show that all the known heirs, namely Ana, Isabelita, Corazon, Susana,
including the incompetent Genoveva, and the minors Josephine, Eleanor and
Concepcion all surnamed were notified of the hearing of the petition.'
On the other hand, the February 25, 1980 order required Agustin to obtain first
express conformity from the heirs before the subject property be sold to Arguna.
The fact that this was reconsidered by the intestate court in its January 07, 1981 is
of no moment. The questioned orders are valid having been issued in accordance
with law and procedure. The problem with the plaintiffs-appellees is that, in trying
to nullify the subject mortgages and the foreclosure proceedings in favor of PNB
and the deeds of sale in favor of Arguna, they are assailing the aforesaid orders of
the intestate court and in attacking the said orders, they attached documents that
they believe would warrant the conclusion that the assailed orders are null and
void. This is a clear collateral attack of the orders of the intestate court which is not
void on its face and which cannot be allowed in the present action. The defects
alleged by the plaintiff-appellees are not apparent on the face of the assailed
orders. Their recourse is to ask for the declaration of nullity of the said orders, not
in a collateral manner, but a direct action to annul the same.
[8]

The same court added that petitioners failure to assail said orders at the most
opportune time constitutes laches:
"In their complaint below, plaintiffs, appellees are assailing in their present action,
four orders of the intestate court namely: July 18, 1973, October 19, 1974, February
25, 1980 and January 07, 1981 orders which were then issued by Judge Martinez. It
should be recalled that except for the January 07, 1981 order, Judge Jacinto, upon
taking over Sp. No. 1792, denied the motion of the plaintiffs-appellees to set aside
the aforesaid orders. Aside from their motion before Judge Jacinto, nothing on the
records would show that the plaintiffs-appellees availed of other remedies to set
aside the questioned orders. Further, the records would not show that the
plaintiffs-appellees appealed the order of Judge Jacinto. If an interval of two years,
seven months and ninety nine days were barred by laches, with more reason should
the same doctrine apply to the present case, considering that the plaintiffs-
appellees did not avail of the remedies provided by law in impugning the various
orders of the intestate court. Thus, the questioned orders of the intestate court, by
operation of law became final. It is a fundamental principle of public policy in every
jural system that at the risk of occasional errors, judgments of courts should
become final at some definite time fixed by law (interest rei publicae ut finis sit
litum). The very object of which the courts were constituted was to put an end to
controversies. Once a judgment or an order of a court has become final, the issues
raised therein should be laid to rest. To date, except as to the present action which
we will later discuss as improper, the plaintiff-appellees have not availed
themselves of other avenues to have the orders issued by Judge Martinez and
Judge Jacinto annulled and set aside. In the present case, when Judge Jacinto
denied the motion of the plaintiffs-appellees, the latter had remedies provided by
the rules to assail such order. The ruling by Judge Jacinto denying plaintiffs-
appellees motion to set aside the questioned orders of Judge Martinez has long
acquired finality. It is well embedded in our jurisprudence, that judgment properly
rendered by a court vested with jurisdiction, like the RTC, and which has acquired
finality becomes immutable and unalterable, hence, may no longer be modified in
any respect except only to correct clerical errors or mistakes. Litigation must have
and always has an end. If not, judicial function will lose its relevance.
In time, petitioners moved for a reconsideration but their motion was denied
by the appellate court in its Resolution of November 20, 2002.
Hence, petitioners present recourse, basically praying for the reversal of the
CA decision and the reinstatement of that of the trial court.
We find merit in the petition.
It is petitioners posture that the mortgage contracts dated July 6,
1973 and October 22, 1974 entered into by Agustin with respondent PNB, as well as
his subsequent sale of estate properties to PLEI and Arguna on March 4, 1981, are
void because they [petitioners] never consented thereto. They assert that as heirs
of their mother Melitona, they are entitled to notice of Agustin's several petitions in
the intestate court seeking authority to mortgage and sell estate properties.
Without such notice, so they maintain, the four orders of the intestate court
dated July 18, 1973, October 19, 1974, February 25, 1980 and January 7, 1981,
which allowed Agustin to mortgage and sell estate properties, are void on account
of Agustins non-compliance with the mandatory requirements of Rule 89 of the
Rules of Court.
Prescinding from their premise that said orders are completely void and
hence, could not attain finality, petitioners maintain that the same could be
attacked directly or collaterally, anytime and anywhere.
For its part, respondent PNB asserts that petitioners cannot raise as issue in
this proceedings the validity of the subject orders in their desire to invalidate the
contracts of mortgage entered into by Agustin. To PNB, the validity of the subject
orders of the intestate court can only be challenged in a direct action for such
purpose and not in an action to annul contracts, as the petitioners have done. This
respondent adds that the mortgage on the subject properties is valid because the
same was made with the approval of the intestate court and with the knowledge of
the heirs of Melitona, petitioners included.
[9]

Upon the other hand, respondent Heirs of Arturo Arguna likewise claim that
petitioners knew of the filing with the intestate court by Agustin of petitions to
mortgage and sell the estate properties. They reecho the CAs ruling that
petitioners are barred by laches in filing Civil Case No. 16,802.
[10]

As we see it, the determinative question is whether or not petitioners can
obtain relief from the effects of contracts of sale and mortgage entered into by
Agustin without first initiating a direct action against the orders of the intestate
court authorizing the challenged contracts.
We answer the question in the affirmative.
It bears emphasizing that the action filed by the petitioners before the trial
court in Civil Case No. 16,802 is for the annulment of several contracts entered into
by Agustin for and in behalf of the estate of Melitona, namely: (a) contract of
mortgage in favor of respondent PNB, (b) contract of sale in favor of Arguna
involving seven (7) parcels of land; and (c) contract of sale of a parcel of land in
favor of PLEI.
The trial court acquired jurisdiction over the subject matter of the case upon
the allegations in the complaint that said contracts were entered into despite lack
of notices to the heirs of the petition for the approval of those contracts by the
intestate court.
Contrary to the view of the Court of Appeals, the action which petitioners
lodged with the trial court in Civil Case No. 16,802 is not an action to annul the
orders of the intestate court, which, according to CA, cannot be done collaterally. It
is the validity of the contracts of mortgage and sale which is directly attacked in the
action.
And, in the exercise of its jurisdiction, the trial court made a factual finding in
its decision of August 7, 1998 that petitioners were, in fact, not notified by their
father Agustin of the filing of his petitions for permission to mortgage/sell the
estate properties. The trial court made the correct conclusion of law that the
challenged orders of the intestate court granting Agustins petitions were null and
void for lack of compliance with the mandatory requirements of Rule 89 of the
Rules of Court, particularly Sections 2, 4, 7 thereof, which respectively read:
Sec. 2. When court may authorize sale, mortgage, or other encumbrance of realty
to pay debts and legacies through personalty not exhausted. - When the personal
estate of the deceased is not sufficient to pay the debts, expenses of
administration, and legacies, or where the sale of such personal estate may injure
the business or other interests of those interested in the estate, and where a
testator has not otherwise made sufficient provision for the payment of such debts,
expenses, and legacies, the court, on the application of the executor or
administrator and on written notice to the heirs, devisees, and legatees residing in
the Philippines, may authorize the executor or administrator to sell, mortgage, or
otherwise encumber so much as may be necessary of the real estate, in lieu of
personal estate, for the purpose of paying such debts, expenses, and legacies, if it
clearly appears that such sale, mortgage, or encumbrance would be beneficial to
the persons interested; and if a part cannot be sold, mortgaged, or otherwise
encumbered without injury to those interested in the remainder, the authority may
be for the sale, mortgage, or other encumbrance of the whole of such real estate,
or so much thereof as is necessary or beneficial under the circumstances.
Sec. 4. When court may authorize sale of estate as beneficial to interested
persons. Disposal of proceeds. - When it appears that the sale of the whole or a part
of the real or personal estate, will be beneficial to the heirs, devisees, legatees, and
other interested persons, the court may, upon application of the executor or
administrator and on written notice to the heirs, devisees and legatees who are
interested in the estate to be sold, authorize the executor or administrator to sell
the whole or a part of said estate, although not necessary to pay debts, legacies, or
expenses of administration; but such authority shall not be granted if inconsistent
with the provisions of a will. In case of such sale, the proceeds shall be assigned to
the persons entitled to the estate in the proper proportions.
Sec. 7. Regulations for granting authority to sell, mortgage, or otherwise
encumber estate. - The court having jurisdiction of the estate of the deceased may
authorize the executor or administrator to sell personal estate, or to sell, mortgage,
or otherwise encumber real estate; in cases provided by these rules and when it
appears necessary or beneficial, under the following regulations:
(a) The executor or administrator shall file a written petition setting forth the
debts due from the deceased, the expenses of administration, the legacies,
the value of the personal estate, the situation of the estate to be sold,
mortgaged, or otherwise encumbered, and such other facts as show that
the sale, mortgage, or other encumbrance is necessary or beneficial;
(b) The court shall thereupon fix a time and place for hearing such petition,
and cause notice stating the nature of the petition, the reason for the same,
and the time and place of hearing, to be given personally or by mail to the
persons interested, and may cause such further notice to be given, by
publication or otherwise, as it shall deem proper; (Emphasis supplied). xxx
xxx xxx
Settled is the rule in this jurisdiction that when an order authorizing the sale or
encumbrance of real property was issued by the testate or intestate court without
previous notice to the heirs, devisees and legatees as required by the Rules, it is not
only the contract itself which is null and void but also the order of the court
authorizing the same.
[11]

Thus, in Maneclang vs. Baun,
[12]
the previous administrator of the estate filed
a petition with the intestate court seeking authority to sell portion of the estate,
which the court granted despite lack of notice of hearing to the heirs of the
decedent. The new administrator of the estate filed with the Regional Trial Court an
action for the annulment of the sales made by the previous administrator. After
trial, the trial court held that the order of the intestate court granting authority to
sell, as well as the deed of sale, were void. On appeal directly to this Court, We held
that without compliance with Sections 2, 4 and 7 of Rule 89 of the Rules of
Court, the authority to sell, the sale itself and the order approving it would be null
and void ab initio.
In Liu vs. Loy, Jr.,
[13]
while the decedent was still living, his son and attorney-in-
fact sold in behalf of the alleged decedent certain parcels of land to Frank Liu. After
the decedent died, the son sold the same properties to two persons. Upon an ex
parte motion filed by the 2
nd
set of buyers of estate properties, the probate court
approved the sale to them of said properties. Consequently, certificates of title
covering the estate properties were cancelled and new titles issued to the 2
nd
set of
buyers. Frank Liu filed a complaint for reconveyance/ annulment of title with the
Regional Trial Court. The trial court dismissed the complaint and the Court of
Appeals affirmed the dismissal. When the case was appealed to us, we set aside the
decision of the appellate court and declared the probate court's approval of the
sale as completely void due to the failure of the 2
nd
set of buyers to notify the heir-
administratrix of the motion and hearing for the sale of estate property.
Clearly, the requirements of Rule 89 of the Rules of Court are mandatory and
failure to give notice to the heirs would invalidate the authority granted by the
intestate/probate court to mortgage or sell estate assets.
Here, it appears that petitioners were never notified of the several petitions
filed by Agustin with the intestate court to mortgage and sell the estate properties
of his wife.
According to the trial court, the [P]etition for Authority to Increase
Mortgage and [P]etition for Declaration of Heirs and for Authority to Increase
Indebtedness, filed by Agustin on July 16, 1973 and October 5, 1974, respectively,
do not contain information that petitioners were furnished with copies of said
petitions. Also, notices of hearings of those petitions were not sent to the
petitioners.
[14]
The trial court also found in Civil Case No. 16,802 that Agustin did not
notify petitioners of the filing of his petitions for judicial authority to sell estate
properties to Arturo Arguna and PLEI.
[15]

As it were, the appellate court offered little explanation on why it did not
believe the trial court in its finding that petitioners were ignorant of Agustins
scheme to mortgage and sell the estate properties.
Aside from merely quoting the orders of July 18, 1973 and October 19,
1974 of the intestate court, the Court of Appeals leaves us in the dark on its reason
for disbelieving the trial court. The appellate court did not publicize its appraisal of
the evidence presented by the parties before the trial court in the matter regarding
the knowledge, or absence thereof, by the petitioners of Agustins petitions. The
appellate court cannot casually set aside the findings of the trial court without
stating clearly the reasons therefor. Findings of the trial court are entitled to great
weight, and absent any indication to believe otherwise, we simply cannot adopt the
conclusion reached by the Court of Appeals.
Laches is negligence or omission to assert a right within a reasonable time,
warranting the presumption that the party entitled to assert it has either
abandoned or declined the right.
[16]
The essential elements of laches are: (1)
conduct on the part of the defendant, or of one under whom he claims, giving rise
to the situation of which complaint is made and for which the complaint seeks a
remedy; (2) delay in asserting the complainant's rights, the complainant having had
knowledge or notice of the defendant's conduct and having been afforded an
opportunity to institute a suit; (3) lack of knowledge or notice on the part of the
defendant that the complainant would assert the right on which he bases his suit;
and (4) injury or prejudice to the defendant in the event relief is accorded to the
complainant, or the suit is not held barred.
[17]

In the present case, the appellate court erred in appreciating laches against
petitioners. The element of delay in questioning the subject orders of the intestate
court is sorely lacking. Petitioners were totally unaware of the plan of Agustin to
mortgage and sell the estate properties. There is no indication that mortgagor PNB
and vendee Arguna had notified petitioners of the contracts they had executed with
Agustin. Although petitioners finally obtained knowledge of the subject petitions
filed by their father, and eventually challenged the July 18, 1973, October 19, 1974,
February 25, 1980 and January 7, 1981 orders of the intestate court, it is not clear
from the challenged decision of the appellate court when they (petitioners) actually
learned of the existence of said orders of the intestate court. Absent any indication
of the point in time when petitioners acquired knowledge of those orders, their
alleged delay in impugning the validity thereof certainly cannot be established. And
the Court of Appeals cannot simply impute laches against them.
WHEREFORE, the assailed issuances of the Court of Appeals are hereby
REVERSED and SET ASIDE and the decision dated August 7, 1998 of the trial court in
its Civil Case No. 16,802 REINSTATED.
SO ORDERED.

SECOND DIVISION G.R. No. 174632
FELICIDAD T. MARTIN, MELISSA M. ISIDRO, GRACE M. DAVID, CAROLINE M.
GARCIA, VICTORIA M. ROLDAN, and BENJAMIN T. MARTIN, JR., Petitioners, -
versus - DBS BANK PHILIPPINES, INC. (Formerly known as Bank of Southeast
Asia) now merged with and into BPI FAMILY BANK, Respondent.

G.R. No. 174804
DBS BANK PHILIPPINES, INC. (Formerly known as Bank of Southeast Asia) now
merged with and into BPI FAMILY BANK), Petitioner, - versus - FELICIDAD T.
MARTIN, MELISSA M. ISIDRO, GRACE M. DAVID, CAROLINE M. GARCIA, VICTORIA
M. ROLDAN, and BENJAMIN T. MARTIN, JR. Promulgated:
Respondents. June 16, 2010

DECISION
ABAD, J.:
This case is about the right of rescission provided in the contract of lease in
the event of failure of the lessor to make repairs that would enable the lessee to
continue with the intended use of the leased property.
The Facts and the Case
On March 27, 1997 Felicidad T. Martin, Melissa M. Isidro, Grace M. David,
Caroline M. Garcia, Victoria M. Roldan, and Benjamin T. Martin, Jr. (the Martins), as
lessors, entered into a lease contract
[1]
with the DBS Bank Philippines, Inc. (DBS),
formerly known as Bank of Southeast Asia and now merged with Bank of the
Philippine Islands, as lessee, covering a commercial warehouse and lots that DBS
was to use for office, warehouse, and parking yard for repossessed vehicles. The
lease was for five years, from March 1, 1997 to March 1, 2002, at a monthly rent
of P300,000.00 for the first year, P330,000.00 for the second year, P363,000.00 for
the third year, P399,300.00 for the fourth year, and P439,230.00 for the final year,
all net of withholding taxes.
[2]
DBS paid a deposit of P1,200,000.00 and advance
rentals of P600,000.00.
On May 25 and August 13, 1997 heavy rains flooded the leased property
and submerged into water the DBS offices there along with its 326 repossessed
vehicles. As a result, on February 11, 1998 DBS wrote the Martins demanding that
they take appropriate steps to make the leased premises suitable as a parking yard
for its vehicles.
[3]
DBS suggested the improvement of the drainage system or the
raising of the propertys ground level. In response, the Martins filled the propertys
grounds with soil and rocks.
But DBS lamented that the property remained unsuitable for its use since
the Martins did not level the grounds. Worse, portions of the perimeter fence
collapsed because of the excessive amount of soil and rock that were haphazardly
dumped on it. In June 1998, DBS vacated the property but continued paying the
monthly rents. On September 11, 1998, however, it made a final demand on the
Martins to restore the leased premises to tenantable condition on or before
September 30, 1998, otherwise, it would rescind the lease contract.
[4]

On September 24, 1998 the Martins contracted the services of Altitude
Systems & Technologies Co. for the reconstruction of the perimeter fence on the
property.
[5]
On October 13, 1998 DBS demanded the rescission of the lease
contract and the return of its deposit.
[6]
At that point, DBS had already paid the
monthly rents from March 1997 to September 1998. The Martins refused,
however, to comply with DBS demand.
On July 7, 1999 DBS filed a complaint against the Martins for rescission of
the contract of lease with damages before the Regional Trial Court (RTC)
of Makati City, Branch 141, in Civil Case 99-1266.
[7]
Claiming that the leased
premises had become untenantable, DBS demanded rescission of the lease contract
as well as the return of its deposit ofP1,200,000.00.
On November 12, 2001 the Makati City RTC rendered a decision, dismissing
the complaint against the Martins.
[8]
The trial court found that, although the floods
submerged DBS vehicles, the leased premises remained tenantable and
undamaged. Moreover, the Martins had begun the repairs that DBS requested but
were not given sufficient time to complete the same. It held that DBS unjustifiably
abandoned the leased premises and breached the lease contract. Thus, the trial
court ordered its deposit of P1,200,000.00 deducted from the unpaid rents due the
Martins and ordered DBS to pay them the remaining P15,198,360.00 in unpaid
rents.
On appeal to the Court of Appeals (CA) in CA-G.R. CV 76210, the latter
court rendered judgment dated April 26, 2006,
[9]
reversing and setting aside the
RTC decision. The CA found that floods rendered the leased premises untenantable
and that the RTC should have ordered the rescission of the lease contract especially
since the contract provided for such remedy. The CA ordered the Martins to apply
the deposit of P1,200,000.00 to the rents due up to July 7, 1999 when DBS filed the
complaint and exercised its option to rescind the lease. The CA ordered the
Martins to return the remaining balance of the deposit to DBS.
DBS moved for partial reconsideration, claiming that it rescinded the lease
contract on October 13, 1998 and not on July 7, 1999. The CA should not require
DBS to pay rents from October 1998 to July 7, 1999. It should rather order the
Martins to return its deposit in full. For their part, the Martins asked the CA to
reconsider its decision, pointing out that they undertook the necessary repairs and
restored the leased premises to tenantable condition. Thus, DBS no longer had the
right to rescind the lease contract.
With the denial of their separate motions for reconsideration,
[10]
DBS and
the Martins filed their respective petitions for review before this Court in G.R.
174632 and 174804. The Court eventually consolidated the two cases.
[11]

The Issues Presented
The issues presented in these cases are:
1. Whether or not the CA erred in holding that the Martins allowed the
leased premises to remain untenantable after the floods, justifying DBS rescission
of the lease agreement between them; and
2. In the affirmative, whether or not the CA erred in holding that DBS is
entitled to the rescission of the lease contract only from July 7, 1999 when it filed
its action for rescission, entitling the Martins to collect rents until that time.
The Courts Rulings
One. Unless the terms of a contract are against the law, morals, good
customs, and public policy, such contract is law between the parties and its terms
bind them.
[12]
InFelsan Realty & Development Corporation v. Commonwealth of
Australia,
[13]
the Court regarded as valid and binding a provision in the lease
contract that allowed the lessee to pre-terminate the same when fire damaged the
leased building, rendering it uninhabitable or unsuitable for living.
Here, paragraph VIII
[14]
of the lease contract between DBS and the Martins
permitted rescission by either party should the leased property become
untenantable because of natural causes. Thus:
In case of damage to the leased premises or any portion
thereof by reason of fault or negligence attributable to the
LESSEE, its agents, employees, customers, or guests, the LESSEE
shall be responsible for undertaking such repair or
reconstruction. In case of damage due to fire, earthquake,
lightning, typhoon, flood, or other natural causes, without fault
or negligence attributable to the LESSEE, its agents, employees,
customers or guests, the LESSOR shall be responsible for
undertaking such repair or reconstruction. In the latter case, if
the leased premises become untenantable, either party may
demand for the rescission of this contract and in such case, the
deposit referred to in paragraph III shall be returned to the
LESSEE immediately. (Underscoring supplied.)

The Martins claim that DBS cannot invoke the above since they undertook
the repair and reconstruction of the leased premises, incurring P1.6 million in
expenses. The Martins point out that the option to rescind was available only if
they failed to do the repair work and reconstruction.
But, under their agreement, the remedy of rescission would become
unavailable to DBS only if the Martins, as lessors, made the required repair and
reconstruction after the damages by natural cause occurred, which meant putting
the premises after the floods in such condition as would enable DBS to resume its
use of the same for the purposes contemplated in the agreement, namely, as office,
warehouse, and parking space for DBS repossessed vehicles.
Here, it is undisputed that the floods of May 25 and August 13, 1997
submerged the DBS offices and its 326 repossessed vehicles. The floods rendered
the place unsuitable for its intended uses.
[15]
And, while the Martins did some
repairs, they did not restore the place to meet DBS needs. The
photographs
[16]
taken of the place show that the Martins filled the grounds with soil
and rocks to raise the elevation but did not level and compact the same so they
could accommodate the repossessed vehicles. Moreover, the heaviness of the
filling materials caused portions of the perimeter walls to collapse or lean
dangerously.
[17]
Indeed, the Office of the City Engineer advised DBS that unless
those walls were immediately demolished or rehabilitated, they would endanger
passersby.
[18]

For their part, although the Martins insisted that they successfully repaired
and restored the leased areas, they failed to produce photographs that would
contradict those that DBS presented in court. For one thing, the evidence for DBS
shows that the Martins simply dumped soil and rocks on the grounds, creating an
uneven terrain that would not permit vehicular parking. True, the Martins
contracted the services of Altitude Systems and Technologies Co. but the scope of
work covered only the construction of a new perimeter fence, leaving out works
that are essential to the leveling and compacting of the grounds.
Undeniably, the DBS suffered considerable damages when flood waters
deluged its offices and 326 repossessed vehicles. Notably, DBS vacated the leased
premises in June of 1998, without rescinding the lease agreement, evidently to
allow for unhindered repair of the grounds. In fact, DBS continued to pay the
monthly rents until September 1998, showing how DBS leaned back to enable the
Martins to finish the repair and rehabilitation of the place.
[19]
The Martins provided
basis for rescission by DBS when they failed to do so.
The Martins point out that paragraph X of the contract forbade the pre-
termination of the lease. But, as the Court held in Manila International Airport
Authority v. Gingoyon,
[20]
the various stipulations in a contract must be read
together and given effect as their meanings warrant. Here, paragraph X, which
barred pre-termination of the lease agreement, cannot be read in
isolation. Paragraph VIII gave DBS and the Martins the right to rescind the
agreement in the event the property becomes untenantable due to natural causes,
including floods, unless proper repairs and rehabilitation are carried out.
Two. As for the effective date of rescission, the record shows that DBS
made a final demand on the Martins on September 11, 1998, giving the latter up to
September 30, 1998 within which to fully restore the leased property to a
tenantable condition, otherwise, it would rescind their lease
contract.
[21]
Consequently, the Martins may be regarded in default with respect to
their obligation to repair and rehabilitate the leased property by the end of
September 1998 when they did not comply with the demand. Contrary to the
ruling of the CA, it is not the filing of the action for rescission that marks the
violation of the lease agreement but the failure of the Martins to repair and
rehabilitate the property despite demand.
Finally, Paragraph III of the lease contract states that the deposit DBS made
is to apply to any: a) unpaid telephone, electric, and water bills, and b) unpaid
rents. As it happened, DBS left no unpaid utility bills. Also, since DBS paid the rents
up to September 1998, it owed no unpaid rents when it exercised its right to rescind
its lease contract with the Martins. The latter must, therefore, return the full
deposit of P1,200,000.00 to DBS.
WHEREFORE, the Court DENIES the petition and AFFIRMS with
MODIFICATION the April 26, 2006 decision of the Court of Appeals in CA-G.R. CV
76210 in that Felicidad T. Martin, Melissa M. Isidro, Grace M. David, Caroline M.
Garcia, Victoria M. Roldan, and Benjamin T. Martin, Jr. are ORDERED to return the
full deposit ofP1,200,000.00 to DBS Bank Philippines, Inc. (formerly known as Bank
of Southeast Asia, now merged with and into BPI Family Bank) with interest of 12%
per annum to be computed from the finality of this decision until the amount is
fully paid.
SO ORDERED.

THIRD DIVISION
HEIRS OF ALFREDO ZABALA, represented by MENEGILDA
ZABALA, ROLANDO ZABALA, MANUEL ZABALA, MARILYN
ZABALA, and ADELINA ZABALA, Petitioners, - versus -
HON. COURT OF APPEALS, VICENTE T. MANUEL AND/OR
HEIRS OF VICENTE T. MANUEL, Respondents.

G.R. No. 189602

Promulgated:
May 6, 2010

RESOLUTION
NACHURA, J.:
The parties to this Petition for Certiorari seek this Courts approval of their
Compromise Agreement.
On April 1, 2002, respondent Vicente T. Manuel filed a Complaint
[1]
for
ejectment with damages against Alfredo Zabala before the Municipal Trial Court in
Cities (MTCC) of Balanga, Bataan. Respondent alleged that he was in actual and
peaceful possession of a fishpond (Lot No. 1483) located in Ibayo, Balanga City. On
October 15, 2001, Zabala allegedly entered the fishpond without authority, and
dumped soil into the fishpond without an Environment Compliance Certificate.
Zabala continued such action until the time of the filing of the Complaint, killing the
crabs and the bangus that respondent was raising in the fishpond. Thus, respondent
asked that Zabala be restrained from touching and destroying the fishpond; that
Zabala be ejected therefrom permanently; and for actual and moral damages and
attorneys fees.
Zabala promptly moved for the dismissal of the Complaint for non-
compliance with the requirement under the Local Government Code to bring the
matter first to barangayconciliation before filing an action in court.
[2]

Respondent subsequently filed a Motion for Judgment
[3]
on the ground of
petitioners failure to file a responsive pleading or answer.
The MTCC, in an Order dated May 27, 2003, granted Zabalas motion and
dismissed the Complaint, holding that respondent indeed violated the requirement
of barangayconciliation.
[4]

Respondent then appealed the ruling to the Balanga, Bataan Regional Trial
Court (RTC).
In a decision dated March 30, 2004,
[5]
the RTC reversed the MTCCs May 27,
2003 Order and rendered judgment directing Zabala, his heirs or subalterns to
immediately vacate Lot No. 1483 and restore respondent to his peaceful possession
thereof. The RTC also directed Zabala to pay respondent actual damages, moral
damages, and attorneys fees. The RTC found that Zabala did not, in fact, file an
answer to the Complaint. Thus, under Section 6 of the Revised Rules on Summary
Procedure, respondent was entitled to judgment on the pleadings. Based on the
allegations in respondents Complaint, the RTC held that respondent was entitled to
the reliefs prayed for.
Zabala then filed a Petition for Review before the Court of Appeals (CA).
On December 19, 2008, the CA promulgated a Decision
[6]
upholding the
RTCs reversal of the MTCCs Order. The CA held that, based on the allegations in
the Complaint, the requirement for prior conciliation proceedings under the Local
Government Code was inapplicable to the suit before the MTCC, the action being
one for ejectment and damages, with application for a writ of preliminary
injunction, even without the use of those actual terms in the Complaint. However,
the CA granted Zabalas prayer for the deletion of the awards for actual and moral
damages, and for attorneys fees.
Zabala filed a Motion for Reconsideration, which the CA denied in a
Resolution dated August 26, 2009.
On October 9, 2009, Zabalas heirs filed this Verified Petition
for Certiorari.
[7]
They prayed for the annulment of the CAs December 19, 2008
Decision and August 26, 2009 Resolution, and for the reinstatement of the MTCCs
May 27, 2003 Order. In the alternative, they prayed that the Court remand the
records to the MTCC, so that they could file their Answer, and that due proceedings
be undertaken before judgment.
In a Resolution dated November 18, 2009, respondents were required to
file their Comment on the Petition.
The parties now present before this Court a Compromise Agreement, viz.:

COMPROMISE AGREEMENT
THE PARTIES represented by their lawyers, respectfully submit the
following compromise agreement:
1. Private respondents acknowledge that the owner of the
subject parcel of land and the improvements thereon are the
petitioners[;]
2. Private respondents filed an ejectment case against the
said owners before the lower court which granted the reliefs sought for
(due to failure of petitioners to file their answer)[;]
3. For and in consideration of the amount of Two Hundred
Thousand Pesos (P200,000.00), receipt of the same is acknowledged
hereof, private respondents hereby abandon the decision rendered in
their favor by the lower courts and instead waive all their rights and
interests to the subject property particularly their right to possession of
the same and thus, hereby assure that petitioners Zabalas will have a
peaceful, continuous and notious (sic) possession of the subject
property.
WHEREFORE, it is respectfully prayed of the Honorable Court
that this Compromise Agreement be duly approved.
Balanga City for Manila, April 8, 2010.
For the petitioner heirs of
Alfredo Zabala
For the respondents Vicente
Manuel and/or Heirs of Vicente
Manuel

By: By:
(Signed) (Signed)
MENEGILDA ZABALA PERFECTA MANUEL

Assisted by: Assisted by:
(Signed) (Signed)
ATTY. VICTOR P. DE DIOS, JR. ATTY. ANTONIO M. ORTIGUERA
Counsel for petitioners Counsel for respondents
[8]


Under Article 2028 of the Civil Code, a compromise agreement is a contract
whereby the parties, by making reciprocal concessions, avoid litigation or put an end
to one already commenced. Compromise is a form of amicable settlement that is not
only allowed, but also encouraged in civil cases.
[9]

Contracting parties may establish such stipulations, clauses, terms, and
conditions as they deem convenient, provided that these are not contrary to law,
morals, good customs, public order, or public policy.
[10]

Thus, finding the above Compromise Agreement to have been
validly executed and not contrary to law, morals, good customs, public order, or
public policy, we approve the same.
WHEREFORE, the foregoing premises considered, the Compromise
Agreement is hereby APPROVED and judgment is hereby rendered in accordance
therewith. By virtue of such approval, this case is now deemed TERMINATED. No
pronouncement as to costs.
SO ORDERED.

[G.R. No. 162994. September 19, 2005]
DUNCAN ASSOCIATION vs. GLAXO
SECOND DIVISION
Sirs/Mesdames:
Quoted hereunder, for your information, is a resolution of this Court dated SEP 19
2005.
G.R. No. 162994 (Duncan Association Of Detailman-PTGWO and Pedro A.
Tecson vs. Glaxo Wellcome Philippines, Inc.)
For resolution is a Motion for Reconsideration dated 8 October 2004, filed by
petitioners who seek the reversal of the Court's Resolution
1
dated 17 September
2004 denying the instantPetition for Review.
A brief recapitulation of the facts is in order. Petitioner Pedro Tecson
("Tecson") was employed in 1995 by respondent Glaxo Wellcome Philippines, Inc.
("Glaxo") as a medical representative. He was assigned to market Glaxo's products
in the Camarines Sur-Camarines Norte sales area. Upon his employment, Tecson
signed an employment contract, wherein he agreed, among others, to study and
abide by existing company rules; to disclose to management any existing or future
relationship by consanguinity or affinity with co-employees or employees of
competing drug companies; and if management found that such relationship posed
a possible conflict of interest, to resign from the company.
Nonetheless, Tecson became romantically involved with Bettsy, an employee
of a rival pharmaceutical firm Astra Pharmaceuticals ("Astra"). The two eventually
married in September of 1998. The relationship, including the subsequent marriage,
was cause for consternation to Glaxo. On January 1999, Tecson's superiors
informed him that his marriage to Bettsy had given rise to a conflict of interest.
Negotiations ensued, with Tecson adverting to his wife's possible resignation from
Astra, and Glaxo making it known that they preferred to retain his services owing to
his good performance. Yet no resolution came to pass. In September 1999, Tecson
applied for a transfer to Glaxo's milk division, but his application was denied in view
of Glaxo's "least-movement-possible" policy. Then in November 1999, Glaxo
transferred Tecson to the Butuan City-Surigao City-Agusan del Sur sales area.
Tecson asked Glaxo to reconsider its decision, but his request was denied.
The matter was then brought to the Glaxo Grievance Committee, and
subsequently to a voluntary arbitrator. On 15 November 2000, the National
Conciliation and Mediation Board (NCMB) rendered its Decision declaring as valid
Glaxo's policy on relationships between its employees and persons employed with
competitor companies, and affirming Glaxo's right to transfer Tecson to another
sales territory. This Decision was assailed by petitioners before the Court of Appeals
and this Court, but for naught.
The present Motion for Reconsideration advances four main arguments: that
the Court erroneously relied on a conjectural presumption that Tecson's
relationship might compromise the interest of the company or allow a competitor
to gain access to Glaxo's secrets and procedures; that Glaxo's policy regarding the
marriage of its employees to employees of rival companies is contrary to public
policy, morals and good customs; that Glaxo violated its own policy which
authorized the transfer of the subject employee to another department when it
denied Tecson's application to transfer to the milk division; and that Tecson was
constructively dismissed when he was transferred to the Butuan City-Surigao City-
Agusan del Sur sales area.
One of the central anchors of the assailed Resolution was the holding that
Glaxo's policy on marriage did not violate the equal protection clause of the
Constitution,
2
as the constitutional guarantee does not encompass discriminatory
behavior engaged by private individuals.
3
Petitioners do not challenge this holding
of the Court, and we see no reason to revisit this issue.
But before we engage in a renewed discussion on the validity of Glaxo's policy
itself, we should examine the claim that Tecson was constructively dismissed. After
all, assuming that the policy itself were declared invalid, a finding nonetheless that
Tecson was not constructively dismissed would still render this petition futile. The
Court has ruled Tecson was not actually dismissed, and theMotion for
Reconsideration adduces no substantial reasons why this holding should be
reversed.
The Resolution cited Abbott Laboratories (Phils.), Inc. v. NLRC
4
wherein the
Court upheld the prerogative of a drug company to reassign a medical
representative under its employ to a new territory. In the same vein, the Court has
consistently affirmed as a valid prerogative of the employer the reasonable
reassignment or transfer of an employee. As held in Philippine Japan Active Carbon
Corp. v. NLRC:
5

It is the employer's prerogative, based on its assessment and perception of its
employees' qualifications, aptitudes, and competence, to move them around in the
various areas of its business operations in order to ascertain where they will
function with maximum benefit to the company. An employee's right to security of
tenure does not give him such a vested right in his position as would deprive the
company of its prerogative to change his assignment or transfer him where he will
be most useful. When his transfer is not unreasonable, nor inconvenient, nor
prejudicial to him, and it does not involve a demotion in rank or a diminution of his
salaries, benefits, and other privileges, the employee may not complain that it
amounts to a constructive dismissal.
6

In Philippine Telegraph and Telephone Corp. v. Laplana,
7
the Court again
upheld the prerogative of management to reassign an employee to a different
locality, despite the "personal inconvenience or hardship that will be caused to the
employee by reason of the transfer.
Tecson was not relieved of his employment with Glaxo. Neither was he
transferred to a different position of lower rank or remuneration. The alleged
constructive dismissal pertained to his transfer to Butuan from Naga City, a
reassignment that would fall within the ambit of management's prerogative to
transfer employees.
Petitioners, in their Motion for Reconsideration, purport that constructive
dismissal was proved by the allegation that Tecson's commissions for January and
February were withheld from him, and that he was forced to surrender his sales
paraphernalia. Yet the veracity of these factual allegations were not acknowledged
by either the voluntary arbitrator or the Court of Appeals. This Court, which is not a
trier of facts, could not very well at this late stage reverse the established factual
conclusions on the basis of mere allegations which have not been previously
substantiated but which in fact have been consistently rebutted by the
respondents.
8

In case of a constructive dismissal, the employer has the burden of proving
that the transfer and demotion of an employee are for valid and legitimate
grounds, i.e., that the transfer is not unreasonable, inconvenient, or prejudicial to
the employee; nor does it involve a demotion in rank or a diminution of his salaries,
privileges and other benefits.
9
In this case, Glaxo did not opt to terminate or
demote Tecson, but transferred him to a sales region that included the respective
home provinces of himself and his wife, and offered monetary assistance to
shoulder his family's relocation.
10
. Certainly, the choice of location was not selected
with petty malice aforethought, but even designed for the easier palatability of the
employee.
The fact that the employee may be displaced from established roots by reason
of the transfer is not sufficient to deny the valid management prerogative to
transfer its employees. Tecson himself had acknowledged this prerogative when he
signed the contract of employment which expressly agreed "to be assigned any
work or work station for such periods as may be determined by the company and
whenever the operations require such assignment."
This finding that Tecson was not actually dismissed is determinative of this
case, especially considering that his transfer by Glaxo from Naga to Butuan would
have been a valid exercise of an employer's prerogative, whether or not the
company policy on marriage subsists. Nonetheless, it would be specious to assume
that Tecson's transfer had nothing to do with his marriage to an employee from a
rival drug company. Moreover, questions on the validity, if not appropriateness of
Glaxo's policy itself, has attracted comment on the various triers of this case, as well
as the public at large.
May an employer impose conditions, restrictions or consequences on an
employee by reason of the latter's choice to marry or choice of spouse? The answer
would really all depend on the particular circumstances in each case.
The governing legal framework should be established. Under Article 136 of the
Labor Code, it is illegal for an employer to prohibit a female employee from getting
married or to actually dismiss, discharge, discriminate or otherwise prejudice a
woman employee merely by reason of her marriage. This provision addresses a
concern, particularly gender discrimination, with no direct relevance to this case.
Nonetheless, it can be invoked by a female employee who finds herself prohibited
by her employer from contracting marriage, or otherwise dismissed or
discriminated upon by reason of her marriage, and the employer faces the
unenviable burden of establishing the inapplicability of Article 136.
11

Of more general application is Article 282 of the Labor Code, which governs
the termination by employers for "just causes." Had Tecson been actually
terminated in this case, Article 282 would have necessarily found application, since
Articles 282 to 284 stand as the only basis in law for the valid termination of an
employee by an employer.
12

Under Article 282, the employer may dismiss the employee for any of the
following causes: (a) serious misconduct or willful disobedience by the employee of
the lawful order of his employer or representative in connection with his work; (b)
gross and habitual neglect by the employee of his duties; (c) fraud or willful breach
by the employee of the trust reposed in him by his employer or duly authorized
representative; (d) commission of a crime or offense against the person of his
employer or any immediate member of his family or his duly authorized
representative; and (e) other causes analogous to the foregoing. Assuming that
there is a company policy allowing the dismissal, constructive
13
or otherwise, of an
employee by reason of the employee's marriage or choice of spouse, such policy
alone cannot justify the dismissal. The employer will have to establish not only the
existence of the policy, but the presence of any of the grounds enumerated in
Article 282. Our Constitution and Labor Code guarantee an employee's security of
tenure. For regular employees as defined under the Labor Code, security of tenure
is assured by the prohibition against termination except for the causes enumerated
under Articles 282 to 284.
Thus, the validity of a company policy on marriage such as that maintained by
Glaxo would not necessarily be determinative of the question of whether an
employee who violated such policy may be terminated. Still, there may be instances
wherein the validity of the policy, whether standing by itself or as incorporated into
an employment contract, would be the decisive factor. Such may arise if for
example, the employee is sought to be dismissed on the ground of loss of
confidence,
14
and such loss of confidence developed due to the marriage to an
employee from a rival company. In such cases wherein it is necessary to pass
judgment on the employer's policy itself, the following points should be considered.
Both the Constitution and our body of statutory laws accord special status and
protection to the contract of marriage. Our Constitution recognizes that "marriage,
as an inviolable social institution, is the foundation of the family, and shall be
protected by the State,"
15
and our Family Code acknowledges that marriage is "a
special contract of permanent union ... an inviolable social institution whose nature,
consequences and incidents are governed by law."
16
It may be debatable whether
these provisions, by themselves, may be the source of operative and executory
rights, but at the very least, they establish a pervasive public policy that frowns
upon acts that encumber any person's freedom to marry.
Moreover, if such encumbrance is contained in an employment contract, the
stipulation can be declared void under Article 1409(1) of the Civil Code, which
provides that a contract whose cause, object or purpose is contrary to law, morals,
good customs, public order or public policy is inexistent and void from the
beginning.
17
The standard is of great utility, as it allows a measure of relief for
persons laboring under private contractual obligations that, while insusceptible to
the traditional constitutional challenge under the Bill of Rights, nonetheless stand
as onerous to the obligor and noxious to our general body of laws.
Still, it would be injudicious, if not irresponsible, to judicially enforce a
universal position that disencumbers marriage from adverse consequences, if the
encumbrance stands to protect third persons inevitably affected by an act of
marital union. For much as we may want to see and regard marriage in a vestal
state, it may be a source of negativity for third persons, and not just the jilted. This
is apparent even on the most visceral level, as anybody who dislikes an immediate
family member's choice of bride or groom can attest to. The statutory protections
accorded to marriage do not translate to a legal compulsion on people to favor
another person's choice in spouse.
The thesis is harmless enough if the consequence of such disapproval extends
merely into the personal sphere and not the legal. Yet, such as in this case, the
consequences may be economic as well. For example, an aunt who voluntarily
extends regular financial benefits to a nephew may refuse to continue the doleout
by reason of the relative's marriage or choice of wife. In such a case, the nephew
would have no cause of action to compel his aunt to continue the remuneration,
even if the aunt's reasons for disliking the new wife are noxious, such as bigotry.
The invocation of the inviolability of marriage or its protection under law will not
suffice to legally compel the aunt to extend her largesse to her nephew, for this act
of charity arises solely from private volition. The State may protect marriage, but it
cannot compel private persons to give away money out of their pockets to the bride
and groom.
If the prohibitions or restrictions are contained in a private employment policy
or contract, the norms that would govern their review are such as those contained
in the Labor Code, and to an extent, the "public policy" clauses of the Civil
Code.
18
However, the sanctity of the marital vow should not be the only relevant
consideration at hand. The considerations which may have impelled the employer
to impose such conditions on the employee's absolute right to marry warrant
examination as well.
We can surmise that if the restrictions or conditions on the employee's right to
marry bear no relevance to any interests that the employer should be concerned
with, then they should be voided if they are of obligatory import. In that regard, it is
difficult to foresee an instance wherein an absolute prohibition on any marriage
imposed on the employees may be sanctioned.
19
Even if the prohibition is premised
on the belief that a married employee would be able to devote less time to the job,
whatever causal economic concerns hardly outweigh the right of an individual to
get married. Employees this day and age have long transcended the yoke of
serfdom and absolute fealty to master and the expense of the marital bind.
If the prohibition or restriction pertains to the choice of spouse, rather than
the choice to marry at all, there should be an examination of the rationale behind
the constraint. Again, if the restrictions or conditions bear no relevance to any
interests that the employer should be concerned with, then they should not be
upheld. Restrictions that are nothing more than the enforcement of personal
biases, such as prohibitions on marrying members of a particular race or ethnic
group, may be struck down.
Nonetheless, while generalities may be sufficient to strike down the most
obnoxious of prohibitions, those restrictions that are geared towards maintaining
valid economic concerns of the employer have to be assessed on a case to case
basis. Our fundamental law respects the right of enterprises to adopt and enforce
such a policy to protect its right to reasonable returns on investments and to
expansion and growth.
20

If the rationale in question relates to a consideration so vital to the interests of
the employer as to warrant legal protection, it should then be determined whether
the means employed by the employer are reasonable enough as to allow a measure
of balance between these key interests of the employer and the fundamental right
of the employee to marry.
Let us pay particular attention to Glaxo's policy. As noted in the Resolution,
Glaxo belongs to the highly competitive pharmaceutical industry. The competitive
nature of the business is further highlighted by the fact that pharmaceutical drugs
are indispensable to modern society, and that the rival companies tend to produce
drugs of like effect but marketed under respective brand names. Thus, within the
pharmaceutical industry, the hazard of industrial espionage looms largely, more so
than most other competitive industries. To that end, Glaxo is entitled to guard its
trade secrets, manufacturing formulas, marketing strategies and other confidential
programs and information from competitors, concomitant to its right to protect its
own economic interests.
This in mind, it is but reasonable for Glaxo to be cautious about the social
interaction of its employees with those of companies which it directly competes
with. If the employee goes as far as sharing hearth and home with the employee of
the rival company, there is greater cause of concern on the part of Glaxo. The fear
may not so much arise from the possibility of willful betrayal by its employees of
trade secrets, but from the myriad opportunities in the course of shared lives that
one may inadvertently divulge to the spouse confidential information that the rival
drug company may benefit from. After all, the employer has no control over pillow
talk. Neither could it be expected that the employee maintain a higher fidelity to
the employer than to the spouse.
It may be so, as petitioners argue, much of the fear is hypothetical in nature.
Yet Glaxo, as with any other industry, is allowed to take reasonable steps in order to
prevent potential damage from becoming actual, especially if the economic
consequences are substantial. Glaxo is hardly a small-scale industry, and the
pharmaceutical business seldom characterized by old-fashioned rectitude.
Still, these concerns aside, the steps that Glaxo may employ to avoid the
undue divulgence of its trade secrets should be within reason. If termination is to
be considered as an option, it should be only as a final resort, if there is no other
way to avoid the conflict of interest.
In this case, Glaxo's assailed policy does not call for automatic termination,
providing as it does a process that allows for all the opportunities for a mutually
agreeable solution. Per the Employee Handbook, "every effort shall be made,
together by management and the employee, to arrive at a solution within six (6)
months, either by transfer to another department in a non-counter checking
position, or by career preparation toward outside employment after Glaxo
Wellcome. Employees must be prepared for possible resignation within six (6)
months, if no other solution is feasible."
21

This procedure is extremely reasonable under the circumstances, and we have
no problems in upholding its validity. As noted in the Resolution: "[i]n any event,
from the wordings of the contractual provision and the policy in its employee
handbook, it is clear that Glaxo does not impose an absolute prohibition against
relationships between its employees and those of competitor companies. Its
employees are free to cultivate relationships with and marry persons of their own
choosing."
22
It recognizes the concern arising from the possible conflict of interest,
yet dissuades the enforcement of a hasty, unilateral solution. It appears from the
record of this case that such a procedure was adopted in good faith by both parties.
Tecson may find fault with the fact that Glaxo refused his request for transfer to the
milk division, a step which, if resorted to, may have resolved the perceived conflict
of interest. Yet the procedure involved allows the transfer only if mutually agreed
upon, and besides, employees cannot generally compel the employer to transfer
them from one division to another, this being a management prerogative.
And finally, if no mutual resolution is arrived at, termination and voluntary
resignation remain as viable options. Neither obtained in this case, and we have
already ruled that the transfer was valid and did not constitute constructive
dismissal. If Glaxo, or any employer with a similarly drawn-out procedure, were to
ultimately resort to termination, the burden would still fall upon it to establish that
such termination is in accordance with the just causes as provided in Article 282 of
the Labor Code. Without such linkage, the termination would be invalid.
The fact that there was no actual termination in this case obviates the need
for us to further apply Article 282 or the jurisprudential rules on illegal termination
to this case.
Still, should Glaxo retain the said policy, and another employee trek the same
trail as Tecson did, it cannot be foreordained that the Court would similarly rule for
Glaxo and against the said employee. As repeatedly emphasized, it all depends on
the particular circumstances of each case. And ultimately, if dismissal, constructive
or otherwise, is resorted to, the standards for termination set by the Labor Code
must still be complied with.
WHEREFORE, petitioner's Motion for Reconsideration is DENIED WITH
FINALITY.
Very truly yours,
(Sgd.) LUDICHI YASAY-NUNAG
Clerk of Court

3
The challenged company policy does not violate the equal protection clause of
the Constitution as petitioners erroneously suggest. It is a settled principle that the
commands of the equal protection clause are addressed only to the state or those
acting under color of its authority. Corollarily, it has been held in a long array of U.S.
Supreme Court decisions that the equal protection clause erects no shield against
merely private conduct, however discriminatory or wrongful. The only exception
occurs when the state in any of its manifestations or actions has been found to have
become entwined or involved in the wrongful private conduct. Obviously, however,
the exception is not present in this case. Significantly, the company actually
enforced the policy after repeated requests to the employee to comply with the
policy. Indeed, the application of the policy was made in an impartial and even-
handed manner, with due regard for the lot of the employee." Duncan Association
v. Glaxo, supra note 1 at 354-355.
11
We have held that a company policy prohibiting female employees from
contracting marriage during their employment is void for violating Article 136 of the
Labor Code. See PT&T v. NLRC, 338 Phil. 1093 (1997). However, the American case
of Emory v. Georgia Hospital Service Association, previously cited in our Decision, is
also worth noting. Therein, a female employee was discharged by her employer, a
health insurance firm, for having married a salesman from a rival insurance
company. The discharged employee brought suit under the Civil Rights Act of 1964,
alleging unlawful discrimination against her because of her sex. However, the
Georgia District Court ruled that plaintiff was validly terminated, as her termination
was occasioned not by reason of her sex, but by her violation of company policy
prohibiting marriage to employees of directly competing insurance businesses.
Emory v. Georgia Hospital Service Association (1971), DC Ga., 4 CCH EPD 7785, 4
BNA FEP Cas 891, affd (CA5) 446 F2d 897, 4 CCH EPD 7786; Cited 45 Am Jur 2d Sec.
469.
12
In this case, Articles 283 (governing dismissals for authorized causes), and 284 (on
dismissals on the ground of disease) would not have found application.
13
In constructive dismissal, the employer has the burden of proving that the
transfer and demotion of an employee are for just and valid grounds such as
genuine business necessity. The employer must be able to show that the transfer is
not unreasonable, inconvenient, or prejudicial to the employee. It must not involve
a demotion in rank or a diminution of salary and other benefits. If the employer
cannot overcome this burden of proof, the employee's demotion shall be
tantamount to unlawful constructive dismissal." Globe Telecom v. Florendo-Flores,
438 Phil. 756 (2002).
14
Loss of confidence, as a just cause for termination of employment, is premised
on the fact that the employee concerned holds a position of responsibility, trust and
confidence. He must be invested with confidence on delicate matters such as the
custody, handling, care and protection of the employer's property and/or funds. But
in order to constitute a just cause for dismissal, the act complained of must be
"work-related" such as would show the employee concerned to be unfit to continue
working for the employer." Gonzales v. NLRC, G.R. No. 131653, 26 March 2001, 355
SCRA 195.
17
See Article 1409 (1), Civil Code. See also Article 1352, Civil Code, which states that
"[C]ontracts without cause, or with unlawful cause, produce no effect whatever.
The cause is unlawful if it is contrary to law, morals, good customs, public order or
public policy." Yet, while the principle is of long-standing recognition, it is also of
purposeful ambiguity. "Public policy" is a vague expression, and few cases can arise
in which its application may not be disputed. Noble v. City of Palo Alto, 89 Cal. App.
47, 50-51 (1928). A court's power to void a contract as being in contravention of
public policy has been described as delicate and undefined, see Jeffrey Lake
Development, Inc. v. Central Nebraska Public Power and Irrigation Dist., 262 Neb.
515, 633 N.W. 2d 102 (2001); In re Kaufman, 201 OK 88, 37 P.3d 845 (Okla. 2001),
and is thus exercised sparingly. First Nat. Bank of Springfield v. Malpractice
Research, Inc., 179 III. 2d 353, 228 III. Dec. 202, 688 N.E. 2d 1179, 70 A.L.R. 5th 759.
The concepts of "morals", "good customs", and "public order" are no less
susceptible to easy definition.
18
Properly speaking, Articles 1306, 1352 and 1409 (1) pertain to contracts. These
provisions can operate to nullify clauses contained in employment contracts. We
are aware though that in many establishments, employees are not required to sign
formal contracts, but are otherwise enjoined to observe company policies. The
absence of a formal contract would not preclude the application of the Civil Code in
preventing the enforcement of obligations that are contrary to law, good customs
or public policy. Article 1183 of the Civil Code mandates the annulment of
conditions to an obligation that are contrary to good customs, public policy, or
otherwise prohibited by law. Moreover, Article 6 prohibits the waiver of rights if
such waiver is contrary to law, public order, public policy, morals or good customs.
Such rights would include the right to marry or the choice of whom to marry.
19
The grey area may exist in instances wherein the employer is a religious order
which, in accordance with its tenets, demands a vow of celibacy. In such a case, the
freedom of exercise of religion would be accorded its due respect, depending on its
appropriate applicability in the particular case.

Republic of the PhilippinesSUPREME COURTManila
SECOND DIVISION
G.R. No. 164774 April 12, 2006
STAR PAPER CORPORATION, JOSEPHINE ONGSITCO & SEBASTIAN
CHUA, Petitioners, vs. RONALDO D. SIMBOL, WILFREDA N. COMIA & LORNA E.
ESTRELLA, Respondents.
D E C I S I O N
PUNO, J.:
We are called to decide an issue of first impression: whether the policy of
the employer banning spouses from working in the same company violates the
rights of the employee under the Constitution and the Labor Code or is a valid
exercise of management prerogative.
At bar is a Petition for Review on Certiorari of the Decision of the Court of
Appeals dated August 3, 2004 in CA-G.R. SP No. 73477 reversing the decision of the
National Labor Relations Commission (NLRC) which affirmed the ruling of the Labor
Arbiter.
Petitioner Star Paper Corporation (the company) is a corporation engaged
in trading principally of paper products. Josephine Ongsitco is its Manager of the
Personnel and Administration Department while Sebastian Chua is its Managing
Director.
The evidence for the petitioners show that respondents Ronaldo D. Simbol
(Simbol), Wilfreda N. Comia (Comia) and Lorna E. Estrella (Estrella) were all regular
employees of the company.
1

Simbol was employed by the company on October 27, 1993. He met Alma
Dayrit, also an employee of the company, whom he married on June 27, 1998. Prior
to the marriage, Ongsitco advised the couple that should they decide to get
married, one of them should resign pursuant to a company policy promulgated in
1995,
2
viz.:
1. New applicants will not be allowed to be hired if in case he/she
has [a] relative, up to [the] 3rd degree of relationship, already employed by
the company.
2. In case of two of our employees (both singles [sic], one male
and another female) developed a friendly relationship during the course of
their employment and then decided to get married, one of them should
resign to preserve the policy stated above.
3

Simbol resigned on June 20, 1998 pursuant to the company policy.
4

Comia was hired by the company on February 5, 1997. She met Howard
Comia, a co-employee, whom she married on June 1, 2000. Ongsitco likewise
reminded them that pursuant to company policy, one must resign should they
decide to get married. Comia resigned on June 30, 2000.
5

Estrella was hired on July 29, 1994. She met Luisito Zuiga (Zuiga), also a
co-worker. Petitioners stated that Zuiga, a married man, got Estrella pregnant. The
company allegedly could have terminated her services due to immorality but she
opted to resign on December 21, 1999.
6

The respondents each signed a Release and Confirmation Agreement. They
stated therein that they have no money and property accountabilities in the
company and that they release the latter of any claim or demand of whatever
nature.
7

Respondents offer a different version of their dismissal. Simbol and Comia
allege that they did not resign voluntarily; they were compelled to resign in view of
an illegal company policy. As to respondent Estrella, she alleges that she had a
relationship with co-worker Zuiga who misrepresented himself as a married but
separated man. After he got her pregnant, she discovered that he was not
separated. Thus, she severed her relationship with him to avoid dismissal due to the
company policy. On November 30, 1999, she met an accident and was advised by
the doctor at the Orthopedic Hospital to recuperate for twenty-one (21) days. She
returned to work on December 21, 1999 but she found out that her name was on-
hold at the gate. She was denied entry. She was directed to proceed to the
personnel office where one of the staff handed her a memorandum. The
memorandum stated that she was being dismissed for immoral conduct. She
refused to sign the memorandum because she was on leave for twenty-one (21)
days and has not been given a chance to explain. The management asked her to
write an explanation. However, after submission of the explanation, she was
nonetheless dismissed by the company. Due to her urgent need for money, she
later submitted a letter of resignation in exchange for her thirteenth month pay.
8

Respondents later filed a complaint for unfair labor practice, constructive
dismissal, separation pay and attorneys fees. They averred that the
aforementioned company policy is illegal and contravenes Article 136 of the Labor
Code. They also contended that they were dismissed due to their union
membership.
On May 31, 2001, Labor Arbiter Melquiades Sol del Rosario dismissed the
complaint for lack of merit, viz.:
[T]his company policy was decreed pursuant to what the respondent
corporation perceived as management prerogative. This management prerogative
is quite broad and encompassing for it covers hiring, work assignment, working
method, time, place and manner of work, tools to be used, processes to be
followed, supervision of workers, working regulations, transfer of employees, work
supervision, lay-off of workers and the discipline, dismissal and recall of workers.
Except as provided for or limited by special law, an employer is free to regulate,
according to his own discretion and judgment all the aspects of
employment.
9
(Citations omitted.)
On appeal to the NLRC, the Commission affirmed the decision of the Labor
Arbiter on January 11, 2002.
10

Respondents filed a Motion for Reconsideration but was denied by the
NLRC in a Resolution
11
dated August 8, 2002. They appealed to respondent
court via Petition for Certiorari.
In its assailed Decision dated August 3, 2004, the Court of Appeals reversed
the NLRC decision, viz.:
WHEREFORE, premises considered, the May 31, 2002 (sic)
12
Decision of the
National Labor Relations Commission is hereby REVERSED and SET ASIDE and a new
one is entered as follows:
(1) Declaring illegal, the petitioners dismissal from employment
and ordering private respondents to reinstate petitioners to their former
positions without loss of seniority rights with full backwages from the time
of their dismissal until actual reinstatement; and
(2) Ordering private respondents to pay petitioners attorneys
fees amounting to 10% of the award and the cost of this suit.
13

On appeal to this Court, petitioners contend that the Court of Appeals
erred in holding that:
1. x x x the subject 1995 policy/regulation is violative of the
constitutional rights towards marriage and the family of employees and of
Article 136 of the Labor Code; and
2. x x x respondents resignations were far from voluntary.
14

We affirm.
The 1987 Constitution
15
states our policy towards the protection of labor
under the following provisions, viz.:
Article II, Section 18. The State affirms labor as a primary social economic
force. It shall protect the rights of workers and promote their welfare.
x x x
Article XIII, Sec. 3. The State shall afford full protection to labor, local and
overseas, organized and unorganized, and promote full employment and equality of
employment opportunities for all.
It shall guarantee the rights of all workers to self-organization, collective
bargaining and negotiations, and peaceful concerted activities, including the right to
strike in accordance with law. They shall be entitled to security of tenure, humane
conditions of work, and a living wage. They shall also participate in policy and
decision-making processes affecting their rights and benefits as may be provided by
law.
The State shall promote the principle of shared responsibility between
workers and employers, recognizing the right of labor to its just share in the fruits
of production and the right of enterprises to reasonable returns on investments,
and to expansion and growth.
The Civil Code likewise protects labor with the following provisions:
Art. 1700. The relation between capital and labor are not merely
contractual. They are so impressed with public interest that labor contracts must
yield to the common good. Therefore, such contracts are subject to the special laws
on labor unions, collective bargaining, strikes and lockouts, closed shop, wages,
working conditions, hours of labor and similar subjects.
Art. 1702. In case of doubt, all labor legislation and all labor contracts shall
be construed in favor of the safety and decent living for the laborer.
The Labor Code is the most comprehensive piece of legislation protecting
labor. The case at bar involves Article 136 of the Labor Code which provides:
Art. 136. It shall be unlawful for an employer to require as a condition of
employment or continuation of employment that a woman employee shall not get
married, or to stipulate expressly or tacitly that upon getting married a woman
employee shall be deemed resigned or separated, or to actually dismiss, discharge,
discriminate or otherwise prejudice a woman employee merely by reason of her
marriage.
Respondents submit that their dismissal violates the above provision.
Petitioners allege that its policy "may appear to be contrary to Article 136 of the
Labor Code" but it assumes a new meaning if read together with the first paragraph
of the rule. The rule does not require the woman employee to resign. The employee
spouses have the right to choose who between them should resign. Further, they
are free to marry persons other than co-employees. Hence, it is not the marital
status of the employee, per se, that is being discriminated. It is only intended to
carry out its no-employment-for-relatives-within-the-third-degree-policy which is
within the ambit of the prerogatives of management.
16

It is true that the policy of petitioners prohibiting close relatives from
working in the same company takes the nature of an anti-nepotism employment
policy. Companies adopt these policies to prevent the hiring of unqualified persons
based on their status as a relative, rather than upon their ability.
17
These policies
focus upon the potential employment problems arising from the perception of
favoritism exhibited towards relatives.
With more women entering the workforce, employers are also enacting
employment policies specifically prohibiting spouses from working for the same
company. We note that two types of employment policies involve spouses: policies
banning only spouses from working in the same company (no-spouse employment
policies), and those banning all immediate family members, including spouses, from
working in the same company (anti-nepotism employment policies).
18

Unlike in our jurisdiction where there is no express prohibition on marital
discrimination,
19
there are twenty state statutes
20
in the United States prohibiting
marital discrimination. Some state courts
21
have been confronted with the issue of
whether no-spouse policies violate their laws prohibiting both marital status and
sex discrimination.
In challenging the anti-nepotism employment policies in the United States,
complainants utilize two theories of employment discrimination:
the disparate treatment and the disparate impact. Under the disparate treatment
analysis, the plaintiff must prove that an employment policy is discriminatory on its
face. No-spouse employment policies requiring an employee of a particular sex to
either quit, transfer, or be fired are facially discriminatory. For example, an
employment policy prohibiting the employer from hiring wives of male employees,
but not husbands of female employees, is discriminatory on its face.
22

On the other hand, to establish disparate impact, the complainants must
prove that a facially neutral policy has a disproportionate effect on a particular
class. For example, although most employment policies do not expressly indicate
which spouse will be required to transfer or leave the company, the policy often
disproportionately affects one sex.
23

The state courts rulings on the issue depend on their interpretation of the
scope of marital status discrimination within the meaning of their respective civil
rights acts. Though they agree that the term "marital status" encompasses
discrimination based on a person's status as either married, single, divorced, or
widowed, they are divided on whether the term has a broader meaning. Thus, their
decisions vary.
24

The courts narrowly
25
interpreting marital status to refer only to a person's
status as married, single, divorced, or widowed reason that if the legislature
intended a broader definition it would have either chosen different language or
specified its intent. They hold that the relevant inquiry is if one is married rather
than to whom one is married. They construe marital status discrimination to include
only whether a person is single, married, divorced, or widowed and not the
"identity, occupation, and place of employment of one's spouse." These courts have
upheld the questioned policies and ruled that they did not violate the marital status
discrimination provision of their respective state statutes.
The courts that have broadly
26
construed the term "marital status" rule
that it encompassed the identity, occupation and employment of one's spouse.
They strike down the no-spouse employment policies based on the broad legislative
intent of the state statute. They reason that the no-spouse employment policy
violate the marital status provision because it arbitrarily discriminates against all
spouses of present employees without regard to the actual effect on the
individual's qualifications or work performance.
27
These courts also find the no-
spouse employment policy invalid for failure of the employer to present any
evidence of business necessity other than the general perception that spouses in
the same workplace might adversely affect the business.
28
They hold that the
absence of such a bona fide occupational qualification
29
invalidates a rule denying
employment to one spouse due to the current employment of the other spouse in
the same office.
30
Thus, they rule that unless the employer can prove that the
reasonable demands of the business require a distinction based on marital status
and there is no better available or acceptable policy which would better accomplish
the business purpose, an employer may not discriminate against an employee
based on the identity of the employees spouse.
31
This is known as the bona fide
occupational qualification exception.
We note that since the finding of a bona fide occupational qualification
justifies an employers no-spouse rule, the exception is interpreted strictly and
narrowly by these state courts. There must be a compelling business necessity for
which no alternative exists other than the discriminatory practice.
32
To justify a
bona fide occupational qualification, the employer must prove two factors: (1) that
the employment qualification is reasonably related to the essential operation of the
job involved; and, (2) that there is a factual basis for believing that all or
substantially all persons meeting the qualification would be unable to properly
perform the duties of the job.
33

The concept of a bona fide occupational qualification is not foreign in our
jurisdiction. We employ the standard ofreasonableness of the company policy
which is parallel to the bona fide occupational qualification requirement. In the
recent case of Duncan Association of Detailman-PTGWO and Pedro Tecson v.
Glaxo Wellcome Philippines, Inc.,
34
we passed on the validity of the policy of a
pharmaceutical company prohibiting its employees from marrying employees of
any competitor company. We held that Glaxo has a right to guard its trade secrets,
manufacturing formulas, marketing strategies and other confidential programs and
information from competitors. We considered the prohibition against personal or
marital relationships with employees of competitor companies upon Glaxos
employeesreasonable under the circumstances because relationships of that nature
might compromise the interests of Glaxo. In laying down the assailed company
policy, we recognized that Glaxo only aims to protect its interests against the
possibility that a competitor company will gain access to its secrets and
procedures.
35

The requirement that a company policy must be reasonable under the
circumstances to qualify as a valid exercise of management prerogative was also at
issue in the 1997 case of Philippine Telegraph and Telephone Company v.
NLRC.
36
In said case, the employee was dismissed in violation of petitioners policy
of disqualifying from work any woman worker who contracts marriage. We held
that the company policy violates the right against discrimination afforded all
women workers under Article 136 of the Labor Code, but established a permissible
exception, viz.:
[A] requirement that a woman employee must remain unmarried could be
justified as a "bona fide occupational qualification," or BFOQ, where the particular
requirements of the job would justify the same, but not on the ground of a general
principle, such as the desirability of spreading work in the workplace. A
requirement of that nature would be valid provided it reflects an inherent
quality reasonably necessary for satisfactory job performance.
37
(Emphases
supplied.)
The cases of Duncan and PT&T instruct us that the requirement of
reasonableness must be clearly established to uphold the questioned employment
policy. The employer has the burden to prove the existence of a reasonable
business necessity. The burden was successfully discharged in Duncan but not in
PT&T.
We do not find a reasonable business necessity in the case at bar.
Petitioners sole contention that "the company did not just want to have
two (2) or more of its employees related between the third degree by affinity
and/or consanguinity"
38
is lame. That the second paragraph was meant to give
teeth to the first paragraph of the questioned rule
39
is evidently not the valid
reasonable business necessity required by the law.
It is significant to note that in the case at bar, respondents were hired after
they were found fit for the job, but were asked to resign when they married a co-
employee. Petitioners failed to show how the marriage of Simbol, then a Sheeting
Machine Operator, to Alma Dayrit, then an employee of the Repacking Section,
could be detrimental to its business operations. Neither did petitioners explain how
this detriment will happen in the case of Wilfreda Comia, then a Production Helper
in the Selecting Department, who married Howard Comia, then a helper in the
cutter-machine. The policy is premised on the mere fear that employees married to
each other will be less efficient. If we uphold the questioned rule without valid
justification, the employer can create policies based on an unproven presumption
of a perceived danger at the expense of an employees right to security of tenure.
Petitioners contend that their policy will apply only when one employee
marries a co-employee, but they are free to marry persons other than co-
employees. The questioned policy may not facially violate Article 136 of the Labor
Code but it creates a disproportionate effect and under the disparate impact
theory, the only way it could pass judicial scrutiny is a showing that it
is reasonable despite the discriminatory, albeit disproportionate, effect. The failure
of petitioners to prove a legitimate business concern in imposing the questioned
policy cannot prejudice the employees right to be free from arbitrary
discrimination based upon stereotypes of married persons working together in one
company.
40

Lastly, the absence of a statute expressly prohibiting marital discrimination
in our jurisdiction cannot benefit the petitioners. The protection given to labor in
our jurisdiction is vast and extensive that we cannot prudently draw inferences
from the legislatures silence
41
that married persons are not protected under our
Constitution and declare valid a policy based on a prejudice or stereotype. Thus, for
failure of petitioners to present undisputed proof of a reasonable business
necessity, we rule that the questioned policy is an invalid exercise of management
prerogative. Corollarily, the issue as to whether respondents Simbol and Comia
resigned voluntarily has become moot and academic.
As to respondent Estrella, the Labor Arbiter and the NLRC based their
ruling on the singular fact that her resignation letter was written in her own
handwriting. Both ruled that her resignation was voluntary and thus valid. The
respondent court failed to categorically rule whether Estrella voluntarily resigned
but ordered that she be reinstated along with Simbol and Comia.
Estrella claims that she was pressured to submit a resignation letter
because she was in dire need of money. We examined the records of the case and
find Estrellas contention to be more in accord with the evidence. While findings of
fact by administrative tribunals like the NLRC are generally given not only respect
but, at times, finality, this rule admits of exceptions,
42
as in the case at bar.
Estrella avers that she went back to work on December 21, 1999 but was
dismissed due to her alleged immoral conduct. At first, she did not want to sign the
termination papers but she was forced to tender her resignation letter in exchange
for her thirteenth month pay.
The contention of petitioners that Estrella was pressured to resign because
she got impregnated by a married man and she could not stand being looked upon
or talked about as immoral
43
is incredulous. If she really wanted to avoid
embarrassment and humiliation, she would not have gone back to work at all. Nor
would she have filed a suit for illegal dismissal and pleaded for reinstatement. We
have held that in voluntary resignation, the employee is compelled by personal
reason(s) to dissociate himself from employment. It is done with the intention of
relinquishing an office, accompanied by the act of abandonment.
44
Thus, it is
illogical for Estrella to resign and then file a complaint for illegal dismissal. Given the
lack of sufficient evidence on the part of petitioners that the resignation was
voluntary, Estrellas dismissal is declared illegal.
IN VIEW WHEREOF, the Decision of the Court of Appeals in CA-G.R. SP No. 73477
dated August 3, 2004 isAFFIRMED.1avvphil.net
SO ORDERED.
Footnotes
2
The records do not state the exact date when the policy in question was
promulgated. The date of reference is "sometime in 1995."
12
Should be January 11, 2002.
15
The questioned Decision also invokes Article II, Section 12. The State
recognizes the sanctity of family life and shall protect and strengthen the
family as a basic autonomous social institution. It shall equally protect the
life of the mother and the life of the unborn from conception. The natural
and primary right and duty of parents in the rearing of the youth for civic
efficiency and the development of moral character shall receive the
support of the Government.
42
In Employees Association of the Philippine American Life Insurance Co. v.
NLRC (G.R. No. 82976, July 26, 1991), the established exceptions are as
follows:
a) the conclusion is a finding of fact grounded on speculations,
surmises and conjectures;
b) the inferences made are manifestly mistaken, absurd or
impossible;
c) there is a grave abuse of discretion;
d) there is misappreciation of facts; and
e) the court, in arriving in its findings, went beyond the issues of
the case and the same are contrary to the admission of the parties
or the evidence presented.

Republic of the Philippines SUPREME COURT Manila
SECOND DIVISION
G.R. No. 163512 February 28, 2007
DAISY B. TIU, Petitioner vs. PLATINUM PLANS PHIL., INC., Respondent.
D E C I S I O N
QUISUMBING, J.:
For review on certiorari are the Decision
1
dated January 20, 2004 of the
Court of Appeals in CA-G.R. CV No. 74972, and its Resolution
2
dated May 4, 2004
denying reconsideration. The Court of Appeals had affirmed the decision
3
dated
February 28, 2002 of the Regional Trial Court (RTC) of Pasig City, Branch 261, in an
action for damages, ordering petitioner to pay respondent P100,000 as liquidated
damages.
The relevant facts are as follows:
Respondent Platinum Plans Philippines, Inc. is a domestic corporation
engaged in the pre-need industry. From 1987 to 1989, petitioner Daisy B. Tiu was its
Division Marketing Director.
On January 1, 1993, respondent re-hired petitioner as Senior Assistant
Vice-President and Territorial Operations Head in charge of its Hongkong and Asean
operations. The parties executed a contract of employment valid for five years.
4

On September 16, 1995, petitioner stopped reporting for work. In
November 1995, she became the Vice-President for Sales of Professional Pension
Plans, Inc., a corporation engaged also in the pre-need industry.
Consequently, respondent sued petitioner for damages before the RTC of
Pasig City, Branch 261. Respondent alleged, among others, that petitioners
employment with Professional Pension Plans, Inc. violated the non-involvement
clause in her contract of employment, to wit:
8. NON INVOLVEMENT PROVISION The EMPLOYEE further undertakes
that during his/her engagement with EMPLOYER and in case of separation from the
Company, whether voluntary or for cause, he/she shall not, for the next TWO (2)
years thereafter, engage in or be involved with any corporation, association or
entity, whether directly or indirectly, engaged in the same business or belonging to
the same pre-need industry as the EMPLOYER. Any breach of the foregoing
provision shall render the EMPLOYEE liable to the EMPLOYER in the amount of One
Hundred Thousand Pesos (P100,000.00) for and as liquidated damages.
5

Respondent thus prayed for P100,000 as compensatory
damages; P200,000 as moral damages; P100,000 as exemplary damages; and 25%
of the total amount due plus P1,000 per counsels court appearance, as attorneys
fees.
Petitioner countered that the non-involvement clause was unenforceable
for being against public order or public policy: First, the restraint imposed was much
greater than what was necessary to afford respondent a fair and reasonable
protection. Petitioner contended that the transfer to a rival company was an
accepted practice in the pre-need industry. Since the products sold by the
companies were more or less the same, there was nothing peculiar or unique to
protect. Second, respondent did not invest in petitioners training or improvement.
At the time petitioner was recruited, she already possessed the knowledge and
expertise required in the pre-need industry and respondent benefited
tremendously from it. Third, a strict application of the non-involvement clause
would amount to a deprivation of petitioners right to engage in the only work she
knew.
In upholding the validity of the non-involvement clause, the trial court
ruled that a contract in restraint of trade is valid provided that there is a limitation
upon either time or place. In the case of the pre-need industry, the trial court found
the two-year restriction to be valid and reasonable. The dispositive portion of the
decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendant, ordering the latter to pay the following:
1. the amount of One Hundred Thousand Pesos (P100,000.00) for and as
damages, for the breach of the non-involvement provision (Item No. 8) of
the contract of employment;
2. costs of suit.
There being no sufficient evidence presented to sustain the grant of
attorneys fees, the Court deems it proper not to award any.
SO ORDERED.
6

On appeal, the Court of Appeals affirmed the trial courts ruling. It
reasoned that petitioner entered into the contract on her own will and volition.
Thus, she bound herself to fulfill not only what was expressly stipulated in the
contract, but also all its consequences that were not against good faith, usage, and
law. The appellate court also ruled that the stipulation prohibiting non-employment
for two years was valid and enforceable considering the nature of respondents
business.
Petitioner moved for reconsideration but was denied. Hence, this appeal
by certiorari where petitioner alleges that the Court of Appeals erred when:
A. *IT SUSTAINED+ THE VALIDITY OF THE NON-INVOLVEMENT CLAUSE IN
PETITIONERS CONTRACT CONSIDERING THAT THE PERIOD FIXED THEREIN IS VOID
FOR BEING OFFENSIVE TO PUBLIC POLICY
B. *IT SUSTAINED+ THE AWARD OF LIQUIDATED DAMAGES CONSIDERING THAT IT
BEING IN THE NATURE OF A PENALTY THE SAME IS EXCESSIVE, INIQUITOUS OR
UNCONSCIONABLE
7

Plainly stated, the core issue is whether the non-involvement clause is
valid.
Petitioner avers that the non-involvement clause is offensive to public
policy since the restraint imposed is much greater than what is necessary to afford
respondent a fair and reasonable protection. She adds that since the products sold
in the pre-need industry are more or less the same, the transfer to a rival company
is acceptable. Petitioner also points out that respondent did not invest in her
training or improvement. At the time she joined respondent, she already had the
knowledge and expertise required in the pre-need industry. Finally, petitioner
argues that a strict application of the non-involvement clause would deprive her of
the right to engage in the only work she knows.
Respondent counters that the validity of a non-involvement clause has
been sustained by the Supreme Court in a long line of cases. It contends that the
inclusion of the two-year non-involvement clause in petitioners contract of
employment was reasonable and needed since her job gave her access to the
companys confidential marketing strategies. Respondent adds that the non-
involvement clause merely enjoined her from engaging in pre-need business akin to
respondents within two years from petitioners separation from respondent. She
had not been prohibited from marketing other service plans.
As early as 1916, we already had the occasion to discuss the validity of a
non-involvement clause. In Ferrazzini v. Gsell,
8
we said that such clause was
unreasonable restraint of trade and therefore against public policy. InFerrazzini, the
employee was prohibited from engaging in any business or occupation in the
Philippines for a period of five years after the termination of his employment
contract and must first get the written permission of his employer if he were to do
so. The Court ruled that while the stipulation was indeed limited as to time and
space, it was not limited as to trade. Such prohibition, in effect, forces an employee
to leave the Philippines to work should his employer refuse to give a written
permission.
In G. Martini, Ltd. v. Glaiserman,
9
we also declared a similar stipulation as
void for being an unreasonable restraint of trade. There, the employee was
prohibited from engaging in any business similar to that of his employer for a period
of one year. Since the employee was employed only in connection with the
purchase and export of abaca, among the many businesses of the employer, the
Court considered the restraint too broad since it effectively prevented the
employee from working in any other business similar to his employer even if his
employment was limited only to one of its multifarious business activities.
However, in Del Castillo v. Richmond,
10
we upheld a similar stipulation as
legal, reasonable, and not contrary to public policy. In the said case, the employee
was restricted from opening, owning or having any connection with any other
drugstore within a radius of four miles from the employers place of business during
the time the employer was operating his drugstore. We said that a contract in
restraint of trade is valid provided there is a limitation upon either time or place
and the restraint upon one party is not greater than the protection the other party
requires.
Finally, in Consulta v. Court of Appeals,
11
we considered a non-involvement
clause in accordance with Article 1306
12
of the Civil Code. While the complainant in
that case was an independent agent and not an employee, she was prohibited for
one year from engaging directly or indirectly in activities of other companies that
compete with the business of her principal. We noted therein that the restriction
did not prohibit the agent from engaging in any other business, or from being
connected with any other company, for as long as the business or company did not
compete with the principals business. Further, the prohibition applied only for one
year after the termination of the agents contract and was therefore a reasonable
restriction designed to prevent acts prejudicial to the employer.
Conformably then with the aforementioned pronouncements, a non-
involvement clause is not necessarily void for being in restraint of trade as long as
there are reasonable limitations as to time, trade, and place.
In this case, the non-involvement clause has a time limit: two years from
the time petitioners employment with respondent ends. It is also limited as to
trade, since it only prohibits petitioner from engaging in any pre-need business akin
to respondents.1awphi1.net
More significantly, since petitioner was the Senior Assistant Vice-President
and Territorial Operations Head in charge of respondents Hongkong and Asean
operations, she had been privy to confidential and highly sensitive marketing
strategies of respondents business. To allow her to engage in a rival business soon
after she leaves would make respondents trade secrets vulnerable especially in a
highly competitive marketing environment. In sum, we find the non-involvement
clause not contrary to public welfare and not greater than is necessary to afford a
fair and reasonable protection to respondent.
13

In any event, Article 1306 of the Civil Code provides that parties to a
contract 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.
Article 1159
14
of the same Code also provides that obligations arising from
contracts have the force of law between the contracting parties and should be
complied with in good faith. Courts cannot stipulate for the parties nor amend their
agreement where the same does not contravene law, morals, good customs, public
order or public policy, for to do so would be to alter the real intent of the parties,
and would run contrary to the function of the courts to give force and effect
thereto.
15
Not being contrary to public policy, the non-involvement clause, which
petitioner and respondent freely agreed upon, has the force of law between them,
and thus, should be complied with in good faith.
16

Thus, as held by the trial court and the Court of Appeals, petitioner is
bound to pay respondent P100,000 as liquidated damages. While we have equitably
reduced liquidated damages in certain cases,
17
we cannot do so in this case, since it
appears that even from the start, petitioner had not shown the least intention to
fulfill the non-involvement clause in good faith.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated
January 20, 2004, and the Resolution dated May 4, 2004, of the Court of Appeals in
CA-G.R. CV No. 74972, are AFFIRMED. Costs against petitioner.
SO ORDERED.
Footnotes
12
Art. 1306. 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.
14
Art. 1159. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good
faith.
17
Art. 2226. Liquidated damages are those agreed upon by the parties to a
contract, to be paid in case of breach thereof.
Art. 2227. Liquidated damages, whether intended as an indemnity
or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable.

Republic of the Philippines SUPREME COURT Manila
FIRST DIVISION
G.R. No. 153674 December 20, 2006
AVON COSMETICS, INCORPORATED and JOSE MARIE FRANCO, petitioners,
vs. LETICIA H. LUNA, respondent.
D E C I S I O N
CHICO-NAZARIO, J.:
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules
of Court, seeking to reverse and set aside the Decision
1
dated 20 May 2002 of the
Court of Appeals in CA-G.R. CV No. 52550, which affirmed in totothe
Decision
2
dated 26 January 1996 of the Regional Trial Court (RTC) of Makati City,
Branch 138, in Civil Case No. 88-2595, in favor of herein respondent Leticia H. Luna
(Luna), rendered by the Honorable Ed Vicente S. Albano, designated as the
"assisting judge" pursuant to Supreme Court Administrative Order No. 70-94, dated
16 June 1994.
The Facts
The facts of the case are not in dispute. As culled from the records, they
are as follows:
The present petition stemmed from a complaint
3
dated 1 December 1988,
filed by herein respondent Luna alleging, inter alia that she began working for
Beautifont, Inc. in 1972, first as a franchise dealer and then a year later, as a
Supervisor.
Sometime in 1978, Avon Cosmetics, Inc. (Avon), herein petitioner, acquired
and took over the management and operations of Beautifont, Inc. Nonetheless,
respondent Luna continued working for said successor company.
Aside from her work as a supervisor, respondent Luna also acted as a
make-up artist of petitioner Avons Theatrical Promotions Group, for which she
received a per diem for each theatrical performance.
On 5 November 1985, petitioner Avon and respondent Luna entered into
an agreement, entitled Supervisors Agreement, whereby said parties contracted in
the manner quoted below:
The Company agrees:x x x x
1) To allow the Supervisor to purchase at wholesale the products of the
Company.x x x x
The Supervisor agrees:
1) To purchase products from the Company exclusively for resale and to be
responsible for obtaining all permits and licenses required to sell the
products on retail.x x x x
The Company and the Supervisor mutually agree:x x x x
2) That this agreement in no way makes the Supervisor an employee or
agent of the Company, therefore, the Supervisor has no authority to bind
the Company in any contracts with other parties.
3) That the Supervisor is an independent retailer/dealer insofar as the
Company is concerned, and shall have the sole discretion to determine
where and how products purchased from the Company will be sold.
However, the Supervisor shall not sell such products to stores,
supermarkets or to any entity or person who sells things at a fixed place of
business.
4) That this agreement supersedes any agreement/s between the
Company and the Supervisor.
5) That the Supervisor shall sell or offer to sell, display or promote only and
exclusively products sold by the Company.
6) Either party may terminate this agreement at will, with or without
cause, at any time upon notice to the other. x x x x.
4

By virtue of the execution of the aforequoted Supervisors Agreement,
respondent Luna became part of the independent sales force of petitioner Avon.
Sometime in the latter part of 1988, respondent Luna was invited by a former Avon
employee who was then currently a Sales Manager of Sandr Philippines, Inc., a
domestic corporation engaged in direct selling of vitamins and other food
supplements, to sell said products. Respondent Luna apparently accepted the
invitation as she then became a Group Franchise Director of Sandr Philippines, Inc.
concurrently with being a Group Supervisor of petitioner Avon. As Group Franchise
Director, respondent Luna began selling and/or promoting Sandr products to other
Avon employees and friends. On 23 September 1988, she requested a law firm to
render a legal opinion as to the legal consequence of the Supervisors Agreement
she executed with petitioner Avon. In response to her query, a lawyer of the firm
opined that the Supervisors Agreement was "contrary to law and public policy."
Wanting to share the legal opinion she obtained from her legal counsel, respondent
Luna wrote a letter to her colleagues and attached mimeographed copies of the
opinion and then circulated them. The full text of her letter reads:
We all love our work as independent dealers and we all love to
continue in this livelihood. Because my livelihood is important to me, I
have asked the legal opinion of a leading Makati law office regarding my
status as an independent dealer, I am sharing this opinion with you.
I have asked their advice on three specific things:
1) May the company legally change the conditions of the existing
"Supervisors Agreement" without the Supervisors consent? If I should
refuse to sign the new Agreement, may the company terminate my
dealership?
On the first issue, my lawyers said that the company cannot
change the existing "Agreement" without my consent, and that it would be
illegal if the company will compel me to sign the new agreement.
2) Is Section 5 of the "Supervisors Agreement" which says that a dealer
may only sell products sold by the company, legal?
My lawyers said that Section 5 of the Supervisors Agreement is
NOT valid because it is contrary to public policy, being an unreasonable
restraint of trade.
3) Is Section 6 of the "Supervisors Agreement" which authorizes the
company to terminate the contract at any time, with or without cause,
legal?
My lawyer said Section 6 is NOT valid because it is contrary to law and
public policy. The company cannot terminate the "Supervisors
Agreement" without a valid cause.
Therefore, I can conclude that I dont violate Section 5 if I sell any
product which is not in direct competition with the companys products,
and there is no valid reason for the company to terminate my dealership
contract if I sell a non-competitive product.
Dear co-supervisor[s], let us all support the reasonable and legal
policies of the company. However, we must all be conscious of our legal
rights and be ready to protect ourselves if they are trampled upon.
I hope we will all stay together selling Avon products for a long
time and at the same time increase our earning opportunity by engaging in
other businesses without being afraid to do so.
In a letter
5
dated 11 October 1988, petitioner Avon, through its President
and General Manager, Jose Mari Franco, notified respondent Luna of the
termination or cancellation of her Supervisors Agreement with petitioner Avon.
Said letter reads in part:
In September, (sic) 1988, you brought to our attention that you
signed up as Group Franchise Director of another company, Sandr
Philippines, Inc. (SPI).
Not only that. You have also sold and promoted products of SPI
(please refer for example to SPI Invoice No. 1695 dated Sept. 30, 1988).
Worse, you promoted/sold SPI products even to several employees of our
company including Mary Arlene Nolasco, Regina Porter, Emelisa Aguilar,
Hermie Esteller and Emma Ticsay.
To compound your violation of the above-quoted provision, you
have written letters to other members of the Avon salesforce inducing
them to violate their own contracts with our company. x x x.
For violating paragraph 5 x x x, the Company, pursuant to
paragraph 6 of the same Agreement, is terminating and canceling its
Supervisors Agreement with you effective upon your receipt of this
notice. We regret having to do this, but your repeated disregard of the
Agreement, despite warnings, leaves (sic) the Company no other choice. x
x x x
Aggrieved, respondent Luna filed a complaint for damages before the RTC
of Makati City, Branch 138. The complaint was docketed as Civil Case No. 88-2595.
On 26 January 1996, after trial on the merits, the RTC rendered judgment in favor of
respondent Luna stating that:
WHEREFORE, in view of the foregoing premises, judgment is
hereby rendered in favor of the plaintiff, and against defendant, Avon,
ordering the latter:
1) to pay moral damages to the plaintiff in the amount of P100,000.00 with
interest from the date of this judgment up to the time of complete
payment;
2) to pay attorneys fees in the amount of P20,000.00;
3) to pay the costs.
6

On 8 February 1996, petitioner Avon filed a Notice of Appeal dated the
same day. In an Order
7
dated 15 February 1996, the RTC gave due course to the
appeal and directed its Branch Clerk of Court to transmit the entire records of the
case to the Court of Appeals, which docketed the appeal as CA G.R. CV No. 52550.
On 20 May 2002, the Court of Appeals promulgated the assailed Decision,
the dispositive part of which states thus:
WHEREFORE, the foregoing premises considered, the decision appealed
from is hereby AFFIRMED in toto.
8

The Issues
In predictable displeasure with the conclusions reached by the appellate
court, petitioner Avon now implores this Court to review, via a petition for review
on certiorari under Rule 45 of the Revised Rules of Court, the formers decision and
to resolve the following assigned errors:
9

I. THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN DECLARING
THAT THE SUPERVISORS AGREEMENT EXECUTED BETWEEN AVON
AND RESPONDENT LUNA AS NULL AND VOID FOR BEING AGAINST
PUBLIC POLICY;
II. THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN HOLDING
THAT AVON HAD NO RIGHT TO TERMINATE OR CANCEL THE
SUPERVIOSRS AGREEMENT;
III. THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN UPHOLDING
THE AWARD OF MORAL DAMAGES AND ATTORNEYS FEES IN FAVOR
OF RESPONDENT LUNA; and
IV. THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN NOT
AWARDING ATTORNEYS FEES AND LITIGATION EXPENSES IN FAVOR
OF PETITIONER.
The Courts Ruling
A priori, respondent Luna objects to the presentation, and eventual
resolution, of the issues raised herein as they allegedly involve questions of facts.
To be sure, questions of law are those that involve doubts or controversies
on what the law is on certain state of facts; and questions of fact, on the other
hand, are those in which there is doubt or difference as to the truth or falsehood of
the alleged facts. One test, it has been held, is whether the appellate court can
determine the issue raised without reviewing or evaluating the evidence, in which
case it is a question of law, otherwise it will be a question of fact.
10

In the present case, the threshold issues are a) whether or not paragraph 5
of the Supervisors Agreement is void for being violative of law and public policy;
and b) whether or not paragraph 6 of the Supervisors Agreement which authorizes
petitioner Avon to terminate or cancel the agreement at will is void for being
contrary to law and public policy. Certainly, it is quite obvious that the foregoing
issues are questions of law.
In affirming the decision of the RTC declaring the subject contract null and
void for being against public policy, the Court of Appeals ruled that
the exclusivity clause, which states that:
The Company and the Supervisor mutually agree:
x x x x
5) That the Supervisor shall sell or offer to sell, display or promote only and
exclusively products sold by the Company. [Emphasis supplied.]
should be interpreted to apply solely to those products directly in competition with
those of petitioner Avons, i.e., cosmetics and/or beauty supplies and lingerie
products. Its declaration is anchored on the fact that Avon products, at that time,
were not in any way similar to the products sold by Sandr Philippines, Inc. At that
time, the latter was merely selling vitamin products. Put simply, the products of the
two companies do not compete with each other. The appellate court ratiocinated
that:
x x x If the agreement were interpreted otherwise, so as to include
products that do not directly compete with the products of defendant-
appellant Avon, such would result in absurdity. x x x [A]greements which
prohibit a person from engaging in any enterprise whether similar or not to
the enterprise of the employer constitute an unreasonable restraint of
trade, thus, it is void as against public policy.
11

Petitioner Avon disputes the abovestated conclusion reached by the Court
of Appeals. It argues that the latter went beyond the literal and obvious intent of
the parties to the subject contract when it interpreted the abovequoted clause to
apply only to those products that do not compete with that of petitioner Avons;
and that the words "only and exclusively" need no other interpretation other than
the literal meaning that "THE SUPERVISORS CANNOT SELL THE PRODUCTS OF
OTHER COMPANIES WHETHER OR NOT THEY ARE COMPETING PRODUCTS."
12

Moreover, petitioner Avon reasons that:
The exclusivity clause was directed against the supervisors selling
other products utilizing their training and experience, and capitalizing on
Avons existing network for the promotion and sale of the said products.
The exclusivity clause was meant to protect Avon from other companies,
whether competitors or not, who would exploit the sales and promotions
network already established by Avon at great expense and effort.
x x x x
Obviously, Sandre Phils., Inc. did not have the (sic) its own trained
personnel and network to sell and promote its products. It was precisely
why Sandre simply invited, and then and there hired Luna and other Avon
supervisors and dealers to sell and promote its products. They had the
training and experience, they also had a ready market for the other
products the customers to whom they had been selling the Avon
products. It was easy to entice the supervisors to sign up. The supervisors
could continue to sell Avon products, and at the same time earn additional
income by selling other products.
This is most unfair to Avon. The other companies cannot ride on
and exploit the training and experience of the Avon sales force to sell and
promote their own products. [Emphasis supplied.]
On the other hand, in her Memorandum, respondent Luna counters that
"there is no allegation nor any finding by the trial court or the Court of Appeals of
an existing nationwide sales and promotions network established by Avon or
Avons existing sales promotions network or Avons tried and tested sales and
promotions network nor the alleged damage caused to such system caused by
other companies." Further, well worth noting is the opinion of respondent Lunas
counsel which started the set off the series of events which culminated to the
termination or cancellation of the Supervisors Agreement. In response to the
query-letter
13
of respondent Luna, the latters legal counsel opined that, as
allegedly held in the case of Ferrazzini v. Gsell,
14
paragraph 5 of the subject
Supervisors Agreement "not only prohibits the supervisor from selling products
which compete with the companys product but restricts likewise the supervisor
from engaging in any industry which involves sales in general."
15
Said counsel
thereafter concluded that the subject provision in the Supervisors Agreement
constitutes an unreasonable restraint of trade and, therefore, void for being
contrary to public policy.
At the crux of the first issue is the validity of paragraph 5 of the
Supervisors Agreement, viz:
The Company and the Supervisor mutually agree: x x x x
5) That the Supervisor shall sell or offer to sell, display or promote only and
exclusively products sold by the Company. [Emphasis supplied.]
In business parlance, this is commonly termed as the "exclusivity clause."
This is defined as agreements which prohibit the obligor from engaging in
"business" in competition with the obligee.
This exclusivity clause is more often the subject of critical scrutiny when it
is perceived to collide with the Constitutional proscription against "reasonable
restraint of trade or occupation." The pertinent provision of the Constitution is
quoted hereunder. Section 19 of Article XII of the 1987 Constitution on the National
Economy and Patrimony states that:
SEC. 19. The State shall regulate or prohibit monopolies when the public
interest so requires. No combinations in restraint of trade or unfair
competition shall be allowed.
First off, restraint of trade or occupation embraces acts, contracts,
agreements or combinations which restrict competition or obstruct due course of
trade.
16

Now to the basics. From the wordings of the Constitution, truly then, what
is brought about to lay the test on whether a given agreement constitutes an
unlawful machination or combination in restraint of trade is whether under the
particular circumstances of the case and the nature of the particular contract
involved, such contract is, or is not, against public interest.
17

Thus, restrictions upon trade may be upheld when not contrary to public
welfare and not greater than is necessary to afford a fair and reasonable protection
to the party in whose favor it is imposed.
18
Even contracts which prohibit an
employee from engaging in business in competition with the employer are not
necessarily void for being in restraint of trade.
In sum, contracts requiring exclusivity are not per se void. Each contract
must be viewed vis--vis all the circumstances surrounding such agreement in
deciding whether a restrictive practice should be prohibited as imposing an
unreasonable restraint on competition.
The question that now crops up is this, when is a restraint in trade
unreasonable? Authorities are one in declaring that a restraint in trade is
unreasonable when it is contrary to public policy or public welfare. As far back as
1916, in the case of Ferrazzini v. Gsell,
19
this Court has had the occasion to declare
that:
There is no difference in principle between the public policy
(orden pblico) in the in the two jurisdictions (United States and the
Philippine Islands) as determined by the Constitution, laws, and judicial
decisions.
In the United States it is well settled that contracts in undue or
unreasonable restraint of trade are unenforcible because they are
repugnant to the established public policy in that country. Such contracts
are illegal in the sense that the law will not enforce them. The Supreme
Court in the United States, in Oregon Steam Navigation Co. vs. Winsor )20
Will., 64), quoted with approval in Gibbs v. Consolidated gas Co. of
Baltimore (130 U.S., 396), said:
Cases must be judged according to their circumstances, and can
only be rightly judged when reason and grounds of the rule are
carefully considered. There are two principle grounds on which
the doctrine is founded that a contract in restraint of trade is void
as against public policy. One is, the injury to the public by being
deprived of the restricted partys industry; and the other is, the
injury to the party himself by being precluded from pursuing his
occupation, and thus being prevented from supporting himself
and his family.
And what is public policy? In the words of the eminent Spanish jurist, Don
Jose Maria Manresa, in his commentaries of the Codigo Civil, public policy (orden
pblico):
Represents in the law of persons the public, social and legal interest, that
which is permanent and essential of the institutions, that which, even if
favoring an individual in whom the right lies, cannot be left to his own will.
It is an idea which, in cases of the waiver of any right, is manifested with
clearness and force.
20

As applied to agreements, Quintus Mucius Scaevola, another distinguished
civilist gives the term "public policy" a more defined meaning:
Agreements in violation of orden pblico must be considered as those
which conflict with law, whether properly, strictly and wholly a public law
(derecho) or whether a law of the person, but law which in certain respects
affects the interest of society.
21

Plainly put, public policy is that principle of the law which holds that no
subject or citizen can lawfully do that which has a tendency to be injurious to the
public or against the public good.
22
As applied to contracts, in the absence of
express legislation or constitutional prohibition, a court, in order to declare a
contract void as against public policy, must find that the contract as to the
consideration or thing to be done, has a tendency to injure the public, is against the
public good, or contravenes some established interests of society, or is inconsistent
with sound policy and good morals, or tends clearly to undermine the security of
individual rights, whether of personal liability or of private property.
23

From another perspective, the main objection to exclusive dealing is its
tendency to foreclose existing competitors or new entrants from competition in the
covered portion of the relevant market during the term of the agreement.
24
Only
those arrangements whose probable effect is to foreclose competition in a
substantial share of the line of commerce affected can be considered as void for
being against public policy. The foreclosure effect, if any, depends on the market
share involved. The relevant market for this purpose includes the full range of
selling opportunities reasonably open to rivals, namely, all the product and
geographic sales they may readily compete for, using easily convertible plants and
marketing organizations.
25

Applying the preceding principles to the case at bar, there is nothing
invalid or contrary to public policy either in the objectives sought to be attained by
paragraph 5, i.e., the exclusivity clause, in prohibiting respondent Luna, and all
other Avon supervisors, from selling products other than those manufactured by
petitioner Avon. We quote with approval the determination of the U.S. Supreme
Court in the case of Board of Trade of Chicago v. U.S.
26
that "the question to be
determined is whether the restraint imposed is such as merely regulates and
perhaps thereby promotes competition, or whether it is such as may suppress or
even destroy competition."
Such prohibition is neither directed to eliminate the competition like
Sandr Phils., Inc. nor foreclose new entrants to the market. In its Memorandum, it
admits that the reason for such exclusion is to safeguard the network that it has
cultivated through the years. Admittedly, both companies employ the direct selling
method in order to peddle their products. By direct selling, petitioner Avon and
Sandre, the manufacturer, forego the use of a middleman in selling their products,
thus, controlling the price by which they are to be sold. The limitation does not
affect the public at all. It is only a means by which petitioner Avon is able to protect
its investment.
It was not by chance that Sandr Philippines, Inc. made respondent Luna
one of its Group Franchise Directors. It doesnt take a genius to realize that by
making her an important part of its distribution arm, Sandr Philippines, Inc., a
newly formed direct-selling business, would be saving time, effort and money as it
will no longer have to recruit, train and motivate supervisors and dealers.
Respondent Luna, who learned the tricks of the trade from petitioner Avon, will do
it for them. This is tantamount to unjust enrichment. Worse, the goodwill
established by petitioner Avon among its loyal customers will be taken advantaged
of by Sandre Philippines, Inc. It is not so hard to imagine the scenario wherein the
sale of Sandr products by Avon dealers will engender a belief in the minds of loyal
Avon customers that the product that they are buying had been manufactured by
Avon. In other words, they will be misled into thinking that the Sandr products are
in fact Avon products. From the foregoing, it cannot be said that the purpose of the
subject exclusivity clause is to foreclose the competition, that is, the entrance of
Sandr products in to the market. Therefore, it cannot be considered void for being
against public policy. How can the protection of ones property be violative of public
policy? Sandr Philippines, Inc. is still very much free to distribute its products in the
market but it must do so at its own expense. The exclusivity clause does not in any
way limit its selling opportunities, just the undue use of the resources of petitioner
Avon.
It has been argued that the Supervisors Agreement is in the nature of a
contract of adhesion; but just because it is does not necessarily mean that it is void.
A contract of adhesion is so-called because its terms are prepared by only one party
while the other party merely affixes his signature signifying his adhesion
thereto.
27
Such contract is just as binding as ordinary contracts. "It is true that we
have, on occasion, struck down such contracts as void when the weaker party is
imposed upon in dealing with the dominant bargaining party and is reduced to the
alternative of taking it or leaving it, completely deprived of the opportunity to
bargain on equal footing. Nevertheless, contracts of adhesion are not invalid per
se and they are not entirely prohibited. The one who adheres to the contract is in
reality free to reject it entirely, if he adheres, he gives his consent."
28
In the case at
bar, there was no indication that respondent Luna was forced to sign the subject
agreement. Being of age, financially stable and with vast business experience, she is
presumed to have acted with due care and to have signed the assailed contract
with full knowledge of its import. Under the premises, it would be difficult to
assume that she was morally abused. She was free to reject the agreement if she
wanted to.
Accordingly, a contract duly executed is the law between the parties, and
they are obliged to comply fully and not selectively with its terms. A contract of
adhesion is no exception.
29

The foregoing premises noted, the Court of Appeals, therefore, committed
reversible error in interpreting the subject exclusivity clause to apply merely to
those products in direct competition to those manufactured and sold by petitioner
Avon. When the terms of the agreement are clear and explicit, that they do not
justify an attempt to read into any alleged intention of the parties, the terms are to
be understood literally just as they appear on the face of the contract.
30
Thus, in
order to judge the intention of the contracting parties, "the circumstances under
which it was made, including the situation of the subject thereof and of the parties
to it, may be shown, so that the judge may be placed in the position of those whose
language he is to interpret."
31
It has been held that once this intention of the parties
has been ascertained, it becomes an integral part of the contract as though it has
been originally expressed therein in unequivocal terms.
32

Having held that the "exclusivity clause" as embodied in paragraph 5 of the
Supervisors Agreement is valid and not against public policy, we now pass to a
consideration of respondent Lunas objections to the validity of her termination as
provided for under paragraph 6 of the Supervisors Agreement giving petitioner
Avon the right to terminate or cancel such contract. The paragraph 6 or the
"termination clause" therein expressly provides that:
The Company and the Supervisor mutually agree:
x x x x
6) Either party may terminate this agreement at will, with or without
cause, at any time upon notice to the other. [Emphasis supplied.]
In the case of Petrophil Corporation v. Court of Appeals,
33
this Court
already had the opportunity to opine that termination or cancellation clauses such
as that subject of the case at bar are legitimate if exercised in good faith. The facts
of said case likewise involved a termination or cancellation clause that clearly
provided for two ways of terminating the contract, i.e., with or without cause. The
utilization of one mode will not preclude the use of the other. Therein, we stated
that the finding that the termination of the contract was "for cause," is immaterial.
When petitioner terminated the contract "without cause," it was required only to
give x x x a 30-day prior written notice, which it did.
In the case at bar, the termination clause of the Supervisors Agreement
clearly provides for two ways of terminating and/or canceling the contract. One
mode does not exclude the other. The contract provided that it can be terminated
or cancelled for cause, it also stated that it can be terminated without cause, both
at any time and after written notice. Thus, whether or not the termination or
cancellation of the Supervisors Agreement was "for cause," is immaterial. The only
requirement is that of notice to the other party. When petitioner Avon chose to
terminate the contract, for cause, respondent Luna was duly notified thereof.
Worth stressing is that the right to unilaterally terminate or cancel the Supervisors
Agreement with or without cause is equally available to respondent Luna, subject to
the same notice requirement. Obviously, no advantage is taken against each other
by the contracting parties.
WHEREFORE, in view of the foregoing, the instant petition is GRANTED.
The Decision dated 20 May 2002 rendered by the Court of Appeals in CA-G.R. CV
No. 52550, affirming the judgment of the RTC of Makati City, Branch 138, in Civil
Case No. 88-2595, are hereby REVERSED and SET ASIDE. Accordingly, let a new one
be entered dismissing the complaint for damages. Costs against respondent Leticia
Luna.
SO ORDERED.

FIRST DIVISION

ANICETO G. SALUDO, JR.,
Petitioner, -versus- SECURITY BANK
CORPORATION, Respondent.

G.R. No. 184041

Promulgated:
October 13, 2010
D E C I S I O N
PEREZ, J.:
Before this Court is a petition for review on certiorari seeking the reversal
of the Decision
[1]
of the Court of Appeals in CA-G.R. CV No. 88079 dated 24 January
2008 which affirmed the Decision
[2]
of Branch 149 of the Regional Trial Court (RTC)
of Makati City, finding petitioner Aniceto G. Saludo, Jr. and Booklight, Inc.
(Booklight) jointly and severally liable to Security Bank Corporation (SBC).
The basic facts follow
On 30 May 1996, Booklight was extended an omnibus line credit facility
[3]
by
SBC in the amount of P10,000,000.00. Said loan was covered by a Credit
Agreement
[4]
and a Continuing Suretyship
[5]
with petitioner as surety, both
documents dated 1 August 1996, to secure full payment and performance of the
obligations arising from the credit accommodation.
Booklight drew several availments of the approved credit facility from 1996 to
1997 and faithfully complied with the terms of the loan. On 30 October 1997, SBC
approved the renewal of credit facility of Booklight in the amount
of P10,000,000.00 under the prevailing security lending rate.
[6]
From August 3 to
14, 1998, Booklight executed nine (9) promissory notes
[7]
in favor of SBC in the
aggregate amount of P9,652,725.00. For failure to settle the loans upon maturity,
demands
[8]
were made on Booklight and petitioner for the payment of the
obligation but the duo failed to pay. As of 15 May 2000, the obligation of Booklight
stood at P10,487,875.41, inclusive of interest past due and penalty.
[9]

On 16 June 2000, SBC filed against Booklight and herein petitioner an
action for collection of sum of money with the RTC. Booklight initially filed a motion
to dismiss, which was later on denied for lack of merit. In his Answer, Booklight
asserted that the amount demanded by SBC was not based on the omnibus credit
line facility of 30 May 1996, but rather on the amendment of the credit facilities
on 15 October 1996 increasing the loan line from P8,000,000.00
to P10,000,000.00. Booklight denied executing the promissory notes. It also
claimed that it was not in default as in fact, it paid the sum of P1,599,126.11 on 30
September 1999 as a prelude to restructuring its loan for which it earnestly
negotiated for a mutually acceptable agreement until 5 July 2000, without knowing
that SBC had already filed the collection case.
[10]

In his Answer to the complaint, herein petitioner alleged that under the
Continuing Suretyship, it was the parties understanding that his undertaking and
liability was merely as an accommodation guarantor of Booklight. He countered
that he came to know that Booklight offered to pay SBC the partial payment of the
loan and proposed the restructuring of the obligation. Petitioner argued that said
offer to pay constitutes a valid tender of payment which discharged Booklights
obligation to the extent of the offer. Petitioner also averred that the imposition of
the penalty on the supposed due and unpaid principal obligation based on the
penalty rate of 2% per month is clearly unconscionable.
[11]

On 7 March 2005, Booklight was declared in default. Consequently, SBC
presented its evidence ex-parte. The case against petitioner, however, proceeded
and the latter was able to present evidence on his behalf.
After trial, the RTC ruled that petitioner is jointly and solidarily liable with
Booklight under the Continuing Suretyship Agreement. The dispositive portion
reads:
WHEREFORE, in view of the foregoing considerations, the Court hereby finds
in favor of the plaintiff against the defendants by ordering the defendants
Booklight, Inc. and Aniceto G. Saludo, Jr., jointly and severally liable (solidarily
liable) to plaintiff [sic], the following sums of Philippine Pesos:
with attorneys fee of P100,000.00 plus cost of suit.
[12]

The Court of Appeals affirmed in toto the ruling of the RTC.
[13]
Petitioner filed
a motion for reconsideration but it was denied by the Court of Appeals on 7 August
2008.
[14]

Hence, the instant petition on the following arguments:
1. The first credit facility has a one-year term from 30 June
1996 to 30 June 1997 while the second credit facility runs
from 30 October 1997 to 30 October 1998.
2. When the first credit facility expired, its accessory contract,
the Continuing Surety agreement likewise expired.
3. The second credit facility is not covered by the Continuing
Suretyship, thus, availments made in 1998 by Booklight are not
covered by the Continuing Suretyship.

4. The approval of the second credit facility necessitates the
consent of petitioner for the latters Continuing Suretyship to be
effective.
5. The nine (9) promissory notes executed and drawn
by Booklight in 1998 did not specify that they were drawn
against and subject to the Continuing Suretyship. Neither was it
mentioned in the Continuing Suretyship that it was executed to
serve as collateral to the nine (9) promissory notes.
6. The Continuing Suretyship is a contract of adhesion and
petitioners participation to it is his signing of his contract.
7. The approval of the second credit facility is considered a
novation of the first sufficient to extinguish the Continuing
Suretyship and discharge petitioner.
8. The 20.178% interest rate imposed by the RTC is
unconscionable.
[15]

The main derivative of these averments is the issue of whether or not
petitioner should be held solidarily liable for the second credit facility extended to
Booklight.
We rule in the affirmative.
There is no doubt that Booklight was extended two (2) credit facilities, each
with a one-year term, by SBC. Booklight availed of these two (2) credit lines. While
Booklight was able to comply with its obligation under the first credit line, it
defaulted in the payment of the loan obligation amounting to P9,652,725.00 under
the second credit line. There is likewise no dispute that the first credit line facility,
with a term from 30 June 1996 to 30 June 1997, was covered by a Continuing
Suretyship with petitioner acting as the surety. The dispute is on the coverage by
the Continuing Suretyship of the loan contracted under the second credit facility.
Under the Continuing Suretyship, petitioner undertook to guarantee the
following obligations:
a) Guaranteed Obligations the obligations of the Debtor
arising from all credit accommodations extended by the Bank to
the Debtor, including increases, renewals, roll-overs,
extensions, restructurings, amendments or novations thereof,
as well as (i) all obligations of the Debtor presently or hereafter
owing to the Bank, as appears in the accounts, books and
records of the Bank, whether direct or indirect, and (ii) any and
all expenses which the Bank may incur in enforcing any of its
rights, powers and remedies under the Credit Instruments as
defined hereinbelow;
[16]
(Emphasis supplied.)
Whether the second credit facility is considered a renewal of the first or a
brand new credit facility altogether was indirectly answered by the trial court when
it invoked paragraph 10 of the Continuing Suretyship which provides:
10. Continuity of Suretyship. This Suretyship shall remain
in full force and effect until full and due payment and
performance of the Guaranteed Obligations. This
Suretyship shall not be terminated by the partial
payment to the Bank of Guaranteed Obligations by any
PN No. Amount Interest Rate (per
annum)
BeginningUntil fully paid
74/787/98 P1,927,000.00 20.189% November 2, 1998
74/788/98 913,545.00 20.189% November 2, 1998
74/789/98 1,927,090.00 20.189% November 2, 1998
74/791/98 500,000.0 20.178% November 4, 1998
74/792/98 800,000.00 20.178% November 4, 1998
74/793/98 665,000.00 20.178% November 3, 1998
74/808/98 970,000.00 20.178% November 9, 1998
74/822/98 975,000.00 20.178% November 12, 1998
74/823/98 975,000.00 20.178% November 12, 1998
other surety or sureties of the Guaranteed Obligations,
even if the particular surety or sureties are relieved of
further liabilities.
[17]

and concluded that the liability of petitioner did not expire upon the termination of
the first credit facility.
It cannot be gainsaid that the second credit facility was renewed for another
one-year term by SBC. The terms of renewal read:
30 October 1997
BOOKLIGHT, INC. x x x x
Gentlemen:
We are pleased to advise you that the Bank has approved the
renewal of your credit facility subject to the terms and conditions
set forth below:
Facility : Loan Line
Amount : P10,000,000.00
Collateral : Existing JSS of Atty. Aniceto Saludo (marital consent
waived)
Term : 180 day Promissory Notes
Interest Rate : Prevailing SBC lending rate; subject to monthly
setting and payment
Expiry : October 31, 1998 x x x x.
[18]

This very renewal is explicitly covered by the guaranteed obligations of the
Continuing Suretyship.
The essence of a continuing surety has been highlighted in the case of Totanes
v. China Banking Corporation
[19]
in this wise:
Comprehensive or continuing surety agreements are, in
fact, quite commonplace in present day financial and commercial
practice. A bank or financing company which anticipates entering
into a series of credit transactions with a particular company,
normally requires the projected principal debtor to execute a
continuing surety agreement along with its sureties. By executing
such an agreement, the principal places itself in a position to
enter into the projected series of transactions with its creditor;
with such suretyship agreement, there would be no need to
execute a separate surety contract or bond for each financing or
credit accommodation extended to the principal debtor.
[20]

In Gateway Electronics Corporation v. Asianbank Corporation,
[21]
the Court
emphasized that *b+y its nature, a continuing suretyship covers current and future
loans, provided that, with respect to future loan transactions, they are x x x within
the description or contemplation of the contract of guaranty.
Petitioner argues that the approval of the second credit facility necessitates
his consent considering the onerous and solidary liability of a surety. This is
contrary to the express waiver of his consent to such renewal, contained in
paragraph 12 of the Continuing Suretyship, which provides in part:
12. Waivers by the Surety. The Surety hereby waives: x x x (v)
notice or consent to any modification, amendment, renewal,
extension or grace period granted by the Bank to the Debtor with
respect to the Credit Instruments.
[22]

Respondent, as last resort, harps on the novation of the first credit facility
to exculpate itself from liability from the second credit facility.
At the outset, it must be pointed out that the Credit Agreement is actually
the principal contract and it covers all credit facilities now or hereafter extended
by *SBC+ to *Booklight+;
[23]
and that the suretyship agreement was executed
precisely to guarantee these obligations, i.e., the credit facilities arising from the
credit agreement. The principal contract is the credit agreement covered by the
Continuing Suretyship.
The two loan facilities availed by Booklight under the credit agreement are
the Omnibus Line amounting to P10,000,000.00 granted to Booklight in 1996 and
the other one is the Loan Line of the same amount in 1997. Petitioner however
seeks to muddle the issue by insisting that these two availments were two separate
principal contracts, conveniently ignoring the fact that it is the credit agreement
which constitutes the principal contract signed by Booklight in order to avail of
SBCs credit facilities. The two credit facilities are but loans made available to
Booklight pursuant to the credit agreement.
On these facts the novation argument advanced by petitioner must fail.
There is no novation to speak of. It is the first credit facility that expired
and not the Credit Agreement. There was a second loan pursuant to the same
credit agreement. The terms and conditions under the Credit Agreement continue
to apply and the Continuing Suretyship continues to guarantee the Credit
Agreement.
The lameness of petitioners stand is pointed up by his attempt to escape
from liability by labelling the Continuing Suretyship as a contract of adhesion.
A contract of adhesion is defined as one in which one of
the parties imposes a ready-made form of contract, which the
other party may accept or reject, but which the latter cannot
modify. One party prepares the stipulation in the contract, while
the other party merely affixes his signature or his adhesion
thereto, giving no room for negotiation and depriving the latter of
the opportunity to bargain on equal footing.
[24]


A contract of adhesion presupposes that the party adhering to the contract
is a weaker party. That cannot be said of petitioner. He is a lawyer. He is deemed
knowledgeable of the legal implications of the contract that he is signing.
It must be borne in mind, however, that contracts of
adhesion are not invalid per se. Contracts of adhesion, where one
party imposes a ready-made form of contract on the other, are
not entirely prohibited. The one who adheres to the contract is,
in reality, free to reject it entirely; if he adheres, he gives his
consent.
[25]

Finally, petitioner challenges the imposition of 20.189% interest rate as
unconscionable. We rule otherwise. In Development Bank of the Philippines v.
Family Foods Manufacturing Co. Ltd.,
[26]
this Court upheld the validity of the
imposition of 18% and 22% stipulated rates of interest in the two (2) promissory
notes. Likewise in Spouses Bacolor v. Banco Filipino Savings and Mortgage
Bank,
[27]
the 24% interest rate agreed upon by parties was held as not violative of
the Usury Law, as amended by Presidential Decree No. 116.
WHEREFORE, the petition is DENIED. The Decision dated 24 January 2008 of
the Court of Appeals in CA-G.R. CV No. 88079 is AFFIRMED in toto.
SO ORDERED.