Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 162802

October 9, 2013

EDS MANUFACTURING, INC., Petitioner,

vs.
HEALTHCHECK INTERNATIONAL INC., Respondent.
DECISION
PERALTA, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the reversal of
the Decision1 dated November 28, 2003 and Resolution2 dated March 16, 2004 of the Court of
Appeals (CA) in CA-G.R. CV No. 69420.
The facts, as found by the CA, are as follows:
The plaintiff Healthcheck Inc. is a 1-lcalth Maintenance Organization HMO) that provides prepaid
health and medical insurance coverage to its clients. To under gird its program, it maintains a
network of accredited hospitals and medical clinics, one of which is the De La Salle University
Medical Center located at Dasmarias. Cavite. Being within the access of this medical facility, the
defendant Eds Manufacturing Inc. with about 5,000 employees at Imus, Cavite saw fit in April 1998
to obtain insurance coverage from it. They entered into a one-year contract from May 1, 1998 to April
30, 1999 in which HCI was to provide the 4,191 employees of EMI and their 4,592 dependents as
host of medical services and benefits. Attached to the Agreement was a Service Program which
listed the services that HCI would provide and the responsibilities that EMI would undertake in order
to avail of the services. Putting the Agreement into effect, EMI paid the full premium for the coverage
in the staggering amount of P8,826,307.50.
Only two months into the program, problems began to loom in the horizon. On July 17, HCI notified
EMI that its accreditation with DLSUMC was suspended and advised it to avail of the services of
nearby accredited institutions. A more detailed communication to subscribers came out days later
informing them of the problems of the HMO industry in the wake of the Asian regional financial crisis
and proposing interim measures for the unexpired service contracts. In a quickly convened meeting,
EMI and HCI hammered out this handwritten 5-point agreement:
"1) Healthcheck to furnish EMI with list of procedural enhancements by 7/24 (FRI)-hospitals
& professional fees payment.
2) Healthcheck to reduce no. of accredited hospitals to improve monitoring of bills for
payment & other problems.

3) EMI to study the possibility of adding LIABILITY CLAUSE to existing contract; to furnish
HC copy for its review.
4) No renewal of contract w/ HC should there be another suspension of services in any
hospitals to be chosen (w/ regard to item #2.) w/in the present contract period.
5) HC decision on APE provided by 7/24(FRI)."
Although HCI had yet to settle its accounts with it, DLSUMC resumed services on July 24. In another
meeting with EMI on August 3, HCI undertook to settle all its accounts with DLSUMC in order to
maintain its accreditation. Despite this commitment, HCI failed to preserve its credit standing with
DLSUMC prompting the latter to suspend its accreditation for a second time from August 15 to 20. A
third suspension was still to follow on September 9 and remained in force until the end of the
contract period.
Until the difficulties between HCI and its client came to a head in September 1998, complaints from
EMI employees and workers were pouring in that their HMO cards were not being honored by the
DLSUMC and other hospitals and physicians. On September 3, EMI formally notified HCI that it was
rescinding their April 1998 Agreement on account of HCIs serious and repeated breach of its
undertaking including but not limited to the unjustified non-availability of services. It demanded a
return of premium for the unused period after September 3, giving a ballpark figure of P6 million.
What went in the way of the rescission of the contract, the fly in the ointment so to speak, was the
failure of EMI to collect all the HMO cards of the employees and surrender them to HCI as stipulated
in the Agreement. HCI had to tell EMI on October 12, 1998 that its employees were still utilizing the
cards even beyond the pretermination date set by EMI. It asked for the surrender of the cards so that
it could process the pretermination of the contract and finalize the reconciliation of accounts. Until we
have received the IDs, HCI said, we will consider your account with us ongoing and existing, thus
subject for inclusion to present billing and payment.
Without responding to this reminder, EMI sent HCI two letters in January 1999 demanding for the
payment ofP5,884,205 as the 2/3 portion of the premium that remained unutilized after the
Agreement was rescinded in the previous September. The computation was made on the basis of
these observations:
- that EMI paid premium of P8,826,307.50
- Healthchecks accreditation with DLSUMC was suspended on July 17, August 15 and Sept.
9, 1998 by reason of Healthchecks unjustified failure to pay its benefits to the hospital.
- That Healthchecks accreditation with other hospitals and individual physicians was also
suspended on various dates for the same reason.
- That, in effect Healthcheck managed to comply with its obligation only for the first 4 months
of the year-long contract, or 1/3 thereof.

HCI pre-empted EMIs threat of legal action by instituting the present case before the Regional Trial
Court of Pasig. The cause of action it presented was the unlawful pretermination of the contract and
failure of EMI to submit to a joint reconciliation of accounts and deliver such assets as properly
belonged to HCI. EMI responded with an answer alleging that HCI reneged on its duty to provide
adequate medical coverage after EMI paid the premium in full. Having rescinded the contract, it
claimed that it was entitled to the unutilized portion of the premium, and that the accounting required
by HCI could not be undertaken until it submitted the monthly utilization reports mentioned in the
Agreement. EMI asked for the dismissal of the complaint and interposed a counterclaim for damages
and unutilized premium of P5,884,205.
In September 2000, after trial, the court ruled in favor of HCI. It found that EMIs rescission of the
Agreement on September 3, 1998 was not done through court action or by a notarial act and was
based on casual or slight breaches of the contract. Moreover, despite the announced rescission, the
employees of EMI continued to avail of HCIs services until March 1999. The services rendered by
HCI from May 1998 to March 1999 purportedly came to a total of P10,149,821.13. The court
deducted from this figure the premium paid by EMI, leaving a net payable to HCI of P1,323,513.63,
in addition to moral damages and attorneys fees. EMIs counterclaims, on the other hand, were
dismissed for lack of merit.3
On appeal, the CA reversed the decision of the Regional Trial Court (RTC) of Pasig City and ruled
that although Healthcheck International, (HCI) substantially breached their agreement, it also
appears that Eds Manufacturing, Inc. (EMI) did not validly rescind the contract between them. Thus,
the CA dismissed the complaint filed by HCI, while at the same time dismissing the counterclaim
filed by EMI.
Undeterred, EMI filed a Motion for Partial Reconsideration against said decision. However, the same
was denied in a Resolution dated March 16, 2004.
Hence, EMI filed the present petition raising the following issues for our resolution:
A
THE COURT OF APPEALS, WHILE CORRECTLY OVERTURNING THE RTCS DECISION
BY DISMISSING THE COMPLAINT, COMMITTED A REVERSIBLE AND GROSS ERROR
WHEN IT LIKEWISE DISMISSED THE COUNTERCLAIM ON THE GROUND THAT
PETITIONER EMI DID NOT ACTUALLY RESCIND THE CONTRACT WHICH RULING BY
THE APPELLATE COURT ALREADY WENT BEYOND THE AGREED/SUBMITTED ISSUES
FOR ADJUDICATION.
B
THE COURT OF APPEALS COMMITTED SERIOUS ERROR OF LAW IN ADMITTING THE
UTILIZATION REPORTS AS COMPETENT EVIDENCE OF THE PURPORTED NONRESCISSION, WHEN SUCH EVIDENCE IS DOUBLE HEARSAY INASMUCH AS THE
PERSON WHO PREPARED THE SAME DID NOT TESTIFY IN COURT AND HIS
UNAVAILABILITY WAS UNEXPLAINED.

C
THE COURT OF APPEALS MADE A GRAVE ERROR WHEN IT DECLARED THAT
PETITIONER, BY SUPPOSEDLY ALLOWING THE UTILIZATIONS AFTER THE
RESCISSION, NEGATED ITS CLAIMED PRE-TERMINATION OF THE CONTRACT AND
THEREFORE FORFEITED ITS P5.8M CLAIMS FOR UNUTILIZED PREMIUMS.4
Simply, the issue is whether or not there was a valid rescission of the Agreement between the
parties.
We rule in the negative.
First, Article 1191 of the Civil Code states:
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.5
The general rule is that rescission (more appropriately, resolution ) of a contract will not be permitted
for a slight or casual breach, but only for such substantial and fundamental violations as would
defeat the very object of the parties in making the agreement.6
In his concurring opinion in Universal Food Corporation v. Court of Appeals, 7 Justice J.B.L. Reyes
clarifies:
It is probable that the petitioners confusion arose from the defective technique of the new Code that
terms both instances as "rescission" without distinction between them; unlike the previous Spanish
Code of 1889 that differentiated between "resolution" for breach of stipulations from "rescission" by
reason of lesion or damage. But the terminological vagueness does not justify confusing one case
with the other, considering the patent difference in causes and results of either action. 8
Reiterating the aforementioned pronouncement, this Court in Pryce Corporation v. Philippine
Amusement Gaming Corporation9 held that:
Relevantly, it has been pointed out that resolution was originally used in Article 1124 of the old Civil
Code, and that the term became the basis for rescission under Article 1191 (and conformably, also
Article 1659).10

Thus, the rescission referred to in Article 1191, more appropriately referred to as resolution, is on the
breach of faith by one of the parties which is violative of the reciprocity between them. 11
In the present case, it is apparent that HCI violated its contract with EMI to provide medical service
to its employees in a substantial way. As aptly found by the CA, the various reports made by the EMI
employees from July to August 1998 are living testaments to the gross denial of services to them at
a time when the delivery was crucial to their health and lives.
However, although a ground exists to validly rescind the contract between the parties, it appears that
EMI failed to judicially rescind the same. In Iringan v. Court of Appeals,12 this Court reiterated the rule
that in the absence of a stipulation, a party cannot unilaterally and extrajudicially rescind a contract.
A judicial or notarial act is necessary before a valid rescission (or resolution) can take place. Thus
Clearly, a judicial or notarial act is necessary before a valid rescission can take place, whether or not
automatic rescission has been stipulated. It is to be noted that the law uses the phrase "even
though" emphasizing that when no stipulation is found on automatic rescission, the judicial or
notarial requirement still applies.
xxxx
But in our view, even if Article 1191 were applicable, petitioner would still not be entitled to automatic
rescission. In Escueta v. Pando, we ruled that under Article 1124 (now Article 1191) of the Civil Code,
the right to resolve reciprocal obligations, is deemed implied in case one of the obligors shall fail to
comply with what is incumbent upon him. But that right must be invoked judicially. The same article
also provides: "The Court shall decree the resolution demanded, unless there should be grounds
which justify the allowance of a term for the performance of the obligation."
This requirement has been retained in the third paragraph of Article 1191, which states that "the
court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period."
Consequently, even if the right to rescind is made available to the injured party, the obligation is not
ipso facto erased by the failure of the other party to comply with what is incumbent upon him.
The party entitled to rescind should apply to the court for a decree of rescission. The right cannot be
exercised solely on a partys own judgment that the other committed a breach of the obligation. The
operative act which produces the resolution of the contract is the decree of the court and not the
mere act of the vendor. Since a judicial or notarial act is required by law for a valid rescission to take
place, the letter written by respondent declaring his intention to rescind did not operate to validly
rescind the contract.13
1wphi1

What is more, it is evident that EMI had not rescinded the contract at all. As observed by the CA,
despite EMI s pronouncement, it failed to surrender the HMO cards of its employees although this
was required by the Agreement, and allowed them to continue using them beyond the date of the
rescission. The in-patient and the out-patient utilization reports submitted by 1 ICI shows entries as
late as March 1999, signifying that EMI employees 1 were availing of the services until the contract

period were almost over. The continued use by them of their privileges under the contract, with the
apparent consent of EMI, belies any intention to cancel or rescind it, even as they felt that they ought
to have received more than what they got.
WHEREFORE premises considered, the Decision dated November 28, 2003 and Resolution dated
March 16, 2004 of the Court of Appeals, in CA-G.R. CV No. 69420, arc hereby AFFIRMED SO
ORDERED.
DIOSDADO M. PERALTA
Associate Justice
WE CONCUR:

-Rescision or resolution cannot be had even if there is breach of faith on one of the
contracting parties. A notarial or judicial declaration is needed to effect such.
Although such may be the words of the law, rescission shall be judicially declared,
otherwise, there is no valid rescission

[G.R. No. 129107. September 26, 2001]

ALFONSO L. IRINGAN, petitioner, vs. HON. COURT OF APPEALS and

ANTONIO PALAO, represented by his Attorney-in-Fact, FELISA P.
DELOS SANTOS,respondents.
DECISION
QUISUMBING, J.:

This petition assails the Decision[1] dated April 30, 1997 of the Court of Appeals in CA G.R.
CV No. 39949, affirming the decision of the Regional Trial Court and deleting the award of
attorneys fee.
The facts of the case are based on the records.
On March 22, 1985, private respondent Antonio Palao sold to petitioner Alfonso Iringan, an
undivided portion of Lot No. 992 of the Tuguegarao Cadastre, located at the Poblacion of
Tuguegarao and covered by Transfer Certificate of Title No. T-5790. The parties executed a
Deed of Sale[2] on the same date with the purchase price of P295,000.00, payable as follows:

(a) P10,000.00 upon the execution of this instrument, and for this purpose, the
vendor acknowledges having received the said amount from the vendee as of this
date;
(b) P140,000.00 on or before April 30, 1985;
(c) P145,000.00 on or before December 31, 1985.[3]
When the second payment was due, Iringan paid only P40,000. Thus, on July 18, 1985,
Palao sent a letter[4] to Iringan stating that he considered the contract as rescinded and that he
would not accept any further payment considering that Iringan failed to comply with his
obligation to pay the full amount of the second installment.
On August 20, 1985, Iringan through his counsel Atty. Hilarion L. Aquino, [5] replied that they
were not opposing the revocation of the Deed of Sale but asked for the reimbursement of the
following amounts:

(a) P50,000.00 cash received by you;

(b) P3,200.00 geodetic engineers fee;
(c) P500.00 attorneys fee;
(d) the current interest on P53,700.00.[6]
In response, Palao sent a letter dated January 10, 1986, [7] to Atty. Aquino, stating that he was
not amenable to the reimbursements claimed by Iringan.
On February 21, 1989, Iringan, now represented by a new counsel Atty. Carmelo Z.
Lasam, proposed that the P50,000 which he had already paid Palao be reimbursed [8] or Palao
could sell to Iringan, an equivalent portion of the land.
Palao instead wrote Iringan that the latters standing obligation had reached P61,600,
representing payment of arrears for rentals from October 1985 up to March 1989. [9] The parties
failed to arrive at an agreement.
On July 1, 1991, Palao filed a Complaint [10] for Judicial Confirmation of Rescission of
Contract and Damages against Iringan and his wife.
In their Answer,[11] the spouses alleged that the contract of sale was a consummated contract,
hence, the remedy of Palao was for collection of the balance of the purchase price and not

rescission. Besides, they said that they had always been ready and willing to comply with their
obligations in accordance with said contract.
In a Decision[12] dated September 25, 1992, the Regional Trial Court of Cagayan, Branch I,
ruled in favor of Palao and affirmed the rescission of the contract. It disposed,

WHEREFORE, the Court finds that the evidence preponderates in favor of the
plaintiff and against the defendants and judgment is hereby rendered as follows:
(a) Affirming the rescission of the contract of sale;
(b) Cancelling the adverse claim of the defendants annotated at the back of TCT No.
T-5790;
(c) Ordering the defendants to vacate the premises;
(d) Ordering the defendants to pay jointly and severally the sum of P100,000.00 as
reasonable compensation for use of the property minus 50% of the amount paid by
them; and to pay P50,000.00 as moral damages; P10,000.00 as exemplary damages;
and P50,000.00 as attorneys fee; and to pay the costs of suit.
SO ORDERED.[13]
As stated, the Court of Appeals affirmed the above decision. Hence, this petition for review.
Iringan avers in this petition that the Court of Appeals erred:
1. In holding that the lower court did not err in affirming the rescission of the contract of sale;
and
2. In holding that defendant was in bad faith for resisting rescission and was made liable to
pay moral and exemplary damages.[14]

We find two issues for resolution: (1) whether or not the contract of sale was validly
rescinded, and (2) whether or not the award of moral and exemplary damages is proper.
On the first issue, petitioner contends that no rescission was effected simply by virtue of the
letter[15] sent by respondent stating that he considered the contract of sale rescinded. Petitioner
asserts that a judicial or notarial act is necessary before one party can unilaterally effect a
rescission.

Respondent Palao, on the other hand, contends that the right to rescind is vested by law on
the obligee and since petitioner did not oppose the intent to rescind the contract, Iringan in effect
agreed to it and had the legal effect of a mutually agreed rescission.
Article 1592 of the Civil Code is the applicable provision regarding the sale of an
immovable property.

Article 1592. In the sale of immovable property, even though it may have been
stipulated that upon failure to pay the price at the time agreed upon the rescission of
the contract shall of right take place, the vendee may pay, even after the expiration of
the period, as long as no demand for rescission of the contract has been made upon
him either judicially or by a notarial act. After the demand, the court may not grant
him a new term. (Italics supplied)
Article 1592 requires the rescinding party to serve judicial or notarial notice of his intent to
resolve the contract.[16]
In the case of Villaruel v. Tan King,[17] we ruled in this wise,

since the subject-matter of the sale in question is real property, it does not come
strictly within the provisions of article 1124 (now Article 1191) of the Civil Code, but
is rather subjected to the stipulations agreed upon by the contracting parties and to the
provisions of article 1504 (now Article 1592) of the Civil Code. [18]
Citing Manresa, the Court said that the requirement of then Article 1504, refers to a
demand that the vendor makes upon the vendee for the latter to agree to the resolution of the
obligation and to create no obstacles to this contractual mode of extinguishing obligations.[19]
Clearly, a judicial or notarial act is necessary before a valid rescission can take place,
whether or not automatic rescission has been stipulated. It is to be noted that the law uses the
phrase even though[20] emphasizing that when no stipulation is found on automatic rescission,
the judicial or notarial requirement still applies.
On the first issue, both the trial and appellate courts affirmed the validity of the alleged
mutual agreement to rescind based on Article 1191 of the Civil Code, particularly paragraphs 1
and 2 thereof.

Article 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 payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become
impossible. [Emphasis ours.]
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.
But in our view, even if Article 1191 were applicable, petitioner would still not be entitled to
automatic rescission. In Escueta v. Pando,[21] we ruled that under Article 1124 (now Article 1191)
of the Civil Code, the right to resolve reciprocal obligations, is deemed implied in case one of the
obligors shall fail to comply with what is incumbent upon him. But that right must be invoked
judicially. The same article also provides: The Court shall decree the resolution demanded,
unless there should be grounds which justify the allowance of a term for the performance of the
obligation.
This requirement has been retained in the third paragraph of Article 1191, which states that
the court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period.
Consequently, even if the right to rescind is made available to the injured party,[22] the
obligation is not ipso facto erased by the failure of the other party to comply with what is
incumbent upon him. The party entitled to rescind should apply to the court for a decree of
rescission.[23] The right cannot be exercised solely on a partys own judgment that the other
committed a breach of the obligation. [24] The operative act which produces the resolution of the
contract is the decree of the court and not the mere act of the vendor. [25] Since a judicial or
notarial act is required by law for a valid rescission to take place, the letter written by respondent
declaring his intention to rescind did not operate to validly rescind the contract.
Notwithstanding the above, however, in our view when private respondent filed an action for
Judicial Confirmation of Rescission and Damages[26] before the RTC, he complied with the
requirement of the law for judicial decree of rescission. The complaint[27] categorically stated that
the purpose was 1) to compel appellants to formalize in a public document, their mutual
agreement of revocation and rescission; and/or 2) to have a judicial confirmation of the said
revocation/rescission under terms and conditions fair, proper and just for both parties. [28] In Luzon
Brokerage Co., Inc. v. Maritime Building Co., Inc.,[29] we held that even a crossclaim found in the

Answer could constitute a judicial demand for rescission that satisfies the requirement of the law.
[30]

Petitioner contends that even if the filing of the case were considered the judicial act
required, the action should be deemed prescribed based on the provisions of Article 1389 of the
Civil Code.[31]
This provision of law applies to rescissible contracts,[32] as enumerated and defined in
Articles 1380[33] and 1381.[34] We must stress however, that the rescission in Article 1381 is not
akin to the term rescission in Article 1191 and Article 1592. [35] In Articles 1191 and 1592, the
rescission is a principal action which seeks the resolution or cancellation of the contract while in
Article 1381, the action is a subsidiary one limited to cases of rescission for lesion as enumerated
in said article.[36]
The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in
Article 1144,[37] which provides that the action upon a written contract should be brought within
ten years from the time the right of action accrues. The suit was brought on July 1, 1991, or six
years after the default. It was filed within the period for rescission. Thus, the contract of sale
between the parties as far as the prescriptive period applies, can still be validly rescinded.
On the issue of moral and exemplary damages, petitioner claims that the Court of Appeals
erred in finding bad faith on his part when he resisted the rescission [38] and claimed he was ready
to pay but never actually paid respondent, notwithstanding that he knew that appellees principal
motivation for selling the lot was to raise money to pay his SSS loan. [39] Petitioner would have us
reverse the said CA findings based on the exception [40] that these findings were made on a
misapprehension of facts.
The records do not support petitioners claims. First, per the records, petitioner knew
respondents reason for selling his property. As testified to by petitioner[41] and in the
deposition[42] of respondent, such fact was made known to petitioner during their negotiations as
well as in the letters sent to petitioner by Palao. [43] Second, petitioner adamantly refused to
formally execute an instrument showing their mutual agreement to rescind the contract of sale,
notwithstanding that it was petitioner who plainly breached the terms of their contract when he
did not pay the stipulated price on time, leaving private respondent desperate to find other
sources of funds to pay off his loan. Lastly, petitioner did not substantiate by clear and
convincing proof, his allegation that he was ready and willing to pay respondent. We are more
inclined to believe his claim of readiness to pay was an afterthought intended to evade the
consequence of his breach. There is no record to show the existence of such amount, which
could have been reflected, at the very least, in a bank account in his name, if indeed one existed;
or, alternatively, the proper deposit made in court which could serve as a formal tender of
payment.[44] Thus, we find the award of moral and exemplary damages proper.

WHEREFORE, the petition is DENIED. The assailed decision dated April 30, 1997 of the
Court of Appeals in CA G.R. CV No. 39949, affirming the Regional Trial Court decision and
deleting the award of attorneys fees, is hereby AFFIRMED. Costs against the petitioner.
SO ORDERED.

G.R. No. 111238 January 25, 1995

ADELFA PROPERTIES, INC., petitioner,
vs.
COURT OF APPEALS, ROSARIO JIMENEZ-CASTAEDA and SALUD JIMENEZ, respondents.

REGALADO, J.:
The main issues presented for resolution in this petition for review on certiorari of the judgment of
respondent Court of appeals, dated April 6, 1993, in CA-G.R. CV No. 34767 1 are (1) whether of not
the "Exclusive Option to Purchase" executed between petitioner Adelfa Properties, Inc. and private
respondents Rosario Jimenez-Castaeda and Salud Jimenez is an option contract; and (2) whether or not
there was a valid suspension of payment of the purchase price by said petitioner, and the legal effects
thereof on the contractual relations of the parties.
The records disclose the following antecedent facts which culminated in the present appellate
review, to wit:
1. Herein private respondents and their brothers, Jose and Dominador Jimenez, were the registered
co-owners of a parcel of land consisting of 17,710 square meters, covered by Transfer Certificate of
Title (TCT) No. 309773, 2situated in Barrio Culasi, Las Pias, Metro Manila.
2. On July 28, 1988, Jose and Dominador Jimenez sold their share consisting of one-half of said
parcel of land, specifically the eastern portion thereof, to herein petitioner pursuant to a "Kasulatan
sa Bilihan ng Lupa." 3Subsequently, a "Confirmatory Extrajudicial Partition Agreement" 4 was executed by

the Jimenezes, wherein the eastern portion of the subject lot, with an area of 8,855 square meters was
adjudicated to Jose and Dominador Jimenez, while the western portion was allocated to herein private
respondents.

3. Thereafter, herein petitioner expressed interest in buying the western portion of the property from
private respondents. Accordingly, on November 25, 1989, an "Exclusive Option to Purchase" 5 was
executed between petitioner and private respondents, under the following terms and conditions:
1. The selling price of said 8,655 square meters of the subject property is TWO
MILLION EIGHT HUNDRED FIFTY SIX THOUSAND ONE HUNDRED FIFTY
PESOS ONLY (P2,856,150.00)
2. The sum of P50,000.00 which we received from ADELFA PROPERTIES, INC. as
an option money shall be credited as partial payment upon the consummation of the
sale and the balance in the sum of TWO MILLION EIGHT HUNDRED SIX
THOUSAND ONE HUNDRED FIFTY PESOS (P2,806,150.00) to be paid on or
before November 30, 1989;
3. In case of default on the part of ADELFA PROPERTIES, INC. to pay said balance
in accordance with paragraph 2 hereof, this option shall be cancelled and 50% of the
option money to be forfeited in our favor and we will refund the remaining 50% of
said money upon the sale of said property to a third party;
4. All expenses including the corresponding capital gains tax, cost of documentary
stamps are for the account of the VENDORS, and expenses for the registration of
the deed of sale in the Registry of Deeds are for the account of ADELFA
PROPERTIES, INC.
Considering, however, that the owner's copy of the certificate of title issued to respondent Salud
Jimenez had been lost, a petition for the re-issuance of a new owner's copy of said certificate of title
was filed in court through Atty. Bayani L. Bernardo, who acted as private respondents' counsel.
Eventually, a new owner's copy of the certificate of title was issued but it remained in the possession
of Atty. Bernardo until he turned it over to petitioner Adelfa Properties, Inc.
4. Before petitioner could make payment, it received summons 6 on November 29, 1989, together with
a copy of a complaint filed by the nephews and nieces of private respondents against the latter, Jose and
Dominador Jimenez, and herein petitioner in the Regional Trial Court of Makati, docketed as Civil Case
No. 89-5541, for annulment of the deed of sale in favor of Household Corporation and recovery of
ownership of the property covered by TCT No. 309773. 7
5. As a consequence, in a letter dated November 29, 1989, petitioner informed private respondents
that it would hold payment of the full purchase price and suggested that private respondents settle
the case with their nephews and nieces, adding that ". . . if possible, although November 30, 1989 is
a holiday, we will be waiting for you and said plaintiffs at our office up to 7:00 p.m." 8 Another letter of
the same tenor and of even date was sent by petitioner to Jose and Dominador Jimenez. 9 Respondent
Salud Jimenez refused to heed the suggestion of petitioner and attributed the suspension of payment of
the purchase price to "lack of word of honor."

6. On December 7, 1989, petitioner caused to be annotated on the title of the lot its option contract
with private respondents, and its contract of sale with Jose and Dominador Jimenez, as Entry No.
1437-4 and entry No. 1438-4, respectively.
7. On December 14, 1989, private respondents sent Francisca Jimenez to see Atty. Bernardo, in his
capacity as petitioner's counsel, and to inform the latter that they were cancelling the transaction. In
turn, Atty. Bernardo offered to pay the purchase price provided that P500,000.00 be deducted
therefrom for the settlement of the civil case. This was rejected by private respondents. On
December 22, 1989, Atty. Bernardo wrote private respondents on the same matter but this time
reducing the amount from P500,000.00 to P300,000.00, and this was also rejected by the latter.
8. On February 23, 1990, the Regional Trial Court of Makati dismissed Civil Case No. 89-5541.
Thus, on February 28, 1990, petitioner caused to be annotated anew on TCT No. 309773 the
exclusive option to purchase as Entry No. 4442-4.
9. On the same day, February 28, 1990, private respondents executed a Deed of Conditional
Sale 10 in favor of Emylene Chua over the same parcel of land for P3,029,250, of which P1,500,000.00
was paid to private respondents on said date, with the balance to be paid upon the transfer of title to the
specified one-half portion.
10. On April 16, 1990, Atty. Bernardo wrote private respondents informing the latter that in view of
the dismissal of the case against them, petitioner was willing to pay the purchase price, and he
requested that the corresponding deed of absolute sale be executed. 11 This was ignored by private
respondents.
11. On July 27, 1990, private respondents' counsel sent a letter to petitioner enclosing therein a
check for P25,000.00 representing the refund of fifty percent of the option money paid under the
exclusive option to purchase. Private respondents then requested petitioner to return the owner's
duplicate copy of the certificate of title of respondent Salud Jimenez. 12 Petitioner failed to surrender
the certificate of title, hence private respondents filed Civil Case No. 7532 in the Regional Trial Court of
Pasay City, Branch 113, for annulment of contract with damages, praying, among others, that the
exclusive option to purchase be declared null and void; that defendant, herein petitioner, be ordered to
return the owner's duplicate certificate of title; and that the annotation of the option contract on TCT No.
309773 be cancelled. Emylene Chua, the subsequent purchaser of the lot, filed a complaint in
intervention.
12. The trial court rendered judgment 13 therein on September 5, 1991 holding that the agreement
entered into by the parties was merely an option contract, and declaring that the suspension of payment
by herein petitioner constituted a counter-offer which, therefore, was tantamount to a rejection of the
option. It likewise ruled that herein petitioner could not validly suspend payment in favor of private
respondents on the ground that the vindicatory action filed by the latter's kin did not involve the western
portion of the land covered by the contract between petitioner and private respondents, but the eastern
portion thereof which was the subject of the sale between petitioner and the brothers Jose and
Dominador Jimenez. The trial court then directed the cancellation of the exclusive option to purchase,
declared the sale to intervenor Emylene Chua as valid and binding, and ordered petitioner to pay
damages and attorney's fees to private respondents, with costs.

13. On appeal, respondent Court of appeals affirmed in toto the decision of the court a quo and held
that the failure of petitioner to pay the purchase price within the period agreed upon was tantamount
to an election by petitioner not to buy the property; that the suspension of payment constituted an
imposition of a condition which was actually a counter-offer amounting to a rejection of the option;
and that Article 1590 of the Civil Code on suspension of payments applies only to a contract of sale
or a contract to sell, but not to an option contract which it opined was the nature of the document
subject of the case at bar. Said appellate court similarly upheld the validity of the deed of conditional
sale executed by private respondents in favor of intervenor Emylene Chua.
In the present petition, the following assignment of errors are raised:
1. Respondent court of appeals acted with grave abuse of discretion in making its finding that the
agreement entered into by petitioner and private respondents was strictly an option contract;
2. Granting arguendo that the agreement was an option contract, respondent court of Appeals acted
with grave abuse of discretion in grievously failing to consider that while the option period had not
lapsed, private respondents could not unilaterally and prematurely terminate the option period;
3. Respondent Court of Appeals acted with grave abuse of discretion in failing to appreciate fully the
attendant facts and circumstances when it made the conclusion of law that Article 1590 does not
apply; and
4. Respondent Court of Appeals acted with grave abuse of discretion in conforming with the sale in
favor of appellee Ma. Emylene Chua and the award of damages and attorney's fees which are not
only excessive, but also without in fact and in law. 14
An analysis of the facts obtaining in this case, as well as the evidence presented by the parties,
irresistibly leads to the conclusion that the agreement between the parties is a contract to sell, and
not an option contract or a contract of sale.
I
1. In view of the extended disquisition thereon by respondent court, it would be worthwhile at this
juncture to briefly discourse on the rationale behind our treatment of the alleged option contract as a
contract to sell, rather than a contract of sale. The distinction between the two is important for in
contract of sale, the title passes to the vendee upon the delivery of the thing sold; whereas in a
contract to sell, by agreement the ownership is reserved in the vendor and is not to pass until the full
payment of the price. In a contract of sale, the vendor has lost and cannot recover ownership until
and unless the contract is resolved or rescinded; whereas in a contract to sell, title is retained by the
vendor until the full payment of the price, such payment being a positive suspensive condition and
failure of which is not a breach but an event that prevents the obligation of the vendor to convey title
from becoming effective. Thus, a deed of sale is considered absolute in nature where there is neither
a stipulation in the deed that title to the property sold is reserved in the seller until the full payment of
the price, nor one giving the vendor the right to unilaterally resolve the contract the moment the
buyer fails to pay within a fixed period. 15

There are two features which convince us that the parties never intended to transfer ownership to
petitioner except upon the full payment of the purchase price. Firstly, the exclusive option to
purchase, although it provided for automatic rescission of the contract and partial forfeiture of the
amount already paid in case of default, does not mention that petitioner is obliged to return
possession or ownership of the property as a consequence of non-payment. There is no stipulation
anent reversion or reconveyance of the property to herein private respondents in the event that
petitioner does not comply with its obligation. With the absence of such a stipulation, although there
is a provision on the remedies available to the parties in case of breach, it may legally be inferred
that the parties never intended to transfer ownership to the petitioner to completion of payment of the
purchase price.
In effect, there was an implied agreement that ownership shall not pass to the purchaser until he had
fully paid the price. Article 1478 of the civil code does not require that such a stipulation be expressly
made. Consequently, an implied stipulation to that effect is considered valid and, therefore, binding
and enforceable between the parties. It should be noted that under the law and jurisprudence, a
contract which contains this kind of stipulation is considered a contract to sell.
Moreover, that the parties really intended to execute a contract to sell, and not a contract of sale, is
bolstered by the fact that the deed of absolute sale would have been issued only upon the payment
of the balance of the purchase price, as may be gleaned from petitioner's letter dated April 16,
1990 16 wherein it informed private respondents that it "is now ready and willing to pay you simultaneously
with the execution of the corresponding deed of absolute sale."
Secondly, it has not been shown there was delivery of the property, actual or constructive, made to
herein petitioner. The exclusive option to purchase is not contained in a public instrument the
execution of which would have been considered equivalent to delivery. 17 Neither did petitioner take
actual, physical possession of the property at any given time. It is true that after the reconstitution of
private respondents' certificate of title, it remained in the possession of petitioner's counsel, Atty. Bayani L.
Bernardo, who thereafter delivered the same to herein petitioner. Normally, under the law, such
possession by the vendee is to be understood as a delivery. 18 However, private respondents explained
that there was really no intention on their part to deliver the title to herein petitioner with the purpose of
transferring ownership to it. They claim that Atty. Bernardo had possession of the title only because he
was their counsel in the petition for reconstitution. We have no reason not to believe this explanation of
private respondents, aside from the fact that such contention was never refuted or contradicted by
petitioner.
2. Irrefragably, the controverted document should legally be considered as a perfected contract to
sell. On this particular point, therefore, we reject the position and ratiocination of respondent Court of
Appeals which, while awarding the correct relief to private respondents, categorized the instrument
as "strictly an option contract."
The important task in contract interpretation is always the ascertainment of the intention of the
contracting parties and that task is, of course, to be discharged by looking to the words they used to
project that intention in their contract, all the words not just a particular word or two, and words in
context not words standing alone. 19Moreover, judging from the subsequent acts of the parties which will
hereinafter be discussed, it is undeniable that the intention of the parties was to enter into a contract to
sell. 20 In addition, the title of a contract does not necessarily determine its true nature. 21 Hence, the fact

that the document under discussion is entitled "Exclusive Option to Purchase" is not controlling where the
text thereof shows that it is a contract to sell.

An option, as used in the law on sales, is a continuing offer or contract by which the owner stipulates
with another that the latter shall have the right to buy the property at a fixed price within a certain
time, or under, or in compliance with, certain terms and conditions, or which gives to the owner of the
property the right to sell or demand a sale. It is also sometimes called an "unaccepted offer." An
option is not of itself a purchase, but merely secures the privilege to buy. 22 It is not a sale of property
but a sale of property but a sale of the right to purchase. 23 It is simply a contract by which the owner of
property agrees with another person that he shall have the right to buy his property at a fixed price within
a certain time. He does not sell his land; he does not then agree to sell it; but he does sell something, that
it is, the right or privilege to buy at the election or option of the other party. 24 Its distinguishing
characteristic is that it imposes no binding obligation on the person holding the option, aside from the
consideration for the offer. Until acceptance, it is not, properly speaking, a contract, and does not vest,
transfer, or agree to transfer, any title to, or any interest or right in the subject matter, but is merely a
contract by which the owner of property gives the optionee the right or privilege of accepting the offer and
buying the property on certain terms. 25
On the other hand, a contract, like a contract to sell, involves a meeting of minds two persons
whereby one binds himself, with respect to the other, to give something or to render some
service. 26 Contracts, in general, are perfected by mere consent, 27 which is manifested by the meeting of
the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer
must be certain and the acceptance absolute. 28
The distinction between an "option" and a contract of sale is that an option is an unaccepted offer. It
states the terms and conditions on which the owner is willing to sell the land, if the holder elects to
accept them within the time limited. If the holder does so elect, he must give notice to the other party,
and the accepted offer thereupon becomes a valid and binding contract. If an acceptance is not
made within the time fixed, the owner is no longer bound by his offer, and the option is at an end. A
contract of sale, on the other hand, fixes definitely the relative rights and obligations of both parties
at the time of its execution. The offer and the acceptance are concurrent, since the minds of the
contracting parties meet in the terms of the agreement. 29
A perusal of the contract in this case, as well as the oral and documentary evidence presented by
the parties, readily shows that there is indeed a concurrence of petitioner's offer to buy and private
respondents' acceptance thereof. The rule is that except where a formal acceptance is so required,
although the acceptance must be affirmatively and clearly made and must be evidenced by some
acts or conduct communicated to the offeror, it may be made either in a formal or an informal
manner, and may be shown by acts, conduct, or words of the accepting party that clearly manifest a
present intention or determination to accept the offer to buy or sell. Thus, acceptance may be shown
by the acts, conduct, or words of a party recognizing the existence of the contract of sale. 30
The records also show that private respondents accepted the offer of petitioner to buy their property
under the terms of their contract. At the time petitioner made its offer, private respondents suggested
that their transfer certificate of title be first reconstituted, to which petitioner agreed. As a matter of
fact, it was petitioner's counsel, Atty. Bayani L. Bernardo, who assisted private respondents in filing a
petition for reconstitution. After the title was reconstituted, the parties agreed that petitioner would

pay either in cash or manager's check the amount of P2,856,150.00 for the lot. Petitioner was
supposed to pay the same on November 25, 1989, but it later offered to make a down payment of
P50,000.00, with the balance of P2,806,150.00 to be paid on or before November 30, 1989. Private
respondents agreed to the counter-offer made by petitioner. 31 As a result, the so-called exclusive
option to purchase was prepared by petitioner and was subsequently signed by private respondents,
thereby creating a perfected contract to sell between them.
It cannot be gainsaid that the offer to buy a specific piece of land was definite and certain, while the
acceptance thereof was absolute and without any condition or qualification. The agreement as to the
object, the price of the property, and the terms of payment was clear and well-defined. No other
significance could be given to such acts that than they were meant to finalize and perfect the
transaction. The parties even went beyond the basic requirements of the law by stipulating that "all
expenses including the corresponding capital gains tax, cost of documentary stamps are for the
account of the vendors, and expenses for the registration of the deed of sale in the Registry of
Deeds are for the account of Adelfa properties, Inc." Hence, there was nothing left to be done except
the performance of the respective obligations of the parties.
We do not subscribe to private respondents' submission, which was upheld by both the trial court
and respondent court of appeals, that the offer of petitioner to deduct P500,000.00, (later reduced to
P300,000.00) from the purchase price for the settlement of the civil case was tantamount to a
counter-offer. It must be stressed that there already existed a perfected contract between the parties
at the time the alleged counter-offer was made. Thus, any new offer by a party becomes binding only
when it is accepted by the other. In the case of private respondents, they actually refused to concur
in said offer of petitioner, by reason of which the original terms of the contract continued to be
enforceable.
At any rate, the same cannot be considered a counter-offer for the simple reason that petitioner's
sole purpose was to settle the civil case in order that it could already comply with its obligation. In
fact, it was even indicative of a desire by petitioner to immediately comply therewith, except that it
was being prevented from doing so because of the filing of the civil case which, it believed in good
faith, rendered compliance improbable at that time. In addition, no inference can be drawn from that
suggestion given by petitioner that it was totally abandoning the original contract.
More importantly, it will be noted that the failure of petitioner to pay the balance of the purchase price
within the agreed period was attributed by private respondents to "lack of word of honor" on the part
of the former. The reason of "lack of word of honor" is to us a clear indication that private
respondents considered petitioner already bound by its obligation to pay the balance of the
consideration. In effect, private respondents were demanding or exacting fulfillment of the obligation
from herein petitioner. with the arrival of the period agreed upon by the parties, petitioner was
supposed to comply with the obligation incumbent upon it to perform, not merely to exercise an
option or a right to buy the property.
The obligation of petitioner on November 30, 1993 consisted of an obligation to give something, that
is, the payment of the purchase price. The contract did not simply give petitioner the discretion to
pay for the property.32 It will be noted that there is nothing in the said contract to show that petitioner was
merely given a certain period within which to exercise its privilege to buy. The agreed period was intended

to give time to herein petitioner within which to fulfill and comply with its obligation, that is, to pay the
balance of the purchase price. No evidence was presented by private respondents to prove otherwise.

The test in determining whether a contract is a "contract of sale or purchase" or a mere "option" is
whether or not the agreement could be specifically enforced. 33 There is no doubt that the obligation of
petitioner to pay the purchase price is specific, definite and certain, and consequently binding and
enforceable. Had private respondents chosen to enforce the contract, they could have specifically
compelled petitioner to pay the balance of P2,806,150.00. This is distinctly made manifest in the contract
itself as an integral stipulation, compliance with which could legally and definitely be demanded from
petitioner as a consequence.
This is not a case where no right is as yet created nor an obligation declared, as where something
further remains to be done before the buyer and seller obligate themselves. 34 An agreement is only
an "option" when no obligation rests on the party to make any payment except such as may be agreed on
between the parties as consideration to support the option until he has made up his mind within the time
specified. 35 An option, and not a contract to purchase, is effected by an agreement to sell real estate for
payments to be made within specified time and providing forfeiture of money paid upon failure to make
payment, where the purchaser does not agree to purchase, to make payment, or to bind himself in any
way other than the forfeiture of the payments made. 36 As hereinbefore discussed, this is not the situation
obtaining in the case at bar.
While there is jurisprudence to the effect that a contract which provides that the initial payment shall
be totally forfeited in case of default in payment is to be considered as an option contract, 37 still we
are not inclined to conform with the findings of respondent court and the court a quo that the contract
executed between the parties is an option contract, for the reason that the parties were already
contemplating the payment of the balance of the purchase price, and were not merely quoting an agreed
value for the property. The term "balance," connotes a remainder or something remaining from the original
total sum already agreed upon.
In other words, the alleged option money of P50,000.00 was actually earnest money which was
intended to form part of the purchase price. The amount of P50,000.00 was not distinct from the
cause or consideration for the sale of the property, but was itself a part thereof. It is a statutory rule
that whenever earnest money is given in a contract of sale, it shall be considered as part of the price
and as proof of the perfection of the contract. 38 It constitutes an advance payment and must, therefore,
be deducted from the total price. Also, earnest money is given by the buyer to the seller to bind the
bargain.
There are clear distinctions between earnest money and option money, viz.: (a) earnest money is
part of the purchase price, while option money ids the money given as a distinct consideration for an
option contract; (b) earnest money is given only where there is already a sale, while option money
applies to a sale not yet perfected; and (c) when earnest money is given, the buyer is bound to pay
the balance, while when the would-be buyer gives option money, he is not required to buy. 39
The aforequoted characteristics of earnest money are apparent in the so-called option contract
under review, even though it was called "option money" by the parties. In addition, private
respondents failed to show that the payment of the balance of the purchase price was only a
condition precedent to the acceptance of the offer or to the exercise of the right to buy. On the

contrary, it has been sufficiently established that such payment was but an element of the
performance of petitioner's obligation under the contract to sell. 40
II
1. This brings us to the second issue as to whether or not there was valid suspension of payment of
the purchase price by petitioner and the legal consequences thereof. To justify its failure to pay the
purchase price within the agreed period, petitioner invokes Article 1590 of the civil Code which
provides:
Art. 1590. Should the vendee be disturbed in the possession or ownership of the
thing acquired, or should he have reasonable grounds to fear such disturbance, by a
vindicatory action or a foreclosure of mortgage, he may suspend the payment of the
price until the vendor has caused the disturbance or danger to cease, unless the
latter gives security for the return of the price in a proper case, or it has been
stipulated that, notwithstanding any such contingency, the vendee shall be bound to
make the payment. A mere act of trespass shall not authorize the suspension of the
payment of the price.
Respondent court refused to apply the aforequoted provision of law on the erroneous assumption
that the true agreement between the parties was a contract of option. As we have hereinbefore
discussed, it was not an option contract but a perfected contract to sell. Verily, therefore, Article 1590
would properly apply.
Both lower courts, however, are in accord that since Civil Case No. 89-5541 filed against the parties
herein involved only the eastern half of the land subject of the deed of sale between petitioner and
the Jimenez brothers, it did not, therefore, have any adverse effect on private respondents' title and
ownership over the western half of the land which is covered by the contract subject of the present
case. We have gone over the complaint for recovery of ownership filed in said case 41 and we are not
persuaded by the factual findings made by said courts. At a glance, it is easily discernible that, although
the complaint prayed for the annulment only of the contract of sale executed between petitioner and the
Jimenez brothers, the same likewise prayed for the recovery of therein plaintiffs' share in that parcel of
land specifically covered by TCT No. 309773. In other words, the plaintiffs therein were claiming to be coowners of the entire parcel of land described in TCT No. 309773, and not only of a portion thereof nor, as
incorrectly interpreted by the lower courts, did their claim pertain exclusively to the eastern half
adjudicated to the Jimenez brothers.
Such being the case, petitioner was justified in suspending payment of the balance of the purchase
price by reason of the aforesaid vindicatory action filed against it. The assurance made by private
respondents that petitioner did not have to worry about the case because it was pure and simple
harassment 42 is not the kind of guaranty contemplated under the exceptive clause in Article 1590
wherein the vendor is bound to make payment even with the existence of a vindicatory action if the
vendee should give a security for the return of the price.
2. Be that as it may, and the validity of the suspension of payment notwithstanding, we find and hold
that private respondents may no longer be compelled to sell and deliver the subject property to
petitioner for two reasons, that is, petitioner's failure to duly effect the consignation of the purchase

price after the disturbance had ceased; and, secondarily, the fact that the contract to sell had been
validly rescinded by private respondents.
The records of this case reveal that as early as February 28, 1990 when petitioner caused its
exclusive option to be annotated anew on the certificate of title, it already knew of the dismissal of
civil Case No. 89-5541. However, it was only on April 16, 1990 that petitioner, through its counsel,
wrote private respondents expressing its willingness to pay the balance of the purchase price upon
the execution of the corresponding deed of absolute sale. At most, that was merely a notice to pay.
There was no proper tender of payment nor consignation in this case as required by law.
The mere sending of a letter by the vendee expressing the intention to
pay, without the accompanying payment, is not considered a valid tender of payment. 43 Besides, a
mere tender of payment is not sufficient to compel private respondents to deliver the property and
execute the deed of absolute sale. It is consignation which is essential in order to extinguish petitioner's
obligation to pay the balance of the purchase price. 44 The rule is different in case of an option
contract 45 or in legal redemption or in a sale with right to repurchase, 46 wherein consignation is not
necessary because these cases involve an exercise of a right or privilege (to buy, redeem or repurchase)
rather than the discharge of an obligation, hence tender of payment would be sufficient to preserve the
right or privilege. This is because the provisions on consignation are not applicable when there is no
obligation to pay. 47 A contract to sell, as in the case before us, involves the performance of an obligation,
not merely the exercise of a privilege of a right. consequently, performance or payment may be effected
not by tender of payment alone but by both tender and consignation.
Furthermore, petitioner no longer had the right to suspend payment after the disturbance ceased
with the dismissal of the civil case filed against it. Necessarily, therefore, its obligation to pay the
balance again arose and resumed after it received notice of such dismissal. Unfortunately, petitioner
failed to seasonably make payment, as in fact it has deposit the money with the trial court when this
case was originally filed therein.
By reason of petitioner's failure to comply with its obligation, private respondents elected to resort to
and did announce the rescission of the contract through its letter to petitioner dated July 27, 1990.
That written notice of rescission is deemed sufficient under the circumstances. Article 1592 of the
Civil Code which requires rescission either by judicial action or notarial act is not applicable to a
contract to sell. 48 Furthermore, judicial action for rescission of a contract is not necessary where the
contract provides for automatic rescission in case of breach, 49 as in the contract involved in the present
controversy.
We are not unaware of the ruling in University of the Philippines vs. De los Angeles, etc. 50 that the
right to rescind is not absolute, being ever subject to scrutiny and review by the proper court. It is our
considered view, however, that this rule applies to a situation where the extrajudicial rescission is
contested by the defaulting party. In other words, resolution of reciprocal contracts may be made
extrajudicially unless successfully impugned in court. If the debtor impugns the declaration, it shall be
subject to judicial determination 51 otherwise, if said party does not oppose it, the extrajudicial rescission
shall have legal effect. 52
In the case at bar, it has been shown that although petitioner was duly furnished and did receive a
written notice of rescission which specified the grounds therefore, it failed to reply thereto or protest

against it. Its silence thereon suggests an admission of the veracity and validity of private
respondents' claim. 53 Furthermore, the initiative of instituting suit was transferred from the rescinder to
the defaulter by virtue of the automatic rescission clause in the contract. 54 But then, the records bear out
the fact that aside from the lackadaisical manner with which petitioner treated private respondents' latter
of cancellation, it utterly failed to seriously seek redress from the court for the enforcement of its alleged
rights under the contract. If private respondents had not taken the initiative of filing Civil Case No. 7532,
evidently petitioner had no intention to take any legal action to compel specific performance from the
former. By such cavalier disregard, it has been effectively estopped from seeking the affirmative relief it
now desires but which it had theretofore disdained.
WHEREFORE, on the foregoing modificatory premises, and considering that the same result has
been reached by respondent Court of Appeals with respect to the relief awarded to private
respondents by the court a quo which we find to be correct, its assailed judgment in CA-G.R. CV No.
34767 is hereby AFFIRMED.
SO ORDERED.

G.R. No. 84751 June 6, 1990

SPOUSES EDUARDO and ANN AGUSTIN, petitioners,
vs.
HON. COURT OF APPEALS and LABRADOR DEVELOPMENT CORPORATION, respondents.
Victor D. Cruz for petitioners.
Singson, Mamaril & Associates for private respondent.

REGALADO, J.:
This petition for review on certiorari impugns the decision of the Court of Appeals, dated March 28,
1988, with the following decretal portion:
WHEREFORE, the present appeal is accordingly resolved deleting the adjudicated
award of P20,000.00 as exemplary damages, and otherwise by AFFIRMING the
Decision dated October 10, 1985 in Civil Case No. Q-42390 entitled "Labrador
Development Corporation vs. Sps. Eduardo Agustin, et al." in all other respects.

Without pronouncement as to costs. 1

Said judgment of respondent court is based on the findings of fact set out in its decision thus:
Plaintiff-appellee, being a subdivision developer, owned Lot 14, Block 1 of the San
Pedro Compound IV at Tandang Sora, Quezon City, under Transfer Certificate of Title
No. 277209. On November 7, 1981, plaintiff-appellee agreed to sell said parcel of
land to defendants-appellants on a package deal together with a residential house
per House Plan Model B-203 to be constructed thereon for the sum of P202,980.00
(Exh. 'B'). As therein stipulated, the defendants-appellants were to pay P42,980.00
as equity-P30,133.00 as down payment and the balance of P12,847.00 upon
completion and de very of the property, the other P160,000.00 to have been funded
through a Pag-Ibig Fund loan to be applied for by defendants-appellants. Central to
the above was a stipulation that in the event the housing loan be insufficient to pay
the full contract price owing, they shall pay the same in cash on or before occupancy
and acceptance of the housing unit (ref. Exh. 'B', para. [e]). The agreement further
provided
(f) Failure of the Vendee to comply with any or all of the above stipulations shall ipso
facto cancel this contract to sell; and thereupon, this contract to sell or any other
contract executed in connection thereof, shall be of no further force and effect; and
the title to the property, if already transferred in the name of the Vendee, shall
automatically revert to the Vendor.
The foregoing stipulation encompassed the necessity of transferring title to the lot to
defendants-appellants as an accommodation to enable their application for a housing
loan in their names.
Hence, plaintiff-appellee executed a deed of sale over the lot (Exh. 'C') in favor of
defendants-appellants, without additional consideration beyond the P30,133.00 down
payment adverted to, and the issuance to said defendants-appellants of Transfer
Certificate of title No. 29435 * (Exh. 'D'). Thusly accommodated, defendants-appellants applied for a
P160,000.00 housing loan with the First Summa Savings and Mortgage Bank as an accredited financing institution.

After initial approval in the amount applied for, the Pag-ibig housing loan was
downgraded to P128,000.00 after reassessment. Under date of December 18, 1982,
plaintiff-appellee apprised defendants-appellants of said development (Exh. 'F')
enclosing the formal bank December 16, 1982 letter (Exh. 'E') requiring a coborrower related within the fourth degree of consanguinity should the defendantsappellants desire approval of an increased loan amount.
Defendants-appellants appear to have disdained a reply to plaintiff-appellee's said
letter. Thus, under date of December 28, 1982, plaintiff-appellee again wrote a
follow- up letter to defendants-appellants (Exh. 'G') affording the latter time to decide
on their options, on pain of enforcement of the terms of the contract to sell.

Failing reaction from defendants-appellants thereto, plaintiff-appellee resorted to

enforcement of the contractual stipulations under date of March 1, 1983 (Exh. 'H')
and remitted an enclosed check for P30,133.00 (Exh. 'I') representing the equity paid
in by defendants-appellants. The latter accepted said check and deposited same into
their account.
Instead of reconveyance of title to the lot, defendants-appellants however sought
time to buy the property; plaintiff-appellee agreed provided that payment be effected
in cash. Defendants-appellants failed to make such payment in cash, despite the
lapse of a second 30-day period afforded therefor. Thereupon, plaintiff-appellee
demanded anew for reconveyance in a July 27, 1984 letter (Exh. 'J').
On August 8, 1984, plaintiff-appellee filed Civil Case No. Q42390 for reconveyance
and damage. In answer, defendants-appellants maintained inter alia that approval of
a P160,000.00 housing loan had been assured upon completion of the house with
proof of its delivery and acceptance, but that acceptance could not be reasonably
given by them in that certain specifications for the housing unit had not been
complied with. 2
After trial on the merits, the lower court rendered judgment in favor of private respondent, the
dispositive part whereof reads:
WHEREFORE, judgment is hereby rendered ordering defendants, jointly and
severally:
a) to reconvey to plaintiff the parcel of land covered by Transfer Certificate of Title
No. 284735 ** of the Register of Deeds, Quezon City;
b) to pay plaintiff the sum of P20,000.00 as exemplary damages;
c) to pay plaintiff the sum of P5,000.00 as attorney's fees, plus costs of the suit.

which judgment, as earlier stated, was affirmed by respondent court but with the deletion of the
award of exemplary damages.
On August 22, 1988, respondent court denied petitioners' motion for reconsideration, hence this
present petition raising the following issues:
I
The 'Contract to Sell' dated November 7, 1981 creates a reciprocal obligation
between Labrador Development Corporation, as seller, and spouses Eduardo and
Ann Agustin, as buyer, of the questioned house and lot.
II

The failure of Labrador Development Corporation (LADECO) to complete

construction of the housing unit pursuant to the 'Contract to Sell' constitutes a
substantial and serious breach thereof as would bar LADECO from executing the
option of cancellation (rescission) of the 'Contract to Sell' under Article 1191 of the
Civil Code.
III
The justifiable refusal of Spouses Agustin to sign the 'House Acceptance Form'
certifying that they accept the house as 100% complete constitutes merely a slight or
casual breach of the 'Contract to Sell' which does not warrant the unilateral
cancellation (rescission,) of the contract under par. 4 (f) thereof and Article 1191 of
the Civil Code.
IV
The remedy of reconveyance of title of the property in question cannot be availed of
by LADECO as there was no valid, binding and effective cancellation (rescission) of
the 'Contract to Sell'.
V
Private respondent LADECO is not entitled to attorney's fees of P5,000.00 under the
facts and circumstances of the case. 4
We agree with the Court of Appeals that reconveyance is proper in this case. Herein petitioners are
already barred from questioning the validity of the cancellation of the contract to sell by their
acquiescence thereto. Their acceptance and encashment of the checks representing the total
amount paid by them to private respondent as equity, coupled by their failure to object or file an
action, despite due notice, to question the validity of the extrajudicial cancellation of said contract
and to ask for specific performance for more than one year, clearly show that they assented to the
same.
Furthermore, after receiving the check refunding their equity payment incident to the reconveyance
desired by private respondents, petitioners, disregarding the original agreement of the parties,
offered to purchase anew the property in question to which private respondent agreed. This novatory
agreement, however, was not consummated as petitioners again failed to raise and pay the
purchase price despite two 30-day extensions. They never at that juncture questioned the propriety
of the rescission and reconveyance desired by private respondent. Obviously, extrajudicial
rescission produces legal effects where the other party does not oppose it. 5
Moreover, even assuming that there was no implied assent to the cancellation of the contract to sell,
reconveyance is still proper. The non-fulfillment by petitioners of their obligation to pay, which is a
suspensive condition to the obligation of private respondent to sell and deliver the house and lot,
rendered the contract to sell and the subsequent contract executed pursuant thereto ineffective and
without force and effect.

The contract between petitioners and private respondent is not an absolute sale but a conditional
sale or contract to sell, whereby ownership is retained by the vender until full payment of the
purchase price. Without such full payment, there is no obligation to sell and deliver. The subsequent
execution of the deed of absolute sale and the transfer and registration of the title of the lot in the
name of petitioners is of no moment, considering that the same, by mutual agreement of the parties,
was made without consideration and solely for the purpose of facilitating the approval and release of
the PAG-IBIG loan and not for the purpose of actually transferring ownership.
Under the contract to sell, the obligation of petitioners to completely pay the purchase price is a
condition precedent to the obligation of private respondent to sell and deliver the house as provided
in the contract to sell, which specifically states:
5. Upon complete payment of the VENDEE/S of the purchase price herein above
stated, and faithful compliance with all his obligations stipulated therein, the
VENDOR, agrees to execute a valid deed of sale in favor of the VENDEE/S and
cause the issuance of the Certificate of Title in the name of the latter, free from all
liens and encumbrances except those provided for in the Land Registration Act and
other laws, Presidential Decrees, General Orders, Letters of Instruction, Zoning
Ordinances, and the attached Deed of Restrictions, which form part of this
Contract; ... 6
The repeated failure and refusal of petitioners, despite due notice, to look for a co- borrower related
to them within the fourth degree of consanguinity as required by the bank in order to prevent the
downgrading of the loan, nor to communicate to private respondent the arrangement they intended
to make regarding the difference between the approved loan of P128,000.00 and the unpaid amount
of P160,000.00, clearly indicate their intention not to perform their obligations under the contract.
This constituted not only a substantial or serious breach, but prevented the happening of the
condition precedent which would give rise to the obligation of private respondent to sell and transfer
ownership of the house and lot to petitioners.
We have repeatedly ruled that:
In contracts to sell, where ownership is retained by the seller and is not to pass until
the full payment of the price, such payment, as we said is a positive suspensive
condition, the failure of which is not a breach, casual or serious, but simply an event
that prevented the obligation of the vendor to convey title from acquiring binding
force, in accordance with Article 1117 of the Old Civil Code. To argue that there was
only a casual breach is to proceed from the assumption that the contract is one of
absolute sale, where non-payment is a resolutory condition, which is not the case.
... appellant overlooks that its contract with appellee Myers is not the ordinary sale
envisaged by Article 1592, transferring ownership simultaneously with the delivery of
the real property sold, but one in which the vendor retained ownership of the
immovable object of the sale, merely undertaking to convey it provided the buyer
strictly complied with the terms of the contract (see paragraph [d], ante, page 5). In
suing to recover possession of the building from Maritime, appellee Myers is not after

the resolution or setting aside of the contract and the restoration of the parties to the
status quo ante, as contemplated by Article 1592, but precisely enforcing the
provisions of the agreement that it is no longer obligated to part with the ownership or
possession of the property because Maritime failed to comply with the specific
condition precedent, which is to pay the installment as they fell due.
The distinction between contracts of sale and contracts to sell with reserved title has
been recognized by this Court in repeated decisions upholding the power of
promissors under contracts to sell in case of failure of the other party to complete
payment, to extrajudicially terminate the operation of the contract, refuse conveyance
and retain the sums or installments already received, where such rights are
expressly provided for, as in the case at bar. 7
We repeat, the obligation of petitioners to fully comply with their undertakings was necessarily
determinative of the obligation of private respondent to complete the construction of the house.
Where one of the parties to a contract did not perform the undertaking which he was bound by the
terms of the agreement to perform, he is not entitled to insist upon the performance of the other
party. 8 For failure of one party to assume and perform the obligation imposed on him, the other patty
does not incur in delay. 9
Correspondingly, we reject the argument of petitioners that the failure of private respondent to
complete the construction of the house constitutes a substantial breach as would bar the latter from
cancelling the contract. Instead, the facts of this case persuade us to hold that petitioners were
merely posturing when, after being required to reconvey the premises, they came up with belated
complaints about the imperfections or incompleteness of the house involved, in the same manner
that they also pretended to be interested in purchasing the property but failed to do so after
importuning private respondents to grant them extensions of time for that purpose.
With the foregoing circumstances, reconveyance is proper and exigible pursuant to Paragraph 4 (f)
of the contract to sell quoted in the decision of respondent court, supra, and on the basic principle
that when an obligation has been extinguished or resolved, it is the duty of the court to require the
parties to surrender whatever they may have received from the other, and the parties must be
restored, as far as practicable, to their original situation. 10
The award to private respondent of attorney's fees, however, must be disallowed considering that
the award of exemplary damages was eliminated by respondent court and the text of the decision of
the trial court, which was aimed by the Court of Appeals, is bereft of any findings of fact and law to
justify such award. The accepted rule is that the reason for the award of attorney's fees must be
stated in the text of the court's decision; otherwise, if it is stated only in the dispositive portion of the
decision, the same must be disallowed on appeal. The award of attorney's fees being an exception
rather than the general rule, it is necessary for the court to make findings of facts and law that would
bring the case within the exception and justify the grant of such award. 11
WHEREFORE, except for the award of attorney's fees which is hereby deleted, the decision of
respondent Court of Appeals is hereby AFFIRMED.

SO ORDERED.

G.R. No. L-28602 September 29, 1970

UNIVERSITY OF THE PHILIPPINES, petitioner,
vs.
WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the COURT OF FIRST INSTANCE
IN QUEZON CITY, et al., respondents.
Office of the Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores and Special Counsel
Perfecto V. Fernandez for petitioner.
Norberto J. Quisumbing for private respondents.

REYES, J.B.L., J.:

Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No.
9435, are sought to be annulled in this petition for certiorari and prohibition, filed by herein petitioner
University of the Philippines (or UP) against the above-named respondent judge and the Associated
Lumber Manufacturing Company, Inc. (or ALUMCO). The first order, dated 25 February 1966,
enjoined UP from awarding logging rights over its timber concession (or Land Grant), situated at the
Lubayat areas in the provinces of Laguna and Quezon; the second order, dated 14 January 1967,
adjudged UP in contempt of court, and directed Sta. Clara Lumber Company, Inc. to refrain from
exercising logging rights or conducting logging operations on the concession; and the third order,
dated 12 December 1967, denied reconsideration of the order of contempt.
As prayed for in the petition, a writ of preliminary injunction against the enforcement or
implementation of the three (3) questioned orders was issued by this Court, per its resolution on 9
February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was segregated from the public domain and given as an
endowment to UP, an institution of higher learning, to be operated and developed for the purpose of
raising additional income for its support, pursuant to Act 3608;
That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under
which the latter was granted exclusive authority, for a period starting from the date of the agreement
to 31 December 1965, extendible for a further period of five (5) years by mutual agreement, to cut,
collect and remove timber from the Land Grant, in consideration of payment to UP of royalties, forest
fees, etc.; that ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it had

incurred an unpaid account of P219,362.94, which, despite repeated demands, it had failed to pay;
that after it had received notice that UP would rescind or terminate the logging agreement, ALUMCO
executed an instrument, entitled "Acknowledgment of Debt and Proposed Manner of Payments,"
dated 9 December 1964, which was approved by the president of UP, and which stipulated the
following:
3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are not
sufficient to liquidate the foregoing indebtedness of the DEBTOR in favor of the
CREDITOR, the balance outstanding after the said payments have been applied
shall be paid by the DEBTOR in full no later than June 30, 1965;
xxx xxx xxx
5. In the event that the DEBTOR fails to comply with any of its promises or
undertakings in this document, the DEBTOR agrees without reservation that the
CREDITOR shall have the right and the power to consider the Logging Agreement
dated December 2, 1960 as rescinded without the necessity of any judicial suit, and
the CREDITOR shall be entitled as a matter of right to Fifty Thousand Pesos
(P50,000.00) by way of and for liquidated damages;
ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from
9 December 1964 to 15 July 1965, in the amount of P61,133.74, in addition to the indebtedness that
it had previously acknowledged.
That on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date,
considered as rescinded and of no further legal effect the logging agreement that they had entered
in 1960; and on 7 September 1965, UP filed a complaint against ALUMCO, which was docketed as
Civil Case No. 9435 of the Court of First Instance of Rizal (Quezon City), for the collection or
payment of the herein before stated sums of money and alleging the facts hereinbefore specified,
together with other allegations; it prayed for and obtained an order, dated 30 September 1965, for
preliminary attachment and preliminary injunction restraining ALUMCO from continuing its logging
operations in the Land Grant.
That before the issuance of the aforesaid preliminary injunction UP had taken steps to have another
concessionaire take over the logging operation, by advertising an invitation to bid; that bidding was
conducted, and the concession was awarded to Sta. Clara Lumber Company, Inc.; the logging
contract was signed on 16 February 1966.
That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and
preliminary injunction but were denied by the court;
That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from conducting
the bidding; on 27 November 1965, it filed a second petition for preliminary injunction; and, on 25
February 1966, respondent judge issued the first of the questioned orders, enjoining UP from
awarding logging rights over the concession to any other party.

That UP received the order of 25 February 1966 after it had concluded its contract with Sta. Clara
Lumber Company, Inc., and said company had started logging operations.
That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order dated 14
January 1967, declared petitioner UP in contempt of court and, in the same order, directed Sta.
Clara Lumber Company, Inc., to refrain from exercising logging rights or conducting logging
operations in the concession.
The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12
December 1967.
Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is
embodied in Act 3608 and, therefore, conclusively known, respondent ALUMCO did not deny the
foregoing allegations in the petition. In its answer, respondent corrected itself by stating that the
period of the logging agreement is five (5) years - not seven (7) years, as it had alleged in its second
amended answer to the complaint in Civil Case No. 9435. It reiterated, however, its defenses in the
court below, which maybe boiled down to: blaming its former general manager, Cesar Guy, in not
turning over management of ALUMCO, thereby rendering it unable to pay the sum of P219,382.94;
that it failed to pursue the manner of payments, as stipulated in the "Acknowledgment of Debt and
Proposed Manner of Payments" because the logs that it had cut turned out to be rotten and could
not be sold to Sta. Clara Lumber Company, Inc., under its contract "to buy and sell" with said firm,
and which contract was referred and annexed to the "Acknowledgment of Debt and Proposed
Manner of Payments"; that UP's unilateral rescission of the logging contract, without a court order,
was invalid; that petitioner's supervisor refused to allow respondent to cut new logs unless the logs
previously cut during the management of Cesar Guy be first sold; that respondent was permitted to
cut logs in the middle of June 1965 but petitioner's supervisor stopped all logging operations on 15
July 1965; that it had made several offers to petitioner for respondent to resume logging operations
but respondent received no reply.
The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO rescinded,
and may disregard the same before any judicial pronouncement to that effect. Respondent ALUMCO
contended, and the lower court, in issuing the injunction order of 25 February 1966, apparently
sustained it (although the order expresses no specific findings in this regard), that it is only after a
final court decree declaring the contract rescinded for violation of its terms that U.P. could disregard
ALUMCO's rights under the contract and treat the agreement as breached and of no force or effect.
We find that position untenable.
In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and
Proposed Manner of Payments" that, upon default by the debtor ALUMCO, the creditor (UP) has
"the right and the power to consider, the Logging Agreement dated 2 December 1960 as rescinded
without the necessity of any judicial suit." As to such special stipulation, and in connection with
Article 1191 of the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al., L11897, 31 October 1964, 12 SCRA 276:

there is nothing in the law that prohibits the parties from entering into agreement that
violation of the terms of the contract would cause cancellation thereof, even without
court intervention. In other words, it is not always necessary for the injured party to
resort to court for rescission of the contract.
Of course, it must be understood that the act of party in treating a contract as cancelled or resolved
on account of infractions by the other contracting party must be made known to the other and is
always provisional, being ever subject to scrutiny and review by the proper court. If the other party
denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the
matter to court. Then, should the court, after due hearing, decide that the resolution of the contract
was not warranted, the responsible party will be sentenced to damages; in the contrary case, the
resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will conclusively and finally settle whether the action taken
was or was not correct in law. But the law definitely does not require that the contracting party who
believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until the final judgment of rescission
is rendered when the law itself requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203).
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by
respondent declaring that judicial action is necessary for the resolution of a reciprocal
obligation, 1 since in every case where the extrajudicial resolution is contested only the final award of the
court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this
sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain
contestable and subject to judicial invalidation, unless attack thereon should become barred by
acquiescence, estoppel or prescription.
Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach
of contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil
Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or
error by the rescinder the other party is not barred from questioning in court such abuse or error, the
practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting
suit, instead of the rescinder.
In fact, even without express provision conferring the power of cancellation upon one contracting
party, the Supreme Court of Spain, in construing the effect of Article 1124 of the Spanish Civil Code
(of which Article 1191 of our own Civil; Code is practically a reproduction), has repeatedly held that, a
resolution of reciprocal or synallagmatic contracts may be made extrajudicially unless successfully
impugned in court.
El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones
reciprocas para el caso de que uno de los obligados no cumpliese lo que le

incumbe, facultad que, segun jurisprudencia de este Tribunal, surge

immediatamente despuesque la otra parte incumplio su deber, sin necesidad de una
declaracion previa de los Tribunales. (Sent. of the Tr. Sup. of Spain, of 10 April 1929;
106 Jur. Civ. 897).
Segun reiterada doctrina de esta Sala, el Art. 1124 regula la resolucioncomo una
"facultad" atribuida a la parte perjudicada por el incumplimiento del contrato, la cual
tiene derecho do opcion entre exigir el cumplimientoo la resolucion de lo
convenido, que puede ejercitarse, ya en la via judicial, ya fuera de ella, por
declaracion del acreedor, a reserva, claro es, que si la declaracion de resolucion
hecha por una de las partes se impugna por la otra, queda aquella sometida el
examen y sancion de los Tribunale, que habran de declarar, en definitiva, bien hecha
la resolucion o por el contrario, no ajustada a Derecho. (Sent. TS of Spain, 16
November 1956; Jurisp. Aranzadi, 3, 447).
La resolucion de los contratos sinalagmaticos, fundada en el incumplimiento por una
de las partes de su respectiva prestacion, puedetener lugar con eficacia" 1. o Por la
declaracion de voluntad de la otra hecha extraprocesalmente, si no es impugnada en juicio luego con exito. y 2. 0 Por
la demanda de la perjudicada, cuando no opta por el cumplimientocon la indemnizacion de danos y perjuicios
realmente causados, siempre quese acredite, ademas, una actitud o conducta persistente y rebelde de laadversa o la
satisfaccion de lo pactado, a un hecho obstativo que de un modoabsoluto, definitivo o irreformable lo impida, segun el
art. 1.124, interpretado por la jurisprudencia de esta Sala, contenida en las Ss. de 12 mayo 1955 y 16 Nov. 1956, entre
otras, inspiradas por el principio del Derecho intermedio, recogido del Canonico, por el cual fragenti fidem, fides non
est servanda. (Ss. de 4 Nov. 1958 y 22 Jun. 1959.) (Emphasis supplied).

In the light of the foregoing principles, and considering that the complaint of petitioner University
made out aprima facie case of breach of contract and defaults in payment by respondent ALUMCO,
to the extent that the court below issued a writ of preliminary injunction stopping ALUMCO's logging
operations, and repeatedly denied its motions to lift the injunction; that it is not denied that the
respondent company had profited from its operations previous to the agreement of 5 December
1964 ("Acknowledgment of Debt and Proposed Manner of Payment"); that the excuses offered in the
second amended answer, such as the misconduct of its former manager Cesar Guy, and the rotten
condition of the logs in private respondent's pond, which said respondent was in a better position to
know when it executed the acknowledgment of indebtedness, do not constitute on their face
sufficient excuse for non-payment; and considering that whatever prejudice may be suffered by
respondent ALUMCO is susceptibility of compensation in damages, it becomes plain that the acts of
the court a quo in enjoining petitioner's measures to protect its interest without first receiving
evidence on the issues tendered by the parties, and in subsequently refusing to dissolve the
injunction, were in grave abuse of discretion, correctible by certiorari, since appeal was not available
or adequate. Such injunction, therefore, must be set aside.
For the reason that the order finding the petitioner UP in contempt of court has open appealed to the
Court of Appeals, and the case is pending therein, this Court abstains from making any
pronouncement thereon.
WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent court of
25 February 1966, granting the Associated Lumber Company's petition for injunction, is hereby set
aside. Let the records be remanded for further proceedings conformably to this opinion.

Filinvest Land vs. Court of Appeals (470 SCRA 57)

06MAR
FILINVEST LAND, INC., petitioner,
vs. THE HONORABLE COURT OF APPEALS, PHILIPPINE AMERICAN GENERAL INSURANCE
COMPANY and PACIFIC EQUIPMENT CORPORATION, respondents.
[G.R. No. 138980. September 20, 2005]
FACTS:
Petitioner awarded to respondent Pacific Equipment Corp (Pecorp) development of its residential
subdivisions, a contract amounting to P12,470,000.00. Pecorp posted two surety bonds to guarantee
faithful compliance. Both agreed that liquidated damages of P15,000/day shall be paid by Pecorp in case
of delay. Petitioner claimed that Pecorp failed to complete the works (94.53%) and claims for damages.
Pecorp on the other hand contended that their work stopped due to failure of petitioner to pay for certain

completed portion. RTC assigned a commissioner to evaluate the claims and counter-claims. The total
amount due to Pecorp was computed to be P1,881,867.66. Petitioner claimed that liquidated damages
amounted to P3,990,000.00 Both claims and counter-claims were dismissed. Court of Appeals affirmed
the ruling of RTC.
ISSUE:
Whether or not the penalty (liquidated damages) of P15,000.00 per day of delay shall be binding upon
mutual agreement of parties.
RULING:
NO. As a general rule, courts are not at liberty to ignore the freedom of the parties to agree on such terms
and conditions as they see fit as long as they are not contrary to law, morals, good customs, public order
or public policy. The judge shall equitably reduce the penalty when the principal obligation has been partly
or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also
be reduced by the courts if it is iniquitous or unconscionable (Art.1229, NCC). A penalty interest
of P15,000.00 per day of delay as liquidated damages or P3,990,000.00 (representing 32% penalty of
the P12,470,000.00 contract price) is unconscionable considering that the construction was already not
far from completion.

[G.R. No. 154852. October 21, 2004]

MULTINATIONAL VILLAGE HOMEOWNERS ASSOCIATION, INC. and

DANILO F. CUNETA, petitioners, vs. ARA SECURITY &
SURVEILLANCE AGENCY, INC., Represented by THERESA C.
MAMAED, President and General Manager, respondent.
DECISION
PANGANIBAN, J.:

Basic is the rule that a contract constitutes the law between the parties.
The mere grant to one party of the right to terminate the agreement because

of the nonpayment of an obligation established therein does not ipso

facto give the other party the same right to end the contract on the ground of
allegedly unsatisfactory service. Concededly, parties may validly stipulate
the unilateral rescission of a contract.
The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules of Court,
challenging the October 11, 2001 Decision[2] and the August 12, 2002
Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 62431. The
assailed Decision disposed as follows:
IN VIEW OF ALL THE FOREGOING, the judgment appealed from is hereby
AFFIRMED with MODIFICATION to read as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
[respondent] and as against the [petitioners], ordering the latter to pay the
[respondent] jointly and severally the following amounts:
1. P591,250.00, as actual damages;
2. P30,000.00, as attorneys fees; and
3. Costs of the suit.[4]

The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts
The antecedents are summarized by the appellate court as follows:
In the Complaint filed below, it is alleged that Ara Security and Surveillance, Inc.
[(Ara)] was hired by Multinational Village Homeowners Association, Inc.
[(Multinational)] to provide security services at the Multinational Village,
Paraaque, Metro Manila. Their agreement was embodied in a document, entitled
Contract of Guards Services dated May 30, 1994. The contract was to take effect for
a period of one (1) year from May 25, 1994 up to May 25, 1995 on a monthly fee of
One Hundred Seven Thousand Five Hundred (P107,500.00) Pesos, payable every

15th and end of the month without need of demand. Under the same contract, Ara will
provide Multinational with thirty (30) guards.
Not long after, on August 29, 1994, Danilo F. Cuneta, President of Multinational,
wrote Ara a letter terminating the aforesaid contract effective 1900 hours of August
31, 1994, having found the guards services to be unsatisfactory, for repeated
violations of the Security Guards Code of Ethics and Conduct, and total disregard of
the General Order causing loss of confidence in the ability of the security guards to
comply with the terms of the contract. Ara replied requesting Multinational to
reconsider its position, which fell on deaf ears. Thus, on September 13, 1994, Ara
commenced the present suit for injunction with preliminary injunction, preliminary
mandatory injunction and temporary restraining order with damages.
On September 15, 1994, a temporary restraining order was issued enjoining
Multinational, their agents and all persons acting in their behalf from enforcing the
letter dated August 29, 1994 and [from] replacing the guards with another agency.
The injunctive relief was then set for hearing.
Summons having been served properly, Multinational submitted an Answer together
with an opposition to the injunction claiming that it has the right to pre-terminate the
contract under paragraph 5 thereof stating:
5. MODE OF PAYMENT:
For and in consideration of the above services and during the effectivity of this
Contract, the CLIENT shall pay the SECURITY COMPANY the sum indicated in the
hereto attached cost analysis per month which consideration shall be paid every 15 th
and end of the month without need of demand.
The CLIENT hereby agrees that it shall pay interest on accounts covered by billings
received by the CLIENT and unpaid for thirty (30) days or more at the rate of 24 per
cent per annum. This shall be without prejedice (sic) to the right of the SECURITY
COMPANY to terminate this contract immediately, for failure of CLIENT to pay the
aforestated consideration in accordance with its terms without notice.
The SECURITY COMPANY shall be entitled to an automatic adjustment of its
stipulated contract price in (sic) event that the minimum wage increase[s] (sic) or in
favor of the guards are promulgated by law, executive order, decree or wage order

subsequent to the execution of this contract. Said adjustments shall be equivalent to

the amount of increase in the minimum wage of the amount benefits promulgated or
both as the case may be.
Billing shall be every fifteen (15) days. After three (3) months of satisfactory
performance, the parties may negotiate for the extension of this contract and
other matters that might be advantageous to both parties.
Meantime, after hearing the trial court denied the prayer for the issuance
of a writ of preliminary injunction on February 16, 1995.
Finally, on December 14, 1998, the court a quo rendered its decision.[5]
Ruling in favor of Ara, the trial court ordered Multinational to pay the
following:
1. P701,137.50 as actual damages
2. P200,000.00 as exemplary damages
3. P50,000.00 as attorneys fees
4. P20,000.00 as and for costs of suit and expenses of litigation

Unsatisfied, petitioners appealed to the CA.

Ruling of the Court of Appeals
The CA held that petitioners had breached their Contract when they preterminated it on the basis of paragraph 5 thereof. According to the appellate
court, the said provision did not provide for a pre-termination option, but was
a mere superfluity with no clear meaning.
Furthermore, the CA ruled that petitioners had no good and valid ground to
pre-terminate the Contract, because the documentary evidence [6] they had
presented was hearsay and of no probative value.[7]
Consequently, the appellate court affirmed the lower courts findings, but
reduced the award of actual damages to P591,250 representing payment for
services rendered for five and a half months at P107,500 per month. It also

deleted the award of exemplary damages, saying that respondent had failed
to present evidence justifying the grant thereof.[8]
Hence, this Petition.[9]
The Issues
In their Memorandum, petitioners raise the following issues for our
consideration:
1. Whether or not the lower erred in finding respondents position as the more
acceptable interpretation of the contract in question that the contract cannot be
terminated even after three months of unsatisfactory performance.
2. Whether or not the lower court erred in ruling that petitioners failed to establish
that the termination of the contract was for legal cause.
3. Whether or not the lower court erred in declaring that [petitioners] committed
breach of contract.[10]
The issue is simply whether the pre-termination of the Contract was valid.
The Courts Ruling
The Petition has no merit.
Main Issue:
Interpretation of Paragraph 5
The last portion of paragraph 5 of the Contract of Guard Services between
petitioners and respondent provides:
Billing shall be every fifteen (15) days. After three (3) months of satisfactory
performance, the parties may negotiate for the extension of this contract and other
matters that might be advantageous to both parties. [11] (Italics supplied)
Petitioners argue that the above stipulation in the Contract of Guard
Services is a resolutory condition. They allege that under this paragraph, the

Contract can no longer be enforced after the three-month period if the guards
performance is unsatisfactory.[12]
They further theorize that since respondent was given the option to end
the Contract upon their failure to pay in accordance with the specified terms,
they are likewise entitled to the option of terminating the agreement on the
basis of allegedly unsatisfactory performance.[13] They add that it would be
unjust to compel respondent to continue with this Contract despite the security
guards ineptitude, which poses a danger to the lives and properties of the
home owners.[14]
Petitioners contentions are not convincing. A reading of paragraph 5
yields the simple and natural meaning that the parties may extend the
Contracts life upon mutual agreement. The appellate court was correct in
holding that the provision was a mere superfluity. The parties need not
provide that they may extend the Contract should they mutually agree,
because they may do so with or without this benign provision. Although
paragraph 5 mentions extensions, it is ominously and significantly silent on
the matter of pre-termination.
True, parties may validly provide for resolutory conditions and unilateral
rescission in their contract. However, paragraph 5 is not a resolutory
condition, as it is not one that constitutes a future and uncertain event[,] upon
the happening or fulfillment of which rights which are already acquired by
virtue of the obligation are extinguished or lost.[15]
Under paragraph 5, the clause satisfactory performance is expressly and
clearly a consideration for extending the life of the Contract. However, in the
same paragraph, there is no mention of the effect of unsatisfactory
performance.
In the absence of any stipulation or provision of law on the matter,
petitioners cannot be deemed to have the contractual right to pre-terminate
the Contract unilaterally as of August 31, 1994, on the ground of the allegedly
unsatisfactory performance of the security guards. Such interpretation is a
direct contravention of paragraph 12, which clearly states that the term of the
Contract shall be one year:

12. TERM OF CONTRACT:

This Contract shall take effect on May 25, 1994 and shall be for a period of One (1)
Year from said date. Thereafter, it shall be deemed renewed for the same period
unless either party notifies the other in writing not later than one (1) month before the
expiry of its intent not to renew.
x x x

xxx

xxx

14. Either party may terminate this contract for legal cause by written notice given
to the other party not later than thirty (30) days prior to the expiry date. [16]
The cases -- Pamintuan v. CA[17] and Viray v. Intermediate Appellate
Court[18] -- cited by petitioners to support the alleged existence of a resolutory
condition are not applicable to the present controversy. In the cited Decisions,
the obligations under the lease Contracts as well as the consequences of the
lessees failure to comply with those obligations -- particularly, rescission and
the landlords taking possession of the leased premises -- were clearly set
forth in the law and in the Contracts, respectively. Thus, it was clearly
discernible in those cases that the failure to comply with the contractual
obligations constituted a resolutory condition.
The foregoing situation does not obtain in the present case. The
consequence of unsatisfactory performance is not specified in the Contract of
Guard Services. There is no stipulation permitting petitioners to terminate the
Contract upon an unsatisfactory performance of the security guards.
Paragraph 5 cannot be deemed to be a resolutory condition.
The contention of petitioners that the grant to respondent of the option to
terminate gives them the same right is a non sequitur. As they themselves
argue, parties may validly provide for unilateral rescission in a contract.
Next, petitioners contend that the court a quo did not comply with Section
11 of Rule 130 of the Rules of Court, because it failed to give effect to
paragraph 5. They further invoke Section 12[19] of the same Rule, arguing that
relative to the provision of the Contract on the duration of its effectivity, which
is one year, paragraph 5 is a particular provision.[20] They conclude that since

the two provisions are inconsistent, paragraph 5 -- being the particular

provision -- should prevail.
Section 11 of Rule 130 of the Rules of Court states that [i]n the
construction of an instrument where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give effect
to all. Contrary to petitioners contention, paragraph 5 is not inconsistent with
paragraph 12. More important, the former does not in any way deal with the
termination of the Contract. Neither does it provide for a right to rescind.
At this point, we stress that the right to rescind is implied in reciprocal
obligations, as provided for in Article 1191 of the Civil Code, which states:
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.
x x x

xxx

x x x.

Therefore, absent any provision providing for a right to rescind, the parties
may nevertheless rescind the contract should the other obligor fail to comply
with its obligations.
As correctly held by the CA in the instant case, petitioners failed to
produce evidence of the alleged breach of obligation by respondent. The
investigation made by Petitioner Danilo F. Cuneta cannot stand as competent
evidence. The Letter-Complaints presented in court were neither identified,
nor were their contents affirmed, by their authors. Therefore, insofar as they
purport to prove that the security guards were remiss in their duties, the
Letter-Complaints are hearsay and inadmissible evidence.[21] In Desierto v.
Estrada, we held as follows:
Evidence is called hearsay when its probative force depends, in whole or in part, on
the competency and credibility of some persons other than the witness by whom it is
sought to produce it. There are three reasons for excluding hearsay evidence: (1)
absence of cross examination; (2) absence of demeanor evidence, and (3) absence of
the oath.

Finally, it is a settled principle of law that rescission will not be permitted

for a slight or casual breach of a contract, but only for such breaches as are
so substantial and fundamental as to defeat the object of the parties in
entering into the agreement.[22] Petitioners failed to produce evidence of any
substantial and fundamental breach that would warrant the rescission of the
Contract.
WHEREFORE,
the
Petition
is DENIED and
Decision AFFIRMED. Costs against petitioners.
SO ORDERED.

SECOND DIVISION

the

assailed

MANUEL GO CINCO and

ARACELI S. GO CINCO,
Petition
ers,

G.R. No. 151903

Present:

CORONA, J.,

CARPIO-MORALES,

**

versus

Acting Chairperson,

***

NACHURA,
BRION, and
ABAD, JJ.

COURT OF APPEALS,
ESTER SERVACIO and
MAASIN TRADERS
LENDING CORPORATION,

Promulgated:

Respon
dents.

October 9, 2009

x ------------------------------------------------------------------------------------------x

DECISION
BRION, J.:

Before the Court is a petition for review on certiorari[1] filed

by petitioners, spouses Manuel and Araceli Go Cinco (collectively,
the spouses Go Cinco), assailing the decision[2] dated June 22,
2001 of the Court of Appeals (CA) in CA-G.R. CV No. 47578, as
well as the resolution[3] dated January 25, 2002 denying the
spouses Go Cincos motion for reconsideration.

THE FACTUAL ANTECEDENTS

In December 1987, petitioner Manuel Cinco (Manuel)

obtained a commercial loan in the amount of P700,000.00 from
respondent Maasin Traders Lending Corporation (MTLC). The loan
was evidenced by a promissory note dated December 11, 1987,
[4]
and secured by a real estate mortgage executed on December
15, 1987 over the spouses Go Cincos land and 4-storey building
located in Maasin, Southern Leyte.

Under the terms of the promissory note, the P700,000.00

loan was subject to a monthly interest rate of 3% or 36% per
annum and was payable within a term of 180 days or 6 months,
renewable for another 180 days. As of July 16, 1989, Manuels
outstanding obligation with MTLC amounted to P1,071,256.66,
which amount included the principal, interest, and penalties. [5]

To be able to pay the loan in favor of MTLC, the spouses Go

Cinco applied for a loan with the Philippine National Bank, Maasin
Branch (PNB or the bank) and offered as collateral the same
properties they previously mortgaged to MTLC. The PNB
approved the loan application for P1.3 Million[6] through a letter
dated July 8, 1989; the release of the amount, however, was
conditioned on the cancellation of the mortgage in favor of MTLC.

On July 16, 1989, Manuel went to the house of respondent

Ester Servacio (Ester), MTLCs President, to inform her that there
was money with the PNB for the payment of his loan with
MTLC. Ester then proceeded to the PNB to verify the information,
but she claimed that the banks officers informed her that Manuel
had no pending loan application with them. When she told
Manuel of the banks response, Manuel assured her there was
money with the PNB and promised to execute a document that
would allow her to collect the proceeds of the PNB loan.

On July 20, 1989, Manuel executed a Special Power of

Attorney[7] (SPA) authorizing Ester to collect the proceeds of his
PNB loan. Ester again went to the bank to inquire about the
proceeds of the loan. This time, the banks officers confirmed the
existence of the P1.3 Million loan, but they required Ester to first
sign a deed of release/cancellation of mortgage before they could
release the proceeds of the loan to her. Outraged that the
spouses Go Cinco used the same properties mortgaged to MTLC
as collateral for the PNB loan, Ester refused to sign the deed and
did not collect the P1.3 Million loan proceeds.

As the MTLC loan was already due, Ester instituted

foreclosure proceedings against the spouses Go Cinco on July 24,
1989.

To prevent the foreclosure of their properties, the spouses Go

Cinco filed an action for specific performance, damages, and
preliminary injunction[8] before the Regional Trial Court (RTC),
Branch 25, Maasin, Southern Leyte. The spouses Go Cinco
alleged that foreclosure of the mortgage was no longer proper as
there had already been settlement of Manuels obligation in favor
of MTLC. They claimed that the assignment of the proceeds of
the PNB loan amounted to the payment of the MTLC loan. Esters
refusal to sign the deed of release/cancellation of mortgage and

to collect the proceeds of the PNB loan were, to the spouses Go

Cinco, completely unjustified and entitled them to the payment of
damages.

Ester countered these allegations by claiming that she had

not been previously informed of the spouses Go Cincos plan to
obtain a loan from the PNB and to use the loan proceeds to settle
Manuels loan with MTLC. She claimed that she had no explicit
agreement with Manuel authorizing her to apply the proceeds of
the PNB loan to Manuels loan with MTLC; the SPA merely
authorized her to collect the proceeds of the loan. She thus
averred that it was unfair for the spouses Go Cinco to require the
release of the mortgage to MTLC when no actual payment of the
loan had been made.

In a decision dated August 16, 1994,[9] the RTC ruled in favor

of the spouses Go Cinco. The trial court found that the evidence
sufficiently established the existence of the PNB loan whose
proceeds were available to satisfy Manuels obligation with MTLC,
and
that
Ester
unjustifiably
refused
to
collect
the
amount. Creditors, it ruled, cannot unreasonably prevent
payment or performance of obligation to the damage and
prejudice of debtors who may stand liable for payment of higher
interest rates.[10] After finding MTLC and Ester liable for abuse of
rights, the RTC ordered the award of the following amounts to the
spouses Go Cinco:
(a) P1,044,475.15 plus 535.63 per day hereafter, representing loss
of savings on interest, by way of actual or compensatory
damages, if defendant corporation insists on the original 3%
monthly interest rate;
(b) P100,000.00 as unrealized profit;
(c) P1,000,000.00 as moral damages;
(d) P20,000.00 as exemplary damages;

(e) P22,000.00 as litigation expenses; and

(f)

10% of the total amount as attorneys fees plus costs. [11]

Through an appeal with the CA, MTLC and Ester successfully

secured a reversal of the RTCs decision. Unlike the trial court,
the appellate court found it significant that there was no explicit
agreement between Ester and the spouses Go Cinco for the
cancellation of the MTLC mortgage in favor of PNB to facilitate the
release and collection by Ester of the proceeds of the PNB
loan. The CA read the SPA as merely authorizing Ester
to withdraw the proceeds of the loan. As Manuels loan obligation
with MTLC remained unpaid, the CA ruled that no valid objection
could be made to the institution of the foreclosure
proceedings. Accordingly, it dismissed the spouses Go Cinco
complaint. From this dismissal, the spouses Go Cinco filed the
present appeal by certiorari.

THE PETITION

The spouses Go Cinco impute error on the part of the CA for

its failure to consider their acts as equivalent to payment that
extinguished the MTLC loan; their act of applying for a loan with
the PNB was indicative of their good faith and honest intention to
settle the loan with MTLC. They contend that the creditors have
the correlative duty to accept the payment.

The spouses Go Cinco charge MTLC and Ester with bad faith
and ill-motive for unjustly refusing to collect the proceeds of the
loan and to execute the deed of release of mortgage. They assert
that Esters justifications for refusing the payment were flimsy
excuses so she could proceed with the foreclosure of the
mortgaged properties that were worth more than the amount due

to MTLC. Thus, they conclude that the acts of MTLC and of Ester
amount to abuse of rights that warrants the award of damages in
their (spouses Go Cincos) favor.

In refuting the claims of the spouses Go Cinco, MTLC and

Ester raise the same arguments they raised before the RTC and
the CA. They claim that they were not aware of the loan and the
mortgage to PNB, and that there was no agreement that the
proceeds of the PNB loan were to be used to settle Manuels
obligation with MTLC. Since the MTLC loan remained unpaid, they
insist that the institution of the foreclosure proceedings was
proper. Additionally, MTLC and Ester contend that the present
petition raised questions of fact that cannot be addressed in a
Rule 45 petition.

THE COURTS RULING

The Court finds the petition meritorious.

Preliminary Considerations

Our review of the records shows that there are no factual

questions involved in this case; the ultimate facts necessary for
the resolution of the case already appear in the records. The RTC
and the CA decisions differed not so much on the findings of fact,
but on the conclusions derived from these factual findings. The
correctness of the conclusions derived from factual findings raises
legal questions when the conclusions are so linked to, or are
inextricably intertwined with, the appreciation of the applicable
law that the case requires, as in the present case. [12] The petition
raises the issue of whether the loan due the MTLC had been

extinguished; this is a question of law that this Court can fully

address and settle in an appeal by certiorari.

Payment as Mode of
Extinguishing Obligations

Obligations are extinguished, among others, by payment or

performance,[13] the mode most relevant to the factual situation in
the present case. Under Article 1232 of the Civil Code, payment
means not only the delivery of money but also the performance,
in any other manner, of an obligation. Article 1233 of the Civil
Code states that a debt shall not be understood to have been
paid unless the thing or service in which the obligation consists
has been completely delivered or rendered, as the case may
be. In contracts of loan, the debtor is expected to deliver the
sum of money due the creditor. These provisions must be read in
relation with the other rules on payment under the Civil Code,
[14]
which rules impliedly require acceptance by the creditor of the
payment in order to extinguish an obligation.

In the present case, Manuel sought to pay Ester by

authorizing her, through an SPA, to collect the proceeds of the
PNB loan an act that would have led to payment if Ester had
collected the loan proceeds as authorized. Admittedly, the
delivery of the SPA was not, strictly speaking, a delivery of the
sum of money due to MTLC, and Ester could not be compelled to
accept it as payment based on Article 1233. Nonetheless, the
SPA stood as an authority to collect the proceeds of the alreadyapproved PNB loan that, upon receipt by Ester, would have
constituted as payment of the MTLC loan. [15] Had Ester presented
the SPA to the bank and signed the deed of release/cancellation of
mortgage, the delivery of the sum of money would have been
effected and the obligation extinguished. [16] As the records show,

Ester refused to collect and allow the cancellation of the

mortgage.

Under these facts, Manuel posits two things: first, that

Esters refusal was based on completely unjustifiable grounds;
and second, that the refusal was equivalent to payment that led
to the extinguishment of the obligation.

a. Unjust Refusal to Accept Payment

After considering Esters arguments, we agree with Manuel

that Esters refusal of the payment was without basis.

Ester refused to accept the payment because the bank

required her to first sign a deed of release/cancellation of the
mortgage before the proceeds of the PNB loan could be
released. As a prior mortgagee, she claimed that the spouses Go
Cinco should have obtained her consent before offering the
properties already mortgaged to her as security for the PNB
loan. Moreover, Ester alleged that the SPA merely authorized her
to collect the proceeds of the loan; there was no explicit
agreement that the MTLC loan would be paid out of the proceeds
of the PNB loan.

There is nothing legally objectionable in a mortgagors act of

taking a second or subsequent mortgage on a property already
mortgaged; a subsequent mortgage is recognized as valid by law
and by commercial practice, subject to the prior rights of previous
mortgages. Section 4, Rule 68 of the 1997 Rules of Civil
Procedure on the disposition of the proceeds of sale after
foreclosure actually requires the payment of the proceeds to,
among others, the junior encumbrancers in the order of their
priority.[17] Under Article 2130 of the Civil Code, a stipulation

forbidding the owner from alienating the immovable mortgaged is

considered void. If the mortgagor-owner is allowed to convey the
entirety of his interests in the mortgaged property, reason
dictates that the lesser right to encumber his property with other
liens must also be recognized. Ester, therefore, could not validly
require the spouses Go Cinco to first obtain her consent to the
PNB loan and mortgage. Besides, with the payment of the MTLC
loan using the proceeds of the PNB loan, the mortgage in favor of
the MTLC would have naturally been cancelled.

We find it improbable for Ester to claim that there was no

agreement to apply the proceeds of the PNB loan to the MTLC
loan. Beginning July 16, 1989, Manuel had already expressed
intent to pay his loan with MTLC and thus requested for an
updated statement of account. Given Manuels express intent of
fully settling the MTLC loan and of paying through the PNB loan he
would secure (and in fact secured), we also cannot give credit to
the claim that the SPA only allowed Ester to collect the proceeds
of the PNB loan, without giving her the accompanying authority,
although verbal, to apply these proceeds to the MTLC loan. Even
Esters actions belie her claim as she in fact even went to the PNB
to collect the proceeds. In sum, the surrounding circumstances of
the case simply do not support Esters position.

b. Unjust Refusal Cannot be Equated to Payment

While Esters refusal was unjustified and unreasonable, we

cannot agree with Manuels position that this refusal had the
effect of payment that extinguished his obligation to
MTLC. Article 1256 is clear and unequivocal on this point when it
provides that
ARTICLE 1256. If the creditor to whom tender of payment has
been made refuses without just cause to accept it, the debtor

shall be released from responsibility by the consignation of the thing or

sum due. [Emphasis supplied.]

In short, a refusal without just cause is not equivalent to payment;

to have the effect of payment and the consequent extinguishment
of the obligation to pay, the law requires the companion acts of
tender of payment and consignation.

Tender of payment, as defined in Far East Bank and Trust

Company v. Diaz Realty, Inc.,[18] is the definitive act of offering the
creditor what is due him or her, together with the demand that
the creditor accept the same. When a creditor refuses the
debtors tender of payment, the law allows the consignation of
the thing or the sum due. Tender and consignation have the
effect of payment, as by consignation, the thing due is deposited
and placed at the disposal of the judicial authorities for the
creditor to collect.[19]

A sad twist in this case for Manuel was that he could not
avail of consignation to extinguish his obligation to MTLC, as PNB
would not release the proceeds of the loan unless and until Ester
had signed the deed of release/cancellation of mortgage, which
she unjustly refused to do. Hence, to compel Ester to accept the
loan proceeds and to prevent their mortgaged properties from
being foreclosed, the spouses Go Cinco found it necessary to
institute the present case for specific performance and damages.

c. Effects of Unjust Refusal

Under these circumstances, we hold that while no completed

tender of payment and consignation took place sufficient to
constitute payment, the spouses Go Cinco duly established that
they have legitimately secured a means of paying off their loan

with MTLC; they were only prevented from doing so by the unjust
refusal of Ester to accept the proceeds of the PNB loan through
her refusal to execute the release of the mortgage on the
properties mortgaged to MTLC. In other words, MTLC and Ester in
fact prevented the spouses Go Cinco from the exercise of their
right to secure payment of their loan. No reason exists under this
legal situation why we cannot compel MTLC and Ester: (1) to
release the mortgage to MTLC as a condition to the release of the
proceeds of the PNB loan, upon PNBs acknowledgment that the
proceeds of the loan are ready and shall forthwith be released;
and (2) to accept the proceeds, sufficient to cover the total
amount of the loan to MTLC, as payment for Manuels loan with
MTLC.

We also find that under the circumstances, the spouses Go

Cinco have undertaken, at the very least, the equivalent of a
tender of payment that cannot but have legal effect. Since
payment was available and was unjustifiably refused, justice and
equity demand that the spouses Go Cinco be freed from the
obligation to pay interest on the outstanding amount from
the time the unjust refusal took place;[20] they would not
have been liable for any interest from the time tender of payment
was made if the payment had only been accepted. Under Article
19 of the Civil Code, they should likewise be entitled to damages,
as the unjust refusal was effectively an abusive act contrary to
the duty to act with honesty and good faith in the exercise of
rights and the fulfillment of duty.

For these reasons, we delete the amounts awarded by the

RTC to the spouses Go Cinco (P1,044,475.15, plus P563.63 per
month) representing loss of savings on interestsfor lack of legal
basis. These amounts were computed based on the difference in
the interest rates charged by the MTLC (36% per annum) and the
PNB (17% to 18% per annum), from the date of tender of
payment up to the time of the promulgation of the RTC
decision. The trial court failed to consider the effects of a tender

of payment and erroneously declared that MTLC can charge

interest at the rate of only 18% per annum the same rate that
PNB charged, not the 36% interest rate that MTLC charged; the
RTC awarded the difference in the interest rates as actual
damages.

As part of the actual and compensatory damages, the RTC

also
awarded P100,000.00
to
the
spouses
Go
Cinco
representing unrealized profits. Apparently, if the proceeds of the
PNB loan (P1,203,685.17) had been applied to the MTLC loan
(P1,071,256.55), there would have been a balance of P132,428.62
left, which amount the spouses Go Cinco could have invested in
their businesses that would have earned them a profit of at
least P100,000.00.

We find no factual basis for this award. The spouses Go

Cinco were unable to substantiate the amount they claimed as
unrealized profits; there was only their bare claim that the excess
could have been invested in their other businesses. Without
more, this claim of expected profits is at best speculative and
cannot be the basis for a claim for damages. In Lucas v. Spouses
Royo,[21] we declared that:
In determining actual damages, the Court cannot rely on speculation,
conjecture or guesswork as to the amount. Actual and compensatory
damages are those recoverable because of pecuniaryloss in
business, trade, property, profession, job or occupation and the
same must be sufficiently proved, otherwise, if the proof is
flimsy and unsubstantiated, no damages will be given.
[Emphasis supplied.]

We agree, however, that there was basis for the award of

moral and exemplary damages and attorneys fees.

Esters act of refusing payment was motivated by bad faith

as evidenced by the utter lack of substantial reasons to support it.
Her unjust refusal, in her behalf and for the MTLC which she
represents, amounted to an abuse of rights; they acted in an
oppressive manner and, thus, are liable for moral and exemplary
damages.[22] We
nevertheless
reduce
the P1,000,000.00 to P100,000.00 as the originally awarded
amount for moral damages is plainly excessive.

We affirm the grant of exemplary damages by way of

example or correction for the public good in light of the same
reasons that justified the grant of moral damages.

As the spouses Go Cinco were compelled to litigate to

protect their interests, they are entitled to payment of 10% of the
total amount of awarded damages as attorneys fees and
expenses of litigation.

WHEREFORE, we GRANT the petitioners petition for review

on certiorari, and REVERSE the decision of June 22, 2001 of the
Court of Appeals in CA-G.R. CV No. 47578, as well as the
resolution of January 25, 2002 that followed. We REINSTATE the
decision dated August 16, 1994 of the Regional Trial Court, Branch
25, Maasin,Southern Leyte, with the following MODIFICATIONS:

(1)

The respondents are hereby directed to accept

the proceeds of the spouses Go Cincos PNB loan, if
still available, and to consent to the release of the
mortgage on the property given as security for the
loan upon PNBs acknowledgment that the proceeds
of the loan, sufficient to cover the total
indebtedness to respondent Maasin Traders Lending
Corporation computed as of June 20, 1989, shall
forthwith be released;

(2)

The award for loss of savings and unrealized

profit is deleted;

(3)

The award for moral damages is reduced

to P100,000.00; and

(4)

The awards for exemplary damages, attorneys

fees, and expenses of litigation are retained.

The awards under (3) and (4) above shall be deducted from the
amount of the outstanding loan due the respondents as of June
20, 1989. Costs against the respondents.
SO ORDERED.
G.R. No. 174882

January 21, 2013

MONDRAGON PERSONAL SALES, INC., Petitioner,

vs.
VICTORIANO S. SOLA, JR., Respondent.
DECISION
PERALTA, J.:
Before us is a petition for review on certiorari seeking to set aside the Decision 1 dated February 10,
2006 and the Resolution2 dated September 6, 2006 issued by the Court of Appeals (CA) in CA-G.R.
CV No. 71690.
Petitioner Mondragon Personal Sales Inc., a company engaged in the business of selling various
consumer products through a network of sales representatives, entered into a Contract of
Services3 with respondent Victoriano S. Sola, Jr. for a period of three years commencing on October
2, 1994 up to October 1, 1997. Under the said contract, respondent, as service contractor, would
provide service facilities, i.e., bodega cum office, to petitioner's products, sales force and customers
in General Santos City and as such, he was entitled to commission or service fee as follows:
MONTHLY SALES
(net of vat)

SERVICE FEE

P50,000.00 to 2,500,000.00

Five percent (5%)

P2,500,001.00 to 3,000.000.00

P125,000.00

P3,000,001.00 to 3,500,000.00

150,000.00

P3,500,001.00 UP

200,000.004

The agreement then came into effect when petitioner's goods were delivered to respondent's
bodega and were sold by petitioner's employees. Prior to the execution of the contract, however,
respondents wife, Lina Sola, had an existing obligation with petitioner arising from her Franchise

Distributorship Agreement with the latter. On January 26, 1995, respondent wrote a letter 5 addressed
to Renato G. de Leon, petitioner's Vice-President for Finance, wherein he acknowledged and
confirmed his wifes indebtedness to petitioner in the amount ofP1,973,154.73 (the other
accountability in the sum of P1,490,091.15 was still subject to reconciliation) and, together with his
wife, bound himself to pay on installment basis the said debt. Consequently, petitioner withheld the
payment of respondent's service fees from February to April 1995 and applied the same as partial
payments to the debt which he obligated to pay. On April 29, 1995, respondent closed and
suspended operation of his office cum bodega where petitioner's products were stored and
customers were being dealt with.
On May 24, 1995, respondent filed with the Regional Trial Court (RTC) of Davao, a Complaint 6 for
accounting and rescission against petitioner alleging that petitioner withheld portions of his service
fees covering the months from October 1994 to January 1995 and his whole service fees for the
succeeding months of February to April 1995, the total amount of which was P222,202.84; that
petitioner's act grossly hampered, if not paralyzed, his business operation, thus left with no other
recourse, he suspended operations to minimize losses. He prayed for the rescission of the contract
of services and for petitioner to render an accounting of his service fees.
In its Answer with Counterclaim7 filed on June 14, 1995, petitioner contended that respondents letter
dated January 26, 1995 addressed to petitioner's Vice-President for Finance, confirmed and
obligated himself to pay on installment basis the accountability of his wife with petitioner, thus
respondent's service fees/commission earned for the period of February to April 1995 amounting
to P125,040.01 was applied by way of compensation to the amounts owing to it; that all the service
fees earned by respondent prior to February 1995 were fully paid to him. By way of counterclaim,
petitioner asked for the payment of the amount of P1,547,892.55 which respondent obligated to pay
plus interest; the delivery of petitioner's products padlocked in respondent's office cum bodega, the
payment for the loss of income in the amount of P833,600.00 as well as the remaining balance
of P45,728.30 from the P100,000.00 given by petitioner to respondent as advance money for the
purchase of office equipment and the renovation of the bodega cum office.
In his Reply and Answer8 to petitioner's counterclaim, respondent averred that he was made to
believe that the sales commission contained in petitioner's memorandum dated July 5, 1994 would
be applicable to him; that it was improper for petitioner to confuse respondent's transaction with that
of his wife as it was divergent in nature and terms.
Pending trial, petitioner moved for the issuance of a preliminary attachment and replevin which the
RTC granted in its Order dated June 19, 1995 upon the filing of bonds. 9 Respondent filed a Motion to
Quash the Writ of Attachment, which the RTC denied in an Order dated July 24, 1995. 10 As
respondent's motion for reconsideration was also denied, he filed with us a petition for certiorari,
docketed as G.R. No. 126427, assailing the RTC orders which we dismissed in a Resolution 11 dated
November 11, 1996 on procedural matters.
Trial thereafter ensued.
On July 6, 2000, the RTC rendered its Decision,12 the dispositive portion of which reads:
FOR THE FOREGOING, judgment is hereby rendered in favor of defendant and against plaintiff,
ordering the latter to pay the former:
1) the sum of P1,543,643.96 representing the principal balance of plaintiff's account with
defendant, plus legal interest from the time of filing of the complaint until fully paid, at the rate
of 6% per annum;

2) attorney's fees in the amount of P25,000.00

3) costs of the suit.13
In so ruling, the RTC found that in computing the service fees/commissions due respondent, the rate
as provided in the contract of service dated January 27, 1995 was controlling, since respondent was
a party thereto duly affixing his signature therein; that petitioner's computation of respondent's
service fees for the months of February to April 1995 in the total amount of P125,040.01 which was
based on the said contract deserved credence. The RTC ruled that while Article 1381 of the Civil
Code provides for the grounds for which a contract may be rescinded, none of these grounds existed
in this case; that there was no showing of fraud which petitioner employed when it entered into the
contract with respondent nor did respondent agree to such a contract without knowing its content,
thus the contract was not rescissible.
As regards to petitioner's counterclaim that respondent confirmed and assumed the payment of his
wife's account with petitioner, the RTC found that respondent obligated himself to pay his wife's
account as evidenced by his letter dated January 26, 1995; that after deducting from the confirmed
amount of P1,668,683.97 the respondent's service commission for the period from February 1995 to
April 1995, which was in the total amount ofP125,040.01, the amount owing to petitioner would still
be P1,543,643.96. The RTC dismissed the other counterclaims, since they were not substantiated
but found petitioner entitled to attorney's fees due to the amount of money involved and the time
spent in pursuing the case.
Respondent filed his appeal to the CA to which petitioner filed its appellee's brief. On February 10,
2006, the CA rendered its assailed decision, the dispositive portion of which reads as follows:
WHEREFORE, in the light of the foregoing premises, herein appeal is GRANTED. Accordingly, the
Contract of Services is hereby RESCINDED. Let the case be REMANDED to the court a quo for the
proper determination of the amount of service fees unlawfully withheld from the appellant.
Furthermore, Appellee is hereby ordered to pay the Appellant attorneys fees in the amount of
twenty-five thousand pesos (P25,000.00).14
The CA found that under Article 1191 of the Civil Code, respondent was entitled to rescind the
contract of services as it was petitioner who breached the same by withholding the service fees
lawfully due to the former; that petitioner's act of unlawfully withholding the service fees due
respondent constituted a willful and deliberate infringement on contractual obligations which would
justify rescission under Article 1191. The CA declared that the contract of services entered into by
the parties did not fall under any of the rescissible contracts enumerated under Article 1381 of the
Civil Code but under Article 1191 which pertains to rescission of reciprocal obligations as in the
instant case.
The CA ruled that respondent did not assume his wife's obligation as he did not substitute himself in
the shoes of his wife regarding the payment of the latter's liability; that there can be no novation as
novation was never presumed. Petitioner's act of withholding respondent's service fee and thereafter
applying them to the obligation of his wife was unlawful, considering that respondent never assumed
his wife's obligation with petitioner; that there could be no legal compensation, since it was
respondent's wife who was principally indebted to petitioner owing from the franchise distributorship
agreement she earlier entered into with petitioner; that granting the debt redounded to the benefit of
the family and incurred with the consent of respondent, and the spouse, as joint administrators of the
community property are solidarily liable with their separate properties for debts incurred, however,
such liability is only subsidiary, when the community property is not sufficient to pay for all liabilities,

however, in this case, there was no showing that the community property of the spouses was
insufficient to pay the debt.
The CA ordered the deletion of attorney's fees as it was respondent who was entitled to such award,
since he was compelled to litigate to protect his interest for the unjustified act of petitioner.
Petitioner's motion for reconsideration was denied in a Resolution dated September 6, 2006.
Hence, this petition where petitioner alleges that the CA erred:
1. In finding that petitioner breached its contract with respondent and that there is no
compensation in accordance to Article 1279 of the Civil Code;
2. In finding that respondent did not assume the obligation of his wife;
3. In remanding the case to the court a quo for proper determination of service fee withheld
when the same has been determined;
4. In obliterating the award of petitioner's counterclaim when respondent admitted his
obligation to petitioner.15
The CA found that petitioner's act of withholding respondent's service fees and thereafter applying
them as partial payment to the obligation of respondent's wife with petitioner was unlawful,
considering that respondent never assumed his wifes obligation, thus, there can be no legal
compensation under Article 1279 of the Civil Code.
We do not agree.
In his letter dated January 26, 1995 addressed to Mr. Renato G. De Leon, petitioner's Vice-President
for Finance, respondent wrote, and which we quote in full:
Gentlemen:
This refers to the account of my wife, Lina (Beng) Sola, with Mondragon Personal Sales, Inc. in the
amount of P3,463,173.88. Of this total amount, we are initially confirming the total amount
ofP1,973,154.73 as due from Lina (Beng) Sola, while the remaining balance of P1,490,091.15 will be
subject to a reconciliation on or before February 5, 1995.
In recognition of Lina (Beng) Sola's account, we undertake to pay P100,000.00 on or before
February 01, 1995 and the balance of P1,873,154.73 plus interest of 18% per annum and 2%
administrative charge per month on the diminishing balance will be covered by postdated checks of
not less than P100,000.00 per month starting February 28, 1995 and every end of the month
thereafter but not to exceed eighteen (18) months or July 31, 1996.
With regards to the remaining balance of P1,490,019.15, we agree that upon final verification of
these accounts, we will issue additional postdated checks subject to the same terms and conditions
as stated above.
We further agree that all subsequent orders that will be released to us will be covered by postdated
checks.

I fully understand and voluntarily agree to the above undertaking with full knowledge of the
consequences which may arise therefrom.
Very truly yours,
(signed)
Victoriano S. Sola16
A reading of the letter shows that respondent becomes a co-debtor of his wife's accountabilities with
petitioner. Notably, the last paragraph of his letter which states "I fully understand and voluntarily
agree to the above undertaking with full knowledge of the consequences which may arise therefrom"
and which was signed by respondent alone, shows that he solidarily bound himself to pay such debt.
Based on the letter, respondent's wife had an account with petitioner in the amount
of P3,463,173.88, out of which only the amount of P1,973,154.73 was confirmed while the remaining
amount of P1,490,019.15 would still be subject to reconciliation. As respondent bound himself to pay
the amount of P1,973,154.73, he becomes petitioner's principal debtor to such amount.
On the other hand, respondent, as petitioner's service contractor, was entitled to a payment of
service fees as provided in their contract of services dated January 26, 1995. We note that
respondent never refuted the amount of monthly sales recorded but only assailed in the RTC the
rate of the service fees which he was entitled to. However, we find that there could be no other
computation of the rate of the service fees other than what was provided in the contract of services
dated January 26, 1995 signed by respondent and petitioner. Thus, we give credence to petitioner's
computation of respondent's service fees for the months of February to April 1995 in the total amount
of P125,040.01. Since respondent promised petitioner in his letter dated January 26, 1995, to
monthly pay a certain amount to cover the indebtedness to petitioner which he failed to do, the latter
withheld the payment of respondent's service fees and applied the same as partial payments of the
debt by way of compensation.
We find that petitioner's act of withholding respondent's service fees/commissions and applying them
to the latter's outstanding obligation with the former is merely an acknowledgment of the legal
compensation that occurred by operation of law between the parties. 17 Compensation is a mode of
extinguishing to the concurrent amount the obligations of persons who in their own right and as
principals are reciprocally debtors and creditors of each other. Legal compensation takes place by
operation of law when all the requisites are present, as opposed to conventional compensation
which takes place when the parties agree to compensate their mutual obligations even in the
absence of some requisites.18 Legal compensation requires the concurrence of the following
conditions:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.19

We find the presence of all the requisites for legal compensation. Petitioner and respondent are both
principal obligors and creditors of each other. Their debts to each other consist in a sum of money.
Respondent acknowledged and bound himself to pay petitioner the amount of P1,973,154.73 which
was already due, while the service fees owing to respondent by petitioner become due every month.
Respondent's debt is liquidated and demandable, and petitioner's payments of service fees are
liquidated and demandable every month as they fall due. Finally, there is no retention or controversy
commenced by third persons over either of the debts. Thus, compensation is proper up to the
concurrent amount where petitioner owes respondent P125,040.01 for service fees, while
respondent owes petitioner P1,973,154.73.
As legal compensation took place in this case, there is no basis for respondent to ask for rescission
since he was the first to breach their contract when, on April 29, 1995, he suddenly closed and
padlocked his bodega cum office in General Santos City occupied by petitioner.
1wphi1

Petitioner claims that the CA erred in obliterating the RTCs award of its counterclaim which it had
alleged and proved during trial and which respondent even admitted.
We agree.
In his letter dated January 6, 1995, respondent confirmed the amount of P1,973,154.73 owing to
petitioner. On September 29, 1997, petitioner wrote another letter20 to petitioner's Credit and
Collection Manager, Rudy Machanco, wherein he again confirmed the indebtedness in the amount
of P1,973,154.73. In the same letter, he showed the payments he had already made and after
deducting the same from the confirmed indebtedness, the total balance remained to be
at P1,668,683.97. As we have said earlier, respondent's service fees from February to April 1995
which was in the total amount of P125,040.01 was not assailed at all by respondent in his appeal
with the CA, thus he is bound by such computation. Hence, the amount of P125,040.01 which
petitioner owes respondent shall be offset against the P1,973,154.73 which respondent owes
petitioner, and therefore leaving a balance of P1,543,643.96 which respondent must pay.
WHEREFORE, the petition for review is GRANTED. The Decision dated February 10, 2006 and the
Resolution dated September 6, 2006 of the Court of Appeals are hereby REVERSED and SET
ASIDE. Respondent is hereby ordered to pay petitioner the amount of P1,543,643.96 with 6%
percent per annum from June 14, 1995 until finality of this Decision and 12% percent per annum
thereafter until full payment.
SO ORDERED.

G.R. No. 176425

HEIRS OF MANUEL UY EK LIONG, represented by BELEN LIM VDA. DE UY, Petitioners,
vs.
MAURICIA MEER CASTILLO, HEIRS OF BUENAFLOR C. UMALI, represented by NANCY
UMALI, VICTORIA H. CASTILLO, BERTILLA C. RADA, MARIETTA C. CAVANEZ, LEOVINA C.
JALBUENA and PHILIP M. CASTILLO, Respondents.
DECISION
PEREZ, J.:
Assailed in this Petition for Review on Certiorari filed pursuant to Rule 45 of the Rules of Court is the
Decision1dated 23 January 2007 rendered by the Fifteenth Division of the Court of Appeals in CAG.R. CV No. 84687,2 the dispositive portion of which states:
WHEREFORE, premises considered, the assailed January 27, 2005 Decision of the Regional Trial
Court of Lucena City, Branch 59, in Civil Case No. 93-176, is hereby REVERSED and SET ASIDE
and a new one entered declaring the AGREEMENT and the KASUNDUAN void ab initio for being
contrary to law and public policy, without prejudice to the attorneys filing a proper action for
collection of reasonable attorneys fees based on quantum meruit and without prejudice also to
administrative charges being filed against counsel for counsels openly entering into such an illegal
AGREEMENT in violation of the Canons of Professional Responsibility which action may be
instituted with the Supreme Court which has exclusive jurisdiction to impose such penalties on
members of the bar.
No pronouncement as to costs.
SO ORDERED.3 (Italics and Underscore Ours)
The Facts
Alongside her husband, Felipe Castillo, respondent Mauricia Meer Castillo was the owner of four
parcels of land with an aggregate area of 53,307 square meters, situated in Silangan Mayao, Lucena

City and registered in their names under Transfer Certificate of Title (TCT) Nos. T-42104, T-32227, T31752 and T-42103. With the death of Felipe, a deed of extrajudicial partition over his estate was
executed by his heirs, namely, Mauricia, Buenaflor Umali and respondents Victoria Castillo, Bertilla
Rada, Marietta Cavanez, Leovina Jalbuena and Philip Castillo. Utilized as security for the payment
of a tractor purchased by Mauricias nephew, Santiago Rivera, from Bormaheco, Inc., it appears,
however, that the subject properties were subsequently sold at a public auction where Insurance
Corporation of the Philippines (ICP) tendered the highest bid. Having consolidated its title, ICP
likewise sold said parcels in favor of Philippine Machinery Parts Manufacturing Co., Inc. (PMPMCI)
which, in turn, caused the same to be titled in its name.4
On 29 September 1976, respondents and Buenaflor instituted Civil Case No. 8085 before the then
Court of First Instance (CFI) of Quezon, for the purpose of seeking the annulment of the transactions
and/or proceedings involving the subject parcels, as well as the TCTs procured by
PMPMCI.5 Encountering financial difficulties in the prosecution of Civil Case No. 8085, respondents
and Buenaflor entered into an Agreement dated 20 September 1978 whereby they procured the
legal services of Atty. Edmundo Zepeda and the assistance of Manuel Uy Ek Liong who, as financier,
agreed to underwrite the litigation expenses entailed by the case. In exchange, it was stipulated in
the notarized Agreement that, in the event of a favorable decision in Civil Case No. 8085, Atty.
Zepeda and Manuel would be entitled to "a share of forty (40%) percent of all the realties and/or
monetary benefits, gratuities or damages" which may be adjudicated in favor of respondents. 6
On the same date, respondents and Buenaflor entered into another notarized agreement
denominated as a Kasunduan whereby they agreed to sell their remaining sixty (60%) percent share
in the subject parcels in favor of Manuel for the sum of P180,000.00. The parties stipulated that
Manuel would pay a downpayment in the sum of P1,000.00 upon the execution of the Kasunduan
and that respondents and Buenaflor would retain and remain the owners of a 1,750-square meter
portion of said real properties. It was likewise agreed that any party violating the Kasunduan would
pay the aggrieved party a penalty fixed in the sum of P50,000.00, together with the attorneys fees
and litigation expenses incurred should a case be subsequently filed in court. The parties likewise
agreed to further enter into such other stipulations as would be necessary to ensure that the sale
would push through and/or in the event of illegality or impossibility of any part of the Kasunduan. 7
With his death on 19 August 1989,8 Manuel was survived by petitioners, Heirs of Manuel Uy Ek
Liong, who were later represented in the negotiations regarding the subject parcels and in this suit
by petitioner BelenLim Vda. de Uy. The record also shows that the proceedings in Civil Case No.
8085 culminated in this Courts rendition of a 13 September 1990 Decision in G.R. No. 89561 9 in
favor of respondents and Buenaflor.10 Subsequent to the finality of the Courts Decision, 11 it appears
that the subject parcels were subdivided in accordance with the Agreement, with sixty (60%) percent
thereof consisting of 31,983 square meters equally apportioned among and registered in the names
of respondents and Buenaflor under TCT Nos. T-72027, T-72028, T-72029, T-72030, T-72031, T72032 and T-72033.12 Consisting of 21,324 square meters, the remaining forty (40%) percent was, in
turn, registered in the names of petitioners and Atty. Zepeda under TCT No. T-72026. 13
Supposedly acting on the advice of Atty. Zepeda, respondents wrote petitioners a letter dated 22
March 1993, essentially informing petitioners that respondents were willing to sell their sixty (60%)
percent share in the subject parcels for the consideration of P500.00 per square meter.14 Insisting on

the price agreed upon in the Kasunduan, however, petitioners sent a letter dated 19 May 1993,
requesting respondents to execute within 15 days from notice the necessary Deed of Absolute Sale
over their 60% share as aforesaid, excluding the 1,750-square meter portion specified in their
agreement with Manuel. Informed that petitioners were ready to pay the remaining P179,000.00
balance of the agreed price,15 respondents wrote a 28 May 1993 reply, reminding the former of their
purported refusal of earlier offers to sell the shares of Leovina and of Buenaflor who had, in the
meantime, died.16 In a letter dated 1 June 1993, respondents also called petitioners attention to the
fact, among others, that their right to ask for an additional consideration for the sale was recognized
under the Kasunduan.17
On 6 October 1993, petitioners commenced the instant suit with the filing of their complaint for
specific performance and damages against the respondents and respondent Heirs of Buenaflor, as
then represented by Menardo Umali. Faulting respondents with unjustified refusal to comply with
their obligation under the Kasunduan, petitioners prayed that the former be ordered to execute the
necessary Deed of Absolute Sale over their shares in the subject parcels, with indemnities for moral
and exemplary damages, as well as attorneys fees, litigation expenses and the costs of the
suit.18 Served with summons, respondents filed their Answer with Counterclaim and Motion to File
Third Party Complaint on 3 December 1993. Maintaining that the Agreement and the Kasunduan
were illegal for being unconscionable and contrary to public policy, respondents averred that Atty.
Zepeda was an indispensable party to the case. Together with the dismissal of the complaint and the
annulment of said contracts and TCT No. T-72026, respondents sought the grant of their
counterclaims for moral and exemplary damages, as well as attorneys fees and litigation
expenses.19
The issues thereby joined, the Regional Trial Court (RTC), Branch 54, Lucena City, proveeded to
conduct the mandatory preliminary conference in the case. 20 After initially granting respondents
motion to file a third party complaint against Atty. Zepeda,21 the RTC, upon petitioners motion for
reconsideration,22 went on to issue the 18 July 1997 Order disallowing the filing of said pleading on
the ground that the validity of the Agreement and the cause of action against Atty. Zepeda, whose
whereabouts were then unknown, would be better threshed out in a separate action. 23 The denial24 of
their motion for reconsideration of the foregoing order 25 prompted respondents to file a notice of
appeal26 which was, however, denied due course by the RTC on the ground that the orders sought to
be appealed were non-appealable.27 On 14 December 1997, Menardo died28 and was substituted by
his daughter Nancy as representative of respondent Heirs of Buenaflor.29
In the ensuing trial of the case on the merits, petitioners called to the witness stand Samuel Lim Uy
Ek Liong30whose testimony was refuted by Philip31 and Leovina32 during the presentation of the
defense evidence. On 27 January 2005, the RTC rendered a decision finding the Kasunduan valid
and binding between respondents and petitioners who had the right to demand its fulfillment as
Manuels successors-in-interest. Brushing aside Philips testimony that respondents were forced to
sign the Kasunduan, the RTC ruled that said contract became effective upon the finality of this
Courts 13 September 1990 Decision in G.R. No. 89561 which served as a suspensive condition
therefor. Having benefited from the legal services rendered by Atty. Zepeda and the financial
assistance extended by Manuel, respondents were also declared estopped from questioning the
validity of the Agreement, Kasunduan and TCT No. T-72026. With the Kasunduan upheld as the law

between the contracting parties and their privies,33 the RTC disposed of the case in the following
wise:
WHEREFORE, premises considered, the Court finds for the petitioners and hereby:
1. Orders the respondents to execute and deliver a Deed of Conveyance in favor of the
petitioners covering the 60% of the properties formerly covered by Transfer Certificates of
Title Nos. T-3175, 42104, T-42103, T-32227 and T-42104 which are now covered by Transfer
Certificates of Title Nos. T-72027, T-72028, T-72029, T-72030, T-72031, T-72032, T-72033
and T-72026, all of the Registry of Deeds of Lucena City, for and in consideration of the
amount of P180,000.00 in accordance with the provisions of the KASUNDUAN, and
2. Orders the petitioners to pay and deliver to the respondents upon the latters execution of
the Deed of Conveyance mentioned in the preceding paragraph, the amount of P179,000.00
representing the balance of the purchase price as provided in the KASUNDUAN, and
3. Orders the respondents to pay the petitioners the following amounts:
a). P50,000.00 as and for moral damages;
b). P50,000.00 as and for exemplary damages; and
c). P50,000.00 as and for attorneys fees.
and to pay the costs.
SO ORDERED.34
Dissatisfied with the RTCs decision, both petitioners35 and respondents perfected their
appeals36 which were docketed before the CA as CA-G.R. CV No. 84687. While petitioners prayed
for the increase of the monetary awards adjudicated a quo, as well as the further grant of liquidated
damages in their favor,37 respondents sought the complete reversal of the appealed decision on the
ground that the Agreement and the Kasunduan were null and void.38 On 23 January 2007, the CA
rendered the herein assailed decision, setting aside the RTCs decision, upon the following findings
and conclusions, to wit: (a) the Agreement and Kasunduan are byproducts of the partnership
between Atty. Zepeda and Manuel who, as a non-lawyer, was not authorized to practice law; (b) the
Agreement is void under Article 1491 (5) of the Civil Code of the Philippines which prohibits lawyers
from acquiring properties which are the objects of the litigation in which they have taken part; (c)
jointly designed to completely deprive respondents of the subject parcels, the Agreement and the
Kasunduan are invalid and unconscionable; and (d) without prejudice to his liability for violation of
the Canons of Professional Responsibility, Atty. Zepeda can file an action to collect attorneys fees
based on quantum meruit.39
The Issue
Petitioners seek the reversal of the CAs decision on the following issue:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS, FIFTEENTH DIVISION,

COMITTED A REVERSIBLE ERROR WHEN IT REVERSED AND SET ASIDE THE DECISION OF
THE RTC BRANCH 59, LUCENA CITY, IN CIVIL CASE NO. 93-176 DECLARING THE
AGREEMENT AND KASUNDUAN VOID AB INITIO FOR BEING CONTRARY TO LAW AND
PUBLIC POLICY FOR BEING VIOLATIVE OF ART. 1491 OF THE NEW CIVIL CODE AND THE
CANONS OF PROFESSIONAL RESPONSIBILITY.40
The Courts Ruling
We find the petition impressed with partial merit.
At the outset, it bears pointing out that the complaint for specific performance filed before the RTC
sought only the enforcement of petitioners rights and respondents obligation under the Kasunduan.
Although the answer filed by respondents also assailed the validity of the Agreement and TCT No. T72026, the record shows that the RTC, in its order dated 18 July 1997, disallowed the filing of a
third-party complaint against Atty. Zepeda on the ground that the causes of action in respect to said
contract and title would be better threshed out in a separate action. As Atty. Zepedas whereabouts
were then unknown, the RTC also ruled that, far from contributing to the expeditious settlement of
the case, the grant of respondents motion to file a third-party complaint would only delay the
proceedings in the case.41 With the 1 October 1998 denial of their motion for reconsideration of the
foregoing order, respondents subsequently filed a notice of appeal which was, however, denied due
course on the ground that the orders denying their motion to file a third-party complaint and their
motion for reconsideration were interlocutory and non-appealable. 42
Absent a showing that the RTCs ruling on the foregoing issues was reversed and set aside, we find
that the CA reversibly erred in ruling on the validity of the Agreement which respondents executed
not only with petitioners predecessor-in-interest, Manuel, but also with Atty. Zepeda. Since it is
generally accepted that no man shall be affected by any proceeding to which he is a stranger,43 the
rule is settled that a court must first acquire jurisdiction over a party either through valid service of
summons or voluntary appearance for the latter to be bound by a court decision. 44 The fact that
Atty. Zepeda was not properly impleaded in the suit and given a chance to present his side of the
controversy before the RTC should have dissuaded the CA from invalidating the Agreement and
holding that attorneys fees should, instead, be computed on a quantum meruit basis. Admittedly,
Article 1491 (5)45 of the Civil Code prohibits lawyers from acquiring by purchase or assignment the
property or rights involved which are the object of the litigation in which they intervene by virtue of
their profession. The CA lost sight of the fact, however, that the prohibition applies only during the
pendency of the suit46 and generally does not cover contracts for contingent fees where the transfer
takes effect only after the finality of a favorable judgment. 47
Although executed on the same day, it cannot likewise be gainsaid that the Agreement and the
Kasunduan are independent contracts, with parties, objects and causes different from that of the
other. Defined as a meeting of the minds between two persons whereby one binds himself, with
respect to the other to give something or to render some service,48 a contract requires the
concurrence of the following requisites: (a) consent of the contracting parties; (b) object certain
which is the subject matter of the contract; and, (c) cause of the obligation which is
established.49 Executed in exchange for the legal services of Atty. Zepeda and the financial

assistance to be extended by Manuel, the Agreement concerned respondents transfer of 40% of the
avails of the suit, in the event of a favorable judgment in Civil Case No. 8085. While concededly
subject to the same suspensive condition, the Kasunduan was, in contrast, concluded by
respondents with Manuel alone, for the purpose of selling in favor of the latter 60% of their share in
the subject parcels for the agreed price of P180,000.00. Given these clear distinctions, petitioners
correctly argue that the CA reversibly erred in not determining the validity of the Kasunduan
independent from that of the Agreement.
Viewed in the light of the autonomous nature of contracts enunciated under Article 1306 50 of the Civil
Code, on the other hand, we find that the Kasunduan was correctly found by the RTC to be a valid
and binding contract between the parties. Already partially executed with respondents receipt
of P1,000.00 from Manuel upon the execution thereof, the Kasunduan simply concerned the sale of
the formers 60% share in the subject parcel, less the 1,750-square meter portion to be retained, for
the agreed consideration of P180,000.00. As a notarized document that carries the evidentiary
weight conferred upon it with respect to its due execution, 51 the Kasunduan was shown to have been
signed by respondents with full knowledge of its contents, as may be gleaned from the testimonies
elicited from Philip52 and Leovina.53
Although Philip had repeatedly claimed that respondents had been forced to sign the Agreement and
the Kasunduan, his testimony does not show such vitiation of consent as would warrant the
avoidance of the contract. He simply meant that respondents felt constrained to accede to the
stipulations insisted upon by Atty. Zepeda and Manuel who were not otherwise willing to push
through with said contracts.54
At any rate, our perusal of the record shows that respondents main objection to the enforcement of
the Kasunduan was the perceived inadequacy of the P180,000.00 which the parties had fixed as
consideration for 60% of the subject parcels. Rather than claiming vitiation of their consent in the
answer they filed a quo, respondents, in fact, distinctly averred that the Kasunduan was tantamount
to unjust enrichment and "a clear source of speculative profit" at their expense since their remaining
share in said properties had "a current market value of P9,594,900.00, more or less."55 In their 22
March 1993 letter to petitioners, respondents also cited prices then prevailing for the sale of
properties in the area and offered to sell their 60% share for the price of P500.00 per square
meter56 or a total of P15,991,500.00. In response to petitioners insistence on the price originally
agreed upon by the parties,57 respondents even invoked the last paragraph58 of the Kasunduan to the
effect that the parties agreed to enter into such other stipulations as would be necessary to ensure
the fruition of the sale.59
In the absence of any showing, however, that the parties were able to agree on new stipulations that
would modify their agreement, we find that petitioners and respondents are bound by the original
terms embodied in the Kasunduan. Obligations arising from contracts, after all, have the force of law
between the contracting parties60who are expected to abide in good faith with their contractual
commitments, not weasel out of them.61 Moreover, when the terms of the contract are clear and
leave no doubt as to the intention of the contracting parties, the rule is settled that the literal meaning
of its stipulations should govern. In such cases, courts have no authority to alter a contract by
construction or to make a new contract for the parties. Since their duty is confined to the
interpretation of the one which the parties have made for themselves without regard to its wisdom or

folly, it has been ruled that courts cannot supply material stipulations or read into the contract words
it does not contain.62Indeed, courts will not relieve a party from the adverse effects of an unwise or
unfavorable contract freely entered into.63
Our perusal of the Kasunduan also shows that it contains a penal clause64 which provides that a
party who violates any of its provisions shall be liable to pay the aggrieved party a penalty fixed
at P50,000.00, together with the attorneys fees and litigation expenses incurred by the latter should
judicial resolution of the matter becomes necessary.65 An accessory undertaking to assume greater
liability on the part of the obligor in case of breach of an obligation, the foregoing stipulation is a
penal clause which serves to strengthen the coercive force of the obligation and provides for
liquidated damages for such breach.66 "The obligor would then be bound to pay the stipulated
indemnity without the necessity of proof of the existence and the measure of damages caused by
the breach."67 Articles 1226 and 1227 of the Civil Code state:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in
the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this
Code.
Art. 1227. The debtor cannot exempt himself from the performance of the obligation by paying the
penalty, save in the case where this right has been expressly reserved for him. Neither can the
creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time,
unless this right has been clearly granted to him. However, if after the creditor has decided to require
the fulfillment of the obligation, the performance thereof should become impossible without his fault,
the penalty may be enforced."
In the absence of a showing that they expressly reserved the right to pay the penalty in lieu of the
performance of their obligation under the Kasunduan, respondents were correctly ordered by the
RTC to execute and deliver a deed of conveyance over their 60% share in the subject parcels in
favor of petitiOners. Considering that the Kasunduan stipulated that respondents would retain a
portion of their share consisting of 1,750 square meters, said disposition should, however, be
modified to give full effect to the intention of the contracting parties. Since the parties also fixed
liquidated damages in the sum of P50,000.00 in case of breach, we find that said amount should
suffice as petitioners' indemnity, without further need of compensation for moral and exemplary
damages. In obligations with a penal clause, the penalty generally substitutes the indemnity for
damages and the payment of interests in case of non-compliance. 68 Usually incorporated to create
an effective deterrent against breach of the obligation by making the consequences of such breach
as onerous as it may be possible, the rule is settled that a penal clause is not limited to actual and
compensatory damages69
The RTC's award of attorney's fees in the sum of P50,000.00 is, however, proper. Aside from the
fact that the penal clause included a liability for said award in the event of litigation over a breach of
1wphi1

the Kasunduan, petitioners were able to prove that they incurred said sum in engaging the services
of their lawyer to pursue their rights and protect their interests.70
WHEREFORE, premises considered, the Court of Appeals' assailed 23 January 2007 Decision is
REVERSED and SET ASIDE. In lieu thereof, the RTC's 27 January 2005 Decision is REINSTATED
subject to the following MODIFICATIONS: (a) the exclusion of a 1,750-square meter portion from the
60% share in the subject parcel respondents were ordered to convey in favor of petitioners; and (b)
the deletion of the awards of moral and exemplary damages. The rights of the parties under the
Agreement may be determined in a separate litigation.
SO ORDERED.
JOSE PORTUGAL PEREZ
Associate Justice
WE CONCUR:

G.R. No. 173622

March 11, 2013

ROBERN DEVELOPMENT CORPORATION and RODOLFO M. BERNARDO, JR., Petitioners,

vs.
PEOPLE'S LANDLESS ASSOCIATION represented by FLORIDA RAMOS and NARDO
LABORA, Respondent.
DECISION
DEL CASTILLO, J.:
"This Court cannot presume the existence of a sale of land, absent any direct proof of it." 1
Challenged in this Petition for Review on Certiorari are the August 16, 2005 Decision 2 and May 30,
2006 Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 66071, which ordered petitioner
Robern Development Corporation (Robern) to reconvey the 2,000-square meter lot it bought from AlAmanah Islamic Development Bank of the Philippines (Al-Amanah) to respondent People's Landless
Association (PELA). Factual Antecedents
Al-Amanah owned a 2000-square meter lot located in Magtu-od, Davao City and covered by
Transfer Certificate of Title (TCT) No. 138914.4 On December 12, 1992, Al-Amanah Davao Branch,
thru its officer-in-charge Febe O. Dalig (OIC Dalig), asked5 some of the members of PELA6 to desist
from building their houses on the lot and to vacate the same, unless they are interested to buy it.
The informal settlers thus expressed their interest to buy the lot at P100.00 per square meter, which
Al-Amanah turned down for being far below its asking price.7Consequently, Al-Amanah reiterated its
demand to the informal settlers to vacate the lot.8
In a letter9 dated March 18, 1993, the informal settlers together with other members comprising
PELA offered to purchase the lot for P300,000.00, half of which shall be paid as down payment and
the remaining half to be paid within one year. In the lower portion of the said letter, Al-Amanah made
the following annotation:
Note:
Subject offer has been acknowledged/received but processing to take effect upon putting up of the
partial amt. of P150,000.00 on or before April 15, 1993.
By May 3, 1993, PELA had deposited P150,000.00 as evidenced by four bank receipts.10 For the first
three receipts, the bank labelled the payments as "Partial deposit on sale of TCT No. 138914", while
it noted the 4th receipt as "Partial/Full payment on deposit on sale of A/asset TCT No. 138914."
In the meantime, the PELA members remained in the property and introduced further improvements.

On November 29, 1993, Al-Amanah, thru Davao Branch Manager Abraham D. Ututalum-Al Haj,
wrote then PELA President Bonifacio Cuizon, Sr. informing him of the Head Offices disapproval of
PELAs offer to buy the said 2,000-square meter lot, viz:
Dear Mr. Cuizon, Sr.,
Please be inform[ed] that your offer to purchase the lot covered by TCT No. T-138914, containing an
area of 2,000 square meters, located at Bakingan, Barangay Magtuod, Davao City for P300,000.00
has been turned down by the top management, due to the reason that your offered price is way
below the selling price of the Bank which is P500.00 per square meter, or negotiate but on Cash
basis only.
You had been told regarding this matter, but you failed to counter offer since you have [conferred]
with the Banks local management. Despite x x x the time given to you to counter offer or to vacate
the lot presently and illegally occupied by you and the members of the association, still you refrain to
hear our previous notices. You even deliberately construct more residential structures without our
permission. As such, you are finally instructed to vacate the lot and remove all the house structures
erected on the said lot within 15 days upon receipt of this letter. Failure on your part including that of
the members, the Bank will be constrained to take legal action against you.
Furthermore, you can withdraw the amount deposited in the name of your association anytime
during banking hours.11
Subsequently, Al-Amanah sent similarly worded letters,12 all dated December 14, 1993, to 19 PELA
members demanding that they vacate the lot.
In a letter13 dated December 20, 1993, PELA, through Atty. Pedro S. Castillo, replied that it had
already reached an agreement with Al-Amanah regarding the sale of the subject lot based on their
offered price:
Dear Mr. Ututalum-Al-Haj,
The Peoples Landless Association, Inc., through Mr. Bonifacio Cuizon, Sr. has requested us to
assist them in communicating with you anent your letter of 29 November 1993. According to Mr.
Cuizon the present occupants of the lot covered by T.C.T. No. T-138914 with an area of 2,000
square meters, had a definite agreement with the Islamic Bank through its previous Manager or
Officer-in-Charge to buy this foreclosed property at P300,000.00. As a matter of fact their deposit
of P150,000.00 was on that basis. For this reason, the occupants, who are members of the
association, have already made lot allocations among themselves and have improved their
respective houses.
It would be most unfair if the Bank would now renege on its commitment and eject these occupants.
In line with the national policy of granting landless members of our society the opportunity of owning
land and providing shelter to their families, it would be equitable and socially justifiable to grant these
occupants their occupied areas pursuant to the earlier agreement with the Bank.

For the foregoing reasons we hope that the Islamic Bank, for legal, moral and social grounds would
reconsider.
Meanwhile, acting on Roberns undated written offer,14 Al-Amanah issued a Recommendation
Sheet15 dated December 27, 1993 addressed to its Board Operations Committee, indicating therein
that Robern is interested to buy the lot for P400,000.00; that it has already deposited 20% of the
offered purchase price; that it is buying the lot on "as is" basis; and, that it is willing to shoulder the
relocation of all informal settlers therein. On December 29, 1993, the Head Office informed the
Davao Branch Manager that the Board Operations Committee had accepted Roberns offer.16
Eight days later, Robern was informed of the acceptance. Al-Amanah stressed that it is Roberns
responsibility to eject the occupants in the subject lot, if any, as well as the payment of the remaining
amount within 15 days; otherwise, the P80,000.00 deposit shall be forfeited.17
In a letter18 dated January 13, 1994, Robern expressed to Al-Amanah its uncertainty on the status of
the subject lot, viz.:
This is in connection with TCT No. 138914 which your bank offered to sell to us and which we
committed to buy.
A group calling itself PEOPLES LANDLESS ASSOCIATION, INC. made representation with our
office bringing with them copies of official receipts totalling P150,000.00 issued by your bank which
stated---"PARTIAL PAYMENT/DEPOSIT on sale of TCT #138914".
While condition no. 6 in the sale of property to us states that the buyer shall be responsible for
ejecting the squatters of the property, the occupants of the said lot could hardly be categorized as
squatters considering the supposed transaction previously entered by your bank with them. We were
greatly appalled that we should learn about this not from the bank but from outside sources.
1wphi1

My company is ready to finalize our transaction provided, however, that the problem with this group
is cleared. In this connection, we are requesting for a definite statement from your bank on whether
the official receipts being brandished by this group are genuine or not, and if they were, were they
ever invalidated by virtue of the return of their deposit and whether there was a cancellation of your
agreement with them.
In the meantime, please consider the 15-day period for us to pay the amount of P320,000.00
imposed by your bank suspended until such time that the legal problem with the lot occupants is
settled.
To convince Robern that it has no existing contract with PELA, Al-Amanah furnished it with copies of
the Head Offices rejection letter of PELAs bid, the demand letters to vacate, and the proof of
consignment of PELAsP150,000.00 deposit to the Regional Trial Court (RTC) of Davao City that
PELA refused to withdraw.19Thereafter, on February 2, 1994, it informed Robern that should the latter
fail to pay the balance by February 9, 1994, its P80,000.00 deposit will be forfeited and the lot shall
be up for sale to other prospective buyers.20Meanwhile, Al-Amanah requested for assistance for the
removal of the houses not only from the Office of the City Engineer of Davao City21 but also from

Mayor Rodrigo Duterte. Gaining a favorable legal opinion from the City Legal Officer, the matter was
indorsed to the Chief of Demolition Consensus of the Department of Public Services for action. 22
On March 4, 1994, Robern paid the balance of the purchase price. 23 The Deed of Sale24 over the
realty was executed on April 6, 1994 and TCT No. T-21298325 was issued in Roberns name the
following day.
A week later, PELA consigned P150,000.00 in the RTC of Davao City.26 Then on April 14, 1994, it
wrote27 Al-Amanah asking the latter to withdraw the amount consigned. Part of the letter states:
xxxx
On March 21, 1994 (almost one month before the April 15, 1994 deadline) we came to your bank to
remit the balance and full payment [for] the abovementioned lot. [Inasmuch] as you refuse[d] to
accept the payment, we have decided to deposit the amount consigned to your bank.
In our dialogue at your office in 1993, we have agreed that documents will be processed as soon as
we pay theP150,000.00 initial deposit. [Inasmuch] as we have not only paid the deposit but have
also made full payment of the account, kindly facilitate processing of the documents to finalize
transaction.
We have not been remiss in doing our part of the transaction; please do your share.
Thank you.
Very truly yours,
For the occupants/claimants
T.C.T. No. T-13891428
Three months later, as its members were already facing eviction and possible demolition of their
houses, and in order to protect their rights as vendees, PELA filed a suit for Annulment and
Cancellation of Void Deed of Sale29against Al-Amanah, its Director Engr. Farouk Carpizo (Engr.
Carpizo), OIC Dalig, Robern, and Roberns President and General Manager, petitioner Rodolfo
Bernardo (Bernardo) before the RTC of Davao City. It insisted that as early as March 1993 it has a
perfected contract of sale with Al-Amanah. However, in an apparent act of bad faith and in cahoots
with Robern, Al-Amanah proceeded with the sale of the lot despite the prior sale to PELA.
Incidentally, the trial court granted PELAs prayer for a temporary restraining order.30 Subsequently, it
issued on August 12, 1994 an Order31 finding merit in the issuance of the writ of preliminary
injunction, inter alia. The RTCs grant of injunctive relief was affirmed by the CA in CA-G.R. SP No.
3523832 when the factual and legal bases for its issuance were questioned before the appellate
court.

The respondents in the annulment case filed their respective Answers.33 Al-Amanah and Engr.
Carpizo claimed that the bank has every right to sell its lot to any interested buyer with the best offer
and thus they chose Robern. They clarified that the P150,000.00 PELA handed to them is not part of
the payment but merely a deposit in connection with its offer. They asserted that PELA was properly
apprised that its offer to buy was subject to the approval of Al-Amanahs Head Office. They stressed
that Al-Amanah never entered into a sale with PELA for there was no perfected agreement as to the
price since the Head Office rejected PELAs offer.
For their part, Robern and Bernardo asserted the corporations standing as a purchaser in good faith
and for value in the sale of the property, having relied on the clean title of Al-Amanah. They also
alleged that the purported sale to PELA is violative of the Statute of Frauds 34 as there is no written
agreement covering the same.
Ruling of the Regional Trial Court
In its August 10, 1999 Decision,35 the RTC dismissed PELAs Complaint. It opined that the March 18,
1993 letter PELA has been relying upon as proof of a perfected contract of sale was a mere offer
which was already rejected.
Furthermore, the annotation appearing in the bottom part of the said letter could not be construed as
an acceptance because the same is a mere acknowledgment of receipt of the letter (not the offer)
which will still be subject to processing. The RTC likewise ruled that being a corporation, only AlAmanahs board of directors can bind the bank with third persons involving the sale of its property.
Thus, the purported offer made by Al-Amanahs OIC, who was never conferred authority by the
board of directors to sell the lot, cannot bind the bank. In contrast, when the Head Office accepted
Roberns offered price, it was duly approved by the board of directors, giving birth to a perfected
contract of sale between Al-Amanah and Robern.
Refusing to accept the Decision, PELA elevated its case to the CA.36
Ruling of the Court of Appeals
Reversing the RTC in its assailed Decision37 of August 16, 2005, the CA ruled that there was already
a perfected contract of sale between PELA and Al-Amanah. It held that the annotationon the lower
portion of the March 18, 1993 letter could be construed to mean that for Al-Amanah to accept PELAs
offer, the sum of P150,000.00 must be first put up. The CA also observed that the subsequent
receipt by Al-Amanah of the amounts totallingP150,000.00, and the annotation of "deposit on sale of
TCT No. 138914," on the receipts it issued explicitly indicated an acceptance of the associations
offer to buy. Consequently, the CA invalidated the sale between Robern and Al-Amanah.
The CA also concluded that Al-Amanah is guilty of bad faith in dealing with PELA because it took AlAmanah almost seven months to reject PELAs offer while holding on to the P150,000.00 deposit.
The CA thus adjudged PELA entitled to moral and exemplary damages as well as attorneys fees.
The dispositive portion of the CA Decision reads:

WHEREFORE, premises considered, the assailed Decision is SET ASIDE. Judgment is hereby
rendered:
1. DECLARING the contract of sale between PELA and defendant Bank valid and subsisting.
2. ORDERING the defendant Bank to receive the balance of P150,000.00 of the purchase
price from PELA as consigned in court.
3. DECLARING the deed of sale executed by defendant Bank in favor or Robern
Development Corporation as invalid and, therefore, void.
4. ORDERING defendant Bank to return to Robern the full amount of P400,000.00 which
Robern paid as the purchase price of the subject property within ten (10) days from finality of
this decision. It shall earn a legal interest of twelve percent (12%) per annum from the tenth
(10th) day aforementioned if there is delay in payment.
5. ORDERING Robern Development Corporation to reconvey the land covered by T.C.T. No.
212983 in favor of Peoples Landless Association within a similar period of ten (10) days from
finality of this decision.
6. ORDERING defendant Bank to pay plaintiffs-appellants the following:
a. The sum of P100,000.00 as moral damages;
b. The sum of P30,000.00 as exemplary damages;
c. The sum of P30,000.00 as attorneys fees;
d. A legal interest of SIX PERCENT (6%) per annum on the sums awarded in (a), (b),
and (c) from the date of this Decision up to the time of full payment thereof.
SO ORDERED.38
Robern and Bernardo filed a Motion for Reconsideration39 which Al-Amanah adopted. The CA,
however, was firm in its disposition and thus denied40 the same. Aggrieved, Robern and Al-Amanah
separately filed Petitions for Review on Certiorari before us. However, Al-Amanahs Petition
docketed as G.R. No. 173437, was denied on September 27, 2006 on procedural grounds. 41 AlAmanahs Motion for Reconsideration of the said Resolution of dismissal was denied with finality on
December 4, 2006.42 Hence, only the Petition of Robern and Bernardo subsists.
Petitioners Arguments
Petitioners stress that there was no sale between PELA and Al-Amanah, for neither a deed nor any
written agreement was executed. They aver that Dalig was a mere OIC of Al-Amanahs Davao
Branch, who was never vested with authority by the board of directors of Al-Amanah to sell the lot.

With regard to the notation on the March 18, 1993 letter and the four bank receipts, Robern
contends that these are only in connection with PELAs offer.
Petitioners likewise contend that Robern is a purchaser in good faith. The PELA members are mere
informal settlers. The title to the lot was clean on its face, and at the time Al-Amanah accepted
Roberns offer, the latter was unaware of the alleged transaction with PELA. And when PELA later
represented to Robern that it entered into a transaction with Al-Amanah regarding the subject lot,
Robern even wrote Al-Amanah to inquire about PELAs claim over the property. And when informed
by Al-Amanah that it rejected the offer of PELA and of its action of requesting assistance from the
local government to remove the occupants from the subject property, only then did Robern push
through with the sale.
Respondents Arguments
PELA, on the other hand, claims that petitioners are not the proper parties who can assail the
contract of sale between it and the bank. It likewise argues that the Petition should be dismissed
because the petitioners failed to attach the material portions of the records that would support its
allegations, as required by Section 4, Rule 45 of the Rules of Court. 43
Aside from echoing the finding of the CA that Al-Amanah has a perfected contract of sale with PELA,
the latter further invokes the reasoning of the RTC and the CA (CA-G.R. SP No. 35238) in finding
merit in the issuance of the writ of preliminary injunction, that is, that there was an apparent
perfection of contract (of sale) between the Bank and PELA.44 Furthermore, PELA claims that AlAmanah accepted its offered price and the P150,000.00, thus barring the application of the Statute
of Frauds as the contract was already partially executed. As to the non-existence of a written
contract evidencing the same, PELA ascribes fault on the bank claiming that nothing happened
despite its repeated follow-ups for the OIC of Al-Amanah to execute the deed after payment of
theP150,000.00 in May 1993.
Issue
At issue before us is whether there was a perfected contract of sale between PELA and Al-Amanah,
the resolution of which will decide whether the sale of the lot to Robern should be sustained or not.
Our Ruling
We shall first briefly address some matters raised by PELA.
PELAs contention that Robern cannot assail the alleged sale between PELA and Al-Amanah is
untenable. Robern is one of the parties who claim title to the disputed lot. As such, it is a real party in
interest since it stands to be benefited or injured by the judgment.45
Petitioners failure to attach the material portions of the record that would support the allegations in
the Petition is not fatal. We ruled in F.A.T. Kee Computer Systems, Inc. v. Online Networks
International, Inc.,46 thus:

x x x However, such a requirement failure to attach material portions of the record was not meant to
be an ironclad rule such that the failure to follow the same would merit the outright dismissal of the
petition. In accordance with Section 7 of Rule 45, the Supreme Court may require or allow the filing
of such pleadings, briefs, memoranda or documents as it may deem necessary within such periods
and under such conditions as it may consider appropriate. More importantly, Section 8 of Rule 45
declares that [i]f the petition is given due course, the Supreme Court may require the elevation of
the complete record of the case or specified parts thereof within fifteen (15) days from notice. x x x 47
Anent the statement of the courts below that there was an apparent perfection of contract (of sale)
between Al-Amanah and PELA, we hold that the same is strictly confined to the resolution of
whether a writ of preliminary injunction should issue since the PELA members were then about to be
evicted. PELA should not rely on such statement as the same is not decisive of the rights of the
parties and the merits of this case.
We shall now delve into the crucial issue of whether there was a perfected contract of sale between
PELA and Al-Amanah.
Essential Elements of a Contract of Sale
A contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the
object of the contract and upon the price.48 Thus, for a contract of sale to be valid, all of the following
essential elements must concur: "a) consent or meeting of the minds; b) determinate subject matter;
and c) price certain in money or its equivalent."49
In the case at bench, there is no controversy anent the determinate subject matter, i.e., the 2,000square meter lot. This leaves us to resolve whether there was a concurrence of the remaining
elements.
As for the price, fixing it can never be left to the decision of only one of the contracting parties. 50 "But
a price fixed by one of the contracting parties, if accepted by the other, gives rise to a perfected
sale."51
As regards consent, "when there is merely an offer by one party without acceptance of the other,
there is no contract."52 The decision to accept a bidders proposal must be communicated to the
bidder.53 However, a binding contract may exist between the parties whose minds have met,
although they did not affix their signatures to any written document, 54 as acceptance may be
expressed or implied.55 It "can be inferred from the contemporaneous and subsequent acts of the
contracting parties."56 Thus, we held:
x x x The rule is that except where a formal acceptance is so required, although the acceptance
must be affirmatively and clearly made and must be evidenced by some acts or conduct
communicated to the offeror, it may be made either in a formal or an informal manner, and may be
shown by acts, conduct, or words of the accepting party that clearly manifest a present intention or
determination to accept the offer to buy or sell. Thus, acceptance may be shown by the acts,
conduct, or words of a party recognizing the existence of the contract of sale. 57

There is no perfected contract of sale between PELA and Al-Amanah for want of consent and
agreement on the price.
After scrutinizing the testimonial and documentary evidence in the records of the case, we find no
proof of a perfected contract of sale between Al-Amanah and PELA. The parties did not agree on the
price and no consent was given, whether express or implied.
When PELA Secretary Florida Ramos (Ramos) testified, she referred to the March 18, 1993 letter
which PELA sent to Al-Amanah as the document supposedly embodying the perfected contract of
sale.58 However, we find that the March 18, 1993 letter referred to was merely an offer to buy, viz:
March 18, 1993
The Manager
Islamic Bank
Davao Branch
Davao City
Sir/Madam:
This has reference to the offer made by Messrs. Alejandro Padilla, Leonardo Labora, Boy Bartiana,
Francisco Paig, and Mr. Asterio Aki for the purchase of the acquired asset of the bank with an area
of 2,000 square meters and covered by T.C.T. No. T-138914, portions of which are occupied by their
houses. These occupants have formed and registered a group of x x x landless families who have
occupied shoulders of National Highways, to be able to raise an amount that would meet the
approval of the Bank as the consideration for the purchase of the property. The group which is
known as PELA or Peoples Landless Association, is offering the bank the amount of THREE
HUNDRED THOUSAND PESOS (P300,000.00) for the whole 2,000 sq. meters. Of this amount the
buyers will pay a down payment of ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00) and
the balance payable in one (1) year.
According to the plan of PELA, about 24 landless families can be accommodated in the property. We
hope the Bank can help these families own even a small plot for their shelter. This would be in line
with the governments program of housing which the present administration promised to put in high
gear this year.59 (Emphasis supplied)
Neither can the note written by the bank that "subject offer has been acknowledged/received but
processing to take effect upon putting up of the partial amount of P150,000.00 on or before April 15,
1993" be construed as acceptance of PELAs offer to buy. Taken at face value, the annotation simply
means that the bank merely acknowledged receipt of PELAs letter-offer. Furthermore, by
processing, Al-Amanah only meant that it will act on the offer, i.e., it still has to evaluate whether
PELAs offer is acceptable. Until and unless Al-Amanah accepts, there is as yet no perfected
contract of sale. Notably here, the bank never signified its approval or acceptance of the offer.

We cannot agree with the CAs ratiocination that receipt of the amount, coupled with the phrase
written on the four receipts as "deposit on sale of TCT No. 138914," signified a tacit acceptance by
Al-Amanah of PELAs offer. For sure, the money PELA gave was not in the concept of an earnest
money. Besides, as testified to by then OIC Dalig, it is the usual practice of Al-Amanah to require
submission of a bid deposit which is acknowledged by way of bank receipts before it entertains
offers. Thus:
Atty. Bolcan:
Now, as far as you can remember, these receipts state that these are partial deposits, what do you
mean by that?
WITNESS:
A: x x x, we normally request an offeror to submit or make deposit, actually the bank does not
entertain any offer without any deposit and just like that, during my time x x x in buying the property
for those interested the bank does not entertain any offer unless they make a deposit.
xxxx
Q: Why do you issue receipts as officer-in-charge stating only partial deposits?
A: Because there was no sale, there was no consu[m]mated sale, so any amount which you will give
as a deposit will be accepted by the bank for the offer and that if their offer will be disapproved we
will return the deposit because their offer was very low and this might be disapproved by the head
office in Manila.60
xxxx
Atty. Taasan:
Do you confirm that based on the interest of the plaintiff to acquire the property they made a deposit
with said bank, as evidenced by the receipts that were shown to you by your counsel, correct?
A: Yes, sir.
Q: And according to you, the bank does not entertain any offer to buy the property without deposits?
A: Yes, sir.
Q: In this case since the plaintiffs made a deposit x x x they were properly entertained, correct?
A: Yes because it is under negotiation, now while their offer price is below the selling price of the
bank.61

The absence of a perfected contract of sale was further buttressed by the testimony of PELA
Secretary Ramos on cross examination, viz:
Atty. Rabor:
Since it was x x x hard earned money you did not require the Amanah Bank when you gave
that P150,000.00 to reduce your agreement into writing regarding the sale of this property?
A: I insisted but she will not issue that.62
xxxx
Atty. Bolcan:
Now, on April 15, 1993 when the deposit was made, you were present?
A: Yes, sir.
Q: Now, after making the deposit of One Hundred Fifty Thousand (P150,000.00) Pesos on April 15,
1993 did you not request for the bank to execute a document to prove that actually you are buying
the property?
A: I even said to the OIC or the manager that maam, now that you have received our money, where
is our paper that we were the ones to buy that property, sir.
Q: To whom are you referring to?
A: Febe Dalig, the OIC, sir.
Q: And this OIC Febe Dalig informed you that the Offer on your part to buy the property is subject for
approval by the head office in Manila, is that correct?
A: Yes she told me that it would be subject to approval in Manila x x x.
Q: And later on you were informed by the bank that your offer was not accepted by the head office in
Manila, is that correct?
A: She did not inform us but we kept on following it up with their office and she told us that it did not
arrive yet, sir.63 (Emphasis supplied)
PELA Secretary Ramos testimony thus corroborated OIC Daligs consistent stand that it is the Head
Office which will decide whether Al-Amanah would accept PELAs offer:
Atty. Bolcan:
And now, if there are interested persons making offer x x x what would you do?

A: Well, we have to screen the offer before we forward the offer to Manila for approval because
Court:
What would you do before you forward that to Manila?
A: We will be screening the offer x x x.
Atty. Bolcan:
And you said that it is referred to Manila?
A: Yes, sir.
Q: Who will eventually approve the offer made by the interested persons to buy the property?
A: We have a committee in Manila to approve the sale of the property.
Q: Do you have any idea who will approve the offer of the property?
A: I have no idea but the president, rather it consists of the president I think and then signed also by
the vice-president and some officers in the office, sir.
xxxx
Q: Now, in case of offers of the property of the bank, x x x the officer-in-charge of the bank, AlAmanah Bank branch, usually refers this matter to the head office in Manila?
A: Yes, sir.
Q: And it is the head office that will decide whether the offer will be approved or not?
A: Yes as head of the branch, we have to forward the offer whether it was acceptable or not. 64
It is thus undisputed, and PELA even acknowledges, that OIC Dalig made it clear that the
acceptance of the offer, notwithstanding the deposit, is subject to the approval of the Head Office.
Recognizing the corporate nature of the bank and that the power to sell its real properties is lodged
in the higher authorities,65 she never falsely represented to the bidders that she has authority to sell
the banks property. And regardless of PELAs insistence that she execute a written agreement of the
sale, she refused and told PELA to wait for the decision of the Head Office, making it clear that she
has no authority to execute any deed of sale.
Contracts undergo three stages: "a) negotiation which begins from the time the prospective
contracting parties indicate interest in the contract and ends at the moment of their agreement[; b)
perfection or birth, x x x which takes place when the parties agree upon all the essential elements of

the contract x x x; and c) consummation, which occurs when the parties fulfill or perform the terms
agreed upon, culminating in the extinguishment thereof."66
In the case at bench, the transaction between Al-Amanah and PELA remained in the negotiation
stage. The offer never materialized into a perfected sale, for no oral or documentary evidence
categorically proves that Al-Amanah expressed amenability to the offered P300,000.00 purchase
price. Before the lapse of the 1-year period PELA had set to pay the remaining balance, Al-Amanah
expressly rejected its offered purchase price, although it took the latter around seven months to
inform the former and this entitled PELA to award of damages.67 Al-Amanahs act of selling the lot to
another buyer is the final nail in the coffin of the negotiation with PELA. Clearly, there is no double
sale, thus, we find no reason to disturb the consummated sale between Al-Amanah and Robern.
At this juncture, it is well to stress that Al-Amanahs Petition before this Court docketed as G.R. No.
173437 was already denied with finality on December 4, 2006. Hence, we see no reason to disturb
paragraph 6 of the CAs Decision ordering Al-Amanah to pay damages to PELA.
WHEREFORE, we PARTIALLY GRANT the Petition. Except for paragraph 6 of the Court of Appeals
Decision which had already been long settled,68 the rest of the judgment in the assailed August 16,
2005 Decision and May 30, 2006 Resolution of the Court of Appeals in CA-G.R. No. CV No. 66071
are hereby ANNULLED and SET ASIDE. The August 10, 1999 Decision of the Regional Trial Court
of Davao City, Branch 12, dismissing the Complaint for Annulment and Cancellation of Void Deed of
Sale filed by respondent People's Landless Association is REINSTATED and AFFIRMED. The
amount of Pesos: Three Hundred Thousand (P300,000.00) consigned with the Regional Trial Court
of Davao City may now be withdrawn by People's Landless Association.
SO ORDERED.
MARIANO C. DEL CASTILLO
Associate Justice
WE CONCUR:

-No perfected sale based on the annotation notwithstanding the initial amount
tendered
-the annotation is clear that the agreement is still under negotiation the putting up
of the deposit is for the bank to proceed for the considerations to process to accept
or not the proposal
-No perfected contract of sale

G.R. No. 166862

December 20, 2006

MANILA METAL CONTAINER CORPORATION, petitioner,

REYNALDO C. TOLENTINO, intervenor,
vs.
PHILIPPINE NATIONAL BANK, respondent,
DMCI-PROJECT DEVELOPERS, INC., intervenor.

DECISION
CALLEJO, SR., J.:
Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in CAG.R. No. 46153 which affirmed the decision2 of the Regional Trial Court (RTC), Branch 71, Pasig
City, in Civil Case No. 58551, and its Resolution3 denying the motion for reconsideration filed by
petitioner Manila Metal Container Corporation (MMCC).
The Antecedents
Petitioner was the owner of a 8,015 square meter parcel of land located in Mandaluyong (now a
City), Metro Manila. The property was covered by Transfer Certificate of Title (TCT) No. 332098 of
the Registry of Deeds of Rizal. To secure a P900,000.00 loan it had obtained from respondent
Philippine National Bank (PNB), petitioner executed a real estate mortgage over the lot. Respondent
PNB later granted petitioner a new credit accommodation of P1,000,000.00; and, on November 16,
1973, petitioner executed an Amendment4 of Real Estate Mortgage over its property. On March 31,
1981, petitioner secured another loan of P653,000.00 from respondent PNB, payable in quarterly
installments of P32,650.00, plus interests and other charges.5
On August 5, 1982, respondent PNB filed a petition for extrajudicial foreclosure of the real estate
mortgage and sought to have the property sold at public auction for P911,532.21, petitioner's
outstanding obligation to respondent PNB as of June 30, 1982, 6 plus interests and attorney's fees.
After due notice and publication, the property was sold at public auction on September 28, 1982
where respondent PNB was declared the winning bidder for P1,000,000.00. The Certificate of

Sale7 issued in its favor was registered with the Office of the Register of Deeds of Rizal, and was
annotated at the dorsal portion of the title on February 17, 1983. Thus, the period to redeem the
property was to expire on February 17, 1984.
Petitioner sent a letter dated August 25, 1983 to respondent PNB, requesting that it be granted an
extension of time to redeem/repurchase the property.8 In its reply dated August 30, 1983, respondent
PNB informed petitioner that the request had been referred to its Pasay City Branch for appropriate
action and recommendation.9
In a letter10 dated February 10, 1984, petitioner reiterated its request for a one year extension from
February 17, 1984 within which to redeem/repurchase the property on installment basis. It reiterated
its request to repurchase the property on installment.11 Meanwhile, some PNB Pasay City Branch
personnel informed petitioner that as a matter of policy, the bank does not accept "partial
redemption."12
Since petitioner failed to redeem the property, the Register of Deeds cancelled TCT No. 32098 on
June 1, 1984, and issued a new title in favor of respondent PNB.13 Petitioner's offers had not yet
been acted upon by respondent PNB.
Meanwhile, the Special Assets Management Department (SAMD) had prepared a statement of
account, and as of June 25, 1984 petitioner's obligation amounted to P1,574,560.47. This included
the bid price of P1,056,924.50, interest, advances of insurance premiums, advances on realty taxes,
registration expenses, miscellaneous expenses and publication cost. 14 When apprised of the
statement of account, petitioner remitted P725,000.00 to respondent PNB as "deposit to
repurchase," and Official Receipt No. 978191 was issued to it.15
In the meantime, the SAMD recommended to the management of respondent PNB that petitioner be
allowed to repurchase the property for P1,574,560.00. In a letter dated November 14, 1984, the PNB
management informed petitioner that it was rejecting the offer and the recommendation of the
SAMD. It was suggested that petitioner purchase the property for P2,660,000.00, its minimum
market value. Respondent PNB gave petitioner until December 15, 1984 to act on the proposal;
otherwise, its P725,000.00 deposit would be returned and the property would be sold to other
interested buyers.16
Petitioner, however, did not agree to respondent PNB's proposal. Instead, it wrote another letter
dated December 12, 1984 requesting for a reconsideration. Respondent PNB replied in a letter
dated December 28, 1984, wherein it reiterated its proposal that petitioner purchase the property
for P2,660,000.00. PNB again informed petitioner that it would return the deposit should petitioner
desire to withdraw its offer to purchase the property.17 On February 25, 1985, petitioner, through
counsel, requested that PNB reconsider its letter dated December 28, 1984. Petitioner declared that
it had already agreed to the SAMD's offer to purchase the property forP1,574,560.47, and that was
why it had paid P725,000.00. Petitioner warned respondent PNB that it would seek judicial recourse
should PNB insist on the position.18
On June 4, 1985, respondent PNB informed petitioner that the PNB Board of Directors had accepted
petitioner's offer to purchase the property, but for P1,931,389.53 in cash less the P725,000.00
already deposited with it.19 On page two of the letter was a space above the typewritten name of
petitioner's President, Pablo Gabriel, where he was to affix his signature. However, Pablo Gabriel did
not conform to the letter but merely indicated therein that he had received it. 20 Petitioner did not
respond, so PNB requested petitioner in a letter dated June 30, 1988 to submit an amended offer to
repurchase.

Petitioner rejected respondent's proposal in a letter dated July 14, 1988. It maintained that
respondent PNB had agreed to sell the property for P1,574,560.47, and that since its P725,000.00
downpayment had been accepted, respondent PNB was proscribed from increasing the purchase
price of the property.21 Petitioner averred that it had a net balance payable in the amount
of P643,452.34. Respondent PNB, however, rejected petitioner's offer to pay the balance
of P643,452.34 in a letter dated August 1, 1989.22
On August 28, 1989, petitioner filed a complaint against respondent PNB for "Annulment of
Mortgage and Mortgage Foreclosure, Delivery of Title, or Specific Performance with Damages." To
support its cause of action for specific performance, it alleged the following:
34. As early as June 25, 1984, PNB had accepted the down payment from Manila Metal in
the substantial amount of P725,000.00 for the redemption/repurchase price
of P1,574,560.47 as approved by its SMAD and considering the reliance made by Manila
Metal and the long time that has elapsed, the approval of the higher management of the
Bank to confirm the agreement of its SMAD is clearly a potestative condition which cannot
legally prejudice Manila Metal which has acted and relied on the approval of SMAD. The
Bank cannot take advantage of a condition which is entirely dependent upon its own will after
accepting and benefiting from the substantial payment made by Manila Metal.
35. PNB approved the repurchase price of P1,574,560.47 for which it accepted P725,000.00
from Manila Metal. PNB cannot take advantage of its own delay and long inaction in
demanding a higher amount based on unilateral computation of interest rate without the
consent of Manila Metal.
Petitioner later filed an amended complaint and supported its claim for damages with the following
arguments:
36. That in order to protect itself against the wrongful and malicious acts of the defendant
Bank, plaintiff is constrained to engage the services of counsel at an agreed fee
of P50,000.00 and to incur litigation expenses of at least P30,000.00, which the defendant
PNB should be condemned to pay the plaintiff Manila Metal.
37. That by reason of the wrongful and malicious actuations of defendant PNB, plaintiff
Manila Metal suffered besmirched reputation for which defendant PNB is liable for moral
damages of at leastP50,000.00.
38. That for the wrongful and malicious act of defendant PNB which are highly reprehensible,
exemplary damages should be awarded in favor of the plaintiff by way of example or
correction for the public good of at least P30,000.00.23
Petitioner prayed that, after due proceedings, judgment be rendered in its favor, thus:
a) Declaring the Amended Real Estate Mortgage (Annex "A") null and void and without any
legal force and effect.
b) Declaring defendant's acts of extra-judicially foreclosing the mortgage over plaintiff's
property and setting it for auction sale null and void.
c) Ordering the defendant Register of Deeds to cancel the new title issued in the name of
PNB (TCT NO. 43792) covering the property described in paragraph 4 of the Complaint, to

reinstate TCT No. 37025 in the name of Manila Metal and to cancel the annotation of the
mortgage in question at the back of the TCT No.37025 described in paragraph 4 of this
Complaint.
d) Ordering the defendant PNB to return and/or deliver physical possession of the TCT
No. 37025described in paragraph 4 of this Complaint to the plaintiff Manila Metal.
e) Ordering the defendant PNB to pay the plaintiff Manila Metal's actual damages, moral and
exemplary damages in the aggregate amount of not less than P80,000.00 as may be
warranted by the evidence and fixed by this Honorable Court in the exercise of its sound
discretion, and attorney's fees of P50,000.00 and litigation expenses of at least P30,000.00
as may be proved during the trial, and costs of suit.
Plaintiff likewise prays for such further reliefs which may be deemed just and equitable in the
premises.24
In its Answer to the complaint, respondent PNB averred, as a special and affirmative defense, that it
had acquired ownership over the property after the period to redeem had elapsed. It claimed that no
contract of sale was perfected between it and petitioner after the period to redeem the property had
expired.
During pre-trial, the parties agreed to submit the case for decision, based on their stipulation of
facts.25 The parties agreed to limit the issues to the following:
1. Whether or not the June 4, 1985 letter of the defendant approving/accepting plaintiff's offer
to purchase the property is still valid and legally enforceable.
2. Whether or not the plaintiff has waived its right to purchase the property when it failed to
conform with the conditions set forth by the defendant in its letter dated June 4, 1985.
3. Whether or not there is a perfected contract of sale between the parties. 26
While the case was pending, respondent PNB demanded, on September 20, 1989, that petitioner
vacate the property within 15 days from notice,27 but petitioners refused to do so.
On March 18, 1993, petitioner offered to repurchase the property for P3,500,000.00.28 The offer was
however rejected by respondent PNB, in a letter dated April 13, 1993. According to it, the prevailing
market value of the property was approximately P30,000,000.00, and as a matter of policy, it could
not sell the property for less than its market value. 29 On June 21, 1993, petitioner offered to purchase
the property for P4,250,000.00 in cash.30The offer was again rejected by respondent PNB on
September 13, 1993.31
On May 31, 1994, the trial court rendered judgment dismissing the amended complaint and
respondent PNB's counterclaim. It ordered respondent PNB to refund the P725,000.00 deposit
petitioner had made.32 The trial court ruled that there was no perfected contract of sale between the
parties; hence, petitioner had no cause of action for specific performance against respondent. The
trial court declared that respondent had rejected petitioner's offer to repurchase the property.
Petitioner, in turn, rejected the terms and conditions contained in the June 4, 1985 letter of the
SAMD. While petitioner had offered to repurchase the property per its letter of July 14, 1988, the
amount of P643,422.34 was way below the P1,206,389.53 which respondent PNB had demanded. It

further declared that the P725,000.00 remitted by petitioner to respondent PNB on June 4, 1985 was
a "deposit," and not a downpayment or earnest money.
On appeal to the CA, petitioner made the following allegations:
I
THE LOWER COURT ERRED IN RULING THAT DEFENDANT-APPELLEE'S LETTER
DATED 4 JUNE 1985 APPROVING/ACCEPTING PLAINTIFF-APPELLANT'S OFFER TO
PURCHASE THE SUBJECT PROPERTY IS NOT VALID AND ENFORCEABLE.
II
THE LOWER COURT ERRED IN RULING THAT THERE WAS NO PERFECTED
CONTRACT OF SALE BETWEEN PLAINTIFF-APPELLANT AND DEFENDANT-APPELLEE.
III
THE LOWER COURT ERRED IN RULING THAT PLAINTIFF-APPELLLANT WAIVED ITS
RIGHT TO PURCHASE THE SUBJECT PROPERTY WHEN IT FAILED TO CONFORM
WITH CONDITIONS SET FORTH BY DEFENDANT-APPELLEE IN ITS LETTER DATED 4
JUNE 1985.
IV
THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT IT WAS THE
DEFENDANT-APPELLEE WHICH RENDERED IT DIFFICULT IF NOT IMPOSSIBLE FOR
PLAINTIFF-APPELLANT TO COMPLETE THE BALANCE OF THEIR PURCHASE PRICE.
V
THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT THERE WAS NO
VALID RESCISSION OR CANCELLATION OF SUBJECT CONTRACT OF REPURCHASE.
VI
THE LOWER COURT ERRED IN DECLARING THAT PLAINTIFF FAILED AND REFUSED
TO SUBMIT THE AMENDED REPURCHASE OFFER.
VII
THE LOWER COURT ERRED IN DISMISSING THE AMENDED COMPLAINT OF
PLAINTIFF-APPELLANT.
VIII
THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF-APPELLANT ACTUAL,
MORAL AND EXEMPLARY DAMAGES, ATTOTRNEY'S FEES AND LITIGATION
EXPENSES.33

Meanwhile, on June 17, 1993, petitioner's Board of Directors approved Resolution No. 3-004, where
it waived, assigned and transferred its rights over the property covered by TCT No. 33099 and TCT
No. 37025 in favor of Bayani Gabriel, one of its Directors.34 Thereafter, Bayani Gabriel executed a
Deed of Assignment over 51% of the ownership and management of the property in favor of
Reynaldo Tolentino, who later moved for leave to intervene as plaintiff-appellant. On July 14, 1993,
the CA issued a resolution granting the motion,35 and likewise granted the motion of Reynaldo
Tolentino substituting petitioner MMCC, as plaintiff-appellant, and his motion to withdraw as
intervenor.36
The CA rendered judgment on May 11, 2000 affirming the decision of the RTC.37 It declared that
petitioner obviously never agreed to the selling price proposed by respondent PNB (P1,931,389.53)
since petitioner had kept on insisting that the selling price should be lowered to P1,574,560.47.
Clearly therefore, there was no meeting of the minds between the parties as to the price or
consideration of the sale.
The CA ratiocinated that petitioner's original offer to purchase the subject property had not been
accepted by respondent PNB. In fact, it made a counter-offer through its June 4, 1985 letter
specifically on the selling price; petitioner did not agree to the counter-offer; and the negotiations did
not prosper. Moreover, petitioner did not pay the balance of the purchase price within the sixty-day
period set in the June 4, 1985 letter of respondent PNB. Consequently, there was no perfected
contract of sale, and as such, there was no contract to rescind.
According to the appellate court, the claim for damages and the counterclaim were correctly
dismissed by the court a quo for no evidence was presented to support it. Respondent PNB's letter
dated June 30, 1988 cannot revive the failed negotiations between the parties. Respondent PNB
merely asked petitioner to submit an amended offer to repurchase. While petitioner reiterated its
request for a lower selling price and that the balance of the repurchase be reduced, however,
respondent rejected the proposal in a letter dated August 1, 1989.
Petitioner filed a motion for reconsideration, which the CA likewise denied.
Thus, petitioner filed the instant petition for review on certiorari, alleging that:
I. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT
THERE IS NO PERFECTED CONTRACT OF SALE BETWEEN THE PETITIONER AND
RESPONDENT.
II. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT
THE AMOUNT OF PHP725,000.00 PAID BY THE PETITIONER IS NOT AN EARNEST
MONEY.
III. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT
THE FAILURE OF THE PETITIONER-APPELLANT TO SIGNIFY ITS CONFORMITY TO
THE TERMS CONTAINED IN PNB'S JUNE 4, 1985 LETTER MEANS THAT THERE WAS
NO VALID AND LEGALLY ENFORCEABLE CONTRACT OF SALE BETWEEN THE
PARTIES.
IV. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW THAT NON-PAYMENT
OF THE PETITIONER-APPELLANT OF THE BALANCE OF THE OFFERED PRICE IN THE
LETTER OF PNB DATED JUNE 4, 1985, WITHIN SIXTY (60) DAYS FROM NOTICE OF
APPROVAL CONSTITUTES NO VALID AND LEGALLY ENFORCEABLE CONTRACT OF
SALE BETWEEN THE PARTIES.

V. THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT HELD THAT THE LETTERS
OF PETITIONER-APPELLANT DATED MARCH 18, 1993 AND JUNE 21, 1993, OFFERING
TO BUY THE SUBJECT PROPERTY AT DIFFERENT AMOUNT WERE PROOF THAT
THERE IS NO PERFECTED CONTRACT OF SALE.38
The threshold issue is whether or not petitioner and respondent PNB had entered into a perfected
contract for petitioner to repurchase the property from respondent.
Petitioner maintains that it had accepted respondent's offer made through the SAMD, to sell the
property forP1,574,560.00. When the acceptance was made in its letter dated June 25, 1984; it then
deposited P725,000.00 with the SAMD as partial payment, evidenced by Receipt No. 978194 which
respondent had issued. Petitioner avers that the SAMD's acceptance of the deposit amounted to an
acceptance of its offer to repurchase. Moreover, as gleaned from the letter of SAMD dated June 4,
1985, the PNB Board of Directors had approved petitioner's offer to purchase the property. It claims
that this was the suspensive condition, the fulfillment of which gave rise to the contract. Respondent
could no longer unilaterally withdraw its offer to sell the property forP1,574,560.47, since the
acceptance of the offer resulted in a perfected contract of sale; it was obliged to remit to respondent
the balance of the original purchase price of P1,574,560.47, while respondent was obliged to
transfer ownership and deliver the property to petitioner, conformably with Article 1159 of the New
Civil Code.
Petitioner posits that respondent was proscribed from increasing the interest rate after it had
accepted respondent's offer to sell the property for P1,574,560.00. Consequently, respondent could
no longer validly make a counter-offer of P1,931,789.88 for the purchase of the property. It likewise
maintains that, although theP725,000.00 was considered as "deposit for the repurchase of the
property" in the receipt issued by the SAMD, the amount constitutes earnest money as contemplated
in Article 1482 of the New Civil Code. Petitioner cites the rulings of this Court in Villonco v.
Bormaheco39 and Topacio v. Court of Appeals.40
Petitioner avers that its failure to append its conformity to the June 4, 1984 letter of respondent and
its failure to pay the balance of the price as fixed by respondent within the 60-day period from notice
was to protest respondent's breach of its obligation to petitioner. It did not amount to a rejection of
respondent's offer to sell the property since respondent was merely seeking to enforce its right to
pay the balance of P1,570,564.47. In any event, respondent had the option either to accept the
balance of the offered price or to cause the rescission of the contract.
Petitioner's letters dated March 18, 1993 and June 21, 1993 to respondent during the pendency of
the case in the RTC were merely to compromise the pending lawsuit, they did not constitute
separate offers to repurchase the property. Such offer to compromise should not be taken against it,
in accordance with Section 27, Rule 130 of the Revised Rules of Court.
For its part, respondent contends that the parties never graduated from the "negotiation stage" as
they could not agree on the amount of the repurchase price of the property. All that transpired was
an exchange of proposals and counter-proposals, nothing more. It insists that a definite agreement
on the amount and manner of payment of the price are essential elements in the formation of a
binding and enforceable contract of sale. There was no such agreement in this case. Primarily, the
concept of "suspensive condition" signifies a future and uncertain event upon the fulfillment of which
the obligation becomes effective. It clearly presupposes the existence of a valid and binding
agreement, the effectivity of which is subordinated to its fulfillment. Since there is no perfected
contract in the first place, there is no basis for the application of the principles governing "suspensive
conditions."

According to respondent, the Statement of Account prepared by SAMD as of June 25, 1984 cannot
be classified as a counter-offer; it is simply a recital of its total monetary claims against petitioner.
Moreover, the amount stated therein could not likewise be considered as the counter-offer since as
admitted by petitioner, it was only recommendation which was subject to approval of the PNB Board
of Directors.
Neither can the receipt by the SAMD of P725,000.00 be regarded as evidence of a perfected sale
contract. As gleaned from the parties' Stipulation of Facts during the proceedings in the court a quo,
the amount is merely an acknowledgment of the receipt of P725,000.00 as deposit to repurchase the
property. The deposit ofP725,000.00 was accepted by respondent on the condition that the purchase
price would still be approved by its Board of Directors. Respondent maintains that its acceptance of
the amount was qualified by that condition, thus not absolute. Pending such approval, it cannot be
legally claimed that respondent is already bound by any contract of sale with petitioner.
According to respondent, petitioner knew that the SAMD has no capacity to bind respondent and
that its authority is limited to administering, managing and preserving the properties and other
special assets of PNB. The SAMD does not have the power to sell, encumber, dispose of, or
otherwise alienate the assets, since the power to do so must emanate from its Board of Directors.
The SAMD was not authorized by respondent's Board to enter into contracts of sale with third
persons involving corporate assets. There is absolutely nothing on record that respondent
authorized the SAMD, or made it appear to petitioner that it represented itself as having such
authority.
Respondent reiterates that SAMD had informed petitioner that its offer to repurchase had been
approved by the Board subject to the condition, among others, "that the selling price shall be the
total bank's claim as of documentation date x x x payable in cash (P725,000.00 already deposited)
within 60 days from notice of approval." A new Statement of Account was attached therein indicating
the total bank's claim to be P1,931,389.53 less deposit of P725,000.00, or P1,206,389.00.
Furthermore, while respondent's Board of Directors accepted petitioner's offer to repurchase the
property, the acceptance was qualified, in that it required a higher sale price and subject to specified
terms and conditions enumerated therein. This qualified acceptance was in effect a counter-offer,
necessitating petitioner's acceptance in return.
The Ruling of the Court
The ruling of the appellate court that there was no perfected contract of sale between the parties on
June 4, 1985 is correct.
A contract is a meeting of minds between two persons whereby one binds himself, with respect to
the other, to give something or to render some service.41 Under Article 1318 of the New Civil Code,
there is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
Contracts are perfected by mere consent which is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract. 42 Once perfected, they

bind other contracting parties and the obligations arising therefrom have the form of law between the
parties and should be complied with in good faith. The parties are bound not only to the fulfillment of
what has been expressly stipulated but also to the consequences which, according to their nature,
may be in keeping with good faith, usage and law.43
By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of
and deliver a determinate thing, and the other to pay therefor a price certain in money or its
equivalent.44 The absence of any of the essential elements will negate the existence of a perfected
contract of sale. As the Court ruled in Boston Bank of the Philippines v. Manalo:45
A definite agreement as to the price is an essential element of a binding agreement to sell
personal or real property because it seriously affects the rights and obligations of the parties.
Price is an essential element in the formation of a binding and enforceable contract of sale.
The fixing of the price can never be left to the decision of one of the contracting parties. But a
price fixed by one of the contracting parties, if accepted by the other, gives rise to a
perfected sale.46
A contract of sale is consensual in nature and is perfected upon mere meeting of the minds. When
there is merely an offer by one party without acceptance of the other, there is no contract. 47 When the
contract of sale is not perfected, it cannot, as an independent source of obligation, serve as a
binding juridical relation between the parties.48
In San Miguel Properties Philippines, Inc. v. Huang,49 the Court ruled that the stages of a contract of
sale are as follows: (1) negotiation, covering the period from the time the prospective contracting
parties indicate interest in the contract to the time the contract is perfected; (2) perfection, which
takes place upon the concurrence of the essential elements of the sale which are the meeting of the
minds of the parties as to the object of the contract and upon the price; and (3) consummation,
which begins when the parties perform their respective undertakings under the contract of sale,
culminating in the extinguishment thereof.
A negotiation is formally initiated by an offer, which, however, must be certain. 50 At any time prior to
the perfection of the contract, either negotiating party may stop the negotiation. At this stage, the
offer may be withdrawn; the withdrawal is effective immediately after its manifestation. To convert the
offer into a contract, the acceptance must be absolute and must not qualify the terms of the offer; it
must be plain, unequivocal, unconditional and without variance of any sort from the proposal.
In Adelfa Properties, Inc. v. Court of Appeals,51the Court ruled that:
x x x The rule is that except where a formal acceptance is so required, although the
acceptance must be affirmatively and clearly made and must be evidenced by some acts or
conduct communicated to the offeror, it may be shown by acts, conduct, or words of the
accepting party that clearly manifest a present intention or determination to accept the offer
to buy or sell. Thus, acceptance may be shown by the acts, conduct, or words of a party
recognizing the existence of the contract of sale. 52
A qualified acceptance or one that involves a new proposal constitutes a counter-offer and a
rejection of the original offer. A counter-offer is considered in law, a rejection of the original offer and
an attempt to end the negotiation between the parties on a different basis.53 Consequently, when
something is desired which is not exactly what is proposed in the offer, such acceptance is not
sufficient to guarantee consent because any modification or variation from the terms of the offer
annuls the offer.54 The acceptance must be identical in all respects with that of the offer so as to
produce consent or meeting of the minds.

In this case, petitioner had until February 17, 1984 within which to redeem the property. However,
since it lacked the resources, it requested for more time to redeem/repurchase the property under
such terms and conditions agreed upon by the parties.55 The request, which was made through a
letter dated August 25, 1983, was referred to the respondent's main branch for appropriate
action.56 Before respondent could act on the request, petitioner again wrote respondent as follows:
1. Upon approval of our request, we will pay your goodselves ONE HUNDRED & FIFTY
THOUSAND PESOS (P150,000.00);
2. Within six months from date of approval of our request, we will pay another FOUR
HUNDRED FIFTY THOUSAND PESOS (P450,000.00); and
3. The remaining balance together with the interest and other expenses that will be incurred
will be paid within the last six months of the one year grave period requested for.57
When the petitioner was told that respondent did not allow "partial redemption,"58 it sent a letter to
respondent's President reiterating its offer to purchase the property.59 There was no response to
petitioner's letters dated February 10 and 15, 1984.
The statement of account prepared by the SAMD stating that the net claim of respondent as of June
25, 1984 was P1,574,560.47 cannot be considered an unqualified acceptance to petitioner's offer to
purchase the property. The statement is but a computation of the amount which petitioner was
obliged to pay in case respondent would later agree to sell the property, including interests,
advances on insurance premium, advances on realty taxes, publication cost, registration expenses
and miscellaneous expenses.
There is no evidence that the SAMD was authorized by respondent's Board of Directors to accept
petitioner's offer and sell the property for P1,574,560.47. Any acceptance by the SAMD of
petitioner's offer would not bind respondent. As this Court ruled in AF Realty Development, Inc. vs.
Diesehuan Freight Services, Inc.:60
Section 23 of the Corporation Code expressly provides that the corporate powers of all
corporations shall be exercised by the board of directors. Just as a natural person may
authorize another to do certain acts in his behalf, so may the board of directors of a
corporation validly delegate some of its functions to individual officers or agents appointed by
it. Thus, contracts or acts of a corporation must be made either by the board of directors or
by a corporate agent duly authorized by the board. Absent such valid
delegation/authorization, the rule is that the declarations of an individual director relating to
the affairs of the corporation, but not in the course of, or connected with the performance of
authorized duties of such director, are held not binding on the corporation.
Thus, a corporation can only execute its powers and transact its business through its Board of
Directors and through its officers and agents when authorized by a board resolution or its by-laws. 61
It appears that the SAMD had prepared a recommendation for respondent to accept petitioner's offer
to repurchase the property even beyond the one-year period; it recommended that petitioner be
allowed to redeem the property and pay P1,574,560.00 as the purchase price. Respondent later
approved the recommendation that the property be sold to petitioner. But instead of
the P1,574,560.47 recommended by the SAMD and to which petitioner had previously conformed,
respondent set the purchase price at P2,660,000.00. In fine, respondent's acceptance of petitioner's
offer was qualified, hence can be at most considered as a counter-offer. If petitioner had accepted
this counter-offer, a perfected contract of sale would have arisen; as it turns out, however, petitioner

merely sought to have the counter-offer reconsidered. This request for reconsideration would later
be rejected by respondent.
We do not agree with petitioner's contention that the P725,000.00 it had remitted to respondent was
"earnest money" which could be considered as proof of the perfection of a contract of sale under
Article 1482 of the New Civil Code. The provision reads:
ART. 1482. Whenever earnest money is given in a contract of sale, it shall be considered as
part of the price and as proof of the perfection of the contract.
This contention is likewise negated by the stipulation of facts which the parties entered into in the
trial court:
8. On June 8, 1984, the Special Assets Management Department (SAMD) of PNB prepared
an updated Statement of Account showing MMCC's total liability to PNB as of June 25, 1984
to be P1,574,560.47 and recommended this amount as the repurchase price of the subject
property.
9. On June 25, 1984, MMCC paid P725,000.00 to PNB as deposit to repurchase the
property. The deposit of P725,000 was accepted by PNB on the condition that the
purchase price is still subject to the approval of the PNB Board.62
Thus, the P725,000.00 was merely a deposit to be applied as part of the purchase price of the
property, in the event that respondent would approve the recommendation of SAMD for respondent
to accept petitioner's offer to purchase the property for P1,574,560.47. Unless and until the
respondent accepted the offer on these terms, no perfected contract of sale would arise. Absent
proof of the concurrence of all the essential elements of a contract of sale, the giving of earnest
money cannot establish the existence of a perfected contract of sale. 63
It appears that, per its letter to petitioner dated June 4, 1985, the respondent had decided to accept
the offer to purchase the property for P1,931,389.53. However, this amounted to an amendment of
respondent's qualified acceptance, or an amended counter-offer, because while the respondent
lowered the purchase price, it still declared that its acceptance was subject to the following terms
and conditions:
1. That the selling price shall be the total Bank's claim as of documentation date (pls. see
attached statement of account as of 5-31-85), payable in cash (P725,000.00 already
deposited) within sixty (60) days from notice of approval;
2. The Bank sells only whatever rights, interests and participation it may have in the property
and you are charged with full knowledge of the nature and extent of said rights, interests and
participation and waive your right to warranty against eviction.
3. All taxes and other government imposts due or to become due on the property, as well as
expenses including costs of documents and science stamps, transfer fees, etc., to be
incurred in connection with the execution and registration of all covering documents shall be
borne by you;
4. That you shall undertake at your own expense and account the ejectment of the
occupants of the property subject of the sale, if there are any;

5. That upon your failure to pay the balance of the purchase price within sixty (60) days from
receipt of advice accepting your offer, your deposit shall be forfeited and the Bank is
thenceforth authorized to sell the property to other interested parties.
6. That the sale shall be subject to such other terms and conditions that the Legal
Department may impose to protect the interest of the Bank.64
It appears that although respondent requested petitioner to conform to its amended counter-offer,
petitioner refused and instead requested respondent to reconsider its amended counter-offer.
Petitioner's request was ultimately rejected and respondent offered to refund its P725,000.00
deposit.
In sum, then, there was no perfected contract of sale between petitioner and respondent over the
subject property.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED.
The assailed decision is AFFIRMED. Costs against petitioner Manila Metal Container Corporation.
SO ORDERED.

G.R. No. 147410

February 5, 2004

THE INSULAR LIFE ASSURANCE COMPANY, LTD., petitioner

vs.
ASSET BUILDERS CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
Where the parties merely exchange offers and counteroffers, no agreement or contract is perfected.
A party may withdraw its offer or counteroffer prior to its receipt of the other party's acceptance
thereof. To produce an agreement, the offer must be certain and the acceptance timely and absolute.
The Case
Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, assailing the
September 20, 2000 Decision2 and the March 7, 2001 Resolution3 of the Court of Appeals (CA) in
CA-GR CV No. 61607. The dispositive part of the Decision reads as follows:
"IN THE LIGHT OF ALL THE FOREGOING, the appeal of the [petitioner] is DISMISSED. The
Decision of the Court a quo is AFFIRMED."4
The assailed Resolution denied petitioner's Motion for Reconsideration.
The Facts
The appellate court summarized the facts of the case as follows:
"Sometime in November, 1992, the Insular Life Assurance Company, Limited, [petitioner], invited
companies/corporations engaged in the building construction business to participate in the bidding of
[petitioner's] proposed Insular Life building in Lucena City. [Petitioner] distributed copies of 'Bid
Document[s]', including the general construction x x x contract, with the winning bidder and 'Bid
Proposal Forms'[,] and furnished copies of the 'Instruction to Bidders' to participating bidders,
containing the rules to be followed in the bidding, including the following rules: (a) all bond proposals
shall be accompanied with a bid bond from the Insular General Insurance Company, Inc., in an
amount equivalent to ten (10) percent of the bid or five (5) percent of the bid in Manager's or
Cashier's check payable to Insular Life, which bid bonds will be returned to the bidder after sixty (60)
days from opening of bids or after award of the project, whichever date comes first; 5 (b) the bid shall
be valid for sixty (60) days [after] opening of bids[,] but the owner of the project (the [petitioner]) had
the option to request the bidder to extend the bid validity period after expiration of the original validity

period;6 [and] (c) the bidder, whose proposal had been deemed acceptable and complying with the
requirements of the owner ([petitioner]) and the project, shall be notified in writing to personally
appear to execute the 'Contract Agreements' within five (5) days after the receipt of the 'Notice of
Award'[,] and that failure on the part of the winning bidder to execute the contract shall constitute a
breach of the agreement, as effected by acceptance of the proposal, resulting in the nullification of
the award; and that the bond heretofore, offered by the winning bidder shall be retained by the
owner ([petitioner]) as payment due for liquidated damages.7
"Asset Builders Corporation, [respondent], with four (4) other bidders, namely, Q.K. Calderon
Construction [Co., Inc.], Specified Contractors, A.[A.] Alarilla Construction[,] and Serg
Construction, submitted their respective bid proposals secured by bid bonds, valid for sixty (60)
days.8 Under its 'Proposal Form' which the [respondent] submitted to the [petitioner], [respondent]
bound and obliged itself to enter into a 'Contract' with the petitioner within ten (10) days from notice
of the award, with good and sufficient securities for the faithful compliance thereof. 9
"On November 9, 1993, the respective proposals of the bidders were opened. The [petitioner]
forwarded a'Summary of Bids and Tender Documents' to Adrian Wilson International Associate[s],
Inc.10 (AWIA for brevity), [petitioner's] designated 'Project Manager[,]' for the proposed Insular Life
Building in Lucena City for its evaluation and analysis. AWIA, in due time, submitted a report of its
evaluation to the 'Real Property Division' of the [petitioner]. As [could] be gleaned from the Report of
AWIA, [respondent's] P12,962,845.5411 bid was the lowest among the bidders.
"On January 21, 1994, Engineer Pete S. Espiritu (Espiritu for brevity) of the 'Real Property
Department', who was designated as 'Project Coordinator' of the petitioner[,] recommended that
[respondent] and the other bidders,'Q.K. CALDERON [CONSTRUCTION] CO., INC.' AND
'SPECIFIED CONTRACTORS', be subjected to post-qualification proceedings, including the
inspection of their respective offices, equipment, as well as past and present projects, and that said
bidders be subjected to credit and financial investigations.12
"[Petitioner] concurred with the recommendation of Espiritu and, indeed, post-qualification,
inspection[,] and evaluations of [respondent] and Q.K. Calderon Construction Co., Inc. were effected.
On January 25, 1994, [petitioner], with concurrence of [respondent], visited [respondent's] main
office at the Tektite Tower and its past and present projects, i.e., the four (4) and two (2) storey Air
Transportation buildings in its compound; the Government Service Insurance System (GSIS)
Headquarters Complex; and the National Historical Institute Building, and [respondent's] equipment.
On February 14, 1994, Espiritu suggested that a bid clarification and negotiation be undertaken with
prospective contractors.
"On February 23, 1994, Abraham Torrijos of [petitioner's] 'Real Property Department' (hereinafter
referred to as Torrijos) recommended the approval by the Board of Directors of [petitioner] of the
award of the general construction of the Proposed Lucena Building, in favor of [respondent],
emphasizing that:
'2. Asset Builders Corporation is a (sic) 'AAA' category Contractor. It has extensive experience in
vertical and horizontal projects. The company [has been] subjected to a post qualification and credit

investigation, the results of which are satisfactory and acceptable, thus making it technically
competent and financially capable of contracting the work.' 13
"On February 24, 1994, a conference was held by and among the representatives of the [petitioner]
and of the [respondent], including [respondent's] Operations Manager, Engineer Ramon Abu, for
some clarifications. [Petitioner] proposed that [respondent] adjust its bid from P12,961,845.54
to P13,000,000.00 to accommodate the wage increase brought about by Wage Order No. 03, series
of 1993, effective December 3, 1993. However, [respondent's] representatives were noncommittal,
declaring that they had [to] report to the management of the [respondent] the proposal of
[petitioner's] representatives, for its consideration and approval. Subsequently, the [respondent]
agreed to the readjustment of the amount of its bid as proposed by the [petitioner].
"On March 9, 1994, Januario L. Flores (Flores for brevity), head of the 'Real Property
Department' and Assistant Vice-President of the [petitioner], submitted to Mabini L. Juan, the Chief
Operating Officer and Senior Executive Vice-President of the [petitioner], his findings on the postqualification, evaluation and credit investigation of [respondent], with the recommendation that the
award be given to the [respondent]:
'2. On the basis of the above very positive indicators, RPD[,] E.L. Mariano, [F. B.] Mariano
Associates and Co.[,] and Adrian Wilson Int'l Associates, [Inc.] recommen[d] to award the Lucena
[p]roject to Asset Builders Corporation. We honestly believe that they will do a good job.
'3. For your consideratio[n/a]pproval.'14
"On March 14, 1994, [Flores] signed a 'Notice to Proceed', addressed to the [respondent], for the
conformity of the latter's President, Rogelio P. Centeno. Under the [ultimate] paragraph of the 'Notice
to Proceed', the [respondent] may start its mobilization and proceed with the construction
immediately[,] pending execution of the'Construction Agreement'.15 The [petitioner prepared] a draft
of the contract to be executed by the [petitioner] and the [respondent].
"On the same day, [Torrijos] informed, by letter, Engineer Bernardo A. Sajorda (Sajorda for brevity's
sake), 'Project Manager' of AWIA, that [petitioner] had awarded the general construction contract of
the proposed Lucena Building to the [respondent] and advised AWIA to coordinate with [respondent]
and inform the latter that a pre-construction meeting [would] be held on March 22, 1994 at the job
site.16 A copy of the 'Notice of Award' was appended to said letter.17 Sajorda forthwith informed
Rogelio P. Centeno, the President of [respondent], by'Memorandum' that, pursuant to the AWARD to
[respondent], of the general construction of the Proposed Lucena Building, a pre-construction
conference [would] be held on March 22, 1994 at the job site, during which the following will be
discussed:
'1. Contract Amount and completion time
2. Role of AWIA
3. Project Contractors Key [p]ersonnel [l]ist with [s]ignatures and [p]ositions

4. Channel of [c]ommunications among Architect, Insular Life, ASSET and AWIA

5. [Contractor submittals i.e. - Work Schedule, Schedule of] Prices, etc.
6. As-built[s] drawings
7. Submitt[al] of shop drawings prior to use of materials
8. Sanitation
9. Safety programs (first aid kit and hard hats)
10. Night work
11. CAR (Contractor's All Ris[k I]nsurance)
12. Owners review of payrolls, vouchers, etc. (sic) payments etc.
13. Sub-contracting [for] approval of subs.
14. Photographs every month
15. Billings based on actual work accomplishments. Undistributed materials not billable
16. Security measures
17. Tests as required by spec[']s
18. Take note of specific requirements before final payment is made' 18
"The [respondent] received a copy of the 'Memorandum' of Sajorda, on March 17, 1994. On March
18, 1994, the [petitioner] transmitted to the [respondent] the following documents, evidenced by
a 'Transmittal Sheet', received by Roy Roxas, for the [respondent], to enable the latter to secure
a 'Building Permit' for the project:
'ONE (1) LOT DOCUMENTS/PLANS FOR BUILDING PERMIT
4 SETS OF STRUCTURAL COMPUTATION
5 SETS OF SPECS FOR GENERAL CONSTRUCTION
3 SETS OF ELECTRICAL LOAD COMPUTATION
5 COPIES OF PRC ID [&] PTR OF DESIGN ENGRS.
6 SETS OF ELMA PLANS

5 SETS OF [R]MDA PLANS/SPECS'19

"On March 22, 1994, the 'Pre-Construction Conference' ensued with the representatives of the
[petitioner] and its Project Manager and of the [respondent], in the person of its Project Engineer,
J.G. Quizon, in attendance:
'Attendees: CARLOS M. ESPIRITU -- AWIA Asst. Project Manager
BERNARDO [A]. SAJORDA -- AWIA Project Manager
EDMUNDO C. SABATER -- AWIA Resident Engineer
JANUARIO L. FLORES -- IL/RPD Manager
J.G. QUIZON -- ASSET Project Manager
PETE S. ESPIRITU -- IL/RPD Project Coordinator
ABRAHAM P. TORRIJOS -- IL/RPD Asst. Manager'20
"During the conference, the following were discussed and clarified:
'1. Contract Amount and Completion Time: Contract is for P13,000,000.00, to be completed within
210 calendar days; day one to be 5 days after receipt of NTP by the Contractor. Actual site
mobilization to be first week of April 1994, per Mr. J.G. Quizon. Issuance of building and other
permits being worked out by the Contractor.'21
"On March 26, 1994, Jacobo G. Quizon, the Project Manager of [respondent], sent to AWIA a letter
requesting for the TCT lot description for the purpose of relocation of the monuments and the staking
out of the building:
'We have the honor to request your good office, in relocating the monuments[,] as per TCT lot
description[s,] prior to staking out the building[;] likewise, we can do the relocation[,] provided the
cost will be reimbursed to the Owner[,] with an approximate fee of P5,000.00 lump sum.
'Further, problems may occur regarding structur[al] excavation for footing [and footing] tie beams at
Grid Line A & 4. As per plan, the proposed depth [of] excavation of about 2.5[0M] along the existing
adjacent building walls will expose the CHB footing.' 22
"Thereafter, a Ground Breaking ceremony was held at the project site, with Rogelio B. Centeno, the
President of [respondent], [and] Pete S. Espiritu and Januario L. Flores of the [petitioner] in
attendance. A billboard announcing the construction of [the] Insular Life Building in Lucena City, with
the [respondent] as the General Contractor, was also erected in the project site.
"However, the [respondent] did not affix its conformity to any 'Notice of Award', much less commence
its construction of the project. Neither did it execute any 'Construction Agreement'. Subsequently, the

[respondent] wrote the [petitioner] a letter dated April 5, 1994, informing the [petitioner] that the
[respondent would] not be able to undertake the project anymore[,] because the prerequisite paper
work and attendant processing could not be fast-trac[k]ed and that, since the previous two (2)
weeks, prices had escalated, which rendered its bid unattractive. 23 On April 25, 1994, the [petitioner]
wrote a letter to the [respondent], in response to its April 5, 1994 [letter], informing the [respondent]
that, in view of the unjust withdrawal of the [respondent] from the project, despite the award of the
project to the [respondent], the [petitioner] was impelled to engage the services of another contractor
to complete the project[,] without prejudice to further action of the [petitioner] against the
[respondent] for its withdrawal, pursuant to Section 10 of the 'Instruction to Bidders', quoted, infra:
'The exact amount of damages to the Owner due to the failure to execute the Contract may be
deemed difficult to determine. Failure, thereof, to execute the Contract within five (5) days after the
receipt of the Notice of Award shall cause [the] annulment of the award. The amount of bid bond
deposited with the proposal shall be retained by the Owner as payment due for liquidated damages
incurred.
"By way of riposte, the [respondent] sent a letter to the [petitioner] averring that: (a) it never received
any written'Notice of Award' from the [petitioner]; [and] (b) since its bid offer had a lifetime of sixty
(60) days from November 9, 1993 or until January 8, 1993 (sic)[,] its offer was automatically
withdrawn after said date, since the [petitioner] had not requested the [respondent] for the extension
of the lifetime thereof.
"On December 23, 1994, the [petitioner] filed a complaint24 against the [respondent], with the
Regional Trial Court25 of Makati City, for 'Damages', x x x:
xxx

xxx

xxx

"The [petitioner] alleged, inter alia, in its complain[t t]hat the [respondent] was duly notified by
AWIA of the award, in its favor, by the [petitioner], of the project[,] but the [respondent] unjustly and
arbitrarily withdrew from the project and refused to execute the 'Construction Contract' with the
[petitioner,] which impelled the latter to engage the services of another contractor for the project at
the price of P14,500,000.00 and that, consequently, the [petitioner] was obliged to pay the amount
of P1,500,000.00 which was [the] difference between the contract price of the project with the
[respondent] in the amount of P13,000,000.00 and P14,500,000.00, by way of actual damages or,
alternatively, by way of liquidated damages. In its Answer 26 to the complaint, the [respondent]
alleged, inter alia, that it never received any 'Notice of Award' or 'Notice to Proceed'; its bid had
expired by January 8, 1994, without the [petitioner] asking the [respondent] for the extension
thereof[,] and interposed counterclaims for damages against the [petitioner], praying that, after due
proceedings, judgment be rendered in its favor, x x x:
xxx

xxx

xxx

"After due proceedings, the Court a quo rendered a Decision,27 dated December [5], 1997, in favor
of the [respondent] and against the [petitioner], ordering the dismissal of the complaint of the
[petitioner] and ordering the latter to pay damages to the [respondent], the dispositive portion of
which is quoted, infra:

'WHEREFORE, judgment is rendered DISMISSING the Complaint with costs against [petitioner].'
'On the counter-claim, Insular Life Assurance Co., Ltd., is hereby ordered to pay Asset Builders
Corporation the sums of Pesos: Five Hundred Thousand (P500,000.00) as compensation for the
injury to the latter's business standing, and Pesos: Seventy Five Thousand (P75,000.00) by way of
attorney's fees and expenses of litigation.
'Filing fees on the amount of P2,135,000.00 [respondent] sought in the counter-claim shall constitute
a first lien on the recovery from [petitioner].'
xxx

xxx

xxx

"The [petitioner] interposed its appeal from the Decision of the Court a quo and posed, for [the CA's]
resolution, the threshold issues of whether or not: (a) a construction contract was perfected by and
between the [petitioner] and the [respondent] for the construction of petitioner's building project in
Lucena City; (b) the [respondent] waived Section 9 of the Instruction to Bidders and was estopped
from claiming that no construction contract was perfected between it and the [petitioner]; [and] (c)
the [respondent] was liable for damages to the [petitioner]." 28
Ruling of the Court of Appeals
The CA affirmed the lower court's Decision. According to the appellate court's ruling, the failure of
petitioner to prove that it gave respondent a written notice of the former's unqualified acceptance of
the latter's bid, as required in the Instruction to Bidders, did not give birth to consent. The appellate
court explained that when the exact terms desired were not in the offer, any modification or variation
therefrom would annul that offer. Furthermore, estoppel did not apply because of petitioner's own
carelessness or want of diligence.
Hence this Petition.29
The Issues
"I. The Court of Appeals gravely erred in not holding that there exists a valid contract for the
construction of the building project between IL30 and ABC.31
"II. The Court of Appeals gravely erred in not holding that IL has notified ABC of the award of
the construction of the building project to it before it withdrew its bid proposal.
"III. The Court of Appeals gravely erred in not holding that ABC's withdrawal from the
contract constituted a breach of that contract.
"IV. The Court of Appeals gravely erred in not holding that the contract had been perfected
and that its consummation stage [had] in fact been commenced.
"V. The Court of Appeals gravely erred in not holding that ABC is estopped from claiming the
contract was not perfected.

"VI. The Court of Appeals gravely erred in not holding that ABC, instead of IL, is liable for
damages[,] and that, at worst, there is no evidence that supported the award in favor of ABC.
"VII. In any event, there is no basis to penalize IL for going to court."32
There is really only one major issue: Was there a valid contract between petitioner and respondent?
The Court's Ruling
The Petition is unmeritorious.
Sole Issue:
Existence of a Contract
No Notice of Award,
No Contract
It is elementary that, being consensual,33 a contract34 is perfected35 by mere consent.36 From the
moment of a meeting37 of the offer and the acceptance38 upon the object and the cause that would
constitute the contract,39consent arises.40 However, "the offer must be certain"41 and "the acceptance
seasonable and absolute;42 if qualified,43 the acceptance44 would merely constitute a counter-offer."45
Equally important are the three distinct stages of a contract -- its "preparation or negotiation, its
perfection, and finally, its consummation."46 Negotiation begins when the prospective contracting
parties manifest their interest in the contract and ends at the moment of their agreement. The
perfection or birth of the contract47 occurs when they agree upon the essential elements
thereof.48 The last stage is its consummation, wherein they "fulfill or perform the terms agreed upon
in the contract, culminating in the extinguishment thereof." 49
In the case at bar, the parties did not get past the negotiation stage. The events that transpired
between them were indeed initiated by a formal offer, but this policitacin was merely an imperfect
promise that could not be considered a binding commitment. 50 At any time, either of the prospective
contracting parties may stop the negotiation and withdraw the offer.
In the present case, in fact, there was only an offer and a counteroffer 51 that did not sum up to any
final arrangement containing the elements of a contract. 52 Clearly, no meeting of minds was
established.53 First, only after the bid bond had lapsed were post-qualification proceedings,
inspections, and credit investigations conducted. Second, the inter-office memoranda issued by
petitioner, as well as other memoranda between it and its own project manager, were simply
documents to which respondent was not privy. Third, petitioner proposed a counteroffer to adjust
respondent's bid to accommodate the wage increase of December 3, 1993.
In effect, the rule on the concurrence of the offer and its acceptance54 did not apply, because other
matters or details -- in addition to the subject matter and the consideration -- would still be stipulated

and agreed upon by the parties.55 While there was an initial offer made, there was no acceptance;
but when there allegedly came an acceptance that could have had a binding effect, the offer was
already lacking. The offer and its acceptance "did not meet to give birth to a contract." 56
Moreover, the Civil Code provides that no contract shall arise unless its acceptance is
communicated to the offeror.57 That is, the mere determination to accept the proposal of a bidder
does not constitute a contract; that decision must be communicated to the bidder.58 Although consent
may be either express or implied,59 the Instruction to Bidders prepared by petitioner itself expressly
required (1) a formal acceptance and (2) a period within which such acceptance was to be made
known to respondent. The effect of giving the Notice of Award to the latter would have been the
perfection of the contract.60 No such acceptance was communicated to respondent; therefore, no
consent was given. Without that express manifestation, as required by the terms of its proposal,
there was no contract. The due execution of documents representing a contract is one thing, but its
perfection is another.61
There is no issue as regards the subject of the contract or the cause of the obligation. The
controversy lies in the consent -- whether there was an acceptance by petitioner of the offer made by
respondent; and, if so, whether that acceptance was communicated to the latter, thereby perfecting
the contract. The period given to the former within which to accept the offer was not itself founded
upon or supported by any consideration. Therefore, under the law, respondent still had the freedom
and the right to withdraw the offer by communicating such withdrawal to petitioner 62 before the
latter's acceptance of the offer;63 or, if the offer has been accepted,64 before the acceptance came to
be known by respondent.65
Petitioner avers that an acceptance was made, but this allegation has not been proven. Respondent
had no knowledge of such acceptance when it communicated its withdrawal to the former. Notably,
this right to withdraw was not exercised whimsically or arbitrarily by respondent. It did send a formal
letter on April 5, 1994, expressing and explaining its withdrawal. As of that date, the decision to
award the contract had not been made according to the terms of the Instruction to Bidders.
Besides, the subsequent acts between the parties did not even serve as a confirmation of that
decision. The existence of a second proposal -- petitioner's request for an adjustment of the bid to
accommodate the wage increase -- in fact belies the perfection of any contract arising from the
first.66 To the Court's mind, there was indeed no acceptance of the offer made by respondent. Such
failure to comply with a condition imposed for the perfection of a contract resulted in failure of the
contract.67
Subsistence of an Offer
Even Without a Bid Bond
Certainly, the "bid bond is an indispensable requirement for the validation of a bid proposal." 68 This
requisite ensures the good faith of bidders and binds them to enter into a contract with the owner,
should their proposal be accepted.69 One who submits a bid not only signifies assent to the terms
and conditions of a proposal, but impliedly binds oneself to them, if and when the bid is considered.
The Invitation to Bidders even provided that incomplete proposals might be sufficient cause for their

rejection.70 If mere insufficiency of a bond required of a bidder is a ground for rejection, a fortiori, all
the more so is the total want thereof.
The proposal of respondent was merely validated by its bid bond, which was considered by
petitioner. The expiration of the bond on January 8, 1994, 71 did not mean that the bid also lapsed on
the same date. The bond, which was an accessory, merely guaranteed the performance of the
principal obligation and could not exist without the latter.72 The former was given for the benefit of
petitioner, which could legally waive it. The bid continued without a bond, but still no formal
acceptance was made. Again, on that basis, no contract was perfected.
In the interpretation of a contract, the literal meaning of its stipulations controls, if their terms are
clear and leave no doubt as to the intention of the contracting parties. 73 When "there is no ambiguity
in the language of a contract, there is no room for construction,74 only compliance."75 This rule applies
to the Instruction to Bidders, which provides that "failure to execute the Contract shall constitute a
breach of agreement as effected by acceptance of the proposal."76 The language is clear and, like
contracts in general, is the law between the parties.77 The contract must be fulfilled according to its
literal sense.78
No Estoppel
As aptly held by the appellate court, respondent's acts subsequent to the expiration of the bid bond
did not constitute a waiver of Section 9 of the Instruction to Bidders. To be valid and effective,
waivers must be couched in clear and unequivocal terms, leaving no doubt as to the intention of
those giving up a right or a benefit that legally pertains to them.79 Respondent, contrary to the claim
of petitioner, despite its repeated requests, never received a copy of the Notice of Award. Indeed, the
former never adopted an inconsistent position, attitude or course of conduct that caused loss or
injury to the latter.80 The attendance of respondent in the pre-construction conference and the
ground-breaking ceremony was part of the negotiation process. Thus, petitioner's claim of estoppel
against it could not be applied.
"Estoppel cannot be sustained by mere argument or doubtful inference; it must be clearly proved in
all its essential elements by clear, convincing and satisfactory evidence."81 It is hardly separable from
the waiver of a right.82 The party claiming estoppel must show the following elements: "(1) lack of
knowledge and of the means of knowledge of the truth as to the facts in question; (2) reliance, in
good faith, upon the conduct or statements of the party to be estopped; and (3) action or inaction
based thereon of such character as to change the position or status of the party claiming the
estoppel, to his injury, detriment or prejudice."83
None of these elements was proven.
First, petitioner had the knowledge and the means of knowledge of the truth as to the facts in
question. It had the means of knowing if respondent had been served a copy of the Notice of Award,
yet the former did not preserve a copy of such Notice, which supposedly bore the signature of the
latter's employee who had received it. Petitioner did not even enter in its corporate logbooks the
release to and receipt by respondent of that copy. The latter had every reason to withdraw its bid,
given that the "prerequisite paper work and attendant processing could not be fast-tracked." 84

Second, respondent's conduct and statements were always consistent and reliable. The manner of
acceptance of all bids was prescribed by petitioner itself. Applying Article 1321 of the Civil Code,
such prescription must be complied with,85 yet it did not follow its own rules. Of no moment was its
reliance in good faith upon respondent. Good faith is always presumed, unless contrary evidence is
adduced.86
Third, the action or inaction of petitioner that caused its own injury was its own fault. The written
Notice of Award, which constituted the acceptance of the proposal, was a sine qua non to the
perfection of the contract.87 The misplacement of such vital document was inexcusable. Without it,
there was no contract. Moreover, the March 14, 1994 Notice to Proceed clearly stated that its
issuance would depend upon the execution of the construction agreement.
Estoppel is a shield against injustice; the party invoking its protection should not be allowed to use it
to conceal its own lack of diligence88 or want of reasonable care and circumspection.89
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution
AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 167004

February 7, 2011

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,

vs.
BEN P. MEDRANO and PRIVATIZATION MANAGEMENT OFFICE [PMO], Respondents.
DECISION
VILLARAMA, JR., J.:
This petition for review on certiorari assails the Decision1 dated December 14, 2004 and
Resolution2 dated February 8, 2005 of the Court of Appeals (CA) in CA-G.R. CV No. 65436. The CA
affirmed in toto the Decision3dated January 26, 1999 of the Regional Trial Court (RTC) of Pasig City,
Branch 158, ordering petitioner Development Bank of the Philippines (DBP) to pay respondent Ben
Medrano the following: (1) the amount ofP2,449,265.00 representing the value of the purchase price
of Medranos 37,681 shares in Paragon Paper Industries, Inc. plus legal interest from date of first
demand; (2) attorneys fees in the amount of P100,000.00; and (3) the cost of suit.
The facts, as culled from the records, are as follows.
Respondent Ben Medrano was the President and General Manager of Paragon Paper Industries,
Inc. (Paragon) wherein he owned 37,681 shares. Sometime in 1980, petitioner DBP sought to
consolidate its ownership in Paragon. In one of the meetings of the Paragon Executive Committee,
the Chairman Jose B. de Ocampo, instructed Medrano, as President and General Manager of
Paragon, to contact or sound off the minority stockholders and to convince them to sell their shares
to DBP at P65.00 per share, or 65% of the stocks par value of P100.00. Medrano followed the
instructions and began to contact each member of the minority stockholders. He was able to contact
all except one who was in Singapore. Medrano testified that all, including himself, agreed to sell, and
all took steps to have their shares surrendered to DBP for payment.4 They made proposals to DBP
and the Board of Directors of DBP approved the sale under DBP Resolution No. 4270 subject to the
following terms and conditions: (1) that prior to the implementation of the approval, 57,596 shares of
Paragons stock issued to the stockholders concerned shall first be surrendered to the DBP; (2) that
all the parties concerned shall give their written conformity to the arrangement; and (3) that the
transaction shall be implemented within forty-five (45) days from the date of approval (December 24,
1980); otherwise, the same shall be deemed canceled. Medrano then indorsed and delivered to DBP
all his 37,681 shares which had a value ofP2,449,265.00. DBP accepted said shares and took over
Paragon.

DBP, through Jose de Ocampo, who was also a member of its Board of Governors, also offered
Medrano a commission of P185,010.00 if the latter could persuade all the other Paragon minority
stockholders to sell their shares. Medrano was able to convince only two stockholders, Alberto Wong
and Gerardo Ledonio III, to sell their respective shares. Thus, his commission was reduced
to P155,455.00.
Thereafter, Medrano demanded that DBP pay the value of his shares, which he had already turned
over, and hisP155,455.00 commission. When DBP did not heed his demand, Medrano filed a
complaint for specific performance and damages against DBP on September 2, 1981.
DBP filed an Answer arguing that there was no perfected contract of sale as the three conditions in
DBP Resolution No. 4270 were not fulfilled. Likewise, certain minority stockholders owning 17,635
shares refused to sell their shares. Hence, DBP exercised its right to cancel the sale under
Resolution No. 4270.
Later, during the pendency of the case, DBP conveyed the shares to the Asset Privatization Trust
(APT) in a Deed of Transfer when the APT took over certain assets, and assumed the liabilities, of
government financial institutions including DBP. As the transferee of the shares, the APT was
impleaded as party-defendant. DBP thereafter filed a cross-claim against the APT which was later on
substituted by the Privatization Management Office (PMO). Medrano adopted his evidence against
DBP as his evidence against the APT while the APT adopted DBPs evidence and defenses against
Medrano. On the cross-claim, the APT raised the defense that the liabilities assumed by the National
Government and referred to in the Deed of Transfer are liabilities to local and foreign intermediaries
and guarantees and not to individual persons like Medrano.
On January 26, 1999, the RTC ruled in Medranos favor and dismissed DBPs cross-claim against
the APT, to wit:
WHEREFORE, in view of the foregoing, judgment is rendered in favor of the plaintiff and against
defendant Development Bank of the Philippines ordering the latter to pay the former the following:
(1) the amount ofP2,449,265.00 representing the value of the purchase price of plaintiff's 37,681
shares in Paragon plus legal rate of interest from date of first demand; (2) attorneys fees in the
amount of P100,000.00; and (3) the cost of suit.
The cross-claim of defendant DBP against the other defendant Asset Privatization Trust is dismissed
because defendant Development Bank of the Philippines accountability to the plaintiff [is] based on
act[s] solely imputable to it.
SO ORDERED.5
Dissatisfied, DBP elevated the case to the CA. DBP prayed that the trial courts decision be reversed
and that DBP be absolved from any and all liabilities to Medrano.
Medrano, for his part, prayed in his appellees brief that DBP be ordered to pay his commission
of P155,445.00.6

On December 14, 2004, the CA issued the challenged Decision 7 and affirmed the decision of the trial
court. The CA, however, refused to grant Medranos prayer for the payment of commission because
Medrano did not appeal the trial courts decision but instead prayed for the payment of his
commission only in his appellees brief.
The CA held that there existed between DBP and Medrano a contract of sale and the conditions
imposed by Resolution No. 4270 were merely conditions imposed on the performance of an
obligation. Hence, while under Article 15458 of the Civil Code, DBP had the right not to proceed with
the agreement upon Medranos failure to comply with the conditions, DBP was deemed to have
waived the performance of the conditions when it chose to retain Medranos shares and later
transfer them to the APT. The CA noted that the retention of the shares was contrary to DBPs claim
of rescission because if indeed DBP rescinded the sale, then it should have returned to Medrano his
shares together with their fruits and the price with interests, as provided by Article 1385 9 of the Civil
Code.
DBP filed a motion for reconsideration, but the same was denied by the CA in a Resolution 10 dated
February 8, 2005. Hence, this appeal.
DBP alleges that the CA erred
I
WHEN IT REACHED A CONCLUSION WHICH IS NOT A LOGICAL CONSEQUENCE OF ITS
FINDING THAT THERE WAS NO PERFECTED CONTRACT OF SALE BETWEEN DBP AND
MEDRANO AND PROCEEDED TO MAKE A CONTRACT FOR THE PARTIES IN THE INSTANT
CASE.
II
WHEN IT APPLIED ARTICLE 1545 OF THE CIVIL CODE OF THE PHILIPPINES
NOTWITHSTANDING ITS FINDING THAT THERE WAS NO PERFECTED CONTRACT OF SALE
BETWEEN MEDRANO AND DBP.
III
WHEN IT FAILED TO EXERCISE ITS AUTHORITY TO RULE ON MATTERS WHICH ARE THE
NATURAL AND LOGICAL CONSEQUENCE OF ITS FINDINGS OF FACTS OR THAT ARE
INDISPENSABLE AND NECESSARY TO THE JUST RESOLUTION OF THE PLEADED ISSUES,
EVEN IF NOT RAISED AS ISSUES IN THE APPEAL.
IV
WHEN IT FAILED TO CONSIDER THE ESTABLISHED FACT THAT THE ASSETS OF
PARAGON PAPER INDUSTRIES, INC., INCLUDING THE SUBJECT CERTIFICATE OF STOCKS,
WERE TRANSFERRED TO THE ASSET PRIVATIZATION TRUST, NOW THE PRIVATIZATION
MANAGEMENT OFFICE, HEREIN CO-DEFENDANT. HENCE, THE PMO SHOULD BE THE PARTY

THAT SHOULD BE MADE TO RETURN THE SUBJECT CERTIFICATES OF STOCKS OR PAY THE
SAID SHARES OF STOCKS.
V
WHEN IT AFFIRMED THE AWARD OF ATTORNEYS FEES, DAMAGES AND COST OF SUIT IN
FAVOR OF RESPONDENT MEDRANO CONTRARY TO LAW AND THE PERTINENT DECISIONS
OF THIS HONORABLE SUPREME COURT.11
Essentially, the issue in this case is whether the CA erred in applying Article 1545 of the Civil
Code and holding that DBP exercised the second option under the said article to justify the order
against DBP to pay the value of Medranos shares of stock. As a side issue, DBP also questions the
award of attorneys fees in Medranos favor.
In fine, DBP contends that the trial court and the CA both ruled that there was no perfected contract
of sale in this case and that accordingly, it was erroneous for them to order DBP to pay Medrano the
value or price of the object of the sale. DBP insists that the proper order was to direct DBP or the
PMO, which now has possession of the shares, to return the shares of stock. By ordering DBP to
pay the purchase price of the stocks, DBP argues that the CA in effect created a new contract of sale
between the parties.12
DBP adds that the CA erred in applying Article 1545 of the Civil Code. According to DBP, Article 1545
of the Civil Code only applies to a perfected contract of sale and since there is no such perfected
contract in this case because of Medranos failure to meet all the conditions agreed upon, the
application of this article by the CA is misplaced.
Lastly, DBP questions the award of attorneys fees to Medrano. DBP maintains that there was no
unjustified refusal to pay for the shares of stock transferred to DBP as there was no perfected
contract of sale.
Medrano, for his part, argues that by retaining the shares of stock transferred to it and later even
appropriating and transferring them to the APT, DBP is deemed to have exercised the second option
under Article 1545 of theCivil Code, that is, it waived performance of the conditions imposed by
Resolution No. 4270. The original conditional sale was thus converted into, and correctly treated by
the courts a quo, as an absolute, unconditional sale where compliance with the obligation of the
buyer to pay the purchase price may be demanded.
As regards the award of attorneys fees, Medrano maintains that he was constrained to acquire the
services of a lawyer and use legal means to enforce his rights over the shares in question. He
argues that since DBP refused to pay for or return the shares that he transferred to it, he was left
with no other option but to go to court. Hence, the award of attorney's fees is legally justified.
We sustain the CA.

As a rule, a contract is perfected upon the meeting of the minds of the two parties. Under Article
147513 of theCivil Code, a contract of sale is perfected the moment there is a meeting of the minds
on the thing which is the object of the contract and on the price.
In the case of Traders Royal Bank v. Cuison Lumber Co., Inc.,14 the Court ruled:
Under the law, a contract is perfected by mere consent, that is, from the moment that there is a
meeting of the offer and the acceptance upon the thing and the cause that constitute the contract.
The law requires that the offer must be certain and the acceptance absolute and unqualified. An
acceptance of an offer may be express and implied; a qualified offer constitutes a counter-offer.
Case law holds that an offer, to be considered certain, must be definite, while an acceptance is
considered absolute and unqualified when it is identical in all respects with that of the offer so as to
produce consent or a meeting of the minds. We have also previously held that the ascertainment of
whether there is a meeting of minds on the offer and acceptance depends on the circumstances
surrounding the case.
the offer must be certain and definite with respect to the cause or consideration and object of the
proposed contract, while the acceptance of this offer - express or implied - must be unmistakable,
unqualified, and identical in all respects to the offer. The required concurrence, however, may not
always be immediately clear and may have to be read from the attendant circumstances; in fact, a
binding contract may exist between the parties whose minds have met, although they did not affix
their signatures to any written document. (Italics supplied.)
Also, in Manila Metal Container Corporation v. Philippine National Bank,15 the Court ruled,
A qualified acceptance or one that involves a new proposal constitutes a counter-offer and a
rejection of the original offer. A counter-offer is considered in law, a rejection of the original offer and
an attempt to end the negotiation between the parties on a different basis. Consequently, when
something is desired which is not exactly what is proposed in the offer, such acceptance is not
sufficient to guarantee consent because any modification or variation from the terms of the offer
annuls the offer. The acceptance must be identical in all respects with that of the offer so as to
produce consent or meeting of the minds. (Italics supplied.)
In the present case, Medranos offer to sell the shares of the minority stockholders at the price of
65% of the par value was not absolutely and unconditionally accepted by DBP. DBP imposed several
conditions to its acceptance and it is clear that Medrano indeed tried in good faith to comply with the
conditions given by DBP but unfortunately failed to do so. Hence, there was no birth of a perfected
contract of sale between the parties.
The petitioner is also correct that Paragraph 1, Article 1545 of the Civil Code speaks of a perfected
contract of sale. Paragraph 1, Article 1545 of the Civil Code provides:
ART. 1545. Where the obligation of either party to a contract of sale is subject to any condition which
is not performed, such party may refuse to proceed with the contract or he may waive performance
of the condition. If the other party has promised that the condition should happen or be performed,

such first mentioned party may also treat the nonperformance of the condition as a breach of
warranty.
x x x x (Italics supplied.)
It is clear from a plain reading of this article that it speaks of a party to a contract of sale who fails in
the performance of his/her obligation. The application of this article presupposes that there is a
perfected contract between the parties and that one of them fails in the performance of an obligation
under the contract.
The present case does not fall under this article because there is no perfected contract of sale to
speak of. Medranos failure to comply with the conditions set forth by DBP prevented the perfection
of the contract of sale. Hence, Medrano and DBP remained as prospective-seller and prospectivebuyer and not parties to a contract of sale.
This notwithstanding, however, we cannot simply agree with DBPs argument that since there is no
perfected contract of sale, DBP should not be ordered to pay Medrano any amount.
The factual scenario of this case took place in 1980 or over thirty (30) years ago. Medrano had
turned over and delivered his own shares of stock to DBP in his attempt to comply with the
conditions given by DBP. DBP then accepted the shares of stock as partial fulfillment of the
conditions that it imposed on Medrano. However, after the lapse of some time and after it became
clear that Medrano would not be able to comply with the conditions, DBP decided to retain
Medranos shares of stock without paying Medrano. After the realization that DBP would in fact not
pay him for his shares of stock, Medrano was constrained to file a suit to enforce his rights. 16
In civil law, DBPs act of keeping the shares delivered by Medrano without paying for them
constitutes unjust enrichment. As we held in Car Cool Philippines, Inc. v. Ushio Realty and
Development Corporation17,
"[t]here is unjust enrichment when a person unjustly retains a benefit to the loss of another, or
when a person retains money or property of another against the fundamental principles of justice,
equity and good conscience." Article 22 of the Civil Code provides that "[e]very person who through
an act of performance by another, or any other means, acquires or comes into possession of
something at the expense of the latter without just or legal ground, shall return the same to him." The
principle of unjust enrichment under Article 22 requires two conditions: (1) that a person is benefited
without a valid basis or justification, and (2) that such benefit is derived at anothers expense or
damage.
It was not proper for DBP to hold on to Medranos shares of stock after it became obvious that he will
not be able to comply with the conditions for the contract of sale. From that point onwards, the
prudent and fair thing to do for DBP was to return Medranos shares because DBP had no just or
legal ground to retain them.
We find that equitable considerations militate against DBPs claimed right over the subject
shares. First, it is clear that DBP did not buy the shares from Medrano as it even asserts there was
1avvphi1

no perfected contract of sale because of the failure of the latter to comply with DBPs conditions.
Second, it cannot be said that Medrano voluntarily donated his shares of stock as he is in fact still
trying to recover them 30 years later. Third, it cannot be said that DBP was merely holding the
shares of stock for safekeeping as DBP even claims that the shares were transferred to the APT
(now PMO). In fine, there is no reason whatsoever for DBP to continue in the possession of the
shares of stock against Medrano. For nearly 30 years, Medrano was deprived of his shares without
any compensation at all from DBP. To this Court, such situation is tantamount to the loss of
respondent's shares of stock, by reason of DBPs unjustified retention.
As to the issue of attorneys fees, it is well settled that the law allows the courts discretion as to the
determination of whether or not attorney's fees are appropriate. The surrounding circumstances of
each case are to be considered in order to determine if such fees are to be awarded. In the case
of Servicewide Specialists, Incorporated v. Court of Appeals,18 the Court ruled:
Article 2208 of the Civil Code allows attorney's fees to be awarded by a court when its claimant is
compelled to litigate with third persons or to incur expenses to protect his interest by reason of an
unjustified act or omission on the part of the party from whom it is sought.
In the present case, it is clear that Medrano was constrained to use legal means to recover his
shares of stock. Records showed that indeed respondent Medrano followed up 19 the payment of his
shares of stock that were transferred to DBP. After some time, he became convinced that DBP will
not pay for the shares of stock for reasons unknown to him. That was when he decided to bring the
matter to court.
DBPs unjustified refusal to pay for the shares or even offer an explanation to Medrano why payment
was being withheld indicates bad faith on its part. Besides having no legal or just reason to hold on
to Medranos shares of stock, DBP also refused to enlighten Medrano of the reason why he was
being denied payment. Further, Medranos failure to comply with the conditions of the acceptance
should have prompted DBP either to return the shares of Medrano or accept the shares of Medrano
as a sale and pay a fair price or at least communicate to Medrano why his shares were being
withheld. Instead, DBP did nothing but to hold on to the shares. Because of this, Medrano was left
with no other option but to seek redress from the courts.
WHEREFORE, the Decision dated December 14, 2004 and Resolution dated February 8, 2005 of
the Court of Appeals in CA-G.R. CV No. 65436 are hereby AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
-no perfected contract of sale, Article 1545 is not applicable. Nevertheless, Medrano is entitled to
recover payment under article 22 due to failure to return shares after conditions for perfection of the
contract never materialized.
-Recovery now is premised under Article 22 on unjust enrichment

SECOND DIVISION

TRADERS ROYAL BANK,

G.R. No. 174286

Petition
er,

Present:

QUISUMBING, Chairperson,
*

YNARES-SANTIAGO,
VELASCO, JR.,

- versus -

**

LEONARDO-DE CASTRO, and

BRION, JJ.

CUISON LUMBER CO.,

INC.,
and JOSEFA JERODIAS
VDA. DE CUISON,
Respondent
s.

Promulgated:

June 5, 2009

x
---------------------------------------------------------------------------------------x

DECISION
BRION, J.:

We review in this petition for review on certiorari[1] the

decision[2] and resolution[3] of the Court of Appeals (CA) in CAG.R. CV No. 49900. The CA affirmed with modifications the
decision[4] of the Regional Trial Court (RTC), Davao City, Branch
13. The RTC ruled in favor of respondents Cuison Lumber Co., Inc.
(CLCI) and Josefa Vda. De Cuison (Mrs. Cuison), collectively
referred to as respondents, in the action they commenced for
breach of contract, specific performance, damages, and
attorneys fees, with prayer for the issuance of a writ of
preliminary injunction against petitioner Traders Royal Bank
(bank).

THE BACKGROUND FACTS

On July 14, 1978 and December 9, 1979, respectively, CLCI,
through its then president, Roman Cuison Sr., obtained two loans
from the bank. The loans were secured by a real estate mortgage
over a parcel of land covered by Transfer Certificate of Title No.
10282 (subject property). CLCI failed to pay the loan, prompting
the bank to extrajudicially foreclose the mortgage on the subject
property. The bank was declared the highest bidder at the public
auction that followed, conducted on August 1, 1985. A Certificate

of Sale and a Sheriffs Final Certificate of Sale were subsequently

issued in the banks favor.
In a series of written communications between CLCI and the
bank, CLCI manifested its intention to restructure its loan
obligations and to repurchase the subject property. On July 31,
1986, Mrs. Cuison, the widow and administratrix of the estate of
Roman Cuison Sr., wrote the banks Officer-in-Charge, Remedios
Calaguas, a letter indicating her offered terms of repurchase. She
stated:
1.

That I will pay the interest of P115,538.66, plus the additional

expenses
of P17,293.69, the
total
amount
of
which
is P132,832.35 on August 8, 1986;

2.

That I will pay 20% of the bid price of P949,632.84, plus

whatever interest accruing within sixty (60) days from August 8,
1986;

3.

That whatever remaining balance after the above two (2)

payments shall be amortized for five (5) years on equal monthly
installments including whatever interest accruing lease on
diminishing balance.[5]

CLCI paid the bank P50,000.00 (on August 8, 1986)

and P85,000.00 (on September 3, 1986). The bank received and
regarded these amounts as earnest money for the repurchase
of the subject property. On October 20, 1986, the bank sent Atty.
Roman Cuison, Jr. (Atty. Cuison), as the president and general
manager of CLCI, a letter informing CLCI of the banks board of
directors resolution of October 10, 1986 (TRB Repurchase
Agreement), laying down the conditions for the repurchase of the
subject property:
This is to formally inform you that our Board of Directors, in its
regular meeting held on October 10, 1986, passed a resolution for the
repurchase of your property acquired by the bank, subject to the
following terms and conditions, viz:

1. That the repurchase price shall be at total banks claim as of

the date of implementation;

2. That client shall initially pay P132,000.00 within fifteen (15)

days from the expiration of the redemption period (August 8, 1986)
and further payment of P200,632.84, representing 20% of the bid
price, to be remitted on or before October 31, 1986;

3. That the balance of P749,000.00 to be paid in three (3) years

in twelve (12) quarterly amortizations, with interest rate at 26%
computed on diminishing balance;

4. That all the interest and other charges starting from August 8,
1986 to date of approval shall be paid first before implementation of
the request; interest as of October 31, 1986 isP65,669.53;

5. Possession of the property shall be deemed transferred after

signing of the Contract to Sell. However, title to the property shall be
delivered only upon full payment of the repurchase price via Deed of
Absolute Sale;

6. Registration fees, documentary stamps, transfer taxes at the

date of sale and other similar government impost shall be for the
exclusive account of the buyer;

7. The improvement of the property shall at all times be covered

by insurance against loss with a policy to be obtained from a reputable
company which designates the bank as beneficiary but premiums shall
be paid by the client;

8. That the sale is good for thirty (30) days from the buyers
receipt of notice of approval of the offer; otherwise, sale is
automatically cancelled;

9. Effective upon signing of the Contract to Sell, all realty taxes

which will become due on the property shall be for the account of the
buyer;

10. That the first quarterly installment shall be due within ninety
(90) days of approval hereof, and the succeeding installment shall be
due every three (3) months thereafter;

11. Upon default of the buyer to pay two (2) successive

quarterly installments, contract is automatically cancelled at the
Banks option and all payments already made shall be treated as
rentals or as liquidated damages; and

12. Other terms and conditions that the bank may further
impose to protect its interest.

Should you agree with the above terms and conditions please
sign under Conforme on the space provided below.

We attach herewith your Statement of Account[6] as of October

31, 1986, for your reference.

Thank you.

Very truly yours,

(Signed)

Conforme: (Not signed)[7]

CLCI failed to comply with the above terms notwithstanding

the extensions of time given by the bank. Nevertheless, CLCI
tendered, on February 3, 1987, a check forP135,091.57 to cover
fifty percent (50%) of the twenty percent (20%) bid price. The
check, however, was returned for insufficiency of funds. On May
13, 1987, CLCI tendered an additional P50,000.00.[8] On May 29,
1987, the bank sent Atty. Cuison a letter informing him that
the P185,000.00 CLCI paid was not a deposit, but formed part of
the earnest money under the TRB Repurchase Agreement. On
August 28, 1987, Atty. Cuison, by letter, requested that CLCIs
outstanding obligation of P1,221,075.61 (as of July 31, 1987) be
reduced to P1 million, and the amount of P221,075.61 be
condoned by the bank. To show its commitment to the request,
CLCI paid the bank P100,000.00 andP200,000.00 on August 28,
1987. The bank credited both payments as earnest money.

A year later, CLCI inquired about the status of its request.

The bank responded that the request was still under consideration
by the banks Manila office. On September 30, 1988, the bank
informed CLCI that it would resell the subject property at an
offered price of P3 million, and gave CLCI 15 days to make a
formal offer; otherwise, the bank would sell the subject property
to third parties. On October 26, 1988, CLCI offered to repurchase
the subject property for P1.5 million, given that it had already
tendered the amount of P400,000.00 as earnest money.

CLCI subsequently claimed that the bank breached the terms

of repurchase, as it had wrongly considered its payments (in the
amounts
of P140,485.18, P200,000.00
andP100,000.00)
as
earnest money, instead of applying them to the purchase price.
Through its counsel, CLCI demanded that the bank rectify the
repurchase agreement to reflect the true consideration agreed
upon for which the earnest money had been given. The bank did
not act on the demand. Instead, it informed CLCI that the
amounts it received were not earnest money, and that the bank

was willing to return these sums, less the amounts forfeited to

answer for the unremitted rentals on the subject property.

In view of these developments, CLCI and Mrs. Cuison, on

February 10, 1989, filed with the RTC a complaint for breach of
contract, specific performance, damages, and attorneys fees
against the bank. On April 20, 1989, the bank filed its Answer
alleging that the TRB repurchase agreement was already
cancelled given CLCIs failure to comply with its provisions; by
way of counterclaim, the bank also demanded the payment of the
accrued rentals in the subject property as of January 31, 1989,
and the award of moral damages and exemplary damages as well
as attorneys fees and litigation expenses for the unfounded suit
instituted against the bank by CLCI. [9] After trial on the merits, the
RTC ruled in respondents favor. The dispositive portion of its
November 4, 1994 Decision states:

WHEREFORE, premises considered, judgment is hereby

rendered in favor of plaintiffs and against the defendant bank, ordering
said defendant bank to:

1. Execute and consummate a Contract to Sell which is reflective

of the true consideration indicated in the Resolution of the Board of
Directors of Traders Royal Bank held on October 10, 1986 (Exhibit F
and Exhibit 13), duly accrediting the amount of P435,000 as earnest
money to be part of the price, the mode of payment being on quarterly
installment, but the period within which the first quarterly payment
being on quarterly payment shall be made to commence upon the
execution of said Contract to Sell;

2. Pay to plaintiffs the amounts of P50,000.00 in concept of

moral damages, P20,000.00 as exemplary damages;

3. Pay attorneys fees of P20,000.00; and

4. Pay litigation expenses in the amount of P2,000.00.

The counterclaim of defendant bank is hereby dismissed.

SO ORDERED.

On appeal to the CA, the bank pointed out the

misappreciation of facts the RTC committed and argued that: first,
the repurchase agreement did not ripen into a perfected contract;
and second, even assuming that there was a perfected
repurchase agreement, the bank had the right to revoke it and
apply the payments already made to the rentals due for the use
of the subject property, or as liquidated damages under
paragraph 11 of the TRB Repurchase Agreement, since CLCI
violated its terms and conditions. Further, the bank contended
that CLCI had abandoned the TRB Repurchase Agreement in its
letters dated August 28, 1987 and October 26, 1988 when it
proposed to repurchase the subject property for P1 million
and P1.5 million, respectively. Lastly, the bank objected to the
award of damages in the plaintiffs favor.

THE CA DECISION

On March 31, 2006, the CA issued the challenged Decision

and
affirmed
the
RTCs
factual
findings
and
legal
conclusions. Although it deleted the awards of attorneys fees,
moral and exemplary damages, the CA ruled that there was a
perfected contract to repurchase the subject property given the

banks acceptance (as stated in the letter dated October 20,

1986) of CLCIs proposal contained in Mrs. Cuisons letter of July
31, 1986. The CA distinguished between a condition imposed on
the perfection of the contract and a condition imposed on the
performance of an obligation, and declared that the conditions
laid down in the letter dated October 20, 1986 merely relate to
the manner the obligation is to be performed and implemented;
failure to comply with the latter obligation does not result in the
failure of the contract and only gives the other party the options
and/or remedies to protect its interest. The CA held that the same
conclusion obtains even if the letter of October 20, 1986 is
considered a counter-offer by the bank; CLCIs payment
of P135,000.00 operated as an implied acceptance of the banks
counter-offer, notwithstanding CLCIs failure to expressly manifest
its conforme. In light of these findings, the CA went on to
acknowledge the validity of the terms of paragraph 11 of the TRB
Repurchase Agreement, but nonetheless held that CLCI has not
yet violated its terms given the banks previous acts (i.e., the
grant of extensions to pay), which showed that it had waived the
agreements original terms of payment.

The CA rejected the theory that CLCI had abandoned the

terms of the TRB Repurchase Agreement and found no
incompatibility between the agreement and the contents of the
August 28, 1987 and October 26, 1988 letters which did not show
an implied abandonment by CLCI, nor the latters expressed
intent to cancel or abandon the perfected repurchase
agreement. In the same manner, the CA struck down the banks
position that CLCIs payments were deposits rather than earnest
money. The appellate court reasoned that while the amounts
tendered cannot be strictly considered as earnest money under
Article 1482 of the New Civil Code, [10] they were nevertheless
within the concept of earnest money under this Courts ruling
in Spouses Doromal, Sr. v. CA,[11] since they were paid as a
guarantee so that the buyer would not back out of the contract.

The CA however ruled that the award of moral and

exemplary damages, attorneys fees and litigation expenses
lacked factual and legal support. The CA found that the bank
acted in good faith and based its actions on the erroneous belief
that CLCI had already abandoned the repurchase agreement.
Likewise, the award of moral damages was not in order as there
was no showing that CLCIs reputation was debased or
besmirched by the banks action of applying the previous
payments made to the interest and rentals due on the subject
property; neither is Mrs. Cuison entitled to moral damages
without any evidence to justify this award. The CA also ruled that
there was nothing in the records to warrant the awards of
exemplary damages and attorneys fees.

The bank subsequently moved but failed to secure a

reconsideration of the CA decision. The bank thus came to us
with the following

ISSUES

I.

THE HONORABLE COURT OF APPEALS GRAVELY ERRED

IN APPREHENDING THE SIGNIFICATION (SIC) OF THE
TERM OFFER ON THE ONE HAND AND ACCEPTANCE
ON THE OTHER HAND IN SALES CONTRACT WHICH
ERROR LED IT TO ARRIVE AT A WRONG CONCLUSION OF
LAW.

II.

THE HONORABLE COURT OF APPEALS GRAVELY ERRED

IN ITS INTERPRETATION OF THE STIPULATIONS AND
TERMS AND CONDITIONS EMBODIED IN THE PROPOSED
REPURCHASE AGREEMENT xxx WHICH LED IT TO
ERRONEOUSLY CONCLUDE THAT THERE WAS A
PERFECTED REPURCHASE AGREEMENT BETWEEN
RESPONDENTS
AND
PETITIONER
AND
WHICH
INTERPRETATION IS NOT IN ACCORDANCE WITH THE
APPLICABLE LAW AND ESTABLISHED JURISPRUDENCE.

Reduced to the most basic, the main issue posed is

whether or not a perfected contract of repurchase existed
and can be enforced between the parties.

THE COURTS RULING

We GRANT the petition.
The case presents to us as threshold issue the presence or
absence of consent as a requisite for a perfected contract to
repurchase the subject property. The RTC ruled that a perfected
contract existed based mainly on the following facts: first, the
existence of the TRB Repurchase Agreement which clearly
depicts the repurchase agreement of the subject property under
the terms therein embodied; and second, the payment of earnest
money in the total amount of P435,000.00 which forms part of the
price and, as initial payment, is proof of the perfection of the
contract.[12] In concurring with the foregoing findings on appeal,
the CA, in turn, declared that there was a meeting of the minds
between the parties on the offer and acceptance for the
repurchase of the subject property under the following quoted
facts:

It may be recalled that it was Mrs. Cuison, through her letter of

July 31, 1986, who proposed to repurchase the foreclosed property. She
in fact had tendered right away an amount ofP50,000.00 as partial
payment of the P132,000.00 she had promised to pay as initial
payment. In response, TRB sent a letter dated October 20, 1986 to
Atty. Cuison informing him of the resolution passed by the Board of
Directors of TRB acknowledging the proposal of Ms. Cuison to
repurchase the property. Under the circumstance, the proposal made
by Ms. Cuison constituted the offer contemplated by law, and the
reply of TRB was the corresponding acceptance of the proposal-offer.

Conceding arguendo that TRBs letter-response October 20,

1986 constituted a counter-offer or politacion, CLCIs ensuing
remittance of P135,000.00 as initial payment of the price, operates
effectively as an implied acceptance of TRBs counter-offer. The
absence of a signature to signify plaintiffs conforme to the repurchase
agreement is of no moment. While theconforme portion of the subject
repurchase agreement indeed bears no signature at all, this fact,
however, does not detract from the accomplished fact that plaintiffs
had acquiesced or assented to the standing conditional counter-offer
of TRB. Plaintiffs conforme would at best be a mere formality
considering that the repurchase agreement had already been
perfected, if impliedly.[13]

Based on these findings, the crucial points that the lower

courts apparently considered were Mrs. Cuisons letter of July 31,
1986 to the bank; the banks letter of October 20, 1986 to CLCI;
and
the
parties
subsequent
conduct
showing
their
acknowledgement of the existence of their agreement,
specifically, the respondents payments (designated as earnest
money) and the banks acceptance of these payments. However,
unlike the RTCs conclusion that relied on CLCIs payment and the
banks acceptance of the payment as earnest money, the CA
concluded that there was a perfected contract, either because of

the banks acceptance of CLCIs offer (made through Mrs.

Cuisons letter of July 31, 1986), or by CLCIs implied acceptance
indicated by its initial payments in compliance with the terms of
the TRB Repurchase Agreement.

The petitioner bank, of course, argues differently and

concludes that the undisputed facts of the case show that there
was no meeting of the minds between the parties given CLCIs
failure to give its consent and conformity to the banks letter of
October 20, 1986, confirmed by the testimony of Atty. Cuison, no
less, when he denied that CLCI consented to the agreements
terms of implementation.

Our task in this petition for review on certiorari is not to

review the factual findings of the CA and the RTC, but to
determine whether or not, on the basis of the said findings, the
conclusions of law reached by the said courts are correct.

Under the law, a contract is perfected by mere consent, that

is, from the moment that there is a meeting of the offer and the
acceptance upon the thing and the cause that constitute the
contract.[14] The law requires that the offer must be certain and
the acceptance absolute and unqualified.[15] An acceptance of an
offer may be express and implied; a qualified offer constitutes a
counter-offer.[16] Case law holds that an offer, to be considered
certain, must be definite,[17] while an acceptance is considered
absolute and unqualified when it is identical in all respects with
that of the offer so as to produce consent or a meeting of the
minds.[18] We have also previously held that the ascertainment of
whether there is a meeting of minds on the offer and acceptance
depends on the circumstances surrounding the case. [19]

In Villonco Realty Co. v. Bormacheco,[20] the Court found a

perfected contract of sale between the parties after considering

the parties written communications showing the offer (counteroffer) and acceptance by the seller who formally manifested his
conformity with the offer in the buyers letter. We took note of the
acts of the parties the payment of the buyer of an amount
representing the partial payment under the contract; the
acceptance of the partial payment by the seller; the allowance of
the buyer for the seller to encash the check containing the partial
payment; the subsequent return of the amount representing the
partial payment by the buyer with the corresponding interest
stated in the buyers letter (offer) and considered them
evidence of the perfection of the sale. Under these circumstances,
we also declared that a change in a phrase in the offer to
purchase, that does not essentially change the terms of the offer,
does not amount to a rejection of the offer and the tender of a
counter-offer.

In Schuback & Sons Philippine Trading Corp. v. CA,[21] we

declared a meeting of minds between the vendor and the vendee
even though the quantity of goods purchased had not been fully
determined. We noted that the vendee, after expressing his
intention to purchase the merchandise, simultaneously enclosed a
purchase order whose receipt prompted the vendor to
immediately order the merchandise. We also took into account
the act of the vendee in requesting for a discount as proof of his
acceptance of the quoted price.

Yuviengco v. Dacuycuy[22] yielded a different result, as we

considered that the letter and telegrams sent by the parties to
each other showed that there was no meeting of minds in the
absence of an unconditional acceptance to the terms of the
contract of sale; otherwise, the buyers would not have included
the phrase to negotiate details when they agreed to the
property that was subject of the proposed contract.

Similarly, in Philippine National Bank v. CA,[23] we ruled that

there was no perfected contract of sale because the specified
terms and conditions imposed under the facts of the case
constituted counter-offers against each other that were not
accepted by either of the parties. This case involved a first
contract, involving the same property, which the parties mutually
cancelled; we said that the terms of this earlier contract cannot
be considered in determining the acceptance and compliance with
the terms of a proposed second contract a distinct and separate
contract from the one earlier aborted.

The incomplete details of the agreement led us to conclude

in Insular Life Assurance Co. Ltd. v. Assets Builders Corp.[24] that
no perfected contract existed; there were other matters or
details in addition to the subject matter and the consideration
[that] would be stipulated and agreed. We likewise considered
the subsequent acts between the parties and the existence of a
second proposal which belied the perfection of any initial
contract.

The recent Navarra v. Planters Development Bank[25] is

another case where we saw no perfected contract, as the offer
was incomplete for lack of agreed details on the manner of paying
the purchase price; there was also no acceptance as the letter of
Planters Development Bank indicated the need to discuss other
details of the transaction.

All these cases illustrate the rule that the concurrence of the
offer and acceptance is vital to the birth and the perfection of a
contract. The clear and neat principle is that the offer must be
certain and definite with respect to the cause or consideration
and object of the proposed contract, while the acceptance of this
offer express or implied must be unmistakable, unqualified,
and identical in all respects to the offer. The required
concurrence, however, may not always be immediately clear and

may have to be read from the attendant circumstances; in fact, a

binding contract may exist between the parties whose minds
have met, although they did not affix their signatures to any
written document.[26]
The facts of the present case, although ambivalent in
some respects, point on the whole to the conclusion that
both parties agreed to the repurchase of the subject
property.
A reading of the petitioners letter of October 20, 1986
informing CLCI that the banks board of directors passed a
resolution for the repurchase of [your] property shows that the
tenor of acceptance, except for the repurchase price, was subject
to conditions not identical in all respects with the CLCIs letteroffer of July 31, 1986. In this sense, the banks October 20, 1986
letter was effectively a counter-offer that CLCI must be shown to
have accepted absolutely and unqualifiedly in order to give birth
to a perfected contract. Evidence exists showing that CLCI did not
sign any document to show its conformity with the banks
counter-offer. Testimony also exists explaining why CLCI did not
sign; Atty. Cuison testified that CLCI did not agree with the
implementation of the repurchase transaction since the bank
made a wrong computation.[27]
These indicators notwithstanding, we find that CLCI
accepted the terms of the TRC Repurchase Agreement and thus
unqualifiedly accepted the banks counter-offer under the TRB
Repurchase Agreement and, in fact, partially executed the
agreement, as shown from the following undisputed evidence:

(a)

The letter-reply dated November 29, 1986 of Atty.

Cuison, as president and general manager of CLCI, to the
bank (in response to the banks demand letter dated
November 27, 1986 to pay 20% of the bid price); CLCI
requested an extension of time, until the end of
December 1986, to pay its due obligation;[28]

(b)

Mrs. Cuisons letter-reply of February 3, 1987 (to the

banks letter of January 13, 1987) showed that she
acknowledged CLCIs failure to comply with its requested
extension and proposed a new payment scheme that
would be reasonable given CLCIs critical economic
difficulties; Mrs.
Cuizon
tendered
a
check
for P135,091.57, which represented 50% of the 20% bid
price;[29]

(c)

The CLCIs continuous payments of the repurchase

price after their receipt of the banks letter of October
20, 1986;

(d)

CLCIs possession of the subject property pursuant to

paragraph 5 of the TRB Repurchase Agreement,
notwithstanding the absence of a signed contract to sell
between the parties;

x x x

We counted the following facts, too, as indicators leading to the

conclusion that a perfected contract existed: CLCI did not raise
any objection to the terms and conditions of the TRB Repurchase
Agreement, and instead, unconditionally paid without protests or
objections[30]; CLCIs acknowledgment of their obligations under
the TRB Repurchase Agreement (as shown by Atty. Cuisons letter
of November 29, 1986); and Atty. Cuisons admission that the TRB
Repurchase Agreement was already a negotiated agreement
between CLCI and the bank, as shown by the following testimony:

When you received this document, this Exh. F from the

defendant bank, did you already consider this as an agreement?

We consider that as a negotiated agreement pending the

documentation of the formal contract to sell which is stated
under the repurchase agreement.

In other words, at the time you received this document Exh.

F, which was on October 23, 1986 date of receipt, was there
already a meeting of the minds between the parties?

That is precisely we put [sic] the earnest money because we

were of the opinion that the bank is already agreeable to the
implementation of the repurchase agreement.
x

COURT

Insofar as Exh. F is concerned?

There was initially, that is precisely we [sic] deposited in

consideration of the repurchase agreement.[31]

The bank, for its part, showed its recognition of the

existence of a repurchase agreement between itself and CLCI by
the following acts:

(a) The letter dated November 27, 1986 of the bank,

reminding CLCI that it was remiss in its commitments to
pay 20% of the bid price under the terms of the TRB
Repurchase Agreement;

(b) In the same letter, the bank gave CLCI an extension of

time (until November 30, 1986) to comply with its past
due obligations under the agreement;

(c) The banks acceptance of CLCIs payments as earnest

money for the repurchase of the property;

(d) CLCIs continued possession of the subject property with

the banks consent;

(e) The banks grant of extensions to CLCI for the payment

of its obligations under the contract;

(f)

The Statement of Account dated July 31, 1987 showing

that the bank applied CLCIs payments according to the
terms of the TRB Repurchase Agreement;

(g) The letter of January 26, 1989 of the banks counsel,

Atty. Abarquez, addressed to CLCIs counsel, showing the
banks recognition that there was an agreement between
the bank and CLCI, which the latter failed to honor; and

(h) The testimonies of the banks witnesses Mr. Eulogio

Giramis[32] and Ms. Arlene Aportadera,[33] the banks
employees who handled the CLCI transactions who
admitted the existence of the repurchase agreement with
CLCI and the latters failure to comply with the
agreements terms.

Admittedly, some evidence on record may be argued to point

to the absence of a meeting of the minds (more particularly, the
previous offers made by CLCI to change the payment scheme of
the repurchase of the subject property which was not accepted;
the banks expressed intent to offer the subject property for sale
to third persons at a higher price; and the unaccepted counteroffer by the respondents after the bank increased the purchase
price).[34] These incidents, however, were the results of CLCIs
failure to comply with its obligations to pay the amounts due on
the stipulated time and were made after the parties minds had
met on the terms of the contract. The seemingly contrary
indications, therefore, do not go into and affect the perfection of
the contract; they came after the contract had been perfected
and, as discussed below, were indicative of the banks
cancellation of the repurchase agreement.

In light of this conclusion, we now determine the

consequential rights, obligations and liabilities of the parties. It is
at this point that we diverge from the conclusions of the CA and
the RTC, as we conclude that while there was a perfected contract
between the parties, the bank effectively cancelled the contract
when it communicated with CLCI that it would sell the subject
property at a higher price to third parties, giving CLCI 15 days to
make a formal offer, and disregarding CLCIs counter-offer to buy
the subject property for P1.5 million. We arrive at this conclusion
after considering the following reasons:

First, the bank communicated its intent not to proceed with

the repurchase as above outlined and formally cancelled the TRB
Repurchase Agreement in its letters dated January 11 and 30,
1989 to CLCI.[35] Thus, CLCIs rights acquired under the TRB
Repurchase Agreement to repurchase the subject property have
been defeated by its own failure to comply with its obligations
under the agreement. The right to cancel for breach is provided
under paragraph 11 of the TRB Repurchase Agreement, as
follows:

11. Upon default of the buyer to pay two (2) successive quarterly
installments, contract is automatically cancelled at the Banks
option and all payments already made shall be treated as rentals
or as liquidated damages;

We note, additionally, that the TRB Repurchase Agreement is in

the nature of a contract to sell where the title to the subject
property remains in the banks name, as the vendor, and shall
only pass to the respondents, as vendees, upon the full payment
of the repurchase price.[36] The settled rule for contracts to sell is
that the full payment of the purchase price is a positive
suspensive condition; the failure to pay in full is not to be
considered a breach, casual or serious, but simply an event that
prevents the obligation of the vendor to convey title from
acquiring any obligatory force.[37] Viewed in this light, the bank
cannot be compelled to perform its obligations under the TRB
Repurchase Agreement that has been rendered ineffective by the
respondents non-performance of their own obligations.

Second, the respondents violated the terms and conditions

of the TRB Repurchase Agreement when they failed to pay their
obligations under the agreement as these obligations fell
due. Paragraphs 2 and 10 of the TRB Repurchase Agreement are
clear on the respondents obligation to pay the bid price and the
quarterly installments. Paragraphs 2 and 10 state:
2.

That client shall initially pay P132,000.00 within fifteen (15) days
from the expiration of the redemption period (August 8, 1986) and
further payment of P200,632.84 representing 20% of the bid price
to be remitted on or before October 31, 1986;

xxx

xxx

xxx

10. That the first quarterly installment shall be due within ninety (90)
days of approval hereof, and the succeeding installment shall be
due every three (3) months thereafter;

The approval referred to under paragraph 10 is the approval by

the bank of the repurchase of the subject property, as indicated in
the banks letter of October 20, 1986 which states, This is to
formally inform you that our Board of Directors in its regular
meeting held on October 10, 1986, passed a resolution for the
repurchase of your property acquired by the bank. It was on
the basis of this approval and the quoted terms of the agreement
that the bank issued its Statement of Account dated July 31, 1987
indicating that the respondents were already in default, not only
with respect to the 20% of the bid price, but also with the three
quarterly installments.

Third, the respondents themselves claim that the bank

violated the agreement when it applied the respondents
payments to the interest and penalties due without the
respondents consent, instead of applying these to the repurchase
price for the subject property. [38] An examination of the provisions
of the TRB Repurchase Agreement reveals that the bank is
allowed to apply the respondents payments first to the amounts
due as interests and other charges, before applying any payment
to the repurchase price. Paragraph 4 of the agreement provides:
4. That all the interest and other charges starting from August 8,
1986 to date of approval shall be paid first before implementation
of the request; interest as of October 31, 1986 isP65,669.53;

Under these terms, the bank cannot be faulted for the application
of payments it made. Likewise, the bank cannot be faulted for the

application of other amounts paid as rentals as this is allowed

under paragraph 11, quoted above, of the agreement.

Fourth, the petitioner bank cannot be said, as the CA ruled,

to have already waived the terms of the TRB Repurchase
Agreement by extending the time to pay and subsequently
accepting late payments. The CAs conclusion lacks factual and
legal basis taking into account that the Statement of Account of
July 31, 1987, heretofore cited, which shows that the bank
considered the respondents already in default. At this point, Atty.
Cuison, by letter, requested that part of its outstanding obligation
be condoned by the bank, paying P300,000.00 as of August 31,
1987, which amount the bank accepted as earnest money. For
one whole year thereafter, neither party moved. Significantly, the
respondents, who had continuing payments to make and who had
the burden of complying with the terms of the agreement, failed
to act except to ask the bank for the status of its requested
condonation. Under these facts, a continuing breach of the
agreement took place, even granting that a waiver had
intervened as of August 31, 1987. Thus, the bank was well within
its right to consider the agreement cancelled when, in September
1988, it changed the repurchase terms to P3.0 million. We find it
significant that the respondents, instead of asserting its rights
under the TRB Repurchase Agreement, counter-offered P1.5
million with the P400,000.00 already paid as part of the purchase
price. At that point, it was clear that even the respondents
themselves considered the TRB Repurchase Agreement cancelled.

Lastly, the perfected repurchase agreement itself provides

for the respondents possession of the subject property; in fact,
the respondents have been in continuous possession of the
subject property since October 1986, despite the absence of a
contract to sell apparently with the banks consent. The
agreement also provides under its paragraph 11 that upon the
respondents default and the cancellation of the agreement, all

payments already made shall be treated as rentals or as

liquidated damages.

The undisputed facts show that the bank has been deprived
of the use and benefit of its property that has been in the
possession of the respondents for the latters use and benefit
without paying any rentals thereon. The records reveal that until
now, the respondents are still in possession of the subject
property.[39]

We note that subsequent to the banks counterclaim for the

payment of rentals due as of January 31, 1989, the bank also
seeks to recover the rentals that accrued after January 31, 1989,
which as of August 8, 1993 amounted to P1,123,500.00 as shown
by the evidence presented by the bank before the RTC and in the
pleadings it had filed before the RTC, CA, and the Court.
[40]
Although this claim was not alleged in the banks Answer being
an after-acquired claim which was only raised during the trial
proper through the testimony dated August 17, 1993 of Ms.
Arlene Aportadera,[41] the bank is not barred from recovering
these rentals. As we explained in Banco de Oro Universal Bank v.
CA,[42] a party is not barred from setting up a claim even after the
filing of the answer if the claim did not exist or had not matured
at the time said party filed its answer. Moreover, we note that the
respondents did not object to the presentation of this evidence,
hence, the issue of rentals from August 8, 1993 and onwards was
tried with the implied consent of the parties; applying Section 5,
Rule 10 of the 1997 Rules of Civil Procedure, [43] the issue should
be treated in all respects as if it had been raised in the pleadings.
[44]
Given the implied consent, judgment may be validly rendered
on this issue even if no motion had been filed and no amendment
had been ordered.[45]

In National Power Corporation v. CA,[46] we held that where

there is a variance in the defendants pleadings and the evidence

adduced by it at the trial, the Court may treat the pleading as

amended to conform to the evidence.

Additionally, the respondents are also liable to pay interest

by way of damages for their failure to pay the rentals due for the
use of the subject property. In Eastern Shipping Lines v. CA,[47] we
laid down the following guidelines with respect to the award and
the computation of legal interest, as follows:
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages except when or until
the demand can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially or extrajudicially (Art. 1169
Civil Code) but when such certainty cannot be so reasonably established at
the time the demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time quantification
of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its

satisfaction, this interim period being deemed to be by then an equivalent to a

forbearance of credit. [Emphasis supplied]

The records are unclear on when the bank made a demand

outside of the judicial proceedings for the rentals on the subject
property.[48] However, the records show that the bank made a
counterclaim for the payments of the rentals due as of January 31,
1989 in its Answer and subsequently, a claim for the afteracquired rentals was made by the bank through the testimony of
Ms. Arlene Aportadera. Applying Eastern Shipping Lines, the
payment of interest for the rentals shall be reckoned from the
date the judicial demand was made by the bank or on April 20,
1989 when the bank set up its counterclaim for rentals in the
subject property.
Under the circumstances, we can impose a 6% interest on
the rentals from April 20, 1989 up to the finality of this
decision. Thereafter, the interest shall be computed at 12% per
annum from such finality up to full satisfaction.

We find no basis for the award of

damages. Article 2232 of the Civil Code declares:

exemplary

Article 2232. In contracts and quasi-contracts, the court may

award exemplary damages if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner.

Considering the factual circumstances we have discussed above,

we can hardly characterize respondents act of insisting on the
enforcement of the repurchase agreement as wanton, fraudulent,
reckless, oppressive, or malevolent.

As there is no basis for an award of exemplary damages, the

awards of attorneys fees and litigation expenses to the bank are
not justified under Article 2208 of the Civil Code.

WHEREFORE, premises considered, we hereby GRANT the

petition. The Decision dated March 31, 2006 and Resolution dated
August 11, 2006 of the Court of Appeals in CA-G.R. CV No. 49900
are hereby REVERSED and SET ASIDE.

The complaint in Civil Case No. 19416-89 for breach of

contract, specific performance, damages, and attorneys fees,
with preliminary injunction filed by Cuison Lumber Co., Inc. and
Mrs. Cuison against Traders Royal Bank is hereby DISMISSED.
The respondents are ordered to vacate the subject property and
to restore its possession to the petitioner bank.

The respondents are further ordered to pay reasonable

compensation, for the use and occupation of the subject property
in the amount of P1,123,500.00, representing the accrued rentals
as of August 8, 1993, less the amount of P485,000.00
representing deposits paid by the respondents. In additiodn,
respondents are also ordered to pay the amount of P13,700.00 a
month by way of rentals starting from August 8, 1993 until they
vacate the subject property. The rentals shall earn a
corresponding legal interest of six percent (6%) per annum to be
computed from April 20, 1989 until the finality of this
decision. After this decision becomes final and executory, the
rate of legal interest shall be computed at twelve percent
(12%) per annum from such finality until its satisfaction.
Costs against the respondents.
SO ORDERED.
-There is perfected contract to sell, nevertheless, respondents own inaction and continued non
compliance on the conditions of the Agreement gave rise to the right of the bank to cancel their
contract to sell subject property.
G.R. No. 128066

June 19, 2000

JARDINE DAVIES INC., petitioner,

vs.
COURT OF APPEALS and FAR EAST MILLS SUPPLY CORPORATION, respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 128069
PURE FOODS CORPORATION, petitioner,
vs.
COURT OF APPEALS and FAR EAST MILLS SUPPLY CORPORATION, respondents.
BELLOSILLO, J.:
This is rather a simple case for specific performance with damages which could have been resolved
through mediation and conciliation during its infancy stage had the parties been earnest in
expediting the disposal of this case. They opted however to resort to full court proceedings and
denied themselves the benefits of alternative dispute resolution, thus making the process more
arduous and long-drawn.
The controversy started in 1992 at the height of the power crisis which the country was then
experiencing. To remedy and curtail further losses due to the series of power failures, petitioner
PURE FOODS CORPORATION (hereafter PUREFOODS) decided to install two (2) 1500 KW
generators in its food processing plant in San Roque, Marikina City.
Sometime in November 1992 a bidding for the supply and installation of the generators was held.
Several suppliers and dealers were invited to attend a pre-bidding conference to discuss the
conditions, propose scheme and specifications that would best suit the needs of PUREFOODS. Out
of the eight (8) prospective bidders who attended the pre-bidding conference, only three (3) bidders,
namely, respondent FAR EAST MILLS SUPPLY CORPORATION (hereafter FEMSCO), MONARK
and ADVANCE POWER submitted bid proposals and gave bid bonds equivalent to 5% of their
respective bids, as required.
Thereafter, in a letter dated 12 December 1992 addressed to FEMSCO President Alfonso Po,
PUREFOODS confirmed the award of the contract to FEMSCO
Gentlemen:
This will confirm that Pure Foods Corporation has awarded to your firm the project: Supply and
Installation of two (2) units of 1500 KW/unit Generator Sets at the Processed Meats Plant, Bo. San
Roque, Marikina, based on your proposal number PC 28-92 dated November 20, 1992, subject to
the following basic terms and conditions:
1. Lump sum contract of P6,137,293.00 (VAT included), for the supply of materials and labor
for the local portion and the labor for the imported materials, payable by progress billing
twice a month, with ten percent (10%) retention. The retained amount shall be released thirty
(30) days after acceptance of the completed project and upon posting of Guarantee Bond in
an amount equivalent to twenty percent (20%) of the contract price. The Guarantee Bond
shall be valid for one (1) year from completion and acceptance of project. The contract price
includes future increase/s in costs of materials and labor;

2. The projects shall be undertaken pursuant to the attached specifications. It is understood

that any item required to complete the project, and those not included in the list of items shall
be deemed included and covered and shall be performed;
3. All materials shall be brand new;
4. The project shall commence immediately and must be completed within twenty (20)
working days after the delivery of Generator Set to Marikina Plant, penalty equivalent to 1/10
of 1% of the purchase price for every day of delay;
5. The Contractor shall put up Performance Bond equivalent to thirty (30%) of the contract
price, and shall procure All Risk Insurance equivalent to the contract price upon
commencement of the project. The All Risk Insurance Policy shall be endorsed in favor of
and shall be delivered to Pure Foods Corporation;
6. Warranty of one (1) year against defective material and/or workmanship.
Once finalized, we shall ask you to sign the formal contract embodying the foregoing terms and
conditions.
Immediately, FEMSCO submitted the required performance bond in the amount of P1,841,187.90
and contractor's all-risk insurance policy in the amount of P6,137,293.00 which PUREFOODS
through its Vice President Benedicto G. Tope acknowledged in a letter dated 18 December 1992.
FEMSCO also made arrangements with its principal and started the PUREFOODS project by
purchasing the necessary materials. PUREFOODS on the other hand returned FEMSCO's Bidder's
Bond in the amount of P1,000,000.00, as requested.
Later, however, in a letter dated 22 December 1992, PUREFOODS through its Senior Vice President
Teodoro L. Dimayuga unilaterally canceled the award as "significant factors were uncovered and
brought to (their) attention which dictate (the) cancellation and warrant a total review and re-bid of
(the) project." Consequently, FEMSCO protested the cancellation of the award and sought a meeting
with PUREFOODS. However, on 26 March 1993, before the matter could be resolved,
PUREFOODS already awarded the project and entered into a contract with JARDINE NELL, a
division of Jardine Davies, Inc. (hereafter JARDINE), which incidentally was not one of the bidders.
1wphi1.nt

FEMSCO thus wrote PUREFOODS to honor its contract with the former, and to JARDINE to cease
and desist from delivering and installing the two (2) generators at PUREFOODS. Its demand letters
unheeded, FEMSCO sued both PUREFOODS and JARDINE: PUREFOODS for reneging on its
contract, and JARDINE for its unwarranted interference and inducement. Trial ensued. After
FEMSCO presented its evidence, JARDINE filed a Demurrer to Evidence.
On 27 June 1994 the Regional Trial Court of Pasig, Br. 68, 1 granted JARDINE's Demurrer to
Evidence. The trial court concluded that "[w]hile it may seem to the plaintiff that by the actions of the
two defendants there is something underhanded going on, this is all a matter of perception, and
unsupported by hard evidence, mere suspicions and suppositions would not stand up very well in a
court of law." 2 Meanwhile trial proceeded as regards the case against PUREFOODS.

On 28 July 1994 the trial court rendered a decision ordering PUREFOODS: (a) to indemnify
FEMSCO the sum of P2,300,000.00 representing the value of engineering services it rendered; (b)
to pay FEMSCO the sum of US$14,000.00 or its peso equivalent, and P900,000.00 representing
contractor's mark-up on installation work, considering that it would be impossible to compel
PUREFOODS to honor, perform and fulfill its contractual obligations in view of PUREFOOD's
contract with JARDINE and noting that construction had already started thereon; (c) to pay attorney's
fees in an amount equivalent to 20% of the total amount due; and, (d) to pay the costs. The trial
court dismissed the counterclaim filed by PUREFOODS for lack of factual and legal basis.
Both FEMSCO and PUREFOODS appealed to the Court of Appeals. FEMSCO appealed the 27
June 1994 Resolution of the trial court which granted the Demurrer to Evidence filed by JARDINE
resulting in the dismissal of the complaint against it, while PUREFOODS appealed the 28 July 1994
Decision of the same court which ordered it to pay FEMSCO.
On 14 August 1996 the Court of Appeals affirmed in toto the 28 July 1994 Decision of the trial
court. 3 It also reversed the 27 June 1994 Resolution of the lower court and ordered JARDINE to pay
FEMSCO damages for inducing PUREFOODS to violate the latter's contract with FEMSCO. As
such, JARDINE was ordered to pay FEMSCO P2,000,000.00 for moral damages. In addition,
PUREFOODS was also directed to pay FEMSCO P2,000,000.00 as moral damages and
P1,000,000.00 as exemplary damages as well as 20% of the total amount due as attorney's fees.
On 31 January 1997 the Court of Appeals denied for lack of merit the separate motions for
reconsideration filed by PUREFOODS and JARDINE. Hence, these two (2) petitions for review filed
by PUREFOODS and JARDINE which were subsequently consolidated.
PUREFOODS maintains that the conclusions of both the trial court and the appellate court are
premised on a misapprehension of facts. It argues that its 12 December 1992 letter to FEMSCO was
not an acceptance of the latter's bid proposal and award of the project but more of a qualified
acceptance constituting a counter-offer which required FEMSCO's express conforme. Since
PUREFOODS never received FEMSCO's conforme, PUREFOODS was very well within reason to
revoke its qualified acceptance or counter-offer. Hence, no contract was perfected between
PUREFOODS and FEMSCO. PUREFOODS also contends that it was never in bad faith when it
dealt with FEMSCO. Hence moral and exemplary damages should not have been awarded.
Corollarily, JARDINE asserts that the records are bereft of any showing that it had prior knowledge of
the supposed contract between PUREFOODS and FEMSCO, and that it induced PUREFOODS to
violate the latter's alleged contract with FEMSCO. Moreover, JARDINE reasons that FEMSCO, an
artificial person, is not entitled to moral damages. But granting arguendo that the award of moral
damages is proper, P2,000,000.00 is extremely excessive.
In the main, these consolidated cases present two (2) issues: first, whether there existed a perfected
contract between PUREFOODS and FEMSCO; and second, granting there existed a perfected
contract, whether there is any showing that JARDINE induced or connived with PUREFOODS to
violate the latter's contract with FEMSCO.

A contract is defined as "a juridical convention manifested in legal form, by virtue of which one or
more persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a
prestation to give, to do, or not to do." 4 There can be no contract unless the following requisites
concur: (a) consent of the contracting parties; (b) object certain which is the subject matter of the
contract; and, (c) cause of the obligation which is established. 5 A contract binds both contracting
parties and has the force of law between them.
Contracts are perfected by mere consent, upon the acceptance by the offeree of the offer made by
the offeror. 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. 6 To produce a contract, the acceptance must not qualify the
terms of the offer. However, the acceptance may be express or implied. 7 For a contract to arise, the
acceptance must be made known to the offeror. Accordingly, the acceptance can be withdrawn or
revoked before it is made known to the offeror.
In the instant case, there is no issue as regards the subject matter of the contract and the cause of
the obligation. The controversy lies in the consent whether there was an acceptance of the offer,
and if so, if it was communicated, thereby perfecting the contract.
To resolve the dispute, there is a need to determine what constituted the offer and the acceptance.
Since petitioner PUREFOODS started the process of entering into the contract by conducting a
bidding, Art. 1326 of the Civil Code, which provides that "[a]dvertisements for bidders are simply
invitations to make proposals," applies. Accordingly, the Terms and Conditions of the Bidding
disseminated by petitioner PUREFOODS constitutes the "advertisement" to bid on the project. The
bid proposals or quotations submitted by the prospective suppliers including respondent FEMSCO,
are the offers. And, the reply of petitioner PUREFOODS, the acceptance or rejection of the
respective offers.
Quite obviously, the 12 December 1992 letter of petitioner. PUREFOODS to FEMSCO constituted
acceptance of respondent FEMSCO's offer as contemplated by law. The tenor of the letter, i.e., "This
will confirm that Pure Foods has awarded to your firm (FEMSCO) the project," could not be more
categorical. While the same letter enumerated certain "basic terms and conditions," these conditions
were imposed on the performance of the obligation rather than on the perfection of the contract.
Thus, the first "condition" was merely a reiteration of the contract price and billing scheme based on
the Terms and Conditions of Bidding and the bid or previous offer of respondent FEMSCO. The
second and third "conditions" were nothing more than general statements that all items and
materials including those excluded in the list but necessary to complete the project shall be deemed
included and should be brand new. The fourth "condition" concerned the completion of the work to
be done, i.e., within twenty (20) days from the delivery of the generator set, the purchase of which
was part of the contract. The fifth "condition" had to do with the putting up of a performance bond
and an all-risk insurance, both of which should be given upon commencement of the project. The
sixth "condition" related to the standard warranty of one (1) year. In fine, the enumerated "basic
terms and conditions" were prescriptions on how the obligation was to be performed and
implemented. They were far from being conditions imposed on the perfection of the contract.

In Babasa v. Court of Appeals 8 we distinguished between a condition imposed on the perfection of a

contract and a condition imposed merely on the performance of an obligation. While failure to
comply with the first condition results in the failure of a contract, failure to comply with the second
merely gives the other party options and/or remedies to protect his interests.
We thus agree with the conclusion of respondent appellate court which affirmed the trial court
As can be inferred from the actual phrase used in the first portion of the letter, the decision to
award the contract has already been made. The letter only serves as a confirmation of such
decision. Hence, to the Court's mind, there is already an acceptance made of the offer
received by Purefoods. Notwithstanding the terms and conditions enumerated therein, the
offer has been accepted and/or amplified the details of the terms and conditions contained in
the Terms and Conditions of Bidding given out by Purefoods to prospective bidders. 9
But even granting arguendo that the 12 December 1992 letter of petitioner PUREFOODS constituted
a "conditional counter-offer," respondent FEMCO's submission of the performance bond and
contractor's all-risk insurance was an implied acceptance, if not a clear indication of its acquiescence
to, the "conditional counter-offer," which expressly stated that the performance bond and the
contractor's all-risk insurance should be given upon the commencement of the contract. Corollarily,
the acknowledgment thereof by petitioner PUREFOODS, not to mention its return of FEMSCO's
bidder's bond, was a concrete manifestation of its knowledge that respondent FEMSCO indeed
consented to the "conditional counter-offer." After all, as earlier adverted to, an acceptance may
either be express or implied, 10 and this can be inferred from the contemporaneous and subsequent
acts of the contracting parties.
Accordingly, for all intents and purposes, the contract at that point has been perfected, and
respondent FEMSCO's conforme would only be a mere surplusage. The discussion of the price of
the project two (2) months after the 12 December 1992 letter can be deemed as nothing more than a
pressure being exerted by petitioner PUREFOODS on respondent FEMSCO to lower the price even
after the contract had been perfected. Indeed from the facts, it can easily be surmised that petitioner
PUREFOODS was haggling for a lower price even after agreeing to the earlier quotation, and was
threatening to unilaterally cancel the contract, which it eventually did. Petitioner PUREFOODS also
makes an issue out of the absence of a purchase order (PO). Suffice it to say that purchase orders
or POs do not make or break a contract. Thus, even the tenor of the subsequent letter of petitioner
PUREFOODS, i.e., "Pure Foods Corporation is hereby canceling the award to your company of the
project," presupposes that the contract has been perfected. For, there can be no cancellation if the
contract was not perfected in the first place.
Petitioner PUREFOODS also argues that it was never in bad faith. On the contrary, it believed in
good faith that no such contract was perfected. We are not convinced. We subscribe to the factual
findings and conclusions of the trial court which were affirmed by the appellate court
1avvphi1

Hence, by the unilateral cancellation of the contract, the defendant (petitioner PURE
FOODS) has acted with bad faith and this was further aggravated by the subsequent inking
of a contract between defendant Purefoods and erstwhile co-defendant Jardine. It is very
evident that Purefoods thought that by the expedient means of merely writing a letter would

automatically cancel or nullify the existing contract entered into by both parties after a
process of bidding. This, to the Court's mind, is a flagrant violation of the express provisions
of the law and is contrary to fair and just dealings to which every man is due. 11
This Court has awarded in the past moral damages to a corporation whose reputation has been
besmirched. 12In the instant case, respondent FEMSCO has sufficiently shown that its reputation was
tarnished after it immediately ordered equipment from its suppliers on account of the urgency of the
project, only to be canceled later. We thus sustain respondent appellate court's award of moral
damages. We however reduce the award from P2,000,000.00 to P1,000,000.00, as moral damages
are never intended to enrich the recipient. Likewise, the award of exemplary damages by way of
example for the public good is excessive and should be reduced to P100,000.00.
Petitioner JARDINE maintains on the other hand that respondent appellate court erred in ordering it
to pay moral damages to respondent FEMSCO as it supposedly induced PUREFOODS to violate
the contract with FEMSCO. We agree. While it may seem that petitioners PUREFOODS and
JARDINE connived to deceive respondent FEMSCO, we find no specific evidence on record to
support such perception. Likewise, there is no showing whatsoever that petitioner JARDINE induced
petitioner PUREFOODS. The similarity in the design submitted to petitioner PUREFOODS by both
petitioner JARDINE and respondent FEMSCO, and the tender of a lower quotation by petitioner
JARDINE are insufficient to show that petitioner JARDINE indeed induced petitioner PUREFOODS
to violate its contract with respondent FEMSCO.
WHEREFORE, judgment is hereby rendered as follows:
(a) The petition in G.R. No. 128066 is GRANTED. The assailed Decision of the Court of
Appeals reversing the 27 June 1994 resolution of the trial court and ordering petitioner
JARDINE DAVIES, INC., to pay private respondent FAR EAST MILLS SUPPLY
CORPORATION P2,000,000.00 as moral damages is REVERSED and SET ASIDE for
insufficiency of evidence; and
(b) The petition in G.R. No. 128069 is DENIED. The assailed Decision of the Court of
Appeals ordering petitioner PUREFOODS CORPORATION to pay private respondent FAR
EAST MILLS SUPPLY CORPORATION the sum of P2,300,000.00 representing the value of
engineering services it rendered, US$14,000.00 or its peso equivalent, and P900,000.00
representing the contractor's mark-up on installation work, as well as attorney's fees
equivalent to twenty percent (20%) of the total amount due, is AFFIRMED. In addition,
petitioner PURE FOODS CORPORATION is ordered to pay private respondent FAR EAST
MILLS SUPPLY CORPORATION moral damages in the amount of P1,000,000.00 and
exemplary damages in the amount of P1,000,000.00. Costs against petitioner.
SO ORDERED.
-contract between purefoods and FEMSCO was perfected as can be gleaned from the letter of
purefoods to the latter confirming the award of the project.

-the conditions set forth in the letter of confirmation were mere surplasage as the same were already
set forth in the bidding contract, to which FEMSCO acknowledged and faithfully complied with

G.R. No. 177783

January 23, 2013

HEIRS OF FAUSTO C. IGNACIO, namely MARFEL D. IGNACIO-MANALO, MILFA D. IGNACIOMANALO AND FAUSTINO D. IGNACIO, Petitioners,
vs.
HOME BANKERS SAVINGS AND TRUST COMPANY, SPOUSES PHILLIP AND THELMA
RODRIGUEZ, CATHERINE, REYNOLD & JEANETTE, all surnamed ZUNIGA, Respondents.
DECISION
VILLARAMA, JR., J.:
Before the Court is a Petition for Review on Certiorari under Rule 45 assailing the Decision 1 dated
July 18, 2006 and Resolution2 dated May 2, 2007 of the Court of Appeals (CA) in CA-G.R. CV No.
73551. The CA reversed the Decision3 dated June 15, 1999 of the Regional Trial Court (RTC) of
Pasig City, Branch 151 in Civil Case No. 58980.
The factual antecedents:
In August 1981, petitioner Fausto C. Ignacio mortgaged two parcels of land to Home Savings Bank
and Trust Company, the predecessor of respondent Home Bankers Savings and Trust Company, as

security for theP500,000.00 loan extended to him by said bank. These properties which are located
in Cabuyao, Laguna are covered by Transfer Certificate of Title Nos. (T-40380) T-8595 and (T45804) T-8350 containing an area of 83,303 square meters and 120,110 square meters,
respectively.4
When petitioner defaulted in the payment of his loan obligation, respondent bank proceeded to
foreclose the real estate mortgage. At the foreclosure sale held on January 26, 1983, respondent
bank was the highest bidder for the sum of P764,984.67. On February 8, 1983, the Certificate of
Sale issued to respondent bank was registered with the Registry of Deeds of Calamba, Laguna.
With the failure of petitioner to redeem the foreclosed properties within one year from such
registration, title to the properties were consolidated in favor of respondent bank. Consequently, TCT
Nos. T-8595 and T-8350 were cancelled and TCT Nos. 111058 and 111059 were issued in the name
of respondent bank.5
Despite the lapse of the redemption period and consolidation of title in respondent bank, petitioner
offered to repurchase the properties. While the respondent bank considered petitioner's offer to
repurchase, there was no repurchase contract executed. The present controversy was fuelled by
petitioner's stance that a verbal repurchase/compromise agreement was actually reached and
implemented by the parties.
In the meantime, respondent bank made the following dispositions of the foreclosed properties
already titled in its name:
TCT No. 111059 (Subdivided into six lots with individual titles - TCT Nos. 117771, 117772, 117773,
117774, 117775 and 117776)
A. TCT No. 117771 (16,350 sq.ms.) - Sold to Fermin Salvador and Bella Salvador under
Deed of Absolute Sale dated May 23, 1984 for the price of P150,000.00
B. TCT No. 11772 (82,569 sq.ms. subdivided into 2 portions
1) Lot 3-B-1 (35,447 sq.ms.) - Sold to Dr. Oscar Remulla and Natividad Pagtakhan,
Dr. Edilberto Torres and Dra. Rebecca Amores under Deed of Absolute Sale dated
April 17, 1985 for the price ofP150,000.00
2) Lot 3-B-2 covered by separate title TCT No. 124660 (Subdivided into 3 portions Lot 3-B-2-A (15,000 sq.ms.) - Sold to Dr. Myrna del Carmen Reyes under
Deed of Absolute Sale dated March 23, 1987 for the price of P150,000.00
Lot 3-B-2-B (15,000 sq.ms.) - Sold to Dr. Rodito Boquiren under Deed of
Absolute Sale dated March 23, 1987 for the price of P150,000.00
Lot 3-B-2-C (17,122 sq.ms.) covered by TCT No. T-154568 -

C. TCT No.117773 (17,232 sq.ms.) - Sold to Rizalina Pedrosa under Deed of Absolute Sale
dated June 4, 1984 for the price of P150,000.00
The expenses for the subdivision of lots covered by TCT No. 111059 and TCT No. 117772 were
shouldered by petitioner who likewise negotiated the above-mentioned sale transactions. The
properties covered by TCT Nos. T-117774 to 117776 are still registered in the name of respondent
bank.6
In a letter addressed to respondent bank dated July 25, 1989, petitioner expressed his willingness to
pay the amount of P600,000.00 in full, as balance of the repurchase price, and requested
respondent bank to release to him the remaining parcels of land covered by TCT Nos. 111058 and T154658 ("subject properties").7Respondent bank however, turned down his request. This prompted
petitioner to cause the annotation of an adverse claim on the said titles on September 18, 1989. 8
Prior to the annotation of the adverse claim, on August 24, 1989, the property covered by TCT No.
154658 was sold by respondent bank to respondent spouses Phillip and Thelma Rodriguez, without
informing the petitioner. On October 6, 1989, again without petitioner's knowledge, respondent bank
sold the property covered by TCT No T-111058 to respondents Phillip and Thelma Rodriguez,
Catherine M. Zuiga, Reynold M. Zuiga and Jeannette M. Zuiga. 9
On December 27, 1989, petitioner filed an action for specific performance and damages in the RTC
against the respondent bank. As principal relief, petitioner sought in his original complaint the
reconveyance of the subject properties after his payment of P600,000.00.10 Respondent bank filed its
Answer denying the allegations of petitioner and asserting that it was merely exercising its right as
owner of the subject properties when the same were sold to third parties.
For failure of respondent bank to appear during the pre-trial conference, it was declared as in default
and petitioner was allowed to present his evidence ex parte on the same date (September 3, 1990).
Petitioner simultaneously filed an "Ex-Parte Consignation" tendering the amount of P235,000.00 as
balance of the repurchase price.11 On September 7, 1990, the trial court rendered judgment in favor
of petitioner. Said decision, as well as the order of default, were subsequently set aside by the trial
court upon the filing of a motion for reconsideration by the respondent bank. 12
In its Order dated November 19, 1990, the trial court granted the motion for intervention filed by
respondents Phillip and Thelma Rodriguez, Catherine Zuiga, Reynold Zuiga and Jeannette
Zuiga. Said intervenors asserted their status as innocent purchasers for value who had no notice or
knowledge of the claim or interest of petitioner when they bought the properties already registered in
the name of respondent bank. Aside from a counterclaim for damages against the petitioner,
intervenors also prayed that in the event respondent bank is ordered to reconvey the properties,
respondent bank should be adjudged liable to the intervenors and return all amounts paid to it. 13
On July 8, 1991, petitioner amended his complaint to include as alternative relief under the prayer for
reconveyance the payment by respondent bank of the prevailing market value of the subject
properties "less whatever remaining obligation due the bank by reason of the mortgage under the
terms of the compromise agreement.14

On June 15, 1999, the trial court rendered its Decision, the dispositive portion of which reads:
WHEREFORE, findings [sic] the facts aver[r]ed in the complaint supported by preponderance of
evidences adduced, judgment is hereby rendered in favor of the plaintiff and against the defendant
and intervenors by:
1. Declaring the two Deeds of Sale executed by the defendant in favor of the intervenors as
null and void and the Register of Deeds in Calamba, Laguna is ordered to cancel and/or
annul the two Transfer Certificate of Titles No. T-154658 and TCT No. T-111058 issued to the
intervenors.
2. Ordering the defendant to refund the amount of P1,004,250.00 to the intervenors as the
consideration of the sale of the two properties.
3. Ordering the defendant to execute the appropriate Deed of Reconveyance of the two (2)
properties in favor of the plaintiff after the plaintiff pays in full the amount of P600,000.00 as
balance of the repurchase price.
4. Ordering the defendant bank to pay plaintiff the sum of P50,000.00 as attorney's fees.
5. Dismissing the counterclaim of the defendant and intervenors against the plaintiff.
Costs against the defendant.
SO ORDERED.15
The trial court found that respondent bank deliberately disregarded petitioner's substantial payments
on the total repurchase consideration. Reference was made to the letter dated March 22, 1984
(Exhibit "I")16 as the authority for petitioner in making the installment payments directly to the
Universal Properties, Inc. (UPI), respondent bank's collecting agent. Said court concluded that the
compromise agreement amounts to a valid contract of sale between petitioner, as Buyer, and
respondent bank, as Seller. Hence, in entertaining other buyers for the same properties already sold
to petitioner with intention to increase its revenues, respondent bank acted in bad faith and is thus
liable for damages to the petitioner. Intervenors were likewise found liable for damages as they failed
to exercise due diligence before buying the subject properties.
Respondent bank appealed to the CA which reversed the trial court's ruling, as follows:
WHEREFORE, the foregoing premises considered, the instant appeal is hereby GRANTED.
Accordingly, the assailed decision is hereby REVERSED and SET ASIDE.
SO ORDERED.17
The CA held that by modifying the terms of the offer contained in the March 22, 1984 letter of
respondent bank, petitioner effectively rejected the original offer with his counter-offer. There was
also no written conformity by respondent bank's officers to the amended conditions for repurchase

which were unilaterally inserted by petitioner. Consequently, no contract of repurchase was

perfected and respondent bank acted well within its rights when it sold the subject properties to
herein respondents-intervenors.
As to the receipts presented by petitioner allegedly proving the installment payments he had
completed, the CA said that these were not payments of the repurchase price but were actually
remittances of the payments made by petitioner's buyers for the purchase of the foreclosed
properties already titled in the name of respondent bank. It was noted that two of these receipts
(Exhibits "K" and "K-1")18 were issued to Fermin Salvador and Rizalina Pedrosa, the vendees of two
subdivided lots under separate Deeds of Absolute Sale executed in their favor by the respondent
bank. In view of the attendant circumstances, the CA concluded that petitioner acted merely as a
broker or middleman in the sales transactions involving the foreclosed properties. Lastly, the
respondents-intervenors were found to be purchasers who bought the properties in good faith
without notice of petitioner's interest or claim. Nonetheless, since there was no repurchase contract
perfected, the sale of the subject properties to respondents-intervenors remains valid and binding,
and the issue of whether the latter were innocent purchasers for value would be of no consequence.
Petitioner's motion for reconsideration was likewise denied by the appellate court.
Hence, this petition alleging that:
A.
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION
IN REVERSING THE FINDING OF THE TRIAL COURT THAT THERE WAS A PERFECTED
CONTRACT TO REPURCHASE BETWEEN PETITIONER AND RESPONDENT-BANK.
B.
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION
IN REVERSING THE FINDING OF THE TRIAL COURT THAT PETITIONER DID NOT ACT
AS BROKER IN THE SALE OF THE FORECLOSED PROPERTIES AND THUS FAILED TO
CONSIDER THE EXISTENCE OF OFFICIAL RECEIPTS ISSUED IN THE NAME OF THE
PETITIONER THAT ARE DULY NOTED FOR HIS ACCOUNT.
C.
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION
IN REVERSING THE FINDING OF THE TRIAL COURT THAT RESPONDENT-BANK DID
NOT HAVE THE RIGHT TO DISPOSE THE SUBJECT PROPERTIES.
D.
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION
IN REVERSING THE FINDING OF THE TRIAL COURT THAT RESPONDENTSINTERVENORS ARE NOT INNOCENT PURCHASERS FOR VALUE IN GOOD FAITH. 19

It is to be noted that the above issues raised by petitioner alleged grave abuse of discretion
committed by the CA, which is proper in a petition for certiorari under Rule 65 of the 1997 Rules of
Civil Procedure, as amended, but not in the present petition for review on certiorari under Rule 45.
The core issue for resolution is whether a contract for the repurchase of the foreclosed properties
was perfected between petitioner and respondent bank.
The Court sustains the decision of the CA.
Contracts are perfected by mere consent, which is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract. 20 The requisite
acceptance of the offer is expressed in Article 1319 of the Civil Code which states:
ART. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and
the cause which are to constitute the contract. The offer must be certain and the acceptance
absolute. A qualified acceptance constitutes a counter-offer.
In Palattao v. Court of Appeals,21 this Court held that if the acceptance of the offer was not absolute,
such acceptance is insufficient to generate consent that would perfect a contract. Thus:
Contracts that are consensual in nature, like a contract of sale, are perfected upon mere meeting of
the minds. Once there is concurrence between the offer and the acceptance upon the subject
matter, consideration, and terms of payment, a contract is produced. The offer must be certain. To
convert the offer into a contract, the acceptance must be absolute and must not qualify the terms of
the offer; it must be plain, unequivocal, unconditional, and without variance of any sort from the
proposal. A qualified acceptance, or one that involves a new proposal, constitutes a counter-offer
and is a rejection of the original offer. Consequently, when something is desired which is not exactly
what is proposed in the offer, such acceptance is not sufficient to generate consent because any
modification or variation from the terms of the offer annuls the offer.22
The acceptance must be identical in all respects with that of the offer so as to produce consent or
meeting of the minds.23 Where a party sets a different purchase price than the amount of the offer,
such acceptance was qualified which can be at most considered as a counter-offer; a perfected
contract would have arisen only if the other party had accepted this counter-offer.24 In Villanueva v.
Philippine National Bank25 this Court further elucidated on the meaning of unqualified acceptance, as
follows:
While it is impossible to expect the acceptance to echo every nuance of the offer, it is imperative
that it assents to those points in the offer which, under the operative facts of each contract, are not
only material but motivating as well. Anything short of that level of mutuality produces not a contract
but a mere counter-offer awaiting acceptance. More particularly on the matter of the consideration of
the contract, the offer and its acceptance must be unanimous both on the rate of the payment and
on its term. An acceptance of an offer which agrees to the rate but varies the term is
ineffective.26 (Emphasis supplied)

Petitioner submitted as evidence of a perfected contract of repurchase the March 22, 1984 letter
(Exhibit "I")27from Rita B. Manuel, then President of UPI, a corporation formed by respondent bank to
dispose of its acquired assets, with notations handwritten by petitioner himself. Said letter reads:
March 22, 1984
Honorable Judge Fausto Ignacio
412 Bagumbayan Street, Pateros
Metro Manila
Dear Judge Ignacio:
Your proposal to repurchase your foreclosed properties located at Cabuyao, Laguna consisting of a
total area of 203,413 square meters has been favorably considered subject to the following terms
and conditions:
1) Total Selling Price shall be P950,000.00
2) Downpayment of P150,00000 with the balance
Payable in Three (3) equal installments
as follows:
1st Installment - P 266,667 - on or before May 31, '84
2nd Installment - P 266,667 - on or before Sept. 31, '84
3rd Installment - P 266,666 - on or before Jan. 30, '85
TOTAL - P 800,000.00
3) All expenses pertinent to the subdivision of the parcel of land consisting of 120,110 square
meters shall be for your account.
Thank you,
Very truly yours,
RITA B. MANUEL
President
According to petitioner, he wrote the notations in the presence of a certain Mr. Lazaro, the
representative of Mrs. Manuel (President), and a certain Mr. Fajardo, which notations supposedly
represent their "compromise agreement."28 These notations indicate that the repurchase price would
be P900,000.00 which shall be paid as follows: P150,000 - end of May '84; P150,000 - end of June
'84; Balance - "Depending on financial position". Petitioner further alleged the following conditions of
the verbal agreement: (1) respondent bank shall release the equivalent land area for payments

made by petitioner who shall shoulder the expenses for subdivision of the land; (2) in case any
portion of the subdivided land is sold by petitioner, a separate document of sale would be executed
directly to the buyer; (3) the remaining portion of the properties shall not be subject of respondent
bank's transaction without the consent and authority of petitioner; (4) the petitioner shall continue in
possession of the properties and whatever portion still remaining, and attending to the needs of its
tenants; and (5) payments shall be made directly to UPI. 29
The foregoing clearly shows that petitioner's acceptance of the respondent bank's terms and
conditions for the repurchase of the foreclosed properties was not absolute. Petitioner set a different
repurchase price and also modified the terms of payment, which even contained a unilateral
condition for payment of the balance (P600,000), that is, depending on petitioner's "financial
position." The CA thus considered the qualified acceptance by petitioner as a counter-proposal
which must be accepted by respondent bank. However, there was no evidence of any document or
writing showing the conformity of respondent bank's officers to this counter-proposal.
Petitioner contends that the receipts issued by UPI on his installment payments are concrete proof -despite denials to the contrary by respondent bank -- that there was an implied acceptance of his
counter-proposal and that he did not merely act as a broker for the sale of the subdivided portions of
the foreclosed properties to third parties. Since all these receipts, except for two receipts issued in
the name of Fermin Salvador and Rizalina Pedrosa, were issued in the name of petitioner instead of
the buyers themselves, petitioner emphasizes that the payments were made for his account.
Moreover, petitioner asserts that the execution of the separate deeds of sale directly to the buyers
was in pursuance of the perfected repurchase agreement with respondent bank, such an
arrangement being "an accepted practice to save on taxes and shortcut paper works."
The Court is unconvinced.
In Adelfa Properties, Inc. v. CA,30 the Court ruled that:
x x x The rule is that except where a formal acceptance is so required, although the acceptance
must be affirmatively and clearly made and must be evidenced by some acts or conduct
communicated to the offeror, it may be made either in a formal or an informal manner, and may be
shown by acts, conduct, or words of the accepting party that clearly manifest a present intention or
determination to accept the offer to buy or sell. Thus, acceptance may be shown by the acts,
conduct, or words of a party recognizing the existence of the contract of sale. 31
Even assuming that the bank officer or employee whom petitioner claimed he had talked to
regarding the March 22, 1984 letter had acceded to his own modified terms for the repurchase, their
supposed verbal exchange did not bind respondent bank in view of its corporate nature. There was
no evidence that said Mr. Lazaro or Mr. Fajardo was authorized by respondent bank's Board of
Directors to accept petitioner's counter-proposal to repurchase the foreclosed properties at the price
and terms other than those communicated in the March 22, 1984 letter. As this Court ruled in AF
Realty & Development, Inc. v. Dieselman Freight Services, Co.32
Section 23 of the Corporation Code expressly provides that the corporate powers of all corporations
shall be exercised by the board of directors. Just as a natural person may authorize another to do

certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its
functions to individual officers or agents appointed by it. Thus, contracts or acts of a corporation
must be made either by the board of directors or by a corporate agent duly authorized by the board.
Absent such valid delegation/authorization, the rule is that the declarations of an individual director
relating to the affairs of the corporation, but not in the course of, or connected with, the performance
of authorized duties of such director, are held not binding on the corporation. 33
1wphi1

Thus, a corporation can only execute its powers and transact its business through its Board of
Directors and through its officers and agents when authorized by a board resolution or its by-laws. 34
In the absence of conformity or acceptance by properly authorized bank officers of petitioner's
counter-proposal, no perfected repurchase contract was born out of the talks or negotiations
between petitioner and Mr. Lazaro and Mr. Fajardo. Petitioner therefore had no legal right to compel
respondent bank to accept the P600,000 being tendered by him as payment for the supposed
balance of repurchase price.
A contract of sale is consensual in nature and is perfected upon mere meeting of the minds. When
there is merely an offer by one party without acceptance of the other, there is no contract. 35 When the
contract of sale is not perfected, it cannot, as an independent source of obligation, serve as a
binding juridical relation between the parties.36
In sum, we find the ruling of the CA more in accord with the established facts and applicable law and
jurisprudence. Petitioner's claim of utmost accommodation by respondent bank of his own terms for
the repurchase of his foreclosed properties are simply contrary to normal business practice. As aptly
observed by the appellate court:
The submission of the plaintiff-appellee is unimpressive.
First, if the counter-proposal was mutually agreed upon by both the plaintiff-appellee and defendantappellant, how come not a single signature of the representative of the defendant-appellant was
affixed thereto. Second, it is inconceivable that an agreement of such great importance, involving
two personalities who are both aware and familiar of the practical and legal necessity of reducing
agreements into writing, the plaintiff-appellee, being a lawyer and the defendant-appellant, a banking
institution, not to formalize their repurchase agreement. Third, it is quite absurd and unusual that the
defendant-appellant could have acceded to the condition that the balance of the payment of the
repurchase price would depend upon the financial position of the plaintiff-appellee. Such
open[-]ended and indefinite period for payment is hardly acceptable to a banking institution like the
defendant-appellant whose core existence fundamentally depends upon its financial arrangements
and transactions which, most, if not all the times are intended to bear favorable outcome to its
business. Last, had there been a repurchase agreement, then, there should have been titles or
deeds of conveyance issued in favor of the plaintiff-appellee. But as it turned out, the plaintiffappellee never had any land deeded or titled in his name as a result of the alleged repurchase
agreement. All these, reinforce the conclusion that the counter-proposal was unilaterally made and
inserted by the plaintiff-appellee in Exhibit "I" and could not have been accepted by the defendantappellant, and that a different agreement other than a repurchase agreement was perfected between
them.37

Petitioner Fausto C. Ignacio passed away on November 11, 2008 and was substituted by his heirs,
namely: Marfel D. Ignacio-Manalo, Milfa D. Ignacio-Manalo and Faustino D. Ignacio.
WHEREFORE, the petition for review on certiorari is DENIED. The Decision dated July 18, 2006 and
Resolution dated May 2, 2007 of the Court of Appeals in CA-G.R. CV No. 73551 are hereby
AFFIRMED.
With costs against the petitioners.
SO ORDERED.

G. R. No. 158149

February 9, 2006

BOSTON BANK OF THE PHILIPPINES, (formerly BANK OF COMMERCE), Petitioner,

vs.
PERLA P. MANALO and CARLOS MANALO, JR., Respondents.
DECISION
CALLEJO, SR., J.:
Before us is a Petition for Review on Certiorari of the Decision1 of the Court of Appeals (CA) in CAG.R. CV No. 47458 affirming, on appeal, the Decision2 of the Regional Trial Court (RTC) of Quezon
City, Branch 98, in Civil Case No. Q-89-3905.
The Antecedents
The Xavierville Estate, Inc. (XEI) was the owner of parcels of land in Quezon City, known as the
Xavierville Estate Subdivision, with an area of 42 hectares. XEI caused the subdivision of the
property into residential lots, which was then offered for sale to individual lot buyers. 3
On September 8, 1967, XEI, through its General Manager, Antonio Ramos, as vendor, and The
Overseas Bank of Manila (OBM), as vendee, executed a "Deed of Sale of Real Estate" over some
residential lots in the subdivision, including Lot 1, Block 2, with an area of 907.5 square meters, and
Lot 2, Block 2, with an area of 832.80 square meters. The transaction was subject to the approval of
the Board of Directors of OBM, and was covered by real estate mortgages in favor of the Philippine
National Bank as security for its account amounting to P5,187,000.00, and the Central Bank of the
Philippines as security for advances amounting to P22,185,193.74.4 Nevertheless, XEI continued
selling the residential lots in the subdivision as agent of OBM. 5

Sometime in 1972, then XEI president Emerito Ramos, Jr. contracted the services of Engr. Carlos
Manalo, Jr. who was in business of drilling deep water wells and installing pumps under the business
name Hurricane Commercial, Inc. For P34,887.66, Manalo, Jr. installed a water pump at Ramos
residence at the corner of Aurora Boulevard and Katipunan Avenue, Quezon City. Manalo, Jr. then
proposed to XEI, through Ramos, to purchase a lot in the Xavierville subdivision, and offered as part
of the downpayment the P34,887.66 Ramos owed him. XEI, through Ramos, agreed. In a letter
dated February 8, 1972, Ramos requested Manalo, Jr. to choose which lots he wanted to buy so that
the price of the lots and the terms of payment could be fixed and incorporated in the conditional
sale.6 Manalo, Jr. met with Ramos and informed him that he and his wife Perla had chosen Lots 1
and 2 of Block 2 with a total area of 1,740.3 square meters.
In a letter dated August 22, 1972 to Perla Manalo, Ramos confirmed the reservation of the lots. He
also pegged the price of the lots at P200.00 per square meter, or a total of P348,060.00, with a 20%
down payment of the purchase price amounting to P69,612.00 less the P34,887.66 owing from
Ramos, payable on or before December 31, 1972; the corresponding Contract of Conditional Sale
would then be signed on or before the same date, but if the selling operations of XEI resumed after
December 31, 1972, the balance of the downpayment would fall due then, and the spouses would
sign the aforesaid contract within five (5) days from receipt of the notice of resumption of such selling
operations. It was also stated in the letter that, in the meantime, the spouses may introduce
improvements thereon subject to the rules and regulations imposed by XEI in the subdivision. Perla
Manalo conformed to the letter agreement.7
The spouses Manalo took possession of the property on September 2, 1972, constructed a house
thereon, and installed a fence around the perimeter of the lots.
In the meantime, many of the lot buyers refused to pay their monthly installments until they were
assured that they would be issued Torrens titles over the lots they had purchased. 8 The spouses
Manalo were notified of the resumption of the selling operations of XEI. 9 However, they did not pay
the balance of the downpayment on the lots because Ramos failed to prepare a contract of
conditional sale and transmit the same to Manalo for their signature. On August 14, 1973, Perla
Manalo went to the XEI office and requested that the payment of the amount representing the
balance of the downpayment be deferred, which, however, XEI rejected. On August 10, 1973, XEI
furnished her with a statement of their account as of July 31, 1973, showing that they had a balance
ofP34,724.34 on the downpayment of the two lots after deducting the account of Ramos,
plus P3,819.6810 interest thereon from September 1, 1972 to July 31, 1973, and that the interests on
the unpaid balance of the purchase price of P278,448.00 from September 1, 1972 to July 31, 1973
amounted to P30,629.28.11 The spouses were informed that they were being billed for said unpaid
interests.12
On January 25, 1974, the spouses Manalo received another statement of account from XEI,
inclusive of interests on the purchase price of the lots.13 In a letter dated April 6, 1974 to XEI, Manalo,
Jr. stated they had not yet received the notice of resumption of Leis selling operations, and that
there had been no arrangement on the payment of interests; hence, they should not be charged with
interest on the balance of the downpayment on the property.14 Further, they demanded that a deed of
conditional sale over the two lots be transmitted to them for their signatures. However, XEI ignored
the demands. Consequently, the spouses refused to pay the balance of the downpayment of the
purchase price.15
Sometime in June 1976, Manalo, Jr. constructed a business sign in the sidewalk near his house. In a
letter dated June 17, 1976, XEI informed Manalo, Jr. that business signs were not allowed along the
sidewalk. It demanded that he remove the same, on the ground, among others, that the sidewalk

was not part of the land which he had purchased on installment basis from XEI. 16 Manalo, Jr. did not
respond. XEI reiterated its demand on September 15, 1977. 17
Subsequently, XEI turned over its selling operations to OBM, including the receivables for lots
already contracted and those yet to be sold.18 On December 8, 1977, OBM warned Manalo, Jr., that
"putting up of a business sign is specifically prohibited by their contract of conditional sale" and that
his failure to comply with its demand would impel it to avail of the remedies as provided in their
contract of conditional sale.19
Meanwhile, on December 5, 1979, the Register of Deeds issued Transfer Certificate of Title (TCT)
No. T-265822 over Lot 1, Block 2, and TCT No. T-265823 over Lot 2, Block 2, in favor of the
OBM.20 The lien in favor of the Central Bank of the Philippines was annotated at the dorsal portion of
said title, which was later cancelled on August 4, 1980. 21
Subsequently, the Commercial Bank of Manila (CBM) acquired the Xavierville Estate from OBM.
CBM wrote Edilberto Ng, the president of Xavierville Homeowners Association that, as of January
31, 1983, Manalo, Jr. was one of the lot buyers in the subdivision. 22 CBM reiterated in its letter to Ng
that, as of January 24, 1984, Manalo was a homeowner in the subdivision. 23
In a letter dated August 5, 1986, the CBM requested Perla Manalo to stop any on-going construction
on the property since it (CBM) was the owner of the lot and she had no permission for such
construction.24 She agreed to have a conference meeting with CBM officers where she informed
them that her husband had a contract with OBM, through XEI, to purchase the property. When asked
to prove her claim, she promised to send the documents to CBM. However, she failed to do so. 25 On
September 5, 1986, CBM reiterated its demand that it be furnished with the documents
promised,26 but Perla Manalo did not respond.
On July 27, 1987, CBM filed a complaint27 for unlawful detainer against the spouses with the
Metropolitan Trial Court of Quezon City. The case was docketed as Civil Case No. 51618. CBM
claimed that the spouses had been unlawfully occupying the property without its consent and that
despite its demands, they refused to vacate the property. The latter alleged that they, as vendors,
and XEI, as vendee, had a contract of sale over the lots which had not yet been rescinded. 28
While the case was pending, the spouses Manalo wrote CBM to offer an amicable settlement,
promising to abide by the purchase price of the property (P313,172.34), per agreement with XEI,
through Ramos. However, on July 28, 1988, CBM wrote the spouses, through counsel, proposing
that the price of P1,500.00 per square meter of the property was a reasonable starting point for
negotiation of the settlement.29 The spouses rejected the counter proposal,30 emphasizing that they
would abide by their original agreement with XEI. CBM moved to withdraw its complaint 31 because of
the issues raised.32
In the meantime, the CBM was renamed the Boston Bank of the Philippines. After CBM filed its
complaint against the spouses Manalo, the latter filed a complaint for specific performance and
damages against the bank before the Regional Trial Court (RTC) of Quezon City on October 31,
1989.
The plaintiffs alleged therein that they had always been ready, able and willing to pay the
installments on the lots sold to them by the defendants remote predecessor-in-interest, as might be
or stipulated in the contract of sale, but no contract was forthcoming; they constructed their house
worth P2,000,000.00 on the property in good faith; Manalo, Jr., informed the defendant, through its
counsel, on October 15, 1988 that he would abide by the terms and conditions of his original
agreement with the defendants predecessor-in-interest; during the hearing of the ejectment case on

October 16, 1988, they offered to pay P313,172.34 representing the balance on the purchase price
of said lots; such tender of payment was rejected, so that the subject lots could be sold at
considerably higher prices to third parties.
Plaintiffs further alleged that upon payment of the P313,172.34, they were entitled to the execution
and delivery of a Deed of Absolute Sale covering the subject lots, sufficient in form and substance to
transfer title thereto free and clear of any and all liens and encumbrances of whatever kind and
nature.33 The plaintiffs prayed that, after due hearing, judgment be rendered in their favor, to wit:
WHEREFORE, it is respectfully prayed that after due hearing:
(a) The defendant should be ordered to execute and deliver a Deed of Absolute Sale over
subject lots in favor of the plaintiffs after payment of the sum of P313,172.34, sufficient in
form and substance to transfer to them titles thereto free and clear of any and all liens and
encumbrances of whatever kind or nature;
(b) The defendant should be held liable for moral and exemplary damages in the amounts
of P300,000.00 and P30,000.00, respectively, for not promptly executing and delivering to
plaintiff the necessary Contract of Sale, notwithstanding repeated demands therefor and for
having been constrained to engage the services of undersigned counsel for which they
agreed to pay attorneys fees in the sum of P50,000.00 to enforce their rights in the premises
and appearance fee of P500.00;
(c) And for such other and further relief as may be just and equitable in the premises. 34
In its Answer to the complaint, the defendant interposed the following affirmative defenses: (a)
plaintiffs had no cause of action against it because the August 22, 1972 letter agreement between
XEI and the plaintiffs was not binding on it; and (b) "it had no record of any contract to sell executed
by it or its predecessor, or of any statement of accounts from its predecessors, or records of
payments of the plaintiffs or of any documents which entitled them to the possession of the
lots."35 The defendant, likewise, interposed counterclaims for damages and attorneys fees and
prayed for the eviction of the plaintiffs from the property.36
Meanwhile, in a letter dated January 25, 1993, plaintiffs, through counsel, proposed an amicable
settlement of the case by paying P942,648.70, representing the balance of the purchase price of the
two lots based on the current market value.37 However, the defendant rejected the same and insisted
that for the smaller lot, they payP4,500,000.00, the current market value of the property.38 The
defendant insisted that it owned the property since there was no contract or agreement between it
and the plaintiffs relative thereto.
During the trial, the plaintiffs adduced in evidence the separate Contracts of Conditional Sale
executed between XEI and Alberto Soller;39 Alfredo Aguila,40 and Dra. Elena Santos-Roque41 to prove
that XEI continued selling residential lots in the subdivision as agent of OBM after the latter had
acquired the said lots.
For its part, defendant presented in evidence the letter dated August 22, 1972, where XEI proposed
to sell the two lots subject to two suspensive conditions: the payment of the balance of the
downpayment of the property, and the execution of the corresponding contract of conditional sale.
Since plaintiffs failed to pay, OBM consequently refused to execute the corresponding contract of
conditional sale and forfeited the P34,877.66 downpayment for the two lots, but did not notify them
of said forfeiture.42 It alleged that OBM considered the lots unsold because the titles thereto bore no

annotation that they had been sold under a contract of conditional sale, and the plaintiffs were not
notified of XEIs resumption of its selling operations.
On May 2, 1994, the RTC rendered judgment in favor of the plaintiffs and against the defendant. The
fallo of the decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendant
(a) Ordering the latter to execute and deliver a Deed of Absolute Sale over Lot 1 and 2,
Block 2 of the Xavierville Estate Subdivision after payment of the sum of P942,978.70
sufficient in form and substance to transfer to them titles thereto free from any and all liens
and encumbrances of whatever kind and nature.
(b) Ordering the defendant to pay moral and exemplary damages in the amount
of P150,000.00; and
(c) To pay attorneys fees in the sum of P50,000.00 and to pay the costs.
SO ORDERED.43
The trial court ruled that under the August 22, 1972 letter agreement of XEI and the plaintiffs, the
parties had a "complete contract to sell" over the lots, and that they had already partially
consummated the same. It declared that the failure of the defendant to notify the plaintiffs of the
resumption of its selling operations and to execute a deed of conditional sale did not prevent the
defendants obligation to convey titles to the lots from acquiring binding effect. Consequently, the
plaintiffs had a cause of action to compel the defendant to execute a deed of sale over the lots in
their favor.
Boston Bank appealed the decision to the CA, alleging that the lower court erred in (a) not
concluding that the letter of XEI to the spouses Manalo, was at most a mere contract to sell subject
to suspensive conditions, i.e., the payment of the balance of the downpayment on the property and
the execution of a deed of conditional sale (which were not complied with); and (b) in awarding moral
and exemplary damages to the spouses Manalo despite the absence of testimony providing facts to
justify such awards.44
On September 30, 2002, the CA rendered a decision affirming that of the RTC with modification. The
fallo reads:
WHEREFORE, the appealed decision is AFFIRMED with MODIFICATIONS that (a) the figure
"P942,978.70" appearing [in] par. (a) of the dispositive portion thereof is changed to "P313,172.34
plus interest thereon at the rate of 12% per annum from September 1, 1972 until fully paid" and (b)
the award of moral and exemplary damages and attorneys fees in favor of plaintiffs-appellees is
DELETED.
SO ORDERED.45
The appellate court sustained the ruling of the RTC that the appellant and the appellees had
executed a Contract to Sell over the two lots but declared that the balance of the purchase price of
the property amounting toP278,448.00 was payable in fixed amounts, inclusive of pre-computed
interests, from delivery of the possession of the property to the appellees on a monthly basis for 120
months, based on the deeds of conditional sale executed by XEI in favor of other lot buyers. 46 The

CA also declared that, while XEI must have resumed its selling operations before the end of 1972
and the downpayment on the property remained unpaid as of December 31, 1972, absent a written
notice of cancellation of the contract to sell from the bank or notarial demand therefor as required by
Republic Act No. 6552, the spouses had, at the very least, a 60-day grace period from January 1,
1973 within which to pay the same.
Boston Bank filed a motion for the reconsideration of the decision alleging that there was no
perfected contract to sell the two lots, as there was no agreement between XEI and the respondents
on the manner of payment as well as the other terms and conditions of the sale. It further averred
that its claim for recovery of possession of the aforesaid lots in its Memorandum dated February 28,
1994 filed before the trial court constituted a judicial demand for rescission that satisfied the
requirements of the New Civil Code. However, the appellate court denied the motion.
Boston Bank, now petitioner, filed the instant petition for review on certiorari assailing the CA rulings.
It maintains that, as held by the CA, the records do not reflect any schedule of payment of the 80%
balance of the purchase price, or P278,448.00. Petitioner insists that unless the parties had agreed
on the manner of payment of the principal amount, including the other terms and conditions of the
contract, there would be no existing contract of sale or contract to sell. 47 Petitioner avers that the
letter agreement to respondent spouses dated August 22, 1972 merely confirmed their reservation
for the purchase of Lot Nos. 1 and 2, consisting of 1,740.3 square meters, more or less, at the price
of P200.00 per square meter (or P348,060.00), the amount of the downpayment thereon and the
application of the P34,887.00 due from Ramos as part of such downpayment.
Petitioner asserts that there is no factual basis for the CA ruling that the terms and conditions
relating to the payment of the balance of the purchase price of the property (as agreed upon by XEI
and other lot buyers in the same subdivision) were also applicable to the contract entered into
between the petitioner and the Respondents. It insists that such a ruling is contrary to law, as it is
tantamount to compelling the parties to agree to something that was not even discussed, thus,
violating their freedom to contract. Besides, the situation of the respondents cannot be equated with
those of the other lot buyers, as, for one thing, the respondents made a partial payment on the
downpayment for the two lots even before the execution of any contract of conditional sale.
Petitioner posits that, even on the assumption that there was a perfected contract to sell between the
parties, nevertheless, it cannot be compelled to convey the property to the respondents because the
latter failed to pay the balance of the downpayment of the property, as well as the balance of 80% of
the purchase price, thus resulting in the extinction of its obligation to convey title to the lots to the
Respondents.
Another egregious error of the CA, petitioner avers, is the application of Republic Act No. 6552. It
insists that such law applies only to a perfected agreement or perfected contract to sell, not in this
case where the downpayment on the purchase price of the property was not completely paid, and no
installment payments were made by the buyers.
Petitioner also faults the CA for declaring that petitioner failed to serve a notice on the respondents
of cancellation or rescission of the contract to sell, or notarial demand therefor. Petitioner insists that
its August 5, 1986 letter requiring respondents to vacate the property and its complaint for ejectment
in Civil Case No. 51618 filed in the Metropolitan Trial Court amounted to the requisite demand for a
rescission of the contract to sell. Moreover, the action of the respondents below was barred by
laches because despite demands, they failed to pay the balance of the purchase price of the lots (let
alone the downpayment) for a considerable number of years.

For their part, respondents assert that as long as there is a meeting of the minds of the parties to a
contract of sale as to the price, the contract is valid despite the parties failure to agree on the
manner of payment. In such a situation, the balance of the purchase price would be payable on
demand, conformably to Article 1169 of the New Civil Code. They insist that the law does not require
a party to agree on the manner of payment of the purchase price as a prerequisite to a valid contract
to sell. The respondents cite the ruling of this Court in Buenaventura v. Court of Appeals 48 to support
their submission.
They argue that even if the manner and timeline for the payment of the balance of the purchase
price of the property is an essential requisite of a contract to sell, nevertheless, as shown by their
letter agreement of August 22, 1972 with the OBM, through XEI and the other letters to them, an
agreement was reached as to the manner of payment of the balance of the purchase price. They
point out that such letters referred to the terms of the terms of the deeds of conditional sale executed
by XEI in favor of the other lot buyers in the subdivision, which contained uniform terms of 120 equal
monthly installments (excluding the downpayment, but inclusive of pre-computed interests). The
respondents assert that XEI was a real estate broker and knew that the contracts involving
residential lots in the subdivision contained uniform terms as to the manner and timeline of the
payment of the purchase price of said lots.
Respondents further posit that the terms and conditions to be incorporated in the "corresponding
contract of conditional sale" to be executed by the parties would be the same as those contained in
the contracts of conditional sale executed by lot buyers in the subdivision. After all, they maintain,
the contents of the corresponding contract of conditional sale referred to in the August 22, 1972
letter agreement envisaged those contained in the contracts of conditional sale that XEI and other lot
buyers executed. Respondents cite the ruling of this Court in Mitsui Bussan Kaisha v. Manila E.R.R.
& L. Co.49
The respondents aver that the issues raised by the petitioner are factual, inappropriate in a petition
for review on certiorari under Rule 45 of the Rules of Court. They assert that petitioner adopted a
theory in litigating the case in the trial court, but changed the same on appeal before the CA, and
again in this Court. They argue that the petitioner is estopped from adopting a new theory contrary to
those it had adopted in the trial and appellate courts. Moreover, the existence of a contract of
conditional sale was admitted in the letters of XEI and OBM. They aver that they became owners of
the lots upon delivery to them by XEI.
The issues for resolution are the following: (1) whether the factual issues raised by the petitioner are
proper; (2) whether petitioner or its predecessors-in-interest, the XEI or the OBM, as seller, and the
respondents, as buyers, forged a perfect contract to sell over the property; (3) whether petitioner is
estopped from contending that no such contract was forged by the parties; and (4) whether
respondents has a cause of action against the petitioner for specific performance.
The rule is that before this Court, only legal issues may be raised in a petition for review on
certiorari. The reason is that this Court is not a trier of facts, and is not to review and calibrate the
evidence on record. Moreover, the findings of facts of the trial court, as affirmed on appeal by the
Court of Appeals, are conclusive on this Court unless the case falls under any of the following
exceptions:
(1) when the conclusion is a finding grounded entirely on speculations, surmises and conjectures; (2)
when the inference made is manifestly mistaken, absurd or impossible; (3) where there is a grave
abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the
findings of fact are conflicting; (6) when the Court of Appeals, in making its findings went beyond the
issues of the case and the same is contrary to the admissions of both appellant and appellee; (7)

when the findings are contrary to those of the trial court; (8) when the findings of fact are conclusions
without citation of specific evidence on which they are based; (9) when the facts set forth in the
petition as well as in the petitioners main and reply briefs are not disputed by the respondents; and
(10) when the findings of fact of the Court of Appeals are premised on the supposed absence of
evidence and contradicted by the evidence on record. 50
We have reviewed the records and we find that, indeed, the ruling of the appellate court dismissing
petitioners appeal is contrary to law and is not supported by evidence. A careful examination of the
factual backdrop of the case, as well as the antecedental proceedings constrains us to hold that
petitioner is not barred from asserting that XEI or OBM, on one hand, and the respondents, on the
other, failed to forge a perfected contract to sell the subject lots.
It must be stressed that the Court may consider an issue not raised during the trial when there is
plain error.51Although a factual issue was not raised in the trial court, such issue may still be
considered and resolved by the Court in the interest of substantial justice, if it finds that to do so is
necessary to arrive at a just decision,52 or when an issue is closely related to an issue raised in the
trial court and the Court of Appeals and is necessary for a just and complete resolution of the
case.53 When the trial court decides a case in favor of a party on certain grounds, the Court may
base its decision upon some other points, which the trial court or appellate court ignored or
erroneously decided in favor of a party.54
In this case, the issue of whether XEI had agreed to allow the respondents to pay the purchase price
of the property was raised by the parties. The trial court ruled that the parties had perfected a
contract to sell, as against petitioners claim that no such contract existed. However, in resolving the
issue of whether the petitioner was obliged to sell the property to the respondents, while the CA
declared that XEI or OBM and the respondents failed to agree on the schedule of payment of the
balance of the purchase price of the property, it ruled that XEI and the respondents had forged a
contract to sell; hence, petitioner is entitled to ventilate the issue before this Court.
We agree with petitioners contention that, for a perfected contract of sale or contract to sell to exist
in law, there must be an agreement of the parties, not only on the price of the property sold, but also
on the manner the price is to be paid by the vendee.
Under Article 1458 of the New Civil Code, in a contract of sale, whether absolute or conditional, one
of the contracting parties obliges himself to transfer the ownership of and deliver a determinate thing,
and the other to pay therefor a price certain in money or its equivalent. A contract of sale is perfected
at the moment there is a meeting of the minds upon the thing which is the object of the contract and
the price. From the averment of perfection, 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.55 On the other hand, when the contract of sale or
to sell is not perfected, it cannot, as an independent source of obligation, serve as a binding juridical
relation between the parties.56
A definite agreement as to the price is an essential element of a binding agreement to sell personal
or real property because it seriously affects the rights and obligations of the parties. Price is an
essential element in the formation of a binding and enforceable contract of sale. The fixing of the
price can never be left to the decision of one of the contracting parties. But a price fixed by one of
the contracting parties, if accepted by the other, gives rise to a perfected sale. 57
It is not enough for the parties to agree on the price of the property. The parties must also agree on
the manner of payment of the price of the property to give rise to a binding and enforceable contract
of sale or contract to sell. This is so because the agreement as to the manner of payment goes into

the price, such that a disagreement on the manner of payment is tantamount to a failure to agree on
the price.58
In a contract to sell property by installments, it is not enough that the parties agree on the price as
well as the amount of downpayment. The parties must, likewise, agree on the manner of payment of
the balance of the purchase price and on the other terms and conditions relative to the sale. Even if
the buyer makes a downpayment or portion thereof, such payment cannot be considered as
sufficient proof of the perfection of any purchase and sale between the parties. Indeed, this Court
ruled in Velasco v. Court of Appeals59 that:
It is not difficult to glean from the aforequoted averments that the petitioners themselves admit that
they and the respondent still had to meet and agree on how and when the down-payment and the
installment payments were to be paid. Such being the situation, it cannot, therefore, be said that a
definite and firm sales agreement between the parties had been perfected over the lot in question.
Indeed, this Court has already ruled before that a definite agreement on the manner of payment of
the purchase price is an essential element in the formation of a binding and enforceable contract of
sale. The fact, therefore, that the petitioners delivered to the respondent the sum ofP10,000.00 as
part of the downpayment that they had to pay cannot be considered as sufficient proof of the
perfection of any purchase and sale agreement between the parties herein under article 1482 of the
New Civil Code, as the petitioners themselves admit that some essential matter the terms of
payment still had to be mutually covenanted.60
We agree with the contention of the petitioner that, as held by the CA, there is no showing, in the
records, of the schedule of payment of the balance of the purchase price on the property amounting
to P278,448.00. We have meticulously reviewed the records, including Ramos February 8, 1972
and August 22, 1972 letters to respondents,61 and find that said parties confined themselves to
agreeing on the price of the property (P348,060.00), the 20% downpayment of the purchase price
(P69,612.00), and credited respondents for theP34,887.00 owing from Ramos as part of the 20%
downpayment. The timeline for the payment of the balance of the downpayment (P34,724.34) was
also agreed upon, that is, on or before XEI resumed its selling operations, on or before December
31, 1972, or within five (5) days from written notice of such resumption of selling operations. The
parties had also agreed to incorporate all the terms and conditions relating to the sale, inclusive of
the terms of payment of the balance of the purchase price and the other substantial terms and
conditions in the "corresponding contract of conditional sale," to be later signed by the parties,
simultaneously with respondents settlement of the balance of the downpayment.
The February 8, 1972 letter of XEI reads:
Mr. Carlos T. Manalo, Jr.
Hurricane Rotary Well Drilling
Rizal Avenue Ext.,Caloocan City
Dear Mr. Manalo:
We agree with your verbal offer to exchange the proceeds of your contract with us to form as a down
payment for a lot in our Xavierville Estate Subdivision.
Please let us know your choice lot so that we can fix the price and terms of payment in
ourconditional sale.
Sincerely yours,

XAVIERVILLE ESTATE, INC.

(Signed)
EMERITO B. RAMOS, JR.
President
CONFORME:
(Signed)
CARLOS T. MANALO, JR.
Hurricane Rotary Well Drilling62
The August 22, 1972 letter agreement of XEI and the respondents reads:
Mrs. Perla P. Manalo
1548 Rizal Avenue Extensionbr>Caloocan City
Dear Mrs. Manalo:
This is to confirm your reservation of Lot Nos. 1 and 2; Block 2 of our consolidation-subdivision plan
as amended, consisting of 1,740.3 square meters more or less, at the price of P200.00 per square
meter or a total price of P348,060.00.
It is agreed that as soon as we resume selling operations, you must pay a down payment of 20% of
the purchase price of the said lots and sign the corresponding Contract of Conditional Sale, on or
before December 31, 1972, provided, however, that if we resume selling after December 31, 1972,
then you must pay the aforementioned down payment and sign the aforesaid contract within five (5)
days from your receipt of our notice of resumption of selling operations.
In the meanwhile, you may introduce such improvements on the said lots as you may desire, subject
to the rules and regulations of the subdivision.
If the above terms and conditions are acceptable to you, please signify your conformity by signing on
the space herein below provided.
Thank you.
Very truly yours,
XAVIERVILLE ESTATE, INC. CONFORME:
By:
(Signed)
EMERITO B. RAMOS, JR.
President Buyer63

(Signed)
PERLA P. MANALO

Based on these two letters, the determination of the terms of payment of the P278,448.00 had yet to
be agreed upon on or before December 31, 1972, or even afterwards, when the parties sign the
corresponding contract of conditional sale.
Jurisprudence is that if a material element of a contemplated contract is left for future negotiations,
the same is too indefinite to be enforceable.64 And when an essential element of a contract is
reserved for future agreement of the parties, no legal obligation arises until such future agreement is
concluded.65
So long as an essential element entering into the proposed obligation of either of the parties remains
to be determined by an agreement which they are to make, the contract is incomplete and
unenforceable.66 The reason is that such a contract is lacking in the necessary qualities of
definiteness, certainty and mutuality.67
There is no evidence on record to prove that XEI or OBM and the respondents had agreed, after
December 31, 1972, on the terms of payment of the balance of the purchase price of the property
and the other substantial terms and conditions relative to the sale. Indeed, the parties are in
agreement that there had been no contract of conditional sale ever executed by XEI, OBM or
petitioner, as vendor, and the respondents, as vendees.68
The ruling of this Court in Buenaventura v. Court of Appeals has no bearing in this case because the
issue of the manner of payment of the purchase price of the property was not raised therein.
We reject the submission of respondents that they and Ramos had intended to incorporate the terms
of payment contained in the three contracts of conditional sale executed by XEI and other lot buyers
in the "corresponding contract of conditional sale," which would later be signed by them. 69 We have
meticulously reviewed the respondents complaint and find no such allegation therein. 70 Indeed,
respondents merely alleged in their complaint that they were bound to pay the balance of the
purchase price of the property "in installments." When respondent Manalo, Jr. testified, he was never
asked, on direct examination or even on cross-examination, whether the terms of payment of the
balance of the purchase price of the lots under the contracts of conditional sale executed by XEI and
other lot buyers would form part of the "corresponding contract of conditional sale" to be signed by
them simultaneously with the payment of the balance of the downpayment on the purchase price.
We note that, in its letter to the respondents dated June 17, 1976, or almost three years from the
execution by the parties of their August 22, 1972 letter agreement, XEI stated, in part, that
respondents had purchased the property "on installment basis."71 However, in the said letter, XEI
failed to state a specific amount for each installment, and whether such payments were to be made
monthly, semi-annually, or annually. Also, respondents, as plaintiffs below, failed to adduce a shred
of evidence to prove that they were obliged to pay the P278,448.00 monthly, semi-annually or
annually. The allegation that the payment of the P278,448.00 was to be paid in installments is, thus,
vague and indefinite. Case law is that, for a contract to be enforceable, its terms must be certain and
explicit, not vague or indefinite.72
There is no factual and legal basis for the CA ruling that, based on the terms of payment of the
balance of the purchase price of the lots under the contracts of conditional sale executed by XEI and
the other lot buyers, respondents were obliged to pay the P278,448.00 with pre-computed interest of
12% per annum in 120-month installments. As gleaned from the ruling of the appellate court, it failed
to justify its use of the terms of payment under the three "contracts of conditional sale" as basis for
such ruling, to wit:

On the other hand, the records do not disclose the schedule of payment of the purchase price, net of
the downpayment. Considering, however, the Contracts of Conditional Sale (Exhs. "N," "O" and "P")
entered into by XEI with other lot buyers, it would appear that the subdivision lots sold by XEI, under
contracts to sell, were payable in 120 equal monthly installments (exclusive of the downpayment but
including pre-computed interests) commencing on delivery of the lot to the buyer.73
By its ruling, the CA unilaterally supplied an essential element to the letter agreement of XEI and the
Respondents. Courts should not undertake to make a contract for the parties, nor can it enforce one,
the terms of which are in doubt.74 Indeed, the Court emphasized in Chua v. Court of Appeals75 that it
is not the province of a court to alter a contract by construction or to make a new contract for the
parties; its duty is confined to the interpretation of the one which they have made for themselves,
without regard to its wisdom or folly, as the court cannot supply material stipulations or read into
contract words which it does not contain.
Respondents, as plaintiffs below, failed to allege in their complaint that the terms of payment of
the P278,448.00 to be incorporated in the "corresponding contract of conditional sale" were those
contained in the contracts of conditional sale executed by XEI and Soller, Aguila and Roque. 76 They
likewise failed to prove such allegation in this Court.
The bare fact that other lot buyers were allowed to pay the balance of the purchase price of lots
purchased by them in 120 or 180 monthly installments does not constitute evidence that XEI also
agreed to give the respondents the same mode and timeline of payment of the P278,448.00.
Under Section 34, Rule 130 of the Revised Rules of Court, evidence that one did a certain thing at
one time is not admissible to prove that he did the same or similar thing at another time, although
such evidence may be received to prove habit, usage, pattern of conduct or the intent of the parties.
Similar acts as evidence. Evidence that one did or did not do a certain thing at one time is not
admissible to prove that he did or did not do the same or a similar thing at another time; but it may
be received to prove a specific intent or knowledge, identity, plan, system, scheme, habit, custom or
usage, and the like.
However, respondents failed to allege and prove, in the trial court, that, as a matter of business
usage, habit or pattern of conduct, XEI granted all lot buyers the right to pay the balance of the
purchase price in installments of 120 months of fixed amounts with pre-computed interests, and that
XEI and the respondents had intended to adopt such terms of payment relative to the sale of the two
lots in question. Indeed, respondents adduced in evidence the three contracts of conditional sale
executed by XEI and other lot buyers merely to prove that XEI continued to sell lots in the
subdivision as sales agent of OBM after it acquired said lots, not to prove usage, habit or pattern of
conduct on the part of XEI to require all lot buyers in the subdivision to pay the balance of the
purchase price of said lots in 120 months. It further failed to prive that the trial court admitted the
said deeds77 as part of the testimony of respondent Manalo, Jr.78
Habit, custom, usage or pattern of conduct must be proved like any other facts. Courts must contend
with the caveat that, before they admit evidence of usage, of habit or pattern of conduct, the offering
party must establish the degree of specificity and frequency of uniform response that ensures more
than a mere tendency to act in a given manner but rather, conduct that is semi-automatic in nature.
The offering party must allege and prove specific, repetitive conduct that might constitute evidence
of habit. The examples offered in evidence to prove habit, or pattern of evidence must be numerous
enough to base on inference of systematic conduct. Mere similarity of contracts does not present the
kind of sufficiently similar circumstances to outweigh the danger of prejudice and confusion.

In determining whether the examples are numerous enough, and sufficiently regular, the key criteria
are adequacy of sampling and uniformity of response. After all, habit means a course of behavior of
a person regularly represented in like circumstances.79 It is only when examples offered to establish
pattern of conduct or habit are numerous enough to lose an inference of systematic conduct that
examples are admissible. The key criteria are adequacy of sampling and uniformity of response or
ratio of reaction to situations.80
There are cases where the course of dealings to be followed is defined by the usage of a particular
trade or market or profession. As expostulated by Justice Benjamin Cardozo of the United States
Supreme Court: "Life casts the moulds of conduct, which will someday become fixed as law. Law
preserves the moulds which have taken form and shape from life." 81 Usage furnishes a standard for
the measurement of many of the rights and acts of men.82 It is also well-settled that parties who
contract on a subject matter concerning which known usage prevail, incorporate such usage by
implication into their agreement, if nothing is said to be contrary.83
However, the respondents inexplicably failed to adduce sufficient competent evidence to prove
usage, habit or pattern of conduct of XEI to justify the use of the terms of payment in the contracts of
the other lot buyers, and thus grant respondents the right to pay the P278,448.00 in 120 months,
presumably because of respondents belief that the manner of payment of the said amount is not an
essential element of a contract to sell. There is no evidence that XEI or OBM and all the lot buyers in
the subdivision, including lot buyers who pay part of the downpayment of the property purchased by
them in the form of service, had executed contracts of conditional sale containing uniform terms and
conditions. Moreover, under the terms of the contracts of conditional sale executed by XEI and three
lot buyers in the subdivision, XEI agreed to grant 120 months within which to pay the balance of the
purchase price to two of them, but granted one 180 months to do so.84 There is no evidence on
record that XEI granted the same right to buyers of two or more lots.
Irrefragably, under Article 1469 of the New Civil Code, the price of the property sold may be
considered certain if it be so with reference to another thing certain. It is sufficient if it can be
determined by the stipulations of the contract made by the parties thereto85 or by reference to an
agreement incorporated in the contract of sale or contract to sell or if it is capable of being
ascertained with certainty in said contract;86 or if the contract contains express or implied provisions
by which it may be rendered certain;87 or if it provides some method or criterion by which it can be
definitely ascertained.88 As this Court held in Villaraza v. Court of Appeals,89 the price is considered
certain if, by its terms, the contract furnishes a basis or measure for ascertaining the amount agreed
upon.
We have carefully reviewed the August 22, 1972 letter agreement of the parties and find no direct or
implied reference to the manner and schedule of payment of the balance of the purchase price of the
lots covered by the deeds of conditional sale executed by XEI and that of the other lot buyers 90 as
basis for or mode of determination of the schedule of the payment by the respondents of
the P278,448.00.
The ruling of this Court in Mitsui Bussan Kaisha v. Manila Electric Railroad and Light Company 91 is
not applicable in this case because the basic price fixed in the contract was P9.45 per long ton, but it
was stipulated that the price was subject to modification "in proportion to variations in calories and
ash content, and not otherwise." In this case, the parties did not fix in their letters-agreement, any
method or mode of determining the terms of payment of the balance of the purchase price of the
property amounting to P278,448.00.
It bears stressing that the respondents failed and refused to pay the balance of the downpayment
and of the purchase price of the property amounting to P278,448.00 despite notice to them of the

resumption by XEI of its selling operations. The respondents enjoyed possession of the property
without paying a centavo. On the other hand, XEI and OBM failed and refused to transmit a contract
of conditional sale to the Respondents. The respondents could have at least consigned the balance
of the downpayment after notice of the resumption of the selling operations of XEI and filed an action
to compel XEI or OBM to transmit to them the said contract; however, they failed to do so.
As a consequence, respondents and XEI (or OBM for that matter) failed to forge a perfected contract
to sell the two lots; hence, respondents have no cause of action for specific performance against
petitioner. Republic Act No. 6552 applies only to a perfected contract to sell and not to a contract
with no binding and enforceable effect.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of
Appeals in CA-G.R. CV No. 47458 is REVERSED and SET ASIDE. The Regional Trial Court of
Quezon City, Branch 98 is ordered to dismiss the complaint. Costs against the Respondents.
SO ORDERED.
-no perfected contract of conditional sale as the manner and schedule of payment of the price or
consideration of the subject of the contract is an infirmity and goes to the heart of one of the
essential element of contract of sale-the price.
-failure on the part of the buyers in this case to make consignation of their alleged payment also
barrs them of their contention that there was really a perfected contract of conditional sale
-RA 6552 applies only to perfected contract of sale of real property and not to contracts that have no
binding and enforceable

REYNALDO VILLANUEVA,

G.R. NO. 154493

Petitioner,
Present:

PANGANIBAN, C.J.
(Chairperson)
YNARES-SANTIAGO,
- versus -

AUSTRIA-MARTINEZ,
CALLEJO, SR., and
CHICO-NAZARIO, JJ.

PHILIPPINE NATIONAL BANK

(PNB),
Respondent.

Promulgated:
December 6, 2006

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ---x

DECISION
AUSTRIA-MARTINEZ, J.:
The Petition for Review on Certiorari under Rule 45 before this
Court assails the January 29, 2002 Decision [1] and June 27, 2002
Resolution[2] of the Court of Appeals (CA) in CA-G.R. CV No.
52008[3] which reversed and set aside the September 14, 1995
Decision[4] of the Regional Trial Court, Branch 22, General Santos
City (RTC) in Civil Case No. 4553.

As culled from the records, the facts are as follows:

The Special Assets Management Department (SAMD) of the
Philippine National Bank (PNB) issued an advertisement for the
sale
thru
bidding
of
certain
PNB
properties
in Calumpang, General Santos City, including Lot No. 17, covered
by TCT No. T-15042, consisting of 22,780 square meters, with an
advertised floor price of P1,409,000.00, and Lot No. 19, covered
by TCT No. T-15036, consisting of 41,190 square meters, with an
advertised floor price of P2,268,000.00.[5] Bidding was subject to
the following conditions: 1) that cash bids be submitted not later
than April 27, 1989; 2) that said bids be accompanied by a 10%

deposit in managers or cashiers check; and 3) that all

acceptable bids be subject to approval by PNB authorities.

In a June 28, 1990 letter[6] to the Manager, PNB-General

Santos Branch, Reynaldo Villanueva (Villanueva) offered to
purchase Lot Nos. 17 and 19 for P3,677,000.00. He also
manifested that he was depositing P400,000.00 to show his good
faith but with the understanding that said amount may be treated
as part of the payment of the purchase price only when his offer
is accepted by PNB. At the bottom of said letter there appears an
unsigned marginal note stating that P400,000.00 was deposited
into Villanuevas account (Savings Account No. 43612) with PNBGeneral Santos Branch. [7]

PNB-General Santos Branch forwarded the June 28,

1990 letter of Villanueva to Ramon Guevara (Guevara), Vice
President, SAMD.[8] On July 6, 1990, Guevara informed Villanueva
that only Lot No. 19 is available and that the asking
price therefor is P2,883,300.00.[9] Guevara further wrote:

If our quoted price is acceptable to you, please

submit a revised offer to purchase. Sale shall be
subject to our Board of Directors approval and to
other terms and conditions imposed by the Bank
on sale of acquired assets. [10] (Emphasis ours)

Instead of submitting a revised offer, Villanueva merely

inserted at the bottom of Guevaras letter a July 11,
1990 marginal note, which reads:

C O N F O R M E:

PRICE OF P2,883,300.00 (downpayment of P600,000.00

and the balance payable in two (2) years at quarterly
amortizations.)

[11]

Villanueva paid P200,000.00 to PNB which issued O.R. No.

16997 to acknowledge receipt of the partial payment deposit on
offer to purchase.[12] On the dorsal portion of Official Receipt No.
16997, Villanueva signed a typewritten note, stating:

This is a deposit made to show the sincerity of my

purchase offer with the understanding that it shall be
returned without interest if my offer is not favorably
considered or be forfeited if my offer is approved but I
fail/refuse to push through the purchase.[13]

Also, on July 24, 1990, P380,000.00 was debited from

Villanuevas Savings Account No. 43612 and credited to SAMD.
[14]

On October 11, 1990, however, Guevara wrote Villanueva

that, upon orders of the PNB Board of Directors to conduct
another appraisal and public bidding of Lot No. 19, SAMD is
deferring negotiations with him over said property and returning
his deposit of P580,000.00.[15] Undaunted, Villanueva attempted
to deliver postdated checks covering the balance of the
purchase price but PNB refused the same.

Hence, Villanueva filed with the RTC a Complaint [16] for

specific performance and damages against PNB. In its September
14, 1995 Decision, the RTC granted the Complaint, thus:

WHEREFORE, judgment is rendered in favor of the

plaintiff and against the defendant directing it to do the
following:

1.
To execute a deed of sale in favor of the
plaintiff over Lot 19 comprising 41,190 square meters
situated at Calumpang, General Santos City covered by
TCT No. T-15036 after payment of the balance in cash in
the amount of P2,303,300.00;

2.
To pay the plaintiff P1,000,000.00 as moral
damages; P500,000.00 as attorneys fees, plus litigation
expenses and costs of the suit.
SO ORDERED.[17]

The RTC anchored its judgment on the finding that there

existed a perfected contract of sale between PNB and
Villanueva. It found:
The following facts are either admitted or undisputed:
xxx
The defendant through Vice-President Guevara
negotiated with the plaintiff in connection with the offer of
the plaintiff to buy Lots 17 & 19. The offer of plaintiff to
buy, however, was accepted by the defendant only
insofar as Lot 19 is concerned as exemplified by its letter
dated July 6, 1990 where the plaintiff signified his

concurrence after conferring with the defendants vicepresident. The conformity of the plaintiff was typewritten
by the defendants own people where the plaintiff
accepted the price of P2,883,300.00. The defendant also
issued a receipt to the plaintiff on the same day when the
plaintiff paid the amount of P200,000.00 to complete
the downpayment of P600,000.00 (Exhibit F & Exhibit
I). With this development, the plaintiff was also given
the go signal by the defendant to improve Lot 19 because
it was already in effect sold to him and because of that
the defendant fenced the lot and completed his two
houses on the property.[18]

The
RTC
also
pointed
out
that
Villanuevas P580,000.00 downpayment was actually
in
the
nature of earnest money acceptance of which by PNB signified
that there was already a sale.[19] The RTC further cited
contemporaneous acts of PNB purportedly indicating that, as
early as July 25, 1990, it considered Lot 19 already sold, as shown
by Guevaras July 25, 1990 letter (Exh. H)[20] to another
interested buyer.

PNB appealed to the CA which reversed and set aside the

September 14, 1995 RTC Decision, thus:

WHEREFORE, the appealed decision is REVERSED

and SET ASIDE and another rendered DISMISSING the
complaint.

SO ORDERED.[21]

According to the CA, there was no perfected contract of sale

because the July 6, 1990 letter of Guevara constituted a qualified
acceptance of the June 28, 1990 offer of Villanueva, and to which
Villanueva replied on July 11, 1990 with a modified offer. The CA
held:

In the case at bench, consent, in respect to the price and

manner of its payment, is lacking. The record shows that appellant,
thru Guevaras July 6, 1990 letter, made a qualified acceptance
of appellees letter-offer dated June 28, 1990 by imposing an asking
price of P2,883,300.00 in cash for Lot 19. The letter dated July 6, 1990
constituted
a
counter-offer
(Art.
1319,
Civil
Code),
to
which appellee made a new proposal, i.e., to pay the amount
of P2,883,300.00 in staggered amounts, that is, P600,000.00
as downpayment and the balance within two years in quarterly
amortizations.

A qualified acceptance, or one that involves a new proposal,

constitutes a counter-offer and a rejection of the original offer (Art.
1319, id.). Consequently, when something is desired which is not
exactly what is proposed in the offer, such acceptance is not sufficient
to generate consent because any modification or variation from the
terms of the offer annuls the offer (Tolentino, Commentaries and
Jurisprudence on the Civil Code of the Philippines, 6 th ed., 1996, p. 450,
cited in ABS-CBN Broadcasting Corporation v. Court of Appeals, et al.,
301 SCRA 572).

Appellees new proposal, which constitutes a counter-offer, was

not accepted by appellant, its board having decided to have Lot 19
reappraised and sold thru public bidding.

Moreover, it was clearly stated in Guevaras July 6, 1990 letter

that the sale shall be subject to our Board of Directors approval and
to other terms and conditions imposed by the Bank on sale of acquired
assets.[22]

Villanuevas Motion for Reconsideration [23] was denied by

the CA in its Resolution of June 27, 2002.

Petitioner Villanueva now assails before this Court the

January 29, 2002 Decision and June 27, 2002 Resolution of the CA.
He assigns five issues which may be condensed into two: first,
whether a perfected contract of sale exists between petitioner
and respondent PNB; and second, whether the conduct and
actuation of respondent constitutes bad faith as to entitle
petitioner to moral and exemplary damages and attorneys fees.

The Court sustains the CA on both issues.

Contracts of sale are perfected by mutual consent

whereby the seller obligates himself, for a price certain, to deliver
and transfer ownership of a specified thing or right to the buyer
over which the latter agrees. [24] Mutual consent being a state of
mind, its existence may only be inferred from the confluence of
two acts of the parties: an offer certain as to the object of the
contract and its consideration, and an acceptance of the offer
which is absolute in that it refers to the exact object and
consideration embodied in said offer.[25] While it is impossible to
expect the acceptance to echo every nuance of the offer, it is
imperative that it assents to those points in the offer which, under
the operative facts of each contract, are not only material but
motivating as well. Anything short of that level of mutuality
produces not a contract but a mere counter-offer awaiting
acceptance.[26] More particularly on the matter of the
consideration of the contract, the offer and its acceptance must
be unanimous both on the rate of the payment and on its term.
An acceptance of an offer which agrees to the rate but varies the
term is ineffective. [27]

To determine whether there was mutual consent between the parties

herein, it is necessary to retrace each offer and acceptance they made.

Respondent began with an invitation to bid issued in April 1989 covering

several of its acquired assets in Calumpang, General Santos City, including Lot No.
19 for which the floor price was P2,268,000.00. The offer was subject to the
condition that sealed bids, accompanied by a 10% deposit in managers or
cashiers check, be submitted not later than 10 oclock in the morning of April 27,
1989.

On June 28, 1990, petitioner made an offer to buy Lot No. 17 and Lot No.
19 for an aggregate price of P3,677,000.00. It is noted that this offer exactly
corresponded to the April 1989 invitation to bid issued by respondent in that the
proposed aggregate purchase price for Lot Nos. 17 and 19 matched the advertised
floor prices for the same properties. However, it cannot be said that the June 28,
1990 letter of petitioner was an effective acceptance of the April 1989 invitation to
bid for, by its express terms, said invitation lapsed on April 27, 1989.[28] More than
that, the April 1989 invitation was subject to the condition that all sealed bids
submitted and accepted be approved by respondents higher authorities.

Thus, the June 28, 1990 letter of petitioner was an offer to buy independent
of the April 1989 invitation to bid. It was a definite offer as it identified with
certainty the properties sought to be purchased and fixed the contract price.

However, respondent replied to the June 28, 1990 offer with a July 6,
1990 letter that only Lot No. 19 is available and that the price therefor is
now P2,883,300.00. As the CA pointed out, this reply was certainly not an
acceptance of the June 28, 1990 offer but a mere counter-offer. It deviated from
the original offer on three material points: first, the object of the proposed sale is
now only Lot No. 19 rather than Lot Nos. 17 and 19; second, the area of the
property to be sold is still 41,190 sq. m but an 8,797-sq. m portion is now part of
a public road; and third, the consideration is P2,883,300 for one lot rather
than P3,677,000.00 for two lots. More important, this July 6, 1990 counter-offer
imposed two conditions: one, that petitioner submit a revised offer to purchase
based on the quoted price; and two, that the sale of the property be approved by

the Board of Directors and subjected to other terms and conditions imposed by the
Bank on the sale of acquired assets.

In reply to the July 6, 1990 counter-offer, petitioner signed

his July 11, 1990 conformity to the quoted price of P2,883,300.00
but inserted the term downpayment ofP600,000.00 and the
balance payable in two years at quarterly amortization. The CA
viewed this July 11, 1990 conformity not as an acceptance of the
July 6, 1990 counter-offer but a further counter-offer for, while
petitioner accepted the P2,883,300.00 price for Lot No. 19, he
qualified his acceptance by proposing a two-year payment term.

Petitioner does not directly impugn such reasoning of the CA.

He merely questions it for taking up the issue of whether his July
11, 1990 conformity modified the July 6, 1990 counter-offer as
this was allegedly never raised during the trial nor on appeal.[29]

Such argument is not well taken. From beginning to end,

respondent denied that a contract of sale with petitioner was ever
perfected.[30] Its defense was broad enough to encompass every
issue relating to the concurrence of the elements of contract,
specifically on whether it consented to the object of the sale and
its consideration. There was nothing to prevent the CA from
inquiring into the offers and counter-offers of the parties to
determine whether there was indeed a perfected contract
between them.

Moreover, there is merit in the ruling of the CA that the July

11, 1990 marginal note was a further counter-offer which did not
lead to the perfection of a contract of sale between the

parties. Petitioners own June 28, 1990 offer quoted the price
of P3,677,000.00 for two lots but was silent on the term of
payment. Respondents July 6, 1990counter-offer quoted the
price of P2,833,300.00 and was also silent on the term of
payment. Up to that point, the term or schedule of payment was
not on the negotiation table. Thus, when petitioner suddenly
introduced a term of payment in his July 11, 1990 counteroffer, he interjected into the negotiations a new substantial
matter on which the parties had no prior discussion and over
which they must yet agree.[31] Petitioners July 11, 1990 counteroffer, therefore, did not usher the parties beyond the negotiation
stage of contract making towards its perfection. He made a
counter-offer that required acceptance by respondent.

As it were, respondent, through its Board of Directors, did

not accept this last counter-offer. As stated in its October 11,
1990 letter to petitioner, respondent ordered the reappraisal of
the property, in clear repudiation not only of the proposed price
but also the term of payment thereof.

Petitioner
insists, however, that
the October
11,
1990 repudiation was belated as respondent had already agreed
to his July 11, 1990 counter-offer when it accepted his
downpayment
or
earnest
money of P580,000.00.[32] He
cites Article 1482 of the Civil Code where it says that acceptance
of downpayment or earnest money presupposes the
perfection of a contract.

Not so. Acceptance of petitioners payments did not amount

to an implied acceptance of his last counter-offer.

To begin with, PNB-General Santos Branch, which accepted

petitioners P380,000.00 payment, and PNB-SAMD, which
accepted his P200,000.00 payment, had no authority to bind
respondent to a contract of sale with petitioner. [33] Petitioner is
well aware of this. To recall, petitioner sent his June 28, 1990 offer
to PNB-General Santos Branch. Said branch did not act on his
offer except to endorse it to Guevarra. Thereafter, petitioner
transacted directly with Guevarra. Petitioner then cannot pretend
that PNB-General Santos Branch had authority to accept his July
11, 1990 counter-offer by merely accepting his P380,000.00
payment.

Neither did SAMD have authority to bind PNB. In its April

1989 invitation to bid, as well as its July 6, 1990 counter-offer,
SAMD was always careful to emphasize that whatever offer is
made and entertained will be subject to the approval
of respondents higher authorities. This is a reasonable disclaimer
considering the corporate nature of respondent. [34]

Moreover, petitioners payment of P200,000.00 was with

the clear understanding that his July 11, 1990 counter-offer was
still subject to approval by respondent. This is borne out by
respondents Exhibits
2-a
and
2-b,
which
petitioner never controverted, where it appears on the dorsal
portion of O.R. No. 16997 that petitioner acceded that the amount
he paid was a mere x x x deposit made to show the sincerity of
[his] purchase offer with the understanding that it shall be
returned without interest if [his] offer is not favorably considered
x x x.[35] This was a clear acknowledgment on his part that there
was yet no perfected contract with respondent and that even with
the payments he had advanced, his July 11, 1990 counter-offer
was still subject to consideration by respondent.

Not only that, in the same Exh. 2-a as well as in his June
28, 1990 offer, petitioner referred to his payments as mere
deposits. Even O.R. No. 16997 refers to petitioners payment as
mere deposit. It is only in the debit notice issued by PNB-General
Santos Branch where petitioners payment is referred to as
downpayment. But then, as we said, PNB-General Santos
Branch has no authority to bind respondent by its interpretation of
the nature of the payment made by petitioner.

In sum, the amounts paid by petitioner were not in the

nature of downpayment or earnest money but were mere deposits
or proof of his interest in the purchase of Lot No. 19. Acceptance
of said amounts by respondent does not presuppose perfection of
any contract.[36]

It must be noted that petitioner has expressly admitted that

he had withdrawn the entire amount of P580,000.00 deposit from
PNB-General Santos Branch.[37]

With the foregoing disquisition, the Court foregoes

resolution of the second issue as it is evident that respondent
acted well within its rights when it rejected the last counter-offer
of petitioner.

In fine, petitioners petition lacks merit.

WHEREFORE, the petition is DENIED. The Decision

dated January 29, 2002 and Resolution dated June 27, 2002 of
the Court of Appeals are AFFIRMED.

No costs.

SO ORDERED.
-there is no perfected contract as the parties are still under the process of
negotiation.
-the money deposited not earnest money but mere deposits to comply with the
requirement for the bidding for the board to consider the proposal
-the counter proposal as to the manner and schedule or mode of payment bolsters
the fact that the parties have not yet reached a perfected contract to sell
-the note of Guevara that the proposal is subject for final review sustains the finding
of no perfected contract yet to speak of.

G.R. No. 177050

July 01, 2013

CARLOS LIM, CONSOLACION LIM, EDMUNDO LIM,* CARLITO LIM, SHIRLEY LEODADIA
DIZON,** AND ARLEEN LIM FERNANDEZ, PETITIONERS,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, RESPONDENT.
DECISION
DEL CASTILLO, J.:
"While the law recognizes the right of a bank to foreclose a mortgage upon the mortgagors failure to
pay his obligation, it is imperative that such right be exercised according to its clear mandate. Each
and every requirement of the law must be complied with, lest, the valid exercise of the right would
end."1

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the February 22,
2007 Decision3 of the Court of Appeals (CA) in CA-G.R. CV No. 59275.
Factual Antecedents
On November 24, 1969, petitioners Carlos, Consolacion, and Carlito, all surnamed Lim, obtained a
loan ofP40,000.00 (Lim Account) from respondent Development Bank of the Philippines (DBP) to
finance their cattle raising business.4 On the same day, they executed a Promissory
Note5 undertaking to pay the annual amortization with an interest rate of 9% per annum and penalty
charge of 11% per annum.
On December 30, 1970, petitioners Carlos, Consolacion, Carlito, and Edmundo, all surnamed Lim;
Shirley Leodadia Dizon, Arleen Lim Fernandez, Juan S. Chua,6 and Trinidad D. Chua7 obtained
another loan from DBP8in the amount of P960,000.00 (Diamond L Ranch Account).9 They also
executed a Promissory Note,10 promising to pay the loan annually from August 22, 1973 until August
22, 1982 with an interest rate of 12% per annum and a penalty charge of 1/3% per month on the
overdue amortization.
To secure the loans, petitioners executed a Mortgage11 in favor of DBP over real properties covered
by the following titles registered in the Registry of Deeds for the Province of South Cotabato:
(a) TCT No. T-6005 x x x in the name of Edmundo Lim;
(b) TCT No. T-6182 x x x in the name of Carlos Lim;
(c) TCT No. T-7013 x x x in the name of Carlos Lim;
(d) TCT No. T-7012 x x x in the name of Carlos Lim;
(e) TCT No. T-7014 x x x in the name of Edmundo Lim;
(f) TCT No. T-7016 x x x in the name of Carlito Lim;
(g) TCT No. T-28922 x x x in the name of Consolacion Lim;
(h) TCT No. T-29480 x x x in the name of Shirley Leodadia Dizon;
(i) TCT No. T-24654 x x x in the name of Trinidad D. Chua; and
(j) TCT No. T-25018 x x x in the name of Trinidad D. Chuas deceased husband Juan Chua. 12
Due to violent confrontations between government troops and Muslim rebels in Mindanao from 1972
to 1977, petitioners were forced to abandon their cattle ranch.13 As a result, their business collapsed
and they failed to pay the loan amortizations.14
In 1978, petitioners made a partial payment in the amount of P902,800.00,15 leaving an outstanding
loan balance of P610,498.30, inclusive of charges and unpaid interest, as of September 30, 1978. 16
In 1989, petitioners, represented by Edmundo Lim (Edmundo), requested from DBP Statements of
Account for the "Lim Account" and the "Diamond L Ranch Account."17 Quoted below are the

computations in the Statements of Account, as of January 31, 1989 which were stamped with the
words "Errors & Omissions Excepted/Subject to Audit:"
1wphi1

Diamond L Ranch Account:

Matured [Obligation]:
Principal

P 939,973.33

Regular Interest

561,037.14

Advances

34,589.45

Additional Interest

2,590,786.26

Penalty Charges

1,068,147.19

Total claims as of January 31, 1989

P 5,194,533.37

18

Lim Account:
Matured [Obligation]:
Principal
Regular Interest

P 40,000.00
5,046.97

Additional Interest

92,113.56

Penalty Charges

39,915.46

Total claims as of January 31, 1989

P 177,075.99

Claiming to have already paid P902,800.00, Edmundo requested for an amended statement of
account.20
On May 4, 1990, Edmundo made a follow-up on the request for recomputation of the two
accounts.21 On May 17, 1990, DBPs General Santos Branch informed Edmundo that the Diamond L
Ranch Account amounted toP2,542,285.60 as of May 31, 199022 and that the mortgaged properties
located at San Isidro, Lagao, General Santos City, had been subjected to Operation Land Transfer
under the Comprehensive Agrarian Reform Program (CARP) of the government. 23 Edmundo was
also advised to discuss with the Department of Agrarian Reform (DAR) and the Main Office of
DBP24 the matter of the expropriated properties.
Edmundo asked DBP how the mortgaged properties were ceded by DAR to other persons without
their knowledge.25 No reply was made.26
On April 30, 1991, Edmundo again signified petitioners intention to settle the Diamond L Ranch
Account.27 Again, no reply was made.28
On February 21, 1992, Edmundo received a Notice of Foreclosure scheduled the following day.29 To
stop the foreclosure, he was advised by the banks Chief Legal Counsel to pay an interest covering a
60-days period or the amount of P60,000.00 to postpone the foreclosure for 60 days. 30 He was also
advised to submit a written proposal for the settlement of the loan accounts. 31
In a letter32 dated March 20, 1992, Edmundo proposed the settlement of the accounts through dacion
en pago, with the balance to be paid in equal quarterly payments over five years.

19

In a reply-letter33 dated May 29, 1992, DBP rejected the proposal and informed Edmundo that unless
the accounts are fully settled as soon as possible, the bank will pursue foreclosure proceedings.
DBP then sent Edmundo the Statements of Account34 as of June 15, 1992 which were stamped with
the words "Errors & Omissions Excepted/Subject to Audit" indicating the following amounts: (1)
Diamond L Ranch:P7,210,990.27 and (2) Lim Account: P187,494.40.
On June 11, 1992, Edmundo proposed to pay the principal and the regular interest of the loans in 36
equal monthly installments.35
On July 3, 1992, DBP advised Edmundo to coordinate with Branch Head Bonifacio Tamayo, Jr.
(Tamayo).36Tamayo promised to review the accounts.37
On September 21, 1992, Edmundo received another Notice from the Sheriff that the mortgaged
properties would be auctioned on November 22, 1992. 38 Edmundo again paid P30,000.00 as
additional interest to postpone the auction.39 But despite payment of P30,000.00, the mortgaged
properties were still auctioned with DBP emerging as the highest bidder in the amount
of P1,086,867.26.40 The auction sale, however, was later withdrawn by DBP for lack of jurisdiction. 41
Thereafter, Tamayo informed Edmundo of the banks new guidelines for the settlement of
outstanding loan accounts under Board Resolution No. 0290-92. 42 Based on these guidelines,
petitioners outstanding loan obligation was computed at P3,500,000.00 plus.43 Tamayo then
proposed that petitioners pay 10% downpayment and the remaining balance in 36 monthly
installments.44 He also informed Edmundo that the bank would immediately prepare the
Restructuring Agreement upon receipt of the downpayment and that the conditions for the settlement
have been "pre-cleared" with the banks Regional Credit Committee.45 Thus, Edmundo wrote a
letter46 on October 30, 1992 manifesting petitioners assent to the proposal.
On November 20, 1992, Tamayo informed Edmundo that the proposal was accepted with some
minor adjustments and that an initial payment should be made by November 27, 1992. 47
On December 15, 1992, Edmundo paid the downpayment of P362,271.7548 and was asked to wait
for the draft Restructuring Agreement.49
However, on March 16, 1993, Edmundo received a letter 50 from Tamayo informing him that the
Regional Credit Committee rejected the proposed Restructuring Agreement; that it required
downpayment of 50% of the total obligation; that the remaining balance should be paid within one
year; that the interest rate should be non prime or 18.5%, whichever is higher; and that the proposal
is effective only for 90 days from March 5, 1993 to June 2, 1993.51
Edmundo, in a letter52 dated May 28, 1993, asked for the restoration of their previous
agreement.53 On June 5, 1993, the bank replied,54 viz:
This has reference to your letter dated May 28, 1993, which has connection to your desire to
restructure the Diamond L Ranch/Carlos Lim Accounts.
We wish to clarify that what have been agreed between you and the Branch are not final until [the]
same has been approved by higher authorities of the Bank. We did [tell] you during our discussion
that we will be recommending the restructuring of your accounts with the terms and conditions as
agreed. Unfortunately, our Regional Credit Committee did not agree to the terms and conditions as
recommended, hence, the subject of our letter to you on March 15, 1993.

Please be informed further, that the Branch cannot do otherwise but to comply with the conditions
imposed by the Regional Credit Committee. More so, the time frame given had already lapsed on
June 2, 1993.
Unless we will receive a favorable action on your part soonest, the Branch will be constrained to do
appropriate action to protect the interest of the Bank." 55
On July 28, 1993, Edmundo wrote a letter56 of appeal to the Regional Credit Committee.
In a letter57 dated August 16, 1993, Tamayo informed Edmundo that the previous Restructuring
Agreement was reconsidered and approved by the Regional Credit Committee subject to the
following additional conditions, to wit:
1) Submission of Board Resolution and Secretarys Certificate designating you as authorized
representative in behalf of Diamond L Ranch;
2) Payment of March 15 and June 15, 1993 amortizations within 30 days from date hereof;
and
3) Submission of SEC registration.
In this connection, please call immediately x x x our Legal Division to guide you for the early
documentation of your approved restructuring.
Likewise, please be reminded that upon failure on your part to sign and perfect the documents and
comply [with] other conditions within (30) days from date of receipt, your approved recommendation
shall be deemed CANCELLED and your deposit of P362,271.75 shall be applied to your account.
No compliance was made by Edmundo.58
On September 21, 1993, Edmundo received Notice that the mortgaged properties were scheduled to
be auctioned on that day.59 To stop the auction sale, Edmundo asked for an extension until
November 15, 199360which was approved subject to additional conditions:
Your request for extension is hereby granted with the conditions that:
1) This will be the last and final extension to be granted your accounts; and
2) That all amortizations due from March 1993 to November 1993 shall be paid including the
additional interest computed at straight 18.5% from date of your receipt of notice of approval,
viz:
xxxx
Failure on your part to comply with these conditions, the Bank will undertake appropriate legal
measures to protect its interest.
Please give this matter your preferential attention.61
On November 8, 1993, Edmundo sent Tamayo a telegram, which reads:

Acknowledge receipt of your Sept. 27 letter. I would like to finalize documentation of restructuring
Diamond L Ranch and Carlos Lim Accounts. However, we would need clarification on amortizations
due on NTFI means [sic]. I will call x x x your Legal Department at DBP Head Office by Nov. 11. Pls.
advise who[m] I should contact. Thank you.62
Receiving no response, Edmundo scheduled a meeting with Tamayo in Manila. 63 During their
meeting, Tamayo told Edmundo that he would send the draft of the Restructuring Agreement by
courier on November 15, 1993 to the Main Office of DBP in Makati, and that Diamond L Ranch need
not submit the Board Resolution, the Secretarys Certificate, and the SEC Registration since it is a
single proprietorship.64
On November 24, 1993 and December 3, 1993, Edmundo sent telegrams to Tamayo asking for the
draft of the Restructuring Agreement.65
On November 29, 1993, the documents were forwarded to the Legal Services Department of DBP in
Makati for the parties signatures. At the same time, Edmundo was required to pay the amount
of P1,300,672.75, plus a daily interest of P632.15 starting November 16, 1993 up to the date of
actual payment of the said amount.66
On December 19, 1993, Edmundo received the draft of the Restructuring Agreement. 67
In a letter68 dated January 6, 1994, Tamayo informed Edmundo that the bank cancelled the
Restructuring Agreement due to his failure to comply with the conditions within a reasonable time.
On January 10, 1994, DBP sent Edmundo a Final Demand Letter asking that he pay the outstanding
amount ofP6,404,412.92, as of November 16, 1993, exclusive of interest and penalty charges. 69
Edmundo, in a letter70 dated January 18, 1994, explained that his lawyer was not able to review the
agreement due to the Christmas holidays. He also said that his lawyer was requesting clarification
on the following points:
Can the existing obligations of the Mortgagors, if any, be specified in the Restructuring Agreement
already?
Is there a statement showing all the accrued interest and advances that shall first be paid before the
restructuring shall be implemented?
Should Mr. Jun Sarenas Chua and his wife Mrs. Trinidad Chua be required to sign as Mortgagors
considering that Mr. Chua is deceased and the pasture lease which he used to hold has already
expired?71
Edmundo also indicated that he was prepared to pay the first quarterly amortization on March 15,
1994 based on the total obligations of P3,260,445.71, as of December 15, 1992, plus interest.72
On January 28, 1994, Edmundo received from the bank a telegram73 which reads:
We refer to your cattle ranch loan carried at our DBP General Santos City Branch.
Please coordinate immediately with our Branch Head not later than 29 January 1994, to forestall the
impending foreclosure action on your account.

Please give the matter your utmost attention.

The bank also answered Edmundos queries, viz:
In view of the extended leave of absence of AVP Bonifacio A. Tamayo, Jr. due to the untimely demise
of his father, we regret [that] he cannot personally respond to your letter of January 18, 1994.
However, he gave us the instruction to answer your letter on direct to the point basis as follows:
- Yes to Items No. 1 and 2,
- No longer needed on Item No. 3
AVP Tamayo would like us also to convey to you to hurry up with your move to settle the obligation,
while the foreclosure action is still pending with the legal division. He is afraid you might miss your
last chance to settle the account of your parents. 74
Edmundo then asked about the status of the Restructuring Agreement as well as the computation of
the accrued interest and advances75 but the bank could not provide any definite answer.76
On June 8, 1994, the Office of the Clerk of Court and Ex-Officio Provincial Sheriff of the RTC of
General Santos City issued a Notice77 resetting the public auction sale of the mortgaged properties
on July 11, 1994. Said Notice was published for three consecutive weeks in a newspaper of general
circulation in General Santos City.78
On July 11, 1994, the Ex-Officio Sheriff conducted a public auction sale of the mortgaged properties
for the satisfaction of petitioners total obligations in the amount of P5,902,476.34. DBP was the
highest bidder in the amount of P3,310,176.55.79
On July 13, 1994, the Ex-Officio Sheriff issued the Sheriffs Certificate of Extra-Judicial Sale in favor
of DBP covering 11 parcels of land.80
In a letter81 dated September 16, 1994, DBP informed Edmundo that their right of redemption over
the foreclosed properties would expire on July 28, 1995, to wit:
This is to inform you that your right of redemption over your former property/ies acquired by the Bank
on July 13, 1994, thru Extra-Judicial Foreclosure under Act 3135 will lapse on July 28, 1995.
In view thereof, to entitle you of the maximum condonable amount (Penal Clause, AI on Interest,
PC/Default Charges) allowed by the Bank, we are urging you to exercise your right within six (6)
months from the date of auction sale on or before January 12, 1995.
Further, failure on your part to exercise your redemption right by July 28, 1995 will constrain us to
offer your former property/ies in a public bidding.
Please give this matter your preferential attention. Thank you.82
On July 28, 1995, petitioners filed before the RTC of General Santos City, a Complaint 83 against DBP
for Annulment of Foreclosure and Damages with Prayer for Issuance of a Writ of Preliminary
Injunction and/or Temporary Restraining Order. Petitioners alleged that DBPs acts and omissions
prevented them from fulfilling their obligation; thus, they prayed that they be discharged from their
obligation and that the foreclosure of the mortgaged properties be declared void. They likewise

prayed for actual damages for loss of business opportunities, moral and exemplary damages,
attorneys fees, and expenses of litigation.84
On same date, the RTC issued a Temporary Restraining Order85 directing DBP to cease and desist
from consolidating the titles over petitioners foreclosed properties and from disposing the same.
In an Order86 dated August 18, 1995, the RTC granted the Writ of Preliminary Injunction and directed
petitioners to post a bond in the amount of P3,000,000.00.
DBP filed its Answer,87 arguing that petitioners have no cause of action;88 that petitioners failed to pay
their loan obligation;89 that as mandated by Presidential Decree No. 385, initial foreclosure
proceedings were undertaken in 1977 but were aborted because petitioners were able to obtain a
restraining order;90 that on December 18, 1990, DBP revived its application for foreclosure but it was
again held in abeyance upon petitioners request;91 that DBP gave petitioners written and verbal
demands as well as sufficient time to settle their obligations;92 and that under Act 3135,93 DBP has
the right to foreclose the properties.94
Ruling of the Regional Trial Court
On December 10, 1996, the RTC rendered a Decision, 95 the dispositive portion of which reads:
WHEREFORE, in light of the foregoing, judgment is hereby rendered:
(1) Declaring that the [petitioners] have fully extinguished and discharged their obligation to
the [respondent] Bank;
(2) Declaring the foreclosure of [petitioners] mortgaged properties, the sale of the properties
under the foreclosure proceedings and the resultant certificate of sale issued by the
foreclosing Sheriff by reason of the foreclosure NULL and VOID;
(3) Ordering the return of the [properties] to [petitioners] free from mortgage liens;
(4) Ordering [respondent] bank to pay [petitioners], actual and compensatory damages
of P170,325.80;
(5) Temperate damages of P50,000.00;
(c) Moral damages of P500,000.00;
(d) Exemplary damages of P500,000.00;
(e) Attorneys fees in the amount of P100,000.00; and
(f) Expenses of litigation in the amount of P20,000.00.
[Respondent] Banks counterclaims are hereby DISMISSED.
[Respondent] Bank is likewise ordered to pay the costs of suit.
SO ORDERED.96

Ruling of the Court of Appeals

On appeal, the CA reversed and set aside the RTC Decision. Thus:
WHEREFORE, in view of the foregoing, the instant appeal is hereby GRANTED. The assailed
Decision dated 10 December 1996 is hereby REVERSED and SET ASIDE. A new judgment is
hereby rendered. It shall now read as follows:
WHEREFORE, premises considered, judgment is hereby rendered:
Ordering the dismissal of the Complaint in Civil Case No. 5608;
Declaring the extrajudicial foreclosure of [petitioners] mortgaged properties as valid;
Ordering [petitioners] to pay the [respondent] the amount of Two Million Five Hundred Ninety Two
Thousand Two Hundred Ninety Nine [Pesos] and Seventy-Nine Centavos (P2,592,299.79) plus
interest and penalties as stipulated in the Promissory Note computed from 11 July 1994 until full
payment; and
Ordering [petitioners] to pay the costs.
SO ORDERED.
SO ORDERED.97
Issues
Hence, the instant recourse by petitioners raising the following issues:
1. Whether x x x respondents own wanton, reckless and oppressive acts and omissions in
discharging its reciprocal obligations to petitioners effectively prevented the petitioners from
paying their loan obligations in a proper and suitable manner;
2. Whether x x x as a result of respondents said acts and omissions, petitioners obligations
should be deemed fully complied with and extinguished in accordance with the principle of
constructive fulfillment;
3. Whether x x x the return by the trial Court of the mortgaged properties to petitioners free
from mortgage liens constitutes unjust enrichment;
4. Whether x x x the low bid price made by the respondent for petitioners mortgaged
properties during the foreclosure sale is so gross, shocking to the conscience and inherently
iniquitous as to constitute sufficient ground for setting aside the foreclosure sale;
5. Whether x x x the restructuring agreement reached and perfected between the petitioners
and the respondent novated and extinguished petitioners loan obligations to respondent
under the Promissory Notes sued upon; and

6. Whether x x x the respondent should be held liable to pay petitioners actual and
compensatory damages, temperate damages, moral damages, exemplary damages,
attorneys fees and expenses of litigation.98
Petitioners Arguments
Petitioners seek the reinstatement of the RTC Decision which declared their obligation fully
extinguished and the foreclosure proceedings of their mortgaged properties void.
Relying on the Principle of Constructive Fulfillment, petitioners insist that their obligation should be
deemed fulfilled since DBP prevented them from performing their obligation by charging excessive
interest and penalties not stipulated in the Promissory Notes, by failing to promptly provide them with
the correct Statements of Account, and by cancelling the Restructuring Agreement even if they
already paid P362,271.75 as downpayment.99 They likewise deny any fault or delay on their part in
finalizing the Restructuring Agreement.100
In addition, petitioners insist that the foreclosure sale is void for lack of personal notice 101 and the
inadequacy of the bid price.102 They contend that at the time of the foreclosure, petitioners obligation
was not yet due and demandable,103 and that the restructuring agreement novated and extinguished
petitioners loan obligation.104
Finally, petitioners claim that DBP acted in bad faith or in a wanton, reckless, or oppressive manner;
hence, they are entitled to actual, temperate, moral and exemplary damages, attorneys fees, and
expenses of litigation.105
Respondents Arguments
DBP, on the other hand, denies acting in bad faith or in a wanton, reckless, or oppressive
manner106 and in charging excessive interest and penalties.107 According to it, the amounts in the
Statements of Account vary because the computations were based on different cut-off dates and
different incentive schemes.108
DBP further argues that the foreclosure sale is valid because gross inadequacy of the bid price as a
ground for the annulment of the sale applies only to judicial foreclosure. 109 It likewise maintains that
the Promissory Notes and the Mortgage were not novated by the proposed Restructuring
Agreement.110
As to petitioners claim for damages, DBP contends it is without basis because it did not act in bad
faith or in a wanton, reckless, or oppressive manner.111
Our Ruling
The Petition is partly meritorious.
The obligation was not extinguished
or discharged.
The Promissory Notes subject of the instant case became due and demandable as early as 1972
and 1976. The only reason the mortgaged properties were not foreclosed in 1977 was because of
the restraining order from the court. In 1978, petitioners made a partial payment of P902,800.00. No
subsequent payments were made. It was only in 1989 that petitioners tried to negotiate the

settlement of their loan obligations. And although DBP could have foreclosed the mortgaged
properties, it instead agreed to restructure the loan. In fact, from 1989 to 1994, DBP gave several
extensions for petitioners to settle their loans, but they never did, thus, prompting DBP to cancel the
Restructuring Agreement.
Petitioners, however, insist that DBPs cancellation of the Restructuring Agreement justifies the
extinguishment of their loan obligation under the Principle of Constructive Fulfillment found in Article
1186 of the Civil Code.
We do not agree.
As aptly pointed out by the CA, Article 1186 of the Civil Code, which states that "the condition shall
be deemed fulfilled when the obligor voluntarily prevents its fulfillment," does not apply in this
case,112 viz:
Article 1186 enunciates the doctrine of constructive fulfillment of suspensive conditions, which
applies when the following three (3) requisites concur, viz: (1) The condition is suspensive; (2) The
obligor actually prevents the fulfillment of the condition; and (3) He acts voluntarily. Suspensive
condition is one the happening of which gives rise to the obligation. It will be irrational for any Bank
to provide a suspensive condition in the Promissory Note or the Restructuring Agreement that will
allow the debtor-promissor to be freed from the duty to pay the loan without paying it. 113
Besides, petitioners have no one to blame but themselves for the cancellation of the Restructuring
Agreement. It is significant to point out that when the Regional Credit Committee reconsidered
petitioners proposal to restructure the loan, it imposed additional conditions. In fact, when DBPs
General Santos Branch forwarded the Restructuring Agreement to the Legal Services Department of
DBP in Makati, petitioners were required to pay the amount of P1,300,672.75, plus a daily interest
of P632.15 starting November 16, 1993 up to the date of actual payment of the said amount. 114 This,
petitioners failed to do. DBP therefore had reason to cancel the Restructuring Agreement.
Moreover, since the Restructuring Agreement was cancelled, it could not have novated or
extinguished petitioners loan obligation. And in the absence of a perfected Restructuring Agreement,
there was no impediment for DBP to exercise its right to foreclose the mortgaged properties. 115
The foreclosure sale is not valid.
But while DBP had a right to foreclose the mortgage, we are constrained to nullify the foreclosure
sale due to the banks failure to send a notice of foreclosure to petitioners.
We have consistently held that unless the parties stipulate, "personal notice to the mortgagor in
extrajudicial foreclosure proceedings is not necessary" 116 because Section 3117 of Act 3135 only
requires the posting of the notice of sale in three public places and the publication of that notice in a
newspaper of general circulation.
In this case, the parties stipulated in paragraph 11 of the Mortgage that:
11. All correspondence relative to this mortgage, including demand letters, summons, subpoenas, or
notification of any judicial or extra-judicial action shall be sent to the Mortgagor at xxx or at the
address that may hereafter be given in writing by the Mortgagor or the Mortgagee; 118

However, no notice of the extrajudicial foreclosure was sent by DBP to petitioners about the
foreclosure sale scheduled on July 11, 1994. The letters dated January 28, 1994 and March 11,
1994 advising petitioners to immediately pay their obligation to avoid the impending foreclosure of
their mortgaged properties are not the notices required in paragraph 11 of the Mortgage. The failure
of DBP to comply with their contractual agreement with petitioners, i.e., to send notice, is a breach
sufficient to invalidate the foreclosure sale.
In Metropolitan Bank and Trust Company v. Wong,119 we explained that:
x x x a contract is the law between the parties and, that absent any showing that its provisions are
wholly or in part contrary to law, morals, good customs, public order, or public policy, it shall be
enforced to the letter by the courts. Section 3, Act No. 3135 reads:
Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least
three public places of the municipality or city where the property is situated, and if such property is
worth more than four hundred pesos, such notice shall also be published once a week for at least
three consecutive weeks in a newspaper of general circulation in the municipality and city.
The Act only requires (1) the posting of notices of sale in three public places, and (2) the publication
of the same in a newspaper of general circulation. Personal notice to the mortgagor is not
necessary. Nevertheless, the parties to the mortgage contract are not precluded from exacting
additional requirements. In this case, petitioner and respondent in entering into a contract of real
estate mortgage, agreed inter alia:
all correspondence relative to this mortgage, including demand letters, summonses, subpoenas, or
notifications of any judicial or extra-judicial action shall be sent to the MORTGAGOR at 40-42
Aldeguer St. Iloilo City, or at the address that may hereafter be given in writing by the MORTGAGOR
to the MORTGAGEE.
Precisely, the purpose of the foregoing stipulation is to apprise respondent of any action which
petitioner might take on the subject property, thus according him the opportunity to safeguard his
rights. When petitioner failed to send the notice of foreclosure sale to respondent, he committed a
contractual breach sufficient to render the foreclosure sale on November 23, 1981 null and
void.120 (Emphasis supplied)
In view of foregoing, the CA erred in finding the foreclosure sale valid.
Penalties and interest rates should
be expressly stipulated in writing.
As to the imposition of additional interest and penalties not stipulated in the Promissory Notes, this
should not be allowed. Article 1956 of the Civil Code specifically states that "no interest shall be due
unless it has been expressly stipulated in writing." Thus, the payment of interest and penalties in
loans is allowed only if the parties agreed to it and reduced their agreement in writing. 121
In this case, petitioners never agreed to pay additional interest and penalties. Hence, we agree with
the RTC that these are illegal, and thus, void. Quoted below are the findings of the RTC on the
matter, to wit:
Moreover, in its various statements of account, [respondent] Bank charged [petitioners] for additional
interests and penalties which were not stipulated in the promissory notes.

In the Promissory Note, Exhibit "A," for the principal amount of P960,000.00, only the following
interest and penalty charges were stipulated:
(1) interest at the rate of twelve percent (12%) per annum;
(2) penalty charge of one-third percent (1/3%) per month on overdue amortization;
(3) attorneys fees equivalent to ten percent (10%) of the total indebtedness then unpaid; and
(4) advances and interest thereon at one percent (1%) per month.
[Respondent] bank, however, charged [petitioners] the following items as shown in its Statement of
Account for the period as of 31 January 1989, Exhibit "D:"
(1) regular interest in the amount of P561,037.14;
(2) advances in the amount of P34,589.45;
(3) additional interest in the amount of P2,590,786.26; and
(4) penalty charges in the amount of P1,068,147.19.
The Court finds no basis under the Promissory Note, Exhibit "A," for charging the additional interest
in the amount of P2,590,786.26. Moreover, it is incomprehensible how the penalty charge of 1/3%
per month on the overdue amortization could amount to P1,086,147.19 while the regular interest,
which was stipulated at the higher rate of 12% per annum, amounted to only P561,037.14 or about
half of the amount allegedly due as penalties.
In Exhibit "N," which is the statement of account x x x as of 15 June 1992, [respondent] bank
charged plaintiffs the following items:
(1) regular interest in the amount of P561,037.14;
(2) advances in the amount of P106,893.93;
(3) additional interest on principal in the amount of P1,233,893.79;
(4) additional interest on regular interest in the amount of P859,966.83;
(5) additional interest on advances in the amount of P27,206.45;
(6) penalty charges on principal in the amount of P1,639,331.15;
(7) penalty charges on regular interest in the amount of P1,146,622.55;
(8) penalty charges on advances in the amount of P40,520.53.
Again, the Court finds no basis in the Promissory Note, Exhibit "A," for the imposition of additional
interest on principal in the amount of P1,233,893.79, additional interest on regular interest in the

amount of P859,966.83, penalty charges on regular interest in the amount of P1,146,622.55 and
penalty charges on advances in the amount of P40,520.53.
In the Promissory Note, Exhibit "C," for the principal amount of P40,000.00, only the following
charges were stipulated:
(1) interest at the rate of nine percent (9%) per annum;
(2) all unpaid amortization[s] shall bear interest at the rate of eleven percent (11%) per
annum; and,
(3) attorneys fees equivalent to ten percent (10%) of the total indebtedness then unpaid.
In its statement of account x x x as of 31 January 1989, Exhibit "E," [respondent] bank charged
[petitioners] with the following items:
(1) regular interest in the amount of P5,046.97
(2) additional interest in the amount of P92,113.56; and
(3) penalty charges in the amount of P39,915.46.
There was nothing in the Promissory Note, Exhibit "C," which authorized the imposition of additional
interest. Again, this Court notes that the additional interest in the amount of P92,113.56 is even
larger than the regular interest in the amount of P5,046.97. Moreover, based on the Promissory
Note, Exhibit "C," if the 11% interest on unpaid amortization is considered an "additional interest,"
then there is no basis for [respondent] bank to add penalty charges as there is no other provision
providing for this charge. If, on the other hand, the 11% interest on unpaid amortization is considered
the penalty charge, then there is no basis to separately charge plaintiffs additional interest. The
same provision cannot be used to charge plaintiffs both interest and penalties.
In Exhibit "O," which is the statement of account x x x as of 15 June 1992, [respondent] charged
[petitioners] with the following:
(1) regular interest in the amount of P4,621.25;
(2) additional interest on principal in the amount of P65,303.33;
(3) additional interest on regular interest in the amount of P7,544.58;
(4) penalty charges on principal in the amount of P47,493.33;
(5) penalty charges on regular interest in the amount of P5,486.97;
(6) penalty charges on advances in the amount of P40,520.53.
[Respondent] bank failed to show the basis for charging additional interest on principal, additional
interest on regular interest and penalty charges on principal and penalty charges on regular interest
under items (2), (3), (4) and (5) above.

Moreover, [respondent] bank charged [petitioners] twice under the same provisions in the promissory
notes. It categorically admitted that the additional interests and penalty charges separately being
charged [petitioners] referred to the same provision of the Promissory Notes, Exhibits "A" and "C."
Thus, for the Lim Account in the amount of P40,000.00, [respondents] Mr. Ancheta stated:
Q:
In Exhibit 14, it is stated that for a principal amount of P40,000.00 you imposed an additional interest
in the amount of P65,303.33 in addition to the regular interest of P7,544.58, can you tell us looking
[at] the mortgage contract and promissory note what is your basis for charging that additional
interest?
A:
The same as that when I answered Exhibit No. 3, which shall cover amortization on the principal and
interest at the above-mentioned rate. All unpaid amortization[s] shall bear interest at the rate of
eleven per centum (11%) per annum.
Q:
You also imposed penalty which is on the principal in the amount of P40,000.00 in the amount
of P47,493.33 in addition to regular interest of P5,486.96. Can you point what portion of Exhibit 3
gives DBP the right to impose such penalty?
A:
The same paragraph as stated.
Q:
Can you please read the portion referring to penalty?
A:
All unpaid amortization shall bear interest at the rate of 11% per annum.
Q:
The additional interest is based on 11% per annum and the penalty is likewise based on the same
rate?
A:
Yes, it is combined (TSN, 28 May 1996, pp. 39-40.)
With respect to the Diamond L. Ranch account in the amount of P960,000.00, Mr. Ancheta testified
as follows:
Q:

Going back to Exhibit 14 Statement of Accounts. Out of the principal of P939,973.33 you imposed an
additional interest of P1,233,893.79 plus P859,966.83 plus P27,206.45. Can you tell us what is the
basis of the imposition?
A:
As earlier stated, it is only the Promissory Note as well as the Mortgage Contract.
Q:
Please point to us where in the Promissory Note is the specific portion?
A:
In Exhibit 1: "in case of failure to pay in full any amortization when due, a penalty charge of 1/3% per
month on the overdue amortization shall be paid."
Q:
What is the rate?
A:
1/3% per month.
Q:
So, the imposition of the additional interest and the penalty charge is based on the same provision?
A:
Yes (TSN, 28 May 1996, pp. 41-42.)
A perusal of the promissory notes, however, failed to justify [respondent] banks computation of both
interest and penalty under the same provision in each of the promissory notes.
[Respondent] bank also admitted that the additional interests and penalties being charged
[petitioners] were not based on the stipulations in the Promissory Notes but were imposed
unilaterally as a matter of its internal banking policies. (TSN, 19 March 1996, pp. 23-24.) This
banking policy, however, has been declared null and void in Philippine National Bank vs. CA, 196
SCRA 536 (1991). The act of [respondent] bank in unilaterally changing the stipulated interest rate is
violative of the principle of mutuality of contracts under 1308 of the Civil Code and contravenes 1956
of the Civil Code. [Respondent] bank completely ignored [petitioners] "right to assent to an important
modification in their agreement and (negated) the element of mutuality in contracts." (Philippine
National Bank vs. CA, G.R. No. 109563, 9 July 1996; Philippine National Bank vs. CA, 238 SCRA 20
1994). As in the PNB cases, [petitioners] herein never agreed in writing to pay the additional interest,
or the penalties, as fixed by [respondent] bank; hence [respondent] banks imposition of additional
interest and penalties is null and void.122 (Emphasis supplied)

Consequently, this case should be remanded to the RTC for the proper determination of petitioners
total loan obligation based on the interest and penalties stipulated in the Promissory Notes.
DBP did not act in bad faith or in a
wanton, reckless, or oppressive manner.
Finally, as to petitioners claim for damages, we find the same devoid of merit.
DBP did not act in bad faith or in a wanton, reckless, or oppressive manner in cancelling the
Restructuring Agreement. As we have said, DBP had reason to cancel the Restructuring Agreement
because petitioners failed to pay the amount required by it when it reconsidered petitioners request
to restructure the loan.
Likewise, DBPs failure to send a notice of the foreclosure sale to petitioners and its imposition of
additional interest and penalties do not constitute bad faith. There is no showing that these
contractual breaches were done in bad faith or in a wanton, reckless, or oppressive manner.
1wphi1

In Philippine National Bank v. Spouses Rocamora,123 we said that:

Moral damages are not recoverable simply because a contract has been breached. They are
recoverable only if the defendant acted fraudulently or in bad faith or in wanton disregard of his
contractual obligations. The breach must be wanton, reckless, malicious or in bad faith, and
oppressive or abusive. Likewise, a breach of contract may give rise to exemplary damages only if
the guilty party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.
We are not sufficiently convinced that PNB acted fraudulently, in bad faith, or in wanton disregard of
its contractual obligations, simply because it increased the interest rates and delayed the foreclosure
of the mortgages. Bad faith cannot be imputed simply because the defendant acted with bad
judgment or with attendant negligence. Bad faith is more than these; it pertains to a dishonest
purpose, to some moral obliquity, or to the conscious doing of a wrong, a breach of a known duty
attributable to a motive, interest or ill will that partakes of the nature of fraud. Proof of actions of this
character is undisputably lacking in this case. Consequently, we do not find the spouses Rocamora
entitled to an award of moral and exemplary damages. Under these circumstances, neither should
they recover attorneys fees and litigation expense. These awards are accordingly
deleted.124(Emphasis supplied)
WHEREFORE, the Petition is PARTLY GRANTED. The assailed February 22, 2007 Decision of the
Court of Appeals in CA-G.R. CV No. 59275 is hereby MODIFIED in accordance with this Decision.
The case is hereby REMANDED to the Regional Trial Court of General Santos City, Branch 22, for
the proper determination of petitioners total loan obligations based on the interest and penalties
stipulated in the Promissory Notes dated November 24, 1969 and December 30, 1970. The
foreclosure sale of the mortgaged properties held on July 11, 1994 is DECLARED void ab initio for
failure to comply with paragraph 11 of the Mortgage, without prejudice to the conduct of another
foreclosure sale based on the recomputed amount of the loan obligations, if necessary.
SO ORDERED.
Carpio, (Chairperson), Brion, Perez, and Perlas-Bernabe, JJ., concur.

-cancellation of the restructuring agreement is attributable to petitioners, thus the

loan still subsist

-suspensive condition as contended is not obtaining since its irrational for a bank to
impose such suspensive condition, failure of the condition will cause obligation to be
extinguished
-foreclosure null and void for reason of failure to give the required notice as
provided in the contract or the promissory note
-the contract is the law between the parties, failure to comply with the provision
thereof renders all action in relation thereto not valid. In this case, the foreclosure
without notice as the notice made is not sufficient compliance as contemplated
under the contract and the law.

G.R. No. 120859

June 26, 2001

METROPOLITAN BANK AND TRUST COMPANY, petitioner,

vs.
FRANCISCO Y. WONG, respondent.
SANDOVAL-GUTIERREZ, J.:
It is bad enough that the mortgagor has no choice but to yield his property in a foreclosure
proceeding. It is infinitely worse, if prior thereto, he was denied of his basic right to be informed of
the impending loss of his property. This is another instance when law and morals echo the same
sentiment.

This is a petition for review on certiorari seeking the reversal and setting aside of the decision dated
June 13, 1994 and resolution dated June 14, 1995 of the Court of Appeals in CA-G.R. CV No. 35615
entitled "Francisco Y. Wong versus Metropolitan Bank and Trust Company."1
The essential antecedents are:
Sometime in 1976, the Mindanao Grains, Inc. (MGI for brevity), through its officers Wenceslao
Buenaventura and Faustino Go, applied for a credit accommodation with the Metropolitan Bank and
Trust Company (herein petitioner) to finance its rice and corn warehousing business. As a security
for such credit accommodation, respondent Francisco Y. Wong, and his wife Betty C. Wong
executed in favor of petitioner a real estate mortgage over a parcel of land consisting of 31, 292
square meters located at Campo 7, Molave, Zamboanga del Sur and registered in respondents
name under Transfer Certificate of Title (TCT) No. 11758.
On April 11, 1980, due to MGIs failure to pay the obligation secured by the real estate mortgage,
petitioner filed an application for extra-judicial foreclosure under Act No. 3135. A notice of foreclosure
sale was published inPagadian Times once, for three consecutive weeks (May 18-25, 1980, May 26June 2, 1980 and June 2-8, 1980), setting the auction sale of the mortgaged property on June 5,
1980. No notice was posted in the municipality or city where the mortgaged property was situated.
As a consequence, MGI, through its president, Simeon Chang (Chang), requested petitioner to
postpone the scheduled auction sale from June 5, 1980 to July 7, 1980. Petitioner granted the
request. Thereafter, Chang and petitioner agreed that should MGI pay P20,000.00 on or before the
scheduled auction sale, the same would be postponed for a period of 60 days. Chang paid the
amount on November 3, 1981. Despite such payment, Sheriff Deo Bontia proceeded with the
auction sale on November 23, 1981. Petitioner was adjudged the sole and highest bidder. Thus, a
certificate of sale was issued to petitioner. The sale was registered with the Registry of Deeds on the
same day. After the expiration of the one (1) year redemption period, ownership over the property
was consolidated and TCT No. T-17853 was correspondingly issued in the name of petitioner.
Respondent, unaware of the foregoing developments, applied for a credit accommodation with the
Producers Bank of the Philippines, Iloilo City, using as security his TCT No. 11758. It was only then
when he learned that his property was already foreclosed by petitioner and no longer in his name.
Feeling aggrieved, respondent filed with the Regional Trial Court, Branch 18, Pagadian City a
complaint for reconveyance and damages against petitioner and the Register of Deeds of
Zamboanga del Sur. Respondent, in his complaint, assailed the validity of the extra-judicial
foreclosure sale basically on the ground that petitioner did not comply with the requirements of
Section 3, Act No. 3135 that "notice shall be given by posting notices of the sale for not less than
twenty days in at least three public places of the municipality or city where the property is situated,
and if such property is worth more than four hundred pesos, such notice shall also be published
once a week for at least three consecutive weeks in a newspaper of general circulation in the
municipality and city."
During the pendency of the case, petitioner sold the disputed property to a certain Betty Ong Yu.

After hearing, the trial court decreed:

"WHEREFORE, IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered
sentencing defendant Metropolitan Bank and Trust Company to pay plaintiff the following
amounts:
1. Ten Million, Five Hundred Thousand (P10,500,000.00) Pesos representing the fair
market value of the property as of the promulgation of this decision, with interest of
twenty four (24%) percent per annum thereof until fully paid;
2. Moral damages of Two million (P2,000,000.00) Pesos;
3. Exemplary damages of Ten million (P10,000,000.00) Pesos;
4. Attorneys fee of Two Hundred Thousand (P200,000.00) Pesos, plus Five Hundred
(P500.00) Pesos for every hearing or court proceeding actually attended by plaintiffs
counsel; and
5. Costs of suit.
No monetary judgment can be rendered against defendant Register of Deeds of Zamboanga
del Sur in view of the absence of monetary claim in the complaint.
Defendant banks counterclaim is hereby DISMISSED for lack of merit.
SO ORDERED."2
On appeal by petitioner, the Court of Appeals affirmed the RTC decision with modification in the
sense that the monetary awards were reduced, thus:
"WHEREFORE, the judgment appealed from is hereby MODIFIED, directing the appellant to
pay appellees the following amounts:
1. Four Million (P4,000,000.00) Pesos representing the fair market value of the
subject property;
2. Moral damages of Five Hundred Thousand (P500,000.00) Pesos;
3. Exemplary damages of One Million (P1,000,000.00) Pesos;
4. Attorney's fees of Two Hundred Thousand (P200,000.00) Pesos, plus Five
Hundred (P500.00) Pesos for every hearing or court proceeding actually attended by
plaintiff's counsel; and
5. Costs of suit.

SO ORDERED."
Twice thwarted, petitioner now comes before us imputing the following errors to the Court of
Appeals:
I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE
FORECLOSURE SALE CONDUCTED ON NOVEMBER 23, 1981 WAS LEGALLY INFIRM
FOR NON COMPLIANCE WITH THE STATUTORY REQUIREMENTS OF POSTING AND
PUBLICATION AS PROVIDED FOR IN ACT 3135, AS AMENDED.
II
THE RESPONDENT COURT OF APPEALS ERRED IN AWARDING DAMAGES AND
ATTORNEYS FEES TO RESPONDENT WONG.
Petitioner places excessive reliance on the case of Olizon v. Court of Appeals3 in justifying its
claims: (a) that its failure to comply with the posting requirement under Section 3 of Act No, 3135
did not necessarily result in the nullification of the foreclosure sale since it complied with
the publication requirement; and (b) that personal notice of the foreclosure proceedings to
respondent is not a condition sine qua non for its validity. In assailing the monetary awards to
respondent, petitioner claims it was not guilty of bad faith in selling the disputed property to Betty
Ong Yu, the sale having been perfected even before respondent filed his action for reconveyance
and damages with the trial court.
For its part, respondent argues that "the unusual nature of the attendant facts and the peculiarity of
the confluent circumstances" involved in Olizon are not present in the instant case.
The petition is bereft of merit.
Succinct and unmistakable is the consistent pronouncement of this Court that it is not a trier of facts.
And well-entrenched is the doctrine that pure questions of fact may not be the subject of appeal by
certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as this mode of appeal is generally
confined to questions of law. Corollarily, non-compliance with the requirements of notice and
publication in an extra-judicial foreclosure is a factual issue. The resolution thereof by the lower
courts is binding and conclusive upon this Court. 4 Thus, disregarding all factual issues which
petitioner interjected in his petition, the only crucial legal queries in this case are: first, is personal
notice to respondent a condition sine qua non to the validity of the foreclosure proceedings?
and,second, is petitioners non-compliance with the posting requirement under Section 3, Act No.
3135 fatal to the validity of the foreclosure proceedings?
In resolving the first query, we resort to the fundamental principle that a contract is the law between
the parties and, that absent any showing that its provisions are wholly or in part contrary to law,
morals, good customs, public order, or public policy, it shall be enforced to the letter by the courts.
Section 3, Act No. 3135 reads:

"Se. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at
least three public places of the municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice shall also be published once a
week for at least three consecutive weeks in a newspaper of general circulation in the
municipality and city."
The Act only requires (1) the posting of notices of sale in three public places, and (2) the publication
of the same in a newspaper of general circulation. Personal notice to the mortgagor is not
necessary. Nevertheless, the parties to the mortgage contract are not precluded from exacting
additional requirements.5 In this case, petitioner and respondent in entering into a contract of real
estate mortgage, agreed inter alia:
"all correspondence relative to this mortgage, including demand letters, summonses,
subpoenas, or notifications of any judicial or extra-judicial action shall be sent to the
MORTGAGOR at 40-42 Aldeguer St. Iloilo City, or at the address that may hereafter be given
in writing by the MORTGAGOR to the MORTGAGEE."
Precisely, the purpose of the foregoing stipulation is to apprise respondent of any action which
petitioner might take on the subject property, thus according him the opportunity to safeguard his
rights. When petitioner failed to send the notice of foreclosure sale to respondent, he committed a
contractual breach sufficient to render the foreclosure sale on November 23, 1981 null and void.
The second query must be answered in the affirmative. An incisive scrutiny of Olizon shows that this
Court has not actually dispensed with the posting requirement under Section 3 of Act No. 3135, thus:
"Neither can the supposed failure of respondent bank to comply with the posting requirement
as provided under the aforesaid Section 3, under the factual ambiance and circumstances
which obtained in this case, be considered a sufficient ground for annulling the
aforementioned sale. We are not unaware of the rulings in some cases that, under normal
situations, the statutory provisions governing publication of notice of extra-judicial foreclosure
sales must be strictly complied with and that failure to publish the notice of auction sale as
required by the statute constitutes a jurisdictional defect which invalidates the sale. However,
the unusual nature of the attendant facts and the peculiarity of the confluent circumstances
involved in this case require that we rule otherwise.
Petitioners' cited authority on the requisite publication of notices is not so all-embracing as to
deny justified exceptions thereto under appropriate situations. x x x
xxx
Furthermore, unlike the situation in previous cases where the foreclosure sales were
annulled by reason of failure to comply with the notice requirement under Section 3 of Act
No. 3135, as amended, what is allegedly lacking here is the posting of the notice in three
public places, and not the publication thereof in a newspaper of general circulation.

We take judicial notice of the fact that newspaper publications have more far-reaching effects
than posting on bulletin boards in public places. There is a greater probability that an
announcement or notice published in a newspaper of general circulation, which is distributed
nationwide, shall have a readership of more people than that posted in a public bulletin
board, no matter how strategic its location may be, which caters only to a limited few. Hence,
the publication of the notice of sale in the newspaper of general circulation alone is more
than sufficient compliance with the notice-posting requirement of the law. By such
publication, a reasonably wide publicity had been effected such that those interested might
attend the public sale, and the purpose of the law had been thereby subserved."(Underlining
added)
Obviously, as correctly pointed out by respondent, what prompted the Court to dispense with the
posting requirement is the "unusual nature of the attendant facts and the peculiarity of the confluent
circumstances"involved in Olizon. It bears stressing that in the said case, the extra-judicial
foreclosure sale sought to be annulled was conducted more than 15 years ago, thus, even on the
equitable ground of laches, the Olizons action for annulment of foreclosure proceedings and
certificate of sale was bound to fail.
Unlike in Olizon where there was a valid publication of the notice of foreclosure sale, the publication
in the case at bar was defective. Not only did it fail to conform with the requirement that the notice
must be published once a week for at least three consecutive weeks in a newspaper of general
circulation, but also, there were substantial errors in the notice of sale published in
the Pagadian Times as found by the scrutinizing eyes of the trial court, thus:
"As maybe noted, the published notice bespeaks of a Deed of Mortgage allegedly executed
by Mindanao Grains, Inc., signed by Faustino Go, Francisco Y. Wong, Wensceslao
Buenaventura and Betty C. Wong on May 9, 1978 in favor of defendant bank. The evidence,
however showed that plaintiff never executed a Real Estate Mortgage (REM) on May 9,
1978. Neither plaintiff had executed any REM whereby his co-mortgagors are MGI, Faustino
Go, Wensceslao Buenaventura and his wife Betty C. Wong. What plaintiff had actually
executed were two REMS dated January 18, 1977 and March 23, 1977 respectively. In other
words the REM adverted to in the published notice is a non-existent document, for there was
no REM of the property in question actually executed and dated May 9, 1978.
The contention of defendant bank that the erroneous date of the REM as published in the
Pagadian Times was merely a clerical error would not cure the fatal defect and invalidity of
that published notice. No further evidence was shown that the glaring error was corrected in
the subsequent notice of publication. The court is in accord with the argument of the plaintiff
that the order in the date of the REM published in the Pagadian Times is not a harmless
error. It did not give proper notice to the public the correct nature of the REM which cover the
properties being sold at public auction. Considering the sizable amount of the properties
being sold, over half a million pesos, a very big amount to businessmen based in the
Province of Zamboanga del Sur, nobody would dare to buy such properties without first
carefully scrutinizing the pertinent documents, foremost of which is the REM allegedly
violated by the plaintiff-mortgagor which gave rise to the foreclosure proceedings. Simply
stated, serious prospective bidders just backed off upon knowing the non-existence of that

REM published in the Pagadian Times. For who would participate in the auction sale of the
properties covered by REMS which are non-existing? It is not surprising, therefore, to note
that the defendant bank was the winning bidder, for the reason that it was the lone bidder.
And lastly, not to be glossed over is the fact that there was no evidence in Olizon insinuating bad
faith or collusion among the Sheriff who conducted the sale, the Register of Deeds and the bank. In
the present case, collusion is evident in the precipitate manner the foreclosure sale was conducted
by Sheriff Bontia as well as in the sale made by petitioner to Betty Ong Yu during the pendency of
the case.
To stress that Olizon is an exception rather than the rule, this Court in the same case held:
"x x x We are not unaware of the rulings in same cases that, under normal situations, the
statutory provisions governing publication of notice of extrajudicial foreclosure sales must be
strictly complied with and that failure to publish the notice of auction sale as required by the
statute constitutes a jurisdictional defect which invalidates the sale. However, the unusual
nature of the attendant facts and the peculiarity of the confluent circumstances involved in
this case require that we rule otherwise."
While the law recognizes the right of a bank to foreclose a mortgage upon the mortgagors failure to
pay his obligation, it is imperative that such right be exercised according to its clear mandate. Each
and every requirement of the law must be complied with, lest, the valid exercise of the right would
end. It must be remembered that the exercise of a right ends when the right disappears, and it
disappears when it is abused especially to the prejudice of others. 6
Anent the award of moral damages, both the trial court and the Court of Appeals found that petitioner
acted in bad faith in extra-judicially foreclosing the real estate mortgage and in selling the mortgaged
property during the pendency of the case in the trial court. To be sure, petitioner banks bad faith
caused serious anxiety, mental anguish and wounded feelings to its client, respondent herein. He is
thus entitled to moral damages.
The Court of Appeals made a commendable ratiocination on the fact that petitioner acted in bad
faith, thus:
"There is no dispute that during the pendency of the reconveyance case, appellant sold the
subject property to one Betty Yu. In this regard, the trial courts observation is worth
mentioning:
Conversely,defendant banks most eloquent manifestation of bad faith, deception,
and fraud is its sale of the mortgaged property subject of the reconveyance action
while this case was already under trial. That sale was without leave of court nor the
knowledge of the plaintiff. At the stage of the court proceedings when the defendants
were in the process of presenting their evidence, defendant bank sold the property in
litigation to Betty Yu of Molave, Zamboanga del Sur on August 8, 1984 (Exhibits FF,
FF-1,FF-2 & FF-3). Accordingly, the title of defendant bank was cancelled and a new
title, TCT No. T-19,350, was issued in the name of Betty Ong Yu (Exhibits HH & HH-

1). The transfer of ownership over the mortgaged property to the third person (Betty
Ong Yu) who is not a party in this case rendered moot and academic the
reconveyance aspect of this case, clearly to the prejudice of the plaintiff.
Appellants contention that there was no need for them to secure leave of court for the sale
of the property because there was no notice of lis pendens annotated in the title of appellant
nor was there a restraining order issued by the court enjoining them from conveying or
transferring the property deserves scant consideration.
A notice of lis pendens is an announcement to the whole world that a particular real property
is in litigation, serving as a warning that one who acquires an interest over the said property
does so at his own risk, or that he gambles on the result of the litigation over said property
(People vs. Regional Trial Court of Manila, 178 SCRA 299). The absence of a notice of lis
pendens on the title of the appellant will not save the day for the appellant. The latter and the
Register of Deeds are being sued with regard to the property. x x x.
Note too that no less than the deputy Register of Deeds Ramon Balinton refused to register
the property subject matter of the controversy because of the pending case as evidenced by
the letter addressed to the Register of Deeds. Even when directed by the Register of Deeds
Pedro Jamero, he made a handwritten annotation in the document which reads: "Register
per instruction of the Acting register of deeds this 31stday of August 1984." The manner by
which appellant deprived appellee of his property through irregular foreclosure proceedings
and its well-orchestrated scheme to frustrate reconveyance of the property by selling the
same to a third person during the pendency of the case entitles appellee to moral damages.
But while the amount of moral damages is a matter left largely to the sound discretion of the trial
court, the same when found excessive, should be reduced to more reasonable amounts considering
the attendant facts and circumstances. Moral damages, though incapable of pecuniary estimation,
are in the category of an award designed to compensate the claimant for actual injury suffered and
not to impose a penalty on the wrongdoer. Moral damages are not intended to enrich a complainant
at the expense of a defendant. They are awarded only to enable the injured party to obtain means,
diversion or amusements that will serve to alleviate the moral sufferings he has undergone by
reason of the defendants culpable action. The award of moral damages must be proportionate to the
sufferings inflicted.7 Taking into consideration the attending circumstances here, we are convinced
that the amount awarded by the Court of Appeals is exorbitant. Likewise, we find the exemplary
damages and attorneys fees quite excessive.
WHEREFORE, the instant petition is hereby DENIED. The assailed Decision of the Court of Appeals
is AFFIRMEDsubject to the MODIFICATION that the awards of moral damages be reduced
to P100,000.00 and the exemplary damages to P50,000.00. The award of attorneys fees is
deleted.
1wphi1.nt

SO ORDERED.
Melo, Vitug, Panganiban, Gonzaga-Reyes, JJ., concur.

G.R. No. 121171 December 29, 1998

ASSET PRIVATIZATION TRUST, petitioner,
vs.
COURT OF APPEALS, JESUS S. CABARRUS, SR., JESUS S. CABARRUS, JR., JAIME T.
CABARRUS, JOSE MIGUEL CABARRUS, ALEJANDRO S. PASTOR, JR., ANTONIO U.
MIRANDA, and MIGUEL M. ANTONIO, as Minority Stock-Holders of Marinduque Mining and
Industrial Corporation, respondents.

KAPUNAN, J.:
The petition for review on certiorari before us seeks to reverse and set aside the decision of the
Court of Appeals which denied due course to the petition for certiorari filed by the Asset Privatization
Trust (APT) assailing the order of the Regional Trial Court (RTC) Branch 62, Makati City. The Makati
RTC's order upheld and confirmed the award made by the Arbitration Committee in favor of
Marinduque Mining and Industrial Corporation (MMIC) and against the Government, represented by
herein petitioner APT for damages in the amount of P2.5 BILLION (or approximately P4.5 BILLION,
including interest).
Ironically, the staggering amount of damages was imposed on the Government for exercising its
legitimate right of foreclosure as creditor against the debtor MMIC as a consequence of the latter's
failure to pay its overdue and unpaid obligation of P22 billion to the Philippine National Bank (PNB)
and the Development Bank of the Philippines (DBP).
The antecedent facts
of the case.

The development, exploration and utilization of the mineral deposits in the Surigao Mineral
Reservation have been authorized by Republic Act No. 1528, as amended by Republic Acts Nos.
2077 and 4167, by virtue of which laws, a Memorandum of Agreement was drawn on July 3, 1968,
whereby the Republic of the Philippines thru the Surigao Mineral Reservation Board, granted MMIC
the exclusive rig ht to explore, develop and exploit nickel, cobalt and other minerals in the Surigao
mineral reservation. 1 MMIC is a domestic corporation engaged in mining with respondent Jesus S.
Cabarrus, Sr. as President and among its original stockholders.
The Philippine Government undertook to support the financing of MMIC by purchase of MMIC
debenture bonds and extension of guarantees. Further, the Philippine Government obtained a firm
commitment form the DBP and/or other government financing institutions to subscribe in MMIC and
issue guarantee/s for foreign loans or deferred payment arrangements secured from the US
Eximbank, Asian Development Bank, Kobe Steel, of amount not exceeding US$100 Million. 2
DBP approved guarantees in favor of MMIC and subsequent requests for guarantees were based on
the unutilized portion of the Government commitment. Thereafter, the Government extended
accommodations to MMIC in various amounts.
On July 13, 1981, MMIC, PNB and DBP executed a Mortgage Trust Agreement 3 whereby MMIC, as
mortgagor, agreed to constitute a mortgage in favor or PNB and DBP as mortgagees, over all MMIC's
assets; subject of real estate and chattel mortgage executed by the mortgagor, and additional assets
described and identified, including assets of whatever kind, nature or description, which the mortgagor
may acquire whether in substitution of, in replenishment, or in addition thereto.
Article IV of the Mortgage Trust Agreement provides for Events of Default, which expressly includes
the event that the MORTGAGOR shall fail to pay any amount secured by this Mortgage Trust
Agreement when due. 4
Article V of the Mortgage Trust Agreement prescribes in detail, and in addition to the enumerated
events of defaults, circumstances by which the mortgagor may be declared in default, the procedure
therefor, waiver of period to foreclose, authority of Trustee before, during and after foreclosure,
including taking possession of the mortgaged properties. 5
In various requests for advances/remittances of loans if huge amounts, Deeds of Undertaking,
Promissory Notes, Loan Documents, Deeds of Real Estate Mortgages, MMIC invariably committed
to pay either on demand or under certain terms the loans and accommodations secured from or
guaranteed by both DBP and PNB.
By 1984, DBP and PNB's financial both in loans and in equity in MMIC had reached tremendous
proportions, and MMIC was having a difficult time meeting its financial obligations. MMIC had an
outstanding loan with DBP in the amount of P13,792,607,565.92 as of August 31, 1984 and with
PNB in the amount of P8,789,028,249.38 as July 15, 1984 or a total Government expose of Twenty
Two Billion Six Hundred Sixty-Eight Million Five Hundred Thirty-Seven Hundred Seventy and 05/100
(P22, 668,537,770.05), Philippine Currency. 6 Thus, a financial restructuring plan (FRP) designed to
reduce MMIC's interest expense through debt conversion to equity was drafted by the Sycip Gorres
Velayo accounting firm. 7 On April 30, 1984, the FRP was approved by the Board of Directors of the
MMIC. 8 However, the proposed FRP had never been formally adopted, approved or ratified by either PNB
or DBP. 9
In August and September 1984, as the various loans and advances made by DBP and PNB to MMIC
had become overdue and since any restructuring program relative to the loans was no longer
feasible, and in compliance with the directive of Presidential Decree No. 385, DBP and PNB as

mortgagees of MMIC assets, decided to exercise their right to extrajudicially foreclose the mortgages
in accordance with the Mortgage Trust Agreement. 10
The foreclosed assets were sold to PNB as the lone bidder and were assigned to three newly
formed corporations, namely, Nonoc Mining Corporation, Maricalum Mining and Industrial
Corporation, and Island Cement Corporation. In 1986, these assets were transferred to the Asset
Privatization Trust (APT). 11
On February 28, 1985, Jesus S. Cabarrus, Sr., together with the other stockholders of MMIC, filed a
derivative suit against DBP and PNB before the RTC of Makati, Branch 62, for Annulment of
Foreclosures, Specific Performance and Damages. 12 The suit, docketed as Civil Case No. 9900,
prayed that the court: (1) annul the foreclosures, restore the foreclosed assets to MMIC, and require the
banks to account for their use and operation in theinterim; (2) direct the banks to honor and perform their
commitments under the alleged FRP; and (3) pay moral and exemplary damages, attorney's fees,
litigation expenses and costs.
In the course of the trial, private respondents and petitioner APT, as successor of the DBP and the
PNB's interest in MMIC, mutually agreed to submit the case to arbitration by entering into a
"Compromise and Arbitration Agreement," stipulating, inter alia:
NOW THEREFORE, for and in consideration of the foregoing premises and the
mutual covenants contained herein the parties agree as follows:
1. Withdrawal and Compromise. The parties have agreed to withdraw their
respective claims from the Trial Court and to resolve their dispute through arbitration
by praying to the Trial Court to issue a Compromise Judgment based on this
Compromise and Arbitration Agreement.
In withdrawing their dispute from the court and in choosing to resolve it through
arbitration, the parties have agreed that:
(a) their respective money claims shall be reduced to purely money claims; and
(b) as successor and assignee of the PNB and DBP interests in MMIC and the MMIC
accounts, APT shall likewise succeed to the rights and obligations of PNB and DBP
in respect of the controversy subject of Civil Case No. 9900 to be transferred to
arbitration and any arbitral award/order against either PNB and/or DBP shall be the
responsibility be discharged by and be enforceable against APT, the parties having
agreed to drop PNB and DBP from the arbitration.
2. Submission. The parties hereby agree that (a) the controversy in Civil Case No.
9900 shall be submitted instead to arbitration under RA 876 and (b) the reliefs prayed
for in Civil Case No. 9900 shall, with the approval of the Trial Court of this
Compromise and Arbitration Agreement, be transferred and reduced to pure
pecuniary/money claims with the parties waiving and foregoing all other forms of
reliefs which they prayed for or should have prayed for in Civil Case No. 9900. 13
The Compromise and Arbitration Agreement limited the issues to the following:
5. Issues The issues to be submitted for the Committee's resolution shall be (a)
Whether PLAINTIFFS have the capacity or the personality to institute this derivative
suit in behalf of the MMIC or its directors, (b) Whether or not the actions leading to,

and including,. the PNB-DBP foreclosure of the MMIC assets were proper, valid and
in good
faith. 14
This agreement was presented for approval to the trial court. On October 14, 1992, the Makati RTC,
Branch 61, issued an order, to wit:
WHEREFORE, this Court orders:
1. Substituting PNB and DBP with the Asset Privatization Trust as
party defendant.
2. Approving the Compromise and Arbitration Agreement dated
October 6, 1997, attached as Annex "C" of the Omnibus Motion.
3. Approving the Transformation of the reliefs prayed for [by] the
plaintiffs in this case into pure money claims; and
4. The Complaint is hereby DISMISSED. 15
The Arbitration Committee was composed of retired Supreme Court Justice Abraham Sarmiento as
Chairman, Atty. Jose C. Sison and former Court of Appeals Justice Magdangal Elma as Members.
On November 24, 1993, after conducting several hearings, the Arbitration Committee rendered a
majority decision in favor of MMIC, the pertinent portions of which read as follows:
Since, as this Committee finds, there is no foreclosure at all as it was not legally and
validly done, the Committee holds and so declares that the loans of PNB and DBP to
MMIC. for the payment and recovery of which the void foreclosure sales were
undertaken, continue to remain outstanding and unpaid. Defendant APT as the
successor-in-interest of PNB and DBP to the said loans is therefore entitled and
retains the right, to collect the same from MMIC pursuant to, and based on the loan
documents signed by MMIC, subject to the legal and valid defenses that the latter
may duly and seasonably interpose. Such loans shall, however, be reduced by the
amount which APT may have realized from the sale of the seized assets of MMIC
which by agreement should no longer be returned even if the foreclosures were
found to be null and void.
The documentary evidence submitted and adopted by the parties (Exhibits "3", "3-B";
Exhibit "100"; and also Exhibit "ZZZ") as their exhibits would show that the total
outstanding obligation due to DBP and PNB as of the date of foreclosure is
P22,668,537,770.05, more or less.
Therefore defendant APT can, and is still entitled to, collect the outstanding
obligations of MMIC to PNB and DBP amounting to P22,668,537,770.05, more or
less, with interest thereon as stipulated in the loan documents from the date of
foreclosure up to the time they are fully paid less the proportionate liability of DBP as
owner of 87% of the total capitalization of MMIC under the FRP. Simply put, DBP
shall share in the award of damages to, and in the obligations of, MMIC in proportion
to its 87% equity in tile total capital stock of MMIC.
xxx xxx xxx

As this Committee holds that the FRP is valid, DBP's equity in MMIC is raised to
87%. So pursuant to the above provision of the Compromise and Arbitration
Agreement, the 87% equity of DBP is hereby deducted from the actual damages of
P19,486,118,654.00 resulting in the net actual damages of P2,531,635,425.02 plus
interest.
DISPOSITION
WHEREFORE, premises considered, judgment is hereby rendered:
1. Ordering the defendant to pay to the Marinduque Mining and Industrial
Corporation, except the DBP, the sum of P2,531,635,425.02 with interest thereon at
the legal rate of six per cent (6%) per annum reckoned from August 3, 9, and 24,
1984, pari passu, as and for actual damages. Payment of these actual damages
shall be offset by APT from the outstanding and unpaid loans of MMIC with DBP and
PNB, which have not been converted into equity. Should there be any balance due to
MMIC after the offsetting, the same shall be satisfied from the funds representing the
purchase price of the sale of the shares of Island Cement Corporation in the amount
of P503,000,000.00 held under escrow pursuant to the Escrow Agreement dated
April 22, 1988 or to such subsequent escrow agreement that would supercede [sic] it
pursuant to paragraph (9) of the Compromise and Arbitration Agreement;
2. Ordering the defendant to pay to the Marinduque Mining and Industrial
Corporation, except the DBP, the sum of P13,000.000.00, as and for moral and
exemplary damages. Payment of these moral and exemplary damages shall be
offset by APT from the outstanding and unpaid loans of MMIC with DBP and PNB,
which have not been converted into equity. Should there be any balance due to
MMIC after the offsetting, the same shall be satisfied from the funds representing the
purchase price of the sale of the shares of Island Cement Corporation in the amount
of P503,000,000.00 held under escrow pursuant to the Escrow Agreement dated
April 22, 1988 or to such subsequent escrow agreement that would supercede [sic] it
pursuant to paragraph (9) of the Compromise and Arbitration Agreement;
3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum of
P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant
to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow
agreement that would supersede it, pursuant to paragraph (9) of the Compromise
and Arbitration Agreement, as and for moral damages; and
4. Ordering the defendant to pay arbitration costs.
This Decision is FINAL and EXECUTORY.
IT IS SO ORDERED. 16
Motions for reconsideration were filed by both parties, but the same were denied.
On October 17, 1993, private respondents filed in the same Civil Case No. 9900 an
"Application/Motion for Confirmation of Arbitration Award." Petitioner countered with an "Opposition
and Motion to Vacate Judgment" raising the following grounds.

1. The plaintiffs Application/Motion is improperly filed with this branch of the Court,
considering that the said motion is neither a part nor the continuation of the
proceedings in Civil Case No. 9900 which was dismissed upon motion of the parties.
In fact, the defendants in the said Civil Case No. 9900 were the Development Bank
of the Philippines and the Philippine National Bank (PNB);
2. Under Section 71 of Rep. Act 876, an arbitration under a contract or submission
shall be deemed a special proceedings and a party to the controversy which was
arbitrated may apply to the court having jurisdiction, (not necessarily with this
Honorable Court) for an order confirming the award;
3. The issues submitted for arbitration have been limited to two: (1) propriety of the
plaintiffs filing the derivative suit and (2) the regularity of the foreclosure proceedings.
The arbitration award sought to be confirmed herein, far exceeded the issues
submitted and even granted moral damages to one of the herein plaintiffs;
4. Under Section 24 of Rep. Act 876, the Court must make an order vacating the
award where the arbitrators exceeded their powers, or so imperfectly executed them,
that a mutual, final and definite award upon the subject matter submitted to them was
not made. 17
Private respondents filed a "REPLY AND OPPOSITION" dated November 10, 1984, arguing that a
dismissal of Civil Case No. 9900 was merely a "qualified dismissal" to pave the way for the
submission of the controversy to arbitration and operated simply as "a mere suspension of the
proceedings" They denied that the Arbitration Committee had exceeded its powers.
In an Order dated November 28, 1993, the trial court confirmed the award of the Arbitration
Committee. The dispositive portion of said order reads:
WHEREFORE, premises considered, and in the light of the parties [sic] Compromise
and Arbitration Agreement dated October 6, 1992, the Decision of the Arbitration
Committee promulgated on November 24, 1993, as affirmed in a Resolution dated
July 26, 1994, and finally settled and clarified in the Separate Opinion dated
September 2, 1994 of Committee Member Elma, and the pertinent provisions of RA
876, also known as the Arbitration Law, this Court GRANTS PLAINTIFFS'
APPLICATION AND THUS CONFIRMS THE ARBITRATION AWARD, AND
JUDGMENT IS HEREBY RENDERED:
(a) Ordering the defendant APT to the Marinduque Mining and Industrial Corporation
(MMIC), except the DBP, the sum of P3,811,757,425.00, as and for actual damages,
which shall be partially satisfied from the funds held under escrow in the amount of
P503,000,000.00 pursuant to the Escrow Agreement dated April 22, 1988. The
balance of the award, after the escrow funds are fully applied, shall be executed
against the APT;
(b) Ordering the defendant to pay to the MMIC, except the DBP, the sum of
P13,000,000.00 as and for moral and exemplary damages;
(c) Ordering the defendant to pay to Jesus S. Cabarrus, Sr., the sum of
P10,000,000.00 as and for moral damages; and

(d) Ordering the defendant to pay the herein plaintiffs/applicants/movants the sum of
P1,705,410.23 as arbitration costs.
In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8 paragraph 2
of the Compromise and Arbitration Agreement, and the final edict of the Arbitration
Committee's decision, and with this Court's Confirmation, the issuance of the
Arbitration Committee's Award shall henceforth be final and executory.
SO ORDERED. 18
On December 27, 1994, petitioner filed its motion for reconsideration of the Order dated November
28, 1994. Private respondents, in turn, submitted their reply and opposition thereto.
On January 18, 1995, the trial court handed down its order denying APT's motion for reconsideration
for lack of merit and for having been filed out of time. The trial court declared that "considering that
the defendant APT, through counsel, officially and actually received a copy of the Order of this Court
dated November 28, 1994 on December 6, 1994, the Motion for Reconsideration thereof filed by the
defendant APT on December 27, 1994, or after the lapse of 21 days, was clearly filed beyond the
15-day reglementary period prescribed or provided for by law for the filing of an appeal from final
orders, resolutions, awards, judgments or decisions of any court in all cases, and by necessary
implication for the filing of a motion for reconsideration thereof."
On February 7, 1995, petitioner received private respondents' Motion for Execution and Appointment
of Custodian of Proceeds of Execution dated February 6, 1995.
Petitioner thereafter filed with the Court of Appeals a special civil action for certiorari with temporary
restraining order and/or preliminary injunction dated February 13, 1996 to annul and declare as void
the Orders of the RTC-Makati dated November 28, 1994 and January 18, 1995 for having been
issued without or in excess of jurisdiction and/or with grave abuse of discretion. 19 As ground therefor,
petitioner alleged that:
I
THE RESPONDENT JUDGE HAS NOT VALIDLY ACQUIRED JURISDICTION
MUCH LESS, HAS THE COURT AUTHORITY, TO CONFIRM THE ARBITRAL
AWARD CONSIDERING THAT THE ORIGINAL CASE, CIVIL CASE NO. 9900, HAD
PREVIOUSLY BEEN DISMISSED.
II
THE RESPONDENT JUDGE COMMITTED GRAVE ABUSE OF DISCRETION AND
ACTED WITHOUT OR IN EXCESS OF JURISDICTION, IN ISSUING THE
QUESTIONED ORDERS CONFIRMING THE ARBITRAL AWARD AND DENYING
THE MOTION FOR RECONSIDERATION OF ORDER OF AWARD.
III
THE RESPONDENT JUDGE GROSSLY ABUSED HIS DISCRETION AND ACTED
WITHOUT OR IN EXCESS OF AND WITHOUT JURISDICTION IN RECKONING
THE COUNTING OF THE PERIOD TO FILE MOTION FOR RECONSIDERATION,
NOT FROM THE DATE OF SERVICE OF THE COURT'S COPY CONFIRMING THE

AWARD, BUT FROM RECEIPT OF A XEROX COPY OF WHAT PRESUMABLY IS

THE OPPOSING COUNSEL'S COPY THEREOF. 20
On July 12, 1995, he Court of Appeals, through its Fifth-Division, denied due course and dismissed
the petition forcertiorari.
Hence, the instant petition for review on certiorari imputing to the Court of Appeals the following
errors:
ASSIGNMENT OF ERRORS
I
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE MAKATI
REGIONAL TRIAL COURT, BRANCH 62 WHICH HAS PREVIOUSLY DISMISSED
CIVIL CASE NO. 9900 HAD LOST JURISDICTION TO CONFIRM THE ARBITRAL
AWARD UNDER THE SAME CIVIL CASE AND NOT RULING THAT THE
APPLICATION FOR CONFIRMATION SHOULD HAVE BEEN FILED AS A NEW
CASE TO BE RAFFLED OFF AMONG THE DIFFERENT BRANCHES OF THE RTC.
II
THE COURT OF APPEALS LIKEWISE ERRED IN HOLDING THAT PETITIONER
WAS ESTOPPED FROM QUESTIONING THE ARBITRATION AWARD, WHEN
PETITIONER QUESTIONED THE JURISDICTION OF THE RTC-MAKATI, BRANCH
62 AND AT THE SAME TIME MOVED TO VACATE THE ARBITRAL AWARD.
III
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT
TRIAL COURT SHOULD HAVE EITHER DISMISSED/DENIED PRIVATE
RESPONDENTS' MOTION/PETITION FOR CONFIRMATION OF ARBITRATION
AWARD AND/OR SHOULD HAVE CONSIDERED THE MERITS OF THE MOTION
TO VACATE ARBITRAL AWARD.
IV
THE COURT OF APPEALS ERRED IN NOT TREATING PETITIONER APT'S
PETITION FORCERTIORARI AS AN APPEAL TAKEN FROM THE ORDER
CONFIRMING THE AWARD.
V
THE COURT OF APPEALS ERRED IN NOT RULING ON THE LEGAL ISSUE OF
WHEN TO RECKON THE COUNTING OF THE PERIOD TO FILE A MOTION FOR
RECONSIDERATION. 21
The petition is impressed with merit.
I

The RTC of Makati, Branch 62,

did not have jurisdiction to confirm
the arbitral award.
The use of the term "dismissed" is not "a mere semantic imperfection". The dispositive portion of the
Order of the trial court dated October 14, 1992 stated in no uncertain terms:
4. The Complaint is hereby DISMISSED. 22
The term "dismiss" has a precise definition in law. "To dispose of an action, suit, or motion
without trial on the issues involved. Conclude, discontinue, terminate, quash." 23
Admittedly, the correct procedure was for the parties to go back to the court where the case was
pending to have the award confirmed by said court. However, Branch 62 made the fatal mistake of
issuing a final order dismissing the case. While Branch 62 should have merely suspended the case
and not dismissed it, 24 neither of the parties questioned said dismissal. Thus, both parties as well as said
court are bound by such error.
It is erroneous then to argue, as private respondents do, that petitioner APT was charged with the
knowledge that the "case was merely stayed until arbitration finished," as again, the order of Branch
62 in very clear terms stated that the "complaint was dismissed." By its own action, Branch 62 had
lost jurisdiction over the case. It could not have validly reacquired jurisdiction over the said case on
mere motion of one of the parties. The Rules of Court is specific on how a new case may be initiated
and such is not done by mere motion in a particular branch of the RTC. Consequently, as there was
no "pending action" to speak of, the petition to confirm the arbitral award should have been filed as a
new case and raffled accordingly to one of the branches of the Regional Trial Court.
II
Petitioner was not estopped from
questioning the jurisdiction of
Branch 62 of the RTC of Makati.
The Court of Appeals ruled that APT was already estopped to question the jurisdiction of the RTC to
confirm the arbitral award because it sought affirmative relief in said court by asking that the arbitral
award be vacated.
The rule is that "Where the court itself clearly has no jurisdiction over the subject matter or the nature
of the action, the invocation of this defense may be done at any time. It is neither for the courts nor
for the parties to violate or disregard that rule, let alone to confer that jurisdiction this matter being
legislative in character." 25 As a rule then, neither waiver nor estoppel shall apply to confer jurisdiction
upon a court barring highly meritorious and exceptional circumstances. 26 One such exception was
enunciated in Tijam vs. Sibonghanoy, 27 where it was held that "after voluntarily submitting a cause and
encountering an adverse decision on the merits, it is too late for the loser to question the jurisdiction or
power of the court."

Petitioner's situation is different because from the outset, it has consistently held the position that the
RTC, Branch 62 had no jurisdiction to confirm the arbitral award; consequently, it cannot be said that
it was estopped from questioning the RTC's jurisdiction. Petitioner's prayer for the setting aside of
the arbitral award was not inconsistent with its disavowal of the court's jurisdiction.
III
Appeal of petitioner to the
Court of Appeals thru certiorari
under Rule 65 was proper.
The Court of Appeals in dismissing APT's petition for certiorari upheld the trial court's denial of APT's
motion for reconsideration of the trial court's order confirming the arbitral award, on the ground that
said motion was filed beyond the 15-day reglementary period; consequently, the petition
for certiorari could not be resorted to as substitute to the lost right of appeal.
We do not agree.
Section 99 of Republic Act No. 876, 28 provides that:
. . . An appeal may be taken from an order made in a proceeding under this Act, or
from a judgment entered upon an award through certiorari proceedings, but such
appeals shall be limited to questions of law. . . ..
The aforequoted provision, however, does not preclude a party aggrieved by the arbitral award from
resorting to the extraordinary remedy of certiorari under Rule 65 of the Rules of Court where, as in
this case, the Regional Trial Court to which the award was submitted for confirmation has acted
without jurisdiction or with grave abuse of discretion and there is no appeal, nor any plain, speedy
remedy in the course of law.
Thus, Section 1 of Rule 65 provides:
Sec 1. Petition for Certiorari: When any tribunal, board or officer exercising judicial
functions, has acted without or in excess of its or his jurisdiction, or with grave abuse
of discretion and there is no appeal, nor any plain, speed, and adequate remedy in
the ordinary course of law, a person aggrieved thereby may file a verified petition in
the proper court alleging the facts with certainty and praying that judgment be
rendered annulling or modifying the proceedings, as the law requires, of such
tribunal, board or officer.
In the instant case, the respondent court erred in dismissing the special civil action for certiorari, it
being clear from the pleadings and the evidence that the trial court lacked jurisdiction and/or
committed grave abuse of discretion in taking cognizance of private respondents' motion to confirm
the arbitral award and, worse, in confirming said award which is grossly and patently not in accord
with the arbitration agreement, as will be hereinafter demonstrated.
IV
The nature and limits of the

Arbitrators' power.
As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment either as to the
law or as to the facts. 29 Courts are without power to amend or overrule merely because of disagreement
with matters of law or facts determined by the arbitrators. 30 They will not review the findings of law and
fact contained in an award, and will not undertake to substitute their judgment for that of the arbitrators,
since any other rule would make an award the commencement, not the end, of litigation. 31 Errors of law
and fact, or an erroneous decision of matters submitted to the judgment of the arbitrators, are insufficient
to invalidate an award fairly and honestly made. 32 Judicial review of an arbitration is thus, more limited
than judicial review of a trial. 33
Nonetheless, the arbitrators' award is not absolute and without exceptions. The arbitrators cannot
resolve issues beyond the scope of the submission agreement. 34 The parties to such an agreement
are bound by the arbitrators' award only to the extent and in the manner prescribed by the contract and
only if the award is rendered in conformity thereto. 35 Thus, Sections 24 and 25 of the Arbitration Law
provide grounds for vacating, rescinding or modifying an arbitration award. Where the conditions
described in Articles 2038, 36
2039, 37 and 1040 38 of the Civil Code applicable to compromises and arbitration are attendant, the
arbitration award may also be annulled.
In Chung Fu Industries (Phils.) vs. Court of Appeals, 39 we held:
. . . . It is stated explicitly under Art. 2044 of the Civil Code that the finality of the
arbitrators' award is not absolute and without exceptions. Where the conditions
described in Articles 2038, 2039 and 2040 applicable to both compromises and
arbitrations are obtaining, the arbitrator's award may be annulled or rescended.
Additionally, under Sections 24 and 25 of the Arbitration Law, there are grounds for
vacating, modifying or rescinding an arbitrator's award. Thus, if and when the factual
circumstances referred to the above-cited provisions are present, judicial review of
the award is properly warranted.
According, Section 20 of R.A. 876 provides:
Sec. 20. Form and contents of award. The award must be made in writing and
signed and acknowledge by a majority of the arbitrators, if more than one; and by the
sole arbitrator, if there is only only. Each party shall be furnished with a copy of the
award. The arbitrators in their award may grant any remedy or relief which they deem
just and equitable and within the scope of the agreement of the parties, which shall
include, but not be limited to, the specific performance of a contract.
xxx xxx xxx
The arbitrators shall have the power to decide only those matters which have been
submitted to them. The terms of the award shall be confined to such disputes.
(Emphasis ours).
xxx xxx xxx
Sec. 24 of the same law enumerating the grounds for vacating an award states:

Sec. 24. Grounds for vacating award. In any one of the following cases, the court
must make an order vacating the award upon the petition of any party to the
controversy when such party proves affirmatively that in the arbitration proceeding:
(a) The award was procured by corruption, fraud, or other undue means; or
(b) That there was evident partiality or corruption in the arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing
upon sufficient cause shown, or in refusing to hear evidence pertinent and material to
the controversy; that one or more of the arbitrators was disqualified to act as such
under section nine hereof, and willfully refrained from disclosing such
disqualifications or any other misbehavior by which the rights of any party have been
materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that
a mutual, final and definite award upon the subject matter submitted to them was not
made. (Emphasis ours)
xxx xxx xxx.
Section 25 which enumerates the grounds for modifying the award provides:
Sec. 25. Grounds for modifying or correcting award In anyone of the following
cases, the court must make an order modifying or correcting the award, upon the
application of any party to the controversy which was arbitrated:
(a) Where there was an evident miscalculation of figures, or an evident mistake in the
description of any person, thing or property referred to in the award; or
(b) Where the arbitrators have awarded upon a matter not submitted to them, not
affecting the merits of the decision upon the matter submitted; or
(c) Where the award is imperfect in a matter of form not affecting the merits of the
controversy, and if it had been a commissioner's report, the defect could have been
amended or disregarded by the court.
xxx xxx xxx
Finally, it should be stressed that while a court is precluded from overturning an award for errors in
the determination of factual issues, nevertheless, if an examination of the record reveals no support
whatever for the arbitrators determinations, their award must be vacated. 40 in the same manner, an
award must be vacated if it was made in "manifest disregard of the law." 41
Against the backdrop of the foregoing provisions and principles, we find that the arbitrators came out
with an award in excess of their powers and palpably devoid of factual and legal basis.
V
There was no financial

structuring program:
foreclosure of mortgage
was fully justified.
The point need not be belabored that PNB and DBP had the legitimate right to foreclose of the
mortgages of MMIC whose obligations were past due. The foreclosure was not a wrongful act of the
banks and, therefore, could not be the basis of any award of damages. There was no financial
restructuring agreement to speak of that could have constituted an impediment to the exercise of the
banks' right to foreclose.
As correctly stated by Mr. Jose C. Sison, a member of the Arbitration Committee who wrote a
separate opinion:
1. The various loans and advances made by DBP and PNB to MMIC have become
overdue and remain unpaid. The fact that a FRP was drawn up is enough to
establish that MMIC has not been complying with the terms of the loan agreement.
Restructuring simply connotes that the obligations are past due that is why it is
"restructurable";
2. When MMIC thru its board and the stockholders agreed and adopted the FRP, it
only means that MMIC had been informed or notified that its obligations were past
due and that foreclosure is forthcoming;
3. At that stage, MMIC also knew that PNB-DBP had the option of either approving
the FRP or proceeding with the foreclosure. Cabarrus, who filed this case
supposedly in behalf of MMIC should have insisted on the FRP. Yet Cabarrus himself
opposed the FRP;
4. So when PNB-DBP proceeded with the foreclosure, it was done without bad faith
but with the honest and sincere belief that foreclosure was the only alternative; a
decision further explained by Dr. Placido Mapa who testified that foreclosure was, in
the judgment of PNB, the best move to save MMIC itself.
Q : Now in this portion of Exh. "L" which was marked as Exh. "L-1", and we adopted
as Exh. 37-A for the respondent, may I know from you, Dr. Mapa what you meant by
"that the decision to foreclose was neither precipitate nor arbitrary"?
A : Well, it is not a whimsical decision but rather decision arrived at after weighty
consideration of the information that we have received, and listening to the prospects
which reported to us that what we had assumed would be the premises of the
financial rehabilitation plan was not materialized nor expected to materialize.
Q : And this statement that "it was premised upon the known fact" that means, it was
referring to the decision to foreclose, was premised upon the known fact that the
rehabilitation plan earlier approved by the stockholders was no longer feasible, just
what is meant "by no longer feasible"?

A : Because the revenue that they were counting on to make the rehabilitation plan
possible, was not anymore expected to be forthcoming because it will result in a
short fall compared to the prices that were actually taking place in the market.
Q : And I suppose that was what you were referring to when you stated that the
production targets and assumed prices of MMIC's products, among other projections,
used in the financial reorganization program that will make it viable were not met nor
expected to be met?
A : Yes.
xxx xxx xxx
Which brings me to my last point in this separate opinion. Was PNB and DBP
absolutely unjustified in foreclosing the mortgages?
In this connection, it can readily be seen and it cannot quite be denied that MMIC
accounts in PNB-DBP were past due. The drawing up of the FRP is the best proof of
this. When MMIC adopted a restructuring program for its loan, it only meant that
these loans were already due and unpaid. If these loans were restructurable because
they were already due and unpaid, they are likewise "forecloseable". The option is
with the PNB-DBP on what steps to take.
The mere fact that MMIC adopted the FRP does not mean that DBP-PNB lost the
option to foreclose. Neither does it mean that the FRP is legally binding and
implementable. It must be pointed that said FRP will, in effect, supersede the existing
and past due loans of MMIC with PNB-DBP. It will become the new loan agreement
between the lenders and the borrowers. As in all other contracts, there must
therefore be a meeting of minds of the parties; the PNB and DBP must have to
validly adopt and ratify such FRP before they can be bound by it; before it can be
implemented. In this case, not an iota of proof has been presented by the
PLAINTIFFS showing that PNB and DBP ratified and adopted the FRP. PLAINTIFFS
simply relied on a legal doctrine of promissory estoppel to support its allegations in
this regard. 42
Moreover, PNB and DBP had to initiate foreclosure proceedings as mandated by P.D. No. 385,
which took effect on January 31, 1974. The decree requires government financial institutions to
foreclose collaterals for loans where the arrearages amount to 20% of the total outstanding
obligations. The pertinent provisions of said decree read as follow:
Sec. 1. It shall be mandatory for government financial institutions, after the lapse of
sixty (60) days from the issuance of this Decree, to foreclose the collaterals and/or
securities for any loan, credit, accommodation, and/or guarantees granted by them
whenever the arrearages on such account, including accrued interest and other
charges, amount to at least twenty percent (20%) of the total outstanding obligations,
including interest and other charges, as appearing in the books of account and/or
related records of the financial institutions concerned. This shall be without prejudice
to the exercise by the government financial institutions of such rights and/or
remedies available to them under their respective contracts with their debtors,
including the right to foreclosure on loans, credits, accommodations and/or
guarantees on which the arrearages are less than twenty percent (20%).

Sec. 2. No restraining order temporary or permanent injunction shall be issued by the

court against any government financial institution in any action taken by such
institution in compliance with themandatory foreclosure provided in Section 1 hereof,
whether such restraining order, temporary or permanent injunction is sought by the
borrower(s) or any third party or parties, except after due hearing in which it is
established by the borrower and admitted by the government financial institution
concerned that twenty percent (20%) of the outstanding arrearages has been paid
after the filing of foreclosure proceedings. (Emphasis supplied.)
Private respondents' thesis that the foreclosure proceedings were null and void because of lack of
publication in the newspaper is nothing more than a mere unsubstantiated aliegation not borne out
by the evidence. In any case, a disputable presumption exists in favor of petitioner that official duty
has been regularly performed and ordinary course of business has been followed. 43
VI
Not only was the foreclosure rightfully exercised by the PNB and DBP, but also, from the facts of the
case, the arbitrators in making the award went beyond the arbitration agreement.
In their complaint filed before the trial court, private respondent Cabarrus, et al. prayed for judgment
in their favor:
1. Declaring the foreclosures effected by the defendants DBP and PNB on the assets
of MMIC null and void and directing said defendants to restore the foreclosed assets
to the possession of MMIC, to render an accounting of their use and/or operation of
said assets and to indemnify MMIC for the loss occasioned by its dispossession or
the deterioration thereof;
2. Directing the defendants DBP and PNB to honor and perform their commitments
under the financial reorganization plan which was approved at the annual
stockholders' meeting of MMIC on 30 April 1984;
3. Condemning the defendants DBP and PNB, jointly and severally to pay the
plaintiffs actual damages consisting of the loss of value of their investments
amounting to not less than P80,000,000, the damnum emergens and lucrum
cessans in such amount as may be established during the trial, moral damages in
such amount as this Honorable Court may deem just and equitable in the premises,
exemplary damages in such amount as this Honorable Court may consider
appropriate for the purpose of setting an example for the public good, attorney's fees
and litigation expenses in such amounts as may be proven during the trial, and the
costs legally taxable in this litigation.
Further, plaintiffs pray for such other reliefs as may be just and equitable in the
premises. 44
Upon submission for arbitration, the Compromise and Arbitration Agreement of the parties clearly
and explicitly defined and limited the issues to the following:
(a) whether PLAINTIFFS have the capacity or the personality to institute this
derivative suit in behalf of the MMIC or its directors;

(b) whether or not the actions leading to, and including, the PNB-DBP foreclosure of
the MMIC assets were proper, valid and in good faith. 45
Item No. 8 of the Agreement provides for the period by which the Committee was to render its
decision, as well as the nature thereof:
8. Decision. The committee shall issue a decision on the controversy not later than
six (6) months from the date of its constitution.
In the event the committee finds that PLAINTIFFS have the personality to file this suit
and the extra-judicial foreclosure of the MMIC assets wrongful, it shall make an
award in favor of the PLAINTIFFS (excluding DBP), in an amount as may be
established or warranted by the evidence which shall be payable in Philippine Pesos
at the time of the award. Such award shall be paid by the APT or its successor-ininterest within sixty (60) days from the date of the award in accordance with the
provisions of par. 9 hereunder. . . . . The PLAINTIFFS' remedies under this Section
shall be in addition to other remedies that may be available to the PLAINTIFFS, all
such remedies being cumulative and not exclusive of each other.
On the other hand, in case the arbitration committee finds that PLAINTIFFS have no
capacity to sue and/or that the extra-judicial foreclosure is valid and legal, it shall also
make an award in favor of APT based on the counterclaims of DBP and PNB in an
amount as may be established or warranted by the evidence. This decision of the
arbitration committee in favor of APT shall likewise finally settle all issues regarding
the foreclosure of the MMIC assets so that the funds held in escrow mentioned in
par. 9 hereunder will thus be released in full in favor of
APT. 46
The clear and explicit terms of the submission notwithstanding, the Arbitration Committee clearly
exceeded its powers or so imperfectly executed them: (a) in ruling on and declaring valid the FRP;
(b) in awarding damages to MMIC which was not a party to the derivative suit; and (c) in awarding
moral damages to Jesus S. Cabarrus, Sr.
The arbiters overstepped
their powers by declaring as
valid the proposed Financial
Restructuring Program.
The Arbitration Committee went beyond its mandate and thus acted in excess of its powers when it
ruled on the validity of, and gave effect to, the proposed FRP.
In submitting the case to arbitration, the parties had mutually agreed to limit the issue to the "validity
of the foreclosure" and to transform the relief prayed for therein into pure money claims.
There is absolutely no evidence that the DBP and PNB agreed, expressly or impliedly, to the
proposed FRP. It cannot be overemphasized that a FRP, as a contract, requires the consent of the
parties thereto. 47 The contract must bind both contracting parties. 48 Private respondents even by their

own admission recognized that the FRP had yet not been carried out and that the loans of MMIC had not
yet been converted into equity. 49

However, the Arbitration Committee not only declared the FRP valid and effective, but also converted
the loans of MMIC into equity raising the equity of DBP to 87%. 50
The Arbitration Committee ruled that there was "a commitment to carry out the FRP"
of promissory estoppel.

51

on the ground

Similarly, the principle of promissory estoppel applies in the present case considering
as we observed, the fact that the government (that is, Alfredo Velayo) was the FRP's
proponent. Although the plaintiffs are agreed that the government executed no formal
agreement, the fact remains that the DBP itself which made representations that the
FRP constituted a "way out" for MMIC. The Committee believes that although the
DBP did not formally agree (assuming that the board and stockholders' approvals
were not formal enough), it is bound nonetheless if only for its conspicuous
representations.
Although the DBP sat in the board in a dual capacity as holder of 36% of MMIC's
equity (at that time) and as MMIC's creditor the DBP can not validly renege on its
commitments simply because at the same time, it held interests against the MMIC.
The fact, of course, is that as APT itself asserted, the FRP was being "carried out"
although apparently, it would supposedly fall short of its targets. Assuming that the
FRP would fail to meet its targets, the DBP and so this Committee holds can
not, in any event, brook any denial that it was bound to begin with, and the fact is that
adequate or not (the FRP), the government is still bound by virtue of its acts.
The FRP, of course, did not itself promise a resounding success, although it raised
DBP's equity in MMIC to 87%. It is not an excuse, however, for the government to
deny its commitments. 52
Atty. Sison, however, did not agree and correctly observed that:
But the doctrine of promissory estoppel can hardly find application here. The nearest
that there can be said of any estoppel being present in this case is the fact that the
board of MMIC was, at the time the FRP was adopted, mostly composed of PNB and
DBP representatives. But those representatives, singly or collectively, are not
themselves PNB or DBP. They are individuals with personalities separate and distinct
from the banks they represent. PNB and DBP have different boards with different
members who may have different decisions. It is unfair to impose upon them the
decision of the board of another company and thus pin them down on the equitable
principle of estoppel. Estoppel is a principle based on equity and it is certainly not
equitable to apply it in this particular situation. Otherwise the rights of entirely
separate distinct and autonomous legal entities like PNB and DBP with thousands of
stockholders will be suppressed and rendered nugatory. 53
As a rule, a corporation exercises its powers, including the power to enter into contracts, through its
board of directors. While a corporation may appoint agents to enter into a contract in its behalf, the
agent should not exceed his authority. 54 In the case at bar, there was no showing that the
representatives of PNB and DBP in MMIC even had the requisite authority to enter into a debt-for-equity

swap. And if they had such authority, there was no showing that the banks, through their board of
directors, had ratified the FRP.

Further, how could the MMIC be entitled to a big amount of moral damages when its credit
reputation was not exactly something to be considered sound and wholesome. Under Article 2217 of
the Civil Code, moral damages include besmirched reputation which a corporation may possibly
suffer. A corporation whose overdue and unpaid debts to the Government alone reached a
tremendous amount of P22 Billion Pesos cannot certainly have a solid business reputation to brag
about. As Atty. Sison in his separate opinion persuasively put it:
Besides, it is not yet a well settled jurisprudence that corporations are entitled to
moral damages. While the Supreme Court may have awarded moral damages to a
corporation for besmirched reputation in Mambulao vs. PNB, 22 SCRA 359, such
ruling cannot find application in this case. It must be pointed out that when the
supposed wrongful act of foreclosure was done, MMIC's credit reputation was no
longer a desirable one. The company then was already suffering from serious
financial crisis which definitely projects an image not compatible with good and
wholesome reputation. So it could not be said that there was a "reputation"
besmirched by the act of foreclosure.55
The arbiters exceeded their
authority in awarding damages
to MMIC, which is not impleaded
as a party to the derivative suit.
Civil Case No. 9900 filed before the RTC being a derivative suit, MMIC should have been impleaded
as a party. It was not joined as a party plaintiff or party defendant at any stage of the proceedings. As
it is, the award of damages to MMIC, which was not a party before the Arbitration Committee, is a
complete nullity.
Settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the
stockholder filing suit for the corporation's behalf is only a nominal party. The corporation should be
included as a party in the suit.
An individual stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue, or are the ones to be sued or
hold the control of the corporation. In such actions, the suing stockholder is regarded
as a nominal party, with the corporation as the real party in interest. . . . . 56
It is a condition sine qua non that the corporation be impleaded as a party because
. . . Not only is the corporation an indispensable party, but it is also the present rule
that it must be served with process. The reason given is that the judgment must be
made binding upon the corporation in order that the corporation may get the benefit
of the suit and may not bring a subsequent suit against the same defendants for the
same cause of action. In other words the corporation must be joined as party

because it is its cause of action that is being litigated and because judgment must be
a res ajudicata against it. 57
The reasons given for not allowing direct individual suit are:
(1) . . . "the universally recognized doctrine that a stockholder in a corporation has no
title legal or equitable to the corporate property; that both of these are in the
corporation itself for the benefit of the stockholders." In other words, to allow
shareholders to sue separately would conflict with the separate corporate entity
principle;
(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme
Court held in the case of Evangelista v. Santos, that "the stockholders may not
directly claim those damages for themselves for that would result in the appropriation
by, and the distribution among them of part of the corporate assets before the
dissolution of the corporation and the liquidation of its debts and liabilities, something
which cannot be legally done in view of section 16 of the Corporation Law . . .;
(3) the filing of such suits would conflict with the duty of the management to sue for
the protection of all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) it would involve confusion in a ascertaining the effect of partial recovery by an
individual on the damages recoverable by the corporation for the same act. 58
If at all an award was due MMIC, which it was not, the same should have been
given sans deduction, regardless of whether or not the party liable had equity in the corporation, in
view of the doctrine that a corporation has a personality separate and distinct from its individual
stockholders or members. DBP's alleged equity, even if it were indeed 87%, did not give it ownership
over any corporate property, including the monetary award, its right over said corporate property
being a mere expectancy or inchoate right. 59 Notably, the stipulation even had the effect of prejudicing
the other creditors of MMIC.
The arbiters, likewise,
exceeded their authority
in awarding moral damages
to Jesus Cabarrus, Sr.
It is perplexing how the Arbitration Committee can in one breath rule that the case before it is a
derivative suit, in which the aggrieved party or the real party in interest is supposedly the MMIC, and
at the same time award moral damages to an individual stockholder, to wit:
WHEREFORE, premises considered, judgment is hereby rendered:
xxx xxx xxx

3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum of
P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant
to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow
agreement that would supersede it, pursuant to paragraph (9), Compromise and
Arbitration Agreement, as and for moral damages; . . . 60
The majority decision of the Arbitration Committee sought to justify its award of moral damages to
Jesus S. Cabarrus, Sr. by pointing to the fact that among the assets seized by the government were
assets belonging to Industrial Enterprise Inc. (IEI), of which Cabarrus is the majority stockholder. It
then acknowledged that Cabarrus had already recovered said assets in the RTC, but that "he won
no more than actual damages. While the Committee cannot possibly speak for the RTC, there is no
doubt that Jesus S. Cabarrus, Sr., suffered moral damages on account of that specific foreclosure,
damages the Committee believes and so holds, he, Jesus S. Cabarrus, Sr., may be awarded in this
proceeding." 61
Cabarrus cause of action for the seizure of the assets belonging to IEI, of which he is the majority
stockholder, having been ventilated in a complaint he previously filed with the RTC, from which he
obtained actual damages, he was barred by res judicata from filing a similar case in another court,
this time asking for moral damages which he failed to get from the earlier case. 62 Worse, private
respondents violated the rule against non-forum shopping.
It is a basic postulate that a corporation has a personality separate and distinct from its
stockholders. 63 The properties foreclosed belonged to MMIC, not to its stockholders. Hence, if wrong
was committed in the foreclosure, it was done against the corporation. Another reason is that Jesus S.
Cabarrus, Sr. cannot directly claim those damages for himself that would result in the appropriation by,
and the distribution to, him part of the corporation's assets before the dissolution of the corporation and
the liquidation of its debts and liabilities. The Arbitration Committee, therefore, passed upon matters nor
submitted to it. Moreover, said cause of action had already been decided in a separate case. It is thus
quite patent that the arbitration committee exceeded the authority granted to it by the parties'
Compromise and Arbitration Agreement by awarding moral damages to Jesus S. Cabarrus, Sr.
Atty. Sison, in his separate opinion, likewise expressed befuddlement to the award of moral
damages to Jesus S. Cabarrus, Sr.:
It is clear and it cannot be disputed therefore that based on these stipulated issues,
the partiesthemselves have agreed that the basic ingredient of the causes of action
in this case is the wrong committed on the corporation (MMIC) for the alleged illegal
foreclosure of its assets. By agreeing to this stipulation, PLAINTIFFS themselves
(Cabarrus, et al.) admit that the cause of action pertains only to the corporation
(MMIC) and that they are filing this for and in behalf of MMIC.
Perforce this has to be so because it is the basic rule in Corporation Law that "the
shareholders have no title, legal or equitable to the property which is owned by the
corporation (13 Am. Jur. 165; Pascual vs. Oresco, 14 Phil. 83). In Ganzon & Sons vs.
Register of Deeds, 6 SCRA 373, the rule has been reiterated that "a stockholder is
not the co-owner of corporate property." Since the property or assets foreclosed
belongs [sic] to MMIC, the wrong committed, if any, is done against the
corporation. There is therefore no direct injury or direct violation of the rights of
Cabarrus et al. There is no way, legal or equitable, by which Cabarrus et al. could
recover damages in their personal capacities even assuming or just because the
foreclosure is improper or invalid. The Compromise and Arbitration Agreement itself
and the elementary principles of Corporation Law say so. Therefore, I am
constrained to dissent from the award of moral damages to Cabarrus. 64

From the foregoing discussions, it is evident that, not only did the arbitration committee exceed its
powers or so imperfectly execute them, but also, its findings and conclusions are palpably devoid of
any factual basis, and in manifest disregard of the law.
We do not find it necessary to remand this case to the RTC for appropriate action. The pleadings
and memoranda filed with this Court, as well as in the Court of Appeals, raised and extensively
discussed the issues on the merits. Such being the case, there is sufficient basis for us to resolve
the controversy between the parties anchored on the records and the pleadings before us. 65
WHEREFORE, the Decision of the Court of Appeals dated July 17, 1995, as well as the Orders of
the Regional Trial Court of Makati, Branch 62, dated November 28, 1994 and January 19, 1995, is
hereby REVERSED and SET ASIDE, and the decision of the Arbitration Committee is hereby
VACATED.
SO ORDERED.
Romero, J., Please see dissenting opinion.
Purisima, J., Concur and also with the separate concurring opinion of Justice Pardo.
Pardo, J., With separate concurring opinion.

Separate Opinions

ROMERO, J., dissenting opinion;

In the instant petition for review on certiorari, petitioner. Asset Privatization Trust (APT) is impugning
the decision of respondent Court of Appeals in CA-GR SP No. 36484 dated July 17, 1995, grounded
upon the following assigned errors which it had allegedly committed:
1) The Court of Appeals erred in not holding that the Makati Regional Trial Court,
Branch 62, which had previously dismissed Civil Case No. 9900, had lost jurisdiction
to confirm the arbitral award under the same civil case and in not ruling that the
application for confirmation should have been filed as a new case to be raffled
among the different branches of the RTC;
2) The Court of Appeals likewise erred in holding that petitioner was estopped from
questioning the arbitration award, when petitioner questioned the jurisdiction of the
RTC-Makati, Branch 62, and at the same time moved to vacate the arbitral award;
3) The Court of Appeals erred in not holding that the respondent Trial Court should
have either dismissed/denied private respondents' motion/petition for confirmation of

arbitration award and/or should have considered the merits of the motion to vacate
(the) arbitral award;
4) The Court of Appeals erred in not treating petitioner APT's petition for certiorari as
an appeal taken from the order confirming the award; and
5) The Court of Appeals erred in not ruling on the legal issue of when to reckon the
counting of the period to file a motion for reconsideration. 1
The resolution of these issues will ultimately test the process of arbitration, how effective or
ineffective it is as an alternative mode of settling disputes, and how it is affected by judicial review.
My esteemed colleagues have taken the view that the petition is impressed with merit and that the
assailed decision of the Court of Appeals should be reversed. In doing so, I believe they have dealt
arbitration a terrible blow and wasted years, even decades, of development in this field. I beg to
differ and, therefore, dissent.
The controversy is actually simpler than it appears. The Marinduque Mining and Industrial
Corporation (MMIC) obtained several loans from the Philippine National Bank (PNB) and the
Development Bank of the Philippines (DBP) secured by mortgages over practically all of its assets.
As of July 15, 1984, MMIC's obligation had ballooned to P22,668,537,770.05, 2 and it had no way of
making the required payments. MMIC and its two creditor banks thus ironed out a complex financial
restructuring plan (FRP) designed to drastically reduce MMIC's liability through a "debt-to-equity"
scheme. 3 This notwithstanding, the creditors opted to sell MMIC's mortgaged properties through
extrajudicial foreclosure proceedings, where PNB turned out to be the lone bidder. 4
Aggrieved by this apparent bad faith on the part of the creditor banks, private respondents Jesus S.
Cabarrus, Sr., and other minority stockholders of MMIC filed a derivative suit 5 against PNB and DBP
before the Makati Regional Trial Court. They prayed for the annulment of the foreclosure and for the
restoration of the company's assets, the recognition by the creditor banks of their commitments under the
FRP, and the payment of damages, as well as attorney's fees and costs of litigation. The case was raffled
to Branch 62 and docketed as Civil Case No. 9900.
In the meantime, the rights and interests of PNB and DBP, including MMIC's indebtedness, were
transferred to petitioner, created by virtue of Proclamation No. 50, in relation to Administrative Order
No. 14. Hence, petitioner was substituted as party defendant in Civil Case No. 9900.
On October 6, 1992, the parties entered into a Compromise and Arbitration
Agreement 6 providing, inter alia, that they were withdrawing their respective claims, which would be
reduced to pure money claims, and that they were submitting the controversy to arbitration under
Republic Act No. 876. 7 The issues for arbitration were thus limited to a determination of the plaintiffs'
capacity or right to institute the derivative suit in behalf of the MMIC or its directors, and of the propriety of
the foreclosure. Of notable import was the provision on the nature of the judgment that the arbitration
committee might render,viz.:
10. Binding Effect and Enforcement. The award of the arbitration committee shall
be final and executory upon its issuance upon the parties to the arbitration and their
assigns and successors-in-interest. In the event the award is not voluntarily satisfied
by the losing party, the party in whose favor the award has been made may, pursuant
to Republic Act No. 876, apply to the proper Regional Trial Court for its enforcement.
(Emphasis supplied)

Upon motion of the parties, this agreement was presented to the court a quo for its approval. 8 On
October 14, 1992, said court issued an order (a) dismissing the complaint; (b) substituting the creditor
banks with the APT as party defendant; (c) "approving the Compromise and Arbitration Agreement dated
October 6, 1992"; and (d) "approving the transformation of the reliefs prayed for by the plaintiffs in this
case into pure money claims." 9
On November 24, 1993, after more than six months of hearing, the arbitration committee 10 concluded
that the assailed foreclosure was not valid and accordingly decided the case in favor of MMIC. Hence,
petitioner was ordered to pay MMIC actual damages in the amount of P2,531,635,425.02, with legal
interest, and moral and exemplary damages amounting to P13,000,000.00, and to pay Jesus S.
Cabarrus, Sr., the sum of P10,000,000.00 by way of moral damages, such awards to be offset from the
outstanding and unpaid obligations of MMIC with the creditor banks, which have not been converted into
equity. The committee likewise decreed its decision to be "final and executory." 11
Nearly a year later, MMIC filed in Civil Case No. 9900, a verified "Application/Motion for Confirmation
of Arbitration Award." 12 This was opposed by petitioner on two grounds, namely, that Branch 62 no
longer had jurisdiction to act on said motion after it "dismissed" the complaint in its order of October 14,
1992, and that the award "far exceeded the issues submitted" for arbitration by the parties. 13 Not wanting
to be outdone, MMIC filed a "Reply and Opposition," arguing that the "qualified dismissal" of Civil Case
No. 9900 was merely intended to expedite the submission of the controversy to arbitration and was,
therefore, "a mere suspension of the proceedings," and that the arbitration committee did not exceed its
authority in making the award.
On November 28, 1994, the trial court issued an order 14 confirming the award of the committee in all
respects except as to the award of actual damages to MMIC, which was increased to P3,811,757,425.00.
The order closed with the following declaration:
In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8 paragraph 2
of the Compromise and Arbitration Agreement, and the final edict of the Arbitration
Committee's decision, and with this Court's Confirmation, the issuance of the
Arbitration Committee's Award shall henceforth be final and executory.
Petitioner filed a "Motion for Reconsideration" of said order on December 27, 1994; but this was
denied by the court a quo in its order dated January 18, 1995 for lack of merit and for having been
filed beyond the reglementary period. Thus, it said:
. . . (C)onsidering that the defendant APT, through counsel, officially and actually
received a copy of the Order of this Court dated November 28, 1994 on December 6,
1994, the Motion for Reconsideration thereof filed by the defendant APT on
December 27, 1994, or after the lapse of 21 days, was clearly filed beyond the 15day reglementary period prescribed or provided for . . . (by law) for the filing of an
appeal from final orders, resolutions, awards, judgments or decisions of any court in
all cases, and by necessary implication, for the filing of a motion for reconsideration
thereof.
Instead of appealing such denial, petitioner filed on February 15, 1995, an "Appeal by Certiorari . . . .
under Sections 1 and 2 of Rule 65 of the Revised Rules of Court" before the Court of Appeals,
praying for the nullification of the trial court's orders dated November 28, 1994 and January 18,
1995. It argued that the trial court had no jurisdiction or authority to confirm the arbitral award,
"considering that the original case, Civil Case No. 9900, had previously been dismissed," and that
the trial judge "acted with grave abuse of discretion in issuing the questioned orders confirming the
award and denying the motion for reconsideration thereof." 15

On July 17, 1995, the Court of Appeals dismissed the petition for lack of merit. 16 From this dismissal,
petitioner elevated its cause to this Tribunal for a review, raising the issues stated at the outset.
I find it distressing that, in reaching the outcome of this controversy, the majority has emasculated
the process of arbitration itself. This should not be the case for after all, the decision of the arbitration
committee is no longer the one being attacked in these proceedings, but the judgment of the Court
of Appeals which herein petitioner found to be erroneous. The Court has had occasion to trace the
history of arbitration and to discuss its significance in the case of Chung Fu Industries (Phils.), Inc. v.
Court of Appeals, 17 viz.:
Allow us to take a leaf from history and briefly trace the evolution of arbitration as a
mode of dispute settlement.
Because conflict is inherent in human society, much effort has been expended by
men and institutions in devising ways of resolving the same. With the progress of
civilization, physical combat has been ruled out and instead, more specific means
have been evolved, such as recourse to the good offices of a disinterested third
party, whether this be a court or a private individual or individuals.
Legal history discloses that "early judges called upon to solve private conflicts were
primarily the arbiters, persons not specially trained but in whose morality, probity and
good sense the parties in conflict reposed full trust. Thus, in Republican
Rome, arbiter and judge (judex) were synonymous. The magistrate of praetor, after
noting down the conflicting claims of litigants, and clarifying the issues, referred them
for decision to a private person designated by the parties, by common agreement, or
selected by them from an apposite listing (the album judicium) or else by having the
arbiter chosen by lot. The judges proper, as specially trained state officials endowed
with (their) own power and jurisdiction, and taking cognizance of litigations from
beginning to end, only appeared under the Empire, by the so-called cognitio extra
ordinem."
Such means of referring a dispute to a third party has also long been an accepted
alternative to litigation at common law.
Sparse though the law and jurisprudence may be on the subject of arbitration in the
Philippines, it was nonetheless recognized in the Spanish Civil Code; specifically, the
provisions on compromises made applicable to arbitrations under Articles 1820 and
1821. Although said provisions were repealed by implication with the repeal of the
Spanish Law of Civil Procedure, these and additional ones were reinstated in the
present Civil Code.
Arbitration found a fertile field in the resolution of labor-management disputes in the
Philippines. Although early on, Commonwealth Act 103 (1936) provided for
compulsory arbitration as the state policy to be administered by the Court of
Industrial Relations, in time such a modality gave way to voluntary arbitration. While
not completely supplanting compulsory arbitration which until today is practiced by
government officials, the Industrial Peace Act which was passed in 1953 as Republic
Act No. 875, favored the policy of free collective bargaining, in general, and resort to
grievance procedure, in particular, as the preferred mode of settling disputes in
industry. It was accepted and enunciated more explicitly in the Labor Code, which
was passed on November 1, 1974 as Presidential Decree No. 442, with the
amendments later introduced by Republic Act No. 6715 (1989).

Whether utilized in business transactions or in employer-employee relations,

arbitration was gaining wide acceptance. A consensual process, it was preferred to
orders imposed by government upon the disputants. Moreover, court litigations
tended to be time-consuming, costly, and inflexible due to their scrupulous
observance of the due process of law doctrine and their strict adherence to rules of
evidence.
As early as the 1920's, this Court declared:
In the Philippines fortunately, the attitude of the court towards
arbitration agreements is slowly crystallizing into definite and
workable form . . . The rule now is that unless the agreement is such
as absolutely to close the doors of the courts against the parties,
which agreement would be void, the courts will look with favor upon
such amicable arrangements and will only with great reluctance
interfere to anticipate or nullify the action of the arbitrator.
That there was a growing need for a law regulating arbitration in general was
acknowledged when Republic Act No. 876 (1953), otherwise known as the Arbitration
Law, was passed. "Said Act was obviously adopted to supplement not to supplant
the New Civil Code on arbitration. It expressly declares that "the provisions of
chapters one and two, Title XIV, Book IV of the Civil Code shall remain in force."
xxx xxx xxx
In practice nowadays, absent an agreement of the parties to resolve their disputes
via a particular mode, it is the regular courts that remain the fora to resolve such
matters. However, the parties may opt for recourse to third parties, exercising their
basic freedom to "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." In such a case, resort to the arbitration process may be
spelled out by them in a contract in anticipation of disputes that may arise between
them. Or this may be stipulated in a submission agreement when they are actually
confronted by a dispute. Whatever be the case, such recourse to an extrajudicial
means of settlement is not intended to completely deprive the courts of jurisdiction. In
fact, the early cases on arbitration carefully spelled out the prevailing doctrine at the
time, thus: ". . . a clause in a contract providing that all matters in dispute between
the parties shall be referred to arbitrators and to them alone is contrary to public
policy and cannot oust the courts of jurisdiction."
But certainly, the stipulation to refer all future disputes to an arbitrator or to submit an
ongoing dispute to one is valid. Being part of a contract between the parties, it is
binding and enforceable in court in case one of them neglects, fails or refuses to
arbitrate. Going a step further, in the event that they declare their intention to refer
their differences to arbitration first before taking court action, this constitutes a
condition precedent, such that where a suit has been instituted prematurely, the court
shall suspend the same and the parties shall be directed forthwith to proceed to
arbitration.
A court action may likewise be proper where the arbitrator has not been selected by
the parties.

xxx xxx xxx

. . . It is stated explicitly under Art. 2044 of the Civil Code that the finality of the
arbitrator's award is not absolute and without exceptions. Where the conditions
described in Articles 2038, 2039 and 204018 applicable to both compromises and
arbitrations are obtaining, the arbitrators' award may be annulled or rescinded.
Additionally, under Sections 24 and 25 of the Arbitration Law, there are grounds for
vacating, modifying or rescinding an arbitrator's award. Thus, if and when the factual
circumstances referred to in the above-cited provisions are present, judicial review of the
award is properly warranted.
What if courts refuse or neglect to inquire into the factual milieu of an arbitrator's
award to determine whether it is in accordance with law or within the scope of his
authority? How may the power of judicial review be invoked?
This is where the proper remedy is certiorari under Rule 65 of the Revised Rules of
Court. It is to be borne in mind, however, that this action will lie only where a grave
abuse of discretion or an act without or in excess of jurisdiction on the part of the
voluntary arbitrator is clearly shown. For "the writ of certiorari is an extraordinary
remedy and that certiorari jurisdiction is not to be equated with appellate jurisdiction.
In a special civil action of certiorari, the Court will not engage in a review of the facts
found nor even of the law as interpreted or applied by the arbitrator unless the
supposed errors of fact or of law are so patent and gross and prejudicial as to
amount to a grave abuse of discretion or an exces de pouvoir on the part of the
arbitrator." 19
So, what are the issues that need to be addressed in this action? Certainly not the capacity of the
plaintiffs below to file the derivative suit in behalf of MMIC nor the validity of the extrajudicial
foreclosure conducted by PNB and DBP. These were the issues submitted for arbitration by the
parties and resolved with finality by the arbitration committee upon agreement of the parties
themselves. The issues, therefore, all stemming from the judgment of the Court of Appeals, may be
narrowed down to three: (1) Was it right in upholding the trial court's authority to confirm the
arbitration award considering that said court had earlier dismissed the complaint? (2) Was it correct
in finding that herein petitioner was estopped from questioning such award? (3) Was it justified in not
treating petitioner's petition for certiorari as an appeal from the trial court's order confirming said
award?
(1) Petitioner overly stresses the fact that in the trial court's order of October 14, 1992; the complaint
was "dismissed" upon approval of the Compromise and Arbitration Agreement between the parties.
Such dismissal, however, far from finally disposing of the controversy as the term denotes, simply
"suspended" it during the period of arbitration. It is, as a colleague pointed out during the deliberation
of this action, a mere "semantic imperfection." Here is a situation where the intent of the tribunal was
obviously not to end the case with finality, but to place the proceedings in abeyance while the parties
breathed life into an alternative mode of settling their differences in the most expeditious manner.
Arbitration is not a self-enforcing process. It focuses the direction of the hearing and the reception
and appreciation of evidence by assigning these tasks to a group of persons chosen by the parties,
themselves. By this, a circuitous and time-consuming court trial is avoided, leaving the court with the
singular duty of confirming the arbitrators' decision, and allowing it to devote more of its time to
resolving other cases. As the appellate court correctly pointed out:
. . . (T)he dismissal of the Complaint in Civil Case No. 9900 was not intended by the
parties and by the court a quo, despite the phraseology in Item No. 4 or the

dispositive portion of the Order of October 14, 1992, as a dismissal that would put an
end to the case. Rather it was simply a pronouncement for the cessation of the
proceedings in the court and the commencement of the arbitration proceedings. It
was for all intents and purposes a stay of the civil action until an arbitration has been
had or pending the return of the arbitral award. This is evident since the parties
submitted to the court below not only an agreement to arbitrate but also a
compromise which is always submitted to the court for approval and as a basis for a
judgment. . . . 20
Regarding the trial court's authority to confirm the decision of the arbitration committee, suffice it to
say that such was not merely its right but its duty as well. Under Section 22 of R.A. No. 876, upon
application or motion of any party to arbitration, the court has the obligation of confirming the
arbitrators' award absent any specific ground to vacate, modify or correct the same. Herein private
respondents did apply for such confirmation on February 7, 1995. This was even opposed by
petitioner on the ground that the judgment had not yet become final and executory, in complete
disregard of paragraph 10 of the Compromise and Arbitration Agreement and the very decision of
the arbitration committee.
The award itself was properly made since it was not vacated, modified or corrected upon any of the
grounds enumerated under Sections 24 and 25 of R.A. No. 876, to wit:
Sec. 24. Grounds for vacating award. In any one of the following cases, the court
must make an order vacating the award upon the petition of any party to the
controversy when such party proves affirmatively that in the arbitration proceedings:
(a) The award was procured by corruption, fraud, or other undue means; or
(b) That there was evident partiality or corruption in the arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing
upon sufficient cause shown, or in refusing to hear evidence pertinent and material to
the controversy; that one or more of the arbitrators was disqualified to act as such
under section nine hereof, and willfully refrained from disclosing such
disqualifications or of any other misbehavior by which the rights of any party have
been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that
a mutual, final and definite award upon the subject matter submitted to them was not
made.
Where an award is vacated, the court, in its discretion, may direct a new hearing
either before the same arbitrators or before a new arbitrator or arbitrators chosen in
the manner provided in the submission or contract for the selection of the original
arbitrator or arbitrators, and any provision limiting the time in which the arbitrators
may make a decision shall be deemed applicable to the new arbitration and to
commence from the date of the court's order.
Where the court vacates, an award, costs, not exceeding fifty pesos, and
disbursements may be awarded to the prevailing party and the payment thereof may
be enforced in like manner as the payment of costs upon the motion in an action

Sec. 25. Grounds for modifying or correcting award. In any one of the following
cases, the court must make an order modifying or correcting the award, upon the
application of any party to the controversy which was arbitrated:
(a) Where there was an evident miscalculation of figures, or an
evident mistake in the description of any person, thing or property
referred to in the award; or
(b) Where the arbitrators have awarded upon a matter not submitted
to them, not affecting the merits of the decision upon the matter
submitted; or
(c) Where the award is imperfect in a matter of form not affecting the
merits of the controversy, and if it had been a commissioner's report,
the defect could have been amended or disregarded by the court.
The order may modify and correct the award so as to effect the intent thereof and promote justice
between the parties. (Emphasis supplied)
Petitioner utterly failed to prove the existence of any of these grounds. Its strongest argument, that
the arbitration award "far exceeded the issue submitted for arbitration," apart from being
unsubstantiated, does not go into the merits of the award, which is the only way its modification or
correction could be justified under the terms of Section 25, aforequoted.
Furthermore, petitioner violated several covenants by asking the court a quo to vacate the arbitration
award. First, in paragraph 10 of the Compromise and Arbitration Agreement, it agreed to abide by
the arbitration committee's decision which "shall be final and executory upon its issuance upon the
parties to the arbitration and their assigns and successors-in-interest." Next, the decision that the
arbitrators did render on November 24, 1993 specifically declared the same to be "final and
executory." Finally, in the court's confirmation order of November 28, 1994, the finality of the award
was reiterated by the court. Arbitration, as an alternative mode of settlement, is gaining adherents in
legal and judicial circles here and abroad. If its tested mechanism can simply be ignored by an
aggrieved party, one who, it must be stressed, voluntarily and actively participated in the arbitration
proceedings from the very beginning, it will destroy the very essence of mutuality inherent in
consensual contracts.
2) Petitioner claims that it is not estopped from questioning the arbitration award probably
because, notwithstanding its tenacious quest for affirmative relief, it did not translate this
pursuit into positive action. The Court of Appeals succinctly puts it in this wise:
. . . The record shows that on its motion, petitioner APT was able to postpone the
hearing on therein plaintiffs' application/motion for confirmation of arbitral award to a
date and time that it chose. However, when said matter was called for hearing, only
counsel for therein plaintiffs showed up. Nonetheless, respondent Judge gave APT a
period of seven (7) days from notice within which to comment on the
application/motion for confirmation. At no time did petitioner APT ask for a hearing to
present its evidence. While petitioner APT repeatedly sought to vacate the arbitral
award, it made no concrete move to pursue its cause. In fact, at the hearing on its
motion for reconsideration, both parties through their respective counsels gave oral
arguments and thereafter agreed to submit the motion for reconsideration for
resolution. If petitioner APT honestly believed that the respondent Judge erroneously
took cognizance of plaintiffs Application/Motion for Confirmation of Arbitration Award,

then it should have limited itself to challenging the jurisdiction of said court. The fact
remains that petitioner APT repeatedly sought affirmative relief from the respondent
Judge in the same Civil Case No. 9900. Under the circumstances, petitioner APT
may not be heard now to complain that it was deprived of its right to question the
award made by the Arbitration Committtee. 21 (Emphasis supplied)
3) The final issue which, to my mind, has particular relevance to the case at bar, pertains to
the alleged error of the Court of Appeals in not treating APT's petition for certiorari as an
appeal from the trial court's confirmation order.
Petitioner's counsel received a copy of the confirmation order dated November 28, 1994, on
December 12, 1994.22 Said order was, for review purposes, a "final order" because it finally disposed of
the case. Other than executing the confirmation order, there was nothing else that the court was dutybound to perform. Petitioner's remedy, therefore, was to question the order, by appeal on certiorari, not
before the Court of Appeals, but before the Supreme Court 23 within the reglementary period of fifteen
days which expired on December 27, 1994. Instead of appealing, however, petitioner filed a motion for
reconsideration of the order on said deadline. Unfortunately, this was denied by the court a quo in its
order dated January 18, 1995, a copy of which was received by petitioner's counsel on February 1, 1995.
Under prevailing procedural laws, it had just one day to perfect its appeal. On February 15, 1995,
petitioner opted to file with the Court of Appeals an "Appeal by Certiorari . . . under Sections 1 and 2 of
Rule 65 of the Revised Rules of Court." The reason is obvious: It could no longer file a regular appeal
from the assailed order because the period for doing so has lapsed. The Court of Appeals thus made the
following pertinent observation.
. . . Assuming arguendo that petitioner APT's counsel received a copy (of the
November 28, 1994, order), as claimed by them, on December 12, 1994, then the
petitioner had fifteen (15) days therefrom or until December 27, 1994, within which to
appeal. The petitioner's motion for reconsideration was admittedly filed on December
27, 1994, the last day of the reglementary 15-day period, and the order dated
January 18, 1995, denying the same was received by petitioner's counsel on
February 1, 1995. Petitioner APT had only the following day to perfect his appeal.
Instead, it chose to file the instant special civil action of certiorari on February 15,
1995.
From the start, petitioner seemed unsure of its position on appeal. While initially questioning the
"order confirming the award" of the arbitration committee, it later stated that it was raising the issue
of "filing by (herein private respondents) of a Motion for Execution and Appointment of Custodian of
proceeds of Execution dated February 6, 1995." The latter recourse is obviously erroneous, for no
appeal under either Rule 45 or Rule 65 may be taken from a "motion" or the "filing" of one. Under
Rule 45, only judgments or final orders of a court or tribunal may be appealed to a higher court,
while Rule 65 allows a special civil action where the acts of a tribunal, board or officer are under
attack for being performed with grave abuse of discretion.
The applicable law, of course, is R.A. No. 876, which provides for appeals from arbitration awards
under Section 29 thereof, viz.:
. . . (A)n appeal may be taken from . . . a judgment entered upon an award
through certiorariproceedings, but such appeals shall be limited to questions of law.
The proceedings upon such an appeal, including the judgment thereon, shall be
governed by the Rules of Court in so far as they are applicable.
The term "certiorari" in the aforequoted provision refers to an ordinary appeal under Rule 45, not the
special action of certiorari under Rule 65. It is an "appeal," as Section 29 proclaims. The proper

forum for this action is, under the old and the new rules of procedure, the Supreme Court. Thus,
Section 2(c) of Rule 41 of the 1997 Rules of Civil Procedure states that, "In all cases where only
questions of law are raised or involved, the appeal shall be to the Supreme Court by petition for
review on certiorari in accordance with Rule 45." Moreover, Section 29 limits the appeal to
"questions of law," another indication that it is referring to an appeal by certiorari under Rule 45
which, indeed, is the customary manner of reviewing such issues. On the other hand, the
extraordinary remedy of certiorari under Rule 65 may be availed of by a party where there is "no
appeal, nor any plain, speedy, and adequate remedy in the course of law," and under circumstances
where "a tribunal, board or officer exercising judicial functions, has acted without or in excess of its
or his jurisdiction, or with grave abuse of discretion." 24
Based on the foregoing, it is clear that petitioner had run out of options after its motion for
reconsideration was denied by the trial court in its order dated January 18, 1995. To compound its
negligence, it filed the wrong action with the wrong forum. These, to my mind, are serious procedural
flaws. To rule otherwise, as the majority did, would constitute a grave injustice to private
respondents.
I vote to DISMISS the petition.

PARDO, J., separate concurring opinion;

I concur. However, I wish to add a few points not particularly emphasized in the majority opinion.
The petition before the Court is one for review via certiorari under Rule 45 of the Revised Rules of
Court seeking to set aside the resolution of the Court of Appeals that denied due course and
dismissed APT's petition forcertiorari to annul the proceedings had before the Regional Trial Court,
Makati, Branch 62, in Civil Case No. 9900, particularly the order confirming the arbitration award,
reading as follows:
WHEREFORE, premises considered, and in the light of the parties Compromise and
Arbitration Agreement dated October 6, 1992, the Decision of the Arbitration
Committee promulgated on November 24, 1993, as affirmed in a Resolution dated
July 26, 1994, and finally settled and clarified in the Separate Opinion dated
September 2, 1994 of Committee Member Elma, and the pertinent provisions of R.A.
876, also known as the Arbitration Law, this Court GRANTS PLAINTIFFS'
APPLICATION AND THUS CONFIRMS THE ARBITRATION AWARD AND
JUDGMENT IS HEREBY RENDERED:
(a) Ordering the defendant APT to the Marinduque
Mining and Industrial Corporation (MMIC), except the
DBP, the sum of P3,811,757,425.00, as and for actual
damages under escrow in the amount of
P503,000,000.00 pursuant to the Escrow Agreement
dated April 22, 1988. The balance of the award, after
the escrow funds are fully applied, shall be executed
against the APT;
(b) Ordering the defendants to pay to the MMIC,
except the DBP, the sum of P13,000.00 as and for
moral and exemplary damages;

(c) Ordering the defendant to pay to Jesus S.

Caburrus, Sr., the sum of P10,000,000.00 as and for
moral damages; and
(d) Ordering the defendant to pay the herein
plaintiff/applicants/movants the sum of P1,705,410.00
as arbitration costs.
In reiteration of the mandates of Stipulation No. 10 and Stipulation
No. 8 paragraph 2 of the Compromise and Arbitration Agreement,
and the final edict of the Arbitration Committee's decision, and with
this Court's Confirmation, the issuance of the Arbitration Committee's
Award shall henceforth be final and executory.
SO ORDERED.
Originally instituted on February 8, 1985, in the Regional Trial Court, Makati, Metro Manila, private
respondents, Jesus S. Cabarrus, Sr., et al., a few of the numerous minority stockholders of
Marinduque Mining and Industrial Corp. (hereafter MMIC), filed a complaint, later amended on
March 13, 1995, for annulment of foreclosure, specific performance and damages against the
Philippine National Bank (PNB) and the Development Bank of the Philippines (DBP) alleging that in
1984, the PNB and DBP effected illegally the extra-judicial foreclosure of real estate and chattel
mortgages constituted in their favor by the MMIC by the latter's assets of real estate and chattels, to
satisfy an obligation amounting to P22,668,537,770.05, and that prior to the extra-judicial
foreclosure, PNB and DBP had agreed to a financial reorganization plan of MMIC to reduce the
latter's indebtedness to P3 billion and to convert the balance of its obligation into equity.
In their joint answer to the amended complaint, defendants PNB and DBP denied the material
allegations of the amended complaint but admitted that in August and September, 1984, they
foreclosed extra-judicially the mortgages on MMIC's assets, with the qualification that the correct
amount of obligation owed by MMIC as of July 15, 1984, was P22,083,313,168.29; that the
foreclosure of the mortgages was legal and valid as mandated by Presidential Decree No. 385 and
by the provisions of the mortgage trust agreements between PNB, DBP and MMIC; and, that the
plaintiff's therein, herein respondents Cabarrus, et al., were not entitled to actual and moral
damages.
In the course of the trial of Civil Case No. 9900, plaintiffs Jesus S. Cabarrus, et al. and the Asset
Privatization Trust (APT), as successor-in-interest of the DBP and PNB's interest in MMIC accounts,
entered into a compromise and arbitration agreement dated October 6, 1992, whereby they "agreed
to move for the dismissal of the case, to transform the reliefs prayed for therein into pure money
claims and to submit the controversy to arbitration under Republic Act (RA) 876 before a committee
composed of three members" limiting the issues to two, namely:
(a) whether plaintiffs have the capacity or the personality to institute
this derivative suit in behalf of the MMIC or its directors, and
(b) whether or not the actions leading to, and including, the PNB-DBP
foreclosure of the MMIC assets were proper, valid and in good faith.
Thus, the parties created an Arbitration Committee composed of three (3) members, one (1)
representative of the plaintiff; one (1) representative of APT; and the Chairman to be agreed upon by
both parties. Consequently, APT nominated Atty. Jose C. Sison, a trustee of APT and its counsel;

MMIC nominated former Justice of the Court of Appeals Magtanggol Elma; and they selected retired
Supreme Court Justice Abraham F. Sarmiento as Chairman.
After conducting hearings and receiving voluminous evidence, on November 24, 1993, the
Arbitration Committee released what purports to be its decision penned by the Chairman, the
dispositive portion of which reads as follows:
DISPOSITION
WHEREFORE, premises considered judgment is hereby rendered:
1. Ordering the defendant to pay the Marinduque Mining and
Industrial Corporation, except the DBP, the sum of
P2,531,635,425,02 with interest thereon at the legal rate of six (6%)
per cent per annum reckoned from August 3, 9 and 24, 1984, pari
passu, as and for actual damages. Payment of these actual damages
shall be offset by APT from the outstanding and unpaid loans of
MMIC with DBP and PNB, which have not been converted into equity.
Should there be any balance due to MMIC after the offsetting, the
same shall be satisfied from the funds representing the purchase
price of the sale of the shares of Island Cement Corporation in the
amount of P503,000,000.00 held under escrow pursuant to the
Escrow Agreement dated April 22, 1988 or to such subsequent
escrow agreement that would supersede it pursuant to paragraph (9)
of the Compromise and Arbitration Agreement;
2. Ordering the defendant to pay to the Marinduque Mining and
Industrial Corporation, except the DBP, the sum of P13,000,000.00,
as and for moral and exemplary damages. Payment of these moral
and exemplary damages shall be offset by APT from the outstanding
and unpaid loans of MMIC with DBP and PNB, which have not been
converted into equity. Should there be any balance due to MMIC after
the offsetting, the same shall be satisfied from the funds representing
the purchase price of the sale of the shares of island Cement
Corporation in the amount of P503,000,000.00 held under escrow
pursuant to the Escrow Agreement dated April 22, 1988 or to such
subsequent escrow agreement that would supersede it pursuant to
paragraph (9) of the Compromise and Arbitration Agreement;
3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus,
Sr., the sum of P10,000,000.00, to be satisfied likewise from the
funds held under escrow pursuant to the Escrow Agreement dated
April 22, 1988 or to such subsequent escrow agreement that would
supersede it, pursuant to paragraph (9), Compromise and Arbitration
Agreement, as and for moral damages; and
4. Ordering the defendant to pay arbitration costs.
This Decision is FINAL and EXECUTORY.
IT IS SO ORDERED.

Member Elma submitted a separate concurring and dissenting opinion reading as follows:
ELMA, concurring and dissenting:
I am in complete agreement with the findings of the Decision on the principal issues
submitted for the Committee's resolution, viz: that plaintiffs Cabarrus, et al., have the
capacity or the personality to institute this derivative suit in behalf of Marinduque
Milling and Industrial Corporation (MMIC) and that the actions leading to, and
including, the PNB-DBP foreclosure of the MMIC assets were improper, invalid
and/or not done in good faith. Consequently, there is concurrence on my part to the
award of actual, moral and exemplary damages to MMIC, and moral damages to
plaintiff Jesus S. Cabarrus, Sr.
However, I am unable to agree with and, therefore, regretfully dissent as to the
manner or method of computation and amount of actual damages awarded to MMIC,
particularly set forth in paragraph 1 of the dispositive potion of the Decision.
xxx xxx xxx
Considering that under the "Compromise and Arbitration Agreement", the parties
agreed that their respective claims be reduced to purely pecuniary/money claims,
then MMIC and/or plaintiffs on behalf of all the other stockholders of MMIC are
entitled to actual or compensatory damages equivalent to the present value of their
equity over the MMIC assets, i.e. the total stockholders' equity of
P20,826,700,952.00 as of December 31, 1992. Further, since as held in the Decision
that the DBP would have an 87% equity in MMIC as a consequence of the finding
that the Financial Rehabilitation Plan (FRP), is valid (p. 64 of the Decision), then the
amount of P18,119,229,828.24 (equivalent to DBP's 87% equity) should be deducted
from the total stockholders' equity of P20,826,700,952.00 leaving a net amount of
P2,707,471,123.76 to be awarded to MMIC (excluding DBP's share) as actual or
compensatory damages.
It is to be noted that defendant APT did not present any evidence rebutting the
figures and computations made by witness Pastor. Since the Decision finds the FRP
valid, then the stockholders of MMIC (excluding DBP) should be placed in the same
position that they would have been where not for the fact that the FRP was
improperly and illegally aborted by PNB/DBP. Accordingly, it is my submission that
defendant APT should be ordered to pay MMIC (excluding DBP) the sum of
P2,707,471,123.76 with legal interest thereon per annum from August 3, 1984 as and
for actual damages.
xxx xxx xxx
Member Sison submitted a separate opinion reading as follows:
SEPARATE OPINION
xxx xxx xxx
It is clear and it cannot be disputed therefore that based on these
stipulated issues, the parties themselves have agreed that the basic

ingredient of the causes of action in this case is the wrong committed

on the corporation (MMIC) for the alleged illegal foreclosure of its
assets. By agreeing to this stipulation, PLAINTIFFS themselves
(Cabarrus, et al.) admit that the cause of action pertains only to the
corporation (MMIC) and that they are filing this for and in behalf of
MMIC.
Perforce this has to be so because it is the basic rule in Corporation
Law that "the shareholders have no title, legal or equitable to the
property which is owned by the corporation (13 Am. Jur. 165; Pascual
vs. Oresco, 14 Phil. 83). In Ganzon & Sons vs. Register of Deeds, 6
SCRA 373, the rule has been reiterated that "a stockholder is not the
co-owner of the corporate property." Since the property or assets
foreclosed belongs to MMIC, the wrong committed, if any, is done
against the corporation. There is therefore no direct injury or direct
violation of the rights of Cabarrus et al. There is no way, legal or
equitable by which Cabarrus et al, could recover damages in their
personal capacities even assuming or just because the foreclosure is
improper or invalid. The Compromise and Arbitration Agreement itself
and the elementary principles of Corporation Law say so. Therefore, I
am constrained to dissent from the award of moral damages to
Cabarrus.
Neither could I agree to the award of moral damages to MMIC. The
acts complained of here in which the Committee based its award of
moral damages to MMIC is the foreclosure of the various real estate
and chattel mortgages. The majority of the Committee believes that
these foreclosure constitute a violation on an agreement forged
between PNB-DBP, on one hand, and MMIC, on the other, regarding
the restructuring of the various past due loans of MMIC to what had
been termed as the Financial Restructuring Program (FRP).
xxx xxx xxx
In this connection, it can readily be seen and it cannot quite be
denied that MMIC accounts in PNB-DBP were past due. The drawing
up of the FRP is the best proof of this. When MMIC adopted a
restructuring program for its loan, it only meant that these loans were
already due and unpaid. If these loans were restructurable because
they were already due and unpaid, they are likewise "forecloseable".
The option is with the PNB-DBP on what steps to take.
The mere fact that MMIC adopted the FRP does not mean that DBPPNB lost the option to foreclose. Neither does it mean that the FRP is
legally binding and implementable. It must be pointed that said FRP
will, in effect, supersede the existing and past due loans of MMIC with
PNB-DBP. It will become the new loan agreement between the
lenders and the borrowers. As in all other contracts, there must
therefore be a meeting of the minds of the parties; the PNB and DBP
must have to validly adopt and ratify such FRP before they can be
bound by it; before it can be implemented. In this case, not an iota of
proof has been presented by the PLAINTIFFS showing that PNB and

DBP ratified and adopted the FRP. PLAINTIFFS simply relied on a

legal doctrine of promissory estoppel to support its allegations in this
regard.
xxx xxx xxx
All told, PNB and DBP had the right to foreclose and were justified in
doing so. But were the foreclosure legally done or carried out? Were
the requirements of notice, posting and publication required by Acts
3135 and 1508 substantially complied with?
xxx xxx xxx
I cannot, however, concur with the for holding that such minor taint of
illegality in the foreclosure is enough to justify the award of damages,
amounting to P19,486,118,654.00. "Rules of law respecting the
recovery of damages are framed with reference to just rights or both
parties, not merely what may be right for an injured person to receive,
but also what is just to compel the other party to pay, to accord just
compensation for the injury" (Kennings vs. Kline Ind. 602). Following
this universally accepted rule on damage, I do not believe it is just to
compel APT to pay such huge amount for such minor technical
infraction.
But while I do not agree with this pronouncement of the Committee, I
nevertheless concur with the result as far as the disposition of the
award for actual damages is concerned. I agree that DEFENDANT
APT can, and is still entitled to, collect the outstanding obligations of
MMIC to PNB and DBP amounting to P22,668,537,770.05 with
interest thereon as stipulated in the loan documents from the date of
foreclosure until the time they are fully paid. The resultant effect of
such a disposition is that APT can offset the said obligation due from
MMIC such that ultimately no damages will be due and payable to
MMIC. As there may be damage without injury, there can be injury
without damage (15 Am. Jur., p. 388). This case is a case of "injury
without damage".
Both parties moved for reconsideration of the "decision" of the Arbitration Committee. In addition,
respondents Cabarrus et al. filed a motion for clarification and to re-open the case to receive
evidence. In a resolution dated July 26, 1984, with one member dissenting, the Arbitration
Committee denied the motions for reconsideration of both parties as well as all other pending
motions.
On October 17, 1984, respondents Cabarrus et al. filed directly with the Regional Trial Court, Makati,
Branch 62, in the same Civil Case No. 9900, a pleading entitled application/motion for confirmation
of arbitral award.
On November 4, 1994, petitioner APT filed an opposition and motion to vacate judgment, contending
that respondents' motion was improperly filed with the same branch of the court in Civil Case No.
9900, which was previously dismissed, and that the motion should have been filed as a separate
special proceedings in the Regional Trial Court to be docketed by the Clerk of Court.

Nonetheless, acting on the application/motion, Judge Roberto C. Diokno, presiding judge, Regional
Trial Court, Makati, Branch 62, on November 28, 1994, issued an order granting plaintiffs' application
confirming the arbitration award, and rendering judgment as set out in the opening paragraph of this
opinion.
On December 12, 1994, petitioner APT received notice of the lower court's order. On December 27,
1994, petitioner APT filed a motion for reconsideration. By order dated January 18, 1995, the trial
court denied the motion. On February 7, 1995, respondents Cabarrus, et al. filed a motion for
execution and appointment of custodian of proceeds of execution. Petitioner opposed the motion. It
is apparently still unresolved.
On February 15, 1995, petitioner APT filed with the Court of Appeals an original special civil action
for certiorariwith prayer for temporary restraining order or preliminary injunction 1 to annul the two (2)
orders of the respondent Regional Trial Court above-mentioned confirming the arbitral award and denying
its reconsideration.
The issue presented in said petition was whether respondent Judge Roberto C. Diokno, Regional
Trial Court, Makati, Branch 62, had jurisdiction to act on private respondents' application/motion for
confirmation of arbitral award in the same Civil Case No. 9900, which had been dismissed earlier on
motion of the parties, and thus the court gravely abused its discretion in confirming the arbitral
award.
In its decision promulgated on July 17, 1995, the Court of Appeals denied due course and dismissed
the petition for certiorari for lack of merit.
Hence, this petition for review filed on September 07, 1995.

The petition is impressed with merit.

First, the Regional Trial Court, Makati, Branch 62, did not validly acquire jurisdiction over the case by
respondents' filing of a mere motion in the same Civil Case No. 9900 because the case had been
dismissed earlier and such dismissal had become final and unappealable. As heretofore stated, on
October 6, 1992, the parties entered into a compromise and arbitration agreement expressly
providing that they "have agreed to withdraw their respective claims from the Trial Court and to
resolve their dispute through arbitration by praying to the Trial Court to issue a compromise
judgment based on this Compromise and Arbitration agreement.
Clearly, the parties had withdrawn the action then pending with the Regional Trial Court, Makati,
Branch 62, in Civil Case No. 9900, and agreed that they would submit their dispute to arbitration and
reduce their respective claims to "purely money claims", "waiving and foregoing all other forms of
reliefs which they prayed for or could have prayed for in Civil Case No. 9900." The parties "agreed to
move for the dismissal of the case, to transform the reliefs prayed for therein to pure money claims
and submit the controversy to arbitration under Republic Act (RA) 876 before a committee composed
of three members."
In its order dated October 12, 1992, in Civil Case No. 9900, the trial court presided over by
respondent Judge categorically decreed that "The complaint is hereby dismissed". Such disposition
terminated the case finally and irretrievably disposed of the same. 3 The term "dismissed" has a
definite meaning in law. "A judgment of 'dismissed', without qualifying words indicating a right to take
further proceedings, is presumed to be dismissed on the merits". 4 The dismissal could not have been a
suspension of action provided for in the arbitration law, Republic Act No. 876.

Upon the finality of such order of dismissal, the case could no longer be revived by mere motion.
The trial court had lost its authority over the case. 5 We cite as squarely applicable the decision where
this Court emphatically said "But after the dismissal has become final through the lapse of the fifteen-day
reglementary period, the only way by which the action may be resuscitated or 'revived,' is by the
institution of a subsequent action through the filing of another complaint and the payment of the fees
prescribed by law. This is so because upon attainment of finality of a dismissal through the lapse of said
reglementary period, the Court loses jurisdiction and control over it and can no longer make any
disposition in respect thereof inconsistent with such dismissal" 6 It is true that the confirmation of an
arbitral award is within the jurisdiction over the subject matter of a regional trial court. Such jurisdiction
must be invoked by proper motion as a special proceedings with notice to the parties filed in the proper
court with the clerk of court (and upon payment of the prescribed fees). 7
Second, the Arbitration Committee did not actually reach a valid decision on the subject controversy.
In the purported decision dated November 24, 1994, penned by Chairman Sarmiento, the
Committee ordered petitioner APT to pay to MMIC the sum of P2,531,635,425.02, with interest
thereon at the legal rate at 6% per annum from August 3, 9 and 24, 1984, pari passu as actual
damages; to pay MMIC P13 million, as moral and exemplary damages, and to pay Jesus S.
Cabarrus, Sr. P10 million, as moral damages.
In the concurring and dissenting opinion of Member Elma, he agreed with the finding on the principal
issue submitted for resolution. However, he dissented as to the manner or method of computation
and amount of actual damages awarded to MMIC. He submitted that APT should be ordered to pay
MMIC the sum of P2,707,471,123.76, with legal interest thereon per annum from August 3, 1984, as
actual damages.
In his separate opinion, Member Sison stated that he concurred with the result as far as the
disposition of the award of actual damage is concerned. He agreed that APT is entitled to collect the
outstanding obligations of MMIC to PNB and DBP amounting to P22,668,537,770.05, with interest as
stipulated in the loan documents from the date of foreclosure until fully paid. The resultant effect is
that APT can offset said obligation due from MMIC such that ultimately no damages shall be due and
payable to MMIC. He was against the award of moral and exemplary damages to MMIC and Jesus
S. Cabarrus, Sr.
It is obvious that the disposition in Chairman Sarmiento's award and the concurring and dissenting
opinion of Member Elma do not tally and, hence, because of the dissent of Member Sison, the
Arbitration Committee did not reach a majority decision constituting a valid judgment or fallo of the
Committee.
The powers and duties of boards and commissions may not be
exercised by the individual members separately. Their acts are official
only when done by the members convened in session upon a
concurrence of at least a majority and with at least a quorum
present. 8
Respondents Cabarrus, et al. considered the disposition as confusing and incomplete as to the
award of damages and thereby requiring the reception of further evidence as to necessitate the reopening of hearings on the case. On May 20, 1994, they filed a motion for clarification seeking
answer from the arbitration committee as to the final amount of actual damages the MMIC is entitled
to, and, on June 9, 1994, they filed a motion to reopen the case and to receive evidence.

Even the Arbitration Committee's resolution of the various motions for reconsideration and other
reliefs was conflicting. For Chairman Sarmiento, respondents' motion for reconsideration, dated
December 15, 1993, and petitioner's motion for reconsideration, dated January 3, 1994,
respondents' motion for clarification dated June 8, 1994, and respondents' urgent motion to re-open
the case and to receive evidence were all DENIED for lack of merit.
Member Elma dissented from the denial of the parties' motion for reconsideration, reiterating that
MMIC is entitled to actual damages in the sum of P2,707,471,123.76, with legal interest thereon
from August 3, 1984.
Member Azura (substituting Sison) concurred with the Chairman in denying respondents' motion for
reconsideration, motion for clarification and motion to re-open the case but favored granting
petitioner's (APT) motion for reconsideration.
WHEREFORE, I vote to GRANT the petition at bench, reverse the decision of the Court of
Appeals 9 as well as the orders of the Regional Trial Court, Makati, Branch 62, in Civil Case No. 9900,
vacate the "decision" of the Arbitration Committee dated November 24, 1993, and, finally, ENJOIN the
trial court from further acting on the case.
Separate Opinions
ROMERO, J., dissenting opinion;
In the instant petition for review on certiorari, petitioner. Asset Privatization Trust (APT) is impugning
the decision of respondent Court of Appeals in CA-GR SP No. 36484 dated July 17, 1995, grounded
upon the following assigned errors which it had allegedly committed:
1) The Court of Appeals erred in not holding that the Makati Regional Trial Court,
Branch 62, which had previously dismissed Civil Case No. 9900, had lost jurisdiction
to confirm the arbitral award under the same civil case and in not ruling that the
application for confirmation should have been filed as a new case to be raffled
among the different branches of the RTC;
2) The Court of Appeals likewise erred in holding that petitioner was estopped from
questioning the arbitration award, when petitioner questioned the jurisdiction of the
RTC-Makati, Branch 62, and at the same time moved to vacate the arbitral award;
3) The Court of Appeals erred in not holding that the respondent Trial Court should
have either dismissed/denied private respondents' motion/petition for confirmation of
arbitration award and/or should have considered the merits of the motion to vacate
(the) arbitral award;
4) The Court of Appeals erred in not treating petitioner APT's petition for certiorari as
an appeal taken from the order confirming the award; and
5) The Court of Appeals erred in not ruling on the legal issue of when to reckon the
counting of the period to file a motion for reconsideration. 1
The resolution of these issues will ultimately test the process of arbitration, how effective or
ineffective it is as an alternative mode of settling disputes, and how it is affected by judicial review.
My esteemed colleagues have taken the view that the petition is impressed with merit and that the

assailed decision of the Court of Appeals should be reversed. In doing so, I believe they have dealt
arbitration a terrible blow and wasted years, even decades, of development in this field. I beg to
differ and, therefore, dissent.
The controversy is actually simpler than it appears. The Marinduque Mining and Industrial
Corporation (MMIC) obtained several loans from the Philippine National Bank (PNB) and the
Development Bank of the Philippines (DBP) secured by mortgages over practically all of its assets.
As of July 15, 1984, MMIC's obligation had ballooned to P22,668,537,770.05, 2 and it had no way of
making the required payments. MMIC and its two creditor banks thus ironed out a complex financial
restructuring plan (FRP) designed to drastically reduce MMIC's liability through a "debt-to-equity"
scheme. 3 This notwithstanding, the creditors opted to sell MMIC's mortgaged properties through
extrajudicial foreclosure proceedings, where PNB turned out to be the lone bidder. 4
Aggrieved by this apparent bad faith on the part of the creditor banks, private respondents Jesus S.
Cabarrus, Sr., and other minority stockholders of MMIC filed a derivative suit 5 against PNB and DBP
before the Makati Regional Trial Court. They prayed for the annulment of the foreclosure and for the
restoration of the company's assets, the recognition by the creditor banks of their commitments under the
FRP, and the payment of damages, as well as attorney's fees and costs of litigation. The case was raffled
to Branch 62 and docketed as Civil Case No. 9900.
In the meantime, the rights and interests of PNB and DBP, including MMIC's indebtedness, were
transferred to petitioner, created by virtue of Proclamation No. 50, in relation to Administrative Order
No. 14. Hence, petitioner was substituted as party defendant in Civil Case No. 9900.
On October 6, 1992, the parties entered into a Compromise and Arbitration
Agreement 6 providing, inter alia, that they were withdrawing their respective claims, which would be
reduced to pure money claims, and that they were submitting the controversy to arbitration under
Republic Act No. 876. 7 The issues for arbitration were thus limited to a determination of the plaintiffs'
capacity or right to institute the derivative suit in behalf of the MMIC or its directors, and of the propriety of
the foreclosure. Of notable import was the provision on the nature of the judgment that the arbitration
committee might render,viz.:
10. Binding Effect and Enforcement. The award of the arbitration committee shall
be final and executory upon its issuance upon the parties to the arbitration and their
assigns and successors-in-interest. In the event the award is not voluntarily satisfied
by the losing party, the party in whose favor the award has been made may, pursuant
to Republic Act No. 876, apply to the proper Regional Trial Court for its enforcement.
(Emphasis supplied)
Upon motion of the parties, this agreement was presented to the court a quo for its approval. 8 On
October 14, 1992, said court issued an order (a) dismissing the complaint; (b) substituting the creditor
banks with the APT as party defendant; (c) "approving the Compromise and Arbitration Agreement dated
October 6, 1992"; and (d) "approving the transformation of the reliefs prayed for by the plaintiffs in this
case into pure money claims." 9
On November 24, 1993, after more than six months of hearing, the arbitration committee 10 concluded
that the assailed foreclosure was not valid and accordingly decided the case in favor of MMIC. Hence,
petitioner was ordered to pay MMIC actual damages in the amount of P2,531,635,425.02, with legal
interest, and moral and exemplary damages amounting to P13,000,000.00, and to pay Jesus S.
Cabarrus, Sr., the sum of P10,000,000.00 by way of moral damages, such awards to be offset from the
outstanding and unpaid obligations of MMIC with the creditor banks, which have not been converted into
equity. The committee likewise decreed its decision to be "final and executory." 11

Nearly a year later, MMIC filed in Civil Case No. 9900, a verified "Application/Motion for Confirmation
of Arbitration Award." 12 This was opposed by petitioner on two grounds, namely, that Branch 62 no
longer had jurisdiction to act on said motion after it "dismissed" the complaint in its order of October 14,
1992, and that the award "far exceeded the issues submitted" for arbitration by the parties. 13 Not wanting
to be outdone, MMIC filed a "Reply and Opposition," arguing that the "qualified dismissal" of Civil Case
No. 9900 was merely intended to expedite the submission of the controversy to arbitration and was,
therefore, "a mere suspension of the proceedings," and that the arbitration committee did not exceed its
authority in making the award.
On November 28, 1994, the trial court issued an order 14 confirming the award of the committee in all
respects except as to the award of actual damages to MMIC, which was increased to P3,811,757,425.00.
The order closed with the following declaration:
In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8 paragraph 2
of the Compromise and Arbitration Agreement, and the final edict of the Arbitration
Committee's decision, and with this Court's Confirmation, the issuance of the
Arbitration Committee's Award shall henceforth be final and executory.
Petitioner filed a "Motion for Reconsideration" of said order on December 27, 1994; but this was
denied by the court a quo in its order dated January 18, 1995 for lack of merit and for having been
filed beyond the reglementary period. Thus, it said:
. . . (C)onsidering that the defendant APT, through counsel, officially and actually
received a copy of the Order of this Court dated November 28, 1994 on December 6,
1994, the Motion for Reconsideration thereof filed by the defendant APT on
December 27, 1994, or after the lapse of 21 days, was clearly filed beyond the 15day reglementary period prescribed or provided for . . . (by law) for the filing of an
appeal from final orders, resolutions, awards, judgments or decisions of any court in
all cases, and by necessary implication, for the filing of a motion for reconsideration
thereof.
Instead of appealing such denial, petitioner filed on February 15, 1995, an "Appeal by Certiorari . . . .
under Sections 1 and 2 of Rule 65 of the Revised Rules of Court" before the Court of Appeals,
praying for the nullification of the trial court's orders dated November 28, 1994 and January 18,
1995. It argued that the trial court had no jurisdiction or authority to confirm the arbitral award,
"considering that the original case, Civil Case No. 9900, had previously been dismissed," and that
the trial judge "acted with grave abuse of discretion in issuing the questioned orders confirming the
award and denying the motion for reconsideration thereof." 15
On July 17, 1995, the Court of Appeals dismissed the petition for lack of merit. 16 From this dismissal,
petitioner elevated its cause to this Tribunal for a review, raising the issues stated at the outset.
I find it distressing that, in reaching the outcome of this controversy, the majority has emasculated
the process of arbitration itself. This should not be the case for after all, the decision of the arbitration
committee is no longer the one being attacked in these proceedings, but the judgment of the Court
of Appeals which herein petitioner found to be erroneous. The Court has had occasion to trace the
history of arbitration and to discuss its significance in the case of Chung Fu Industries (Phils.), Inc. v.
Court of Appeals, 17 viz.:
Allow us to take a leaf from history and briefly trace the evolution of arbitration as a
mode of dispute settlement.

Because conflict is inherent in human society, much effort has been expended by
men and institutions in devising ways of resolving the same. With the progress of
civilization, physical combat has been ruled out and instead, more specific means
have been evolved, such as recourse to the good offices of a disinterested third
party, whether this be a court or a private individual or individuals.
Legal history discloses that "early judges called upon to solve private conflicts were
primarily the arbiters, persons not specially trained but in whose morality, probity and
good sense the parties in conflict reposed full trust. Thus, in Republican
Rome, arbiter and judge (judex) were synonymous. The magistrate of praetor, after
noting down the conflicting claims of litigants, and clarifying the issues, referred them
for decision to a private person designated by the parties, by common agreement, or
selected by them from an apposite listing (the album judicium) or else by having the
arbiter chosen by lot. The judges proper, as specially trained state officials endowed
with (their) own power and jurisdiction, and taking cognizance of litigations from
beginning to end, only appeared under the Empire, by the so-called cognitio extra
ordinem."
Such means of referring a dispute to a third party has also long been an accepted
alternative to litigation at common law.
Sparse though the law and jurisprudence may be on the subject of arbitration in the
Philippines, it was nonetheless recognized in the Spanish Civil Code; specifically, the
provisions on compromises made applicable to arbitrations under Articles 1820 and
1821. Although said provisions were repealed by implication with the repeal of the
Spanish Law of Civil Procedure, these and additional ones were reinstated in the
present Civil Code.
Arbitration found a fertile field in the resolution of labor-management disputes in the
Philippines. Although early on, Commonwealth Act 103 (1936) provided for
compulsory arbitration as the state policy to be administered by the Court of
Industrial Relations, in time such a modality gave way to voluntary arbitration. While
not completely supplanting compulsory arbitration which until today is practiced by
government officials, the Industrial Peace Act which was passed in 1953 as Republic
Act No. 875, favored the policy of free collective bargaining, in general, and resort to
grievance procedure, in particular, as the preferred mode of settling disputes in
industry. It was accepted and enunciated more explicitly in the Labor Code, which
was passed on November 1, 1974 as Presidential Decree No. 442, with the
amendments later introduced by Republic Act No. 6715 (1989).
Whether utilized in business transactions or in employer-employee relations,
arbitration was gaining wide acceptance. A consensual process, it was preferred to
orders imposed by government upon the disputants. Moreover, court litigations
tended to be time-consuming, costly, and inflexible due to their scrupulous
observance of the due process of law doctrine and their strict adherence to rules of
evidence.
As early as the 1920's, this Court declared:
In the Philippines fortunately, the attitude of the court towards
arbitration agreements is slowly crystallizing into definite and
workable form . . . The rule now is that unless the agreement is such

as absolutely to close the doors of the courts against the parties,

which agreement would be void, the courts will look with favor upon
such amicable arrangements and will only with great reluctance
interfere to anticipate or nullify the action of the arbitrator.
That there was a growing need for a law regulating arbitration in general was
acknowledged when Republic Act No. 876 (1953), otherwise known as the Arbitration
Law, was passed. "Said Act was obviously adopted to supplement not to supplant
the New Civil Code on arbitration. It expressly declares that "the provisions of
chapters one and two, Title XIV, Book IV of the Civil Code shall remain in force."
xxx xxx xxx
In practice nowadays, absent an agreement of the parties to resolve their disputes
via a particular mode, it is the regular courts that remain the fora to resolve such
matters. However, the parties may opt for recourse to third parties, exercising their
basic freedom to "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." In such a case, resort to the arbitration process may be
spelled out by them in a contract in anticipation of disputes that may arise between
them. Or this may be stipulated in a submission agreement when they are actually
confronted by a dispute. Whatever be the case, such recourse to an extrajudicial
means of settlement is not intended to completely deprive the courts of jurisdiction. In
fact, the early cases on arbitration carefully spelled out the prevailing doctrine at the
time, thus: ". . . a clause in a contract providing that all matters in dispute between
the parties shall be referred to arbitrators and to them alone is contrary to public
policy and cannot oust the courts of jurisdiction."
But certainly, the stipulation to refer all future disputes to an arbitrator or to submit an
ongoing dispute to one is valid. Being part of a contract between the parties, it is
binding and enforceable in court in case one of them neglects, fails or refuses to
arbitrate. Going a step further, in the event that they declare their intention to refer
their differences to arbitration first before taking court action, this constitutes a
condition precedent, such that where a suit has been instituted prematurely, the court
shall suspend the same and the parties shall be directed forthwith to proceed to
arbitration.
A court action may likewise be proper where the arbitrator has not been selected by
the parties.
xxx xxx xxx
. . . It is stated explicitly under Art. 2044 of the Civil Code that the finality of the
arbitrator's award is not absolute and without exceptions. Where the conditions
described in Articles 2038, 2039 and 204018 applicable to both compromises and
arbitrations are obtaining, the arbitrators' award may be annulled or rescinded.
Additionally, under Sections 24 and 25 of the Arbitration Law, there are grounds for
vacating, modifying or rescinding an arbitrator's award. Thus, if and when the factual
circumstances referred to in the above-cited provisions are present, judicial review of the
award is properly warranted.

What if courts refuse or neglect to inquire into the factual milieu of an arbitrator's
award to determine whether it is in accordance with law or within the scope of his
authority? How may the power of judicial review be invoked?
This is where the proper remedy is certiorari under Rule 65 of the Revised Rules of
Court. It is to be borne in mind, however, that this action will lie only where a grave
abuse of discretion or an act without or in excess of jurisdiction on the part of the
voluntary arbitrator is clearly shown. For "the writ of certiorari is an extraordinary
remedy and that certiorari jurisdiction is not to be equated with appellate jurisdiction.
In a special civil action of certiorari, the Court will not engage in a review of the facts
found nor even of the law as interpreted or applied by the arbitrator unless the
supposed errors of fact or of law are so patent and gross and prejudicial as to
amount to a grave abuse of discretion or an exces de pouvoir on the part of the
arbitrator." 19
So, what are the issues that need to be addressed in this action? Certainly not the capacity of the
plaintiffs below to file the derivative suit in behalf of MMIC nor the validity of the extrajudicial
foreclosure conducted by PNB and DBP. These were the issues submitted for arbitration by the
parties and resolved with finality by the arbitration committee upon agreement of the parties
themselves. The issues, therefore, all stemming from the judgment of the Court of Appeals, may be
narrowed down to three: (1) Was it right in upholding the trial court's authority to confirm the
arbitration award considering that said court had earlier dismissed the complaint? (2) Was it correct
in finding that herein petitioner was estopped from questioning such award? (3) Was it justified in not
treating petitioner's petition for certiorari as an appeal from the trial court's order confirming said
award?
(1) Petitioner overly stresses the fact that in the trial court's order of October 14, 1992; the complaint
was "dismissed" upon approval of the Compromise and Arbitration Agreement between the parties.
Such dismissal, however, far from finally disposing of the controversy as the term denotes, simply
"suspended" it during the period of arbitration. It is, as a colleague pointed out during the deliberation
of this action, a mere "semantic imperfection." Here is a situation where the intent of the tribunal was
obviously not to end the case with finality, but to place the proceedings in abeyance while the parties
breathed life into an alternative mode of settling their differences in the most expeditious manner.
Arbitration is not a self-enforcing process. It focuses the direction of the hearing and the reception
and appreciation of evidence by assigning these tasks to a group of persons chosen by the parties,
themselves. By this, a circuitous and time-consuming court trial is avoided, leaving the court with the
singular duty of confirming the arbitrators' decision, and allowing it to devote more of its time to
resolving other cases. As the appellate court correctly pointed out:
. . . (T)he dismissal of the Complaint in Civil Case No. 9900 was not intended by the
parties and by the court a quo, despite the phraseology in Item No. 4 or the
dispositive portion of the Order of October 14, 1992, as a dismissal that would put an
end to the case. Rather it was simply a pronouncement for the cessation of the
proceedings in the court and the commencement of the arbitration proceedings. It
was for all intents and purposes a stay of the civil action until an arbitration has been
had or pending the return of the arbitral award. This is evident since the parties
submitted to the court below not only an agreement to arbitrate but also a
compromise which is always submitted to the court for approval and as a basis for a
judgment. . . . 20
Regarding the trial court's authority to confirm the decision of the arbitration committee, suffice it to
say that such was not merely its right but its duty as well. Under Section 22 of R.A. No. 876, upon

application or motion of any party to arbitration, the court has the obligation of confirming the
arbitrators' award absent any specific ground to vacate, modify or correct the same. Herein private
respondents did apply for such confirmation on February 7, 1995. This was even opposed by
petitioner on the ground that the judgment had not yet become final and executory, in complete
disregard of paragraph 10 of the Compromise and Arbitration Agreement and the very decision of
the arbitration committee.
The award itself was properly made since it was not vacated, modified or corrected upon any of the
grounds enumerated under Sections 24 and 25 of R.A. No. 876, to wit:
Sec. 24. Grounds for vacating award. In any one of the following cases, the court
must make an order vacating the award upon the petition of any party to the
controversy when such party proves affirmatively that in the arbitration proceedings:
(a) The award was procured by corruption, fraud, or other undue means; or
(b) That there was evident partiality or corruption in the arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing
upon sufficient cause shown, or in refusing to hear evidence pertinent and material to
the controversy; that one or more of the arbitrators was disqualified to act as such
under section nine hereof, and willfully refrained from disclosing such
disqualifications or of any other misbehavior by which the rights of any party have
been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that
a mutual, final and definite award upon the subject matter submitted to them was not
made.
Where an award is vacated, the court, in its discretion, may direct a new hearing
either before the same arbitrators or before a new arbitrator or arbitrators chosen in
the manner provided in the submission or contract for the selection of the original
arbitrator or arbitrators, and any provision limiting the time in which the arbitrators
may make a decision shall be deemed applicable to the new arbitration and to
commence from the date of the court's order.
Where the court vacates, an award, costs, not exceeding fifty pesos, and
disbursements may be awarded to the prevailing party and the payment thereof may
be enforced in like manner as the payment of costs upon the motion in an action
Sec. 25. Grounds for modifying or correcting award. In any one of the following
cases, the court must make an order modifying or correcting the award, upon the
application of any party to the controversy which was arbitrated:
(a) Where there was an evident miscalculation of figures, or an
evident mistake in the description of any person, thing or property
referred to in the award; or
(b) Where the arbitrators have awarded upon a matter not submitted
to them, not affecting the merits of the decision upon the matter
submitted; or

(c) Where the award is imperfect in a matter of form not affecting the
merits of the controversy, and if it had been a commissioner's report,
the defect could have been amended or disregarded by the court.
The order may modify and correct the award so as to effect the intent thereof and promote justice
between the parties. (Emphasis supplied)
Petitioner utterly failed to prove the existence of any of these grounds. Its strongest argument, that
the arbitration award "far exceeded the issue submitted for arbitration," apart from being
unsubstantiated, does not go into the merits of the award, which is the only way its modification or
correction could be justified under the terms of Section 25, aforequoted.
Furthermore, petitioner violated several covenants by asking the court a quo to vacate the arbitration
award. First, in paragraph 10 of the Compromise and Arbitration Agreement, it agreed to abide by
the arbitration committee's decision which "shall be final and executory upon its issuance upon the
parties to the arbitration and their assigns and successors-in-interest." Next, the decision that the
arbitrators did render on November 24, 1993 specifically declared the same to be "final and
executory." Finally, in the court's confirmation order of November 28, 1994, the finality of the award
was reiterated by the court. Arbitration, as an alternative mode of settlement, is gaining adherents in
legal and judicial circles here and abroad. If its tested mechanism can simply be ignored by an
aggrieved party, one who, it must be stressed, voluntarily and actively participated in the arbitration
proceedings from the very beginning, it will destroy the very essence of mutuality inherent in
consensual contracts.
2) Petitioner claims that it is not estopped from questioning the arbitration award probably
because, notwithstanding its tenacious quest for affirmative relief, it did not translate this
pursuit into positive action. The Court of Appeals succinctly puts it in this wise:
. . . The record shows that on its motion, petitioner APT was able to postpone the
hearing on therein plaintiffs' application/motion for confirmation of arbitral award to a
date and time that it chose. However, when said matter was called for hearing, only
counsel for therein plaintiffs showed up. Nonetheless, respondent Judge gave APT a
period of seven (7) days from notice within which to comment on the
application/motion for confirmation. At no time did petitioner APT ask for a hearing to
present its evidence. While petitioner APT repeatedly sought to vacate the arbitral
award, it made no concrete move to pursue its cause. In fact, at the hearing on its
motion for reconsideration, both parties through their respective counsels gave oral
arguments and thereafter agreed to submit the motion for reconsideration for
resolution. If petitioner APT honestly believed that the respondent Judge erroneously
took cognizance of plaintiffs Application/Motion for Confirmation of Arbitration Award,
then it should have limited itself to challenging the jurisdiction of said court. The fact
remains that petitioner APT repeatedly sought affirmative relief from the respondent
Judge in the same Civil Case No. 9900. Under the circumstances, petitioner APT
may not be heard now to complain that it was deprived of its right to question the
award made by the Arbitration Committtee. 21 (Emphasis supplied)
3) The final issue which, to my mind, has particular relevance to the case at bar, pertains to
the alleged error of the Court of Appeals in not treating APT's petition for certiorari as an
appeal from the trial court's confirmation order.
Petitioner's counsel received a copy of the confirmation order dated November 28, 1994, on
December 12, 1994.22 Said order was, for review purposes, a "final order" because it finally disposed of

the case. Other than executing the confirmation order, there was nothing else that the court was dutybound to perform. Petitioner's remedy, therefore, was to question the order, by appeal on certiorari, not
before the Court of Appeals, but before the Supreme Court 23 within the reglementary period of fifteen
days which expired on December 27, 1994. Instead of appealing, however, petitioner filed a motion for
reconsideration of the order on said deadline. Unfortunately, this was denied by the court a quo in its
order dated January 18, 1995, a copy of which was received by petitioner's counsel on February 1, 1995.
Under prevailing procedural laws, it had just one day to perfect its appeal. On February 15, 1995,
petitioner opted to file with the Court of Appeals an "Appeal by Certiorari . . . under Sections 1 and 2 of
Rule 65 of the Revised Rules of Court." The reason is obvious: It could no longer file a regular appeal
from the assailed order because the period for doing so has lapsed. The Court of Appeals thus made the
following pertinent observation.

. . . Assuming arguendo that petitioner APT's counsel received a copy (of the
November 28, 1994, order), as claimed by them, on December 12, 1994, then the
petitioner had fifteen (15) days therefrom or until December 27, 1994, within which to
appeal. The petitioner's motion for reconsideration was admittedly filed on December
27, 1994, the last day of the reglementary 15-day period, and the order dated
January 18, 1995, denying the same was received by petitioner's counsel on
February 1, 1995. Petitioner APT had only the following day to perfect his appeal.
Instead, it chose to file the instant special civil action of certiorari on February 15,
1995.
From the start, petitioner seemed unsure of its position on appeal. While initially questioning the
"order confirming the award" of the arbitration committee, it later stated that it was raising the issue
of "filing by (herein private respondents) of a Motion for Execution and Appointment of Custodian of
proceeds of Execution dated February 6, 1995." The latter recourse is obviously erroneous, for no
appeal under either Rule 45 or Rule 65 may be taken from a "motion" or the "filing" of one. Under
Rule 45, only judgments or final orders of a court or tribunal may be appealed to a higher court,
while Rule 65 allows a special civil action where the acts of a tribunal, board or officer are under
attack for being performed with grave abuse of discretion.
The applicable law, of course, is R.A. No. 876, which provides for appeals from arbitration awards
under Section 29 thereof, viz.:
. . . (A)n appeal may be taken from . . . a judgment entered upon an award
through certiorariproceedings, but such appeals shall be limited to questions of law.
The proceedings upon such an appeal, including the judgment thereon, shall be
governed by the Rules of Court in so far as they are applicable.
The term "certiorari" in the aforequoted provision refers to an ordinary appeal under Rule 45, not the
special action of certiorari under Rule 65. It is an "appeal," as Section 29 proclaims. The proper
forum for this action is, under the old and the new rules of procedure, the Supreme Court. Thus,
Section 2(c) of Rule 41 of the 1997 Rules of Civil Procedure states that, "In all cases where only
questions of law are raised or involved, the appeal shall be to the Supreme Court by petition for
review on certiorari in accordance with Rule 45." Moreover, Section 29 limits the appeal to
"questions of law," another indication that it is referring to an appeal by certiorari under Rule 45
which, indeed, is the customary manner of reviewing such issues. On the other hand, the
extraordinary remedy of certiorari under Rule 65 may be availed of by a party where there is "no
appeal, nor any plain, speedy, and adequate remedy in the course of law," and under circumstances
where "a tribunal, board or officer exercising judicial functions, has acted without or in excess of its
or his jurisdiction, or with grave abuse of discretion." 24

Based on the foregoing, it is clear that petitioner had run out of options after its motion for
reconsideration was denied by the trial court in its order dated January 18, 1995. To compound its
negligence, it filed the wrong action with the wrong forum. These, to my mind, are serious procedural
flaws. To rule otherwise, as the majority did, would constitute a grave injustice to private
respondents.
I vote to DISMISS the petition.

PARDO, J., separate concurring opinion;

I concur. However, I wish to add a few points not particularly emphasized in the majority opinion.
The petition before the Court is one for review via certiorari under Rule 45 of the Revised Rules of
Court seeking to set aside the resolution of the Court of Appeals that denied due course and
dismissed APT's petition forcertiorari to annul the proceedings had before the Regional Trial Court,
Makati, Branch 62, in Civil Case No. 9900, particularly the order confirming the arbitration award,
reading as follows:
WHEREFORE, premises considered, and in the light of the parties Compromise and
Arbitration Agreement dated October 6, 1992, the Decision of the Arbitration
Committee promulgated on November 24, 1993, as affirmed in a Resolution dated
July 26, 1994, and finally settled and clarified in the Separate Opinion dated
September 2, 1994 of Committee Member Elma, and the pertinent provisions of R.A.
876, also known as the Arbitration Law, this Court GRANTS PLAINTIFFS'
APPLICATION AND THUS CONFIRMS THE ARBITRATION AWARD AND
JUDGMENT IS HEREBY RENDERED:
(a) Ordering the defendant APT to the Marinduque
Mining and Industrial Corporation (MMIC), except the
DBP, the sum of P3,811,757,425.00, as and for actual
damages under escrow in the amount of
P503,000,000.00 pursuant to the Escrow Agreement
dated April 22, 1988. The balance of the award, after
the escrow funds are fully applied, shall be executed
against the APT;
(b) Ordering the defendants to pay to the MMIC,
except the DBP, the sum of P13,000.00 as and for
moral and exemplary damages;
(c) Ordering the defendant to pay to Jesus S.
Caburrus, Sr., the sum of P10,000,000.00 as and for
moral damages; and
(d) Ordering the defendant to pay the herein
plaintiff/applicants/movants the sum of P1,705,410.00
as arbitration costs.

In reiteration of the mandates of Stipulation No. 10 and Stipulation

No. 8 paragraph 2 of the Compromise and Arbitration Agreement,
and the final edict of the Arbitration Committee's decision, and with
this Court's Confirmation, the issuance of the Arbitration Committee's
Award shall henceforth be final and executory.
SO ORDERED.
Originally instituted on February 8, 1985, in the Regional Trial Court, Makati, Metro Manila, private
respondents, Jesus S. Cabarrus, Sr., et al., a few of the numerous minority stockholders of
Marinduque Mining and Industrial Corp. (hereafter MMIC), filed a complaint, later amended on
March 13, 1995, for annulment of foreclosure, specific performance and damages against the
Philippine National Bank (PNB) and the Development Bank of the Philippines (DBP) alleging that in
1984, the PNB and DBP effected illegally the extra-judicial foreclosure of real estate and chattel
mortgages constituted in their favor by the MMIC by the latter's assets of real estate and chattels, to
satisfy an obligation amounting to P22,668,537,770.05, and that prior to the extra-judicial
foreclosure, PNB and DBP had agreed to a financial reorganization plan of MMIC to reduce the
latter's indebtedness to P3 billion and to convert the balance of its obligation into equity.
In their joint answer to the amended complaint, defendants PNB and DBP denied the material
allegations of the amended complaint but admitted that in August and September, 1984, they
foreclosed extra-judicially the mortgages on MMIC's assets, with the qualification that the correct
amount of obligation owed by MMIC as of July 15, 1984, was P22,083,313,168.29; that the
foreclosure of the mortgages was legal and valid as mandated by Presidential Decree No. 385 and
by the provisions of the mortgage trust agreements between PNB, DBP and MMIC; and, that the
plaintiff's therein, herein respondents Cabarrus, et al., were not entitled to actual and moral
damages.
In the course of the trial of Civil Case No. 9900, plaintiffs Jesus S. Cabarrus, et al. and the Asset
Privatization Trust (APT), as successor-in-interest of the DBP and PNB's interest in MMIC accounts,
entered into a compromise and arbitration agreement dated October 6, 1992, whereby they "agreed
to move for the dismissal of the case, to transform the reliefs prayed for therein into pure money
claims and to submit the controversy to arbitration under Republic Act (RA) 876 before a committee
composed of three members" limiting the issues to two, namely:
(a) whether plaintiffs have the capacity or the personality to institute
this derivative suit in behalf of the MMIC or its directors, and
(b) whether or not the actions leading to, and including, the PNB-DBP
foreclosure of the MMIC assets were proper, valid and in good faith.
Thus, the parties created an Arbitration Committee composed of three (3) members, one (1)
representative of the plaintiff; one (1) representative of APT; and the Chairman to be agreed upon by
both parties. Consequently, APT nominated Atty. Jose C. Sison, a trustee of APT and its counsel;
MMIC nominated former Justice of the Court of Appeals Magtanggol Elma; and they selected retired
Supreme Court Justice Abraham F. Sarmiento as Chairman.
After conducting hearings and receiving voluminous evidence, on November 24, 1993, the
Arbitration Committee released what purports to be its decision penned by the Chairman, the
dispositive portion of which reads as follows:
DISPOSITION

WHEREFORE, premises considered judgment is hereby rendered:

1. Ordering the defendant to pay the Marinduque Mining and
Industrial Corporation, except the DBP, the sum of
P2,531,635,425,02 with interest thereon at the legal rate of six (6%)
per cent per annum reckoned from August 3, 9 and 24, 1984, pari
passu, as and for actual damages. Payment of these actual damages
shall be offset by APT from the outstanding and unpaid loans of
MMIC with DBP and PNB, which have not been converted into equity.
Should there be any balance due to MMIC after the offsetting, the
same shall be satisfied from the funds representing the purchase
price of the sale of the shares of Island Cement Corporation in the
amount of P503,000,000.00 held under escrow pursuant to the
Escrow Agreement dated April 22, 1988 or to such subsequent
escrow agreement that would supersede it pursuant to paragraph (9)
of the Compromise and Arbitration Agreement;
2. Ordering the defendant to pay to the Marinduque Mining and
Industrial Corporation, except the DBP, the sum of P13,000,000.00,
as and for moral and exemplary damages. Payment of these moral
and exemplary damages shall be offset by APT from the outstanding
and unpaid loans of MMIC with DBP and PNB, which have not been
converted into equity. Should there be any balance due to MMIC after
the offsetting, the same shall be satisfied from the funds representing
the purchase price of the sale of the shares of island Cement
Corporation in the amount of P503,000,000.00 held under escrow
pursuant to the Escrow Agreement dated April 22, 1988 or to such
subsequent escrow agreement that would supersede it pursuant to
paragraph (9) of the Compromise and Arbitration Agreement;
3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus,
Sr., the sum of P10,000,000.00, to be satisfied likewise from the
funds held under escrow pursuant to the Escrow Agreement dated
April 22, 1988 or to such subsequent escrow agreement that would
supersede it, pursuant to paragraph (9), Compromise and Arbitration
Agreement, as and for moral damages; and
4. Ordering the defendant to pay arbitration costs.
This Decision is FINAL and EXECUTORY.
IT IS SO ORDERED.
Member Elma submitted a separate concurring and dissenting opinion reading as follows:
ELMA, concurring and dissenting:
I am in complete agreement with the findings of the Decision on the principal issues
submitted for the Committee's resolution, viz: that plaintiffs Cabarrus, et al., have the
capacity or the personality to institute this derivative suit in behalf of Marinduque
Milling and Industrial Corporation (MMIC) and that the actions leading to, and
including, the PNB-DBP foreclosure of the MMIC assets were improper, invalid

and/or not done in good faith. Consequently, there is concurrence on my part to the
award of actual, moral and exemplary damages to MMIC, and moral damages to
plaintiff Jesus S. Cabarrus, Sr.
However, I am unable to agree with and, therefore, regretfully dissent as to the
manner or method of computation and amount of actual damages awarded to MMIC,
particularly set forth in paragraph 1 of the dispositive potion of the Decision.
xxx xxx xxx
Considering that under the "Compromise and Arbitration Agreement", the parties
agreed that their respective claims be reduced to purely pecuniary/money claims,
then MMIC and/or plaintiffs on behalf of all the other stockholders of MMIC are
entitled to actual or compensatory damages equivalent to the present value of their
equity over the MMIC assets, i.e. the total stockholders' equity of
P20,826,700,952.00 as of December 31, 1992. Further, since as held in the Decision
that the DBP would have an 87% equity in MMIC as a consequence of the finding
that the Financial Rehabilitation Plan (FRP), is valid (p. 64 of the Decision), then the
amount of P18,119,229,828.24 (equivalent to DBP's 87% equity) should be deducted
from the total stockholders' equity of P20,826,700,952.00 leaving a net amount of
P2,707,471,123.76 to be awarded to MMIC (excluding DBP's share) as actual or
compensatory damages.
It is to be noted that defendant APT did not present any evidence rebutting the
figures and computations made by witness Pastor. Since the Decision finds the FRP
valid, then the stockholders of MMIC (excluding DBP) should be placed in the same
position that they would have been where not for the fact that the FRP was
improperly and illegally aborted by PNB/DBP. Accordingly, it is my submission that
defendant APT should be ordered to pay MMIC (excluding DBP) the sum of
P2,707,471,123.76 with legal interest thereon per annum from August 3, 1984 as and
for actual damages.
xxx xxx xxx
Member Sison submitted a separate opinion reading as follows:
SEPARATE OPINION
xxx xxx xxx
It is clear and it cannot be disputed therefore that based on these
stipulated issues, the parties themselves have agreed that the basic
ingredient of the causes of action in this case is the wrong committed
on the corporation (MMIC) for the alleged illegal foreclosure of its
assets. By agreeing to this stipulation, PLAINTIFFS themselves
(Cabarrus, et al.) admit that the cause of action pertains only to the
corporation (MMIC) and that they are filing this for and in behalf of
MMIC.
Perforce this has to be so because it is the basic rule in Corporation
Law that "the shareholders have no title, legal or equitable to the

property which is owned by the corporation (13 Am. Jur. 165; Pascual
vs. Oresco, 14 Phil. 83). In Ganzon & Sons vs. Register of Deeds, 6
SCRA 373, the rule has been reiterated that "a stockholder is not the
co-owner of the corporate property." Since the property or assets
foreclosed belongs to MMIC, the wrong committed, if any, is done
against the corporation. There is therefore no direct injury or direct
violation of the rights of Cabarrus et al. There is no way, legal or
equitable by which Cabarrus et al, could recover damages in their
personal capacities even assuming or just because the foreclosure is
improper or invalid. The Compromise and Arbitration Agreement itself
and the elementary principles of Corporation Law say so. Therefore, I
am constrained to dissent from the award of moral damages to
Cabarrus.
Neither could I agree to the award of moral damages to MMIC. The
acts complained of here in which the Committee based its award of
moral damages to MMIC is the foreclosure of the various real estate
and chattel mortgages. The majority of the Committee believes that
these foreclosure constitute a violation on an agreement forged
between PNB-DBP, on one hand, and MMIC, on the other, regarding
the restructuring of the various past due loans of MMIC to what had
been termed as the Financial Restructuring Program (FRP).
xxx xxx xxx
In this connection, it can readily be seen and it cannot quite be
denied that MMIC accounts in PNB-DBP were past due. The drawing
up of the FRP is the best proof of this. When MMIC adopted a
restructuring program for its loan, it only meant that these loans were
already due and unpaid. If these loans were restructurable because
they were already due and unpaid, they are likewise "forecloseable".
The option is with the PNB-DBP on what steps to take.
The mere fact that MMIC adopted the FRP does not mean that DBPPNB lost the option to foreclose. Neither does it mean that the FRP is
legally binding and implementable. It must be pointed that said FRP
will, in effect, supersede the existing and past due loans of MMIC with
PNB-DBP. It will become the new loan agreement between the
lenders and the borrowers. As in all other contracts, there must
therefore be a meeting of the minds of the parties; the PNB and DBP
must have to validly adopt and ratify such FRP before they can be
bound by it; before it can be implemented. In this case, not an iota of
proof has been presented by the PLAINTIFFS showing that PNB and
DBP ratified and adopted the FRP. PLAINTIFFS simply relied on a
legal doctrine of promissory estoppel to support its allegations in this
regard.
xxx xxx xxx
All told, PNB and DBP had the right to foreclose and were justified in
doing so. But were the foreclosure legally done or carried out? Were

the requirements of notice, posting and publication required by Acts

3135 and 1508 substantially complied with?
xxx xxx xxx
I cannot, however, concur with the for holding that such minor taint of
illegality in the foreclosure is enough to justify the award of damages,
amounting to P19,486,118,654.00. "Rules of law respecting the
recovery of damages are framed with reference to just rights or both
parties, not merely what may be right for an injured person to receive,
but also what is just to compel the other party to pay, to accord just
compensation for the injury" (Kennings vs. Kline Ind. 602). Following
this universally accepted rule on damage, I do not believe it is just to
compel APT to pay such huge amount for such minor technical
infraction.
But while I do not agree with this pronouncement of the Committee, I
nevertheless concur with the result as far as the disposition of the
award for actual damages is concerned. I agree that DEFENDANT
APT can, and is still entitled to, collect the outstanding obligations of
MMIC to PNB and DBP amounting to P22,668,537,770.05 with
interest thereon as stipulated in the loan documents from the date of
foreclosure until the time they are fully paid. The resultant effect of
such a disposition is that APT can offset the said obligation due from
MMIC such that ultimately no damages will be due and payable to
MMIC. As there may be damage without injury, there can be injury
without damage (15 Am. Jur., p. 388). This case is a case of "injury
without damage".
Both parties moved for reconsideration of the "decision" of the Arbitration Committee. In addition,
respondents Cabarrus et al. filed a motion for clarification and to re-open the case to receive
evidence. In a resolution dated July 26, 1984, with one member dissenting, the Arbitration
Committee denied the motions for reconsideration of both parties as well as all other pending
motions.
On October 17, 1984, respondents Cabarrus et al. filed directly with the Regional Trial Court, Makati,
Branch 62, in the same Civil Case No. 9900, a pleading entitled application/motion for confirmation
of arbitral award.
On November 4, 1994, petitioner APT filed an opposition and motion to vacate judgment, contending
that respondents' motion was improperly filed with the same branch of the court in Civil Case No.
9900, which was previously dismissed, and that the motion should have been filed as a separate
special proceedings in the Regional Trial Court to be docketed by the Clerk of Court.
Nonetheless, acting on the application/motion, Judge Roberto C. Diokno, presiding judge, Regional
Trial Court, Makati, Branch 62, on November 28, 1994, issued an order granting plaintiffs' application
confirming the arbitration award, and rendering judgment as set out in the opening paragraph of this
opinion.
On December 12, 1994, petitioner APT received notice of the lower court's order. On December 27,
1994, petitioner APT filed a motion for reconsideration. By order dated January 18, 1995, the trial
court denied the motion. On February 7, 1995, respondents Cabarrus, et al. filed a motion for

execution and appointment of custodian of proceeds of execution. Petitioner opposed the motion. It
is apparently still unresolved.
On February 15, 1995, petitioner APT filed with the Court of Appeals an original special civil action
for certiorariwith prayer for temporary restraining order or preliminary injunction 1 to annul the two (2)
orders of the respondent Regional Trial Court above-mentioned confirming the arbitral award and denying
its reconsideration.
The issue presented in said petition was whether respondent Judge Roberto C. Diokno, Regional
Trial Court, Makati, Branch 62, had jurisdiction to act on private respondents' application/motion for
confirmation of arbitral award in the same Civil Case No. 9900, which had been dismissed earlier on
motion of the parties, and thus the court gravely abused its discretion in confirming the arbitral
award.
In its decision promulgated on July 17, 1995, the Court of Appeals denied due course and dismissed
the petition for certiorari for lack of merit.
Hence, this petition for review filed on September 07, 1995.

The petition is impressed with merit.

First, the Regional Trial Court, Makati, Branch 62, did not validly acquire jurisdiction over the case by
respondents' filing of a mere motion in the same Civil Case No. 9900 because the case had been
dismissed earlier and such dismissal had become final and unappealable. As heretofore stated, on
October 6, 1992, the parties entered into a compromise and arbitration agreement expressly
providing that they "have agreed to withdraw their respective claims from the Trial Court and to
resolve their dispute through arbitration by praying to the Trial Court to issue a compromise
judgment based on this Compromise and Arbitration agreement.
Clearly, the parties had withdrawn the action then pending with the Regional Trial Court, Makati,
Branch 62, in Civil Case No. 9900, and agreed that they would submit their dispute to arbitration and
reduce their respective claims to "purely money claims", "waiving and foregoing all other forms of
reliefs which they prayed for or could have prayed for in Civil Case No. 9900." The parties "agreed to
move for the dismissal of the case, to transform the reliefs prayed for therein to pure money claims
and submit the controversy to arbitration under Republic Act (RA) 876 before a committee composed
of three members."
In its order dated October 12, 1992, in Civil Case No. 9900, the trial court presided over by
respondent Judge categorically decreed that "The complaint is hereby dismissed". Such disposition
terminated the case finally and irretrievably disposed of the same. 3 The term "dismissed" has a
definite meaning in law. "A judgment of 'dismissed', without qualifying words indicating a right to take
further proceedings, is presumed to be dismissed on the merits". 4 The dismissal could not have been a
suspension of action provided for in the arbitration law, Republic Act No. 876.
Upon the finality of such order of dismissal, the case could no longer be revived by mere motion.
The trial court had lost its authority over the case. 5 We cite as squarely applicable the decision where
this Court emphatically said "But after the dismissal has become final through the lapse of the fifteen-day
reglementary period, the only way by which the action may be resuscitated or 'revived,' is by the
institution of a subsequent action through the filing of another complaint and the payment of the fees
prescribed by law. This is so because upon attainment of finality of a dismissal through the lapse of said
reglementary period, the Court loses jurisdiction and control over it and can no longer make any
disposition in respect thereof inconsistent with such dismissal" 6 It is true that the confirmation of an

arbitral award is within the jurisdiction over the subject matter of a regional trial court. Such jurisdiction
must be invoked by proper motion as a special proceedings with notice to the parties filed in the proper
court with the clerk of court (and upon payment of the prescribed fees). 7

Second, the Arbitration Committee did not actually reach a valid decision on the subject controversy.
In the purported decision dated November 24, 1994, penned by Chairman Sarmiento, the
Committee ordered petitioner APT to pay to MMIC the sum of P2,531,635,425.02, with interest
thereon at the legal rate at 6% per annum from August 3, 9 and 24, 1984, pari passu as actual
damages; to pay MMIC P13 million, as moral and exemplary damages, and to pay Jesus S.
Cabarrus, Sr. P10 million, as moral damages.
In the concurring and dissenting opinion of Member Elma, he agreed with the finding on the principal
issue submitted for resolution. However, he dissented as to the manner or method of computation
and amount of actual damages awarded to MMIC. He submitted that APT should be ordered to pay
MMIC the sum of P2,707,471,123.76, with legal interest thereon per annum from August 3, 1984, as
actual damages.
In his separate opinion, Member Sison stated that he concurred with the result as far as the
disposition of the award of actual damage is concerned. He agreed that APT is entitled to collect the
outstanding obligations of MMIC to PNB and DBP amounting to P22,668,537,770.05, with interest as
stipulated in the loan documents from the date of foreclosure until fully paid. The resultant effect is
that APT can offset said obligation due from MMIC such that ultimately no damages shall be due and
payable to MMIC. He was against the award of moral and exemplary damages to MMIC and Jesus
S. Cabarrus, Sr.
It is obvious that the disposition in Chairman Sarmiento's award and the concurring and dissenting
opinion of Member Elma do not tally and, hence, because of the dissent of Member Sison, the
Arbitration Committee did not reach a majority decision constituting a valid judgment or fallo of the
Committee.
The powers and duties of boards and commissions may not be
exercised by the individual members separately. Their acts are official
only when done by the members convened in session upon a
concurrence of at least a majority and with at least a quorum
present. 8
Respondents Cabarrus, et al. considered the disposition as confusing and incomplete as to the
award of damages and thereby requiring the reception of further evidence as to necessitate the reopening of hearings on the case. On May 20, 1994, they filed a motion for clarification seeking
answer from the arbitration committee as to the final amount of actual damages the MMIC is entitled
to, and, on June 9, 1994, they filed a motion to reopen the case and to receive evidence.
Even the Arbitration Committee's resolution of the various motions for reconsideration and other
reliefs was conflicting. For Chairman Sarmiento, respondents' motion for reconsideration, dated
December 15, 1993, and petitioner's motion for reconsideration, dated January 3, 1994,
respondents' motion for clarification dated June 8, 1994, and respondents' urgent motion to re-open
the case and to receive evidence were all DENIED for lack of merit.
Member Elma dissented from the denial of the parties' motion for reconsideration, reiterating that
MMIC is entitled to actual damages in the sum of P2,707,471,123.76, with legal interest thereon
from August 3, 1984.

Member Azura (substituting Sison) concurred with the Chairman in denying respondents' motion for
reconsideration, motion for clarification and motion to re-open the case but favored granting
petitioner's (APT) motion for reconsideration.
WHEREFORE, I vote to GRANT the petition at bench, reverse the decision of the Court of
Appeals 9 as well as the orders of the Regional Trial Court, Makati, Branch 62, in Civil Case No. 9900,
vacate the "decision" of the Arbitration Committee dated November 24, 1993, and, finally, ENJOIN the
trial court from further acting on the case.

-the FRP was just a projected plan with the hope of trying to rehabilitate the
company. However, since the circumstances indicate that implementing the same
will be futile and not feasible, the same was vacated. As such, the FRP did not
become a new contract between the parties as the same was not agreed upon to be
implemented.

G.R. No. 201167

February 27, 2013

GOTESCO PROPERTIES, INC., JOSE C. GO, EVELYN GO, LOURDES G. ORTIGA, GEORGE
GO, and VICENTE GO, Petitioners,
vs.
SPOUSES EUGENIO and ANGELINA FAJARDO, Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court is the July 22,
2011 Decision1and February 29, 2012 Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No.
112981, which affirmed with modification the August 27, 2009 Decision3 of the Office of the President
(OP).
The Facts

On January 24, 1995, respondent-spouses Eugenio and Angelina Fajardo (Sps. Fajardo) entered
into a Contract to Sell4 (contract) with petitioner-corporation Gotesco Properties, Inc. (GPI) for the
purchase of a 100-square meter lot identified as Lot No. 13, Block No.6, Phase No. IV of Evergreen
Executive Village, a subdivision project owned and developed by GPI located at Deparo Road,
Novaliches, Caloocan City. The subject lot is a portion of a bigger lot covered by Transfer Certificate
of Title (TCT) No. 2442205 (mother title).
Under the contract, Sps. Fajardo undertook to pay the purchase price of P126,000.00 within a 10year period, including interest at the rate of nine percent (9%) per annum. GPI, on the other hand,
agreed to execute a final deed of sale (deed) in favor of Sps. Fajardo upon full payment of the
stipulated consideration. However, despite its full payment of the purchase price on January 17,
20006 and subsequent demands,7 GPI failed to execute the deed and to deliver the title and physical
possession of the subject lot. Thus, on May 3, 2006, Sps. Fajardo filed before the Housing and Land
Use Regulatory Board-Expanded National Capital Region Field Office (HLURBENCRFO) a
complaint8 for specific performance or rescission of contract with damages against GPI and the
members of its Board of Directors namely, Jose C. Go, Evelyn Go, Lourdes G. Ortiga, George Go,
and Vicente Go (individual petitioners), docketed as HLURB Case No. REM-050306-13319.
Sps. Fajardo averred that GPI violated Section 209 of Presidential Decree No. 95710 (PD 957) due to
its failure to construct and provide water facilities, improvements, infrastructures and other forms of
development including water supply and lighting facilities for the subdivision project. They also
alleged that GPI failed to provide boundary marks for each lot and that the mother title including the
subject lot had no technical description and was even levied upon by the Bangko Sentral ng Pilipinas
(BSP) without their knowledge. They thus prayed that GPI be ordered to execute the deed, to deliver
the corresponding certificate of title and the physical possession of the subject lot within a
reasonable period, and to develop Evergreen Executive Village; or in the alternative, to cancel
and/or rescind the contract and refund the total payments made plus legal interest starting January
2000.
For their part, petitioners maintained that at the time of the execution of the contract, Sps. Fajardo
were actually aware that GPI's certificate of title had no technical description inscribed on it.
Nonetheless, the title to the subject lot was free from any liens or encumbrances. 11 Petitioners
claimed that the failure to deliver the title to Sps. Fajardo was beyond their control 12 because while
GPI's petition for inscription of technical description (LRC Case No. 4211) was favorably granted 13 by
the Regional Trial Court of Caloocan City, Branch 131 (RTC-Caloocan), the same was reversed 14 by
the CA; this caused the delay in the subdivision of the property into individual lots with individual
titles. Given the foregoing incidents, petitioners thus argued that Article 1191 of the Civil Code
(Code) the provision on which Sps. Fajardo anchor their right of rescission remained inapplicable
since they were actually willing to comply with their obligation but were only prevented from doing so
due to circumstances beyond their control. Separately, petitioners pointed out that BSP's adverse
claim/levy which was annotated long after the execution of the contract had already been settled.
The Ruling of the HLURB-ENCRFO
On February 9, 2007, the HLURB-ENCRFO issued a Decision 15 in favor of Sps. Fajardo, holding that
GPIs obligation to execute the corresponding deed and to deliver the transfer certificate of title and

possession of the subject lot arose and thus became due and demandable at the time Sps. Fajardo
had fully paid the purchase price for the subject lot. Consequently, GPIs failure to meet the said
obligation constituted a substantial breach of the contract which perforce warranted its rescission. In
this regard, Sps. Fajardo were given the option to recover the money they paid to GPI in the amount
of P168,728.83, plus legal interest reckoned from date of extra-judicial demand in September 2002
until fully paid. Petitioners were likewise held jointly and solidarily liable for the payment of moral and
exemplary damages, attorney's fees and the costs of suit.
The Ruling of the HLURB Board of Commissioners
On appeal, the HLURB Board of Commissioners affirmed the above ruling in its August 3, 2007
Decision,16finding that the failure to execute the deed and to deliver the title to Sps. Fajardo
amounted to a violation of Section 25 of PD 957 which therefore, warranted the refund of payments
in favor of Sps. Fajardo.
The Ruling of the OP
On further appeal, the OP affirmed the HLURB rulings in its August 27, 2009 Decision. 17 In so doing,
it emphasized the mandatory tenor of Section 25 of PD 957 which requires the delivery of title to the
buyer upon full payment and found that GPI unjustifiably failed to comply with the same.
The Ruling of the CA
On petition for review, the CA affirmed the above rulings with modification, fixing the amount to be
refunded to Sps. Fajardo at the prevailing market value of the property18 pursuant to the ruling
in Solid Homes v. Tan (Solid Homes).19
The Petition
Petitioners insist that Sps. Fajardo have no right to rescind the contract considering that GPI's
inability to comply therewith was due to reasons beyond its control and thus, should not be held
liable to refund the payments they had received. Further, since the individual petitioners never
participated in the acts complained of nor found to have acted in bad faith, they should not be held
liable to pay damages and attorney's fees.
The Court's Ruling
The petition is partly meritorious.
A. Sps. Fajardos right to rescind
It is settled that in a contract to sell, the seller's obligation to deliver the corresponding certificates of
title is simultaneous and reciprocal to the buyer's full payment of the purchase price. 20 In this relation,
Section 25 of PD 957, which regulates the subject transaction, imposes on the subdivision owner or
developer the obligation to cause the transfer of the corresponding certificate of title to the buyer
upon full payment, to wit:

Sec. 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to the
buyer upon full payment of the lot or unit. No fee, except those required for the registration of the
deed of sale in the Registry of Deeds, shall be collected for the issuance of such title. In the event a
mortgage over the lot or unit is outstanding at the time of the issuance of the title to the buyer, the
owner or developer shall redeem the mortgage or the corresponding portion thereof within six
months from such issuance in order that the title over any fully paid lot or unit may be secured and
delivered to the buyer in accordance herewith. (Emphasis supplied.)
In the present case, Sps. Fajardo claim that GPI breached the contract due to its failure to execute
the deed of sale and to deliver the title and possession over the subject lot, notwithstanding the full
payment of the purchase price made by Sps. Fajardo on January 17, 2000 21 as well as the latters
demand for GPI to comply with the aforementioned obligations per the letter 22 dated September 16,
2002. For its part, petitioners proffer that GPI could not have committed any breach of contract
considering that its purported non-compliance was largely impelled by circumstances beyond its
control i.e., the legal proceedings concerning the subdivision of the property into individual lots.
Hence, absent any substantial breach, Sps. Fajardo had no right to rescind the contract.
The Court does not find merit in petitioners contention.
A perusal of the records shows that GPI acquired the subject property on March 10, 1992 through a
Deed of Partition and Exchange23 executed between it and Andres Pacheco (Andres), the former
registered owner of the property. GPI was issued TCT No. 244220 on March 16, 1992 but the same
did not bear any technical description.24 However, no plausible explanation was advanced by the
petitioners as to why the petition for inscription (docketed as LRC Case No. 4211) dated January 6,
2000,25 was filed only after almost eight (8) years from the acquisition of the subject property.
Neither did petitioners sufficiently explain why GPI took no positive action to cause the immediate
filing of a new petition for inscription within a reasonable time from notice of the July 15, 2003 CA
Decision which dismissed GPIs earlier petition based on technical defects, this notwithstanding Sps.
Fajardo's full payment of the purchase price and prior demand for delivery of title. GPI filed the
petition before the RTC-Caloocan, Branch 122 (docketed as LRC Case No. C-5026) only
on November 23, 2006,26 following receipt of the letter27 dated February 10, 2006 and the filing of the
complaint on May 3, 2006, alternatively seeking refund of payments. While the court a quo decided
the latter petition for inscription in its favor,28 there is no showing that the same had attained finality or
that the approved technical description had in fact been annotated on TCT No. 244220, or even that
the subdivision plan had already been approved.
Moreover, despite petitioners allegation29 that the claim of BSP had been settled, there appears to
be no cancellation of the annotations30 in GPIs favor. Clearly, the long delay in the performance of
GPI's obligation from date of demand on September 16, 2002 was unreasonable and unjustified. It
cannot therefore be denied that GPI substantially breached its contract to sell with Sps. Fajardo
which thereby accords the latter the right to rescind the same pursuant to Article 1191 of the
Code, viz:
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.
B. Effects of rescission
At this juncture, it is noteworthy to point out that rescission does not merely terminate the contract
and release the parties from further obligations to each other, but abrogates the contract from its
inception and restores the parties to their original positions as if no contract has been
made.31 Consequently, mutual restitution, which entails the return of the benefits that each party may
have received as a result of the contract, is thus required.32To be sure, it has been settled that the
effects of rescission as provided for in Article 1385 of the Code are equally applicable to cases under
Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving rescission under Article 1191. This means
bringing the parties back to their original status prior to the inception of the contract. Article 1385 of
the Civil Code provides, thus:
1wphi1

ART. 1385. Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be
carried out only when he who demands rescission can return whatever he may be obligated
to restore.
Neither shall rescission take place when the things which are the object of the contract are legally in
the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.
This Court has consistently ruled that this provision applies to rescission under Article 1191:
Since Article 1385 of the Civil Code expressly and clearly states that "rescission creates the
obligation to return the things which were the object of the contract, together with their fruits, and the
price with its interest," the Court finds no justification to sustain petitioners position that said Article
1385 does not apply to rescission under Article 1191. x x x33 (Emphasis supplied; citations omitted.)
In this light, it cannot be denied that only GPI benefited from the contract, having received full
payment of the contract price plus interests as early as January 17, 2000, while Sps. Fajardo
remained prejudiced by the persisting non-delivery of the subject lot despite full payment. As a

necessary consequence, considering the propriety of the rescission as earlier discussed, Sps.
Fajardo must be able to recover the price of the property pegged at its prevailing market value
consistent with the Courts pronouncement in Solid Homes,34 viz:
Indeed, there would be unjust enrichment if respondents Solid Homes, Inc. & Purita Soliven are
made to pay only the purchase price plus interest. It is definite that the value of the subject property
already escalated after almost two decades from the time the petitioner paid for it. Equity and
justice dictate that the injured party should be paid the market value of the lot, otherwise,
respondents Solid Homes, Inc. & Purita Soliven would enrich themselves at the expense of
herein lot owners when they sell the same lot at the present market value. Surely, such a
situation should not be countenanced for to do so would be contrary to reason and therefore,
unconscionable. Over time, courts have recognized with almost pedantic adherence that what is
inconvenient or contrary to reason is not allowed in law. (Emphasis supplied.)
On this score, it is apt to mention that it is the intent of PD 957 to protect the buyer against
unscrupulous developers, operators and/or sellers who reneged on their obligations. 35 Thus, in order
to achieve this purpose, equity and justice dictate that the injured party should be afforded full
recompense and as such, be allowed to recover the prevailing market value of the undelivered lot
which had been fully paid for.
1wphi1

C. Moral and exemplary damages, attorneys fees and costs of suit

Furthermore, the Court finds that there is proper legal basis to accord moral and exemplary
damages and attorney's fees, including costs of suit. Verily, GPIs unjustified failure to comply with its
obligations as above-discussed caused Sps. Fajardo serious anxiety, mental anguish and sleepless
nights, thereby justifying the award of moral damages. In the same vein, the payment of exemplary
damages remains in order so as to prevent similarly minded subdivision developers to commit the
same transgression. And finally, considering that Sps. Fajardo were constrained to engage the
services of counsel to file this suit, the award of attorneys fees must be likewise sustained.
D. Liability of individual Petitioners
However, the Court finds no basis to hold individual petitioners solidarily liable with petitioner GPI for
the payment of damages in favor of Sps. Fajardo since it was not shown that they acted maliciously
or dealt with the latter in bad faith. Settled 1s the rule that in the absence of malice and bad faith, as
in this case, officers of the corporation cannot be made personally liable for liabilities of the
corporation which, by legal fiction, has a personality separate and distinct from its officers,
stockholders, and members.36
WHEREFORE, the assailed July 22, 2011 Decision and February 29, 2012 Resolution of the Court
of Appeals in CA-G.R. SP No. 112981 are hereby AFFIRMED WITH MODIFICATION, absolving
individual petitioners Jose C. Go, Evelyn Go, Lourdes G. Ortiga, George Go, and Vicente Go from
personal liability towards respondent-spouses Eugenio and Angelina Fajardo.
SO ORDERED.

-failure of seller to deliver deed of sale and title after full payment entitles the buyer to rescind
contract
-effects of rescission in 1385 likewise applicable in rescission in 1191 with the same force and
effects
G.R. No. 130913

June 21, 2005

OLIVERIO LAPERAL and FILIPINAS GOLF & COUNTRY CLUB INC., petitioners,
vs.
SOLID HOMES, INC., respondent.
SOUTHRIDGE VILLAGE HOMEOWNERS ASSOCIATION, intervenor.
DECISION
GARCIA, J.:
Before us is this petition for review on certriorari under Rule 45 of the Rules of Court to nullify and
set aside the following issuances of the Court of Appeals in CA-G.R. CV No. 37853, to wit:
1. Decision dated September 18, 1996,1 affirming with modification an earlier decision of
the Regional Trial Court at Laguna, Br. XXV, in an action for reformation of document thereat
commenced by herein respondent Solid Homes, Inc. against the petitioners; and
2. Resolution dated September 23, 1997,2 denying the parties respective motions for
reconsideration.
As found by the Court of Appeals in the decision under review, the material facts may be briefly
stated, as follows:
On June 6, 1981, Filipinas Golf Sales and Development Corporation (FGSDC), predecessor-ininterest of petitioner Filipinas Golf and Country Club, Inc. (FGCCI), represented by its then
President, the other petitioner herein, Oliverio Laperal, entered into a Development and
Management Agreement3 (Agreement, for short) with herein respondent Solid Homes, Inc., a
registered subdivision developer, involving several parcels of land owned by Laperal and FGSDC
with an aggregate area of approximately 42 hectares and located at Bo. San Antonio, San Pedro,
Laguna.
Under the terms and conditions of the aforementioned Agreement and the Supplement4 thereto
dated January 19, 1982, respondent Solid Homes, Inc., undertook to convert at its own expense the
land subject of the agreement into a first-class residential subdivision, in consideration of which
respondent will get 45% of the lot titles of the saleable area in the entire project.
On different dates, or more specifically on June 8, 1983, June 22, 1983 and July 29, 1983, Victorio
V. Soliven, President and General Manager of respondent Solid Homes, Inc., wrote Oliverio Laperal,
President of FGSDC, requesting Laperal to furnish Solid Homes, Inc., with the owners duplicate

copies of the Torrens titles covering the subject land in order to facilitate the processing of
respondents application with the Human Settlements Regulatory Commission (HSRC) for a license
to sell subdivision lots, as required under Presidential Decree No. 957.
Despite repeated requests, however, Laperal did not comply.
On October 7, 1983, the aforementioned Agreement was cancelled by the parties, and, in lieu
thereof, two (2) contracts identically denominated Revised Development and Management
Agreement5 (Revised Agreements, for short) were entered into by respondent with the two (2)
successors-in-interest of FGSDC, to wit: (1) one, with petitioner Oliverio Laperal as owner of the
181,075-square meter area of the subject land; and (2) another, with petitioner FGCCI as owner of
the 399,075-square meter area thereof.
Unlike the original agreement, both Revised Agreements omitted the obligation of herein petitioners
Laperal and FGCCI to make available to respondent Solid Homes, Inc. the owners duplicate copies
of the titles covering the subject parcels of land.
And, because there were still other matters which were inadvertently omitted in the said Revised
Agreements, the parties executed an Addendum6 thereto dated November 11, 1983.
In addition to the provision on the automatic rescission of the Revised Agreements in case of breach
of the terms and conditions thereof under paragraph 10 of the same, the parties further agreed in
the Addendum that upon a showing that respondent deliberately abandoned or discontinued work in
the subject project, all improvements of whatever nature and kind it may have introduced in the
property and existing as of the date of the violation shall be forfeited in favor of the petitioners
without any obligation on their part to pay respondent therefor. Likewise, the parties agreed in the
same Addendum to a forfeiture of all advances made and remittances of proceeds from reservations
and sales upon occurrence of the aforesaid default or violation of any of the terms and conditions of
the Revised Agreements and the Addendum. Under the Addendum, abandonment is deemed to
have occurred upon failure or absence of any work for development for any ten (10) days.
It appears, however, that even as the Revised Agreements already provided for the non-surrender of
the owners duplicate copies of the titles, respondent persisted in its request for the delivery thereof,
explaining that said owners duplicate copies were necessary for: (1) the issuance by the HSRC of
the license to sell; (2) the segregation of the golf course portion from the rest of the subdivision
area; (3) the segregation of the individual titles for portions which are supposed to be made available
for PAG-IBIG take-outs; and (4) the preparation of the technical description of nine (9) blocks already
approved by the Bureau of Lands.
Then, in a letter dated December 7, 1983 addressed to herein petitioners, respondent, through its
Executive Vice-President and Treasurer, Purita R. Soliven, explained that it was unable to meet the
November 30, 1983 deadline for the payment of P1 Million as provided for in the Revised
Agreements because there was delay in the processing of its license to sell, which, in turn, is due to
petitioners continued refusal to deliver the owners duplicate copies of the titles, contrary to what
was allegedly agreed upon by the parties. Respondent reiterated in the same letter that in the
absence of such license from HSRC, it would not be able to comply with the rest of its undertakings

within the allotted periods since the projected collection of amounts from sales and reservations of
the subdivision lots did not materialize. Nonetheless, in order to demonstrate that it was not reneging
on its commitments under the Revised Agreements despite its difficulties to generate more funds,
respondent proposed that it be allowed to assign to petitioners P1Million out of its receivables
worth P1,209,000.00 from loan proceeds due in its favor under the PAG-IBIG housing program,
which it expected to receive for some of the completed housing units.
In separate letters both dated December 9, 1983, however, petitioners rejected respondents
proposal and instead insisted on the payment of P1Million to each of them.
It was only at this point, as alleged in respondents reply letter dated December 13, 1983, that
respondent supposedly realized that instead of providing for the payment of only P500,000.00 in
each contract, or a total ofP1Million for both Revised Agreements, the total amount of P1Million was
erroneously carried over in each of theRevised Agreements, with the consequence that under said
two (2) Revised Agreements, it was bound to pay a total of P2Million to the petitioners.
Meanwhile, in subsequent letters dated January 6, 1984, January 17, 1984 and February 6, 1984,
respondent continued to press petitioners for the delivery of the owners duplicate copies of their
titles covering the subject parcel of land.
Then, on March 9, 1984, petitioners served on respondent notices of rescission of the Revised
Agreements with a demand to vacate the subject properties and yield possession thereof to them. In
the same letter, petitioners made it clear that they are enforcing the rescission clause of the Revised
Agreements on account of respondents failure to: (1) pay them P1Million each on November 30,
1983; (2) complete the development of Phase I-A of the project not later than February 15, 1984;
and (3) obtain from the HSRC the license to sell subdivision lots.
In its response-letter dated March 14, 1984, respondent, through counsel, objected to the
announced rescission, arguing that the proximate cause of its inability to meet its contractual
obligations was petitioners own failure and refusal to deliver their owners duplicate copies of the
titles for processing by the HSRC, PAG-IBIG, accredited banks, and other government agencies,
adding that on account of petitioners failure to do so, it was not issued the necessary license to sell,
thus resulting in the slowdown in the development works in the project due to its inability to generate
additional funds and to the slackening of its sales campaign.
Such was the state of things when, on April 2, 1984, in the Regional Trial Court (RTC) at Bian,
Laguna respondent Solid Homes, Inc. instituted the complaint in this case praying for the reformation
of the Revised Agreements and the Addendum on the ground that these contracts failed to express
the true intent of the parties. In the same complaint, respondent prayed for the issuance of a
temporary restraining order (TRO) and a writ of preliminary injunction to prevent petitioners from
exercising their rights as owners of the subject properties. Docketed with the same court as Civil
Case No. B-2069, the complaint was raffled to Branch XXV thereof.
On the very day that the complaint was filed, the trial court issued a TRO to prevent petitioners from
implementing the unilateral rescission of the Revised Agreements and the Addendum.

Later, in an order dated May 23, 1984,7 the same court granted respondents application for a writ of
preliminary injunction upon its posting of a bond in the amount of P1Million.
On April 18, 1985,8 the Southridge Village Homeowners Association filed a complaint-inintervention praying that the rights and preferential status of its members who have been occupying
some of the completed units in the subdivision project be respected by whoever between the
principal litigants may later be adjudged as the prevailing party.
Both the petitioners and respondent filed their respective answers to the aforesaid complaint-inintervention, commonly alleging intervenors lack of capacity to sue. Petitioners added in their
answer that it should be respondent which must be made solely liable to the intervenor for whatever
claims its members may be entitled to. For its part, respondent prayed for the cancellation, in whole
or in part, of its contracts with the members of the intervenor Association to the extent compatible
with prevailing economic conditions.
Upon petitioners motion, the trial court issued an order on May 20, 1985 lifting the writ of preliminary
injunction over the entire property except as to Phase I-A thereof, and reducing respondents
injunction bond from P1Million to only P200,000.00.
Petitioners then filed a motion for reconsideration. Finding merit in the motion, the trial court, in its
order of August 15, 1985,9 as clarified in its order of September 27, 1985,10 completely lifted the writ
of preliminary injunction so as to include the area covered by Phase I-A, and cancelled the bond
of P200,000.00 earlier posted by respondent.
To these orders, both parties filed their respective motions for reconsideration. In its subsequent
order dated November 8, 1985,11 the trial court modified its August 15, 1985 order by maintaining the
complete lifting of the writ of preliminary injunction but ordering the restoration of
respondents P1Million bond or its substitution with another if the same had already been cancelled,
to answer for whatever damages that may be proven by the petitioners during the trial of the case.
The above-mentioned orders, namely, orders dated May 20, 1985, August 15, 1985, September 27,
1985 and November 8, 1985 involving the dissolution of the writ of preliminary injunction over the
entire property and the maintenance of the P1Million bond against respondent, became the subject
of a petition for certiorari filed by respondent before the Court of Appeals docketed therein as CAG.R. SP No. 47885.
In a decision dated October 9, 1987, the Court of Appeals dismissed the petition.
Therefrom, respondent went to this Court in G.R, No. 80290 but later abandoned the same,
prompting this Court, in its Resolution dated February 22, 1988, to consider the Court of Appeals
dismissal of respondents petition final and executory.
Meanwhile, upon respondents application, a notice of lis pendens was annotated on the Torrens
titles covering the properties in litigation. Said notice, however, was lifted by the trial court in its
orders of April 12, 1988 and May 21, 1991.

Eventually, after due proceedings in the main case, the trial court, in a decision dated December 19,
1991,12rendered judgment dismissing respondents complaint for reformation. We quote the
dispositive portion of the same decision:
IN THE LIGHT OF THE FOREGOING, judgment is hereby rendered in favor of the defendants and
against the plaintiff dismissing the complaint with costs:
On defendants recovery upon the bond posted by the plaintiff to answer to whatever damages that
the party enjoined may suffer by reason of the injunction, resolution as to the propriety of its award is
hereby held in abeyance until after proper application by the defendants and hearing thereon, as
reserved by the defendants in their memorandum.
As regards the Intervenors, the defendants are directed to respect and acknowledge their
preferential rights over said Intervenors occupied houses and lots.
SO ORDERED.
Therefrom, respondent went to the Court of Appeals via ordinary appeal in CA-G.R. CV No. 37853.
As stated at the threshold hereof, the Court of Appeals, in a decision dated September 18,
1996,13 affirmed with modification the appealed decision of the trial court, thus:
WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision appealed from is AFFIRMED with
the modification that [petitioners] are ordered to reimburse [respondent], jointly and severally, the
amount of Five Million Two Hundred Thousand Eight Hundred Thirty Three Pesos and Twenty Seven
Centavos (P5,200,833.27) representing the actual cost of the development and the completed
improvements on the project. In all other respects, the judgment of the trial court is AFFIRMED.
SO ORDERED.
Both parties separately moved for reconsideration, but their respective motions were denied by the
appellate court in its resolution of September 23, 1997.14
And, as they did not agree with the judgment, petitioners are now appealing to this Court for
relief via the present recourse, it being their submission that the Court of Appeals erredI.
xxx IN HOLDING THAT PETITIONERS TERMINATION OF THE REVISED AGREEMENT AND
ADDENDUM, BECAUSE OF THE CONTRACTUAL BREACH COMMITTED BY RESPONDENT
SOLID HOMES, CARRIED WITH IT THE EFFECT PROVIDED UNDER ARTICLE 1385 OF THE
NEW CIVIL CODE.
II.

xxx IN VOIDING THE FORFEITURE CLAUSES OF THE ADDENDUM, AND IN ORDERING THE
REFUND OF THE SUM OF P5,200,833.27 TO RESPONDENT SOLID HOMES.
III.
xxx IN HOLDING, IN EFFECT, THAT PETITIONERS ARE NOT ENTITLED TO DAMAGES.
The Court finds merit in the petition.
While this Court does not agree with petitioners that the right to rescind under Article 1191 of the
Civil Code does not carry with it the corresponding obligation for restitution, we do not subscribe to
the Court of Appeals conclusion that: (1) "the forfeiture/penalty clause under paragraphs Nos. 2 and
3 of the Addendum to the Revised Development and Management Agreements is, under the factual
milieu of this case, unreasonable and unconscionable and, therefore, void for being contrary to
morals and good customs"15; and (2) petitioners must reimburse respondent the actual cost of
development and completed improvements on the project in the total amount of P5,200,833.27.16
It is petitioners thesis that inasmuch as the rescission of the Revised Agreements and
its Addendum was made pursuant to Article 1191 of the Civil Code, the provision of Article 1385 17 of
the same Code, which requires mutual restitution should not apply because Article 1385 applies
only if the rescission is made under the instances enumerated in Article 1381 18 of the Code.
We do not agree.
Mutual restitution is required in cases involving rescission under Article 1191. In Velarde vs. Court of
Appeals,19this Court, in no uncertain terms, squarely ruled on this matter:
Considering that the rescission of the contract is based on Article 1191 of the Civil Code,
mutual restitution is required to bring back the parties to their original situation prior to the
inception of the contract. Accordingly, the initial payment of P800,000 and the corresponding
mortgage payments in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00)
advanced by petitioners should be returned by private respondents, lest the latter unjustly enrich
themselves at the expense of the former.
Rescission creates the obligation to return the object of the contract. It can be carried out only when
the one who demands rescission can return whatever he may be obliged to restore (citing Co v.
Court of Appeals, 312 SCRA 528, August 17, 1999; and Vitug, Compendium of Civil Law and
Jurisprudence, 1993 revised ed., p. 556). To rescind is to declare a contract void at its inception and
to put an end to it as though it never was. It is not merely to terminate it and release the parties from
further obligations to each other, but to abrogate it from the beginning and restore the parties to their
relative positions as if no contract has been made (citing Ocampo v. Court of Appeals, 233 SCRA
551, June 30, 1994).
Article 1191 of the Civil Code provides:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of the
period.
This is understood 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)
Despite the fact that Article 1124 of the old Civil Code from whence Article 1191 was taken, used the
term "resolution", the amendment thereto (presently, Article 1191) explicitly and clearly used the term
"rescission". Unless Article 1191 is subsequently amended to revert back to the term "resolution",
this Court has no alternative but to apply the law, as it is written.
Again, since Article 1385 of the Civil Code expressly and clearly states that "rescission creates the
obligation to return the things which were the object of the contract, together with their fruits, and the
price with its interest," the Court finds no justification to sustain petitioners position that said Article
1385 does not apply to rescission under Article 1191.
In Palay, Inc. vs. Clave,20 this Court applied Article 1385 in a case involving "resolution" under Article
1191, thus:
Regarding the second issue on refund of the installment payments made by private respondent.
Article 1385 of the Civil Code provides:
"ART. 1385. Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be carried out
only when he who demands rescission can return whatever he may be obliged to restore.
"Neither shall rescission take place when the things which are the object of the contract are legally in
the possession of third persons who did not act in bad faith.
"In this case, indemnity for damages may be demanded from the person causing the loss."
As a consequence of the resolution by petitioners, rights to the lot should be restored to
private respondent or the same should be replaced by another acceptable lot. However,
considering that the property had already been sold to a third person and there is no evidence on
record that other lots are still available, private respondent is entitled to the refund of installments
paid plus interest at the legal rate of 12% computed from the date of the institution of the action. It
would be most inequitable if petitioners were to be allowed to retain private respondent's payments
and at the same time appropriate the proceeds of the second sale to another.

Applying the clear language of the law and the consistent jurisprudence on the matter, therefore, the
Court rules that rescission under Article 1191 in the present case, carries with it the corresponding
obligation of restitution.
This notwithstanding, the Court does not agree with the Court of Appeals that, as a consequence of
the obligation of mutual restitution in this case, petitioners should return the amount
of P5,200,833.27 to respondent.
Article 1191 states that "the injured party may choose between fulfillment and rescission of the
obligation, with the payment of damages in either case." In other words, while petitioners are
indeed obliged to return the said amount to respondent under Article 1385, assuming said figure is
correct, respondent is at the same time liable to petitioners in the same amount as liquidated
damages by virtue of the forfeiture/penalty clause as freely stipulated upon by the parties in the
Addendum, paragraphs 1 and 221 of which respectively read:
WHEREAS, included as part of said agreement are the following:
1. Further to the stipulations on paragraph 10, upon default of performances, violations and/or noncompliance with the terms and conditions herein agreed upon by the DEVELOPER wherein it
appears that the DEVELOPER deliberately abandoned or discontinued the work on the project, said
party shall lose any entitlement, if any, to any refund and/or advances it may have incurred in
connection with or relative to previous development works in the subdivision; likewise, all
improvements of whatever nature and kind introduced by the DEVELOPER on the property, existing
as of the date of default or violation, shall automatically belong to the OWNER without obligation on
his part to pay for the costs thereof.
2. Similarly with the same condition of default or violation obtaining, as stated in paragraph 10 of
said agreement, all advances made and remittances of proceeds from reservations and sales given
by the DEVELOPER to the OWNER as provided for in this agreement shall be deemed absolutely
forfeited in favor of the OWNER, resulting to waiver of DEVELOPERs rights, if any, with respect to
said amount(s).
If this Court recognized the right of the parties to stipulate on an extrajudicial rescission 22 under
Article 1191, there is no reason why this Court will not allow the parties to stipulate on the matter of
damages in case of such rescission under Book IV, Title VIII, Chapter 3, Section 2 of the Civil Code
governing liquidated damages.23
For sure, we find no factual and legal justification to sustain the appellate courts conclusion that the
agreed forfeiture/penalty clause is unreasonable and unconscionable unless respondent had
sufficiently shown that it had completely accounted for the proceeds of the sale of subdivision lots it
made during the effectivity of the agreement. It must be stressed that the lots sold by respondent
were owned by petitioners Laperal and FGCCI. How then could there be unjust enrichment in favor
of petitioners in such a case?
Furthermore, a substantial part of the funds spent by respondent in the construction works which by
the Court of Appeals required to be reimbursed by petitioners admittedly came from the proceeds of

the sale of the real property still owned by petitioners. This may be gleaned from the fact that one of
the main reasons respondent raised in its complaint for reformation before the trial court was that it
was unable to proceed with the construction works due to lack of funds on account of the slackening
of its sales campaign resulting from the alleged refusal, which is after all justified, of the petitioners to
surrender their titles to respondent.
Finally, even assuming that the foregoing forfeiture/penalty clause in the "Addendum" would result in
considerable losses on the part of respondent, it is not for this Court to release said party from its
obligation. Our pronouncement in Esguerra vs. Court of Appeals24 is apt and pertinent:
xxx. It is a long established doctrine that the law does not relieve a party from the effects of an
unwise, foolish, or disastrous contract, entered into with all the required formalities and with full
awareness of what he was doing. Courts have no power to relieve parties from obligations
voluntarily assumed, simply because their contracts turned out to be disastrous deals or unwise
investments." xxx.
WHEREFORE, the petition is hereby GRANTED. Accordingly, the assailed decision and resolution of
the Court of appeals are REVERSED and SET ASIDE and the decision dated December 19, 1991 of
the Regional Trial Court in Civil Case No. B-2069 REINSTATED.
No pronouncement as to costs.
SO ORDERED.
Panganiban, (Chairman), Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ., concur.

-rescission in article 1191 has the same effects as rescission in article 1385
-however, there is no restitution on the amount received by herein petitioners as
liquidated damages under article 1191.
-no violation on the doctrine of unjust enrichment as the property sold, the proceeds
of which is the same amount being ordered to be given back, were the proceeds of
sales of properties belonging to the petitioners.

G.R. No. 193453

June 5, 2013

SPOUSES RUBIN AND PORTIA HOJAS, Petitioners,

vs.
PHILIPPINE AMANAH BANK AND RAMON KUE, Respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari assailing the July 28, 2010 Decision1 of the Court of Appeals
(CA), in CA-G.R. CV No. 55722, which affirmed the May 27, 1996 Decision of the Regional Trial
Court, Branch 13, Zamboanga City (RTC), dismissing Civil Case No. 1028 (3952), an action for
"Determination of True Balance of Mortgage, Debt, Annulment/Setting Aside of Extrajudicial
Foreclosure of Mortgage and Damages, with Prayer for Preliminary Injunction."
The petitioners, Spouses Rubin and Portia Hojas (petitioners), alleged that on April 11, 1980, they
secured a loan from respondent Philippine Amanah Bank (PAB) in the amount of P450,000.00; that
this loan was secured by a mortgage, covering both personal and real properties; that from May 14,
1981 to June 27, 1986, they made various payments amounting to P486,162.13; that PAB, however,
did not properly credit their payments; that based on the summary of payments furnished by PAB to
them on February 24, 1989, only 13 payments were credited, erroneously amounting
to P317,048.83; that PAB did not credit the payment they made totalingP165,623.24; and that, in the
statement of their account as of October 17, 1984, PAB listed their total payment as 412,211.54 on
the principal, and P138,472.09 as 30% interest, all amounting to P550,683.63, despite the fact that
at that time, petitioners had already paid the total sum of P486,162.13.2
Petitioners further averred that for failure to pay the loan, PAB applied for the extrajudicial
foreclosure of the mortgaged real properties of petitioners with the Ex-Officio Sheriff; that
consequently, a Notice of Extrajudicial Foreclosure was issued on January 12, 1987 setting the
foreclosure sale on April 21, 1987 and, stating therein the mortgage debt in the sum of P450,000.00;
and that, in the public auction conducted, PAB acquired said real property.3
It was further alleged that on March 9, 1988, through the intervention of then Senator Aquilino
Pimentel, Farouk A. Carpizo (Carpizo), the OICPresident of PAB, wrote Roberto Hojas (Roberto),
petitioners son, informing him that although the one-year redemption period would expire on April
21, 1988, by virtue of the banks incentive scheme, the redemption period was extended until
December 31, 1988; that despite said letter from the OIC-President, the OIC of the Project
Development Department of PAB wrote Rubin Hojas that the real properties acquired by PAB would
be sold in a public bidding before the end of August, 1988; that on November 4, 1988, a public
bidding was conducted; that in the said bidding, the mortgaged properties were awarded to
respondent Ramon Kue (Kue); that subsequently, they received a letter from the OIC of the Project
Development Department, dated January 3, 1989, informing them that they had fifteen (15) days
from receipt within which to vacate the premises; that Kue then sent another letter, dated January
31, 1989, informing them that he had already acquired the said property and that they were
requested to vacate the premises within fifteen (15) days from receipt thereof; 4 and that because of

this development, on May 7, 1991, petitioners filed an action for "Determination of True Balance of
Mortgage Debt, Annulment/Setting Aside of Extrajudicial Foreclosure of Mortgage and Damages,
with Prayer for Preliminary Injunction" against PAB.5
On May 27, 1996, the RTC dismissed petitioners complaint. It ruled, among others, that: 1) PAB was
not guilty of bad faith in conducting the extrajudicial foreclosure as it, at one time, even suspended
the conduct of the foreclosure upon the request of petitioners, who, nevertheless, failed to exert
effort to settle their accounts; 2) because petitioners failed to redeem their properties within the
period allowed, PAB became its absolute owner and, as such, it had the right to sell the same to
Kue, who acquired the property for value and in good faith; and 3) the subsequent foreclosure and
auction sale having been conducted above board and in accordance with the requisite legal
procedure, collusion between PAB and Kue was certainly alien to the issue. 6
Aggrieved, petitioners filed an appeal assailing the May 27, 1996 RTC Decision. They asserted that
the March 9, 1988 Letter of Carpizo to Roberto Hojas extended the redemption period from April 21
to December 31, 1988. Considering that they had relied on Carpizos representation, PAB violated
the principle of estoppel when it conducted the public sale on November 4, 1988. 7 Their basis was
the portion of said letter which stated:
xxxx
As the Bank has adopted an incentive scheme whereby payments are liberalized to give chances to
former owners to repossess their properties, we suggest that you advise your parents to drop by at
our Zamboanga Office so they can avail of this rare privilege which shall be good only up to
December 31, 1988. (Emphasis supplied)8
The CA was not sympathetic with petitioners position. It held that the period of redemption was
never extended. The date "December 31, 1988" was not an extension of the redemption period. It
was merely the last day for the availment of the liberalized payment for the repossession of
foreclosed assets under PABs incentive scheme. PAB, through said letter, did not make an
unqualified representation to petitioners that it had extended the redemption period. As such, PAB
could not be said to have violated the principle of estoppel when it conducted a public sale on
November 4, 1988.9 Thus, the dispositive portion of the CA decision reads:
ACCORDINGLY, the instant appeal is DENIED. The Decision dated May 27, 1996, of the Regional
Trial Court, 9th Judicial Region, Branch No. 13 of Zamboanga City, in Civil Case No. 1028 (3952), is
AFFIRMED.
SO ORDERED.10
Undaunted, petitioners filed the present petition for review. It postulated the sole issue:
WHETHER OR NOT THE CA ERRED IN NOT HOLDING PAB TO HAVE VIOLATED THE
PRINCIPLE OF ESTOPPEL WHEN THE LATTER CONDUCTED THE NOVEMBER 4, 1988 PUBLIC
SALE.

Petitioners reiterated their argument that the November 4, 1988 public sale by PAB was violative of
the principle of estoppel because said bank made it appear that the one-year redemption period was
extended. As such, when PAB sold the property before said date, they suffered damages and were
greatly prejudiced.11 They also argued that since they manifested their interest in availing of the said
"incentive scheme," PAB should have, at the very least, waited until December 31, 1988, before it
sold the subject foreclosed property in a public auction.12
On the other hand, PAB explains that the purpose of the "incentive scheme" was to give previous
owners the chance to redeem their properties on easy payment term basis, through condonation of
some charges and penalties and allowing payment by installment based on their proposals which
may be acceptable to PAB. Therefore, the March 9, 1988 Letter of Carpizo was an invitation for
petitioners to submit a proposal to PAB.13 It was not meant to extend the one-year redemption period.
As early as August 11, 1988, PAB wrote petitioners informing them of the scheduled public bidding.
After receipt of the letter, petitioners went to PAB to signify their willingness to avail of the said
incentive scheme. They, however, failed to submit a proposal. In fact, PAB did not hear from
petitioners again. As such, the respondent sold the subject property in a public sale on November 4,
198814 PAB cited the RTCs finding that although the petitioners manifested their intention to avail of
the incentive scheme desire alone was not sufficient. Redemption is not a matter of intent but
involved making the proper payment or tender of the price of the land within the specified period. 15
The petition is bereft of merit.
Through estoppel, an admission or representation is rendered conclusive upon the person making it,
and cannot be denied or disproved as against the person relying on it. 16 This doctrine is based on the
grounds of public policy, fair dealing, good faith, and justice and its purpose is to forbid one to speak
against his own act, representations or commitments to the injury of one to whom they were directed
and who reasonably relied on it.17 Thus, in order for this doctrine to operate, a representation must
have been made to the detriment of another who relied on it. In other words, estoppel would not lie
against one who, in the first place, did not make any representation.
In this case, a perusal of the letter, on which petitioners based their position that the redemption
period had been extended, shows otherwise. Pertinent portions of the said letter read:
xxxx
Our records show that the above account has already been foreclosed by the bank. However, the
borrowers concerned can still exercise the one (1) year right of redemption over the foreclosed
properties until April 21, 1988.
As the Bank has adopted an incentive scheme whereby payments are liberalized to give chances to
former owners to repossess their properties, we suggest that you advise your parents to drop by at
our Zamboanga Office so they can avail of this rare privilege which shall be good only up to
December 31, 1988. [Emphases and Underscoring Supplied] 18

As correctly held by the RTC and upheld by the CA, the date "December 31, 1988" refers to the last
day when owners of foreclosed properties, like petitioners, could submit their payment proposals to
the bank. The letter was very clear. It was about the availment of the liberalized payment scheme of
the bank. On the last day for redemption, the letter was also clear. It was April 21, 1988. It was never
extended.
The opportunity given to the petitioners was to avail of the liberalized payment scheme which
program would expire on December 31, 1988. As explained by Abraham Iribani (Iribani), the OIC of
the Project Development Department of PAB, it was to give a chance to previous owners to
repossess their properties on easy term basis, possibly by condonation of charges and penalties and
payment on instalment. The letter of Carpizo was an invitation to the petitioners to come to the bank
with their proposal. It appears that the petitioners could not come up with a proposal acceptable to
the bank.
For said reason, the mortgaged property was included in the list of mortgaged properties that would
be sold through a scheduled public bidding. Thus, on August 11, 1988, Iribani wrote the petitioners
about the scheduled bidding. In response, the petitioners told Iribani that they would go Manila to
explain their case. They did not, however, return even after the public bidding. In this regard, the CA
was correct when it wrote:
Here, there is no estoppel to speak of. The letter does not show that the Bank had unqualifiedly
represented to the Hojases that it had extended the redemption period to December 31, 1988. Thus,
the Hojases have no basis in positing that the public sale conducted on November 4, 1988 was null
and void for having been prematurely conducted. 19
Moreover, petitioners allegation that they had signified their intention to avail of the incentive
scheme (which they have equated to their intention to redeem the property), did not amount to an
exercise of redemption precluding the bank from making the public sale. 20 In the case of China
Banking Corporation v. Martir,21 this Court expounded on what constitutes a proper exercise of the
right of redemption, to wit:
The general rule in redemption is that it is not sufficient that a person offering to redeem manifests
his desire to do so. The statement of intention must be accompanied by an actual and simultaneous
tender of payment. This constitutes the exercise of the right to repurchase.
In several cases decided by the Court where the right to repurchase was held to have been properly
exercised, there was an unequivocal tender of payment for the full amount of the repurchase price.
Otherwise, the offer to redeem is ineffectual. Bona fide redemption necessarily implies a reasonable
and valid tender of the entire repurchase price, otherwise the rule on the redemption period fixed by
law can easily be circumvented.
Moreover, jurisprudence also characterizes a valid tender of payment as one where the full
redemption price is tendered. Consequently, in this case, the offer by respondents on July 24, 1986
to redeem the foreclosed properties for 1,872,935 and the subsequent consignation in court
of P1,500,000 on August 27, 1986, while made within the period of redemption, was ineffective since
the amount offered and actually consigned not only did not include the interest but was in fact also

way below the P2,782,554.66 paid by the highest bidder/purchaser of the properties during the
auction sale.
In Bodiongan vs. Court of Appeals, we held:
In order to effect a redemption, the judgment debtor must pay the purchaser the redemption price
composed of the following: (1) the price which the purchaser paid for the property; (2) interest of 1%
per month on the purchase price; (3) the amount of any assessments or taxes which the purchaser
may have paid on the property after the purchase; and (4) interest of 1% per month on such
assessments and taxes x x x.
Furthermore, Article 1616 of the Civil Code of the Philippines provides:
The vendor cannot avail himself of the right to repurchase without returning to the vendee the price
of the sale x x x.
It is not difficult to understand why the redemption price should either be fully offered in legal tender
or else validly consigned in court. Only by such means can the auction winner be assured that the
offer to redeem is being made in good faith.
1wphi1

Respondents' repeated requests for information as regards the amount of loan availed from the
credit line and the amount of redemption, and petitioner's failure to accede to said requests do not
invalidate the foreclosure. Respondents can find other ways to know the redemption price. For one,
they can examine the Certificate of Sale registered with the Register of Deeds to verify the purchase
price, or upon the filing of their complaint, they could have moved for a computation of the
redemption price and consigned the same to the court. At any rate, whether or not respondents
'"were diligent in asserting their willingness to pay is irrelevant. Redemption within the period allowed
by law is not a matter of intent but a question of payment or valid tender of the full redemption price
within said period.
Even the complaint instituted by respondents cannot aid their plight because the institution of an
action to annul a foreclosure sale does not suspend the running of the redemption period.
(Underscoring supplied)22
In the case at bench, the record is bereft of concrete evidence that would show that, aside from the
fact that petitioners manifested their intention to avail of the scheme, they were also ready to pay the
redemption price. Hence, as they failed to exercise their right of redemption and failed to take
advantage of the liberalized incentive scheme, PAB was well within its right to sell its property in a
public sale.
WHEREFORE, the petition is DENIED.
SO ORDERED.

-Doctrine in Estoppel is misplaced; the letter of the bank did not extend the
redemption period but the liberalized scheme for the payment of their loan secured
by a mortgage.
-There was no misrepresentation to speak of in this case as petitioners
misunderstood the date for the liberalized payment scheme with that of the
deadline of the redemption period

G.R. No. 140479 March 8, 2001

ROSENCOR DEVELOPMENT CORPORATION and RENE JOAQUIN, petitioners,
vs.
PATERNO INQUING, IRENE GUILLERMO, FEDERICO BANTUGAN, FERNANDO MAGBANUA
and LIZZA TIANGCO, respondents.
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking reversal of the
Decision1 of the Court of Appeals dated June 25, 1999 in CA-G.R. CV No. 53963. The Court of
Appeals decision reversed and set aside the Decision2 dated May 13, 1996 of Branch 217 of the
Regional Trial Court of Quezon City in Civil Case No. Q-93-18582.
1wphi1.nt

The case was originally filed on December 10, 1993 by Paterno Inquing, Irene Guillermo and
Federico Bantugan, herein respondents, against Rosencor Development Corporation (hereinafter
"Rosencor"), Rene Joaquin, and Eufrocina de Leon. Originally, the complaint was one for annulment
of absolute deed of sale but was later amended to one for rescission of absolute deed of sale. A
complaint-for intervention was thereafter filed by respondents Fernando Magbanua and Danna Lizza

Tiangco. The complaint-in-intervention was admitted by the trial court in an Order dated May 4,
1994.3
The facts of the case, as stated by the trial court and adopted by the appellate court, are as follows:
"This action was originally for the annulment of the Deed of Absolute Sale dated September
4, 1990 between defendants Rosencor and Eufrocina de Leon but later amended (sic)
praying for the rescission of the deed of sale.
Plaintiffs and plaintiffs-intervenors averred that they are the lessees since 1971 of a twostory residential apartment located at No. 150 Tomas Morato Ave., Quezon City covered by
TCT No. 96161 and owned by spouses Faustino and Cresencia Tiangco. The lease was not
covered by any contract. The lessees were renting the premises then for P150.00 a month
and were allegedly verbally granted by the lessors the pre-emptive right to purchase the
property if ever they decide to sell the same.
Upon the death of the spouses Tiangcos in 1975, the management of the property was
adjudicated to their heirs who were represented by Eufrocina de Leon. The lessees were
allegedly promised the same pre-emptive right by the heirs of Tiangcos since the latter had
knowledge that this right was extended to the former by the late spouses Tiangcos. The
lessees continued to stay in the premises and allegedly spent their own money amounting
from P50,000.00 to P100,000.00 for its upkeep. These expenses were never deducted from
the rentals which already increased to P1,000.00.
In June 1990, the lessees received a letter from Atty. Erlinda Aguila demanding that they
vacate the premises so that the demolition of the building be undertaken. They refused to
leave the premises. In that same month, de Leon refused to accept the lessees rental
payment claiming that they have run out of receipts and that a new collector has been
assigned to receive the payments. Thereafter, they received a letter from Eufrocina de Leon
offering to sell to them the property they were leasing for P2,000,000.00. xxx.
The lessees offered to buy the property from de Leon for the amount of P1,000,000.00. De
Leon told them that she will be submitting the offer to the other heirs. Since then, no answer
was given by de Leon as to their offer to buy the property. However, in November 1990,
Rene Joaquin came to the leased premises introducing himself as its new owner.
In January 1991, the lessees again received another letter from Atty. Aguila demanding that
they vacate the premises. A month thereafter, the lessees received a letter from de Leon
advising them that the heirs of the late spouses Tiangcos have already sold the property to
Rosencor. The following month Atty. Aguila wrote them another letter demanding the rental
payment and introducing herself as counsel for Rosencor/Rene Joaquin, the new owners of
the premises.
The lessees requested from de Leon why she had disregarded the pre-emptive right she and
the late Tiangcos have promised them. They also asked for a copy of the deed of sale
between her and the new owners thereof but she refused to heed their request. In the same

manner, when they asked Rene Joaquin a copy of the deed of sale, the latter turned down
their request and instead Atty. Aguila wrote them several letters demanding that they vacate
the premises. The lessees offered to tender their rental payment to de Leon but she refused
to accept the same.
In April 1992 before the demolition can be undertaken by the Building Official, the barangay
interceded between the parties herein after which Rosencor raised the issue as to the rental
payment of the premises. It was also at this instance that the lessees were furnished with a
copy of the Deed of Sale and discovered that they were deceived by de Leon since the sale
between her and Rene Joaquin/Rosencor took place in September 4, 1990 while de Leon
made the offer to them only in October 1990 or after the sale with Rosencor had been
consummated. The lessees also noted that the property was sold only for P726,000.00.
The lessees offered to reimburse de Leon the selling price of P726,000.00 plus an additional
P274,000.00 to complete their P1,000.000.00 earlier offer. When their offer was refused,
they filed the present action praying for the following: a) rescission of the Deed of Absolute
Sale between de Leon and Rosencor dated September 4, 1990; b) the defendants
Rosencor/Rene Joaquin be ordered to reconvey the property to de Leon; and c) de Leon be
ordered to reimburse the plaintiffs for the repairs of the property, or apply the said amount as
part of the price for the purchase of the property in the sum of P100,000.00." 4
After trial on the merits, the Regional Trial Court rendered a Decision 5 dated May 13, 1996
dismissing the complaint. The trial court held that the right of redemption on which the complaint.
The trial court held that the right of redemption on which the complaint was based was merely an
oral one and as such, is unenforceable under the law. The dispositive portion of the May 13, 1996
Decision is as follows:
"WHEREFORE, in view of the foregoing, the Court DISMISSES the instant action. Plaintiffs
and plaintiffs-intervenors are hereby ordered to pay their respective monthly rental of
P1,000.00 per month reckoned from May 1990 up to the time they leave the premises. No
costs.
SO ORDERED."6
Not satisfied with the decision of the trial court, respondents herein filed a Notice of Appeal dated
June 3, 1996. On the same date, the trial court issued an Order for the elevation of the records of
the case to the Court of Appeals. On August 8, 1997, respondents filed their appellate brief before
the Court of Appeals.
On June 25, 1999, the Court of Appeals rendered its decision 7 reversing the decision of the trial
court. The dispositive portion of the June 25, 1999 decision is as follows:
"WHEREFORE, premises considered, the appealed decision (dated May 13, 1996) of the
Regional Trial Court (Branch 217) in Quezon City in Case No. Q-93-18582 is hereby
REVERSED and SET ASIDE. In its stead, a new one is rendered ordering:

(1) The rescission of the Deed of Absolute Sale executed between the appellees on
September 4, 1990;
(2) The reconveyance of the subject premises to appellee Eufrocina de Leon;
(3) The heirs of Faustino and Crescencia Tiangco, thru appellee Eufrocina de Leon,
to afford the appellants thirty days within which to exercise their right of first refusal
by paying the amount of ONE MILLION PESOS (P1,000,000.00) for the subject
property; and
(4) The appellants to, in turn, pay the appellees back rentals from May 1990 up to the
time this decision is promulgated.
No pronouncement as to costs.
SO ORDERED".8
Petitioners herein filed a Motion for Reconsideration of the decision of the Court of Appeals but the
same was denied in a Resolution dated October 15, 1999. 9
Hence, this petition for review on certiorari where petitioners Rosencor Development Corporation
and Rene Joaquin raise the following assignment of errors 10:
I.
THE COURT OF APPEALS GRAVELY ERRED WHEN IT ORDERED THE RESCISSION OF
THE ABSOLUTE DEED OF SALE BETWEEN EUFROCINA DE LEON AND PETITIONER
ROSENCOR.
II.
THE COURT OF APPEALS COMMTITED MANIFEST ERROR IN MANDATING THAT
EUFROCINA DE LEON AFFORD RESPONDENTS THE OPPORTUNITY TO EXERCISE
THEIR RIGHT OF FIRST REFUSAL.
III.
THE COURT OF APPEALS GRIEVOUSLY ERRED IN CONCLUDING THAT
RESPONDENTS HAVE ESTABLISHED THEIR RIGHT OF FIRST REFUSAL DESPITE
PETITIONERS RELIANCE ON THEIR DEFENSE BASED ON THE STATUTE OF FRAUDS.
Eufrocina de Leon, for herself and for the heirs of the spouses Faustino and Crescencia Tiangco, did
not appeal the decision of the Court of Appeals.
At the onset, we not that both the Court of Appeals and the Regional Trial Court relied on Article
1403 of the New Civil Code, more specifically the provisions on the statute of frauds, in coming out

with their respective decisions. The trial court, in denying the petition for reconveyance, held that
right of first refusal relied upon by petitioners was not reduced to writing and as such, is
unenforceable by virtue of the said article. The Court of Appeals, on the other hand, also held that
the statute of frauds governs the "right of first refusal" claimed by respondents. However, the
appellate court ruled that respondents had duly proven the same by reason of petitioners waiver of
the protection of the statute by reason of their failure to object to the presentation of oral evidence of
the said right.
Both the appellate court and the trial court failed to discuss, however, the threshold issue of whether
or not a right of first refusal is indeed covered by the provisions of the New Civil Code on the statute
of frauds. The resolution of the issue on the applicability of the statute of frauds is important as it will
determine the type of evidence which may be considered by the trial court as proof of the alleged
right of first refusal.
The term "statute of frauds" is descriptive of statutes which require certain classes of contracts to be
in writing. This statute does not deprive the parties of the right to contract with respect to the matters
therein involved, but merely regulates the formalities of the contract necessary to render it
enforceable. Thus, they are included in the provisions of the New Civil Code regarding
unenforceable contracts, more particularly Art. 1403, paragraph 2. Said article provides, as follows:
"Art. 1403. The following contracts are unenforceable, unless they are ratified:
xxx
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the
following cases an agreement hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of the agreement cannot be received without
the writing, or a secondary evidence of its contents:
a) An agreement that by its terms is not to be performed within a year from the
making thereof;
b) A special promise to answer for the debt, default, or miscarriage of another;
c) An agreement made in consideration of marriage, other than a mutual promise to
marry;
d) An agreement for the sale of goods, chattels or things in action, at a price not less
than five hundred pesos, unless the buyer accept and receive part of such goods and
chattels, or the evidences, or some of them, of such things in action, or pay at the
time some part of the purchase money; but when a sale is made by auction and entry
is made by the auctioneer in his sales book, at the time of the sale, of the amount
and kind of property sold, terms of sale, price, names of purchasers and person on
whose account the sale is made, it is a sufficient memorandum;

e) An agreement for the leasing of a longer period than one year, or for the sale of
real property or of an interest therein;
f) A representation to the credit of a third person."
The purpose of the statute is to prevent fraud and perjury in the enforcement of obligations
depending for their evidence on the unassisted memory of witnesses by requiring certain
enumerated contracts and transactions to be evidenced by a writing signed by the party to be
charged.11 Moreover, the statute of frauds refers to specific kinds of transactions and cannot apply to
any other transaction that is not enumerated therein.12 The application of such statute presupposes
the existence of a perfected contract.13
The question now is whether a "right of first refusal" is among those enumerated in the list of
contracts covered by the Statute of Frauds. More specifically, is a right of first refusal akin to "an
agreement for the leasing of a longer period than one year, or for the sale of real property or of an
interest therein" as contemplated by Article 1403, par. 2(e) of the New Civil Code.
We have previously held that not all agreements "affecting land" must be put into writing to attain
enforceability.14Thus, we have held that the setting up of boundaries, 15 the oral partition of real
property16, and an agreement creating a right of way17 are not covered by the provisions of the statute
of frauds. The reason simply is that these agreements are not among those enumerated in Article
1403 of the New Civil Code.
A right of first refusal is not among those listed as unenforceable under the statute of frauds.
Furthermore, the application of Article 1403, par. 2(e) of the New Civil Code presupposes the
existence of a perfected, albeit unwritten, contract of sale. 18 A right of first refusal, such as the one
involved in the instant case, is not by any means a perfected contract of sale of real property. At
best, it is a contractual grant, not of the sale of the real property involved, but of the right of first
refusal over the property sought to be sold19.
It is thus evident that the statute of frauds does not contemplate cases involving a right of first
refusal. As such, a right of first refusal need not be written to be enforceable and may be proven by
oral evidence.
The next question to be ascertained is whether or not respondents have satisfactorily proven their
right of first refusal over the property subject of the Deed of Absolute Sale dated September 4, 1990
between petitioner Rosencor and Eufrocina de Leon.
On this point, we agree with the factual findings of the Court of Appeals that respondents have
adequately proven the existence of their right of first refusal. Federico Bantugan, Irene Guillermo,
and Paterno Inquing uniformly testified that they were promised by the late spouses Faustino and
Crescencia Tiangco and, later on, by their heirs a right of first refusal over the property they were
currently leasing should they decide to sell the same. Moreover, respondents presented a letter20
dated October 9, 1990 where Eufrocina de Leon, the representative of the heirs of the spouses
Tiangco, informed them that they had received an offer to buy the disputed property for
P2,000,000.00 and offered to sell the same to the respondents at the same price if they were

interested. Verily, if Eufrocina de Leon did not recognize respondents right of first refusal over the
property they were leasing, then she would not have bothered to offer the property for sale to the
respondents.
It must be noted that petitioners did not present evidence before the trial court contradicting the
existence of the right of first refusal of respondents over the disputed property. They only presented
petitioner Rene Joaquin, the vice-president of petitioner Rosencor, who admitted having no personal
knowledge of the details of the sales transaction between Rosencor and the heirs of the spouses
Tiangco21. They also dispensed with the testimony of Eufrocina de Leon 22 who could have denied the
existence or knowledge of the right of first refusal. As such, there being no evidence to the contrary,
the right of first refusal claimed by respondents was substantially proven by respondents before the
lower court.
Having ruled upon the question as to the existence of respondents right of first refusal, the next
issue to be answered is whether or not the Court of Appeals erred in ordering the rescission of the
Deed of Absolute Sale dated September 4, 1990 between Rosencor and Eufrocina de Leon and in
decreeing that the heirs of the spouses Tiangco should afford respondents the exercise of their right
of first refusal. In other words, may a contract of sale entered into in violation of a third partys right of
first refusal be rescinded in order that such third party can exercise said right?
The issue is not one of first impression.
In Guzman, Bocaling and Co, Inc. vs. Bonnevie23, the Court upheld the decision of a lower court
ordering the rescission of a deed of sale which violated a right of first refusal granted to one of the
parties therein. The Court held:
"xxx Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381 (3) of the
Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded by reason
of injury to third persons, like creditors. The status of creditors could be validly accorded the
Bonnevies for they had substantial interests that were prejudiced by the sale of the subject
property to the petitioner without recognizing their right of first priority under the Contract of
Lease.
According to Tolentino, rescission is a remedy granted by law to the contracting parties and
even to third persons, to secure reparations for damages caused to them by a contract, even
if this should be valid, by means of the restoration of things to their condition at the moment
prior to the celebration of said contract. It is a relief allowed for the protection of one of the
contracting parties and even third persons from all injury and damage the contract may
cause, or to protect some incompatible and preferent right created by the contract.
Rescission implies a contract which, even if initially valid, produces a lesion or pecuniary
damage to someone that justifies its invalidation for reasons of equity.
It is true that the acquisition by a third person of the property subject of the contract is an
obstacle to the action for its rescission where it is shown that such third person is in lawful
possession of the subject of the contract and that he did not act in bad faith. However, this
rule is not applicable in the case before us because the petitioner is not considered a third

party in relation to the Contract of Sale nor may its possession of the subject property be
regarded as acquired lawfully and in good faith.
Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover, the
petitioner cannot be deemed a purchaser in good faith for the record shows that it
categorically admitted that it was aware of the lease in favor of the Bonnevies, who were
actually occupying the subject property at the time it was sold to it. Although the occupying
the subject property at the time it was sold to it. Although the Contract of Lease was not
annotated on the transfer certificate of title in the name of the late Jose Reynoso and Africa
Reynoso, the petitioner cannot deny actual knowledge of such lease which was equivalent to
and indeed more binding than presumed notice by registration.
A purchaser in good faith and for value is one who buys the property of another without
notice that some other person has a right to or interest in such property without 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. Good faith connotes an honest
intention to abstain from taking unconscientious advantage of another. Tested by these
principles, the petitioner cannot tenably claim to be a buyer in good faith as it had notice of
the lease of the property by the Bonnevies and such knowledge should have cautioned it to
look deeper into the agreement to determine if it involved stipulations that would prejudice its
own interests."
Subsequently24 in Equatorial Realty and Development, Inc. vs. Mayfair Theater, Inc.25, the Court, en
banc, with three justices dissenting,26 ordered the rescission of a contract entered into in violation of
a right of first refusal. Using the ruling in Guzman Bocaling & Co., Inc. vs. Bonnevie as basis, the
Court decreed that since respondent therein had a right of first refusal over the said property, it could
only exercise the said right if the fraudulent sale is first set aside or rescinded. Thus:
"What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that
Mayfair will have the right of first refusal in the event Carmelo sells the leased premises. It is
undisputed that Carmelo did recognize this right of Mayfair, for it informed the latter of its
intention to sell the said property in 1974. There was an exchange of letters evidencing the
offer and counter-offers made by both parties. Carmelo, however, did not pursue the
exercise to its logical end. While it initially recognized Mayfairs right of first refusal, Carmelo
violated such right when without affording its negotiations with Mayfair the full process to
ripen to at least an interface of a definite offer and a possible corresponding acceptance
within the "30-day exclusive option" time granted Mayfair, Carmelo abandoned negotiations,
kept a low profile for some time, and then sold, without prior notice to Mayfair, the entire
Claro M. Recto property to Equatorial.
Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in
question, rescissible. We agree with respondent Appellate Court that the records bear out
the fact that Equatorial was aware of the lease contracts because its lawyers had, prior to the
sale, studied the said contracts. As such, Equatorial cannot tenably claim that to be a
purchaser in good faith, and, therefore, rescission lies.

XXX
As also earlier emphasized, the contract of sale between Equatorial and Carmelo is
characterized by bad faith, since it was knowingly entered into in violation of the rights of and
to the prejudice of Mayfair. In fact, as correctly observed by the Court of Appeals, Equatorial
admitted that its lawyers had studied the contract or lease prior to the sale. Equatorials
knowledge of the stipulations therein should have cautioned it to look further into the
agreement to determine if it involved stipulations that would prejudice its own interests.
Since Mayfair had a right of first refusal, it can exercise the right only if the fraudulent sale is
first set aside or rescinded. All of these matters are now before us and so there should be no
piecemeal determination of this case and leave festering sores to deteriorate into endless
litigation. The facts of the case and considerations of justice and equity require that we order
rescission here and now. Rescission is a relief allowed for the protection of one of the
contracting parties and even third persons from all injury and damage the contract may
cause or to protect some incompatible and preferred right by the contract. The sale of the
subject real property should now be rescinded considering that Mayfair, which had
substantial interest over the subject property, was prejudiced by the sale of the subject
property to Equatorial without Carmelo conferring to Mayfair every opportunity to negotiate
within the 30-day stipulate periond.27
In Paranaque Kings Enterprises, Inc. vs. Court of Appeals,28 the Court held that the allegations in a
complaint showing violation of a contractual right of "first option or priority to buy the properties
subject of the lease" constitute a valid cause of action enforceable by an action for specific
performance. Summarizing the rulings in the two previously cited cases, the Court affirmed the
nature of and concomitant rights and obligations of parties under a right of first refusal. Thus:
"We hold however, that in order to have full compliance with the contractual right granting
petitioner the first option to purchase, the sale of the properties for the amount of
P9,000,000.00, the price for which they were finally sold to respondent Raymundo, should
have likewise been offered to petitioner.
The Court has made an extensive and lengthy discourse on the concept of, and obligations
under, a right of first refusal in the case of Guzman, Bocaling & Co. vs. Bonnevie. In that
case, under a contract of lease, the lessees (Raul and Christopher Bonnevie) were given a
"right of first priority" to purchase the leased property in case the lessor (Reynoso) decided to
sell. The selling price quoted to the Bonnevies was 600,000.00 to be fully paid in cash, less a
mortgage lien of P100,000.00. On the other hand, the selling price offered by Reynoso to
and accepted by Guzman was only P400,000.00 of which P137,500.00 was to be paid in
cash while the balance was to be paid only when the property was cleared of occupants. We
held that even if the Bonnevies could not buy it at the price quoted (P600,000.00),
nonetheless, Reynoso could not sell it to another for a lower price and under more favorable
terms and conditions without first offering said favorable terms and price to the Bonnevies as
well. Only if the Bonnevies failed to exercise their right of first priority could Reynoso
thereafter lawfully sell the subject property to others, and only under the same terms and
conditions previously offered to the Bonnevies.

XXX
This principle was reiterated in the very recent case of Equatorial Realty vs. Mayfair Theater,
Inc. which was decided en banc. This Court upheld the right of first refusal of the lessee
Mayfair, and rescinded the sale of the property by the lessor Carmelo to Equatorial Realty
"considering that Mayfair, which had substantial interest over the subject property, was
prejudiced by its sale to Equatorial without Carmelo conferring to Mayfair every opportunity
to negotiate within the 30-day stipulated period"
In that case, two contracts of lease between Carmelo and Mayfair provided "that if the
LESSOR should desire to sell the leased premises, the LESSEE shall be given 30 days
exclusive option to purchase the same." Carmelo initially offered to sell the leased property
to Mayfair for six to seven million pesos. Mayfair indicated interest in purchasing the property
though it invoked the 30-day period. Nothing was heard thereafter from Carmelo. Four years
later, the latter sold its entire Recto Avenue property, including the leased premises, to
Equatorial for P11,300,000.00 without priorly informing Mayfair. The Court held that both
Carmelo and Equatorial acted in bad faith: Carmelo or knowingly violating the right of first
option of Mayfair, and Equatorial for purchasing the property despite being aware of the
contract stipulation. In addition to rescission of the contract of sale, the Court ordered
Carmelo to allow Mayfair to buy the subject property at the same price of P11,300,000.00.
In the recent case of Litonjua vs L&R Corporation,29 the Court, also citing the case of Guzman,
Bocaling & Co. vs. Bonnevie, held that the sale made therein in violation of a right of first refusal
embodied in a mortgage contract, was rescissible. Thus:
"While petitioners question the validity of paragraph 8 of their mortgage contract, they appear
to be silent insofar as paragraph 9 thereof is concerned. Said paragraph 9 grants upon L&R
Corporation the right of first refusal over the mortgaged property in the event the mortgagor
decides to sell the same. We see nothing wrong in this provision. The right of first refusal has
long been recognized as valid in our jurisdiction. The consideration for the loan mortgage
includes the consideration for the right of first refusal. L&R Corporation is in effect stating that
it consents to lend out money to the spouses Litonjua provided that in case they decide to
sell the property mortgaged to it, then L&R Corporation shall be given the right to match the
offered purchase price and to buy the property at that price. Thus, while the spouses Litonjua
had every right to sell their mortgaged property to PWHAS without securing the prior written
consent of L&R Corporation, they had the obligation under paragraph 9, which is a perfectly
valid provision, to notify the latter of their intention to sell the property and give it priority over
other buyers. It is only upon the failure of L&R Corporation to exercise its right of first refusal
could the spouses Litonjua validly sell the subject properties to the others, under the same
terms and conditions offered to L&R Corporation.
What then is the status of the sale made to PWHAS in violation of L & R Corporations
contractual right of first refusal? On this score, we agree with the Amended Decision of the
Court of Appeals that the sale made to PWHAS is rescissible. The case of Guzman,
Bocaling & Co. v. Bonnevie is instructive on this point.

XXX
It was then held that the Contract of Sale there, which violated the right of first refusal, was
rescissible.
In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted to L &
R Corporation over the subject properties since the Deed of Real Estate Mortgage
containing such a provision was duly registered with the Register of Deeds. As such,
PWHAS is presumed to have been notified thereof by registration, which equates to notice to
the whole world.
XXX
All things considered, what then are the relative rights and obligations of the parties? To
recapitulate: the sale between the spouses Litonjua and PWHAS is valid, notwithstanding the
absence of L & R Corporations prior written consent thereto. Inasmuch as the sale to
PWHAS was valid, its offer to redeem and its tender of the redemption price, as successorin-interest of the spouses Litonjua, within the one-year period should have been accepted as
valid by the L & R Corporation. However, while the sale is, indeed, valid, the same is
rescissible because it ignored L & R Corporations right of first refusal."
Thus, the prevailing doctrine, as enunciated in the cited cases, is that a contract of sale entered into
in violation of a right of first refusal of another person, while valid, is rescissible.
There is, however, a circumstance which prevents the application of this doctrine in the case at
bench. In the cases cited above, the Court ordered the rescission of sales made in violation of a right
of first refusal precisely because the vendees therein could not have acted in good faith as they were
aware or should have been aware of the right of first refusal granted to another person by the
vendors therein. The rationale for this is found in the provisions of the New Civil Code on rescissible
contracts. Under Article 1381 of the New Civil Code, paragraph 3, a contract validly agreed upon
may be rescinded if it is "undertaken in fraud of creditors when the latter cannot in any manner
collect the claim due them." Moreover, under Article 1385, rescission shall not take place "when the
things which are the object of the contract are legally in the possession of third persons who did not
act in bad faith."30
It must be borne in mind that, unlike the cases cited above, the right of first refusal involved in the
instant case was an oral one given to respondents by the deceased spouses Tiangco and
subsequently recognized by their heirs. As such, in order to hold that petitioners were in bad faith,
there must be clear and convincing proof that petitioners were made aware of the said right of first
refusal either by the respondents or by the heirs of the spouses Tiangco.
It is axiomatic that good faith is always presumed unless contrary evidence is adduced. 31 A
purchaser in good faith is one who buys the property of another without notice that some other
person has a right or interest in such a property and pays a full and fair price at the time of the
purchase or before he has notice of the claim or interest of some other person in the property.32 In
this regard, the rule on constructive notice would be inapplicable as it is undisputed that the right of

first refusal was an oral one and that the same was never reduced to writing, much less registered
with the Registry of Deeds. In fact, even the lease contract by which respondents derive their right to
possess the property involved was an oral one.
On this point, we hold that the evidence on record fails to show that petitioners acted in bad faith in
entering into the deed of sale over the disputed property with the heirs of the spouses Tiangco.
Respondents failed to present any evidence that prior to the sale of the property on September 4,
1990, petitioners were aware or had notice of the oral right of first refusal.
Respondents point to the letter dated June 1, 199033 as indicative of petitioners knowledge of the
said right. In this letter, a certain Atty. Erlinda Aguila demanded that respondent Irene Guillermo
vacate the structure they were occupying to make way for its demolition.
We fail to see how the letter could give rise to bad faith on the part of the petitioner. No mention is
made of the right of first refusal granted to respondents. The name of petitioner Rosencor or any of it
officers did not appear on the letter and the letter did not state that Atty. Aguila was writing in behalf
of petitioner. In fact, Atty. Aguila stated during trial that she wrote the letter in behalf of the heirs of
the spouses Tiangco. Moreover, even assuming that Atty. Aguila was indeed writing in behalf of
petitioner Rosencor, there is no showing that Rosencor was aware at that time that such a right of
first refusal existed.
Neither was there any showing that after receipt of this June 1, 1990 letter, respondents notified
Rosencor or Atty. Aguila of their right of first refusal over the property. Respondents did not try to
communicate with Atty. Aguila and inform her about their preferential right over the disputed property.
There is even no showing that they contacted the heirs of the spouses Tiangco after they received
this letter to remind them of their right over the property.
Respondents likewise point to the letter dated October 9, 1990 of Eufrocina de Leon, where she
recognized the right of first refusal of respondents, as indicative of the bad faith of petitioners. We do
not agree. Eufrocina de Leon wrote the letter on her own behalf and not on behalf of petitioners and,
as such, it only shows that Eufrocina de Leon was aware of the existence of the oral right of first
refusal. It does not show that petitioners were likewise aware of the existence of the said right.
Moreover, the letter was made a month after the execution of the Deed of Absolute Sale on
September 4, 1990 between petitioner Rosencor and the heirs of the spouses Tiangco. There is no
showing that prior to the date of the execution of the said Deed, petitioners were put on notice of the
existence of the right of first refusal.
Clearly, if there was any indication of bad faith based on respondents evidence, it would only be on
the part of Eufrocina de Leon as she was aware of the right of first refusal of respondents yet she
still sold the disputed property to Rosencor. However, bad faith on the part of Eufrocina de Leon
does not mean that petitioner Rosencor likewise acted in bad faith. There is no showing that prior to
the execution of the Deed of Absolute Sale, petitioners were made aware or put on notice of the
existence of the oral right of first refusal. Thus, absent clear and convincing evidence to the contrary,
petitioner Rosencor will be presumed to have acted in good faith in entering into the Deed of
Absolute Sale over the disputed property.

Considering that there is no showing of bad faith on the part of the petitioners, the Court of Appeals
thus erred in ordering the rescission of the Deed of Absolute Sale dated September 4, 1990 between
petitioner Rosencor and the heirs of the spouses Tiangco. The acquisition by Rosencor of the
property subject of the right of first refusal is an obstacle to the action for its rescission where, as in
this case, it was shown that Rosencor is in lawful possession of the subject of the contract and that it
did not act in bad faith.34
This does not mean however that respondents are left without any remedy for the unjustified
violation of their right of first refusal. Their remedy however is not an action for the rescission of the
Deed of Absolute Sale but an action for damages against the heirs of the spouses Tiangco for the
unjustified disregard of their right of first refusal35.
WHEREFORE, premises considered, the decision of the Court of Appeals dated June 25, 1999 is
REVERSED and SET ASIDE. The Decision dated May 13, 1996 of the Quezon City Regional Trial
Court, Branch 217 is hereby REINSTATED insofar as it dismisses the action for rescission of the
Deed of Absolute Sale dated September 4, 1990 and orders the payment of monthly rentals of
P1,000.00 per month reckoned from May 1990 up to the time respondents leave the premises.
SO ORDERED.
Melo, Vitug, Panganiban, and Sandoval-Gutierrez, JJ., concur.

-right of first refusal not one of the instances under the statute of frauds that require
the contract to be in writing
-right of first refusal can be proved by parol evidence
-case under statute of frauds if not objected to is a waiver
-rosencor is not aware of the right of first refusal;no bad faith in the purchase of the
property that will entail rescission of its deed of sale with de leon
-action for damages against eufrocina de leon and not rescission of the deed

G.R. No. 190016

October 2, 2013

FREDERICK VENTURA, MARITES VENTURA-ROXAS, and PHILIP VENTURA (HEIRS OF

DECEASED DOLORES C. VENTURA), Petitioners,
vs.

HEIRS OF SPOUSES EUSTACIO T. ENDAYA and TRINIDAD L. ENDAYA, namely, TITUS L.

ENDAYA, ENRICO L. ENDAYA, and JOSEPHINE ENDAYA-BANTUG, 1 Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari2 is the Decision3 dated August 18, 2006 of the Court
of Appeals (CA) in CA-G.R. CV No.68465 which reversed and set aside the Decision 4 dated August
7, 2000 of the Regional Trial Court of Paraaque City, Branch 258 (RTC) in Civil Case No. 96-0500,
dismissing petitioners' complaint for specific performance seeking to compel respondents to execute
a deed of sale over the properties subject of this case.
The facts
On June 29, 1981, Dolores Ventura (Dolores) entered into a Contract to Sell 5 (contract to sell) with
spouses Eustacio and Trinidad Endaya (Sps. Endaya) for the purchase of two parcels of land
covered by Transfer Certificates of Title (TCT) Nos. 3922256 and (343392) S-679757 (subject
properties), denominated as Lots 8 and 9, Block 3, situated in Marian Road II, Marian Park 8 (now
Barangay San Martin de Porres),9 Paraaque City, Metro Manila.
The contract to sell provides that the purchase price of P347,760.00shall be paid by Dolores in the
following manner: (a) down payment of P103,284.00 upon execution of the contract; and (b) the
balance of P244,476.00 within a 15-year period (payment period), plus 12% interest per annum
(p.a.) on the outstanding balance and 12% interest p.a. on arrearages. It further provides that all
payments made shall be applied in the following order: first, to the reimbursement of real estate
taxes and other charges; second, to the interest accrued to the date of payment; third, to the
amortization of the principal obligation; and fourth, to the payment of any other accessory obligation
subsequently incurred by the owner in favor of the buyer. It likewise imposed upon Dolores the
obligation to pay the real property taxes over the subject properties, or to reimburse Sps. Endaya for
any tax payments made by them, plus 1% interest per month. Upon full payment of the stipulated
consideration, Sps. Endaya undertook to execute a final deed of sale and transfer ownership over
the same in favor of Dolores.10
Meanwhile, Dolores was placed in possession of the subject properties and allowed to erect a
building thereon.11However, on April 10, 1992, before the payment period expired, Dolores passed
away.12
On November 28, 1996, Dolores children, Frederick Ventura, Marites Ventura-Roxas, and Philip
Ventura (petitioners), filed before the RTC a Complaint 13 and, thereafter, an Amended Complaint14 for
specific performance, seeking to compel Sps. Endaya to execute a deed of sale over the subject
properties. In this regard, they averred that due to the close friendship between their parents and
Sps. Endaya, the latter did not require the then widowed Dolores to pay the down payment stated in
the contract to sell and, instead, allowed her to pay amounts as her means would permit. The
payments were made in cash as well as in kind,15 and the same were recorded by respondent
Trinidad herself in a passbook16 given to Dolores to evidence the receipt of said payments. As of

June 15, 1996, the total payments made by Dolores and petitioners amounted to P952,152.00,
which is more than the agreed purchase price of P347,760.00, including the 12%interest p.a.
thereon computed on the outstanding balance.17
However, when petitioners demanded18 the execution of the corresponding deed of sale, Sps.
Endaya refused.
For their part, Sps. Endaya filed their Answer,19 admitting the execution and genuineness of the
contract to sell and the passbook. However, they countered that Dolores did not pay the stipulated
down payment and remitted only a total of 22 installments. After her death in1992, petitioners no
longer remitted any installment. Sps. Endaya also averred that prior to Dolores' death, the parties
agreed to a restructuring of the contract to sell whereby Dolores agreed to give a "bonus"
of P265,673.93 and to pay interest at the increased rate of 24% p.a. on the outstanding balance.
They further claimed that in April 1996, when the balance of the purchase price stood
atP1,699,671.69, a final restructuring of the contract to sell was agreed with petitioners, fixing the
obligation atP3,000,000.00. Thereafter, the latter paid a total of P380,000.00 on two separate
occasions,20 leaving a balance of P2,620,000.00. In any event, Sps. Endaya pointed out that the
automatic cancellation clause under the foregoing contract rendered the same cancelled as early as
1981 with Dolores failure to make a down payment and to faithfully pay the installments; 21 hence,
petitioners complaint for specific performance must fail. In addition, Sps. Endaya interposed a
counterclaim for the alleged unpaid balance of P2,620,000.00, plus damages, attorney's fees and
costs of suit.22
In their Reply with Answer to Counterclaim,23 petitioners denied the existence of any restructuring of
the contract to sell, invoking24 the Dead Man's Statute25 and the Statute of Frauds.26 In turn, Sps.
Endaya filed a Rejoinder,27challenging the inapplicability of the foregoing principles since the case
was not filed against an estate or an administrator of an estate, and in view of the partial
performance of the contract to sell.28
While the oral depositions of Sps. Endaya were taken at the 4th Municipal Circuit Trial Court of
Malvar-Balete, Batangas on account of their frailty and old age, they, however, did not make a formal
offer of their depositions and documentary evidence. Hence, the case was submitted for decision on
the basis of the petitioners' evidence.29
The RTC Ruling
In a Decision30 dated August 7, 2000, the RTC found that petitioners were able to prove by a
preponderance of evidence the fact of full payment of the purchase price for the subject
properties.31 As such, it ordered Sps. Endaya to execute a deed of absolute sale covering the sale of
the subject properties in petitioners favor and to pay them attorney's fees and costs of
suit.32 Dissatisfied, Sps. Endaya elevated the matter to the CA.
The CA Ruling and Subsequent Proceedings
In a Decision33 dated August 18, 2006 (August 18, 2006 Decision),the CA reversed and set aside the
RTC ruling. It found that petitioners were not able to show that they fully complied with their

obligations under the contract to sell. It observed that aside from the payment of the purchase price
and 12% interest p.a. on the outstanding balance, the contract to sell imposed upon petitioners the
obligations to pay 12% interest p.a. on the arrears and to reimburse Sps. Endaya the amount of the
pertinent real estate taxes due on the subject properties, which the former, however, totally
disregarded as shown in their summary of payments.34
Meanwhile, counsel for petitioners, Atty. German A. Gineta, passed away on June 12, 2006, 35 hence,
the notice of the August 18, 2006 Decision sent to him was returned unserved. 36 On the other hand,
the notice sent to petitioners at No. 2, Barangay San Martin de Porres, Paraaque City, was likewise
returned unserved for the reason "insufficient address."37 Nonetheless, the CA deemed the service of
the said notice to them as valid and complete as of March 9, 2007 pursuant to Section 8, 38 Rule 13 of
the Rules of Court (Rules). Accordingly, it directed39 the Division Clerk of Court to issue the
corresponding Entry of Judgment. An Entry of Judgment40 was, thus, made in the CA Book of Entries
of Judgments certifying that the August 18, 2006 Decision became final and executory on March 25,
2007.The records were thereafter remanded41 to the RTC.
In July 2009, respondent Titus Endaya, heir of Sps. Endaya, 42 demanded43 petitioners to vacate the
subject properties, which they refused.
On November 10, 2009, petitioners filed the instant petition invoking the benevolence of the Court to
set aside the CAs August 18, 2006 Decision and, instead, reinstate the RTC Decision in the interest
of substantial justice. They claimed that they had no knowledge of the demise of their counsel;
therefore, they were unable to file a timely motion for reconsideration before the CA or the proper
petition before the Court. Further, they contend that they have proven full payment of the purchase
price within the payment period as required by the contract to sell.
For their part, the heirs of Sps. Endaya (respondents) objected 44 to the belated filing of the petition
long after the said CA Decision had lapsed into finality, especially as the petition raised factual issues
that are improper in a petition for review on certiorari under Rule 45 of the Rules. In any case, they
countered that the CA correctly held that petitioners failed to fully comply with their obligations under
the contract to sell; thus, respondents are under no obligation to execute any deed of sale over the
subject properties in favor of petitioners.
On September 22, 2010, the Court gave due course to the petition and required the parties to file
their respective memoranda,45 which they duly submitted.
The Issues Before the Court
The principal issues in this case are: (a) whether or not petitioners right to appeal before the Court
should be upheld; and (b) whether or not respondents should execute a deed of sale over the
subject properties in favor of petitioners.
The Court's Ruling
The petition is partly meritorious.

Anent the first issue, it is observed that the CA erroneously sent the notice of the assailed August 18,
2006 Decision to petitioners at No. 2, Barangay San Martin de Porres, Paraaque City, instead of
their address of record, i.e., Marian Road 2, Brgy. San Martin de Porres, Paraaque, Metro
Manila46 and thus, was returned unserved for the reason "insufficient address." 47
The notices of the Entry of Judgment48 and the transmittal letter49 to the Clerk of Court of the RTC
indicate this fact. As such, there was clearly no proper and valid service of the said CA Decision
which deprived petitioners of the opportunity to file a motion for reconsideration before the CA and/or
further appeal to the Court. Verily, it would be unjust and unfair to allow petitioners to suffer the
adverse effects of the premature entry of judgment made by the CA. Therefore, the Court deems it
prudent to set aside the foregoing entry and upholds petitioners' right to appeal.
Nevertheless, with respect to the second issue, a thorough review of the records reveals no
sufficient reason to warrant the reversal of the CAs August 18, 2006 Decision dismissing petitioners'
complaint for specific performance which sought to enforce the contract to sell and to compel
respondents to execute a deed of sale over the subject properties.
1wphi1

A contract to sell is defined as a bilateral contract whereby the prospective seller, while expressly
reserving the ownership of the subject property despite delivery thereof to the prospective buyer,
binds himself to sell the said property exclusively to the latter upon his fulfillment of the conditions
agreed upon, i.e., the full payment of the purchase price 50 and/or compliance with the other
obligations stated in the contract to sell. Given its contingent nature, the failure of the prospective
buyer to make full payment51 and/or abide by his commitments stated in the contract to sell prevents
the obligation of the prospective seller to execute the corresponding deed of sale to effect the
transfer of ownership to the buyer from arising. As discussed in Sps. Serrano and Herrera v.
Caguiat:52
A contract to sell is akin to a conditional sale where the efficacy or obligatory force of the vendor's
obligation to transfer title is subordinated to the happening of a future and uncertain event, so that if
the suspensive condition does not take place, the parties would stand as if the conditional obligation
had never existed. x x x.53
To note, while the quality of contingency inheres in a contract to sell, the same should not be
confused with a conditional contract of sale. In a contract to sell, the fulfillment of the suspensive
condition will not automatically transfer ownership to the buyer although the property may have been
previously delivered to him. The prospective seller still has to convey title to the prospective buyer by
entering into a contract of absolute sale.54On the other hand, in a conditional contract of sale, the
fulfillment of the suspensive condition renders the sale absolute and the previous delivery of the
property has the effect of automatically transferring the sellers ownership or title to the property to
the buyer.55
Keeping with these principles, the Court finds that respondents had no obligation to petitioners to
execute a deed of sale over the subject properties. As aptly pointed out by the CA, aside from the
payment of the purchase price and 12% interest p.a. on the outstanding balance, the contract to sell
likewise imposed upon petitioners the obligation to pay the real property taxes over the subject
properties as well as 12% interest p.a. on the arrears.56However, the summary of payments57 as well

as the statement of account58 submitted by petitioners clearly show that only the payments
corresponding to the principal obligation and the 12% interest p.a. on the outstanding balance were
considered in arriving at the amount of P952,152.00. The Court has examined the petition59 as well
as petitioners' memorandum60 and found no justifiable reason for the said omission. Hence, the
reasonable conclusion would therefore be that petitioners indeed failed to comply with all their
obligations under the contract to sell and, as such, have no right to enforce the same. Consequently,
there lies no error on the part of the CA in reversing the RTC Decision and dismissing petitioners
complaint for specific performance seeking to compel respondents to execute a deed of sale over
the subject properties.
WHEREFORE, the Entry of Judgment in CA-G.R. CV No. 68465 is hereby LIFTED. The Decision
dated August 18, 2006 of the Court of Appeals in the said case is, however, AFFIRMED.SO
ORDERED.
ESTELA M. PERLAS-BERNABE
Associate Justice

G.R. No. 161318

November 25, 2009

JULIE NABUS,* MICHELLE NABUS* and BETTY TOLERO, Petitioners,

vs.
JOAQUIN PACSON and JULIA PACSON, Respondents.
DECISION
PERALTA, J.:
This is a petition for review on certiorari 1 of the Decision2 of the Court of Appeals in CA-G.R. CV No.
44941 dated November 28, 2003. The Court of Appeals affirmed with modification the Decision of
the Regional Trial Court of La Trinidad, Benguet, Branch 10, ordering petitioner Betty Tolero to
execute a deed of absolute sale in favor of respondents, spouses Joaquin and Julia Pacson, over
the lots covered by Transfer Certificate of Title (TCT) Nos. T-18650 and T-18651 upon payment to
her by respondents of the sum of P57,544.[8]4 representing the balance due for the full payment of
the property subject of this case; and ordering petitioner Betty Tolero to surrender to respondents her
owners duplicate copy of TCT Nos. T-18650 and T-18651.
The facts, as stated by the trial court,3 are as follows:
The spouses Bate and Julie Nabus were the owners of parcels of land with a total area of 1,665
square meters, situated in Pico, La Trinidad, Benguet, duly registered in their names under TCT No.
T-9697 of the Register of Deeds of the Province of Benguet. The property was mortgaged by the
Spouses Nabus to the Philippine National Bank (PNB), La Trinidad Branch, to secure a loan in the
amount of P30,000.00.

On February 19, 1977, the Spouses Nabus executed a Deed of Conditional Sale 4 covering 1,000
square meters of the 1,665 square meters of land in favor of respondents Spouses Pacson for a
consideration of P170,000.00, which was duly notarized on February 21, 1977. The consideration
was to be paid, thus:
THAT, the consideration of the amount of P170,000.00 will be paid by the VENDEE herein in my
favor in the following manner:
a. That the sum of P13,000.00, more or less, on or before February 21, 1977 and which
amount will be paid directly to the PNB, La Trinidad Branch, and which will form part of the
purchase price;
b. That after paying the above amount to the PNB, La Trinidad, Benguet branch, a balance of
aboutP17,500.00 remains as my mortgage balance and this amount will be paid by the
VENDEE herein at the rate of not less than P3,000.00 a month beginning March 1977, until
the said mortgage balance is fully liquidated, and that all payments made by the VENDEE to
the PNB, La Trinidad, Benguet branch, shall form part of the consideration of this sale;
c. That, as soon as the mortgage obligation with the PNB as cited above is fully paid, then
the VENDEE herein hereby obligates himself, his heirs and assigns, to pay the amount of
not less than P2,000.00 a month in favor of the VENDOR, his heirs and assigns, until the full
amount of P170,000.00 is fully covered(including the payments cited in Pars. a and b
above);
THAT, as soon as the full consideration of this sale has been paid by the VENDEE, the
corresponding transfer documents shall be executed by the VENDOR to the VENDEE for the portion
sold;
THAT, the portion sold is as shown in the simple sketch hereto attached as Annex "A" and made part
hereof;
THAT, a segregation survey for the portion sold in favor of the VENDEE and the portion remaining in
favor of the VENDOR shall be executed as soon as possible, all at the expense of the VENDEE
herein;
THAT, it is mutually understood that in as much as there is a claim by other persons of the entire
property of which the portion subject of this Instrument is only a part, and that this claim is now the
subject of a civil case now pending before Branch III of the Court of First Instance of Baguio and
Benguet, should the VENDOR herein be defeated in the said civil action to the end that he is
divested of title over the area subject of this Instrument, then he hereby warrants that he shall return
any and all monies paid by the VENDEE herein whether paid to the PNB, La Trinidad, Benguet
Branch, or directly received by herein VENDOR, all such monies to be returned upon demand by the
VENDEE;
THAT, [a] portion of the parcel of land subject of this instrument is presently in the possession of Mr.
Marcos Tacloy, and the VENDOR agrees to cooperate and assist in any manner possible in the

ouster of said Mr. Marcos Tacloy from said possession and occupation to the end that the VENDEE
herein shall make use of said portion as soon as is practicable;
THAT, finally, the PARTIES hereby agree that this Instrument shall be binding upon their respective
heirs, successors or assigns.5
Pursuant to the Deed of Conditional Sale, respondents paid PNB the amount of P12,038.86 on
February 22, 19776 and P20,744.30 on July 17, 19787 for the full payment of the loan.
At the time of the transaction, Mr. Marcos Tacloy had a basket-making shop on the property, while
the spouses Delfin and Nelita Flores had a store. Tacloy and the Spouses Flores vacated the
property after respondents paid them P4,000.00 each.
Thereafter, respondents took possession of the subject property. They constructed an 80 by 32-feet
building and a steel-matting fence around the property to house their truck body-building shop which
they called the "Emiliano Trucking Body Builder and Auto Repair Shop."
On December 24, 1977, before the payment of the balance of the mortgage amount with PNB, Bate
Nabus died. On August 17, 1978, his surviving spouse, Julie Nabus, and their minor daughter,
Michelle Nabus, executed a Deed of Extra Judicial Settlement over the registered land covered by
TCT No. 9697. On the basis of the said document, TCT No. T- 177188 was issued on February 17,
1984 in the names of Julie Nabus and Michelle Nabus.
Meanwhile, respondents continued paying their balance, not in installments of P2,000.00 as agreed
upon, but in various, often small amounts ranging from as low as P10.009 to as high
as P15,566.00,10 spanning a period of almost seven years, from March 9, 1977 11 to January 17,
1984.12
There was a total of 364 receipts of payment,13 which receipts were mostly signed by Julie Nabus,
who also signed as Julie Quan when she remarried. The others who signed were Bate Nabus; PNB,
La Trinidad Branch; Maxima Nabus; Sylvia Reyes; Michelle Nabus and the second husband of Julie
Nabus, Gereon Quan. Maxima Nabus is the mother of Bate Nabus, while Sylvia Reyes is a niece.
The receipts showed that the total sum paid by respondents to the Spouses Nabus
was P112,455.16,14 leaving a balance of P57,544.84. The sum of P30,000.00 which was the value of
the pick-up truck allegedly sold and delivered in 1978 to the Spouses Nabus, was not considered as
payment because the registration papers remained in the name of its owner, Dominga D. Pacson,
who is the sister of Joaquin Pacson. The vehicle was also returned to respondents.
During the last week of January 1984, Julie Nabus, accompanied by her second husband,
approached Joaquin Pacson to ask for the full payment of the lot. Joaquin Pacson agreed to pay, but
told her to return after four days as his daughter, Catalina Pacson, would have to go over the
numerous receipts to determine the balance to be paid. When Julie Nabus returned after four days,
Joaquin sent her and his daughter, Catalina, to Atty. Elizabeth Rillera for the execution of the deed of
absolute sale. Since Julie was a widow with a minor daughter, Atty. Rillera required Julie Nabus to
return in four days with the necessary documents, such as the deed of extrajudicial settlement, the

transfer certificate of title in the names of Julie Nabus and minor Michelle Nabus, and the
guardianship papers of Michelle. However, Julie Nabus did not return.
Getting suspicious, Catalina Pacson went to the Register of Deeds of the Province of Benguet and
asked for a copy of the title of the land. She found that it was still in the name of Julie and Michelle
Nabus.
After a week, Catalina Pacson heard a rumor that the lot was already sold to petitioner Betty Tolero.
Catalina Pacson and Atty. Rillera went to the Register of Deeds of the Province of Benguet, and
found that Julie Nabus and her minor daughter, Michelle Nabus, represented by the formers mother
as appointed guardian by a court order dated October 29, 1982, had executed a Deed of Absolute
Sale in favor of Betty Tolero on March 5, 1984, covering the whole lot comprising 1,665 square
meters.15 The property was described in the deed of sale as comprising four lots: (1) Lot A-2-A, with
an area of 832 square meters; (2) Lot A-2-B, 168 square meters; (3) Lot A-2-C, 200 square meters;
and (4) Lot A-2-D, 465 square meters. Lots A-2-A and A-2-B, with a combined area of 1,000 square
meters, correspond to the lot previously sold to Joaquin and Julia Pacson in the Deed of Conditional
Sale.
Catalina Pacson and Atty. Rillera also found that the Certificate of Title over the property in the name
of Julie and Michelle Nabus was cancelled on March 16, 1984, and four titles to the fours lots were
issued in the name of Betty Tolero, namely: TCT No. T-1865016 for Lot A-2-A; TCT No. 1865117 for Lot
A-2-B; TCT No. T-1865218 for Lot A-2-C; and T-1865319 for Lot A-2-D.
On March 22, 1984, the gate to the repair shop of the Pacsons was padlocked. A sign was displayed
on the property stating "No Trespassing."20
On March 26, 1984, Catalina Pacson filed an affidavit-complaint regarding the padlocking incident of
their repair shop with the police station at La Trinidad, Benguet.
On March 28, 2008, respondents Joaquin and Julia Pacson filed with the Regional Trial Court of La
Trinidad, Benguet (trial court) a Complaint21 for Annulment of Deeds, with damages and prayer for
the issuance of a writ of preliminary injunction.22 They sought the annulment of (1) the Extra-judicial
Settlement of Estate, insofar as their right to the 1,000-square-meter lot subject of the Deed of
Conditional Sale23 was affected; (2) TCT No. T-17718 issued in the names of Julie and Michelle
Nabus; and (3) the Deed of Absolute Sale24 in favor of Betty Tolero and the transfer certificates of title
issued pursuant thereto. They also prayed for the award of actual, moral and exemplary damages,
as well as attorneys fees.
In their Answer,25 Julie and Michelle Nabus alleged that respondent Joaquin Pacson did not proceed
with the conditional sale of the subject property when he learned that there was a pending case over
the whole property. Joaquin proposed that he would rather lease the property with a monthly rental
of P2,000.00 and apply the sum of P13,000.00 as rentals, since the amount was already paid to the
bank and could no longer be withdrawn. Hence, he did not affix his signature to the second page of
a copy of the Deed of Conditional Sale.26 Julie Nabus alleged that in March 1994, due to her own
economic needs and those of her minor daughter, she sold the property to Betty Tolero, with
authority from the court.

During the hearing on the merits, Julie Nabus testified that she sold the property to Betty Tolero
because she was in need of money. She stated that she was free to sell the property because the
Deed of Conditional Sale executed in favor of the Spouses Pacson was converted into a contract of
lease. She claimed that at the time when the Deed of Conditional Sale was being explained to them
by the notary public, Joaquin Pacson allegedly did not like the portion of the contract stating that
there was a pending case in court involving the subject property. Consequently, Joaquin Pacson did
not continue to sign the document; hence, the second page of the document was
unsigned.27 Thereafter, it was allegedly their understanding that the Pacsons would occupy the
property as lessees and whatever amount paid by them would be considered rentals.
Betty Tolero put up the defense that she was a purchaser in good faith and for value. She testified
that it was Julie Nabus who went to her house and offered to sell the property consisting of two lots
with a combined area of 1,000 square meters. She consulted Atty. Aurelio de Peralta before she
agreed to buy the property. She and Julie Nabus brought to Atty. De Peralta the pertinent papers
such as TCT No. T-17718 in the names of Julie and Michelle Nabus, the guardianship papers of
Michelle Nabus and the blueprint copy of the survey plan showing the two lots. After examining the
documents and finding that the title was clean, Atty. De Peralta gave her the go-signal to buy the
property.
Tolero testified that upon payment of the agreed price of P200,000.00, the Deed of Absolute Sale
was executed and registered, resulting in the cancellation of the title of Julie and Michelle Nabus and
the issuance in her name of TCT Nos. T-18650 and T-1865128 corresponding to the two lots.
Thereafter, she asked her common-law husband, Ben Ignacio, to padlock the gate to the property
and hang the "No Trespassing" sign.
Tolero also testified that as the new owner, she was surprised and shocked to receive the Complaint
filed by the Spouses Pacson. She admitted that she knew very well the Spouses Pacson, because
they used to buy vegetables regularly from her. She had been residing along the highway at
Kilometer 4, La Trinidad, Benguet since 1971. She knew the land in question, because it was only 50
meters away across the highway. She also knew that the Spouses Pacson had a shop on the
property for the welding and body-building of vehicles. She was not aware of the Deed of Conditional
Sale executed in favor of the Pacsons, and she saw the document for the first time when Joaquin
Pacson showed it to her after she had already bought the property and the title had been transferred
in her name. At the time she was buying the property, Julie Nabus informed her that the Pacsons
were merely renting the property. She did not bother to verify if that was true, because the Pacsons
were no longer in the property for two years before she bought it.
In a Decision dated September 30, 1993, the trial court ruled in favor of respondents. The dispositive
portion of the Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs, ordering
defendant Betty Tolero to execute a deed of absolute sale in favor of the Spouses Joaquin and Julia
Pacson over the lots covered by Transfer Certificates of Title Nos. T-18650 and T-18651 upon
payment to her by the plaintiffs of the sum of P57,544.[8]4 representing the balance due for the full
payment of the property subject of this case. In addition to the execution of a deed of absolute sale,

defendant Betty Tolero shall surrender to the plaintiffs her owners duplicate copy of Transfer
Certificates of Title Nos. T-18650 and T-18651.
Defendants Julie Nabus, Michelle Nabus, and Betty Tolero shall also pay the plaintiffs damages as
follows:P50,000.00 for moral damages; P20,000.00 for exemplary damages; and P10,000.00 for
attorneys fees and expenses for litigation.29
Two issues determined by the trial court were: (1) Was the Deed of Conditional Sale between the
Spouses Pacson and the Nabuses converted into a contract of lease? and (2) Was Betty Tolero a
buyer in good faith?
The trial court held that the Deed of Conditional Sale was not converted into a contract of lease
because the original copy of the contract30 showed that all the pages were signed by all the parties to
the contract. By the presumption of regularity, all other carbon copies must have been duly signed.
The failure of Joaquin Pacson to sign the second page of one of the carbon copies of the contract
was by sheer inadvertence. The omission was of no consequence since the signatures of the parties
in all the other copies of the contract were complete. Moreover, all the receipts of payment expressly
stated that they were made in payment of the lot. Not a single receipt showed payment for rental.
Further, the trial court held that Betty Tolero was not a purchaser in good faith as she had actual
knowledge of the Conditional Sale of the property to the Pacsons.
The trial court stated that the Deed of Conditional Sale contained reciprocal obligations between the
parties, thus:
THAT, as soon as the full consideration of this sale has been paid by the VENDEE, the
corresponding transfer documents shall be executed by the VENDOR to the VENDEE for the portion
sold;
xxxx
THAT, finally, the PARTIES hereby agree that this Instrument shall be binding upon their respective
heirs, successors or assigns.31
In other words, the trial court stated, when the vendees (the Spouses Pacson) were already ready to
pay their balance, it was the corresponding obligation of the vendors (Nabuses) to execute the
transfer documents.
The trial court held that "[u]nder Article 1191 of the Civil Code, an injured party in a reciprocal
obligation, such as the Deed of Conditional Sale in the case at bar, may choose between the
fulfillment [or] the rescission of the obligation, with the payment of damages in either case." It stated
that in filing the case, the Spouses Pacson opted for fulfillment of the obligation, that is, the
execution of the Deed of Absolute Sale in their favor upon payment of the purchase price.
Respondents appealed the decision of the trial court to the Court of Appeals.

In the Decision dated November 28, 2003, the Court of Appeals affirmed the trial courts decision,
but deleted the award of attorneys fees. The dispositive portion of the Decision reads:
WHEREFORE, finding no reversible error in the September 30, 1993 Decision of the Regional Trial
Court of La Trinidad, Benguet, Branch 10, in Civil Case No. 84-CV-0079, the instant appeal is hereby
DISMISSED for lack of merit, and the assailed Decision is hereby AFFIRMED and UPHELD with the
modification that the award of attorneys fees is deleted.32
Petitioners filed this petition raising the following issues:
I
THE [COURT OF APPEALS] ERRED IN CONSIDERING THE CONTRACT ENTERED INTO
BETWEEN THE SPOUSES BATE NABUS AND JULIE NABUS AND SPOUSES JOAQUIN PACSON
AND JULIA PACSON TO BE A CONTRACT OF SALE.
II
THE COURT A QUO ERRED IN FINDING THAT THERE ARE ONLY TWO ISSUES IN THE CASE
ON APPEAL AND THEY ARE: WHETHER THE DEED OF CONDITIONAL SALE WAS
CONVERTED INTO A CONTRACT OF LEASE; AND THAT [WHETHER] PETITIONER BETTY
TOLERO WAS A BUYER IN GOOD FAITH.
III
THAT THE TRIAL COURT ERRED IN HOLDING THAT [RESPONDENTS] BALANCE TO THE
SPOUSES NABUS UNDER THE CONDITIONAL SALE IS ONLY P57,544.[8]4.
IV
THAT ASSUMING WITHOUT ADMITTING THAT PETITIONER BETTY TOLERO WAS AWARE OF
THE EXISTENCE OF THE DEED OF CONDITIONAL SALE, THE TRIAL COURT, AS WELL AS THE
[COURT OF APPEALS], ERRED IN ORDERING PETITIONER BETTY TOLERO TO EXECUTE A
DEED OF ABSOLUTE SALE IN FAVOR OF THE [RESPONDENTS] AND TO SURRENDER THE
OWNER'S DUPLICATE COPY OF TCT NOS. T-18650 AND T-18651, WHICH WAS NOT PRAYED
FOR IN THE PRAYER IN THE COMPLAINT.
V
THAT THE [COURT OF APPEALS] ERRED IN FINDING BETTY TOLERO [AS] A BUYER [WHO]
FAILED TO TAKE STEPS IN INQUIRING FROM THE [RESPONDENTS] THE STATUS OF THE
PROPERTY IN QUESTION BEFORE HER PURCHASE, CONTRARY TO FACTS ESTABLISHED
BY EVIDENCE.
VI

THE [COURT OF APPEALS] ERRED IN CONSIDERING PETITIONER BETTY TOLERO A BUYER

IN BAD FAITH, IGNORING THE APPLICATION OF THE DOCTRINE IN THE RULING OF THE
SUPREME COURT IN THE CASE OF RODOLFO ALFONSO, ET AL. VS. COURT OF APPEALS,
G.R. NO. 63745.33
The main issues to be resolved are:
1) Whether or not the Deed of Conditional Sale was converted into a contract of lease;
2) Whether the Deed of Conditional Sale was a contract to sell or a contract of sale.
As regards the first issue, the Deed of Conditional Sale entered into by the Spouses Pacson and the
Spouses Nabus was not converted into a contract of lease. The 364 receipts issued to the Spouses
Pacson contained either the phrase "as partial payment of lot located in Km. 4" or "cash vale" or
"cash vale (partial payment of lot located in Km. 4)," evidencing sale under the contract and not the
lease of the property. Further, as found by the trial court, Joaquin Pacsons non-signing of the
second page of a carbon copy of the Deed of Conditional Sale was through sheer inadvertence,
since the original contract34 and the other copies of the contract were all signed by Joaquin Pacson
and the other parties to the contract.
On the second issue, petitioners contend that the contract executed by the respondents and the
Spouses Nabus was a contract to sell, not a contract of sale. They allege that the contract was
subject to the suspensive condition of full payment of the consideration agreed upon before
ownership of the subject property could be transferred to the vendees. Since respondents failed to
pay the full amount of the consideration, having an unpaid balance ofP57,544.84, the obligation of
the vendors to execute the Deed of Absolute Sale in favor of respondents did not arise. Thus, the
subsequent Deed of Absolute Sale executed in favor of Betty Tolero, covering the same parcel of
land was valid, even if Tolero was aware of the previous deed of conditional sale.
Moreover, petitioners contend that respondents violated the stipulated condition in the contract that
the monthly installment to be paid was P2,000.00, as respondents gave meager amounts as low
as P10.00.
Petitioners also assert that respondents allegation that Julie Nabus failure to bring the pertinent
documents necessary for the execution of the final deed of absolute sale, which was the reason for
their not having paid the balance of the purchase price, was untenable, and a lame and shallow
excuse for violation of the Deed of Conditional Sale. Respondents could have made a valid tender of
payment of their remaining balance, as it had been due for a long time, and upon refusal to accept
payment, they could have consigned their payment to the court as provided by law. This,
respondents failed to do.
The Court holds that the contract entered into by the Spouses Nabus and respondents was a
contract to sell, not a contract of sale.
A contract of sale is defined in Article 1458 of the Civil Code, thus:

Art. 1458. By the contract of sale, one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in
money or its equivalent.
A contract of sale may be absolute or conditional.
Ramos v. Heruela35 differentiates a contract of absolute sale and a contract of conditional sale as
follows:
Article 1458 of the Civil Code provides that a contract of sale may be absolute or conditional. A
contract of sale is absolute when title to the property passes to the vendee upon delivery of the thing
sold. A deed of sale is absolute when there is no stipulation in the contract that title to the property
remains with the seller until full payment of the purchase price. The sale is also absolute if there is
no stipulation giving the vendor the right to cancel unilaterally the contract the moment the vendee
fails to pay within a fixed period. In a conditional sale, as in a contract to sell, ownership remains with
the vendor and does not pass to the vendee until full payment of the purchase price. The full
payment of the purchase price partakes of a suspensive condition, and non-fulfillment of the
condition prevents the obligation to sell from arising.36
Coronel v. Court of Appeals37 distinguished a contract to sell from a contract of sale, thus:
Sale, by its very nature, is a consensual contract because it is perfected by mere consent. The
essential elements of a contract of sale are the following:
a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange for
the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.
Under this definition, a Contract to Sell may not be considered as a Contract of Sale because the
first essential element is lacking. In a contract to sell, the prospective seller explicitly reserves the
transfer of title to the prospective buyer, meaning, the prospective seller does not as yet agree or
consent to transfer ownership of the property subject of the contract to sell until the happening of an
event, which for present purposes we shall take as the full payment of the purchase price. What the
seller agrees or obliges himself to do is to fulfill his promise to sell the subject property when the
entire amount of the purchase price is delivered to him. In other words, the full payment of the
purchase price partakes of a suspensive condition, the non-fulfilment of which prevents the
obligation to sell from arising and, thus, ownership is retained by the prospective seller without
further remedies by the prospective buyer.
xxxx
Stated positively, upon the fulfillment of the suspensive condition which is the full payment of the
purchase price, the prospective sellers obligation to sell the subject property by entering into a

contract of sale with the prospective buyer becomes demandable as provided in Article 1479 of the
Civil Code which states:
Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding
upon the promissor if the promise is supported by a consideration distinct from the price.
A contract to sell may thus be defined as a bilateral contract whereby the prospective seller, while
expressly reserving the ownership of the subject property despite delivery thereof to the prospective
buyer, binds himself to sell the said property exclusively to the prospective buyer upon fulfillment of
the condition agreed upon, that is, full payment of the purchase price.
A contract to sell as defined hereinabove, may not even be considered as a conditional contract of
sale where the seller may likewise reserve title to the property subject of the sale until the fulfillment
of a suspensive condition, because in a conditional contract of sale, the first element of consent is
present, although it is conditioned upon the happening of a contingent event which may or may not
occur. If the suspensive condition is not fulfilled, the perfection of the contract of sale is completely
abated. However, if the suspensive condition is fulfilled, the contract of sale is thereby perfected,
such that if there had already been previous delivery of the property subject of the sale to the buyer,
ownership thereto automatically transfers to the buyer by operation of law without any further act
having to be performed by the seller.
In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment of the
purchase price, ownership will not automatically transfer to the buyer although the property may
have been previously delivered to him. The prospective seller still has to convey title to the
prospective buyer by entering into a contract of absolute sale.38
Further, Chua v. Court of Appeals39 cited this distinction between a contract of sale and a contract to
sell:
In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold;
in a contract to sell, ownership is, by agreement, reserved in the vendor and is not to pass to the
vendee until full payment of the purchase price. Otherwise stated, in a contract of sale, the vendor
loses ownership over the property and cannot recover it until and unless the contract is resolved or
rescinded; whereas, in a contract to sell, title is retained by the vendor until full payment of the price.
In the latter contract, payment of the price is a positive suspensive condition, failure of which is not a
breach but an event that prevents the obligation of the vendor to convey title from becoming
effective.40
It is not the title of the contract, but its express terms or stipulations that determine the kind of
contract entered into by the parties. In this case, the contract entitled "Deed of Conditional Sale" is
actually a contract to sell. The contract stipulated that "as soon as the full consideration of the sale
has been paid by the vendee, the corresponding transfer documents shall be executed by the
vendor to the vendee for the portion sold."41 Where the vendor promises to execute a deed of

absolute sale upon the completion by the vendee of the payment of the price, the contract is only a
contract to sell."42 The aforecited stipulation shows that the vendors reserved title to the subject
property until full payment of the purchase price.
If respondents paid the Spouses Nabus in accordance with the stipulations in the Deed of
Conditional Sale, the consideration would have been fully paid in June 1983. Thus, during the last
week of January 1984, Julie Nabus approached Joaquin Pacson to ask for the full payment of the
lot. Joaquin Pacson agreed to pay, but told her to return after four days as his daughter, Catalina
Pacson, would have to go over the numerous receipts to determine the balance to be paid.
When Julie Nabus returned after four days, Joaquin Pacson sent Julie Nabus and his daughter,
Catalina, to Atty. Elizabeth Rillera for the execution of the deed of sale. Since Bate Nabus had
already died, and was survived by Julie and their minor daughter, Atty. Rillera required Julie Nabus
to return in four days with the necessary documents such as the deed of extrajudicial settlement, the
transfer certificate of title in the names of Julie Nabus and minor Michelle Nabus, and the
guardianship papers of Michelle. However, Julie Nabus did not return.
As vendees given possession of the subject property, the ownership of which was still with the
vendors, the Pacsons should have protected their interest and inquired from Julie Nabus why she
did not return and then followed through with full payment of the purchase price and the execution of
the deed of absolute sale. The Spouses Pacson had the legal remedy of consigning their payment to
the court; however, they did not do so. A rumor that the property had been sold to Betty Tolero
prompted them to check the veracity of the sale with the Register of Deeds of the Province of
Benguet. They found out that on March 5, 1984, Julie Nabus sold the same property to Betty Tolero
through a Deed of Absolute Sale, and new transfer certificates of title to the property were issued to
Tolero.
1avvphi1

Thus, the Spouses Pacson filed this case for the annulment of the contract of absolute sale
executed in favor of Betty Tolero and the transfer certificates of title issued in her name.
Unfortunately for the Spouses Pacson, since the Deed of Conditional Sale executed in their favor
was merely a contract to sell, the obligation of the seller to sell becomes demandable only upon the
happening of the suspensive condition.43 The full payment of the purchase price is the positive
suspensive condition, the failure of which is not a breach of contract, but simply an event that
prevented the obligation of the vendor to convey title from acquiring binding force. 44 Thus, for its nonfulfilment, there is no contract to speak of, the obligor having failed to perform the suspensive
condition which enforces a juridical relation.45 With this circumstance, there can be no rescission or
fulfilment of an obligation that is still non-existent, the suspensive condition not having occurred as
yet.46 Emphasis should be made that the breach contemplated in Article 1191 of the New Civil Code
is the obligors failure to comply with an obligation already extant, not a failure of a condition to
render binding that obligation.47
The trial court, therefore, erred in applying Article 1191 of the Civil Code 48 in this case by ordering
fulfillment of the obligation, that is, the execution of the deed of absolute sale in favor of the Spouses
Pacson upon full payment of the purchase price, which decision was affirmed by the Court of
Appeals. Ayala Life Insurance, Inc. v. Ray Burton Development Corporation49 held:

Evidently, before the remedy of specific performance may be availed of, there must be a breach of
the contract.
Under a contract to sell, the title of the thing to be sold is retained by the seller until the purchaser
makes full payment of the agreed purchase price. Such payment is a positive suspensive condition,
the non-fulfillment of which is not a breach of contract but merely an event that prevents the seller
from conveying title to the purchaser. The non-payment of the purchase price renders the contract to
sell ineffective and without force and effect. Thus, a cause of action for specific performance does
not arise.50
Since the contract to sell was without force and effect, Julie Nabus validly conveyed the subject
property to another buyer, petitioner Betty Tolero, through a contract of absolute sale, and on the
strength thereof, new transfer certificates of title over the subject property were duly issued to
Tolero.51
The Spouses Pacson, however, have the right to the reimbursement of their payments to the
Nabuses, and are entitled to the award of nominal damages. The Civil Code provides:
Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been
violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered by him.
Art. 2222. The court may award nominal damages in every obligation arising from any source
enumerated in article 1157, or in every case where any property right has been invaded.
As stated by the trial court, under the Deed of Conditional Sale, respondents had the right to
demand from petitioners Julie and Michelle Nabus that the latter execute in their favor a deed of
absolute sale when they were ready to pay the remaining balance of the purchase price. The
Nabuses had the corresponding duty to respect the respondents right, but they violated such right,
for they could no longer execute the document since they had sold the property to Betty
Tolero.52 Hence, nominal damages in the amount of P10,000.00 are awarded to respondents.
Respondents are not entitled to moral damages because contracts are not referred to in Article
221953 of the Civil Code, which enumerates the cases when moral damages may be recovered.
Article 222054 of the Civil Code allows the recovery of moral damages in breaches of contract where
the defendant acted fraudulently or in bad faith. However, this case involves a contract to sell,
wherein full payment of the purchase price is a positive suspensive condition, the non-fulfillment of
which is not a breach of contract, but merely an event that prevents the seller from conveying title to
the purchaser. Since there is no breach of contract in this case, respondents are not entitled to moral
damages.
In the absence of moral, temperate, liquidated or compensatory damages, exemplary damages
cannot be granted for they are allowed only in addition to any of the four kinds of damages
mentioned.55

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. CV No.
44941, dated November 28, 2003, is REVERSED and SET ASIDE. Judgment is hereby rendered
upholding the validity of the sale of the subject property made by petitioners Julie Nabus and
Michelle Nabus in favor of petitioner Betty Tolero, as well as the validity of Transfer Certificates of
Title Nos. T-18650 and T-18651 issued in the name of Betty Tolero. Petitioners Julie Nabus and
Michelle Nabus are ordered to reimburse respondents spouses Joaquin and Julia Pacson the sum of
One Hundred Twelve Thousand Four Hundred Fifty-Five Pesos and Sixteen Centavos
(P112,455.16), and to pay Joaquin and Julia Pacson nominal damages in the amount of Ten
Thousand Pesos (P10,000.00), with annual interest of twelve percent (12%) until full payment of the
amounts due to Joaquin and Julia Pacson.
No costs.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice

-Contract of sale is absolute when ownership is transferred to vendee upon delivery,

when there is no mention that ownership remains with vendors and stipulation that
vendors can unilaterally rescind the contract
-contract to sell ownership remains with the vendor subject to a positive suspensive
condition which is the payment of purchase price giving rise to the obligation of
vendor to transfer ownership and deliver the thing.
-conditional contract of sale is one which the vendor retains ownership of the thing
however, arrival of the suspensive condition will cause automatic cause of transfer
of ownership by operation of law if property or thing is in the possession of the
vendee without any act to be performed by the vendors to effect such transfer
G.R. No. 139173

February 28, 2007

SPOUSES ONNIE SERRANO AND AMPARO HERRERA, Petitioners

vs.
GODOFREDO CAGUIAT, Respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, assailing the Decision1 of the Court of Appeals dated January 29, 1999 and its Resolution
dated July 14, 1999 in CA-G.R. CV No. 48824.

Spouses Onnie and Amparo Herrera, petitioners, are the registered owners of a lot located in Las
Pias, Metro Manila covered by Transfer Certificate of Title No. T-9905.
Sometime in March 1990, Godofredo Caguiat, respondent, offered to buy the lot. Petitioners
agreed to sell it atP1,500.00 per square meter. Respondent then gave petitioners P100,000.00 as
partial payment. In turn, petitioners gave respondent the corresponding receipt stating that
respondent promised to pay the balance of the purchase price on or before March 23, 1990, thus:
Las Pias, Metro Manila
March 19, 1990
RECEIPT FOR PARTIAL PAYMENT OF LOT NO. 23 COVERED BY TCT NO. T-9905, LAS PIAS,
METRO MANILA
RECEIVED FROM MR. GODOFREDO CAGUIAT THE AMOUNT OF ONE HUNDRED THOUSAND
PESOS (P100,000.00) AS PARTIAL PAYMENT OF OUR LOT SITUATED IN LAS PIAS, M.M.
COVERED BY TCT NO. T-9905 AND WITH AN AREA OF 439 SQUARE METERS.
MR. CAGUIAT PROMISED TO PAY THE BALANCE OF THE PURCHASE PRICE ON OR BEFORE
MARCH 23, 1990, AND THAT WE WILL EXECUTE AND SIGN THE FINAL DEED OF SALE ON
THIS DATE.
SIGNED THIS 19th DAY OF MARCH, 1990 AT LAS PIAS, M.M.
(SGD) AMPARO HERRERA

(SGD) ONNIE SERRANO"2

On March 28, 1990, respondent, through his counsel Atty. Ponciano Espiritu, wrote petitioners
informing them of his readiness to pay the balance of the contract price and requesting them to
prepare the final deed of sale.3
On April 4, 1990, petitioners, through Atty. Ruben V. Lopez, sent a letter4 to respondent stating that
petitioner Amparo Herrera is leaving for abroad on or before April 15, 1990 and that they are
canceling the transaction. Petitioners also informed respondent that he can recover the earnest
money of P100,000.00 anytime.
Again, on April 6, 1990,5 petitioners wrote respondent stating that they delivered to his counsel
Philippine National Bank Managers Check No. 790537 dated April 6, 1990 in the amount
of P100,000.00 payable to him.
In view of the cancellation of the contract by petitioners, respondent filed with the Regional Trial
Court, Branch 63, Makati City a complaint against them for specific performance and damages,
docketed as Civil Case No. 90-1067.6

On June 27, 1994, after hearing, the trial court rendered its Decision 7 finding there was a perfected
contract of sale between the parties and ordering petitioners to execute a final deed of sale in favor
of respondent. The trial court held:
xxx
In the evaluation of the evidence presented by the parties as to the issue as to who was ready to
position deserves more weight and credibility. First, the P100,000.00 that plaintiff paid whether as
downpayment or earnest money showed that there was already a perfected contract. Art. 1482 of
the Civil Code of the Philippines, reads as follows, to wit:
Art. 1482. Whenever earnest money is given in a contract of sale, it shall be considered as part of
the price and as proof of the perfection of the contract.
Second, plaintiff was the first to react to show his eagerness to push through with the sale by
sending defendants the letter dated March 25, 1990. (Exh. D) and reiterated the same intent to
pursue the sale in a letter dated April 6, 1990. Third, plaintiff had the balance of the purchase price
ready for payment (Exh. C). Defendants mere allegation that it was plaintiff who did not appear on
March 23, 1990 is unavailing. Defendants letters (Exhs. 2 and 5) appear to be mere afterthought.
On appeal, the Court of Appeals, in its assailed Decision of January 29, 1999, affirmed the trial
courts judgment.
Forthwith, petitioners filed their motion for reconsideration but it was denied by the appellate court in
its Resolution8 dated July 14, 1999.
Hence, the present recourse.
The basic issue to be resolved is whether the document entitled "Receipt for Partial Payment"
signed by both parties earlier mentioned is a contract to sell or a contract of sale.
Petitioners contend that the Receipt is not a perfected contract of sale as provided for in Article
14589 in relation to Article 147510 of the Civil Code. The delivery to them of P100,000.00 as down
payment cannot be considered as proof of the perfection of a contract of sale under Article 1482 11 of
the same Code since there was no clear agreement between the parties as to the amount of
consideration.
Generally, the findings of fact of the lower courts are entitled to great weight and should not be
disturbed except for cogent reasons.14 Indeed, they should not be changed on appeal in the
absence of a clear showing that the trial court overlooked, disregarded, or misinterpreted
some facts of weight and significance, which if considered would have altered the result of
the case. 12 In the present case, we find that both the trial court and the Court of Appeals interpreted
some significant facts resulting in an erroneous resolution of the issue involved.
1awphi1.net

In holding that there is a perfected contract of sale, both courts mainly relied on the earnest money
given by respondent to petitioners. They invoked Article 1482 of the Civil Code which provides that

"Whenever earnest money is given in a contract of sale, it shall be considered as part of the price
and as proof of the perfection of the contract."
We are not convinced.
In San Miguel Properties Philippines, Inc. v. Spouses Huang, 13 we held that the stages of a contract
of sale are: (1) negotiation, covering the period from the time the prospective contracting parties
indicate interest in the contract to the time the contract is perfected; (2) perfection, which takes place
upon the concurrence of the essential elements of the sale, which is the meeting of the minds of the
parties as to the object of the contract and upon the price; and (3) consummation, which begins
when the parties perform their respective undertakings under the contract of sale, culminating in the
extinguishment thereof.
With the above postulates as guidelines, we now proceed to determine the real nature of the
contract entered into by the parties.
It is a canon in the interpretation of contracts that the words used therein should be given their
natural and ordinary meaning unless a technical meaning was intended. 14 Thus, when petitioners
declared in the said "Receipt for Partial Payment" that they
RECEIVED FROM MR. GODOFREDO CAGUIAT THE AMOUNT OF ONE HUNDRED THOUSAND
PESOS (P100,000.00) AS PARTIAL PAYMENT OF OUR LOT SITUATED IN LAS PIAS, M.M.
COVERED BY TCT NO. T-9905 AND WITH AN AREA OF 439 SQUARE METERS.
MR. CAGUIAT PROMISED TO PAY THE BALANCE OF THE PURCHASE PRICE ON OR BEFORE
MARCH 23, 1990, AND THAT WE WILL EXECUTE AND SIGN THE FINAL DEED OF SALE ON
THIS DATE.
there can be no other interpretation than that they agreed to a conditional contract of sale,
consummation of which is subject only to the full payment of the purchase price.
A contract to sell is akin to a conditional sale where the efficacy or obligatory force of the vendor's
obligation to transfer title is subordinated to the happening of a future and uncertain event, so that if
the suspensive condition does not take place, the parties would stand as if the conditional obligation
had never existed. The suspensive condition is commonly full payment of the purchase price.15
The differences between a contract to sell and a contract of sale are well-settled in jurisprudence. As
early as 1951, in Sing Yee v. Santos,16 we held that:
x x x [a] distinction must be made between a contract of sale in which title passes to the buyer upon
delivery of the thing sold and a contract to sell x x x where by agreement the ownership is reserved
in the seller and is not to pass until the full payment, of the purchase price is made. In the first case,
non-payment of the price is a negative resolutory condition; in the second case, full payment is a
positive suspensive condition. Being contraries, their effect in law cannot be identical. In the first
case, the vendor has lost and cannot recover the ownership of the land sold until and unless the
contract of sale is itself resolved and set aside. In the second case, however, the title remains in the

vendor if the vendee does not comply with the condition precedent of making payment at the time
specified in the contract.
In other words, in a contract to sell, ownership is retained by the seller and is not to pass to the
buyer until full payment of the price.17
In this case, the "Receipt for Partial Payment" shows that the true agreement between the parties is
a contract to sell.
First, ownership over the property was retained by petitioners and was not to pass to
respondent until full payment of the purchase price. Thus, petitioners need not push through
with the sale should respondent fail to remit the balance of the purchase price before the
deadline on March 23, 1990. In effect, petitioners have the right to rescind unilaterally the
contract the moment respondent fails to pay within the fixed period. 18
Second, the agreement between the parties was not embodied in a deed of sale. The
absence of a formal deed of conveyance is a strong indication that the parties did not intend
immediate transfer of ownership, but only a transfer after full payment of the purchase
price.19
Third, petitioners retained possession of the certificate of title of the lot. This is an additional
indication that the agreement did not transfer to respondent, either by actual or constructive
delivery, ownership of the property.20
It is true that Article 1482 of the Civil Code provides that "Whenever earnest money is given in a
contract of sale, it shall be considered as part of the price and proof of the perfection of the contract."
However, this article speaks ofearnest money given in a contract of sale. In this case, the earnest
money was given in a contract to sell. The earnest money forms part of the consideration only if
the sale is consummated upon full payment of the purchase price. 21 Now, since the earnest money
was given in a contract to sell, Article 1482, which speaks of a contract of sale, does not apply.
As previously discussed, the suspensive condition (payment of the balance by respondent) did not
take place. Clearly, respondent cannot compel petitioners to transfer ownership of the property to
him.
WHEREFORE, we GRANT the instant Petition for Review. The challenged Decision of the Court of
Appeals isREVERSED and respondents complaint is DISMISSED.
SO ORDERED.
ANGELINA SANDOVAL-GUTIERREZ
Associate Justice
-the contract to sell in this case was not yet perfected.

-the receipt of partial payment of 100k as earnest money which forms part of the purchase price
applies if the contract to sell was perfected or consummated upon compliance with the condition of
payment on the stipulated date, which vendee, failed to comply in this case.

G.R. No. 179594

September 11, 2013

MANUEL UY & SONS, INC., Petitioner,

vs.
VALBUECO, INCORPORATED, Respondent.
DECISION
PERALTA, J.:
This is a petition for review on certiorari1 of the Court of Appeals Decision2 dated December 11, 2006
in CA-G.R. CV No. 85877, and its Resolution dated September 4, 2007, denying petitioners motion
for reconsideration.
The Court of Appeals reversed and set aside the Decision3 of the Regional Trial Court (RTC) of
Manila, Branch 1, dismissing the Complaint for specific performance and damages. The Court of
Appeals reinstated the Complaint and directed petitioner to execute deeds of absolute sale in favor
of respondent after payment of the purchase price of the subject lots.
The facts, as stated by the Court of Appeals, are as follows:
Petitioner Manuel Uy & Sons, Inc. is the registered owner of parcels of land located in Teresa, Rizal
covered by Transfer Certificate of Title(TCT) No. 59534, covering an area of about 6,119 square
meters; TCT No.59445, covering an area of about 6,838 square meters; TCT No. 59446,covering an
area of about 12,389 square meters; and TCT No. 59444,covering an area of about 32,047 square
meters.
On November 29, 1973, two Conditional Deeds of Sale were executed by petitioner, as vendor, in
favor of respondent Valbueco, Incorporated, as vendee. The first Conditional Deed of Sale 4 covered
TCT Nos. 59534, 59445 and 59446, and contained the following terms and conditions:
That for and in consideration of the sum of ONE HUNDREDSIXTY-FOUR THOUSAND SEVEN
HUNDRED FORTY-NINE(Php164,749.00) PESOS, Philippine currency, the VENDOR hereby agrees
to SELL, CEDE, TRANSFER and CONVEY unto the VENDEE xx x the aforementioned properties,
payable under the following terms and conditions:

1. The sum of FORTY-ONE THOUSAND ONE HUNDREDEIGHTY-SEVEN and 25/100 (Php

41,187.25) PESOS shall be paid upon signing of this conditional deed of sale; and
2. The balance of ONE HUNDRED TWENTY-THREETHOUSAND FIVE HUNDRED SIXTYONE and 75/100 (Php123,561.75) PESOS shall be paid within a period of one (1) year from
November 15, 1973, with interest of 12% per annum based on the balance, in the mode and
manner specified below:
a) January 4, 1974 P16,474.90 plus interest
b) On or before May 15, 1974 P53,543.43 plus interest
c) On or before November 15, 1974 P53,543.32 plus interest
3. That the vendee shall be given a grace period of thirty (30)days from the due date of any
installment with corresponding interest to be added, but should the VENDEE fail to make
such payment within the grace period this contract shall be deemed rescinded and without
force and effect after notice in writing by VENDOR to VENDEE.
4. That the VENDOR agrees to have the existing Mortgages on the properties subject of this
sale released on or before May 20, 1974.
5. That the VENDOR agrees to have the above-described properties freed and cleared of all
lessees, tenants, adverse occupants or squatters within 100 days from the execution of this
conditional deed of sale. In case of failure by the VENDOR to comply with the undertaking
provided in this paragraph and the VENDEE shall find it necessary to file a case or cases in
court to eject the said lessees, tenants, occupants and/or squatters from the land, subject of
this sale, the VENDOR agrees to answer and pay for all the expenses incurred and to be
incurred in connection with said cases until the same are fully and finally terminated.
6. That the VENDOR and the VENDEE agree that during the existence of this Contract and
without previous expressed written permission from the other, they shall not sell, cede,
assign, transfer or mortgage, or in any way encumber unto another person or party any right,
interest or equity that they may have in and to said parcels of land. x x x x
8. That it is understood that ownership of the properties herein conveyed shall not pass to
the VENDEE until after payment of the full purchase price; provided, however, that the
VENDOR shall allow the annotation of this Conditional Deed of Sale at the back of the titles
of the above-described parcels of land in the corresponding Registry of Deeds x xx.
9. That upon full payment of the total purchase price, a Deed of Absolute Sale shall be
executed in favor of the VENDEE and the VENDOR agrees to pay the documentary stamps
and the science stamp tax of the Deed of Sale; while the VENDEE agrees to pay the
registration and other expenses for the issuance of a new title.

10. That it is mutually agreed that in case of litigation, the venue of the case shall be in the
courts of Manila, having competent jurisdiction, any other venue being expressly waived. 5
On the other hand, the second Conditional Deed of Sale6 covering Lot No. 59444 provides, thus:
1. The sum of FIFTY-TWO THOUSAND SEVENTY-SIXAND 37/100 (Php 52,076.37)
PESOS, shall be paid upon signing of this conditional deed of sale; and
2. The balance of ONE HUNDRED FIFTY-SIXTHOUSAND TWO HUNDRED TWENTY-NINE
and 13/100 (Php156,229.13) PESOS shall be paid within a period of one (1) year from
November 15, 1973, with interest of 12% per annum based on the balance, in the mode and
manner specified below:
a) January 4, 1974 P20,830.55 plus interest
b) On or before May 15, 1974 P67,699.29 plus interest
c) On or before November 15, 1974, P67,699.29 plus interest
3. That the VENDEE shall be given a grace period of thirty (30) days from the due date of
any installment with corresponding interest to be added, but should the VENDEE fail to make
such payment within the grace period, this contract shall be deemed rescinded and without
force and effect after notice in writing by VENDOR to VENDEE.
4. That the VENDOR agrees and acknowledges that any and all payments to be made by
the VENDEE by reason of this presents unless hereafter advised by VENDOR to the
contrary, shall be made in favor of and to the Philippine Trust Company by way of liquidation
and payment of the existing mortgage on the property subject of this sale.
5. That after each payment adverted to above the VENDOR shall issue the corresponding
receipt for the amount paid by the VENDOR to the Philippine Trust Company.
6. That the VENDOR agrees to have the above-described property freed and cleared of all
lessees, tenants, adverse occupants or squatters within 100 days from the execution of this
conditional deed of sale. In case of failure by the VENDOR to comply with this undertaking
provided in this paragraph and the VENDEE shall find it necessary to file a case or cases in
court to eject the said lessees, tenants, occupants and/or squatters from the land, subject of
this sale, the VENDOR agrees to answer and pay for all the expenses incurred and to be
incurred in connection with said cases until the same are fully and finally terminated.
7. That the VENDOR and the VENDEE agree that during the existence of this Contract and
without previous expressed written permission from the other, they shall not sell, cede,
assign, transfer or mortgage, or in any way encumber unto another person or party any right,
interest or equity that they may have in and to said parcel of land.
xxxx

9. That it is understood that ownership of the property herein conveyed shall not pass to the
VENDEE until after payment of the full purchase price, provided, however, that the VENDOR
shall allow the annotation of the Conditional Deed of Sale at the back of the Title of the
above-described parcel of land in the corresponding Registry of Deeds; x xx.
10. That upon full payment of the total purchase price, a Deed of Absolute Sale shall be
executed in favor of the VENDEE and the VENDOR agrees to pay the documentary stamps
and the science stamp tax of the Deed of Sale; while the VENDEE agrees to pay the
registration and other expenses for the issuance of a new title.
11. That it is mutually agreed that in case of litigation, the venue of the case shall be in the
courts of Manila, having competent jurisdiction, any other venue being expressly waived. 7
Respondent was able to pay petitioner the amount of P275,055.558 as partial payment for the two
properties corresponding to the initial payments and the first installments of the said properties.
At the same time, petitioner complied with its obligation under the conditional deeds of sale, as
follows: (1) the mortgage for TCT No. 59446 was released on May 18, 1984, while the mortgages for
TCT Nos. 59445and 59534 were released on July 19, 1974; (2) the unlawful occupants of the lots
covered by TCT Nos. 59444, 59534, 59445 and 59446 surrendered their possession and use of the
said lots in consideration of the amount of P6,000.00 in a document9 dated November 19, 1973, and
they agreed to demolish their shanties on or before December 7, 1973; and (3) the mortgage with
Philippine Trust Company covering TCT No. 59444 was discharged10 in 1984.
However, respondent suspended further payment as it was not satisfied with the manner petitioner
complied with its obligations under the conditional deeds of sale. Consequently, on March 17, 1978,
petitioner sent respondent a letter 11 informing respondent of its intention to rescind the conditional
deeds of sale and attaching therewith the original copy of the respective notarial rescission.
On November 28, 1994, respondent filed a Complaint 12 for specific performance and damages
against petitioner with the RTC of Antipolo City. However, on January 15, 1996, the case was
dismissed without prejudice13 for lack of interest, as respondent's counsel failed to attend the pre-trial
conference.
Five years later, or on March 16, 2001, respondent again filed with the RTC of Manila, Branch 1 (trial
court) a Complaint14 for specific performance and damages, seeking to compel petitioner to accept
the balance of the purchase price for the two conditional deeds of sale and to execute the
corresponding deeds of absolute sale. Respondent contended that its non-payment of the
installments was due to the following reasons:(1) Petitioner refused to receive the balance of the
purchase price as the properties were mortgaged and had to be redeemed first before a deed of
absolute sale could be executed; (2) Petitioner assured that the existing mortgages on the properties
would be discharged on or before May 20,1974, or that petitioner did not inform it (respondent) that
the mortgages on the properties were already released; and (3) Petitioner failed to fully eject the
unlawful occupants in the area.

In its Answer,15 petitioner argued that the case should be dismissed, as it was barred by prior
judgment. Moreover, petitioner contended that it could not be compelled to execute any deed of
absolute sale, because respondent failed to pay in full the purchase price of the subject lots.
Petitioner claimed that it gave respondent a notice of notarial rescission of both conditional deeds of
sale that would take effect 30 days from receipt thereof. The notice of notarial rescission was
allegedly received by respondent on March 17,1978. Petitioner asserted that since respondent failed
to pay the full purchase price of the subject lots, both conditional deeds of sale were rescinded as of
April 16, 1978; hence, respondent had no cause of action against it.
In its Reply,16 respondent denied that it received the alleged notice of notarial rescission. Respondent
also denied that the alleged recipient (one Wenna Laurenciana) 17 of the letter dated March 17, 1978,
which was attached to the notice of notarial rescission, was its employee. Respondent stated that
assuming arguendo that the notice was sent to it, the address (6th Floor, SGC Bldg., Salcedo Street,
Legaspi Village, Makati, Metro Manila) was not the given address of respondent. Respondent
contended that its address on the conditional deeds of sale and the receipts issued by it and
petitioner showed that its principal business address was the 7th Floor, Bank of P.I. Bldg, Ayala
Avenue, Makati, Rizal.
On August 1, 2005, the trial court rendered a Decision, 18 dismissing the complaint, as petitioner had
exercised its right to rescind the contracts. The dispositive portion of the Decision reads:
WHEREFORE, premises considered, the complaint is DISMISSED for lack of merit.
Claims and counterclaims for damages are also dismissed.19
The trial court stated that the issues before it were: (1) Did petitioner unlawfully evade its obligation
to execute the final deed of sale and to eject the squatters/occupants on the properties; (2) Is the
case barred by prior judgment; and (3) Does respondent have a cause of action against petitioner.
The trial court said that both conditional deeds of sale clearly provided that "ownership x x x shall not
pass to the VENDEE until after full payment of the purchase price." Respondent admitted that it has
not yet fully paid the purchase price. The trial court held that the conditions in the conditional deeds
of sale being suspensive, that is, its fulfillment gives rise to the obligation, the reasons for the
inability of respondent to fulfill its own obligations is material, in order that the obligation of petitioner
to execute the final deeds of absolute sale will arise. The trial court stated that the evidence showed
that petitioner had exercised its right to rescind the contract by a written notice dated March 17, 1978
and notarial acts both dated March15, 1978. The trial court noted that respondent denied having
received the notice and disclaimed knowing the recipient, Wenna Laurenciana. However, on crossexamination, respondent's witness, Gaudencio Juan, who used to be respondent's Personnel
Manager and Forester at the same time, admitted knowing Laurenciana because she was the
secretary of Mr. Valeriano Bueno, respondent's president at that time, although Laurenciana was not
employed by respondent, but she was employed by Mahogany Products Corporation, presumably
one of the 14 other companies being controlled by Mr. Bueno.20
The trial court held that the conditional deeds of sale were executed on November 29, 1973 and
were already covered by Republic Act (R.A.) No. 6552, otherwise known as the Realty Installment

Buyer Act. Under Section 4 of the law, if the buyer fails to pay the installments due at the expiration
of the grace period, which is not less than 60 days from the date the installment became due, the
seller may cancel the contract after 30 days from receipt of the buyer of the notice of cancellation or
the demand for rescission of the contracts by notarial act. The trial court found no lawful ground to
grant the relief prayed for and dismissed the complaint for lack of merit.
Respondent appealed the decision of the trial court to the Court of Appeals, and made these
assignments of error: (1) the trial court erred in holding that petitioner did not unlawfully evade
executing a final deed of sale, since respondent's failure to fulfill its own obligation is material; (2) the
trial court erred in holding that it is unbelievable and a self-contradiction that respondent was
informed of the mortgage only when it was paying the balance of the properties; and (3) the trial
court erred in holding that as early as November 19, 1973, petitioner had already taken necessary
steps to evict the squatters/occupants through the intercession of the agrarian reform officer.
On December 11, 2006, the Court of Appeals rendered a Decision, reversing and setting aside the
Decision of the trial court. It reinstated the complaint of respondent, and directed petitioner to
execute deeds of absolute sale in favor of respondent after payment of the balance of the purchase
price of the subject lots. The dispositive portion of the Decision reads:
WHEREFORE, premises considered, the August 1, 2005Decision of the Regional Trial Court of
Manila, Branch 1, in Civil Case No. 01-100411, is hereby REVERSED and SET ASIDE.
A new one is hereby entered: REINSTATING the complaint and defendant-appellee MANUEL UY &
SONS INC. is hereby DIRECTED, pursuant to Sec. 4, R. A. No. 6552, otherwise known as the
Maceda Law, to EXECUTE and DELIVER:
(1) Deeds of Absolute Sale in favor of VALBUECO, INC.; and
(2) Transfer Certificates of Title pertaining to Nos. 59534, 59445,59446 and 59444, in the
name of plaintiff-appellant VALBUECO, INC., after VALBUECO pays MANUEL UY & SONS,
without additional interest, within thirty days from finality of this judgment, the balance of the
contract price.
If MANUEL UY & SONS refuses to deliver the Deeds of Absolute Sale and the co-owner's copy of
the TCTs, the Register of Deeds of Antipolo, Rizal is hereby DIRECTED to CANCEL the latest TCTs
issued derived from TCT Nos. 59534, 59445, 59446 and 59444, and to
ISSUE new TCTS in the name of VALBUECO.
Only if VALBUECO fails in the payment directed above, then defendant-appellee MANUEL UY &
SONS INC. has the opportunity to serve a valid notice of notarial rescission.
SO ORDERED.21
The Court of Appeals held that the two conditional deeds of sale in this case are contracts to sell. It
stated that the law applicable to the said contracts to sell on installments is R.A. No. 6552,

specifically Section 4thereof, as respondent paid less than two years in installments. It held that
upon repeated defaults in payment by respondent, petitioner had the right to cancel the said
contracts, but subject to the proper receipt of respondent of the notice of cancellation or the demand
for the rescission of the contracts by notarial act.
However, the Court of Appeals found that petitioner sent the notice of notarial rescission to the
wrong address. The business address of respondent, as used in all its transactions with petitioner,
was the 7th Floor, Bank of the Philippine Islands Building, Ayala Avenue, Makati City, but the notice
of notarial rescission was sent to the wrong address at the 6th Floor, SGC Building, Salcedo Street,
Legaspi Village, Makati, Metro Manila. Petitioner served the notice to the address of Mahogany
Products Corporation. It was established that the person who received the notice, one Wenna
Laurenciana, was an employee of Mahogany Products Corporation and not an employee of
respondent or Mr. Valeriano Bueno, the alleged president of Mahogany Products Corporation and
respondent company.22 The appellate court stated that this cannot be construed as to have been
contructively received by respondent as the two corporations are two separate entities with a distinct
personality independent from each other. Thus, the Court of Appeals held that the notarial rescission
was in validly served. It stated that it is a general rule that when service of notice is an issue, the
person alleging that the notice was served must prove the fact of service by a preponderance of
evidence. In this case, the Court of Appeals held that there was no evidence that the notice of
cancellation by notarial act was actually received by respondent. Thus, for petitioner's failure to
cancel the contract in accordance with the procedure provided by law, the Court of Appeals held that
the contracts to sell on installment were valid and subsisting, and respondent has the right to offer to
pay for the balance of the purchase price before actual cancellation.
Petitioner's motion for reconsideration was denied for lack of merit by the Court of Appeals in a
Resolution23dated September 4, 2007.
Petitioner filed this petition raising the following issues:
I
THE HONORABLE COURT OF APPEALS GRAVELY ERRED INREVERSING THE RTC DECISION
AND REINSTATING THECOMPLAINT WHEN ON ITS FACE IT HAS LONG BEENPRESCRIBED,
AS IT WAS FILED AFTER 27 YEARS AND HAS NOJURISDICTION (SIC).
II
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED ANDGRAVELY ABUSED ITS
DISCRETION IN COMPELLINGPETITIONER TO EXECUTE A FINAL DEED OF ABSOLUTE SALE
EVEN IF RESPONDENT JUDICIALLY ADMITTED ITS NON-PAYMENT OF THE BALANCE OF THE
DEEDS OF CONDITIONALSALE DUE SINCE 1974.
III

THE HONORABLE COURT OF APPEALS GRAVELY ERRED INGRANTING THE RELIEFS

PRAYED BY RESPONDENT IN ITSCOMPLAINT FOR SPECIFIC PERFORMANCE WHEN IT
WASRESPONDENT WHO BREACHED THE CONTRACT.
IV
THE HONORABLE COURT OF APPEALS COMMITTED GRAVEINJUSTICE WHEN IT PENALIZED
PETITIONER FOR EXERCISINGITS LEGAL RIGHT AND DID NOT COMMIT AN
ACTIONABLEWRONG WHILE IT HEFTILY REWARDED RESPONDENT, WHOBREACHED THE
CONTRACT, AND ORDERED TO PAY WITHOUTINTEREST PHP 97,998.95, WHICH IS DUE
SINCE 1974 UNDER THECONTRACT, FOR FOUR (4) PARCELS OF LAND (57,393
SQUAREMETERS), NOW WORTH HUNDRED MILLIONS.
V
THE HONORABLE COURT OF APPEALS GRAVELY ERRED INANNULING THE NOTARIAL
RESCISSION WHEN THE COMPLAINT IS ONLY FOR SPECIFIC PERFORMANCE AND WAS NOT
AN ISSUE RAISED IN THE PLEADINGS OR DURING THETRIAL. 24
The main issue is whether respondent is entitled to the relief granted by the Court of Appeals.
Petitioner contends that the Court of Appeals erred in directing it to execute deeds of absolute sale
over the subject lots even if respondent admitted non-payment of the balance of the purchase price.
As found by the Court of Appeals, the two conditional deeds of sale entered into by the parties are
contracts to sell, as they both contained a stipulation that ownership of the properties shall not pass
to the vendee until after full payment of the purchase price. In a conditional sale, as in a contract to
sell, ownership remains with the vendor and does not pass to the vendee until full payment of the
purchase price.25 The full payment of the purchase price partakes of a suspensive condition, and
non-fulfillment of the condition prevents the obligation to sell from arising. 26 To differentiate, a deed of
sale is absolute when there is no stipulation in the contract that title to the property remains with the
seller until full payment of the purchase price.
Ramos v. Heruela27 held that Articles 1191 and 1592 of the Civil Code28 are applicable to contracts of
sale, while R.A. No. 6552 applies to contracts to sell.
The Court of Appeals correctly held that R.A. No. 6552, otherwise known as the Realty Installment
Buyer Act, applies to the subject contracts to sell. R.A. No. 6552 recognizes in conditional sales of all
kinds of real estate (industrial, commercial, residential) the right of the seller to cancel the contract
upon non-payment of an installment by the buyer, which is simply an event that prevents the
obligation of the vendor to convey title from acquiring binding force. 29
It also provides the right of the buyer on installments in case he defaults in the payment of
succeeding installments30 as follows:
Section 3. In all transactions or contracts involving the sale or financing of real estate on installment
payments, including residential condominium apartments but excluding industrial lots, commercial

buildings and sales to tenants under Republic Act Numbered Thirty-eight hundred forty-four, as
amended by Republic Act Numbered Sixty-three hundred eighty-nine, where the buyer has paid at
least two years of installments, the buyer is entitled to the following rights in case he defaults in the
payment of succeeding installments:
(a) To pay, without additional interest, the unpaid installments due within the total grace
period earned by him which is hereby fixed at the rate of one month grace period for every
one year of installment payments made: Provided, That this right shall be exercised by the
buyer only once in every five years of the life of the contract and its extensions, if any.
(b) If the contract is canceled, the seller shall refund to the buyer the cash surrender value of
the payments on the property equivalent to fifty per cent of the total payments made, and,
after five years of installments, an additional five per cent every year but not to exceed ninety
per cent of the total payments made: Provided, That the actual cancellation of the contract
shall take place after thirty days from receipt by the buyer of the notice of cancellation or the
demand for rescission of the contract by a notarial act and upon full payment of the cash
surrender value to the buyer.
Down payments, deposits or options on the contract shall be included in the computation of the total
number of installment payments made. chanrobles a law library
Sec. 4. In case where less than two years of installments were paid, the seller shall give the buyer a
grace period of not less than sixty days from the date the installment became due.
If the buyer fails to pay the installments due at the expiration of the grace period, the seller may
cancel the contract after thirty days from receipt by the buyer of the notice of cancellation or the
demand for rescission of the contract by a notarial act.31
In this case, respondent has paid less than two years of installments; therefore, Section 4 of R.A.
No. 6552 applies.
The Court of Appeals held that even if respondent defaulted in its full payment of the purchase price
of the subject lots, the conditional deeds of sale remain valid and subsisting, because there was no
valid notice of notarial rescission to respondent, as the notice was sent to the wrong address, that is,
to Mahogany Products Corporation, and it was received by a person employed by Mahogany
Products Corporation and not the respondent. The Court of Appeals stated that the allegation that
Mahogany Products Corporation and respondent have the same President, one Valeriano Bueno, is
irrelevant and has not been actually proven or borne by evidence. The appellate court held that there
was insufficient proof that respondent actually received the notice of notarial rescission of the
conditional deeds of sale; hence, the unilateral rescission of the conditional deeds of sale cannot be
given credence.
However, upon review of the records of this case, the Court finds that respondent had been served a
notice of the notarial rescission of the conditional deeds of sale when it was furnished with the
petitioner's Answer, dated February 16, 1995, to its first Complaint filed on November 28, 1994with

the RTC of Antipolo City, which case was docketed as Civil Case No.94-3426, but the complaint was
later dismissed without prejudice on January15, 1996.32
It appears that after respondent filed its first Complaint for specific performance and damages with
the RTC of Antipolo City on November 28,1994, petitioner filed an Answer and attached thereto a
copy of the written notice dated March 17, 1978 and copies of the notarial acts of rescission dated
March 15, 1978, and that respondent received a copy of the said Answer with the attached notices of
notarial rescission. However, to reiterate, the first Complaint was dismissed without prejudice.
Five years after the dismissal of the first Complaint, respondent again filed this case for specific
performance and damages, this time, with the RTC of Manila. Petitioner filed an Answer, and
alleged, among others, that the case was barred by prior judgment, since respondent filed a
complaint on November 28, 1994 before the RTC of Antipolo City, Branch 73, against it (petitioner)
involving the same issues and that the case, docketed as Civil Case No. 94-3426, was dismissed on
January 15, 1996 for lack of interest. Respondent filed a Reply33 dated July 18, 2001, asserting that
petitioner prayed for the dismissal of the first case filed on November 28, 1994 (Civil Case No. 943426) on the ground of improper venue as the parties agreed in the deeds of conditional sale that in
case of litigation, the venue shall be in the courts of Manila. To prove its assertion, respondent
attached to its Reply a copy of petitioners Answer to the first Complaint in Civil Case No. 94-3426,
which Answer included the written notice dated March 17, 1978 and two notarial acts of rescission,
both dated March 15, 1978, of the two conditional deeds of sale. Hence, respondent is deemed to
have had notice of the notarial rescission of the two conditional deeds of sale when it received
petitioners Answer to its first complaint filed with the RTC of Antipolo, since petitioners Answer
included notices of notarial rescission of the two conditional deeds of sale. The first complaint was
filed six years earlier before this complaint was filed. As stated earlier, the first complaint was
dismissed without prejudice, because respondents counsel failed to appear at the pre-trial. Since
respondent already received notices of the notarial rescission of the conditional deeds of sale,
together with petitioners Answer to the first Complaint five years before it filed this case, it can no
longer deny having received notices of the notarial rescission in this case, as respondent admitted
the same when it attached the notices of notarial rescission to its Reply in this case. Consequently,
respondent is not entitled to the relief granted by the Court of Appeals.
Under R.A. No. 6552, the right of the buyer to refund accrues only when he has paid at least two
years of installments.34 In this case, respondent has paid less than two years of installments; hence,
it is not entitled to a refund.35
Moreover, petitioner raises the issue of improper venue and lack of jurisdiction of the RTC of Manila
over the case. It contends that the complaint involved real properties in Antipolo City and
cancellation of titles; hence, it was improperly filed in the RTC of Manila.
Petitioner's contention lacks merit, as petitioner and respondent stipulated in both Conditional Deeds
of Sale that they mutually agreed that in case of litigation, the case shall be filed in the courts of
Manila.36
Further, petitioner contends that the action has prescribed. Petitioner points out that the cause of
action is based on a written contract; hence, the complaint should have been brought within 10 years

from the time the right of action accrues under Article 1144 of the Civil Code. Petitioner argues that it
is evident on the face of the complaint and the two contracts of conditional sale that the cause of
action accrued in 1974; yet, the complaint for specific performance was filed after 27 years.
Petitioner asserts that the action has prescribed.
The contention is meritorious.
Section 1, Rule 9 of the 1997 Rules of Civil Procedure provides:
Section 1. Defense and objections not pleaded. - Defenses and objections not pleaded whether in a
motion to dismiss or in the answer are deemed waived. However, when it appears from the
pleadings that the court has no jurisdiction over the subject matter, that there is another action
pending between the same parties for the same cause, or that the action is barred by a prior
judgment or by statute of limitations, the court shall dismiss the claim. 37
In Gicano v. Gegato,38 the Court held:
x x x (T)rial courts have authority and discretion to dismiss an action on the ground of prescription
when the parties' pleadings or other facts on record show it to be indeed time-barred; (Francisco v.
Robles, Feb, 15,1954; Sison v. Mc Quaid, 50 O.G. 97; Bambao v. Lednicky, Jan. 28, 1961;Cordova
v. Cordova, Jan. 14, 1958; Convets, Inc. v. NDC, Feb. 28, 1958;32 SCRA 529; Sinaon v. Sorongan,
136 SCRA 408); and it may do so on the basis of a motion to dismiss (Sec. 1,f, Rule 16, Rules of
Court), or an answer which sets up such ground as an affirmative defense (Sec. 5, Rule16), or even
if the ground is alleged after judgment on the merits, as in a motion for reconsideration (Ferrer v.
Ericta, 84 SCRA 705); or even if the defense has not been asserted at all, as where no statement
thereof is found in the pleadings (Garcia v. Mathis, 100 SCRA 250;PNB v. Pacific Commission
House, 27 SCRA 766; Chua Lamco v.Dioso, et al., 97 Phil. 821); or where a defendant has been
declared in default (PNB v. Perez, 16 SCRA 270). What is essential only, to repeat, is that the facts
demonstrating the lapse of the prescriptive period, be otherwise sufficiently and satisfactorily
apparent on the record; either in the averments of the plaintiff's complaint, or otherwise established
by the evidence.39
Moreover, Dino v. Court of Appeals40 held:
Even if the defense of prescription was raised for the first time on appeal in respondent's
Supplemental Motion for Reconsideration of the appellate court's decision, this does not militate
against the due process right of the petitioners. On appeal, there was no new issue of fact that arose
in connection with the question of prescription, thus it cannot be said that petitioners were not given
the opportunity to present evidence in the trial court to meet a factual issue. Equally important,
petitioners had the opportunity to oppose the defense of prescription in their Opposition to the
Supplemental Motion for Reconsideration filed in the appellate court and in their Petition for Review
in this Court.41
In this case, petitioner raised the defense of prescription for the first time before this Court, and
respondent had the opportunity to oppose the defense of prescription in its Comment to the petition.
Hence, the Court can resolve the issue of prescription as both parties were afforded the opportunity

to ventilate their respective positions on the matter. The Complaint shows that the Conditional Deeds
of Sale were executed on November 29, 1973, and payments were due on both Conditional Deeds
of Sale on November 15, 1974. Article 114442 of the Civil Code provides that actions based upon a
written contract must be brought within ten years from the time the right of action accrues. Nonfulfillment of the obligation to pay on the last due date, that is, on November 15, 1974, would give
rise to an action by the vendor, which date of reckoning may also apply to any action by the vendee
to determine his right under R.A. No. 6552. The vendee, respondent herein, filed this case on March
16, 2001, which is clearly beyond the 10-year prescriptive period; hence, the action has prescribed.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals, dated December 11,
2006, in CA-G.R. CV No. 85877 and its Resolution dated September 4, 2007 are REVERSED and
SET ASIDE. The Decision of the Regional Trial Court of Manila, Branch I, dated August 1, 2005 in
Civil Case No. 01-100411, dismissing the case for lack of merit, is REINSTATED.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
-Maceda law squarely applies in this case, since payment was made less than two years, there can
be no refund of payment or installments given
-cause of action arising from contracts prescribes in 10 years from the time cause of action arises;
prescription can be raised even for the first time on appeal since the defense of prescription does not
involve other issues; nevertheless, this was not controverted in this case, thus the same can be used
as basis for decision.

G.R. No.171692

June 3, 2013

SPOUSES DELFIN O. TUMIBAY and AURORA T. TUMIBAY-deceased; GRACE JULIE ANN

TUMIBAY MANUEL, legal representative, Petitioners,
vs.
SPOUSES MELVIN A. LOPEZ and ROWENA GAY T. VISITACION LOPEZ, Respondents.
DECISION
DEL CASTILLO, J.:
In a contract to sell, the seller retains ownership of the property until the buyer has paid the price in
full. A -buyer who covertly usurps the seller's ownership of the property prior to the full payment of
the price is in breach of the contract and the seller is entitled to rescission because the breach is
substantial and fundamental as it defeats the very object of the parties in entering into the contract to
sell.

The Petition for Review on Certiorari1 assails the May 19, 2005 Decision2 of the Court of Appeals
(CA) in CA-G.R. CV No. 79029, which reversed the January 6, 2003 Decision 3 of the Regional Trial
Court (RTC) of Malaybalay City, Branch 9 in Civil Case No. 2759-98, and the February 10, 2006
Resolution4 denying petitioner-spouses Delfin O. Tumibay and Aurora5 T. Tumibays Motion for
Reconsideration.6
Factual Antecedents
On March 23, 1998, petitioners filed a Complaint7 for declaration of nullity ab initio of sale, and
recovery of ownership and possession of land with the RTC of Malaybalay City. The case was raffled
to Branch 9 and docketed as Civil Case No. 2759-98.
In their Complaint, petitioners alleged that they are the owners of a parcel of land located in
Sumpong, Malaybalay, Bukidnon covered by Transfer Certificate of Title (TCT) No. T-253348 (subject
land) in the name of petitioner Aurora; that they are natural born Filipino citizens but petitioner Delfin
acquired American citizenship while his wife, petitioner Aurora, remained a Filipino citizen; that
petitioner Aurora is the sister of Reynalda Visitacion (Reynalda); 9 that on July 23, 1997, Reynalda
sold the subject land to her daughter, Rowena Gay T. Visitacion Lopez (respondent Rowena),
through a deed of sale10 for an unconscionable amount of P95,000.00 although said property had a
market value of more than P2,000,000.00; that the subject sale was done without the knowledge and
consent of petitioners; and that, for these fraudulent acts, respondents should be held liable for
damages. Petitioners prayed that (1) the deed of sale dated July 23, 1997 be declared void ab initio,
(2) the subject land be reconveyed to petitioners, and (3) respondents be ordered to pay damages.
On May 19, 1998, respondents filed their Answer11 with counterclaim. Respondents averred that on
December 12, 1990, petitioners executed a special power of attorney (SPA) 12 in favor of Reynalda
granting the latter the power to offer for sale the subject land; that sometime in 1994, respondent
Rowena and petitioners agreed that the former would buy the subject land for the price
of P800,000.00 to be paid on installment; that on January 25, 1995, respondent Rowena paid in
cash to petitioners the sum of $1,000.00; that from 1995 to 1997, respondent Rowena paid the
monthly installments thereon as evidenced by money orders; that, in furtherance of the agreement, a
deed of sale was executed and the corresponding title was issued in favor of respondent Rowena;
that the subject sale was done with the knowledge and consent of the petitioners as evidenced by
the receipt of payment by petitioners; and that petitioners should be held liable for damages for filing
the subject Complaint in bad faith. Respondents prayed that the Complaint be dismissed and that
petitioners be ordered to pay damages.
On May 25, 1998, petitioners filed an Answer to Counterclaim.13 Petitioners admitted the existence of
the SPA but claimed that Reynalda violated the terms thereof when she (Reynalda) sold the subject
land without seeking the approval of petitioners as to the selling price. Petitioners also claimed that
the monthly payments from 1995 to 1997 were mere deposits as requested by respondent Rowena
so that she (Rowena) would not spend the same pending their agreement as to the purchase price;
and that Reynalda, acting with evident bad faith, executed the deed of sale in her favor but placed it
in the name of her daughter, respondent Rowena, which sale is null and void because an agent
cannot purchase for herself the property subject of the agency.
Ruling of the Regional Trial Court
On January 6, 2003, the RTC rendered a Decision in favor of petitioners, viz:
WHEREFORE, Decision is hereby rendered, as follows;

(1) Ordering the petitioners, jointly and severally, to return the said amount of $12,000.00 at
the present rate of exchange less the expenses to be incurred for the transfer of the property
in question under the name of the petitioners;
(2) Ordering the Register of Deeds of Bukidnon to cancel TCT No. T-62674 in the name of
the respondent Rowena Gay T. Visitacion-Lopez and to issue a new TCT in the name of the
petitioners;
(3) Ordering respondents, spouses Melvin and Rowena Gay Lopez, to execute a Deed of
Reconveyance in favor of the petitioners, or if said respondents should refuse to do so or are
unable to do so, the Clerk of Court of the RTC and ex-officio Provincial Sheriff to execute
such Deed of Reconveyance;
(4) No x x x damages are awarded. The respective parties must bear their own expenses
except that respondents, jointly and severally, must pay the costs of this suit.
SO ORDERED.14
In ruling in favor of petitioners, the trial court held: (1) the SPA merely authorized Reynalda to offer
for sale the subject land for a price subject to the approval of the petitioners; (2) Reynalda violated
the terms of the SPA when she sold the subject land to her daughter, respondent Rowena, without
first seeking the approval of petitioners as to the selling price thereof; (3) the SPA does not
sufficiently confer on Reynalda the authority to sell the subject land; (4) Reynalda, through fraud and
with bad faith, connived with her daughter, respondent Rowena, to sell the subject land to the latter;
and, (5) the sale contravenes Article 1491, paragraph 2, of the Civil Code which prohibits the agent
from acquiring the property subject of the agency unless the consent of the principal has been given.
The trial court held that Reynalda, as agent, acted outside the scope of her authority under the SPA.
Thus, the sale is null and void and the subject land should be reconveyed to petitioners. The trial
court further ruled that petitioners are not entirely free from liability because they received from
respondent Rowena deposits totaling $12,000.00. Under the principle of unjust enrichment,
petitioners should, thus, be ordered to reimburse the same without interest.
Petitioners filed a partial motion for reconsideration15 praying for the award of attorneys fees. In its
January 14, 2003 Order16 denying the aforesaid motion, the trial court clarified that the
reimbursement of $12,000.00 in favor of respondents was without interest because there was also
no award of rental income in favor of petitioners. Both parties are deemed mutually compensated
and must bear their own expenses.
From this Decision, respondents appealed to the CA.
Ruling of the Court of Appeals
On May 19, 2005, the CA rendered the assailed Decision reversing the judgment of the trial court,
viz:
WHEREFORE, premises considered, the appealed Decision of the Court a quo is hereby
REVERSED and SET ASIDE. Accordingly, title to the subject property shall remain in the name of
the Appellant ROWENA GAY VISITACION-LOPEZ. The latter and her spouse MELVIN LOPEZ are
directed to pay the balance of Four Hundred Eighty Eight Thousand Pesos (P488,000.00) to the
petitioners effective within 30 days from receipt of this Decision and in case of delay, to pay the legal
rate of interests [sic] at 12% per annum until fully paid.

SO ORDERED.17
In reversing the trial courts Decision, the appellate court ruled that: (1) the SPA sufficiently conferred
on Reynalda the authority to sell the subject land; (2) although there is no direct evidence of
petitioners approval of the selling price of the subject land, petitioner Auroras acts of receiving two
money orders and several dollar checks from respondent Rowena over the span of three years
amount to the ratification of any defect in the authority of Reynalda under the SPA; (3) petitioners are
estopped from repudiating the sale after they had received the deposits totaling $12,000.00; (4) the
sale is not contrary to public policy because there is no rule or law which prohibits the sale of
property subject of the agency between the agent and his children unless it would be in fraud of
creditors which is not the case here; (5) petitioners impliedly ratified the subject SPA and contract of
sale as well as its effects; and, (6) the selling price of P800,000.00 for the subject land is deemed
reasonable based on the testimony of respondent Rowena as this was the selling price agreed upon
by her and petitioner Delfin. Considering that respondent Rowena proved that she remitted a total of
$12,000.00 to petitioners and pegging the exchange rate at that time at P26.00 per dollar, the
appellate court ruled that P312,000.00 of the P800,000.00 selling price was already received by
petitioners. Thus, respondents are only liable for the balance ofP488,000.00.
Hence, this Petition.
Issues
Petitioners raise the following issues for our resolution:
I. Whether the CA erred in resolving the issue in the case at bar.
II. Whether under the SPA Reynalda had the power to sell the subject land.
III. Whether the actuations of petitioner Aurora in receiving money from respondent Rowena
amounted to the ratification of the breach in the exercise of the SPA.
IV. Whether the CA erred in not declaring the sale void on grounds of public policy.
V. Whether the CA erred in adopting the testimony of respondent Rowena as to
the P800,000.00 selling price of the subject land.18
Petitioners Arguments
Petitioners argue that the appellate court went beyond the issues of this case when it ruled that there
was a contract of sale between respondent Rowena and petitioner Aurora because the issues before
the trial court were limited to the validity of the deed of sale dated July 23, 1997 for being executed
by Reynalda beyond the scope of her authority under the SPA. Further, the existence of the alleged
contract of sale was not proven because the parties failed to agree on the purchase price as stated
by petitioner Aurora in her testimony. The money, in cash and checks, given to petitioners from 1995
to 1997 were mere deposits until the parties could agree to the purchase price. Moreover, Reynalda
acted beyond the scope of her authority under the SPA because she was merely authorized to look
for prospective buyers of the subject land. Even assuming that she had the power to sell the subject
land under the SPA, she did not secure the approval as to the price from petitioners before executing
the subject deed of sale, hence, the sale is null and void. Petitioners also contend that there was no
ratification of the subject sale through petitioners acceptance of the monthly checks from respondent
Rowena because the sale occurred subsequent to the receipt of the aforesaid checks. They further

claim that the sale was void because it was not only simulated but violates Article 1491 of the Civil
Code which prohibits the agent from acquiring the property subject of the agency. Here, Reynalda
merely used her daughter, respondent Rowena, as a dummy to acquire the subject land. Finally,
petitioners question the determination by the appellate court that the fair market value of the subject
land is P800,000.00 for lack of any factual and legal basis.
Respondents Arguments
Respondents counter that the issue as to whether there was a perfected contract of sale between
petitioners and respondent Rowena is inextricably related to the issue of whether the deed of sale
dated July 23, 1997 is valid, hence, the appellate court properly ruled on the former. Furthermore,
they reiterate the findings of the appellate court that the receipt of monthly installments constitutes
an implied ratification of any defect in the SPA and deed of sale dated July 23, 1997. They
emphasize that petitioners received a total of $12,000.00 as consideration for the subject land.
Our Ruling
The Petition is meritorious.
As a general rule, we do not disturb the factual findings of the appellate court. However, this case
falls under one of the recognized exceptions thereto because the factual findings of the trial court
and appellate court are conflicting.19 Our review of the records leads us to conclude that the following
are the relevant factual antecedents of this case.
Petitioners were the owners of the subject land covered by TCT No. T-25334 in the name of
petitioner Aurora. On December 12, 1990, petitioners, as principals and sellers, executed an SPA in
favor of Reynalda, as agent, to, among others, offer for sale the subject land provided that the
purchase price thereof should be approved by the former. Sometime in 1994, petitioners and
respondent Rowena agreed to enter into an oral contract to sell over the subject land for the price
of P800,000.00 to be paid in 10 years through monthly installments.
On January 25, 1995, respondent Rowena paid the first monthly installment of $1,000.00 to
petitioner Aurora which was followed by 22 intermittent monthly installments of $500.00 spanning
almost three years. Sometime in 1997, after having paid a total of $10,000.00, respondent Rowena
called her mother, Reynalda, claiming that she had already bought the subject land from petitioners.
Using the aforesaid SPA, Reynalda then transferred the title to the subject land in respondent
Rowenas name through a deed of sale dated July 23, 1997 without the knowledge and consent of
petitioners. In the aforesaid deed, Reynalda appeared and signed as attorney-in-fact of petitioner
Aurora, as seller, while respondent Rowena appeared as buyer. After which, a new title, i.e., TCT No.
62674,20 to thesubject land was issued in the name of respondent Rowena.
We explain these factual findings and the consequences thereof below.
Petitioners and respondent
Rowena entered into a contract to sell over the subject land.
Petitioners deny that they agreed to sell the subject land to respondent Rowena for the price
of P800,000.00 payable in 10 years through monthly installments. They claim that the payments
received from respondent Rowena were for safekeeping purposes only pending the final agreement
as to the purchase price of the subject land.

We are inclined to give credence to the claim of the respondents for the following reasons.
First, the payment of monthly installments was duly established by the evidence on record consisting
of money orders21 and checks22 payable to petitioner Aurora. Petitioners do not deny that they
received 23 monthly installments over the span of almost three years. As of November 30, 1997 (i.e.,
the date of the last monthly installment), the payments already totaled $12,000.00, to wit:
Date

Amount Paid
(in dollars)

January 25, 1995

1,000.0023

February 21, 1995

500.00

March 27, 1995

500.00

April 25, 1995

500.00

June 1, 1995

500.00

June 30, 1995

500.00

July 31, 1995

500.00

May 29, 1996

500.00

June 30, 1996

500.00

July 31, 1996

500.00

August 31, 1996

500.00

September 30, 1996

500.00

October 29, 1996

500.00

December 31, 1996

500.00

January 31, 1997

500.00

February 28, 1997

500.00

March 31, 1997

500.00

May 31, 1997

500.00

July 19, 1997

500.00

August 31, 1997

500.00

September 30, 1997

500.00

October 31, 1997

500.00

November 30, 1997

500.00
Total

12,000.00

Second, in her testimony, petitioner Aurora claimed that the $1,000.00 in cash that she received from
respondent Rowena on January 25, 1995 was a mere deposit until the purchase price of the subject
land would have been finally agreed upon by both parties.24 However, petitioner Aurora failed to

explain why, after receiving this initial sum of $1,000.00, she thereafter accepted from respondent
Rowena 22 intermittent monthly installments in the amount of $500.00. No attempt was made on the
part of petitioners to return these amounts and it is fair to assume that petitioners benefited
therefrom.
Third, it strains credulity that respondent Rowena would make such monthly installments for a
substantial amount of money and for a long period of time had there been no agreement between
the parties as to the purchase price of the subject land.
We are, thus, inclined to rule that there was, indeed, a contractual agreement between the parties
for the purchase of the subject land and that this agreement partook of an oral contract to sell for the
sum ofP800,000.00. A contract to sell has been defined as "a bilateral contract whereby the
prospective seller, while expressly reserving the ownership of the subject property despite delivery
thereof to the prospective buyer, binds himself to sell the said property exclusively to the prospective
buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase price." 25 In a
contract to sell, "ownership is retained by the seller and is not to pass until the full payment of the
price x x x."26 It is "commonly entered into so as to protect the seller against a buyer who intends to
buy the property in installments by withholding ownership over the property until the buyer effects full
payment therefor."27
In the case at bar, while there was no written agreement evincing the intention of the parties to enter
into a contract to sell, its existence and partial execution were sufficiently established by, and may be
reasonably inferred from the actuations of the parties, to wit: (1) the title to the subject land was not
immediately transferred, through a formal deed of conveyance, in the name of respondent Rowena
prior to or at the time of the first payment of $1,000.00 by respondent Rowena to petitioner Aurora on
January 25, 1995;28 (2) after this initial payment, petitioners received 22 intermittent monthly
installments from respondent Rowena in the sum of $500.00; and, (3) in her testimony, respondent
Rowena admitted that she had the title to the subject land transferred in her name only later on or on
July 23, 1997, through a deed of sale, because she believed that she had substantially paid the
purchase price thereof,29 and that she was entitled thereto as a form of security for the installments
she had already paid.30
Respondent Rowena was in breach of the contract to sell.
Although we rule that there was a contract to sell over the subject land between petitioners and
respondent Rowena, we find that respondent Rowena was in breach thereof because, at the time
the aforesaid deed of sale was executed on July 23, 1997, the full price of the subject land was yet
to be paid. In arriving at this conclusion, we take judicial notice 31 of the prevailing exchange rates at
the time, as published by the Bangko Sentral ng Pilipinas,32 and multiply the same with the monthly
installments respondent Rowena paid to petitioners, as supported by the evidence on record, to wit:
Date
January 25, 1995

Amount Paid
(in dollars)

Exchange Rate
(peso per dollar)

Peso Equivalent

1,000.00

24.7700

24,770.00

February 21, 1995

500.00

25.1140

12,557.00

March 27, 1995

500.00

25.9670

12,983.50

April 25, 1995

500.00

26.0270

13,013.50

June 1, 1995

500.00

25.8040

12,902.00

June 30, 1995

500.00

25.5750

12,787.50

July 31, 1995

500.00

25.5850

12,792.50

May 29, 1996

500.00

26.1880

13,094.00

June 30, 1996

500.00

26.203033

13,101.50

July 31, 1996

500.00

26.2280

13,114.00

August 31, 1996

500.00

26.202034

13,101.00

September 30, 1996

500.00

26.2570

13,128.50

October 29, 1996

500.00

26.2830

13,141.50

December 31, 1996

500.00

26.288035

13,144.00

January 31, 1997

500.00

26.3440

13,172.00

February 28, 1997

500.00

26.3330

13,166.50

March 31, 1997

500.00

26.3670

13,183.50

May 31, 1997

500.00

26.374036

13,187.00

July 19, 1997

500.00

28.574037

14,287.00

Total

260,626.50

Thus, as of July 19, 1997 or prior to the execution of the deed of sale dated July 23, 1997, the total
amount of monthly installments paid by respondent Rowena to petitioners was only P260,626.50 or
32.58%38 of theP800,000.00 purchase price. That the full price was yet to be paid at the time of the
subject transfer of title was admitted by respondent Rowena on cross-examination, viz:
ATTY. OKIT:
Q - Let us make this clear. You now admit that x x x you agreed to buy the lot at eight hundred
thousand, to which the Plaintiff x x x agreed. Now based on the dollar rate, your total payment did
not reach x x x eight hundred thousand pesos? Is that correct? [sic]
A - Yes.
Q - Since notwithstanding the fact this eight hundred thousand which you have agreed is not fully
paid why did your mother finalize the deed of sale?
A - My mother is equipped with the SPA to transfer the lot to me only for security purposes but
actually there is no full payment.39 (Emphasis supplied)
Respondent Rowena tried to justify the premature transfer of title by stating that she had
substantially paid the full amount of the purchase price and that this was necessary as a security for
the installments she had already paid. However, her own evidence clearly showed that she had, by
that time, paid only 32.58% thereof. Neither can we accept her justification that the premature
transfer of title was necessary as a security for the installments she had already paid absent proof
that petitioners agreed to this new arrangement. Verily, she failed to prove that petitioners agreed to
amend or novate the contract to sell in order to allow her to acquire title over the subject land even if
she had not paid the price in full.

Significantly, the evidence on record indicates that the premature transfer of title in the name of
respondent Rowena was done without the knowledge and consent of petitioners. In particular,
respondent Rowenas narration of the events leading to the transfer of title showed that she and her
mother, Reynalda, never sought the consent of petitioners prior to said transfer of title, viz:
COURT:
Q- Why is this check (in the amount of $1,000.00) in your possession now?
A- This is the check I paid to her (referring to petitioner Aurora) which is in cash. [sic]
ATTY. BARROSO:
Q - Now did you continue x x x paying the $500.00 dollar to him (referring to petitioner Delfin)?
A - Yes.
xxxx
Q - Now having stated substantially paid, what did you do with the land subject of this case? [sic]
A - I called my mother who has equipped with SPA to my Uncle that I have already bought the land.
[sic]
Q - And you called your mother?
A - Yes.
xxxx
Q - Then what transpired next?
A - After two years my mother called me if how much I have paid the land and being equipped with
SPA, so she transferred the land to me. [sic]40 (Emphases supplied)
Respondent Rowenas reliance on the SPA as the authority or consent to effect the premature
transfer of title in her name is plainly misplaced. The terms of the SPA are clear. It merely authorized
Reynalda to sell the subject land at a price approved by petitioners. The SPA could not have
amended or novated the contract to sell to allow respondent Rowena to acquire the title over the
subject land despite non-payment of the price in full for the reason that the SPA was executed four
years prior to the contract to sell. In fine, the tenor of her testimony indicates that respondent
Rowena made a unilateral determination that she had substantially paid the purchase price and that
she is entitled to the transfer of title as a form of security for the installments she had already paid,
reasons, we previously noted, as unjustified.
The contract to sell is rescissible.
Article 1191 of the Civil Code provides:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between 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. x x x
As a general rule, "rescission will not be permitted for a slight or casual breach of the contract, but
only for such breaches as are substantial and fundamental as to defeat the object of the parties in
making the agreement."41
In the case at bar, we find that respondent Rowenas act of transferring the title to the subject land in
her name, without the knowledge and consent of petitioners and despite non-payment of the full
price thereof, constitutes a substantial and fundamental breach of the contract to sell. As previously
noted, the main object or purpose of a seller in entering into a contract to sell is to protect himself
against a buyer who intends to buy the property in installments by withholding ownership over the
property until the buyer effects full payment therefor.42 As a result, the sellers obligation to convey
and the buyers right toconveyance of the property arise only upon full payment of the price. Thus, a
buyer who willfully contravenes this fundamental object or purpose of the contract, by covertly
transferring the ownership of the property in his name at a time when the full purchase price has yet
to be paid, commits a substantial and fundamental breach which entitles the seller to rescission of
the contract.43
Indeed, it would be highly iniquitous for us to rule that petitioners, as sellers, should continue with the
contract to sell even after the discovery of the aforesaid breach committed by respondent Rowena,
as buyer, considering that these acts betrayed in no small measure the trust reposed by petitioners
in her and her mother, Reynalda. Put simply, respondent Rowena took advantage of the SPA, in the
name of her mother and executed four years prior to the contract to sell, to effect the transfer of title
to the subject land in her (Rowenas) name without the knowledge and consent of petitioners and
despite non-payment of the full price.
We, thus, rule that petitioners are entitled to the rescission of the subject contract to sell.
Petitioners are entitled to moral damages and attorneys fees while respondent Rowena is entitled to
the reimbursement of the monthly installments with legal interest.
Article 1170 of the Civil Code provides:
Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay,
and those who in any manner contravene the tenor thereof, are liable for damages.
Fraud or malice (dolo) has been defined as a "conscious and intentional design to evade the normal
fulfillment of existing obligations" and is, thus, incompatible with good faith. 44 In the case at bar, we
find that respondent Rowena was guilty of fraud in the performance of her obligation under the
subject contract to sell because (1) she knew that she had not yet paid the full price (having paid
only 32.58% thereof) when she had the title to the subject land transferred to her name, and (2) she
orchestrated the aforesaid transfer of title without the knowledge and consent of petitioners. Her own
testimony and documentary evidence established this fact. Where fraud and bad faith have been

established, the award of moral damages is proper.45 Further, under Article 2208(2)46 of the Civil
Code, the award of attorneys fees is proper where the plaintiff is compelled to litigate with third
persons or incur expenses to protect his interest because of the defendants act or omission. Here,
respondent Rowenas aforesaid acts caused petitioners to incur expenses in litigating their just
claims. We, thus, find respondent Rowena liable for moral damages and attorneys fees which we fix
at P100,000.00 andP50,000.00, respectively.47
Anent the monthly installments respondent Rowena paid to petitioners, our review of the records
leads us to conclude that respondent Rowena is entitled to the reimbursement of the same with legal
interest. Although respondent Rowena was clearly unjustified in prematurely and covertly
transferring the title to the subject land in her name, we deplore petitioners lack of candor in
prosecuting their claims before the trial court and intent to evade recognition of the monthly
installments that they received from respondent Rowena. The records indicate that, in their
Complaint, petitioners made no mention of the fact that they had entered into a contract to sell with
respondent Rowena and that they had received 23 monthly installments from the latter. The
Complaint merely alleged that the subject sale was done without the knowledge and consent of
petitioners. It was only later on, when respondent Rowena presented the proof of payment of the
monthly installments in her Answer to the Complaint, that this was brought to light to which
petitioners readily admitted. Further, no evidence was presented to prove that respondent Rowena
occupied the subject land or benefited from the use thereof upon commencement of the contract to
sell which would have justified the setting off of rental income against the monthly installments paid
by respondent Rowena to petitioners.
In view of the foregoing, the sums paid by respondent Rowena as monthly installments to petitioners
should, thus, be returned to her with legal interest. The total amount to be reimbursed by petitioners
to respondent Rowena is computed as follows:
Date
January 25, 1995

Amount Paid
(in dollars)

Exchange Rate
(peso per dollar)

Peso Equivalent

1,000.00

24.7700

24,770.00

February 21, 1995

500.00

25.1140

12,557.00

March 27, 1995

500.00

25.9670

12,983.50

April 25, 1995

500.00

26.0270

13,013.50

June 1, 1995

500.00

25.8040

12,902.00

June 30, 1995

500.00

25.5750

12,787.50

July 31, 1995

500.00

25.5850

12,792.50

May 29, 1996

500.00

26.1880

13,094.00

June 30, 1996

500.00

26.2030

13,101.50

July 31, 1996

500.00

26.2280

13,114.00

August 31, 1996

500.00

26.2020

13,101.00

September 30, 1996

500.00

26.2570

13,128.50

October 29, 1996

500.00

26.2830

13,141.50

December 31, 1996

500.00

26.2880

13,144.00

January 31, 1997

500.00

26.3440

13,172.00

February 28, 1997

500.00

26.3330

13,166.50

March 31, 1997

500.00

26.3670

13,183.50

May 31, 1997

500.00

26.3740

13,187.00

July 19, 1997

500.00

28.5740

14,287.00

August 31, 1997

500.00

30.1650

15,082.50

September 30, 1997

500.00

33.8730

16,936.50

October 31, 1997

500.00

34.9380

17,469.00

November 30, 1997

500.00

34.6550

17,327.50

Total

327,442.00

Since this amount is neither a loan nor forbearance of money, we set the interest rate at 6% per
annum computed from the time of the filing of the Answer 48 to the Complaint on May 19, 199849 until
finality of judgement and thereafter at 12% per annum until fully paid in accordance with our ruling in
Eastern Shipping Lines, Inc. v. Court of Appeals.50 Petitioners are, thus, ordered to pay respondent
Rowena the sum of P327,442.00 with an interest of 6% per annum computed from May 19, 1998
until finality of judgment and thereafter of 12% per annum until fully paid.
The sale of the subject land, effected through the deed of sale dated July 23, 1997, is void.
Having ruled that respondent Rowena was in substantial breach of the contract to sell because she
had the title to the subject land transferred in her name without the knowledge and consent of
petitioners and despite lack of full payment of the purchase price, we now rule on the validity of the
deed of sale dated July 23, 1997 which was used to effect the aforesaid transfer of ownership.
It will be recalled that on December 12, 1990, petitioners, as principals and sellers, executed an SPA
in favor of Reynalda, as agent. The SPA stated in part:
That we spouses, AURORA TUMIBAY and DELFIN TUMIBAY, of legal age and presently residing at
36 Armstrong Drive, Clark, New Jersey, 07066 name, constitute and appoint REYNALDA
VISITACION, widow, of legal age and residing at Don Carlos, Bukidnon, Philippines, to be our true
and lawful Attorney-in-fact, for us and in our name, place and stead and for our use and benefit to do
and perform the following acts and deed:
To administer our real property located in the Province of Bikidnon, Town of Malaybalay, Barrio of
Bantaunon, Towns of Maramag, Paradise, Maramag and Barrio of Kiburiao, Town of Quezon.
To offer for sale said properties, the selling price of which will be subject to our approval.
xxxx
To sign all papers and documents on our behalf in a contract of sale x x x. 51.
As can be seen, the SPA gave Reynalda the power and duty to, among others, (1) offer for sale the
subject land to prospective buyers, (2) seek the approval of petitioners as to the selling price thereof,

and (3) sign the contract of sale on behalf of petitioners upon locating a buyer willing and able to
purchase the subject land at the price approved by petitioners. Although the SPA was executed four
years prior to the contract to sell, there would have been no obstacle to its use by Reynalda had the
ensuing sale been consummated according to its terms. However, as previously discussed, when
Reynalda, as attorney-in-fact of petitioner Aurora, signed the subject deed of sale dated July 23,
1997, the agreed price of P800,000.00 (which may be treated as the approved price) was not yet
fully paid because respondent Rowena at the time had paid only P260,262.50.52 Reynalda, therefore,
acted beyond the scope of her authority because she signed the subject deed of sale, on behalf of
petitioners, at a price of P95,000.00 which was not approved by the latter. For her part, respondent
Rowena cannot deny that she was aware of the limits of Reynaldas power under the SPA because
she (Rowena) was the one who testified that the agreed price for the subject land was P800,000.00.
Article 1898 of the Civil Code provides:
Art. 1898. If the agent contracts in the name of the principal, exceeding the scope of his authority,
and the principal does not ratify the contract, it shall be void if the party with whom the agent
contracted is aware of the limits of the powers granted by the principal. In this case, however, the
agent is liable if he undertook to secure the principals ratification.
It should be noted that, under Article 1898 of the Civil Code, the principals ratification of the acts of
the agent, done beyond the scope of the latters authority, may cure the defect in the contract
entered into between the agent and a third person. This seems to be the line of reasoning adopted
by the appellate court in upholding the validity of the subject sale. The appellate court conceded that
there was no evidence that respondents sought the approval of petitioners for the subject sale but it,
nonetheless, ruled that whatever defect attended the sale of the subject land should be deemed
impliedly ratified by petitioners acceptance of the monthly installments paid by respondent Rowena.
Though not clearly stated in its Decision, the appellate court seemed to rely on the four monthly
installments (i.e., August 31, September 30, October 31, and November 30, 1997) respondent
Rowena paid to petitioners which the latter presumably received and accepted even after the
execution of the deed of sale dated July 23, 1997.
We disagree.
That petitioners continued to receive four monthly installments even after the premature titling of the
subject land in the name of respondent Rowena, through the deed of sale dated July 23, 1997, did
not, by itself, establish that petitioners ratified such sale. On the contrary, the fact that petitioners
continued to receive the aforesaid monthly installments tended to establish that they had yet to
discover the covert transfer of title in the name of respondent Rowena. As stated earlier, the
evidence on record established that the subject sale was done without petitioners knowledge and
consent which would explain why receipt or acceptance by petitioners of the aforementioned four
monthly installments still occurred. Further, it runs contrary to common human experience and
reason that petitioners, as sellers, would forego the reservation or retention of the ownership over
the subject land, which was intended to guarantee the full payment of the price under the contract to
sell, especially so in this case where respondent Rowena, as buyer, had paid only 32.58% of the
purchase price. In a contract to sell, it would be unusual for the seller to consent to the transfer of
ownership of the property to the buyer prior to the full payment of the purchase price because the
reservation of the ownership in the seller is precisely intended to protect the seller from the buyer.
We, therefore, find that petitioners claim that they did not ratify the subject sale, which was done
without their knowledge and consent, and that the subsequent discovery of the aforesaid fraudulent
sale led them to promptly file this case with the courts to be more credible and in accord with the
evidence on record. To rule otherwise would be to reward respondent Rowena for the fraud that she
committed on petitioners.

Based on the foregoing, we rule that (1) Reynalda, as agent, acted beyond the scope of her
authority under the SPA when she executed the deed of sale dated July 23, 1997 in favor of
respondent Rowena, as buyer, without the knowledge and consent of petitioners, and conveyed the
subject land to respondent Rowena at a price not approved by petitioners, as principals and sellers,
(2) respondent Rowena was aware of the limits of the authority of Reynalda under the SPA, and (3)
petitioners did not ratify, impliedly or expressly, the acts of Reynalda. Under Article 1898 of the Civil
Code, the sale is void and petitioners are, thus, entitled to the reconveyance of the subject land.
WHEREFORE, the Petition is GRANTED. The May 19, 2005 Decision and February 10, 2006
Resolution of the Court of Appeals in CA-G.R. CV No. 79029 are ANNULLED and SET ASIDE. The
January 6, 2003 Decision of the Regional Trial Court of Malaybalay City, Branch 9 in Civil Case No.
2759-98 is REINSTATED and MODIFIED to read as follows:
1. The deed of sale dated July 23, 1997 over the subject land, covered by TCT No. T-62674,
between petitioner Aurora, represented by Reynalda as her attorney-in-fact, and respondent
Rowena is declared void.
2. The contract to sell over the subject land, covered by TCT No. T-25334, between
petitioners, as sellers, and respondent Rowena, as buyer, is declared rescinded.
1wphi1

3. The Register of Deeds of Malaybalay City is ordered to cancel TCT No. T-62674 in the
name of respondent Rowena and to reinstate TCT No. T-25334 in the name of petitioner
Aurora.
4. Respondent Rowena is ordered to pay petitioners the sum of P100,000.00 as moral
damages andP50,000.00 as attorneys fees.
5. Petitioners are ordered to pay respondent Rowena the sum of P327,442.00 with legal
interest of 6% per annum from May 19, 1998 until finality of this Decision. In case petitioners
fail to pay the amount due upon finality of this Decision, they shall pay legal interest thereon
at the rate of 12% per annum until fully paid.
No costs.
SO ORDERED.
MARIANO C. DEL CASTILLO
Associate Justice
-there was a perfected contract to sell; however, the premature transfer of ownership using the SPA
which sets out the scope of authority of the agent, was used in breach of the contractual obligation
under the contract to sell.
-since payment was not yet of the full price as greed upon, the fraudulent and covert act of
transferring ownership is a substantial breach making the contract rescissible
-no ratification on the part of the seller-principal on the acceptance of the installments because they
have no knowledge and consent on the transfer considering that the contract is one of contract to
sell. The nature and purpose of a contract to sell runs counter to what transpired in this case as to
the premature transfer of ownership without full payment of the purchase price. This was further

aggravated by the the fact that there was no consent and knowledge on the premature transfer using
as shield the limited authority conferred by the SPA.

G.R. No. 194846

June 19, 2013

HOSPICIO D. ROSAROSO, ANTONIO D. ROSAROSO, MANUEL D. ROSAROSO, ALGERICA D.

ROSAROSO, and CLEOFE R. LABINDAO, Petitioners,
vs.
LUCILA LABORTE SORIA, SPOUSES HAM SOLUTAN and **LAILA SOLUTAN, and MERIDIAN
REALTY CORPORATION, Respondents.
*

DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the December
4, 2009 Decision1 of the Court of Appeals (CA). in CA G.R. CV No. 00351, which reversed and set
aside the July 30, 2004 Decision2 of the Regional Trial Court, Branch 8, 7th Judicial Region, Cebu
City (RTC), in Civil Case No. CEB-16957, an action for declaration of nullity of documents.

The Facts
Spouses Luis Rosaroso (Luis) and Honorata Duazo (Honorata) acquired several real properties in
Daan Bantayan, Cebu City, including the subject properties. The couple had nine (9) children
namely: Hospicio, Arturo, Florita, Lucila, Eduardo, Manuel, Cleofe, Antonio, and Angelica. On April
25, 1952, Honorata died. Later on, Luis married Lourdes Pastor Rosaroso (Lourdes).
On January 16, 1995, a complaint for Declaration of Nullity of Documents with Damages was filed by
Luis, as one of the plaintiffs, against his daughter, Lucila R. Soria (Lucila); Lucilas daughter, Laila S.
Solutan (Laila); and Meridian Realty Corporation (Meridian). Due to Luis untimely death, however,
an amended complaint was filed on January 6, 1996, with the spouse of Laila, Ham Solutan (Ham);
and Luis second wife, Lourdes, included as defendants.3
In the Amended Complaint, it was alleged by petitioners Hospicio D. Rosaroso, Antonio D. Rosaroso
(Antonio), Angelica D. Rosaroso (Angelica), and Cleofe R. Labindao (petitioners) that on November
4, 1991, Luis, with the full knowledge and consent of his second wife, Lourdes, executed the Deed of
Absolute Sale4 (First Sale) covering the properties with Transfer Certificate of Title (TCT) No. 31852
(Lot No. 8); TCT. No. 11155 (Lot 19); TCT No. 10885 (Lot No. 22); TCT No. 10886 (Lot No. 23); and
Lot Nos. 5665 and 7967, all located at Daanbantayan, Cebu, in their favor.5
They also alleged that, despite the fact that the said properties had already been sold to them,
respondent Laila, in conspiracy with her mother, Lucila, obtained the Special Power of Attorney
(SPA),6 dated April 3, 1993, from Luis (First SPA); that Luis was then sick, infirm, blind, and of
unsound mind; that Lucila and Laila accomplished this by affixing Luis thumb mark on the SPA
which purportedly authorized Laila to sell and convey, among others, Lot Nos. 8, 22 and 23, which
had already been sold to them; and that on the strength of another SPA7 by Luis, dated July 21,
1993 (Second SPA), respondents Laila and Ham mortgaged Lot No. 19 to Vital Lending Investors,
Inc. for and in consideration of the amount of P150,000.00 with the concurrence of Lourdes.8
Petitioners further averred that a second sale took place on August 23, 1994, when the respondents
made Luis sign the Deed of Absolute Sale9 conveying to Meridian three (3) parcels of residential land
for P960,500.00 (Second Sale); that Meridian was in bad faith when it did not make any inquiry as to
who were the occupants and owners of said lots; and that if Meridian had only investigated, it would
have been informed as to the true status of the subject properties and would have desisted in
pursuing their acquisition.
Petitioners, thus, prayed that they be awarded moral damages, exemplary damages, attorneys fees,
actual damages, and litigation expenses and that the two SPAs and the deed of sale in favor of
Meridian be declared null and void ab initio.10
On their part, respondents Lucila and Laila contested the First Sale in favor of petitioners. They
submitted that even assuming that it was valid, petitioners were estopped from questioning the
Second Sale in favor of Meridian because they failed not only in effecting the necessary transfer of
the title, but also in annotating their interests on the titles of the questioned properties. With respect
to the assailed SPAs and the deed of absolute sale executed by Luis, they claimed that the
documents were valid because he was conscious and of sound mind and body when he executed

them. In fact, it was Luis together with his wife who received the check payment issued by Meridian
where a big part of it was used to foot his hospital and medical expenses. 11
Respondent Meridian, in its Answer with Compulsory Counterclaim, averred that Luis was fully
aware of the conveyances he made. In fact, Sophia Sanchez (Sanchez), Vice-President of the
corporation, personally witnessed Luis affix his thumb mark on the deed of sale in its favor. As to
petitioners contention that Meridian acted in bad faith when it did not endeavor to make some
inquiries as to the status of the properties in question, it countered that before purchasing the
properties, it checked the titles of the said lots with the Register of Deeds of Cebu and discovered
therein that the First Sale purportedly executed in favor of the plaintiffs was not registered with the
said Register of Deeds. Finally, it argued that the suit against it was filed in bad faith. 12
On her part, Lourdes posited that her signature as well as that of Luis appearing on the deed of sale
in favor of petitioners, was obtained through fraud, deceit and trickery. She explained that they
signed the prepared deed out of pity because petitioners told them that it was necessary for a loan
application. In fact, there was no consideration involved in the First Sale. With respect to the Second
Sale, she never encouraged the same and neither did she participate in it. It was purely her
husbands own volition that the Second Sale materialized. She, however, affirmed that she received
Meridians payment on behalf of her husband who was then bedridden. 13
RTC Ruling
After the case was submitted for decision, the RTC ruled in favor of petitioners. It held that when Luis
executed the second deed of sale in favor of Meridian, he was no longer the owner of Lot Nos. 19,
22 and 23 as he had already sold them to his children by his first marriage. In fact, the subject
properties had already been delivered to the vendees who had been living there since birth and so
had been in actual possession of the said properties. The trial court stated that although the deed of
sale was not registered, this fact was not prejudicial to their interest. It was of the view that the actual
registration of the deed of sale was not necessary to render a contract valid and effective because
where the vendor delivered the possession of the parcel of land to the vendee and no superior rights
of third persons had intervened, the efficacy of said deed was not destroyed. In other words, Luis
lost his right to dispose of the said properties to Meridian from the time he executed the first deed of
sale in favor of petitioners. The same held true with his alleged sale of Lot 8 to Lucila
Soria.14 Specifically, the dispositive portion of the RTC decision reads:
IN VIEW OF THE FOREGOING, the Court finds that a preponderance of evidence exists in favor of
the plaintiffs and against the defendants. Judgment is hereby rendered:
a. Declaring that the Special Power of Attorney, Exhibit "K," for the plaintiffs and Exhibit "3"
for the defendants null and void including all transactions subsequent thereto and all
proceedings arising therefrom;
b. Declaring the Deed of Sale marked as Exhibit "E" valid and binding;
c. Declaring the Deed of Absolute Sale of Three (3) Parcels of Residential Land marked as
Exhibit "F" null and void from the beginning;

d. Declaring the Deed of Sale, Exhibit "16" (Solutan) or Exhibit "FF," null and void from the
beginning;
e. Declaring the vendees named in the Deed of Sale marked as Exhibit "E" to be the lawful,
exclusive and absolute owners and possessors of Lots Nos. 8, 19, 22, and 23;
f. Ordering the defendants to pay jointly and severally each plaintiff P50,000.00 as moral
damages; and
g. Ordering the defendants to pay plaintiffs P50,000.00 as attorneys fees; and P20,000.00
as litigation expenses.
The crossclaim made by defendant Meridian Realty Corporation against defendants Soria and
Solutan is ordered dismissed for lack of sufficient evidentiary basis.
SO ORDERED."15
Ruling of the Court of Appeals
On appeal, the CA reversed and set aside the RTC decision. The CA ruled that the first deed of sale
in favor of petitioners was void because they failed to prove that they indeed tendered a
consideration for the four (4) parcels of land. It relied on the testimony of Lourdes that petitioners did
not pay her husband. The price or consideration for the sale was simulated to make it appear that
payment had been tendered when in fact no payment was made at all. 16
With respect to the validity of the Second Sale, the CA stated that it was valid because the
documents were notarized and, as such, they enjoyed the presumption of regularity. Although
petitioners alleged that Luis was manipulated into signing the SPAs, the CA opined that evidence
was wanting in this regard. Dr. Arlene Letigio Pesquira, the attending physician of Luis, testified that
while the latter was physically infirmed, he was of sound mind when he executed the first SPA. 17
With regard to petitioners assertion that the First SPA was revoked by Luis when he executed the
affidavit, dated November 24, 1994, the CA ruled that the Second Sale remained valid. The Second
Sale was transacted on August 23, 1994, before the First SPA was revoked. In other words, when
the Second Sale was consummated, the First SPA was still valid and subsisting. Thus, "Meridian had
all the reasons to rely on the said SPA during the time of its validity until the time of its actual filing
with the Register of Deeds considering that constructive notice of the revocation of the SPA only
came into effect upon the filing of the Adverse Claim and the aforementioned Letters addressed to
the Register of Deeds on 17 December 1994 and 25 November 1994, respectively, informing the
Register of Deeds of the revocation of the first SPA."18 Moreover, the CA observed that the affidavit
revoking the first SPA was also revoked by Luis on December 12, 1994. 19
Furthermore, although Luis revoked the First SPA, he did not revoke the Second SPA which
authorized respondent Laila to sell, convey and mortgage, among others, the property covered by
TCT T-11155 (Lot No. 19). The CA opined that had it been the intention of Luis to discredit the

Second Sale, he should have revoked not only the First SPA but also the Second SPA. The latter
being valid, all transactions emanating from it, particularly the mortgage of Lot 19, its subsequent
redemption and its second sale, were valid.20 Thus, the CA disposed in this wise:
WHEREFORE, the appeal is hereby GRANTED. The Decision dated 30 July 2004 is hereby
REVERSED AND SET ASIDE, and in its stead a new decision is hereby rendered:
1. DECLARING the Special Power of Attorney, dated 21 July 1993, as valid;
2. DECLARING the Special Power of Attorney, dated 03 April 1993, as valid up to the time of
its revocation on 24 November 1994;
3. DECLARING the Deed of Absolute sale, dated 04 November 1991, as ineffective and
without any force and effect;
4. DECLARING the Deed of Absolute Sale of Three (3) Parcels of Residential Land, dated
23 August 1994, valid and binding from the very beginning;
5. DECLARING the Deed of Absolute Sale, dated 27 September 1994, also valid and binding
from the very beginning;
6. ORDERING the substituted plaintiffs to pay jointly and severally the defendant-appellant
Meridian Realty Corporation the sum of Php100,000.00 as moral damages, Php100,000.00
as attorneys fee and Php100,000.00 as litigation expenses; and
7. ORDERING the substituted plaintiffs to pay jointly and severally the defendant-appellants
Leila Solutan et al., the sum of Php50,000.00 as moral damages.
SO ORDERED.21
Petitioners filed a motion for reconsideration, but it was denied in the CA Resolution, 22 dated
November 18, 2010. Consequently, they filed the present petition with the following ASSIGNMENT
OF ERRORS
I.
THE HONORABLE COURT OF APPEALS (19TH DIVISION) GRAVELY ERRED WHEN IT
DECLARED AS VOID THE FIRST SALE EXECUTED BY THE LATE LUIS ROSAROSO IN FAVOR
OF HIS CHILDREN OF HIS FIRST MARRIAGE.
II.
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT SUSTAINING AND
AFFIRMING THE RULING OF THE TRIAL COURT DECLARING THE MERIDIAN REALTY
CORPORATION A BUYER IN BAD FAITH, DESPITE THE TRIAL COURTS FINDINGS THAT THE

DEED OF SALE (First Sale), IS GENUINE AND HAD FULLY COMPLIED WITH ALL THE LEGAL
FORMALITIES.
III.
THE HONORABLE COURT OF APPEALS FURTHER ERRED IN NOT HOLDING THE SALE
(DATED 27 SEPTEMBER 1994), NULL AND VOID FROM THE VERY BEGINNING SINCE LUIS
ROSAROSO ON NOVEMBER 4, 1991 WAS NO LONGER THE OWNER OF LOTS 8, 19, 22 AND
23 AS HE HAD EARLIER DISPOSED SAID LOTS IN FAVOR OF THE CHILDREN OF HIS (LUIS
ROSAROSO) FIRST MARRIAGE.23
Petitioners argue that the second deed of sale was null and void because Luis could not have validly
transferred the ownership of the subject properties to Meridian, he being no longer the owner after
selling them to his children. No less than Atty. William Boco, the lawyer who notarized the first deed
of sale, appeared and testified in court that the said deed was the one he notarized and that Luis
and his second wife, Lourdes, signed the same before him. He also identified the signatures of the
subscribing witnesses.24 Thus, they invoke the finding of the RTC which wrote:
In the case of Heirs of Joaquin Teves, Ricardo Teves versus Court of Appeals, et al., G.R. No.
109963, October 13, 1999, the Supreme Court held that a public document executed [with] all the
legal formalities is entitled to a presumption of truth as to the recitals contained therein. In order to
overthrow a certificate of a notary public to the effect that a grantor executed a certain document and
acknowledged the fact of its execution before him, mere preponderance of evidence will not suffice.
Rather, the evidence must (be) so clear, strong and convincing as to exclude all reasonable dispute
as to the falsity of the certificate. When the evidence is conflicting, the certificate will be upheld x x
x.
A notarial document is by law entitled to full faith and credit upon its face. (Ramirez vs. Ner, 21
SCRA 207). As such it must be sustained in full force and effect so long as he who impugns it
shall not have presented strong, complete and conclusive proof of its falsity or nullity on account of
some flaw or defect provided against by law (Robinson vs. Villafuerte, 18 Phil. 171, 189-190).25
Furthermore, petitioners aver that it was erroneous for the CA to say that the records of the case
were bereft of evidence that they paid the price of the lots sold to them. In fact, a perusal of the
records would reveal that during the cross-examination of Antonio Rosaroso, when asked if there
was a monetary consideration, he testified that they indeed paid their father and their payment
helped him sustain his daily needs.26
Petitioners also assert that Meridian was a buyer in bad faith because when its representative visited
the site, she did not make the necessary inquiries. The fact that there were already houses on the
said lots should have put Meridian on its guard and, for said reason, should have made inquiries as
to who owned those houses and what their rights were over the same. 27
Meridians assertion that the Second Sale was registered in the Register of Deeds was a falsity. The
subject titles, namely: TCT No. 11155 for Lot 19, TCT No. 10885 for Lot 22, and TCT No. 10886 for
Lot 23 were free from any annotation of the alleged sale. 28

After an assiduous assessment of the records, the Court finds for the petitioners.
The First Deed Of Sale Was Valid
The fact that the first deed of sale was executed, conveying the subject properties in favor of
petitioners, was never contested by the respondents. What they vehemently insist, though, is that
the said sale was simulated because the purported sale was made without a valid consideration.
Under Section 3, Rule 131 of the Rules of Court, the following are disputable presumptions: (1)
private transactions have been fair and regular; (2) the ordinary course of business has been
followed; and (3) there was sufficient consideration for a contract.29 These presumptions operate
against an adversary who has not introduced proof to rebut them. They create the necessity of
presenting evidence to rebut the prima facie case they created, and which, if no proof to the contrary
is presented and offered, will prevail. The burden of proof remains where it is but, by the
presumption, the one who has that burden is relieved for the time being from introducing evidence in
support of the averment, because the presumption stands in the place of evidence unless rebutted. 30
In this case, the respondents failed to trounce the said presumption. Aside from their bare allegation
that the sale was made without a consideration, they failed to supply clear and convincing evidence
to back up this claim. It is elementary in procedural law that bare allegations, unsubstantiated by
evidence, are not equivalent to proof under the Rules of Court.31
The CA decision ran counter to this established rule regarding disputable presumption. It relied
heavily on the account of Lourdes who testified that the children of Luis approached him and
convinced him to sign the deed of sale, explaining that it was necessary for a loan application, but
they did not pay the purchase price for the subject properties.32 This testimony, however, is selfserving and would not amount to a clear and convincing evidence required by law to dispute the said
presumption. As such, the presumption that there was sufficient consideration will not be disturbed.
Granting that there was no delivery of the consideration, the seller would have no right to sell again
what he no longer owned. His remedy would be to rescind the sale for failure on the part of the buyer
to perform his part of their obligation pursuant to Article 1191 of the New Civil Code. In the case of
Clara M. Balatbat v. Court Of Appeals and Spouses Jose Repuyan and Aurora Repuyan, 33 it was
written:
The failure of the buyer to make good the price does not, in law, cause the ownership to revest to the
seller unless the bilateral contract of sale is first rescinded or resolved pursuant to Article 1191 of the
New Civil Code. Non-payment only creates a right to demand the fulfillment of the obligation or to
rescind the contract. [Emphases supplied]
Meridian is Not a
Buyer in Good Faith
Respondents Meridian and Lucila argue that, granting that the First Sale was valid, the properties
belong to them as they acquired these in good faith and had them first recorded in the Registry of
Property, as they were unaware of the First Sale.34

Again, the Court is not persuaded.

The fact that Meridian had them first registered will not help its cause. In case of double sale, Article
1544 of the Civil Code provides:
ART. 1544. If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first possession thereof in good faith, if it should be movable
property.
Should it be immovable property, the ownership shall belong to the person acquiring it who in good
faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith was first
in possession; and, in the absence thereof; to the person who presents the oldest title, provided
there is good faith.
Otherwise stated, ownership of an immovable property which is the subject of a double sale shall be
transferred: (1) to the person acquiring it who in good faith first recorded it in the Registry of
Property; (2) in default thereof, to the person who in good faith was first in possession; and (3) in
default thereof, to the person who presents the oldest title, provided there is good faith. The
requirement of the law then is two-fold: acquisition in good faith and registration in good faith. Good
faith must concur with the registration. If it would be shown that a buyer was in bad faith, the alleged
registration they have made amounted to no registration at all.
The principle of primus tempore, potior jure (first in time, stronger in right) gains greater significance
in case of a double sale of immovable property. When the thing sold twice is an immovable, the one
who acquires it and first records it in the Registry of Property, both made in good faith, shall be
deemed the owner. Verily, the act of registration must be coupled with good faith that is, the
registrant must have no knowledge of the defect or lack of title of his vendor or must not have been
aware of facts which should have put him upon such inquiry and investigation as might be necessary
to acquaint him with the defects in the title of his vendor.)35 [Emphases and underlining supplied]
When a piece of land is in the actual possession of persons other than the seller, the buyer must be
wary and should investigate the rights of those in possession. Without making such inquiry, one
cannot claim that he is a buyer in good faith. When a man proposes to buy or deal with realty, his
duty is to read the public manuscript, that is, to look and see who is there upon it and what his rights
are. A want of caution and diligence, which an honest man of ordinary prudence is accustomed to
exercise in making purchases, is in contemplation of law, a want of good faith. The buyer who has
failed to know or discover that the land sold to him is in adverse possession of another is a buyer in
bad faith.36 In the case of Spouses Sarmiento v. Court of Appeals,37 it was written:
Verily, every person dealing with registered land may safely rely on the correctness of the certificate
of title issued therefor and the law will in no way oblige him to go behind the certificate to determine
the condition of the property. Thus, the general rule is that a purchaser may be considered a
purchaser in good faith when he has examined the latest certificate of title. An exception to this rule
is when there exist important facts that would create suspicion in an otherwise reasonable man to go

beyond the present title and to investigate those that preceded it. Thus, it has been said that a
person who deliberately ignores a significant fact which would create suspicion in an otherwise
reasonable man is not an innocent purchaser for value. A purchaser cannot close his eyes to facts
which should put a reasonable man upon his guard, and then claim that he acted in good faith under
the belief that there was no defect in the title of the vendor. As we have held:
The failure of appellees to take the ordinary precautions which a prudent man would have taken
under the circumstances, specially in buying a piece of land in the actual, visible and public
possession of another person, other than the vendor, constitutes gross negligence amounting to bad
faith.
In this connection, it has been held that where, as in this case, the land sold is in the possession of a
person other than the vendor, the purchaser is required to go beyond the certificate of title to make
inquiries concerning the rights of the actual possessor. Failure to do so would make him a purchaser
in bad faith. (Citations omitted).
One who purchases real property which is in the actual possession of another should, at least make
some inquiry concerning the right of those in possession. The actual possession by other than the
vendor should, at least put the purchaser upon inquiry. He can scarely, in the absence of such
inquiry, be regarded as a bona fide purchaser as against such possessors. (Emphases supplied)
Prescinding from the foregoing, the fact that private respondent RRC did not investigate the
Sarmiento spouses' claim over the subject land despite its knowledge that Pedro Ogsiner, as their
overseer, was in actual possession thereof means that it was not an innocent purchaser for value
upon said land. Article 524 of the Civil Code directs that possession may be exercised in one's name
or in that of another. In herein case, Pedro Ogsiner had informed RRC that he was occupying the
subject land on behalf of the Sarmiento spouses. Being a corporation engaged in the business of
buying and selling real estate, it was gross negligence on its part to merely rely on Mr. Puzon's
assurance that the occupants of the property were mere squatters considering the invaluable
information it acquired from Pedro Ogsiner and considering further that it had the means and the
opportunity to investigate for itself the accuracy of such information. [Emphases supplied]
In another case, it was held that if a vendee in a double sale registers the sale after he has acquired
knowledge of a previous sale, the registration constitutes a registration in bad faith and does not
confer upon him any right. If the registration is done in bad faith, it is as if there is no registration at
all, and the buyer who has first taken possession of the property in good faith shall be preferred. 38
In the case at bench, the fact that the subject properties were already in the possession of persons
other than Luis was never disputed. Sanchez, representative and witness for Meridian, even testified
as follows:
x x x; that she together with the two agents, defendant Laila Solutan and Corazon Lua, the president
of Meridian Realty Corporation, went immediately to site of the lots; that the agents brought with
them the three titles of the lots and Laila Solutan brought with her a special power of attorney
executed by Luis B. Rosaroso in her favor but she went instead directly to Luis Rosaroso to be sure;
that the lots were pointed to them and she saw that there were houses on it but she did not have any

interest of the houses because her interest was on the lots; that Luis Rosaroso said that the houses
belonged to him; that he owns the property and that he will sell the same because he is very sickly
and he wanted to buy medicines; that she requested someone to check the records of the lots in the
Register of Deeds; that one of the titles was mortgaged and she told them to redeem the mortgage
because the corporation will buy the property; that the registered owner of the lots was Luis
Rosaroso; that in more or less three months, the encumbrance was cancelled and she told the
prospective sellers to prepare the deed of sale; that there were no encumbrances or liens in the title;
that when the deed of absolute sale was prepared it was signed by the vendor Luis Rosaroso in their
house in Opra x x x.39 (Underscoring supplied)
From the above testimony, it is clear that Meridian, through its agent, knew that the subject
properties were in possession of persons other than the seller. Instead of investigating the rights and
interests of the persons occupying the said lots, however, it chose to just believe that Luis still owned
them. Simply, Meridian Realty failed to exercise the due diligence required by law of purchasers in
acquiring a piece of land in the possession of person or persons other than the seller.
In this regard, great weight is accorded to the findings of fact of the RTC. Basic is the rule that the
trial court is in a better position to examine real evidence as well as to observe the demeanor of
witnesses who testify in the case.40
WHEREFORE, the petition is GRANTED. The December 4, 2009 Decision and the November 18,
201 0 Resolution of the Court of Appeals, in CA-G.R. CV No. 00351, are REVERSED and SET
ASIDE. The July 30, 2004 Decision of the Regional Trial Court, Branch 8, 7th Judicial Region, Cebu
City, in Civil Case No. CEB-16957, is hereby REINSTATED.
SO ORDERED.
JOSE CATRAL MENDOZA
Associate Justice
WE CONCUR:

-double sale issue: the owner who divested himself of title and ownership of an
immovable can no longer convey the same
-in case of dispute the rules are: the first person who registers in good faith, in
default, the first person who took possession in good faith and in default, the person
who presents the oldest title. Registration and good faith must concur

G.R. No. 124242

January 21, 2005

SAN LORENZO DEVELOPMENT CORPORATION, petitioner,

vs.
COURT OF APPEALS, PABLO S. BABASANTA, SPS. MIGUEL LU and PACITA ZAVALLA
LU, respondents.
DECISION
TINGA, J.:
From a coaptation of the records of this case, it appears that respondents Miguel Lu and Pacita
Zavalla, (hereinafter, the Spouses Lu) owned two (2) parcels of land situated in Sta. Rosa, Laguna
covered by TCT No. T-39022 and TCT No. T-39023 both measuring 15,808 square meters or a total
of 3.1616 hectares.
On 20 August 1986, the Spouses Lu purportedly sold the two parcels of land to respondent Pablo
Babasanta, (hereinafter, Babasanta) for the price of fifteen pesos (P15.00) per square meter.
Babasanta made a downpayment of fifty thousand pesos (P50,000.00) as evidenced by a
memorandum receipt issued by Pacita Lu of the same date. Several other payments totaling two
hundred thousand pesos (P200,000.00) were made by Babasanta.

Sometime in May 1989, Babasanta wrote a letter to Pacita Lu to demand the execution of a final
deed of sale in his favor so that he could effect full payment of the purchase price. In the same letter,
Babasanta notified the spouses about having received information that the spouses sold the same
property to another without his knowledge and consent. He demanded that the second sale be
cancelled and that a final deed of sale be issued in his favor.
In response, Pacita Lu wrote a letter to Babasanta wherein she acknowledged having agreed to sell
the property to him at fifteen pesos (P15.00) per square meter. She, however, reminded Babasanta
that when the balance of the purchase price became due, he requested for a reduction of the price
and when she refused, Babasanta backed out of the sale. Pacita added that she returned the sum of
fifty thousand pesos (P50,000.00) to Babasanta through Eugenio Oya.
On 2 June 1989, respondent Babasanta, as plaintiff, filed before the Regional Trial Court (RTC),
Branch 31, of San Pedro, Laguna, a Complaint for Specific Performance and Damages1 against his
co-respondents herein, the Spouses Lu. Babasanta alleged that the lands covered by TCT No. T39022 and T-39023 had been sold to him by the spouses at fifteen pesos (P15.00) per square meter.
Despite his repeated demands for the execution of a final deed of sale in his favor, respondents
allegedly refused.
In their Answer,2 the Spouses Lu alleged that Pacita Lu obtained loans from Babasanta and when
the total advances of Pacita reached fifty thousand pesos (P50,000.00), the latter and Babasanta,
without the knowledge and consent of Miguel Lu, had verbally agreed to transform the transaction
into a contract to sell the two parcels of land to Babasanta with the fifty thousand pesos
(P50,000.00) to be considered as the downpayment for the property and the balance to be paid on
or before 31 December 1987. Respondents Lu added that as of November 1987, total payments
made by Babasanta amounted to only two hundred thousand pesos (P200,000.00) and the latter
allegedly failed to pay the balance of two hundred sixty thousand pesos (P260,000.00) despite
repeated demands. Babasanta had purportedly asked Pacita for a reduction of the price from fifteen
pesos (P15.00) to twelve pesos (P12.00) per square meter and when the Spouses Lu refused to
grant Babasantas request, the latter rescinded the contract to sell and declared that the original loan
transaction just be carried out in that the spouses would be indebted to him in the amount of two
hundred thousand pesos (P200,000.00). Accordingly, on 6 July 1989, they purchased Interbank
Managers Check No. 05020269 in the amount of two hundred thousand pesos (P200,000.00) in the
name of Babasanta to show that she was able and willing to pay the balance of her loan obligation.
Babasanta later filed an Amended Complaint dated 17 January 19903 wherein he prayed for the
issuance of a writ of preliminary injunction with temporary restraining order and the inclusion of the
Register of Deeds of Calamba, Laguna as party defendant. He contended that the issuance of a
preliminary injunction was necessary to restrain the transfer or conveyance by the Spouses Lu of the
subject property to other persons.
The Spouses Lu filed their Opposition4 to the amended complaint contending that it raised new
matters which seriously affect their substantive rights under the original complaint. However, the trial
court in its Order dated 17 January 19905 admitted the amended complaint.

On 19 January 1990, herein petitioner San Lorenzo Development Corporation (SLDC) filed a Motion
for Intervention6 before the trial court. SLDC alleged that it had legal interest in the subject matter
under litigation because on 3 May 1989, the two parcels of land involved, namely Lot 1764-A and
1764-B, had been sold to it in a Deed of Absolute Sale with Mortgage.7 It alleged that it was a buyer
in good faith and for value and therefore it had a better right over the property in litigation.
In his Opposition to SLDCs motion for intervention,8 respondent Babasanta demurred and argued
that the latter had no legal interest in the case because the two parcels of land involved herein had
already been conveyed to him by the Spouses Lu and hence, the vendors were without legal
capacity to transfer or dispose of the two parcels of land to the intervenor.
Meanwhile, the trial court in its Order dated 21 March 1990 allowed SLDC to intervene. SLDC filed
its Complaint-in-Intervention on 19 April 1990.9 Respondent Babasantas motion for the issuance of a
preliminary injunction was likewise granted by the trial court in its Order dated 11 January
199110 conditioned upon his filing of a bond in the amount of fifty thousand pesos (P50,000.00).
SLDC in its Complaint-in-Intervention alleged that on 11 February 1989, the Spouses Lu executed in
its favor anOption to Buy the lots subject of the complaint. Accordingly, it paid an option money in the
amount of three hundred sixteen thousand one hundred sixty pesos (P316,160.00) out of the total
consideration for the purchase of the two lots of one million two hundred sixty-four thousand six
hundred forty pesos (P1,264,640.00). After the Spouses Lu received a total amount of six hundred
thirty-two thousand three hundred twenty pesos (P632,320.00) they executed on 3 May 1989
a Deed of Absolute Sale with Mortgage in its favor. SLDC added that the certificates of title over the
property were delivered to it by the spouses clean and free from any adverse claims and/or notice
of lis pendens. SLDC further alleged that it only learned of the filing of the complaint sometime in the
early part of January 1990 which prompted it to file the motion to intervene without delay. Claiming
that it was a buyer in good faith, SLDC argued that it had no obligation to look beyond the titles
submitted to it by the Spouses Lu particularly because Babasantas claims were not annotated on
the certificates of title at the time the lands were sold to it.
After a protracted trial, the RTC rendered its Decision on 30 July 1993 upholding the sale of the
property to SLDC. It ordered the Spouses Lu to pay Babasanta the sum of two hundred thousand
pesos (P200,000.00) with legal interest plus the further sum of fifty thousand pesos (P50,000.00) as
and for attorneys fees. On the complaint-in-intervention, the trial court ordered the Register of
Deeds of Laguna, Calamba Branch to cancel the notice of lis pendens annotated on the original of
the TCT No. T-39022 (T-7218) and No. T-39023 (T-7219).
Applying Article 1544 of the Civil Code, the trial court ruled that since both Babasanta and SLDC did
not register the respective sales in their favor, ownership of the property should pertain to the buyer
who first acquired possession of the property. The trial court equated the execution of a public
instrument in favor of SLDC as sufficient delivery of the property to the latter. It concluded that
symbolic possession could be considered to have been first transferred to SLDC and consequently
ownership of the property pertained to SLDC who purchased the property in good faith.

Respondent Babasanta appealed the trial courts decision to the Court of Appeals alleging in the
main that the trial court erred in concluding that SLDC is a purchaser in good faith and in upholding
the validity of the sale made by the Spouses Lu in favor of SLDC.
Respondent spouses likewise filed an appeal to the Court of Appeals. They contended that the trial
court erred in failing to consider that the contract to sell between them and Babasanta had been
novated when the latter abandoned the verbal contract of sale and declared that the original loan
transaction just be carried out. The Spouses Lu argued that since the properties involved were
conjugal, the trial court should have declared the verbal contract to sell between Pacita Lu and Pablo
Babasanta null and void ab initio for lack of knowledge and consent of Miguel Lu. They further
averred that the trial court erred in not dismissing the complaint filed by Babasanta; in awarding
damages in his favor and in refusing to grant the reliefs prayed for in their answer.
On 4 October 1995, the Court of Appeals rendered its Decision11 which set aside the judgment of the
trial court. It declared that the sale between Babasanta and the Spouses Lu was valid and subsisting
and ordered the spouses to execute the necessary deed of conveyance in favor of Babasanta, and
the latter to pay the balance of the purchase price in the amount of two hundred sixty thousand
pesos (P260,000.00). The appellate court ruled that the Absolute Deed of Sale with Mortgage in
favor of SLDC was null and void on the ground that SLDC was a purchaser in bad faith. The
Spouses Lu were further ordered to return all payments made by SLDC with legal interest and to pay
attorneys fees to Babasanta.
SLDC and the Spouses Lu filed separate motions for reconsideration with the appellate
court.12 However, in aManifestation dated 20 December 1995,13 the Spouses Lu informed the
appellate court that they are no longer contesting the decision dated 4 October 1995.
In its Resolution dated 11 March 1996,14 the appellate court considered as withdrawn the motion for
reconsideration filed by the Spouses Lu in view of their manifestation of 20 December 1995. The
appellate court denied SLDCs motion for reconsideration on the ground that no new or substantial
arguments were raised therein which would warrant modification or reversal of the courts decision
dated 4 October 1995.
Hence, this petition.
SLDC assigns the following errors allegedly committed by the appellate court:
THE COURT OF APPEALS ERRED IN HOLDING THAT SAN LORENZO WAS NOT A BUYER IN
GOOD FAITH BECAUSE WHEN THE SELLER PACITA ZAVALLA LU OBTAINED FROM IT THE
CASH ADVANCE OF P200,000.00, SAN LORENZO WAS PUT ON INQUIRY OF A PRIOR
TRANSACTION ON THE PROPERTY.
THE COURT OF APPEALS ERRED IN FAILING TO APPRECIATE THE ESTABLISHED FACT THAT
THE ALLEGED FIRST BUYER, RESPONDENT BABASANTA, WAS NOT IN POSSESSION OF
THE DISPUTED PROPERTY WHEN SAN LORENZO BOUGHT AND TOOK POSSESSION OF THE
PROPERTY AND NO ADVERSE CLAIM, LIEN, ENCUMBRANCE OR LIS PENDENS WAS
ANNOTATED ON THE TITLES.

THE COURT OF APPEALS ERRED IN FAILING TO APPRECIATE THE FACT THAT

RESPONDENT BABASANTA HAS SUBMITTED NO EVIDENCE SHOWING THAT SAN LORENZO
WAS AWARE OF HIS RIGHTS OR INTERESTS IN THE DISPUTED PROPERTY.
THE COURT OF APPEALS ERRED IN HOLDING THAT NOTWITHSTANDING ITS FULL
CONCURRENCE ON THE FINDINGS OF FACT OF THE TRIAL COURT, IT REVERSED AND SET
ASIDE THE DECISION OF THE TRIAL COURT UPHOLDING THE TITLE OF SAN LORENZO AS A
BUYER AND FIRST POSSESSOR IN GOOD FAITH. 15
SLDC contended that the appellate court erred in concluding that it had prior notice of Babasantas
claim over the property merely on the basis of its having advanced the amount of two hundred
thousand pesos (P200,000.00) to Pacita Lu upon the latters representation that she needed the
money to pay her obligation to Babasanta. It argued that it had no reason to suspect that Pacita was
not telling the truth that the money would be used to pay her indebtedness to Babasanta. At any
rate, SLDC averred that the amount of two hundred thousand pesos (P200,000.00) which it
advanced to Pacita Lu would be deducted from the balance of the purchase price still due from it
and should not be construed as notice of the prior sale of the land to Babasanta. It added that at no
instance did Pacita Lu inform it that the lands had been previously sold to Babasanta.
Moreover, SLDC stressed that after the execution of the sale in its favor it immediately took
possession of the property and asserted its rights as new owner as opposed to Babasanta who has
never exercised acts of ownership. Since the titles bore no adverse claim, encumbrance, or lien at
the time it was sold to it, SLDC argued that it had every reason to rely on the correctness of the
certificate of title and it was not obliged to go beyond the certificate to determine the condition of the
property. Invoking the presumption of good faith, it added that the burden rests on Babasanta to
prove that it was aware of the prior sale to him but the latter failed to do so. SLDC pointed out that
the notice of lis pendens was annotated only on 2 June 1989 long after the sale of the property to it
was consummated on 3 May 1989.
1awphi1.nt

Meanwhile, in an Urgent Ex-Parte Manifestation dated 27 August 1999, the Spouses Lu informed the
Court that due to financial constraints they have no more interest to pursue their rights in the instant
case and submit themselves to the decision of the Court of Appeals.16
On the other hand, respondent Babasanta argued that SLDC could not have acquired ownership of
the property because it failed to comply with the requirement of registration of the sale in good faith.
He emphasized that at the time SLDC registered the sale in its favor on 30 June 1990, there was
already a notice of lis pendens annotated on the titles of the property made as early as 2 June 1989.
Hence, petitioners registration of the sale did not confer upon it any right. Babasanta further
asserted that petitioners bad faith in the acquisition of the property is evident from the fact that it
failed to make necessary inquiry regarding the purpose of the issuance of the two hundred thousand
pesos (P200,000.00) managers check in his favor.
The core issue presented for resolution in the instant petition is who between SLDC and Babasanta
has a better right over the two parcels of land subject of the instant case in view of the successive
transactions executed by the Spouses Lu.

To prove the perfection of the contract of sale in his favor, Babasanta presented a document signed
by Pacita Lu acknowledging receipt of the sum of fifty thousand pesos (P50,000.00) as partial
payment for 3.6 hectares of farm lot situated at Barangay Pulong, Sta. Cruz, Sta. Rosa,
Laguna.17 While the receipt signed by Pacita did not mention the price for which the property was
being sold, this deficiency was supplied by Pacita Lus letter dated 29 May 1989 18 wherein she
admitted that she agreed to sell the 3.6 hectares of land to Babasanta for fifteen pesos (P15.00) per
square meter.
An analysis of the facts obtaining in this case, as well as the evidence presented by the parties,
irresistibly leads to the conclusion that the agreement between Babasanta and the Spouses Lu is a
contract to sell and not a contract of sale.
Contracts, in general, are perfected by mere consent, 19 which is manifested by the meeting of the
offer and the acceptance upon the thing which are to constitute the contract. The offer must be
certain and the acceptance absolute.20 Moreover, contracts shall be obligatory in whatever form they
may have been entered into, provided all the essential requisites for their validity are present. 21
The receipt signed by Pacita Lu merely states that she accepted the sum of fifty thousand pesos
(P50,000.00) from Babasanta as partial payment of 3.6 hectares of farm lot situated in Sta. Rosa,
Laguna. While there is no stipulation that the seller reserves the ownership of the property until full
payment of the price which is a distinguishing feature of a contract to sell, the subsequent acts of the
parties convince us that the Spouses Lu never intended to transfer ownership to Babasanta except
upon full payment of the purchase price.
Babasantas letter dated 22 May 1989 was quite telling. He stated therein that despite his repeated
requests for the execution of the final deed of sale in his favor so that he could effect full payment of
the price, Pacita Lu allegedly refused to do so. In effect, Babasanta himself recognized that
ownership of the property would not be transferred to him until such time as he shall have effected
full payment of the price. Moreover, had the sellers intended to transfer title, they could have easily
executed the document of sale in its required form simultaneously with their acceptance of the partial
payment, but they did not. Doubtlessly, the receipt signed by Pacita Lu should legally be considered
as a perfected contract to sell.
The distinction between a contract to sell and a contract of sale is quite germane. In a contract of
sale, title passes to the vendee upon the delivery of the thing sold; whereas in a contract to sell, by
agreement the ownership is reserved in the vendor and is not to pass until the full payment of the
price.22 In a contract of sale, the vendor has lost and cannot recover ownership until and unless the
contract is resolved or rescinded; whereas in a contract to sell, title is retained by the vendor until the
full payment of the price, such payment being a positive suspensive condition and failure of which is
not a breach but an event that prevents the obligation of the vendor to convey title from becoming
effective.23
The perfected contract to sell imposed upon Babasanta the obligation to pay the balance of the
purchase price. There being an obligation to pay the price, Babasanta should have made the proper
tender of payment and consignation of the price in court as required by law. Mere sending of a letter
by the vendee expressing the intention to pay without the accompanying payment is not considered

a valid tender of payment.24 Consignation of the amounts due in court is essential in order to
extinguish Babasantas obligation to pay the balance of the purchase price. Glaringly absent from
the records is any indication that Babasanta even attempted to make the proper consignation of the
amounts due, thus, the obligation on the part of the sellers to convey title never acquired obligatory
force.
On the assumption that the transaction between the parties is a contract of sale and not a contract to
sell, Babasantas claim of ownership should nevertheless fail.
Sale, being a consensual contract, is perfected by mere consent 25 and from that moment, the parties
may reciprocally demand performance.26 The essential elements of a contract of sale, to wit: (1)
consent or meeting of the minds, that is, to transfer ownership in exchange for the price; (2) object
certain which is the subject matter of the contract; (3) cause of the obligation which is established. 27
The perfection of a contract of sale should not, however, be confused with its consummation. In
relation to the acquisition and transfer of ownership, it should be noted that sale is not a mode, but
merely a title. A mode is the legal means by which dominion or ownership is created, transferred or
destroyed, but title is only the legal basis by which to affect dominion or ownership. 28 Under Article
712 of the Civil Code, "ownership and other real rights over property are acquired and transmitted by
law, by donation, by testate and intestate succession, and in consequence of certain contracts, by
tradition." Contracts only constitute titles or rights to the transfer or acquisition of ownership, while
delivery or tradition is the mode of accomplishing the same. 29 Therefore, sale by itself does not
transfer or affect ownership; the most that sale does is to create the obligation to transfer ownership.
It is tradition or delivery, as a consequence of sale, that actually transfers ownership.
Explicitly, the law provides that the ownership of the thing sold is acquired by the vendee from the
moment it is delivered to him in any of the ways specified in Article 1497 to 1501. 30 The word
"delivered" should not be taken restrictively to mean transfer of actual physical possession of the
property. The law recognizes two principal modes of delivery, to wit: (1) actual delivery; and (2) legal
or constructive delivery.
Actual delivery consists in placing the thing sold in the control and possession of the vendee. 31 Legal
or constructive delivery, on the other hand, may be had through any of the following ways: the
execution of a public instrument evidencing the sale; 32 symbolical tradition such as the delivery of the
keys of the place where the movable sold is being kept;33 traditio longa manu or by mere consent or
agreement if the movable sold cannot yet be transferred to the possession of the buyer at the time of
the sale;34 traditio brevi manu if the buyer already had possession of the object even before the
sale;35 and traditio constitutum possessorium, where the seller remains in possession of the property
in a different capacity.36
Following the above disquisition, respondent Babasanta did not acquire ownership by the mere
execution of the receipt by Pacita Lu acknowledging receipt of partial payment for the property. For
one, the agreement between Babasanta and the Spouses Lu, though valid, was not embodied in a
public instrument. Hence, no constructive delivery of the lands could have been effected. For
another, Babasanta had not taken possession of the property at any time after the perfection of the
sale in his favor or exercised acts of dominion over it despite his assertions that he was the rightful

owner of the lands. Simply stated, there was no delivery to Babasanta, whether actual or
constructive, which is essential to transfer ownership of the property. Thus, even on the assumption
that the perfected contract between the parties was a sale, ownership could not have passed to
Babasanta in the absence of delivery, since in a contract of sale ownership is transferred to the
vendee only upon the delivery of the thing sold. 37
However, it must be stressed that the juridical relationship between the parties in a double sale is
primarily governed by Article 1544 which lays down the rules of preference between the two
purchasers of the same property. It provides:
Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession thereof in good faith, if it should be
movable property.
Should it be immovable property, the ownership shall belong to the person acquiring it who in good
faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith was first
in the possession; and, in the absence thereof, to the person who presents the oldest title, provided
there is good faith.
The principle of primus tempore, potior jure (first in time, stronger in right) gains greater significance
in case of double sale of immovable property. When the thing sold twice is an immovable, the one
who acquires it and first records it in the Registry of Property, both made in good faith, shall be
deemed the owner.38 Verily, the act of registration must be coupled with good faith that is, the
registrant must have no knowledge of the defect or lack of title of his vendor or must not have been
aware of facts which should have put him upon such inquiry and investigation as might be necessary
to acquaint him with the defects in the title of his vendor.39
Admittedly, SLDC registered the sale with the Registry of Deeds after it had acquired knowledge of
Babasantas claim. Babasanta, however, strongly argues that the registration of the sale by SLDC
was not sufficient to confer upon the latter any title to the property since the registration was
attended by bad faith. Specifically, he points out that at the time SLDC registered the sale on 30
June 1990, there was already a notice of lis pendens on the file with the Register of Deeds, the
same having been filed one year before on 2 June 1989.
Did the registration of the sale after the annotation of the notice of lis pendens obliterate the effects
of delivery and possession in good faith which admittedly had occurred prior to SLDCs knowledge of
the transaction in favor of Babasanta?
We do not hold so.
It must be stressed that as early as 11 February 1989, the Spouses Lu executed the Option to Buy in
favor of SLDC upon receiving P316,160.00 as option money from SLDC. After SLDC had paid more
than one half of the agreed purchase price of P1,264,640.00, the Spouses Lu subsequently
executed on 3 May 1989 a Deed of Absolute Sale in favor or SLDC. At the time both deeds were

executed, SLDC had no knowledge of the prior transaction of the Spouses Lu with Babasanta.
Simply stated, from the time of execution of the first deed up to the moment of transfer and delivery
of possession of the lands to SLDC, it had acted in good faith and the subsequent annotation of lis
pendens has no effect at all on the consummated sale between SLDC and the Spouses Lu.
A purchaser in good faith is one who buys 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 beforehe has notice of the claim or interest of some other person in the
property.40 Following the foregoing definition, we rule that SLDC qualifies as a buyer in good faith
since there is no evidence extant in the records that it had knowledge of the prior transaction in favor
of Babasanta. At the time of the sale of the property to SLDC, the vendors were still the registered
owners of the property and were in fact in possession of the lands. Time and again, this Court has
ruled that a person dealing with the owner of registered land is not bound to go beyond the
certificate of title as he is charged with notice of burdens on the property which are noted on the face
of the register or on the certificate of title.41 In assailing knowledge of the transaction between him
and the Spouses Lu, Babasanta apparently relies on the principle of constructive notice incorporated
in Section 52 of the Property Registration Decree (P.D. No. 1529) which reads, thus:
l^vvphi1.net

Sec. 52. Constructive notice upon registration. Every conveyance, mortgage, lease, lien,
attachment, order, judgment, 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.
However, the constructive notice operates as suchby the express wording of Section 52from the
time of the registration of the notice of lis pendens which in this case was effected only on 2 June
1989, at which time the sale in favor of SLDC had long been consummated insofar as the obligation
of the Spouses Lu to transfer ownership over the property to SLDC is concerned.
More fundamentally, given the superiority of the right of SLDC to the claim of Babasanta the
annotation of the notice of lis pendens cannot help Babasantas position a bit and it is irrelevant to
the good or bad faith characterization of SLDC as a purchaser. A notice of lis pendens, as the Court
held in Natao v. Esteban,42serves as a warning to a prospective purchaser or incumbrancer that the
particular property is in litigation; and that he should keep his hands off the same, unless he intends
to gamble on the results of the litigation." Precisely, in this case SLDC has intervened in the pending
litigation to protect its rights. Obviously, SLDCs faith in the merit of its cause has been vindicated
with the Courts present decision which is the ultimate denouement on the controversy.
The Court of Appeals has made capital43 of SLDCs averment in its Complaint-in-Intervention44 that at
the instance of Pacita Lu it issued a check for P200,000.00 payable to Babasanta and the
confirmatory testimony of Pacita Lu herself on cross-examination. 45 However, there is nothing in the
said pleading and the testimony which explicitly relates the amount to the transaction between the
Spouses Lu and Babasanta for what they attest to is that the amount was supposed to pay off the
advances made by Babasanta to Pacita Lu. In any event, the incident took place after the Spouses
Lu had already executed the Deed of Absolute Sale with Mortgage in favor of SLDC and therefore,
as previously explained, it has no effect on the legal position of SLDC.

Assuming ex gratia argumenti that SLDCs registration of the sale had been tainted by the prior
notice of lis pendens and assuming further for the same nonce that this is a case of double sale, still
Babasantas claim could not prevail over that of SLDCs. In Abarquez v. Court of Appeals,46 this
Court had the occasion to rule that if a vendee in a double sale registers the sale after he has
acquired knowledge of a previous sale, the registration constitutes a registration in bad faith and
does not confer upon him any right. If the registration is done in bad faith, it is as if there is no
registration at all, and the buyer who has taken possession first of the property in good faith shall be
preferred.
In Abarquez, the first sale to the spouses Israel was notarized and registered only after the second
vendee, Abarquez, registered their deed of sale with the Registry of Deeds, but the Israels were first
in possession. This Court awarded the property to the Israels because registration of the property by
Abarquez lacked the element of good faith. While the facts in the instant case substantially differ
from that in Abarquez, we would not hesitate to rule in favor of SLDC on the basis of its prior
possession of the property in good faith. Be it noted that delivery of the property to SLDC was
immediately effected after the execution of the deed in its favor, at which time SLDC had no
knowledge at all of the prior transaction by the Spouses Lu in favor of Babasanta.
1a\^/phi1.net

The law speaks not only of one criterion. The first criterion is priority of entry in the registry of
property; there being no priority of such entry, the second is priority of possession; and, in the
absence of the two priorities, the third priority is of the date of title, with good faith as the common
critical element. Since SLDC acquired possession of the property in good faith in contrast to
Babasanta, who neither registered nor possessed the property at any time, SLDCs right is definitely
superior to that of Babasantas.
At any rate, the above discussion on the rules on double sale would be purely academic for as
earlier stated in this decision, the contract between Babasanta and the Spouses Lu is not a contract
of sale but merely a contract to sell. In Dichoso v. Roxas,47 we had the occasion to rule that Article
1544 does not apply to a case where there was a sale to one party of the land itself while the other
contract was a mere promise to sell the land or at most an actual assignment of the right to
repurchase the same land. Accordingly, there was no double sale of the same land in that case.
WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals
appealed from is REVERSED and SET ASIDE and the decision of the Regional Trial Court, Branch
31, of San Pedro, Laguna is REINSTATED. No costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

-there was perfected contract to sell in this case. However, the positive suspensive
condition, the full payment or in case refused, tender and consignation, was not
effected. As such, the sale did not materialize transferring of ownership and delivery
to Babasanta.

-There is no case of double sale as the perfected contract to sell did not reach
consummation stage. The principle of double sale is not applicable as only one sale
was perfected and consummated, the other which is a contract to sell never
materialize.
-Question: is the principle of double sale applicable in case one contract is a merely
contract to sell that failed and one involving perfected contract of sale?

A.C. No. 4650

August 14, 2003

ROSALINA BIASCAN, Complainant,

vs.
ATTY. MARCIAL F. LOPEZ, Respondent.
RESOLUTION
QUISUMBING, J.:
This administrative case stems from a verified complaint 1 for disbarment, filed on October 4, 1996,
by complainant Rosalina Biascan against respondent Atty. Marcial F. Lopez for alleged fraud or
misrepresentation, breach of his duty as an officer of the court, and betrayal of his oath as a lawyer
amounting to gross misconduct, which renders him unfit to continue in the practice of law.
Subject of the complaint is a 600-square meter lot located between Constancia and Miguelin Streets
in Sampaloc, Manila. Said property was originally covered by Transfer Certificate of Title (TCT) No.

34127 in the name of Florencio Biascan. The latter died intestate, leaving behind two parcels
namely: the lot in Sampaloc, Manila, and another parcel in Novaliches, Quezon City, covered by TCT
No. 87068.
In her complaint, Rosalina Biascan avers that she is the court-appointed administratrix of the estate
of her deceased father, Florencio Biascan. That estate is the subject of Special Proceedings No.
98037 entitled "In the Matter of the Intestate Estate of the Deceased Timotea Zulueta and Florencio
Biascan," pending before the Regional Trial Court (RTC) of Manila, Branch 4. Pursuant to her
appointment, she filed her Inventory and Appraisal2 Report sometime in November 1975.
In August 1977, respondent entered his appearance in the intestate proceedings as counsel for an
oppositor, Maria Manuel Biascan (now deceased).3
In an Order4 dated April 2, 1981, the RTC declared complainant and her brother, German Biascan,
heirs of the late Florencio. Maria Manuel Biascan then filed a Motion for Reconsideration 5 on June 6,
1981, but the trial court denied said motion on April 30, 1985.6 Meanwhile, in complete disregard of
the intestate proceedings and without knowledge and approval of the lower court or complainant and
her brother, Maria Manuel Biascan executed an Affidavit of Self-Adjudication 7 on June 20, 1983
where she falsely represented herself as the sole heir of the late Florencio Biascan. On July 12,
1983, she then presented the Affidavit of Self-Adjudication to the Register of Deeds of Manila, as a
result of which TCT No. 34127 was cancelled and TCT No. 155384 issued in her name.
Complainant further averred that on July 24, 1990, without the approval of the intestate court and
taking advantage of the aforementioned fraud, respondent Lopez registered with the Register of
Deeds a Deed of Assignment,8 dated December 22, 1977, which Maria Manuel Biascan had
executed in his favor. In that deed, Maria Manuel Biascan ceded to respondent 210 square meters of
the 600-square meter land now covered by TCT No. 155384. Thereafter, the Register of Deeds of
Manila issued TCT No. 193790 covering the ceded 210 square meters in respondents name. 9
On June 15, 1992, respondent sold the 210-square meter lot covered by TCT No. 193790 to the
Spouses Danilo and Corazon Arganoza in whose favor TCT No. 208601 was issued. 10
According to complainant, all the foregoing transfers occurred while Special Proceedings No. 98037
was still pending, but she discovered the transfers only in February 1993 after inquiries on her behalf
were made with the Registries of Deeds of Manila and Caloocan. 11 Suits for the recovery of the
properties are pending with the Regional Trial Courts of Manila and Caloocan. 12
In his Comment/Answer13 filed on November 17, 1998, respondent Lopez denies committing any
fraud, misconduct, or breach of duty to the court, and asserts he acted in good faith. According to
him, what complainant Rosalina Biascan reported in her Inventory and Appraisal report was a parcel
of land covered by TCT No. 24127 and not the Sampaloc property covered by TCT No. 34127. Also,
his acquisition of subject property and the resulting issuance of TCT No. 193790 in his name was
valid because the land was payment for his legal services under a valid contingent fee contract.
Respondent claims that Maria Manuel Biascan offered to pay him 35% of the area of TCT No.
155384 for his legal services. Since there was no notice of lis pendens on TCT No. 155384, he
accepted the offer and the Deed of Assignment was executed between them. 14

Respondent further asserts that complainant is guilty of laches, as she failed to act swiftly to protect
her alleged interest over the subject property. He points out that from June 2, 1975, the date
complainant filed the petition for settlement and administration of the intestate estate of Florencio
Biascan, up to May 28, 1983 or for approximately eight (8) years, complainant failed to assert her
rights as owner of the property by either registering a claim to the subject property or filing a case for
recovery thereof.
Finally, respondent prayed for the suspension of the instant administrative case on the ground that
the recovery suits pending before the RTCs of Manila and Caloocan raise issues that must first be
resolved before the instant complaint can proceed; otherwise, there might be conflicting findings
between said lower courts and this Court.
In our Resolution15 of March 1, 1999, we referred the instant complaint to the Integrated Bar of the
Philippines (IBP) for investigation, report, and recommendation.
On August 3, 2002, the IBP Board of Governors passed Resolution No. XV-2002-394, the full text of
which reads as follows:
RESOLVED to ADOPT and APPROVE, as it is hereby ADOPTED and APPROVED, the Report and
Recommendation of the Investigating Commissioner of the above-entitled case, herein made part of
this Resolution/Decision as Annex "A"; and, finding the recommendation fully supported by the
evidence on record and the applicable laws and rules, and considering that it has been established
that respondent committed acts of misconduct which have caused damage and prejudice to
complainant and her brother, respondent is hereby SUSPENDED from the practice of law for three
(3) years.16
This Resolution is now before this Court for confirmation.
At the outset, we note that there appears to be some confusion between the parties on whether the
original TCT covering the property in question was TCT No. 24127 or TCT No. 34127. Resort to the
records show, however, that both parties are in fact referring to the lot located between Constancia
and Miguelin Streets in Sampaloc, Manila.
On the issue of respondents liability, this Court agrees with the findings of the IBP Board of
Governors.
It is clear from the records that when respondent entered his appearance in Special Proceedings No.
98037 as counsel for Maria Manuel Biascan in August 1977, complainant had already filed her
Inventory and Appraisal Report dated November 22, 1975, which listed the realty covered by TCT
No. 34127, as one of the properties forming part of the Estate of Florencio Biascan. As counsel for
an oppositor, respondent must have gone over the records of Special Proceedings No. 98037, which
included the aforesaid Inventory and Appraisal Report. Also, the Deed of Assignment itself stated
that TCT No. 34127 was registered in Florencio Biascans name and was the subject of Special
Proceedings No. 98037. Clearly therefore, when Maria Manuel Biascan executed the Deed of
Assignment in December 22, 1977 to cover respondents contingent fees, respondent had actual
knowledge that the lot subject of said deed formed part of the estate of Florencio Biascan.

Notwithstanding this and the fact that Special Proceedings No. 98037 was still pending, 17 respondent
registered the Deed of Assignment in his favor on July 24, 1990 and caused the transfer of title over
the part of the land Maria Manuel Biascan assigned to him. In so doing, the respondent transgressed
Article 149118 of the Civil Code expressly prohibiting a lawyer from acquiring property or rights that
may be the object of any litigation in which they may take part by virtue of their profession.
Respondents assertion that the assignment was made pursuant to a contingent fee contract will not
exonerate him. True, a contract for a contingent fee is generally not covered by Article 1491 and is
valid because the transfer or assignment of the property in litigation takes effect only after the finality
of a favorable judgment.19However, as aforesaid respondent caused the transfer of the subject
property in his name during the pendency of Special Proceedings No. 98037. Thus, the prohibition in
Article 1491 clearly applies.20 Respondent is, therefore, liable for malpractice.21
1wphi1

As a member of the bar, respondent is strictly mandated to comply with the Attorneys Oath as well
as the Code of Professional Responsibility,22 both of which require him to obey the laws as well as
the legal orders of duly constituted authorities. The transgression of any provision of law by a lawyer
is a reprehensible act, which the Court will not countenance. 23
Likewise, respondent defied the tenor and intent of the trial courts Order of April 2, 1981 when on
July 24, 1990, he proceeded to register the Deed of Assignment and caused the issuance of a new
TCT in his name. Note that respondent proceeded with such registration of property included in the
Estate of Florencio Biascan, despite the fact that the trial court had ruled that aside from Maria
Manuel Biascan, complainant and her brother were legal heirs of Florencio Biascan. That the Order
dated April 2, 1981 was the subject of an appeal and had not become final at the time he acquired
title to the property does not change the fact that there is such an Order. As a lawyer and an officer
of the court, respondent should have respected said Order24 and refrained from doing any act, which
would have rendered such Order ineffectual. It bears repeating that a lawyer should uphold the
dignity and authority of the court.25 His actions violate Canon 1 of the Code of Professional
Responsibility that requires every member of the bar to promote respect for law and legal
processes. 26
Finally, respondents contention that the result of the recovery suits should be awaited before any
action is taken on the instant Complaint fails to persuade us. What is addressed in this case is
whether respondent knowingly acquired an interest over property subject of Special Proceedings No.
98037 to the damage and prejudice of the persons lawfully entitled to said property as legal heirs
and in violation of respondents oath as a lawyer and his duty as an officer of the court. The question
of whether complainant herein is entitled to recovery is not in issue. Thus, the outcome of the
recovery suits has no bearing in the instant case.
On the matter of the imposable penalty, however, this Court is unable to agree with the
recommendation of the IBP Board of Governors, it being too harsh and not in accord with
jurisprudence. In Valencia v. Cabanting,27Bautista v. Gonzales,28 and Ordonio v. Eduarte29 all involving
violations of Article 1491 of the Civil Code, this Court imposed the penalty of suspension of six (6)
months on the respondents therein. Considering the nature of the acts of professional misconduct
respondent committed, and the facts and circumstances of this case, the Court finds sufficient
grounds to suspend respondent from the practice of law for six (6) months.

WHEREFORE, respondent ATTY. MARCIAL F. LOPEZ is declared LIABLE for SERIOUS

MISCONDUCT as a lawyer. He is ordered SUSPENDED from the practice of law for SIX (6)
MONTHS, effective upon receipt of this Resolution, with a STERN WARNING that any future
misconduct on respondents part will be dealt with more severely. Let copies of this Resolution be
circulated soonest to all courts, tribunals, and quasi-judicial agencies of the country for their
information and guidance, and spread in the personal record of respondent, Atty. Marcial F. Lopez.
SO ORDERED.
Bellosillo, (Chairman), Austria-Martinez, and Tinga, JJ., concur.
Callejo, Sr., J., on leave.

-Article 1491 incapacitates a lawyer from acquiring any interest to the subject of
pending litigation where his profession and services are rendered. Any violation will
be subject to administrative liabilities to the person violating the same

G.R. No. 200173

April 15, 2013

SPS. ESMERALDO D. VALLIDO and ARSENIA M. V ALLIDO, rep. by ATTY. SERGIO C.

SUMAYOD,Petitioners,
vs.
SPS. ELMER PONO and JULIET PONO, and PURIFICACION CERNA-PONG and SPS.
MARIANITO PONO and ESPERANZA MERO-PONO, Respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari assailing the December 8, 2011 Decision of the Court of
Appeals (CA) which reversed and set aside the July 20, 2004 Decision of the Regional Trial Court,
Branch 12, Ormoc City (RTC). a case involving a double sale of a parcel of land.
It appears that Martino Dandan (Martino) was the registered owner of a parcel of land in Kananga,
Leyte, with an area of 28,214 square meters, granted under Homestead Patent No. V-21513 on
November 11, 1953 and covered by Original Certificate of Title (OCT) No. P-429.
On January 4, 1960, Martino, who was at that time living in Kananga, Leyte, sold a portion of the
subject property equivalent to 18,214 square meters to respondent Purificacion Cerna (Purificacion).
Upon execution of the Deed of Absolute Sale, Martino gave Purificacion the owners copy of OCT
No. P-429. The transfer, however, was not recorded in the Registry of Deeds.
On May 4, 1973, Purificacion sold her18,214 square meter portion of the subject property to
respondent Marianito Pono (Marianito) and also delivered OCT No. P-429 to him. Marianito
registered the portion he bought for taxation purposes, paid its taxes, took possession, and allowed
his son respondent Elmer Pono (Elmer) and daughter-in-law, Juliet Pono (Juliet), to construct a
house thereon. Marianito kept OCT No. P-429. The transfer, however, was also not recorded in the
Registry of Deeds.
Meanwhile, Martino left Kananga, Leyte, and went to San Rafael III, Noveleta, Cavite, and re-settled
there. On June 14, 1990, he sold the whole subject property to his grandson, petitioner Esmeraldo
Vallido (Esmeraldo), also a resident of Noveleta, Cavite. Considering that Martino had delivered OCT
No. P-429 to Purificacion in 1960, he no longer had any certificate of title to hand over to Esmeraldo.
On May 7, 1997, Martino filed a petition seeking for the issuance of a new owners duplicate copy of
OCT No. P-429, which he claimed was lost. He stated that he could not recall having delivered the
said owners duplicate copy to anybody to secure payment or performance of any legal obligation.
On June 8, 1998, the petition was granted by the RTC, Branch 12 of Ormoc City. On September 17,
1999, Esmeraldo registered the deed of sale in the Registry of Deeds and Transfer Certificate of Title
(TCT) No. TP-13294 was thereafter issued in the name of the petitioners.
Subsequently, the petitioners filed before the RTC a complaint for quieting of title, recovery of
possession of real property and damages against the respondents. In their Answer, respondents
Elmer and Juliet averred that their occupation of the property was upon permission of Marianito.

They included a historical chronology of the transactions from that between Martino and Purificacion
to that between Purificacion and Marianito.
On July 20, 2004, the RTC promulgated a decision1 favoring the petitioners. The RTC held that there
was a double sale under Article 1544 of the Civil Code. The respondents were the first buyers while
the petitioners were the second buyers. The RTC deemed the petitioners as buyers in good faith
because during the sale on June 4, 1990, OCT No. P-429 was clean and free from all liens. The
petitioners were also deemed registrants in good faith because at the time of the registration of the
deed of sale, both OCT No. P-429 and TCT No. TP-13294 did not bear any annotation or mark of
any lien or encumbrance. The RTC concluded that because the petitioners registered the sale in the
Register of Deeds, they had a better right over the respondents.
Aggrieved, the respondents filed their Notice of Appeal on August 27, 2004.
In the assailed Decision,2 dated December 8, 2011, the CA ruled in favor of the respondents. The CA
agreed that there was a double sale. It, however, held that the petitioners were neither buyers nor
registrants in good faith. The respondents indisputably were occupying the subject land. It wrote that
where the land sold was in the possession of a person other than the vendor, the purchaser must go
beyond the certificate of title and make inquiries concerning the rights of the actual possessors. It
further stated that mere registration of the sale was not enough as good faith must concur with the
registration. Thus, it ruled that the petitioners failed to discharge the burden of proving that they were
buyers and registrants in good faith. Accordingly, the CA concluded that because the sale to
Purificacion took place in 1960, thirty (30) years prior to Esmeraldos acquisition in 1990, the
respondents had a better right to the property.
Hence, this petition.
The petitioners argue that the CA erred in ruling in favor of the respondents. Primarily, they contend
that the Appellants Brief was filed beyond the 30-day extension period granted by the CA and that
the findings of fact of the RTC were no longer subject to review and should not have been disturbed
on appeal.
They invoke that they are buyers and registrants in good faith. They claim that the title of the land
was clean and free from any and all liens and encumbrances from the time of the sale up to the time
of its registration. They also aver that they had no knowledge of the sale between Martino and
Purificacion on July 4, 1960 as they have been residents of Noveleta, Cavite, which is very far from
Brgy. Masarayao, Kananga, Leyte. When Esmeraldo confronted his grandfather, Martino, about the
July 4, 1960 sale to Purificacion, he took as gospel truth the vehement denial of his grandfather on
the existence of the sale. The latter explained that the transaction was only a mortgage. These facts
show that indeed they were buyers and registrants in good faith. Thus, their right of ownership is
preferred against the unregistered claim of the respondents.
The petition is without merit.

On the procedural aspect, it was the ruling of the CA that the respondents were deemed to have filed
their Appellants Brief within the reglementary period.3 The Court accepts that as it was merely a
technical issue.
The core issue in this case is whether the petitioners are buyers and registrants in good faith.
It is undisputed that there is a double sale and that the respondents are the first buyers while the
petitioners are the second buyers. The burden of proving good faith lies with the second buyer
(petitioners herein) which is not discharged by simply invoking the ordinary presumption of good
faith.4
After an assiduous assessment of the evidentiary records, this Court holds that the petitioners are
NOT buyers in good faith as they failed to discharge their burden of proof.
Notably, it is admitted that Martino is the grandfather of Esmeraldo. As an heir, petitioner Esmeraldo
cannot be considered as a third party to the prior transaction between Martino and Purificacion. In
Pilapil v. Court of Appeals,5 it was written:
The purpose of the registration is to give notice to third persons. And, privies are not third persons.
The vendor's heirs are his privies. Against them, failure to register will not vitiate or annul the
vendee's right of ownership conferred by such unregistered deed of sale.
The non-registration of the deed of sale between Martino and Purificacion is immaterial as it is
binding on the petitioners who are privies.6 Based on the privity between petitioner Esmeraldo and
Martino, the petitioner as a second buyer is charged with constructive knowledge of prior
dispositions or encumbrances affecting the subject property. The second buyer who has actual or
constructive knowledge of the prior sale cannot be a registrant in good faith. 7
Moreover, although it is a recognized principle that a person dealing on a registered land need not
go beyond its certificate of title, it is also a firmly settled rule that where there are circumstances
which would put a party on guard and prompt him to investigate or inspect the property being sold to
him, such as the presence of occupants/tenants thereon, it is expected from the purchaser of a
valued piece of land to inquire first into the status or nature of possession of the occupants. As in the
common practice in the real estate industry, an ocular inspection of the premises involved is a
safeguard that a cautious and prudent purchaser usually takes. Should he find out that the land he
intends to buy is occupied by anybody else other than the seller who, as in this case, is not in actual
possession, it would then be incumbent upon the purchaser to verify the extent of the occupants
possessory rights.
The failure of a prospective buyer to take such precautionary steps would mean negligence on his
part and would preclude him from claiming or invoking the rights of a "purchaser in good faith." 8 It
has been held that "the registration of a later sale must be done in good faith to entitle the registrant
to priority in ownership over the vendee in an earlier sale."9
There are several indicia that should have placed the petitioners on guard and prompted them to
investigate or inspect the property being sold to them. First, Martino, as seller, did not have

possession of the subject property. Second, during the sale on July 4, 1990, Martino did not have the
owners duplicate copy of the title. Third, there were existing permanent improvements on the land.
Fourth, the respondents were in actual possession of the land. These circumstances are too glaring
to be overlooked and should have prompted the petitioners, as prospective buyers, to investigate or
inspect the land. Where the vendor is not in possession of the property, the prospective vendees are
obligated to investigate the rights of one in possession. 10
When confronted by Esmeraldo on the alleged previous sale, Martino declared that there was no
sale but only a mortgage.The petitioners took the declaration of Martino as gospel truth or ex
cathedra.11 The petitioners are not convincing. Glaringly, Martino gave conflicting statements. He
stated in his Petition for Issuance of New Owner's Duplicate Copy of OTC 12 that he could not recall
having delivered the owner's duplicate copy to anybody to secure payment or performance of any
obligation. Yet, when confronted by Esmeraldo, Martino stated that he mortgaged the land with
Purificacion. The claims of Martino, as relayed by the petitioners, cannot be relied upon.
As the petitioners cannot be considered buyers in good faith, they cannot lean on the indefeasibility
of their TCT in view of the doctrine that the defense of indefeasibility of a torrens title does not
extend to transferees who take the certificate of title in bad faith. 13
The Court cannot ascribe good faith to those who have not shown any diligence in protecting their
rights.14
Lastly, it is uncontroverted that the respondents were occupying the land since January 4, 1960
based on the deed of sale between Martino and Puriticacion. They have also made improvements
on the land by erecting a house of mixed permanent materials thereon, which was also admitted by
the petitioners.15 The respondents, without a doubt, are possessors in good faith. Ownership should
therefore vest in the respondents because they were first in possession of the property in good
faith.16
WHEREFORE, the petition is DENIED.
JOSE CATRAL MENDOZA
Associate Justice

-In case of double sale where the second buyer is a relative of the seller, they are
not considered third person and thus have constructive knowledge of any
transactions involving the land
-as privies, the act of registration for the protection of third persons does not apply
to them.
-first in time stronger in right doctrine

G.R. No. 174240

March 20, 2013

SPOUSES LEHNER and LUDY MARTIRES, Petitioners,

vs.
MENELIA CHUA, Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to
reverse and set aside the Amended Decision,1 as well as the Resolutions2 of the Court of Appeals
(CA), dated September 30, 2005, July 5, 2006 and August 28, 2006, respectively, in CA-G.R. CV No.
76388. The assailed Decision of the CA reversed and set aside its earlier Decision, dated April 30,
2004, in favor of petitioners. The July 5, 2006 Resolution denied petitioners' Motion for
Reconsideration, while the August 28, 2006 Resolution denied petitioners' Second Motion for
Reconsideration.
The factual and procedural antecedents of the case are as follows:
Subject of the instant controversy are twenty-four memorial lots located at the Holy Cross Memorial
Park in Barangay Bagbag, Novaliches, Quezon City. The property, more particularly described as
"Lot: 24 lots, Block 213, Section: Plaza of Heritage-Reg.," is covered by Transfer Certificate of Title
(TCT) No. 342914. Respondent, together with her mother, Florencia R. Calagos, own the disputed
property. Their co-ownership is evidenced by a Deed of Sale and Certificate of Perpetual Care,
denominated as Contract No. 31760, which was executed on June 4, 1992. 3

On December 18, 1995, respondent borrowed from petitioner spouses the amount of P150,000.00.
The loan was secured by a real estate mortgage over the abovementioned property. Respondent
committed to pay a monthly interest of 8% and an additional 10% monthly interest in case of default. 4
Respondent failed to fully settle her obligation.
Subsequently, without foreclosure of the mortgage, ownership of the subject lots were transferred in
the name of petitioners via a Deed of Transfer.5
On June 23, 1997, respondent filed with the Regional Trial Court (RTC) of Quezon City a Complaint
against petitioners, Manila Memorial Park Inc., the company which owns the Holy Cross Memorial
Park, and the Register of Deeds of Quezon City, praying for the annulment of the contract of
mortgage between her and petitioners on the ground that the interest rates imposed are unjust and
exorbitant. Respondent also sought accounting to determine her liability under the law. She likewise
prayed that the Register of Deeds of Quezon City and Manila Memorial Park, Inc. be directed to
reconvey the disputed property to her.6
On November 20, 1998, respondent moved for the amendment of her complaint to include the
allegation that she later discovered that ownership of the subject lots was transferred in the name of
petitioners by virtue of a forged Deed of Transfer and Affidavit of Warranty. Respondent prayed that
the Deed of Transfer and Affidavit of Warranty be annulled.7 In their Manifestation dated January 25,
1999, petitioners did not oppose respondent's motion.8 Trial ensued.
After trial, the RTC of Quezon City rendered a Decision in favor of petitioners, the dispositive portion
of which reads, thus:
Wherefore, premises considered, judgment is hereby rendered against Menelia R. Chua and in favor
of the Sps. Lehner Martires and Ludy Martires; and Manila Memorial Park Cemetery, Inc. as follows:
1. The Complaint is denied and dismissed for lack of merit;
2. The counterclaims are granted as follows:
a. Menelia R. Chua is ordered to pay the Sps. Martires the amount of P100,000.00
as moral damages; the amount of P50,000.00 as exemplary damages; and the
amount of P30,000.00 as reasonable attorneys fees plus costs of suit.
b. Menelia R. Chua is ordered to pay Manila Memorial Park Cemetery, Inc. the
amount ofP30,000.00 as reasonable attorney's fees plus costs of suit.
SO ORDERED.9
On appeal, the CA affirmed, with modification, the judgment of the RTC, disposing as follows:
WHEREFORE, premises considered, the instant appeal is hereby DENIED for lack of merit, and the
decision of the trial court dated 03 August 2002 is hereby AFFIRMED with MODIFICATION as to the

amount of moral and exemplary damages, and attorney's fees. Plaintiff-appellant Menelia R. Chua is
hereby ordered to pay the defendant-appellees Spouses Martires the amount of P30,000.00 as
moral damages; P20,000.00 as exemplary damages; and attorney's fees of P10,000.00 plus costs of
suit.
Insofar as defendant-appellee Manila Memorial Park Cemetery, Inc. is concerned, the attorney's fees
awarded is reduced to P10,000.00 plus costs of suit.
SO ORDERED.10
The CA ruled that respondent voluntarily entered into a contract of loan and that the execution of the
Deed of Transfer is sufficient evidence of petitioners' acquisition of ownership of the subject property.
Respondent filed a Motion for Reconsideration. 11 Petitioners opposed it.12
On September 30, 2005, the CA promulgated its assailed Amended Decision with the following
dispositive portion:
WHEREFORE, the Court grants the movant's Motion for Reconsideration.
Accordingly, the decision of this Court dated April 30, 2004 in CA-G.R. CV No. 76388, which had
affirmed the judgment of the Regional Trial Court of Quezon City, Branch 221, in Civil Case No. Q97-31408, is REVERSED and SET ASIDE, and it is hereby declared that:
(1) The assailed decision dated August 3, 2002 of the Regional Trial Court of Quezon City Branch
221 in Civil Case No. Q-97-31408 is hereby Reversed with the following MODIFICATIONS, to wit:
(1) The Deed of Transfer dated July 3, 1996, as well as the Affidavit of Warranty, are hereby
declared void ab initio;
(2) The loan of P150,000.00 is hereby subject to an interest of 12% per annum.
(3) The Manila Memorial Park Cemetery, Inc. and the Register of Deeds of Quezon City [are]
hereby directed to cancel the registration or annotation of ownership of the spouses Martires
on Lot: 24 lots, Block 213, Section: Plaza Heritage Regular, Holy Cross Memorial Park,
being a portion of Transfer Certificate of Title No. 342914 issued by the Register of Deeds of
Quezon City, and revert registration of ownership over the same in the name of appellant
Menelia R. Chua, and Florencia R. Calagos.
(4) The movant, Menelia R. Chua, is hereby ordered to pay the spouses Martires the amount
ofP150,000.00 plus interest of 12% per annum computed from December 18, 1995 up to the
time of full payment thereof and, after deducting payments made in the total amount
of P80,000.00, the same shall be paid within ninety (90) days from the finality of this
decision. In case of failure to pay the aforesaid amount and the accrued interests from the
period hereinstated, the property shall be sold at public auction to satisfy the mortgage debt
and costs, and if there is an excess, the same is to be given to the owner.

No costs.
SO ORDERED.13
The CA reconsidered its findings and concluded that the Deed of Transfer which, on its face,
transfers ownership of the subject property to petitioners, is, in fact, an equitable mortgage. The CA
held that the true intention of respondent was merely to provide security for her loan and not to
transfer ownership of the property to petitioners. The CA so ruled on the basis of its findings that: (1)
the consideration, amounting to P150,000.00, for the alleged Deed of Transfer is unusually
inadequate, considering that the subject property consists of 24 memorial lots; (2) the Deed of
Transfer was executed by reason of the same loan extended by petitioners to respondent; (3) the
Deed of Transfer is incomplete and defective; and (4) the lots subject of the Deed of Transfer are
one and the same property used to secure respondent's P150,000.00 loan from petitioners.
Petitioners filed a Motion for Reconsideration,14 but the CA denied it in its Resolution dated July 5,
2006.
On July 26, 2006, petitioners filed a Second Motion for Reconsideration, 15 but again, the CA denied it
via its Resolution dated August 28, 2006.
Hence, the present petition based on the following grounds:
A. THE COURT OF APPEALS PATENTLY ERRED IN NOT UPHOLDING THE DEED OF
TRANSFER EXECUTED BY THE RESPONDENT IN FAVOR OF THE PETITIONERS BY RULING
THAT:
1. The Deed of Transfer executed by respondent in favor of petitioners over the subject
property was not entered in the Notarial Book of Atty. Francisco Talampas and reported in
the Notarial Section of the Regional Trial Court of Makati City.
2. The Deed of Transfer was not duly notarized by Atty. Francisco Talampas inasmuch as
there was no convincing proof that respondent appeared before Notary Public Atty.
Talampas.
B. THE COURT OF APPEALS PATENTLY ERRED IN RULING THAT THE DEED OF TRANSFER
EXECUTED BETWEEN THE RESPONDENT AND THE PETITIONERS CONSTITUTED AN
EQUITABLE MORTGAGE CONSIDERING THAT:
1. Said issue was not raised in any pleading in the appellate and trial courts.

1wphi1

2. Respondent herself admitted that a separate mortgage was executed to secure the loan. 16
The petition lacks merit.
At the outset, the instant petition should be denied for being filed out of time. Petitioners admit in the
instant petition that: (1) on July 18, 2006, they received a copy of the July 5, 2006 Resolution of the

CA which denied their Motion for Reconsideration of the assailed Amended Decision; (2) on July 26,
2006, they filed a Motion to Admit Second Motion for Reconsideration attaching thereto the said
Second Motion for Reconsideration; (3) on September 5, 2006, they received a copy of the August
28, 2006 Resolution of the CA which denied their Motion to Admit as well as their Second Motion for
Reconsideration; and (4) they filed the instant petition on October 20, 2006.
Section 2, Rule 45 of the Rules of Court provides that a petition for review on certiorari under the
said Rule "shall be filed within fifteen (15) days from notice of the judgment or final order or
resolution appealed from or of the denial of the petitioner's motion for new trial or reconsideration
filed in due time after notice of the judgment." Relative thereto, Section 2, Rule 52 of the same Rules
provides that "no second motion for reconsideration of a judgment or final resolution by the same
party shall be entertained." Based on the abovementioned dates, the start f the 15-day period for the
filing of this petition should have been reckoned from July 18, 2006, the time of petitioners' receipt of
the CA Resolution denying their Motion for Reconsideration, and not on September 5, 2006, the date
when they received the CA Resolution denying their Second Motion for Reconsideration. Thus,
petitioners should have filed the instant petition not later than August 2, 2006. It is wrong for
petitioners to reckon the 15-day period for the filing of the instant petition from the date when they
received the copy of the CA Resolution denying their Second Motion for Reconsideration. Since a
second motion for reconsideration is not allowed, then unavoidably, its filing did not toll the running
of the period to file an appeal by certiorari.17Petitioners made a critical mistake in waiting for the CA
to resolve their second motion for reconsideration before pursuing an appeal.
Perfection of an appeal within the reglementary period is not only mandatory but also
jurisdictional.18 For this reason, petitioners' failure to file this petition within the 15-day period
rendered the assailed Amended CA Decision and Resolutions final and executory, thus, depriving
this Court of jurisdiction to entertain an appeal therefrom. 19On this ground alone, the instant petition
should be dismissed.
In any case, even granting, arguendo, that the present petition is timely filed, the Court finds no
cogent reason to depart from the findings and conclusions of the CA in its disputed Amended
Decision.
Anent the first assigned error, petitioners are correct in pointing out that notarized documents carry
evidentiary weight conferred upon them with respect to their due execution and enjoy the
presumption of regularity which may only be rebutted by evidence so clear, strong and convincing as
to exclude all controversy as to falsity.20However, the presumptions that attach to notarized
documents can be affirmed only so long as it is beyond dispute that the notarization was regular.21 A
defective notarization will strip the document of its public character and reduce it to a private
instrument.22 Consequently, when there is a defect in the notarization of a document, the clear and
convincing evidentiary standard normally attached to a duly-notarized document is dispensed with,
and the measure to test the validity of such document is preponderance of evidence. 23
In the present case, the CA has clearly pointed out the dubious circumstances and irregularities
attendant in the alleged notarization of the subject Deed of Transfer, to wit: (1) the
Certification24 issued by the Clerk of Court of the Notarial Section of the RTC of Makati City which
supposedly attested that a copy of the subject Deed of Transfer is on file with the said court, was

contradicted by the Certification25 issued by the Administrative Officer of the Notarial Section of the
same office as well as by the testimony of the court employee who prepared the Certification issued
by the Clerk of Court, to the effect that the subject Deed of Transfer cannot, in fact, be found in their
files; (2) respondent's categorical denial that she executed the subject Deed of Transfer; and (3) the
subject document did not state the date of execution and lacks the marital consent of respondent's
husband.
Indeed, petitioners' heavy reliance on the Certification issued by the notary public who supposedly
notarized the said deed, as well as the Certification issued by the Clerk of Court of the Notarial
Section of the RTC of Makati City, is misplaced for the following reasons: first, the persons who
issued these Certifications were not presented as witnesses and, as such, they could not be crossexamined with respect to the truthfulness of the contents of their Certifications; second, as
mentioned above, these Certifications were contradicted by the Certification issued by the
Administrative Officer of the Notarial Section of the RTC of Makati City as well as by the admission,
on cross-examination, of the clerk who prepared the Certification of the Clerk of Court, that their
office cannot, in fact, find a copy of the subject Deed of Transfer in their files; 26 and third, the further
admission of the said clerk that the Certification, which was issued by the clerk of court and relied
upon by petitioners, was not based on documents existing in their files, but was simply based on the
Certification issued by the notary public who allegedly notarized the said Deed of Transfer.27
Assuming further that the notarization of the disputed Deed of Transfer was regular, the Court,
nonetheless, is not persuaded by petitioners' argument that such Deed is a sufficient evidence of the
validity of the agreement between petitioners and respondent.
While indeed a notarized document enjoys the presumption of regularity, the fact that a deed is
notarized is not a guarantee of the validity of its contents.28 The presumption is not absolute and may
be rebutted by clear and convincing evidence to the contrary.29 In the present case, the presumption
cannot be made to apply, because aside from the regularity of its notarization, the validity of the
contents and execution of the subject Deed of Transfer was challenged in the proceedings below
where its prima facie validity was subsequently overthrown by the questionable circumstances
attendant in its supposed execution. These circumstances include: (1) the alleged agreement
between the parties that the ownership of the subject property be simply assigned to petitioners
instead of foreclosure of the contract of mortgage which was earlier entered into by them; (2) the
Deed of Transfer was executed by reason of the loan extended by petitioners to respondent, the
amount of the latter's outstanding obligation being the same as the amount of the consideration for
the assignment of ownership over the subject property; (3) the inadequacy of the consideration; and
(4) the claim of respondent that she had no intention of transferring ownership of the subject
property to petitioners.
Based on the foregoing, the Court finds no cogent reason to depart from the findings of the CA that
the agreement between petitioners and respondent is, in fact, an equitable mortgage.
An equitable mortgage has been defined as 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, there being no impossibility nor anything contrary to
law in this intent.30

One of the circumstances provided for under Article 1602 of the Civil Code, where a contract shall be
presumed to be an equitable mortgage, is "where it may be fairly inferred that the real intention of
the parties is that the transaction shall secure the payment of a debt or the performance of any other
obligation." In the instant case, it has been established that the intent of both petitioners and
respondent is that the subject property shall serve as security for the latter's obligation to the former.
As correctly pointed out by the CA, the circumstances surrounding the execution of the disputed
Deed of Transfer would show that the said document was executed to circumvent the terms of the
original agreement and deprive respondent of her mortgaged property without the requisite
foreclosure.
With respect to the foregoing discussions, it bears to point out that in Misena v. Rongavilla, 31 a case
which involves a factual background similar to the present case, this Court arrived at the same
ruling. In the said case, the respondent mortgaged a parcel of land to the petitioner as security for
the loan which the former obtained from the latter. Subsequently, ownership of the property was
conveyed to the petitioner via a Deed of Absolute Sale. Applying Article 1602 of the Civil Code, this
Court ruled in favor of the respondent holding that the supposed sale of the property was, in fact, an
equitable mortgage as the real intention of the respondent was to provide security for the loan and
not to transfer ownership over the property.
Since the original transaction between the parties was a mortgage, the subsequent assignment of
ownership of the subject lots to petitioners without the benefit of foreclosure proceedings, partakes
of the nature of a pactum commissorium, as provided for under Article 2088 of the Civil Code.
Pactum commissorium is a stipulation empowering the creditor to appropriate the thing given as
guaranty for the fulfillment of the obligation in the event the obligor fails to live up to his undertakings,
without further formality, such as foreclosure proceedings, and a public sale. 32
In the instant case, evidence points to the fact that the sale of the subject property, as proven by the
disputed Deed of Transfer, was simulated to cover up the automatic transfer of ownership in
petitioners' favor. While there was no stipulation in the mortgage contract which provides for
petitioners' automatic appropriation of the subject mortgaged property in the event that respondent
fails to pay her obligation, the subsequent acts of the parties and the circumstances surrounding
such acts point to no other conclusion than that petitioners were empowered to acquire ownership of
the disputed property without need of any foreclosure.
Indeed, the Court agrees with the CA in not giving credence to petitioners' contention in their Answer
filed with the RTC that respondent offered to transfer ownership of the subject property in their name
as payment for her outstanding obligation. As this Court has held, all persons in need of money are
liable to enter into contractual relationships whatever the condition if only to alleviate their financial
burden albeit temporarily.33
Hence, courts are duty-bound to exercise caution in the interpretation and resolution of contracts lest
the lenders devour the borrowers like vultures do with their prey.34 Aside from this aforementioned
reason, the Court cannot fathom why respondent would agree to transfer ownership of the subject
property, whose value is much higher than her outstanding obligation to petitioners. Considering that
the disputed property was mortgaged to secure the payment of her obligation, the most logical and

practical thing that she could have done, if she is unable to pay her debt, is to wait for it to be
foreclosed. She stands to lose less of the value of the subject property if the same is foreclosed,
rather than if the title thereto is directly transferred to petitioners. This is so because in foreclosure,
unlike in the present case where ownership of the property was assigned to petitioners, respondent
can still claim the balance from the proceeds of the foreclosure sale, if there be any. In such a case,
she could still recover a portion of the value of the subject property rather than losing it completely
by assigning its ownership to petitioners.
As to the second assigned error, the Court is not persuaded by petitioners' contention that the issue
of whether or not the subject Deed of Transfer is, in fact, an equitable mortgage was not raised by
the latter either in the RTC or the CA.
It is true that, as a rule, no issue may be raised on appeal unless it has been brought before the
lower tribunal for its consideration.35 Higher courts are precluded from entertaining matters neither
alleged in the pleadings nor raised during the proceedings below, but ventilated for the first time only
in a motion for reconsideration or on appeal.36 However, as with most procedural rules, this maxim is
subject to exceptions.37 In this regard, the Court's ruling in Mendoza v. Bautista38 is instructive, to wit:
x x x Indeed, our rules recognize the broad discretionary power of an appellate court to waive the
lack of proper assignment of errors and to consider errors not assigned. Section 8 of Rule 51 of the
Rules of Court provides:
SEC. 8 Questions that may be decided. - No error which does not affect the jurisdiction over the
subject matter or the validity of the judgment appealed from or the proceedings therein will be
considered, unless stated in the assignment of errors, or closely related to or dependent on an
assigned error and properly argued in the brief, save as the court may pass upon plain errors and
clerical errors.
Thus, an appellate court is clothed with ample authority to review rulings even if they are not
assigned as errors in the appeal in these instances: (a) grounds not assigned as errors but affecting
jurisdiction over the subject matter; (b) matters not assigned as errors on appeal but are evidently
plain or clerical errors within contemplation of law; (c) matters not assigned as errors on appeal but
consideration of which is necessary in arriving at a just decision and complete resolution of the case
or to serve the interests of justice or to avoid dispensing piecemeal justice; (d) matters not
specifically assigned as errors on appeal but raised in the trial court and are matters of record having
some bearing on the issue submitted which the parties failed to raise or which the lower court
ignored; (e) matters not assigned as errors on appeal but closely related to an error assigned; and (f)
matters not assigned as errors on appeal but upon which the determination of a question properly
assigned, is dependent.39
In the present case, petitioners must be reminded that one of the main issues raised by respondent
in her appeal with the CA is the validity and due execution of the Deed of Transfer which she
supposedly executed in petitioners' favor. The Court agrees with respondent that, under the factual
circumstances obtaining in the instant case, the determination of the validity of the subject Deed of
Transfer would necessarily entail or involve an examination of the true nature of the said agreement.
In other words, the matter of validity of the disputed Deed of Transfer and the question of whether

the agreement evidenced by such Deed was, in fact, an equitable mortgage are issues which are
closely related, which can, thus, be resolved jointly by the CA.
WHEREFORE, the instant petition is DENIED. The assailed Amended Decision and Resolutions of
the Court of Appeals, dated September 30, 2005, July 5, 2006 and August 28, 2006, respectively, in
CA-G.R. CV No. 76388, are AFFIRMED.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
-the agreement is just an equitable mortgage, a contract wherein, although lacking some formalities,
or form, or words or the requisites under the statutes, charges a real property the burden of securing
performance of an obligation or the payment of debts.
-the reliance of the petitioner on the validity of the deeds, under the doctrine of regularity, goes in to
the very heart of the contract and was overthrown by evidence to the contrary.
-the acts of automatically ceding and transfer of ownership by the subject deed of transfer is in the
nature of pactum commisorium, an agrrement that gives authority to the creditor to automatically
effect transfer of ownership in case of failure to pay the obligation secured by the real property

G.R. No. 156125

August 25, 2010

FRANCISCO MUOZ, JR., Petitioner,

vs.
ERLINDA RAMIREZ and ELISEO CARLOS, Respondents.
DECISION
BRION, J.:
We resolve the present petition for review on certiorari1 filed by petitioner Francisco Muoz, Jr.
(petitioner) to challenge the decision2 and the resolution3 of the Court of Appeals (CA) in CA-G.R. CV
No. 57126.4 The CA decision set aside the decision5 of the Regional Trial Court (RTC), Branch 166,
Pasig City, in Civil Case No. 63665. The CA resolution denied the petitioners subsequent motion for
reconsideration.
FACTUAL BACKGROUND
The facts of the case, gathered from the records, are briefly summarized below.
Subject of the present case is a seventy-seven (77)-square meter residential house and lot located
at 170 A. Bonifacio Street, Mandaluyong City (subject property), covered by Transfer Certificate of
Title (TCT) No. 7650 of the Registry of Deeds of Mandaluyong City in the name of the petitioner.6
The residential lot in the subject property was previously covered by TCT No. 1427, in the name of
Erlinda Ramirez, married to Eliseo Carlos (respondents).7
On April 6, 1989, Eliseo, a Bureau of Internal Revenue employee, mortgaged TCT No. 1427, with
Erlindas consent, to the Government Service Insurance System (GSIS) to secure a P136,500.00
housing loan, payable within twenty (20) years, through monthly salary deductions
of P1,687.66.8 The respondents then constructed a thirty-six (36)-square meter, two-story residential
house on the lot.
On July 14, 1993, the title to the subject property was transferred to the petitioner by virtue of a Deed
of Absolute Sale, dated April 30, 1992, executed by Erlinda, for herself and as attorney-in-fact of
Eliseo, for a stated consideration of P602,000.00.9

On September 24, 1993, the respondents filed a complaint with the RTC for the nullification of the
deed of absolute sale, claiming that there was no sale but only a mortgage transaction, and the
documents transferring the title to the petitioners name were falsified.
The respondents alleged that in April 1992, the petitioner granted them a P600,000.00 loan, to be
secured by a first mortgage on TCT No. 1427; the petitioner gave Erlinda a P200,000.0010 advance
to cancel the GSIS mortgage, and made her sign a document purporting to be the mortgage
contract; the petitioner promised to give the P402,000.00 balance when Erlinda surrenders TCT No.
1427 with the GSIS mortgage cancelled, and submits an affidavit signed by Eliseo stating that he
waives all his rights to the subject property; with the P200,000.00 advance, Erlinda paid
GSIS P176,445.2711 to cancel the GSIS mortgage on TCT No. 1427;12 in May 1992, Erlinda
surrendered to the petitioner the clean TCT No. 1427, but returned Eliseos affidavit, unsigned; since
Eliseos affidavit was unsigned, the petitioner refused to give the P402,000.00 balance and to cancel
the mortgage, and demanded that Erlinda return the P200,000.00 advance; since Erlinda could not
return theP200,000.00 advance because it had been used to pay the GSIS loan, the petitioner kept
the title; and in 1993, they discovered that TCT No. 7650 had been issued in the petitioners name,
cancelling TCT No.1427 in their name.
The petitioner countered that there was a valid contract of sale. He alleged that the respondents sold
the subject property to him after he refused their offer to mortgage the subject property because they
lacked paying capacity and were unwilling to pay the incidental charges; the sale was with the
implied promise to repurchase within one year,13 during which period (from May 1, 1992 to April 30,
1993), the respondents would lease the subject property for a monthly rental of P500.00;14 when the
respondents failed to repurchase the subject property within the one-year period despite notice, he
caused the transfer of title in his name on July 14, 1993;15 when the respondents failed to pay the
monthly rentals despite demand, he filed an ejectment case 16 against them with the Metropolitan
Trial Court (MeTC), Branch 60, Mandaluyong City, on September 8, 1993, or sixteen days before the
filing of the RTC case for annulment of the deed of absolute sale.
During the pendency of the RTC case, or on March 29, 1995, the MeTC decided the ejectment case.
It ordered Erlinda and her family to vacate the subject property, to surrender its possession to the
petitioner, and to pay the overdue rentals.17
In the RTC, the respondents presented the results of the scientific examination 18 conducted by the
National Bureau of Investigation of Eliseos purported signatures in the Special Power of
Attorney19 dated April 29, 1992 and the Affidavit of waiver of rights dated April 29, 1992, 20 showing
that they were forgeries.
The petitioner, on the other hand, introduced evidence on the paraphernal nature of the subject
property since it was registered in Erlindas name; the residential lot was part of a large parcel of
land owned by Pedro Ramirez and Fructuosa Urcla, Erlindas parents; it was the subject of Civil
Case No. 50141, a complaint for annulment of sale, before the RTC, Branch 158, Pasig City, filed by
the surviving heirs of Pedro against another heir, Amado Ramirez, Erlindas brother; and, as a result
of a compromise agreement, Amado agreed to transfer to the other compulsory heirs of Pedro,
including Erlinda, their rightful shares of the land.21

THE RTC RULING

In a Decision dated January 23, 1997, the RTC dismissed the complaint. It found that the subject
property was Erlindas exclusive paraphernal property that was inherited from her father. It also
upheld the sale to the petitioner, even without Eliseos consent as the deed of absolute sale bore the
genuine signatures of Erlinda and the petitioner as vendor and vendee, respectively. It concluded
that the NBI finding that Eliseos signatures in the special power of attorney and in the affidavit were
forgeries was immaterial because Eliseos consent to the sale was not necessary.22
The respondents elevated the case to the CA via an ordinary appeal under Rule 41 of the Revised
Rules of Court.
THE CA RULING
The CA decided the appeal on June 25, 2002. Applying the second paragraph of Article 158 23 of the
Civil Code and Calimlim-Canullas v. Hon. Fortun,24 the CA held that the subject property, originally
Erlindas exclusive paraphernal property, became conjugal property when it was used as collateral
for a housing loan that was paid through conjugal funds Eliseos monthly salary deductions; the
subject property, therefore, cannot be validly sold or mortgaged without Eliseos consent, pursuant to
Article 12425 of the Family Code. Thus, the CA declared void the deed of absolute sale, and set aside
the RTC decision.
When the CA denied26 the subsequent motion for reconsideration,27 the petitioner filed the present
petition for review on certiorari under Rule 45 of the Revised Rules of Court.
THE PETITION
The petitioner argues that the CA misapplied the second paragraph of Article 158 of the Civil Code
and Calimlim-Canullas28 because the respondents admitted in the complaint that it was the petitioner
who gave the money used to cancel the GSIS mortgage on TCT No. 1427; Article 120 29 of the Family
Code is the applicable rule, and since the value of the house is less than the value of the lot, then
Erlinda retained ownership of the subject property. He also argues that the contract between the
parties was a sale, not a mortgage, because (a) Erlinda did not deny her signature in the
document;30 (b) Erlinda agreed to sign a contract of lease over the subject property; 31 and, (c) Erlinda
executed a letter, dated April 30, 1992, confirming the conversion of the loan application to a deed of
sale.32
THE CASE FOR THE RESPONDENTS
The respondents submit that it is unnecessary to compare the respective values of the house and of
the lot to determine ownership of the subject property; it was acquired during their marriage and,
therefore, considered conjugal property. They also submit that the transaction between the parties
was not a sale, but an equitable mortgage because (a) they remained in possession of the subject
property even after the execution of the deed of absolute sale, (b) they paid the 1993 real property
taxes due on the subject property, and (c) they receivedP200,000.00 only of the total stated price
of P602,000.00.

THE ISSUE
The issues in the present case boil down to (1) whether the subject property is paraphernal or
conjugal; and, (2) whether the contract between the parties was a sale or an equitable mortgage.
OUR RULING
We deny the present Petition but for reasons other than those advanced by the CA.
This Court is not a trier of facts. However, if the inference, drawn by the CA, from the facts is
manifestly mistaken, as in the present case, we can review the evidence to allow us to arrive at the
correct factual conclusions based on the record.33
First Issue:
Paraphernal or Conjugal?
As a general rule, all property acquired during the marriage, whether the acquisition appears to have
been made, contracted or registered in the name of one or both spouses, is presumed to be
conjugal unless the contrary is proved.34
In the present case, clear evidence that Erlinda inherited the residential lot from her father has
sufficiently rebutted this presumption of conjugal ownership.35 Pursuant to Articles 9236 and 10937 of
the Family Code, properties acquired by gratuitous title by either spouse, during the marriage, shall
be excluded from the community property and be the exclusive property of each spouse. 38 The
residential lot, therefore, is Erlindas exclusive paraphernal property.
The CA, however, held that the residential lot became conjugal when the house was built thereon
through conjugal funds, applying the second paragraph of Article 158 of the Civil Code and CalimlimCanullas.39 Under the second paragraph of Article 158 of the Civil Code, a land that originally
belonged to one spouse becomes conjugal upon the construction of improvements thereon at the
expense of the partnership. We applied this provision in Calimlim-Canullas, 40 where we held that
when the conjugal house is constructed on land belonging exclusively to the husband, the land ipso
facto becomes conjugal, but the husband is entitled to reimbursement of the value of the land at the
liquidation of the conjugal partnership.
The CA misapplied Article 158 of the
Civil Code and Calimlim-Canullas
We cannot subscribe to the CAs misplaced reliance on Article 158 of the Civil Code and CalimlimCanullas.
As the respondents were married during the effectivity of the Civil Code, its provisions on conjugal
partnership of gains (Articles 142 to 189) should have governed their property relations. However,
with the enactment of the Family Code on August 3, 1989, the Civil Code provisions on conjugal

partnership of gains, including Article 158, have been superseded by those found in the Family Code
(Articles 105 to 133). Article 105 of the Family Code states:
xxxx
The provisions of this Chapter [on the Conjugal Partnership of Gains] shall also apply to conjugal
partnerships of gains already established between spouses before the effectivity of this Code,
without prejudice to vested rights already acquired in accordance with the Civil Code or other laws,
as provided in Article 256.
Thus, in determining the nature of the subject property, we refer to the provisions of the Family
Code, and not the Civil Code, except with respect to rights then already vested.
Article 120 of the Family Code, which supersedes Article 158 of the Civil Code, provides the solution
in determining the ownership of the improvements that are made on the separate property of the
spouses, at the expense of the partnership or through the acts or efforts of either or both spouses.
Under this provision, when the cost of the improvement and any resulting increase in value are more
than the value of the property at the time of the improvement, the entire property of one of the
spouses shall belong to the conjugal partnership, subject to reimbursement of the value of the
property of the owner-spouse at the time of the improvement; otherwise, said property shall be
retained in ownership by the owner-spouse, likewise subject to reimbursement of the cost of the
improvement.41
In the present case, we find that Eliseo paid a portion only of the GSIS loan through monthly salary
deductions. From April 6, 198942 to April 30, 1992,43 Eliseo paid about P60,755.76,44 not the entire
amount of the GSIS housing loan plus interest, since the petitioner advanced the P176,445.2745 paid
by Erlinda to cancel the mortgage in 1992. Considering the P136,500.00 amount of the GSIS
housing loan, it is fairly reasonable to assume that the value of the residential lot is considerably
more than the P60,755.76 amount paid by Eliseo through monthly salary deductions.
Thus, the subject property remained the exclusive paraphernal property of Erlinda at the time she
contracted with the petitioner; the written consent of Eliseo to the transaction was not necessary. The
NBI finding that Eliseos signatures in the special power of attorney and affidavit were forgeries was
immaterial.
Nonetheless, the RTC and the CA apparently failed to consider the real nature of the contract
between the parties.
Second Issue:
Sale or Equitable Mortgage?
Jurisprudence has defined an equitable mortgage "as 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, there being no impossibility nor anything
contrary to law in this intent."46

Article 1602 of the Civil Code enumerates the instances when a contract, regardless of its
nomenclature, may be presumed to be an equitable mortgage: (a) when the price of a sale with right
to repurchase is unusually inadequate; (b) when the vendor remains in possession as lessee or
otherwise; (c) when upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed; (d) when the purchaser
retains for himself a part of the purchase price; (e) when the vendor binds himself to pay the
taxes on the thing sold; and, (f) in any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the payment of a debt or the
performance of any other obligation. These instances apply to a contract purporting to be an
absolute sale.47
For the presumption of an equitable mortgage to arise under Article 1602 of the Civil Code, two (2)
requisites must concur: (a) that the parties entered into a contract denominated as a contract of sale;
and, (b) that their intention was to secure an existing debt by way of a mortgage. Any of the
circumstances laid out in Article 1602 of the Civil Code, not the concurrence nor an overwhelming
number of the enumerated circumstances, is sufficient to support the conclusion that a contract of
sale is in fact an equitable mortgage.48
Contract is an equitable mortgage
In the present case, there are four (4) telling circumstances pointing to the existence of an equitable
mortgage.
First, the respondents remained in possession as lessees of the subject property; the parties, in fact,
executed a one-year contract of lease, effective May 1, 1992 to April 30, 1993. 49
Second, the petitioner retained part of the "purchase price," the petitioner gave a P200,000.00
advance to settle the GSIS housing loan, but refused to give the P402,000.00 balance when Erlinda
failed to submit Eliseos signed affidavit of waiver of rights.
Third, respondents paid the real property taxes on July 8, 1993, despite the alleged sale on April 30,
1992;50payment of real property taxes is a usual burden attaching to ownership and when, as here,
such payment is coupled with continuous possession of the property, it constitutes evidence of great
weight that the person under whose name the realty taxes were declared has a valid and rightful
claim over the land.51
Fourth, Erlinda secured the payment of the principal debt owed to the petitioner with the subject
property. The records show that the petitioner, in fact, sent Erlinda a Statement of Account showing
that as of February 20, 1993, she owed P384,660.00, and the daily interest, starting February 21,
1993, was P641.10.52 Thus, the parties clearly intended an equitable mortgage and not a contract of
sale.
That the petitioner advanced the sum of P200,000.00 to Erlinda is undisputed. This advance, in fact,
prompted the latter to transfer the subject property to the petitioner. Thus, before the respondents
can recover the subject property, they must first return the amount of P200,000.00 to the petitioner,
plus legal interest of 12% per annum, computed from April 30, 1992.

We cannot sustain the ballooned obligation of P384,660.00, claimed in the Statement of Account
sent by the petitioner,53 sans any evidence of how this amount was arrived at. Additionally, a daily
interest of P641.10 orP19,233.00 per month for a P200,000.00 loan is patently unconscionable.
While parties are free to stipulate on the interest to be imposed on monetary obligations, we can
step in to temper the interest rates if they are unconscionable. 54
In Lustan v. CA,55 where we established the reciprocal obligations of the parties under an equitable
mortgage, we ordered the reconveyance of the property to the rightful owner therein upon the
payment of the loan within ninety (90) days from the finality of the decision. 56
WHEREFORE, in light of all the foregoing, we hereby DENY the present petition. The assailed
decision and resolution of the Court of Appeals in CA-G.R. CV No. 57126 are AFFIRMED with the
following MODIFICATIONS:
1. The Deed of Absolute Sale dated April 30, 1992 is hereby declared an equitable mortgage;
and
2. The petitioner is obligated to RECONVEY to the respondents the property covered by
Transfer Certificate of Title No. 7650 of the Register of Deeds of Mandaluyong City, UPON
THE PAYMENT OFP200,000.00, with 12% legal interest from April 30, 1992, by respondents
within NINETY DAYS FROM THE FINALITY OF THIS DECISION.
Costs against the petitioner.
SO ORDERED.

-In case parties entered into a contract of sale and a real property is thereby given
to secure performance to pay the debt coupled with any of the circumstances under
Article 1602, the contract shall be treated as an equitable mortgage.

SECOND DIVISION

ROCKVILLE EXCEL

G.R. No. 155716

INTERNATIONAL EXIM
CORPORATION,
Petitioner,

Present:

- versus -

**

YNARES- SANTIAGO,

CARPIO-MORALES,
Acting Chairperson,
BRION,

SPOUSES OLIGARIO CULLA

and
BERNARDITA
MIRANDA,

DEL CASTILLO, and

ABAD, JJ.

Respondents.

Promulgated:

October 2, 2009

x
--------------------------------------------------------------------------------------- x

DECISION

BRION, J.:

Whether a Deed of Absolute Sale is really an absolute sale

of real property or an equitable mortgage is the main issue now
before us. Petitioner Rockville Excel International Exim
Corporation (Rockville) prays in this petition[1] that we reverse the
October 9, 2002 decision[2] of the Court of Appeals (CA) in CA G.R.
SP No. 66070, denying its appeal and affirming the decision of the
Regional Trial Court (RTC), Batangas City, Branch 2 in Civil Case
No. 4789, which dismissed their complaint for specific
performance against the respondents Spouses Oligario (Oligario)
and Bernardita Culla.

BACKGROUND FACTS

The spouses Oligario and Bernardita (Sps. Culla) are the

registered owners of a parcel of land covered by Transfer
Certificate of Title (TCT) No. 5416. They mortgaged this property
to PS Bank to secure a loan of P1,400,000.00.

Sometime in 1993, the Office of the Clerk of Court and the

Ex-Officio Sheriff issued a Sheriffs Notice of Sale for the
extrajudicial foreclosure of the property. To prevent the
foreclosure, Oligario approached Rockville represented by its
president and chairman, Diana Young for financial
assistance. Rockville accommodated Oligarios request and
extended him a loan of P1,400,000.00. This amount was
increased by P600,000.00 for the cash advances Oligario
requested, for a total loan amount of P2,000,000.00.

According to Rockville, when Oligario failed to pay

the P2,000,000.00 loan after repeated demands and promises to
pay, the Sps. Culla agreed to pay their indebtedness by selling
to Rockville another property the spouses owned in Brgy.
Calicanto, Batangas City (property). The property has an area of
approximately 7,074 square meters and is covered by TCT No. T19538. Since a survey of the surrounding properties revealed that
the property is worth more than the Sps. Cullas P2,000,000.00
loan, the parties agreed to fix the purchase price
at P3,500,000.00.

As narrated by Rockville, it accepted the offer for a dacion

en pago; on June 25, 1994, Rockville and Oligario executed a
Deed of Absolute Sale over the property. While the property was a
conjugal property of the Sps. Culla, only Oligario signed the Deed
of Absolute Sale. Rockville asserted that, by agreement with the
Sps. Culla, Rockvillewould pay the additional P1,500,000.00 after
Bernardita affixes her signature to the Deed of Absolute Sale.

Rockville claimed that it had always been ready and willing

to comply with its obligation to deliver the P1,500,000.00. In
fact, Rockville initially deposited this whole amount with May Bank

of Malaysia, with notice to Oligario, which amount was

subsequently transferred to Rockvilles law firm. However, when
Bernardita continued to refuse to sign the Deed of Absolute
Sale, Rockville caused the annotation of an adverse claim on TCT
No. T-19538 in order to protect its interest in the property.
Furthermore,Rockville tried to transfer the title of the property in
its name but the Registry of Deeds refused to carry out the
transfer, given the absence of Bernarditas signature in the Deed
of Absolute Sale.

On February 4, 1997, Rockville filed a complaint for Specific

Performance and Damages before the Regional Trial Court (RTC)
of Batangas City, Branch 2 against the Sps. Culla, praying that
the lower court order Bernardita to sign the Deed of
Absolute Sale or, in the alternative, to authorize the sale even
without Bernarditas signature.

In their Answer, the Sps. Culla alleged that the purported

Deed of Absolute Sale failed to reflect their true intentions, as the
deed was meant only to guarantee the debt to Diana Young, not
to Rockville. Contrary to Rockvilles contention, the agreement
was that the P1,500,000.00 had to be paid before Bernardita
would sign the Deed of Absolute Sale. When neither Rockville nor
Diana Young paid the P1,500,000.00, the Sps. Culla volunteered
to repay the P2,000,000.00 and opted to rescind the sale.

On October 26, 1999, the RTC decided the case in the

respondents
favor,[3] dismissing Rockvilles
complaint
after
finding that the transaction between the parties was in reality an
equitable mortgage, not an absolute sale. The dispositive portion
of the RTC decision states:

WHEREFORE, in view of all the foregoing, the

complaint filed by the plaintiff, Rockville Excel
International Exim Corporation against defendants
Oligario Culla and Bernardita Miranda is hereby
DISMISSED. The Absolute Deed of Sale executed between
the said plaintiff and defendants on June 25, 1994 is
hereby declared as an equitable mortgage and,
defendants are hereby entitled to redeem the mortgaged
property upon full payment of their mortgaged debt to
the plaintiff in the total amount of two million pesos
(P2,000,000.00) with legal rate of interest from June 25,
1994, the time the loan matured, until it is fully satisfied.
With costs against the plaintiff.

SO ORDERED.

THE CA DECISION

Rockville appealed to the CA. In the assailed October 9, 2002

decision, the CA concluded that the purported contract of sale
between Rockville and the Sps. Culla was in reality an equitable
mortgage based on the following factual circumstances: (a) the
glaring inadequacy in the consideration for the sale and the
actual market value of the property; (b) the fact that the Sps.
Culla remained in possession of the property even after the
execution of the Deed of Absolute Sale; (c) the fact that Rockville
never paid the Sps. Culla the agreed P1,500,000.00 balance in the
purchase price; and (d) Rockvilles continuous grant of extensions
to the Sps. Culla to pay their loan despite the execution of the
deed of sale.

THE PETITION

The present petition filed after the CA denied Rockvilles

motion for reconsideration asks us to resolve whether the
parties agreement is an absolute sale or an equitable mortgage
of real property.

Rockville submits that the CA erred in finding that the

contract of sale with the Sps. Culla was an equitable mortgage,
insisting
that
the
transaction
was
a dacion
en
pago.Rockville points out that the Sps. Culla themselves admitted
that they agreed to sell the property as payment for
the P2,000,000.00 loan and for the additional payment
ofP1,500,000.00 Rockville was to pay. Rockville further argues
that even without Bernarditas signature on the Deed of Absolute
Sale, the document is still binding as Oligario represented the
spouses in the transaction. Since Bernardita benefited from the
transaction, with the P1,400,000.00 of the purchase price having
been
used
to
redeem
the
mortgaged
conjugal
property, Rockville posits that Bernardita impliedly and effectively
ratified the sale.

The Sps. Culla, on the other hand, maintain the contrary

view and insist that the RTC and the CA were correct in holding
that the sale was in fact an equitable mortgage.

THE COURTS RULING

We find the petitioners arguments to be legally

flawed, and therefore deny the petition for lack of merit.
Whether or not the contract is an equitable mortgage or
an absolute sale

No dacion en pago
Dacion en pago is the delivery and transmission of
ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of an existing obligation.It is a
special mode of payment where the debtor offers another
thing to the creditor who accepts it as equivalent to the
payment of an outstanding debt.[4] For dacion en pago to
exist, the following elements must concur: (a) existence of a
money obligation; (b) the alienation to the creditor of a property
by the debtor with the consent of the former; and (c) satisfaction
of the money obligation of the debtor.[5]

Rockville mainly contends that the Sps. Culla sold their property to pay their
due and demandable P2,000,000.00 debt; the transaction is therefore a dacion en
pago. It also repeatedly emphasized that Bernardita admitted in her testimony that
she would have signed the Deed of Absolute Sale if Rockville had paid
the P1,500,000.00.

Rockvilles arguments would have been telling and convincing were it not
for the undisputed fact that even after the execution of the Deed of Absolute
Sale, Rockville still granted Oligario time to repay his P2,000,000.00 indebtedness.
In fact, as Diana Young admitted in her testimony, Rockville gave Oligario the
chance to pay off the loan on the same day that the deed was executed. As Diana
Young stated:

Q. Why, he was asking for the extension of P2 million

pesos that he barrowed (sic) from you to be paid by him?

A. He asked me for the extension of time to pay.

Q. After the execution of the deed of sale (Exhibit

C)?

A. On the very day. Yes, after the lapse of the six (6)
months to pay back the property.

Q. So what appears was a document of sale Exhibit C

was executed signed by the defendant, Oligario Culla,
signed by you and then notarized by a Notary Public.

A. Yes, sir.

Q. On same occasion he asked from you that he be

given an extension of six (6) months within which
to pay the loan of P2 million pesos?

A. Yes, sir.[6]

If the parties had truly intended a dacion en pago transaction to extinguish

the Sps. Cullas P2,000,000.00 loan and Oligario had sold the property in payment
for this debt, it made no sense for him to continue to ask for extensions of the time
to pay the loan. More importantly, Rockville would not have granted the requested
extensions to Oligario if payment through a dacion en pago had taken
place. That Rockville granted the extensions simply belied its contention that they
had intended a dacion en pago.

On several occasions, we have decreed that in determining

the nature of a contract, courts are not bound by the title or name
given by the parties. The decisive factor in evaluating an
agreement is the intention of the parties, as shown, not
necessarily by the terminology used in the contract but, by their
conduct,
words,
actions
and
deeds prior
to,
[7]
during and immediately after executing the agreement. Thus, to
ascertain the intention of the parties, their contemporaneous and
subsequent acts should be considered. Once the intention of the
parties is duly ascertained, that intent is deemed as integral to
the contract as its originally expressed unequivocal terms. [8]

Thus, we agree with the factual findings of the RTC and the
CA
that
no
agreement
of
sale
was
perfected
between Rockville and the Sps. Culla. On the contrary, what they
denominated as a Deed of Absolute Sale was in fact an equitable
mortgage.

Definition of equitable mortgage

An equitable mortgage has been defined as 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, there being no impossibility nor anything contrary to law in
this intent.[9]

A contract of sale is presumed to be an equitable mortgage when any of the

following circumstances, enumerated in Article 1602 of the Civil Code, is present:

Art. 1602. The contract shall be presumed to be an equitable

mortgage, in any of the following cases:

(1) When the price of a sale with right to repurchase is unusually

inadequate;
(2) When the vendor remains in possession as lessee or
otherwise;
(3) When upon or after the expiration of the right to repurchase
another instrument extending the period of redemption or granting a new
period is executed;
(4) When the purchaser retains for himself a part of the
purchase price;
(5) When the vendor binds himself to pay the taxes on the thing
sold;
(6) In any other case where it may be fairly inferred that the
real intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any other obligation.

In any of the foregoing cases, any money, fruits, or other benefit

to be received by the vendee as rent or otherwise shall be considered as
interest which shall be subject to the usury laws. [Emphasis supplied.]

The provisions of Article 1602 shall also apply to a contract purporting to be

an absolute sale.[10]

For the presumption of an equitable mortgage to arise under Article 1602,

two (2) requisites must concur: (a) that the parties entered into a contract
denominated as a contract of sale; and, (b) that their intention was to secure an
existing debt by way of a mortgage. Any of the circumstances laid out in Article
1602, not the concurrence nor an overwhelming number of the enumerated
circumstances, is sufficient to support the conclusion that a contract of sale is in
fact an equitable mortgage.[11] In several cases, we have not hesitated to declare a
purported contract of sale to be an equitable mortgage based solely on one of the
enumerated circumstances under Article 1602.[12] This approach follows the rule
that when doubt exists on the nature of the parties transaction, the law favors the
least transmission of property rights.[13]

Indicators of equitable mortgage

In the present case, three attendant circumstances indicate that the purported
sale was in fact an equitable mortgage. First, the Sps. Culla retained possession of
the property. Second, Rockville kept a part of the purchase price. Third, as
previously discussed, Rockville continued to give the Sps. Culla extensions on the
period to repay their loan even after the parties allegedly agreed to a dacion en
pago. These circumstances, coupled with the clear and unequivocal testimonies of
Oligario and Bernardita that the purpose of the Deed of Absolute Sale was merely
to guarantee their loan, clearly reveal the parties true intention to execute an
equitable mortgage and not a contract of sale.

That a contract where the vendor remains in physical possession of the land,
as lessee or otherwise, is an equitable mortgage is well-settled.[14] The reason for
this rule lies in the legal reality that in a contract of sale, the legal title to the
property is immediately transferred to the vendee; retention by the vendor of the
possession of the property is inconsistent with the vendees acquisition of
ownership under a true sale.[15] It discloses, in the alleged vendee, a lack of interest
in the property that belies the truthfulness of the sale.[16]

According to Rockville, it took possession of the property, albeit

constructively and not through actual occupation. Rockville contends, too, that its
possession of the title to the property and its subsequent attempt to register the
property in its name are clear indicators of its intent to enforce the contract of
sale.

We cannot agree with these positions. In the first place, the Sps. Culla
retained actual possession of the property and this was never
disputed. Rockville itself admits this in its petition, but claims in justification that
since the property is contiguous to the site of the Sps. Cullas family home, it
would have been impossible for Rockville to obtain actual possession of the
property. Regardless of where the property is located, however, if the transaction
had really been a sale as Rockville claimed, it should have asserted its rights for
the immediate delivery and possession of the lot instead of allowing the Sps. Culla
to freely stay in the premises. Its failure to do so suggests that Rockville did not
truly intend to enforce the contract of sale.

Moreover, we observe that while Rockville did take steps to register the
property in its name, it did so more than two years after the Deed of Absolute Sale
was executed, and only after Oligarios continued failure to pay the P2,000,000.00
loan.

In addition, Rockville admitted that it never paid the P1,500,000.00 balance

to the Sps. Culla. As found by the RTC, while Rockville claims that it deposited
this amount with May Bank of Malaysia and notified Oligario of the deposit, no
evidence was presented to support this claim. Besides, even if this contention had
been true, the deposit in a foreign bank was neither a valid tender of payment nor
an effective consignation.

Lastly, the numerous extensions granted by Rockville to Oligario to pay his

debt after the execution of the Deed of Sale convince us that the parties never
intended to enter into a contract of sale; instead, the intent was merely to secure the
payment of Oligarios loan.

All told, we see no reason to depart from the findings and conclusions of
both the trial court and the Court of Appeals.

WHEREFORE, premises considered, we DENY the petition

for lack of merit; the assailed Decision dated October 9, 2002 in
CA G.R. SP No. 66070 is thusAFFIRMED. Costs against the
petitioner.

SO ORDERED.

ARTURO

D.

BRION
Associate Justice

-equitable mortgage is one where the parties entered into a contract

denominated as contract of absolute sale and property is given with
the intention to secure the same as mortgage.
-contemporeneous as well as subsequent acts of the parties shall
determine their true intentions in entering the contract.

G.R. No. 162090

January 31, 2007

SPOUSES HOWARD T. CO CHIEN and SUSAN Y. CO CHIEN, Petitioners,

vs.
STA. LUCIA REALTY & DEVELOPMENT, INC., and ALSONS LAND
CORPORATION, Respondents.
DECISION
PUNO, CJ.:
This case is a Petition for Certiorari under Rule 45 of the Revised Rules of Court appealing the
decision of the Court of Appeals in CA G.R. SP No. 78161 entitled "Spouses Howard T. Co Chien &
Susan Y. Co Chien v. Sta. Lucia Realty & Development, Inc. and Alsons Land Corporation."
The facts are undisputed.
Sometime in December 1995, private respondents Sta. Lucia Realty & Development, Inc. (Sta.
Lucia) and Alsons Land Corporation (Alsons) offered for sale to the general public parcels of land
and golf shares to the Eagle Ridge Golf and Residential Estates (Eagle Ridge) in General Trias,
Cavite.1 Sta. Lucia, as the developer, owns 60% of Eagle Ridge while Alsons, the owner of the land,
owns the remaining 40% by virtue of a joint venture agreement. Fil-Estate Realty Corporation (FilEstate) was commissioned to sell the subdivision lots and/or golf shares under an Exclusive
Marketing Agreement executed on December 5, 1995.2
On December 20, 1995, Sta. Lucia and Alsons entered into a Contract to Sell, including an
addendum to the same, with the petitioners, spouses Howard T. Co Chien and Susan Y. Co Chien
(Spouses Co Chien). According to the Contract to Sell, Spouses Co Chien shall purchase Lot No.
16, Block No. 1, Phase I of Eagle Ridge with an area of three hundred one (301) square meters for a
lump sum price of one million two hundred ninety three thousand three hundred pesos
(P1,293,300.00), with one half of the purchase price as down payment to be paid upon signing the
contract and the balance upon delivery of the title to the land to Spouses Co Chien. The petitioners
were also given a 10% discount on the purchase price and thereafter they paid a down payment of
five hundred eighty one thousand five hundred thirty five pesos (P581,535.00), after the discount. It
was also agreed in the addendum to the Contract to Sell that the 10% discount deducted from the
down payment shall be forfeited and added to the balance, should Spouses Co Chien fail to pay the

said balance within seven (7) days from notice that the title to the subject property is ready for
delivery.3
At the time the Contract to Sell was executed, the private respondents did not possess a License to
Sell and a Certificate of Registration from the Housing and Land Use Regulatory Board (HLURB) as
required under Sections 4 and 5 of Presidential Decree No. 957 (P.D. 957). The License and
Certificate were issued only in July 1997, one year and six months after the execution of the
Contract to Sell between the petitioners and the private respondents. 4
On January 19, 1998, Sta. Lucia informed the petitioners that the title to the property was ready for
delivery and demanded the payment of the balance of the purchase price. Instead of paying the
balance, Spouses Co Chien tried to negotiate for a further discount or, in the alternative, to
exchange the property for a better lot in Eagle Ridge. When Spouses Co Chien failed to pay within
seven days from notice of the availability of the title, the private respondents forfeited the 10%
discount previously given to the petitioners in accordance with the contract and its addendum. 5
On June 16, 1999, Spouses Co Chien sent a written demand to Sta. Lucia for the refund of their
down payment on the ground that the Contract to Sell was void for the reason that at the time of its
execution, December 20, 1995, the private respondents had no Certificate of Registration and
License to Sell as required by Sections 4 and 5 of P.D. 957. 6 On July 6, 1999, failing to receive a
favorable response from the private respondents, Spouses Co Chien filed a complaint with the
HLURB.7
On May 30, 2001, the HLURB Arbiter ruled in favor of Spouses Co Chien ordering Sta. Lucia and
Alsons to refund the down payment with legal interest from July 6, 1999 and to further pay the
petitioners P10,000.00 as attorneys fees. The HLURB Arbiter ruled that the lack of Certificate of
Registration and License to Sell at the time of execution of the Contract to Sell resulted in the
nullification of the contract.8
On appeal, the HLURB Board of Commissioners (the HLURB Board) reversed the HLURB Arbiters
decision and held that the Contract to Sell was valid and ordered Spouses Co Chien to pay the
private respondents the balance of P646,150.00 without penalty interest. The HLURB Board also
ordered Sta. Lucia and Alsons to pay jointly and severally an administrative fine of P20,000.00 for
two counts of violation of Section 4 of P.D. 957 and another P20,000.00 for two counts of violation of
Section 5 of the same decree.9
Spouses Co Chien then appealed to the Office of the President. In a decision dated June 10, 2003,
the Office of the President affirmed the decision of the HLURB Board in toto. Not satisfied with the
aforementioned ruling, Spouses Co Chien filed a Petition for Review with the Court of Appeals. 10
On February 10, 2004, the Court of Appeals denied the petition and affirmed the decision of the
Office of the President.11
Hence, this petition.

The primary issues in this case are as follows: (1) whether the absence of the Certificate of
Registration and License to Sell at the time of execution rendered the Contract to Sell and its
addendum null and void; and (2) whether the petitioners are guilty of laches or estoppel.
We will discuss the issues seriatim.
It is the contention of the petitioners that the lack of Certificate of Registration (the Certificate) and
License to Sell (the License) on the part of the private respondents at the time the contract was
executed rendered the Contract to Sell null and void, thus, entitling them to a refund of their down
payment. Spouses Co Chien aver that the use of the words "shall not" and the phrase "unless he
shall have first obtained a license to sell within two weeks from the registration of such project" in
Section 5 of P.D. 957 indicate that the absence of the Certificate and License render the contract null
and void.12 The private respondents, on the other hand, state that the provision of law invoked by
Spouses Co Chien does not provide that the absence of the Certificate and License at the time the
contract was executed would automatically invalidate the contract.13 The private respondents assert
that the Sec. 5, P.D. 957 is merely directory as it does not affect substantial rights, does not relate to
the essence of a sale and compliance therewith is simply a matter of administrative convenience. 14
Sections 4 and 5 of P.D. 957 state:
Sec. 4. Registration of Projects
....
The owner or the real estate dealer interested in the sale of lots or units, respectively, in such
subdivision project or condominium project shall register the project with the Authority by filing
therewith a sworn registration statement containing the following information:
....
The subdivision project of the condominium project shall be deemed registered upon completion
of the above publication requirement. The fact of such registration shall be evidenced by a
registration certificate to be issued to the applicant-owner or dealer.
Sec. 5. License to Sell. - Such owner or dealer to whom has been issued a registration
certificate shall not, however, be authorized to sell any subdivision lot or condominium unit in
the registered project unless he shall have first obtained a license to sell the project within
two weeks from the registration of such project.
The Authority, upon proper application therefor, shall issue to such owner or dealer of a
registered project a license to sell the project if, after an examination of the registration statement
filed by said owner or dealer and all the pertinent documents attached thereto, he is convinced that
the owner or dealer is of good repute, that his business is financially stable, and that the
proposed sale of the subdivision lots or condominium unitsto the public would not be
fraudulent.15

The same decree further states:

Sec. 38. Administrative Fines. - The Authority may prescribe and impose fines not exceeding ten
thousand pesos for violations of the provisions of this Decree or of any rule or regulation thereunder.
Fines shall be payable to the Authority and enforceable through writs of execution in accordance
with the provisions of the Rules of Court.
Sec. 39. Penalties. - Any person who shall violate any of the provisions of this Decree and/or any
rule or regulation that may be issued pursuant to this Decree shall, upon conviction, be punished by
a fine of not more than twenty thousand (P20,000.00) pesos and/or imprisonment of not more than
ten years: Provided, That in the case of corporations, partnership, cooperatives, or associations, the
President, Manager or Administrator or the person who has charge of the administration of the
business shall be criminally responsible for any violation of this Decree and/or the rules and
regulations promulgated pursuant thereto.16
P.D. 957 is a law that seeks to regulate the sale of subdivision lots and condominiums in view of the
increasing number of incidents wherein "real estate subdivision owners, developers, operators,
and/or sellers have reneged on their representations and obligations to provide and maintain
properly"17 the basic requirements and amenities, as well as "reports of alarming magnitudeof
swindling and fraudulent manipulations perpetrated by unscrupulous subdivision and condominium
sellers and operators."18 As such, P.D. 957 requires the registration not just of the developers,
sellers, brokers and/or owners of the project but also of the project itself. 19 Upon registration of the
project, a license to sell must be obtained prior to the sale of the subdivision lots or condominium
units therein.20 The law also provides for the suspension and revocation of the registration and
license in certain instances, as well as the procedure to be observed in the event thereof. 21 Finally,
the law provides for administrative fines and other penalties in case of violation of, or noncompliance with its provisions.22
A review of the relevant provisions of P.D. 957 reveals that while the law penalizes the selling of
subdivision lots and condominium units without prior issuance of a Certificate of Registration and
License to Sell by the HLURB, it does not provide that the absence thereof will automatically render
a contract, otherwise validly entered, void. The penalty imposed by the decree is the general penalty
provided for the violation of any of its provisions.23 It is well-settled in this jurisdiction that the clear
language of the law shall prevail.24 This principle particularly enjoins strict compliance with provisions
of law which are penal in nature, or when a penalty is provided for the violation thereof. With regard
to P.D. 957, nothing therein provides for the nullification of a contract to sell in the event that the
seller, at the time the contract was entered into, did not possess a certificate of registration and
license to sell.25 Absent any specific sanction pertaining to the violation of the questioned provisions
(Secs. 4 and 5), the general penalties provided in the law shall be applied. The general penalties for
the violation of any provisions in P.D. 957 are provided for in Sections 38 and 39. As can clearly be
seen in the aforequoted provisions, the same do not include the nullification of contracts that are
otherwise validly entered.
As found by the Court of Appeals, in the case at bar, the requirements of Sections 4 and 5 of P.D.
957 do not go into the validity of the contract, such that the absence thereof would automatically
render the contract null and void. It is rather more of an administrative convenience in order to allow

for a more effective regulation of the industry.26 While it is the intent of the prohibition in Section 5 of
P.D. 957 "to prevent cases of swindling and fraudulent manipulations perpetrated by unscrupulous
subdivision and condominium sellers and operators"27 and to ensure that "penalties be imposed on
fraudulent practices and manipulations committed in connection therewith," 28 such does not obtain in
this case, as it is undisputed that the title to the subject property has been available for more than a
year, and the Eagle Ridge project was almost 100% completed, before Spouses Co Chien decided
to have the Contract declared void and to seek a refund of their down payment. Contrary to Spouses
Co Chiens bare allegations of bad faith on the part of the private respondents, the Court of Appeals
found that at the time the Contract to Sell was executed, the applications for the Certificate and the
License were already pending with the HLURB but were only issued several months
thereafter.29 More importantly, when Spouses Co Chien received notice of the availability of the title
to the subject property, the private respondents had long since been issued the Certificate and
License. It was in fact Spouses Co Chien who, instead of paying the balance as required in the
contract, sought to renegotiate the same, and failing therein, sought to nullify the contract a year and
a half after notice that the title to the subject property, free from any liens and encumbrance, was
already available for delivery.
One of the purposes of P.D. 957 is to discourage and prevent unscrupulous owners, developers,
agents and sellers from reneging on their obligations and representations to the detriment of
innocent purchasers. The law mandates HLURB to closely regulate, supervise and monitor the real
estate industry, particularly residential developments such as subdivisions and condominium
projects. To this end, P.D. 957 provides for the issuance, suspension, revocation and even the
outright denial of registration and license to developers, agents and the project itself, as well as
penalties for the non-compliance with the requirements provided therein. It does not, however,
provide for the nullification of a contract, due to the lack of registration and license at the moment of
execution, which in this case was thereafter undisputedly issued by HLURB. As correctly averred by
respondent Alsons, the requirement for registration and license is primarily directed at preventing
fraudulent schemes from being perpetrated on the public who seek to have their own abode. 30 No
fraud has been alleged, much less proven, by Spouses Co Chien in the present case. The lack of
certificate and registration, without more, while penalized under the law, is not in and of itself
sufficient to render a contract void. Such a deficiency, however, together with other relevant factors
may be duly considered in nullifying a contract, should the circumstances so demand.
The second issue in the instant petition is whether or not estoppel bars the claim of Spouses Co
Chien. There are generally three kinds of estoppel: (1) estoppel in pais; (2) estoppel by deed; and
(3) estoppel by laches. In the first classification, a person is considered in estoppel if by his conduct,
representations or admissions or silence when he ought to speak out, whether intentionally or
through culpable negligence, "causes another to believe certain facts to exist and such other
rightfully relies and acts on such belief, as a consequence of which he would be prejudiced if the
former is permitted to deny the existence of such facts." 31 Estoppel by deed, on the other hand,
occurs when a party to a deed and his privies are precluded from denying any material fact stated in
the said deed as against the other party and his privies.32 Estoppel by laches is considered an
equitable estoppel wherein a person who failed or neglected to assert a right for an unreasonable
and unexplained length of time is presumed to have abandoned or otherwise declined to assert such
right and cannot later on seek to enforce the same, to the prejudice of the other party, who has no

notice or knowledge that the former would assert such rights and whose condition has so changed
that the latter cannot, without injury or prejudice, be restored to his former state. 33
In the present case, Spouses Co Chien only demanded a refund and alleged the nullity of the
Contract due to lack of the Certificate and License after it failed to renegotiate for a better lot or a
bigger discount, or three and a half (3-1/2) years after the execution of the contract, and one and a
half (1-1/2) years from notice of the availability of the title and the demand for full payment. Due to
the unexplained delay in the assertion of their rights despite the opportunity to do so, Spouses Co
Chien are now estopped from raising the issue of lack of the Certificate and License, particularly
since the same have long since been issued to the private respondents. In fact, there is nothing left
for the fulfillment of the obligations set forth in the Contract to Sell and its addendum, except for the
payment of the balance by Spouses Co Chien so that the title to the property can finally be
transferred in their name. Further, the act of renegotiating the Contract to Sell may be considered a
tacit ratification of whatever defect the contract allegedly suffers from.
It is well-settled that the terms of a contract have the force of law between the parties. 34 As such, the
terms thereof shall govern their relationship, rights and obligations in connection with the same.
Obligations arising from contracts should be complied with in good faith. Unless the stipulations in
the contract are contrary to law, morals, good customs, public order or public policy, the same are
binding as between the parties.35 In the instant case, as previously discussed, the Contract to Sell
between Spouses Co Chien and private respondents Sta. Lucia and Alsons has all the essential
requisites of a valid and binding contract. While there is non-compliance with the requirements in
Sections 4 and 5 of P.D. 957 due to the lack of the Certificate and License at the moment of
execution, such defect does not affect the intrinsic validity of the contract, particularly in this case
wherein the said Certificate and License have been issued prior to the demand for the payment of
the balance of the purchase price and the project is almost 100% complete and operational.
IN VIEW WHEREOF, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP
No. 78161 is AFFIRMED in toto.
Costs against petitioners.
SO ORDERED.
REYNATO S. PUNO
Chief Justice
-lack of certificate and registration with HLURB of a corporation engage in the business of selling
housing units or condo units does not invalidate a perfected and valid contract.
-the perfected contract to sell between the parties are binding to both and their respective rights and
obligations flowing therefrom shall not be reneged by either party.
-the contract is the law between the parties; must be fully complied with.

[G.R. No. 147999. February 27, 2004

SUI MAN HUI CHAN and GONZALO CO, petitioners, vs. HON. COURT
OF APPEALS and OSCAR D. MEDALLA, respondents.
DECISION
QUISUMBING, J.:

For review on certiorari is the Decision dated May 3, 2001, of the Court of
Appeals in CA-G.R. SP No. 61889, affirming the Order dated January 11,
2000, of the Regional Trial Court (RTC) of Mandaluyong City, Branch 213, in
Civil Case No. MC99-666, which had denied petitioners Motion to Dismiss the
complaint filed by private respondent.
[1]

[2]

The facts, as culled from records, are as follows:

On March 30, 1999, private respondent Oscar Medalla filed a complaint
before the RTC of Mandaluyong City, docketed as Civil Case No. MC99-666,
for collection of a sum of money arising from breach of a contract of lease and
damages, against petitioners Sui Man Hui Chan and Gonzalo Co.
The complaint alleged that on November 14, 1988, Napoleon C. Medalla
as lessor and Ramon Chan as lessee entered into a Lease Contract over a
hotel building located at No. 29 Abanao Street, Baguio City. Chan would use
the leased premises as a restaurant named Cypress Inn. Pertinently, the
parties agreed on the following:
[3]

1. The period of lease shall be for ten (10) years or from 15 July 1988 to 15 July 1998.
2. The payment of the realty taxes due to the government on the leased premises
shall be for the account of the Lessee.
3. The agreement is binding upon the heirs and/or successors-in-interest of the Lessor
and the Lessee.

Petitioner Gonzalo Co was employed by Ramon Chan as the general

manager of Cypress Inn and acted as his agent in all his dealings with
Napoleon Medalla.

On August 5, 1989, Ramon Chan died. He was survived by his wife,

petitioner Sui Man Hui Chan, who continued to operate the restaurant.
On July 17, 1996, Napoleon Medalla died. Among his heirs is private
respondent Oscar Medalla, who succeeded him as owner and lessor of the
leased premises. The contract was neither amended nor terminated after the
death of the original parties but was continued by their respective successorsin-interest pursuant to the terms thereof. Petitioners Chan and Co, the latter,
in his capacity as agent and general manager, continued to deal with private
respondent Medalla in all transactions pertaining to the contract.
On various occasions, petitioners failed to pay the monthly rentals due on
the leased premises. Despite several Statements of Accounts sent by
Medalla, petitioners failed to pay the rentals due but, nonetheless, continued
to use and occupy the leased premises.
On February 26, 1997, Medalla sent a letter addressed to Ramon Chan,
indicating that (1) the contract of lease would expire on July 15, 1998, and (2)
he was not amenable to a renewal of said contract after its expiration.
Medalla then sent demand letters to petitioners, but the latter still failed to
pay the unpaid rentals. He also found out that petitioners had not paid the
realty taxes due on the leased premises since 1991, amounting
to P610,019.11. Medalla then asked petitioners to settle the unpaid rentals,
pay the unpaid real estate taxes, and vacate the leased premises.
On January 1999, petitioners vacated the premises but without paying
their unpaid rentals and realty taxes. Aggrieved by petitioners refusal to pay
the amounts owing, which had reached P4,147,901.80 by March 1999, private
respondent Medalla instituted Civil Case No. MC99-666.
In their Answer to the Complaint, petitioners denied owing private
respondent the amounts claimed by the latter. They alleged that the late
Ramon Chan had paid all the rentals due up to March 15, 1998. Moreover,
they need not pay any balance owing on the rentals as they were required to
pay two (2) months advance rentals upon signing of the contract and make a
guarantee deposit amounting to P220,000. On the matter of unpaid realty

taxes, petitioners alleged that private respondent was responsible therefor as

the owner of the leased premises, notwithstanding any contrary stipulations in
the contract.
On July 19, 1999, petitioners filed a Supplemental Answer with Motion to
Dismiss alleging that they were neither parties nor privies to the Contract of
Lease, hence they are not the real parties-in-interest.
Private respondent filed a Reply and Opposition to petitioners
Supplemental Answer with Motion to Dismiss dated August 2, 1999, praying
for the denial of the Motion to Dismiss for having been belatedly filed in direct
contravention of Section 1, Rule 16, of the 1997 Rules of Civil Procedure. He
further alleged that petitioner Chan, as the owner of the business and
petitioner Co as the agent of petitioner Chan, are clearly real parties-ininterest in the case. Private respondent pointed to their continuous dealings
with him in all transactions relating to the contract after the death of Ramon
Chan and even after the expiration of the Contract of Lease.
[4]

On January 11, 2000, the RTC denied petitioners Motion to Dismiss, thus:
WHEREFORE, in view of the foregoing, the motion to dismiss dated July 19, 1999
filed by defendant through counsel against plaintiff is hereby DENIED for lack of
merit.
SO ORDERED.

[5]

The trial court pointed out that petitioners continued to transact business
with private respondent after the death of Ramon Chan as shown by the
communications between the parties. It also declared that private
respondents acquiescence to petitioners continued occupation and
enjoyment of the leased premises and the latters recognition of the formers
ownership of said premises reflected an oral agreement between the parties
to continue the Lease Contract.
Petitioners moved for reconsideration on the ground that any claim should
be filed against the estate of Ramon Chan in an estate proceeding pursuant to
Section 5, Rule 86, of the Revised Rules of Court since Ramon Chans estate
[6]

is the real party-in-interest. The court denied said motion and declared that
Section 5, Rule 86 is inapplicable in the case. It pointed out that the unpaid
rentals being claimed were those for the period April 1993 to December
1998. These were incurred by petitioners and not by the late Ramon Chan,
who died on August 5, 1989.
Dissatisfied, petitioners elevated the matter to the Court of Appeals
through a special civil action of certiorari, docketed as CA-G.R. SP No.
61889. The Court of Appeals, however, affirmed the RTC Orders, as follows:
WHEREFORE, foregoing premises considered, the petition having no merit in fact
and in law is hereby DENIED DUE COURSE and ACCORDINGLY ORDERED
DISMISSED. The assailed Orders are resultantly AFFIRMED WITH COSTS TO
PETITIONERS.
SO ORDERED.

[7]

Hence, the instant petition submitting as sole issue for our resolution:
WHETHER OR NOT RESPONDENT COURT OF APPEALS COMMITTED
SERIOUS ERROR IN LAW IN AFFIRMING THE RTC ORDERS DENYING
PETITIONERS MOTION TO DISMISS AND THE SUBSEQUENT MOTION FOR
RECONSIDERATION.
[8]

Petitioners argue that the Court of Appeals erred in affirming the RTCs
Orders because they are not the real parties-in-interest and hence, were
improperly impleaded in the complaint as defendants. Petitioners insist that
they were neither parties nor were they privy to the Contract of Lease
between the late Ramon Chan and Napoleon Medalla. They vigorously assert
that any claim for unpaid rentals should be made against the estate of Ramon
Chan pursuant to Section 5, Rule 86 of the Revised Rules of Court.
We find for private respondent. Prefatorily, it bears stressing that
petitioners Motion to Dismiss was filed after an Answer had already been
filed. This alone warranted an outright dismissal of the motion for having been
filed in contravention of the clear and explicit mandate of Section 1, Rule 16,
of the Revised Rules of Civil Procedure. Under this section, a motion to

dismiss shall be filed within the time for but before filing the answer to the
complaint or pleading asserting a claim. Here, petitioners filed their
Supplemental Answer with Motion to Dismiss almost two months after filing
their Answer, in clear contravention of the aforecited rule.
[9]

The Court of Appeals stated that the grant or denial of a Motion to Dismiss
is an interlocutory order, and it cannot be the proper subject of a special civil
action for certiorari. The proper remedy in such a case is to appeal after a
decision has been rendered, the CA said. A writ of certiorari is not intended to
correct every controversial interlocutory ruling; it is resorted to only to correct
a grave abuse of discretion or a whimsical exercise of judgment equivalent to
lack or excess of jurisdiction. The function of a petition for certiorari is limited
to keeping an inferior court within the bounds of its jurisdiction and to relieve
persons from arbitrary acts, acts which courts or judges have no power or
authority in law to perform. Certiorari is not designed to correct erroneous
findings and conclusions made by the court. On this score, we are in
agreement with the appellate court.
[10]

At any rate, we find no merit to petitioners contention that they are not real
parties-in-interest since they are not parties nor signatories to the contract and
hence should not have been impleaded as defendants. It is undeniable that
petitioner Chan is an heir of Ramon Chan and, together with petitioner Co,
was a successor-in-interest to the restaurant business of the late Ramon
Chan. Both continued to operate the business after the death of
Ramon. Thus, they are real parties-in-interest in the case filed by private
respondent, notwithstanding that they are not signatories to the Contract of
Lease.
A lease contract is not essentially personal in character. Thus, the rights
and obligations therein are transmissible to the heirs. The general rule,
therefore, is that heirs are bound by contracts entered into by their
predecessors-in-interest except when the rights and obligations arising
therefrom are not transmissible by (1) their nature, (2) stipulation or (3)
provision of law. In the subject Contract of Lease, not only were there no
stipulations prohibiting any transmission of rights, but its very terms and
conditions explicitly provided for the transmission of the rights of the lessor
and of the lessee to their respective heirs and successors. The contract is the
[11]

[12]

law between the parties. The death of a party does not excuse
nonperformance of a contract, which involves a property right, and the rights
and obligations thereunder pass to the successors or representatives of the
deceased. Similarly, nonperformance is not excused by the death of the party
when the other party has a property interest in the subject matter of the
contract.
[13]

Finally, as to petitioners contention that any claim should have been filed
before the estate proceeding of Ramon Chan pursuant to Section 5 of Rule
86, the trial court found that the unpaid rentals sought to be claimed were for
the period April 1993 to December 1998. Note that Ramon Chan, the original
lessee, died on August 5, 1989. In other words, as the unpaid rentals did not
accrue during the lifetime of Ramon Chan, but well after his death, his estate
might not be held liable for them. Hence, there is no indubitable basis to
apply Section 5, Rule 86, of the Revised Rules of Court as petitioners urge
respondents to do.
WHEREFORE, the instant petition is DENIED and the Decision of the
Court of Appeals in CA-G.R. SP. No. 61889 is AFFIRMED. Costs against
petitioners.
SO ORDERED.

-the motion to dismiss was filed out of time under rule 16

-contention that they are not real parties in interest has no basis both in fact and in
law.
-the contract is the law between the parties, parties are free to stipulate under the
regime of law on contracts obtaining in this jurisdiction, provided they are not
contrary to law, morals, public policy. Since it was stipulated under the contract of
lease that the stipulations are binding to heirs/successors in interest and the same
is not contrary to law, the petitioners are bound to the express terms thereof

G.R. No. L-68021 February 20, 1989

HEIRS OF FAUSTA DIMACULANGAN, petitioners,

vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT and FELIMON UY, respondents.
Jerry D. Baares for petitioners.
Luis T. Tuason, Jr. for private respondent.

FERNAN, C.J.:
This is a petition for review on certiorari of the July 2, 1984 decision of the Third Special Cases
Division, Intermediate Appellate Court, in AC-G.R. SP. No. 01230, entitled "Heirs of Fausta
Dimaculangan v. Hon. Baltazar R. Dizon, et al." dismissing for lack of merit the petition for review of
the Orders dated June 6, 1983 and July 13, 1983, issued by the Regional Trial Court of Pasay City,
Branch CXIII in Civil Case No. 8865-P which in turn affirmed on appeal the October 16, 1980
decision of Hon. Mariano A. Lacsamana, then presiding judge, Pasay City Court, Branch 11, in Civil
Case No. 13591, entitled "Felimon Uy v. Fausta Dimaculangan, for Ejectment".
Fausta Dimaculangan and her children, petitioners herein, occupy by lease an apartment located at
No. 2490 E. Zamora St., Pasay City, at a monthly rental of P260.00. They have been living in said
premises since 1961. To augment its income, the family maintains therein a sari-sari store and bakes
hot pan de sal to sell to the general public. The capital investment involved is claimed to be
P3,200.00 only.
On July 5, 1978, private respondent Felimon Uy sent Fausta Dimaculangan a registered letter
informing her that the property which she has been occupying has been sold to him and should she
desire to continue occupying the same, she should sign a contract of lease for a period of two (2)
years at a monthly rental of P1,500.00. Receiving no reply to his letter, the private respondent sent a
second one, demanding payment of P750.00 covering unpaid rentals for the months of August,
September and October, 1978 but still he received no answer to his-demand. Thus, he filed with the
City Court of Pasay City a complaint for ejectment 1 praying, among others, that said court render
judgment ordering Fausta Dimaculangan and all persons claiming rights under her to vacate the leased
premises.
In her answer with compulsory counterclaim, 2 Fausta Dimaculangan admitted that she received
plaintiff's letter of July 5, 1978 but claimed that she sent plaintiff a reply which was however returned
undelivered because plaintiff distorted his address. She denied having been in default in her monthly
rentals to the plaintiff, and alleged that she has never been in default during the entire period of her
occupancy of the premises since 1961 up to the present. In fact she tried to pay the plaintiff who did not
want to collect the monthly rentals, even in the form of money orders which were however, returned
unclaimed. She countered that the filing of the complaint was just a scheme to compel her to agree to the
capricious and whimsical demand for an unconscionable increase in the monthly rental from P250.00 to
P1,500.00, in clear violation of the provisions of P.D. No. 20, as amended. She further alleged that when
she received the plaintiff s letter of October 3, 1978, she caused the payment of the rentals for August,

September and October, 1978. Defendant Fausta Dimaculangan prayed to the trial court that the
complaint be dismissed and a favorable judgment be rendered in her favor.

Pending trial of the case, Fausta Dimaculangan died. She was substituted by her children as
defendants.
After trial, the presiding judge of the City Court of Pasay found that the premises in question is partly
residential and partly commercial; that defendant has no arrears and that the latter replied to plaintiff
s demand letter and paid by way of money orders her rentals which were however, returned
unclaimed.
On October 16, 1980, the aforementioned court rendered a decision increasing the monthly rentals
and fixing a definite period for the term of the lease, the dispositive portion of which reads:
WHEREFORE, AND IN VIEW OF THE FOREGOING, the defendant is hereby
ordered to pay the plaintiff the amount of P500.00 per month, as monthly rental from
August 1978 to August 1980; defendant shall be granted a Contract of Lease for two
(2) years from August 1980 to August 1982 of which the defendant shall pay the
plaintiff a monthly rental of P750.00; the party-litigants are ordered to pay the amount
of P1,500.00 to their respective counsels by way of attorney's fees; and the partylitigates (sic) shall equally pay the costs of suit.
SO ORDERED. 3
On Appeal, the Regional Trial Court, Branch CXIII, Pasay City, affirmed the aforesaid decision of the
City Court and denied petitioner's motion for reconsideration. 4
On review by certiorari, the Intermediate Appellate Court, now Court of Appeals, dismissed the
petition for lack of merit. 5
Hence, the instant petition for review, raising the following issues for the resolution of this Court:
1. May the trial court in a complaint for ejectment increase the rental agreed upon by
the parties, and in the instant case, from the agreed P250.00 to P500.00, and then to
P750.00, without violating the provisions of existing laws;
2. May the trial court alter the agreement of the parties by shortening the period of
the lease from an indefinite period within the purview of Presidential Decree No. 20,
the law in force at the time, and of the amendatory Batas Pambansa Blg. 25, to a
fixed two (2) years;
3. In two dismissing the petition for review, and in effect, affirming the judgments of
the Metropolitan Trial Court, and the Regional Trial Court, has the Honorable
Intermediate Appellate Court committed a grave abuse of discretion amounting to
lack or absence of jurisdiction, or at least a grave reversible error of a question of
law, and/or of fact and law, correctible by the instant petition ? 6

It has been established that petitioners have been occupying the leased premises on a verbal
contract since 1961 at a monthly rent of P250.00, and that although no fixed period for the duration
of the lease has been agreed upon the original lessor and lessee, the rentals were paid monthly.
Under the circumstances, there appears to be no dispute that subject contract of lease is covered by
P.D. 20 and later by B.P. No. 25.
The decisive issue therefore, in this case, is whether or not subject contract of lease is for an
indefinite period, for the purpose of applying Presidential Decree No. 20.
The pertinent provision of P.D. No. 20 reads:
SEC. 4. Except when the lease is for a definite period, the provisions of paragraph
(1) of Article 1673 of the Civil Code of the Philippines insofar as they refer to dwelling
unit or land on which another's dwelling is located shall be suspended until otherwise
provided; but other provisions of the Civil Code and the Rules of Court of the
Philippines on lease contracts, insofar as they are not in conflict with the provisions
of this act, shall apply.
To exempt the lease from the application of P.D. No. 20, it must be one with a definite period.
It will be recalled that the agreement between the original lessor and lessee was unwritten, so that it
is difficult to determine with certainty the terms and conditions agreed upon.
Be that as it may, it is undisputed that the rentals are paid monthly. This Court had already ruled that
leases are deemed on a "month-to-month basis", if rentals therefore are paid monthly. 7
Similarly, it is well settled that a lease contract "on a month-to month basis" provides for a definite
period and may be terminated at the end of any month. 8 By express exception of P.D. No. 20, judicial
ejectment lies when the lease is for a definite period or when the fixed or definite period agreed upon has
expired. 9
Even more recently, this Court clarified that "(I)n exempting from suspension ejectments on the
ground of the expiration of the lease period, Section 4 of Presidential Decree No. 20 made no
distinction between oral and written lease contracts and no distinction may, therefore, be inferred.
Consequently, at the time of filing her action the private respondent had a clear and indubitable right
to eject the petitioners, the period of the latter's lease expiring at the end of every monthly
period ... 10 The Court further pointed out that the Rent Control Law now in force, Batas Pambansa Blg.
877, has erased the distinction between oral and written leases insofar as expiration of the lease period
as a ground for judicial ejectment in leases covered by said law, is concerned. 11
In view of the foregoing, there appears to be no necessity to discuss the other issues in this case;
more specifically whether or not the trial court may increase the rental and/or alter the period of the
lease from an indefinite period to a definite period; both issues having become moot and academic.

Citing the case of Mabalot v. Madela Jr. 12 the Court of Appeals ruled that the petition has been
rendered moot and academic by the death of the lessee Fausta Dimaculangan, which terminated the
lease in her favor. It will be noted however, that in the aforecited case, those seeking to continue in
possession of the premises were not the heirs of the lessee but merely members of the lessee's
household, which does not apply in the case at bar, where petitioners are the lessee's children.
Authorities are of the view that lease is not essentially personal in character, thus the right is transmissible
to the heirs. 13
At any rate, the period fixed by respondent Judge which appears acceptable to the lessor has
expired in 1982 and has therefore become moot and academic, aside from the fact that with private
respondent's conformity, it has become the latter's term which is well within his authority; that is, to
terminate the contract and enter into a new one.
WHEREFORE, the petition is hereby dismissed for lack of merit, with costs against the petitioner.
SO ORDERED.
Feliciano, Bidin and Cortes JJ., concur.
Gutierrez, Jr., J., In the result.

-lease is a transmissible right especially if lessee successor in interest are heirs or

children but not transmissible if the same are personal, by stipulation or by
provision of law

G.R. No. 179382

January 14, 2013

SPOUSES BENJAMIN C. MAMARIL AND SONIA P. MAMARIL, Petitioners,

vs.
THE BOY SCOUT OF THE PHILIPPINES, AIB SECURITY AGENCY, INC., CESARIO PEA, * AND
VICENTE GADDI, Respondents.
DECISION
PERLAS-BERNABE, J.:
This is a Petition for Review on Certiorari assailing the May 31, 2007 Decision 1 and August 16, 2007
Resolution2of the Court of Appeals (CA) in CA-G.R. CV No. 75978. The dispositive portion of the
said Decision reads:
WHEREFORE, the Decision dated November 28, 2001 and the Order dated June 11, 2002 rendered
by the Regional Trial Court of Manila, Branch 39 is hereby MODIFIED to the effect that only
defendants AIB Security Agency, Inc., Cesario Pea and Vicente Gaddi are held jointly and severally
liable to pay plaintiffs-appellees Spouses Benjamin C. Mamaril and Sonia P. Mamaril the amount of
Two Hundred Thousand Pesos (P200,000.00) representing the cost of the lost vehicle, and to pay
the cost of suit. The other monetary awards are DELETED for lack of merit and/or basis.
Defendant-Appellant Boy Scout of the Philippines is absolved from any liability.
SO ORDERED.3
The Antecedent Facts
Spouses Benjamin C. Mamaril and Sonia P. Mamaril (Sps. Mamaril) are jeepney operators since
1971. They would park their six (6) passenger jeepneys every night at the Boy Scout of the

Philippines' (BSP) compound located at 181 Concepcion Street, Malate, Manila for a fee of P300.00
per month for each unit. On May 26, 1995 at 8 o'clock in the evening, all these vehicles were parked
inside the BSP compound. The following morning, however, one of the vehicles with Plate No. DCG
392 was missing and was never recovered.4 According to the security guards Cesario Pea (Pea)
and Vicente Gaddi (Gaddi) of AIB Security Agency, Inc. (AIB) with whom BSP had contracted 5 for its
security and protection, a male person who looked familiar to them took the subject vehicle out of the
compound.
On November 20, 1996, Sps. Mamaril filed a complaint6 for damages before the Regional Trial Court
(RTC) of Manila, Branch 39, against BSP, AIB, Pea and Gaddi. In support thereof, Sps. Mamaril
averred that the loss of the subject vehicle was due to the gross negligence of the above-named
security guards on-duty who allowed the subject vehicle to be driven out by a stranger despite their
agreement that only authorized drivers duly endorsed by the owners could do so. Pea and Gaddi
even admitted their negligence during the ensuing investigation. Notwithstanding, BSP and AIB did
not heed Sps. Mamaril's demands for a conference to settle the matter. They therefore prayed that
Pea and Gaddi, together with AIB and BSP, be held liable for: (a) the value of the subject vehicle
and its accessories in the aggregate amount of P300,000.00; (b) P275.00 representing daily loss of
income/boundary reckoned from the day the vehicle was lost; (c) exemplary damages; (d) moral
damages; (e) attorney's fees; and (f) cost of suit.
In its Answer,7 BSP denied any liability contending that not only did Sps. Mamaril directly deal with
AIB with respect to the manner by which the parked vehicles would be handled, but the parking
ticket8 itself expressly stated that the "Management shall not be responsible for loss of vehicle or any
of its accessories or article left therein." It also claimed that Sps. Mamaril erroneously relied on the
Guard Service Contract. Apart from not being parties thereto, its provisions cover only the protection
of BSP's properties, its officers, and employees.
In addition to the foregoing defenses, AIB alleged that it has observed due diligence in the selection,
training and supervision of its security guards while Pea and Gaddi claimed that the person who
drove out the lost vehicle from the BSP compound represented himself as the owners' authorized
driver and had with him a key to the subject vehicle. Thus, they contended that Sps. Mamaril have
no cause of action against them.
The RTC Ruling
After due proceedings, the RTC rendered a Decision9 dated November 28, 2001 in favor of Sps.
Mamaril. The dispositive portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered ordering the defendants Boy Scout of the Philippines
and AIB Security Agency, with security guards Cesario Pena and Vicente Gaddi: 1. To pay the plaintiffs jointly and severally the cost of the vehicle which is P250,000.00 plus
accessories ofP50,000.00;

2. To pay jointly and severally to the plaintiffs the daily loss of the income/boundary of the
said jeepney to be reckoned fromits loss up to the final adjudication of the case, which
is P275.00 a day;
3. To pay jointly and severally to the plaintiffs moral damages in the amount of P50,000.00;
4. To pay jointly and severally to the plaintiffs exemplary damages in the amount
of P50,000.00;
5. To pay jointly and severally the attorney's fees of P50,000.00 and appearances in court
the amount ofP1,500.00 per appearance; and
6. To pay cost.
SO ORDERED.10
The RTC found that the act of Pea and Gaddi in allowing the entry of an unidentified person and
letting him drive out the subject vehicle in violation of their internal agreement with Sps. Mamaril
constituted gross negligence, rendering AIB and its security guards liable for the former's loss. BSP
was also adjudged liable because the Guard Service Contract it entered into with AIB offered
protection to all properties inside the BSP premises, which necessarily included Sps. Mamaril's
vehicles. Moreover, the said contract stipulated AIB's obligation to indemnify BSP for all losses or
damages that may be caused by any act or negligence of its security guards. Accordingly, the BSP,
AIB, and security guards Pea and Gaddi were held jointly and severally liable for the loss suffered
by Sps. Mamaril.
On June 11, 2002, the RTC modified its decision reducing the cost of the stolen vehicle
from P250,000.00 toP200,000.00.11
Only BSP appealed the foregoing disquisition before the CA.
The CA Ruling
In its assailed Decision,12 the CA affirmed the finding of negligence on the part of security guards
Pea and Gaddi. However, it absolved BSP from any liability, holding that the Guard Service
Contract is purely between BSP and AIB and that there was nothing therein that would indicate any
obligation and/or liability on the part of BSP in favor of third persons, such as Sps. Mamaril. Nor was
there evidence sufficient to establish that BSP was negligent.
It further ruled that the agreement between Sps. Mamaril and BSP was substantially a contract of
lease whereby the former paid parking fees to the latter for the lease of parking slots. As such, the
lessor, BSP, was not an insurer nor bound to take care and/or protect the lessees' vehicles.
On the matter of damages, the CA deleted the award of P50,000.00 representing the value of the
accessories inside the lost vehicle and the P275.00 a day for loss of income in the absence of proof

to support them. It also deleted the award of moral and exemplary damages and attorney's fees for
lack of factual and legal bases.
Sps. Mamaril's motion for reconsideration thereof was denied in the August 16, 2007 Resolution. 13
Issues Before the Court
Hence, the instant petition based on the following assignment of errors, to wit:
I.
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN ABSOLVING
RESPONDENT BOY SCOUT OF THE PHILIPPINES FROM ANY LIABILITY.
II.
THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS MISTAKE WHEN IT
RULED THAT THE GUARD SERVICE CONTRACT IS PURELY BETWEEN BOY SCOUT
OF THE
PHILIPPINES AND AIB SECURITY AGENCY, INC., AND IN HOLDING THAT THERE IS
ABSOLUTELY NOTHING IN THE SAID CONTRACT THAT WOULD INDICATE ANY
OBLIGATION AND/OR LIABILITY ON THE PART OF THE PARTIES THEREIN IN FAVOR
OF THIRD PERSONS, SUCH AS PETITIONERS HEREIN.
III.
THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ERROR IN THE
INTERPRETATION OF LAW WHEN IT CONSIDERED THE AGREEMENT BETWEEN BOY
SCOUT OF THE PHILIPPINES AND PETITIONERS A CONTRACT OF LEASE, WHEREBY
THE BOY SCOUT IS NOT DUTY BOUND TO PROTECT OR TAKE CARE OF
PETITIONERS' VEHICLES.
IV.
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED WHEN IT RULED THAT
PETITIONERS ARE NOT ENTITLED TO DAMAGES AND ATTORNEY'S FEES.14
In fine, Sps. Mamaril maintain that: (1) BSP should be held liable for the loss of their vehicle based
on the Guard Service Contract and the parking ticket it issued; and (2) the CA erred in deleting the
RTC awards of damages and attorney's fees.
The Court's Ruling
The petition lacks merit.

Article 20 of the Civil Code provides that every person, who, contrary to law, willfully or negligently
causes damage to another, shall indemnify the latter for the same. Similarly, Article 2176 of the Civil
Code states:
Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or negligence, if there is no preexisting contractual
relation between the parties, is called a quasi-delict and is governed by the provisions of this
Chapter.
In this case, it is undisputed that the proximate cause of the loss of Sps. Mamaril's vehicle was the
negligent act of security guards Pea and Gaddi in allowing an unidentified person to drive out the
subject vehicle. Proximate cause has been defined as that cause, which, in natural and continuous
sequence, unbroken by any efficient intervening cause, produces the injury or loss, and without
which the result would not have occurred.15
Moreover, Pea and Gaddi failed to refute Sps. Mamaril's contention 16 that they readily admitted
being at fault during the investigation that ensued.
On the other hand, the records are bereft of any finding of negligence on the part of BSP. Hence, no
reversible error was committed by the CA in absolving it from any liability for the loss of the subject
vehicle based on fault or negligence.
Neither will the vicarious liability of an employer under Article 2180 17 of the Civil Code apply in this
case. It is uncontested that Pea and Gaddi were assigned as security guards by AIB to BSP
pursuant to the Guard Service Contract. Clearly, therefore, no employer-employee relationship
existed between BSP and the security guards assigned in its premises. Consequently, the latter's
negligence cannot be imputed against BSP but should be attributed to AIB, the true employer of
Pea and Gaddi.18
In the case of Soliman, Jr. v. Tuazon,19 the Court enunciated thus:
It is settled that where the security agency, as here, recruits, hires and assigns the work of its
watchmen or security guards, the agency is the employer of such guards and watchmen. Liability for
illegal or harmful acts committed by the security guards attaches to the employer agency, and not to
the clients or customers of such agency. As a general rule, a client or customer of a security agency
has no hand in selecting who among the pool of security guards or watchmen employed by the
agency shall be assigned to it; the duty to observe the diligence of a good father of a family in the
selection of the guards cannot, in the ordinary course of events, be demanded from the client whose
premises or property are protected by the security guards. The fact that a client company may give
instructions or directions to the security guards assigned to it, does not, by itself, render the client
responsible as an employer of the security guards concerned and liable for their wrongful acts or
omissions. Those instructions or directions are ordinarily no more than requests commonly
envisaged in the contract for services entered into with the security agency.20
Nor can it be said that a principal-agent relationship existed between BSP and the security guards
Pea and Gaddi as to make the former liable for the latter's complained act. Article 1868 of the Civil

Code states that "by the contract of agency, a person binds himself to render some service or to do
something in representation or on behalf of another, with the consent or authority of the latter." The
basis for agency therefore is representation,21which element is absent in the instant case. Records
show that BSP merely hired the services of AIB, which, in turn, assigned security guards, solely for
the protection of its properties and premises. Nowhere can it be inferred in the Guard Service
Contract that AIB was appointed as an agent of BSP. Instead, what the parties intended was a pure
principal-client relationship whereby for a consideration, AIB rendered its security services to BSP.
Notwithstanding, however, Sps. Mamaril insist that BSP should be held liable for their loss on the
basis of the Guard Service Contract that the latter entered into with AIB and their parking agreement
with BSP.
Such contention cannot be sustained.
Article 1311 of the Civil Code states:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case
where the rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. The heir is not liable beyond the value of the property he received
from the decedent.
If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment
provided he communicated his acceptance to the obligor before its revocation. A mere incidental
benefit or interest of a person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person.
Thus, in order that a third person benefited by the second paragraph of Article 1311, referred to as a
stipulation pour autrui, may demand its fulfillment, the following requisites must concur: (1) There is a
stipulation in favor of a third person; (2) The stipulation is a part, not the whole, of the contract; (3)
The contracting parties clearly and deliberately conferred a favor to the third person - the favor is not
merely incidental; (4) The favor is unconditional and uncompensated; (5) The third person
communicated his or her acceptance of the favor before its revocation; and (6) The contracting
parties do not represent, or are not authorized, by the third party.22 However, none of the foregoing
elements obtains in this case.
It is undisputed that Sps. Mamaril are not parties to the Guard Service Contract. Neither did the
subject agreement contain any stipulation pour autrui. And even if there was, Sps. Mamaril did not
convey any acceptance thereof. Thus, under the principle of relativity of contracts, they cannot
validly claim any rights or favor under the said agreement. 23 As correctly found by the CA:
1wphi1

First, the Guard Service Contract between defendant-appellant BSP and defendant AIB Security
Agency is purely between the parties therein. It may be observed that although the whereas clause
of the said agreement provides that defendant-appellant desires security and protection for its
compound and all properties therein, as well as for its officers and employees, while inside the
premises, the same should be correlated with paragraph 3(a) thereof which provides that the

security agency shall indemnify defendant-appellant for all losses and damages suffered by it
attributable to any act or negligence of the former's guards.
Otherwise stated, defendant-appellant sought the services of defendant AIB Security Agency for the
purpose of the security and protection of its properties, as well as that of its officers and employees,
so much so that in case of loss of [sic] damage suffered by it as a result of any act or negligence of
the guards, the security agency would then be held responsible therefor. There is absolutely nothing
in the said contract that would indicate any obligation and/or liability on the part of the parties therein
in favor of third persons such as herein plaintiffs-appellees.24
Moreover, the Court concurs with the finding of the CA that the contract between the parties herein
was one of lease25 as defined under Article 164326 of the Civil Code. It has been held that the act of
parking a vehicle in a garage, upon payment of a fixed amount, is a lease. 27 Even in a majority of
American cases, it has been ruled that where a customer simply pays a fee, parks his car in any
available space in the lot, locks the car and takes the key with him, the possession and control of the
car, necessary elements in bailment, do not pass to the parking lot operator, hence, the contractual
relationship between the parties is one of lease. 28
In the instant case, the owners parked their six (6) passenger jeepneys inside the BSP compound for
a monthly fee of P300.00 for each unit and took the keys home with them. Hence, a lessor-lessee
relationship indubitably existed between them and BSP. On this score, Article 1654 of the Civil Code
provides that "the lessor (BSP) is obliged: (1) to deliver the thing which is the object of the contract in
such a condition as to render it fit for the use intended; (2) to make on the same during the lease all
the necessary repairs in order to keep it suitable for the use to which it has been devoted, unless
there is a stipulation to the contrary; and (3) to maintain the lessee in the peaceful and adequate
enjoyment of the lease for the entire duration of the contract." In relation thereto, Article 1664 of the
same Code states that "the lessor is not obliged to answer for a mere act of trespass which a third
person may cause on the use of the thing leased; but the lessee shall have a direct action against
the intruder." Here, BSP was not remiss in its obligation to provide Sps. Mamaril a suitable parking
space for their jeepneys as it even hired security guards to secure the premises; hence, it should not
be held liable for the loss suffered by Sps. Mamaril.
It bears to reiterate that the subject loss was caused by the negligence of the security guards in
allowing a stranger to drive out plaintiffs-appellants' vehicle despite the latter's instructions that only
their authorized drivers may do so. Moreover, the agreement with respect to the ingress and egress
of Sps. Mamaril's vehicles were coordinated only with AIB and its security guards, 29 without the
knowledge and consent of BSP. Accordingly, the mishandling of the parked vehicles that resulted in
herein complained loss should be recovered only from the tort feasors (Pea and Gaddi) and their
employer, AIB; and not against the lessor, BSP.30
Anent Sps. Mamaril's claim that the exculpatory clause: "Management shall not be responsible for
loss of vehicle or any of its accessories or article left therein"31 contained in the BSP issued parking
ticket was void for being a contract of adhesion and against public policy, suffice it to state that
contracts of adhesion are not void per se. It is binding as any other ordinary contract and a party
who enters into it is free to reject the stipulations in its entirety. If the terms thereof are accepted
without objection, as in this case, where plaintiffs-appellants have been leasing BSP's parking space

for more or less 20 years,32 then the contract serves as the law between them.33 Besides, the parking
fee of P300.00 per month or P10.00 a day for each unit is too minimal an amount to even create an
inference that BSP undertook to be an insurer of the safety of plaintiffs-appellants' vehicles.
On the matter of damages, the Court noted that while Sonia P. Mamaril testified that the subject
vehicle had accessories worth around !J50,000.00, she failed to present any receipt to substantiate
her claim.34 Neither did she submit any record or journal that would have established the
purported P275.0035 daily earnings of their jeepney. It is axiomatic that actual damages must be
proved with reasonable degree of certainty and a party is entitled only to such compensation for the
pecuniary loss that was duly proven. Thus, absent any competent proof of the amount of damages
sustained, the CA properly deleted the said awards.36
Similarly, the awards of moral and exemplary damages and attorney's fees were properly disallowed
by the CA for lack of factual and legal bases. While the RTC granted these awards in the dispositive
portion of its November 28, 2001 decision, it failed to provide sufficient justification therefor.37
WHEREFORE premises considered, the instant petition is DENIED. The May 31, 2007 Decision and
August 16, 2007 Resolution of the Court of Appeals in CA-G.R. CV No. 75978 are AFFIRMFED.
SO ORDERED.
ESTELA M. PERLAS-BERNABE
Associate Justice
WE CONCUR:

G.R. No. 66207 May 18, 1992

MAXIMINO SOLIMAN, JR., represented by his judicial guardian VIRGINIA C. SOLIMAN, petitioner,
vs.
HON. JUDGE RAMON TUAZON, Presiding Judge of Branch LXI, Regional Trial Court of Region III, Angeles
City, and the REPUBLIC CENTRAL COLLEGES, represented by its President, respondents.
Mariano Y. Navarro for Republic Central Colleges.
RESOLUTION

FELICIANO, J.:
On 22 March 1983, petitioner Soliman, Jr. filed a civil complaint for damages against private respondent Republic
Central Colleges ("Colleges"), the R.L. Security Agency Inc. and one Jimmy B. Solomon, a security guard, as
defendants. The complaint alleged that:
. . . on 13 August 1982, in the morning thereof, while the plaintiff was in the campus ground and
premises of the defendant, REPUBLIC CENTRAL COLLEGES, as he was and is still a regular
enrolled student of said school taking his morning classes, the defendant, JIMMY B. SOLOMON,
who was on said date and hour in the premises of said school performing his duties and obligations
as a duly appointed security guard under the employment, supervision and control of his employerdefendant R.L. SECURITY AGENCY, INC., headed by Mr. Benjamin Serrano, without any
provocation, in a wanton, fraudulent, reckless, oppressive or malevolent manner, with intent to kill,
attack, assault, strike and shoot the plaintiff on the abdomen with a .38 Caliber Revolver, a deadly
weapon, which ordinarily such wound sustained would have caused plaintiff's death were it not for
the timely medical assistance given to him. The plaintiff was treated and confined at Angeles
Medical Center, Angeles City, and, as per doctor's opinion, the plaintiff may not be able to attend to
his regular classes and will be incapacitated in the performance of his usual work for a duration of
from three to four months before his wounds would be completely healed. 1
Private respondent Colleges filed a motion to dismiss, contending that the complaint stated no cause of action
against it. Private respondent argued that it is free from any liability for the injuries sustained by petitioner student for
the reason that private respondent school was not the employer of the security guard charged, Jimmy Solomon, and
hence was not responsible for any wrongful act of Solomon. Private respondent school further argued that Article
2180, 7th paragraph, of the Civil Code did not apply, since said paragraph holds teachers and heads of establishment
of arts and trades liable for damages caused by their pupils and students or apprentices, while security guard Jimmy
Solomon was not a pupil, student or apprentice of the school.
In an order dated 29 November 1983, respondent Judge granted private respondent school's motion to dismiss,
holding that security guard Jimmy Solomon was not an employee of the school which accordingly could not be held
liable for his acts or omissions. Petitioner moved for reconsideration, without success.

In this Petition for Certiorari and Prohibition, it is contended that respondent trial judge committed a grave abuse of
discretion when he refused to apply the provisions of Article 2180, as well as those of Articles 349, 350 and 352, of
the Civil Code and granted the school's motion to dismiss.
Under Article 2180 of the Civil Code, the obligation to respond for damage inflicted by one against another by fault or
negligence exists not only for one's own act or omission, but also for acts or omissions of a person for whom one is
by law responsible. Among the persons held vicariously responsible for acts or omissions of another person are the
following:
xxx xxx xxx
Employers shall be liable for the damages caused by their employees and household helpers
acting within the scope of their assigned tasks, even though the former are not engaged in any
business or industry.
xxx xxx xxx
Lastly, teachers or heads of establishments of arts and trades shall be liable for damages caused
by their pupils, their students or apprentices, so long as they remain in their custody.
xxx xxx xxx
The first paragraph quoted above offers no basis for holding the Colleges liable for the alleged wrongful acts of
security guard Jimmy B. Solomon inflicted upon petitioner Soliman, Jr. Private respondent school was not the
employer of Jimmy Solomon. The employer of Jimmy Solomon was the R.L. Security Agency Inc., while the school
was the client or customer of the R.L. Security Agency Inc. It is settled that where the security agency, as here,
recruits, hires and assigns the work of its watchmen or security guards, the agency is the employer of such guards or
watchmen. 2 Liability for illegal or harmful acts committed by the security guards attaches to the employer

agency, and not to the clients or customers of such agency. 3 As a general rule, a client or customer of a
security agency has no hand in selecting who among the pool of security guards or watchmen employed
by the agency shall be assigned to it; the duty to observe the diligence of a good father of a family in the
selection of the guards cannot, in the ordinary course of events, be demanded from the client whose
premises or property are protected by the security guards. The fact that a client company may give
instructions or directions to the security guards assigned to it, does not, by itself, render the client
responsible as an employer of the security guards concerned and liable for their wrongful acts or
omissions. Those instructions or directions are ordinarily no more than requests commonly envisaged in
the contract for services entered into with the security agency. There being no employer-employee
relationship between the Colleges and Jimmy Solomon, petitioner student cannot impose vicarious
liability upon the Colleges for the acts of security guard Solomon.
Since there is no question that Jimmy Solomon was not a pupil or student or an apprentice of the Colleges, he being
in fact an employee of the R.L. Security Agency Inc., the other above-quoted paragraph of Article 2180 of the Civil
Code is similarly not available for imposing liability upon the Republic Central Colleges for the acts or omissions of
Jimmy Solomon.
The relevant portions of the other Articles of the Civil Code invoked by petitioner are as follows:
Art. 349. The following persons shall exercise substitute parental authority:
xxx xxx xxx

(2) Teachers and professors;

xxx xxx xxx
(4) Directors of trade establishments with regard to apprentices;
xxx xxx xxx
Art. 350. The persons named in the preceding article shall exercise reasonable supervision over
the conduct of the child.
xxx xxx xxx
Art. 352. The relations between teacher and pupil, professor and student are fixed by government
regulations and those of each school or institution. In no case shall corporal punishment be
countenanced. The teacher or professor shall cultivate the best potentialities of the heart and mind
of the pupil or student.
In Palisoc v. Brillantes, 4 invoked by petitioner, the Court held the owner and president of a school of arts

and trades known as the "Manila Technical Institute," Quezon Blvd., Manila, responsible in damages for
the death of Dominador Palisoc, a student of Institute, which resulted from fist blows delivered by Virgilio
L. Daffon, another student of the Institute. It will be seen that the facts of Palisoc v. Brillantes brought it
expressly within the 7th paragraph of Article 2180, quoted above; but those facts are entirely different
from the facts existing in the instant case.
Persons exercising substitute parental authority are made responsible for damage inflicted upon a third person by the
child or person subject to such substitute parental authority. In the instant case, as already noted, Jimmy Solomon
who committed allegedly tortious acts resulting in injury to petitioner, was not a pupil, student or apprentice of the
Republic Central Colleges; the school had no substitute parental authority over Solomon.
Clearly, within the confines of its limited logic, i.e., treating the petitioner's claim as one based wholly and exclusively
on Article 2180 of the Civil Code, the order of the respondent trial judge was correct. Does it follow, however, that
respondent Colleges could not be held liable upon any other basis in law, for or in respect of the injury sustained by
petitioner, so as to entitle respondent school to dismissal of petitioner's complaint in respect of itself?
The very recent case of the Philippine School of Business Administration (PSBA) v. Court of Appeals, 5 requires us

to give a negative answer to that question.

In PSBA, the Court held that Article 2180 of the Civil Code was not applicable where a student had been injured by
one who was an outsider or by one over whom the school did not exercise any custody or control or supervision. At
the same time, however, the Court stressed that an implied contract may be held to be established between a school
which accepts students for enrollment, on the one hand, and the students who are enrolled, on the other hand, which
contract results in obligations for both parties:
When an academic institution accepts students for enrollment, there is established
a contract between them, resulting in bilateral obligations which parties are bound to comply with.
For its part, the school undertakes to provide the student with an education that would presumably
suffice to equip him with the necessary tools and skills to pursue higher education or a profession.
On the other hand, the student covenants to abide by the school's academic requirements and
observe its rules and regulations.

Institutions of learning must also meet the implicit or "built-in" obligation of providing their students
with an atmosphere that promotes or assists in attaining its primary undertaking of imparting
knowledge. Certainly, no student can absorb the intricacies of physics or higher mathematics or
explore the realm of the arts and other sciences when bullets are flying or grenades exploding in
the air or where there looms around the school premises a constant threat to life and limb.
Necessarily, the school must ensure that adequate steps are taken to maintain peace and order
within the campus premises and to prevent the breakdown thereof. 6
In that case, the Court was careful to point out that:
In the circumstances obtaining in the case at bar, however, there is, as yet, no finding that the
contract between the school and Bautista had been breached thru the former's negligence in
providing proper security measures. This would be for the trial court to determine. And, even if
there be a finding of negligence, the same could give rise generally to a breach of contractual
obligation only. Using the test of Cangco, supra, the negligence of the school would not be relevant
absent a contract. In fact, that negligence becomes material only because of the contractual
relation between PSBA and Bautista. In other words, a contractual relation is a condition sine qua
non to the school's liability. The negligence of the school cannot exist independently of the contract,
unless the negligence occurs under the circumstances set out in Article 21 of the Civil Code.
The Court is not unmindful of the attendant difficulties posed by the obligation of schools, abovementioned, for conceptually a school, like a common carrier, cannot be an insurer of its students
against all risks. This is specially true in the populous student communities of the so-called
"university belt" in Manila where there have been reported several incidents ranging from gang
wars to other forms of hooliganism. It would not be equitable to expect of schools to anticipate all
types of violent trespass upon their premises, for notwithstanding the security measures installed,
the same may still fail against an individual or group determined to carry out a nefarious deed
inside school premises and environs. Should this be the case, the school may still avoid liability by
proving that the breach of its contractual obligation to the students was not due to its negligence,
here statutorily defined to be the omission of that degree of diligence which is required by the
nature of obligation and corresponding to the circumstances of person, time and place. 7
In the PSBA case, the trial court had denied the school's motion to dismiss the complaint against it, and both the
Court of Appeals and this Court affirmed the trial court's order. In the case at bar, the court a quo granted the motion
to dismiss filed by respondent Colleges, upon the assumption that petitioner's cause of action was based, and could
have been based, only on Article 2180 of the Civil Code. As PSBA, however, states, acts which are tortious or
allegedly tortious in character may at the same time constitute breach of a contractual, or other legal, obligation.
Respondent trial judge was in serious error when he supposed that petitioner could have no cause of action other
than one based on Article 2180 of the Civil Code. Respondent trial judge should not have granted the motion to
dismiss but rather should have, in the interest of justice, allowed petitioner to prove acts constituting breach of an
obligation ex contractu or ex lege on the part of respondent Colleges.
In line, therefore, with the most recent jurisprudence of this Court, and in order to avoid a possible substantial
miscarriage of justice, and putting aside technical considerations, we consider that respondent trial judge committed
serious error correctible by this Court in the instant case.
ACCORDINGLY, the Court Resolved to GRANT DUE COURSE to the Petition, to TREAT the comment of respondent
Colleges as its answer, and to REVERSE and SET ASIDE the Order dated 29 November 1983. This case is
REMANDED to the court a quo for further proceedings consistent with this Resolution.
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

G.R. No. 201787

September 25, 2013

ANALITA P. INOCENCIO, substituting for RAMON INOCENCIO (Deceased), Petitioner,

vs.
HOSPICIO DE SAN JOSE, Respondent.
DECISION
CARPIO, J.:
The Case
This petition for review seeks to annul and set aside the Decision1 dated 12 January 2012 and the
Resolution2dated 9 May 2012 of the Court of Appeals (CA) in CA-G.R. SP No. 117009. The Decision
dismissed Analita P. Inocencios (Analita) petition for review and affirmed with modification the
Decision3 dated 21 January 2009 of the Regional Trial Court of Pasay, Branch 119 (RTC-Pasay). The
Resolution denied Analitas motion for reconsideration.
The Facts
On 1 March 1946, Hospicio de San Jose (HDSJ) leased a parcel of land located in Pasay City to
German Inocencio (German).4 The lease contract was effective for a period of one year, and was

renewed for one-year periods several times. The last written contract was executed on 31 May
1951.5 Section 6 of the lease contract provides:
Este contrato es intransferible, a menos que para ello se obtenga elconsentimiento escrito del
arrendador. (This contract is nontransferable unless prior consent of the lessor is obtained in
writing.)6
In 1946, German constructed two buildings on the parcel of land 7 which he subleased. He also
designated his son Ramon Inocencio (Ramon)to administer the said property.8
On 21 September 1990, German received a letter from HDSJ informing him that the increased
rentals shall take effect in November 1990instead of August 1990, "to give him ample time to make
the necessary rental adjustments with his sublessees."9
German passed away in 1997. Evidence on record shows that Ramon did not notify HDSJ of
Germans death. After Germans passing, Ramon collected the rentals from the sublessees, and
paid the rentals to HDSJ, and the taxes on the property. On 1 March 2001, HDSJs property
administrator, Five Star Multi-Services, Inc., notified Ramon that HDSJ is terminating the lease
contract effective 31 March 2001:
We acknowledge the fact that Hospicio de San Jose has been accepting the payment of your rentals
since the demise of Mr. German Inocencio. Hence, an implied contract of lease between the two of
you exists. However, since there is no stipulation as to the period of the contract and you are paying
a monthly rental to our client, the period for the lease is on a month-to-month basis (Art. 1687). Thus
as of this date, your contract should expire on March 31, 2001.10
Ramon then sent a letter to HDSJ dated 12 March 2001, suggesting that the lease contract be
renegotiated for the welfare of the sublessees occupying the parcel of land. 11 On 3 April 2001, HDSJ
notified Ramon that the lease contract shall not be renewed because Ramon has "continually
subleased the subject premises to about 20 families (in addition to a commercial establishment) x x
x without the knowledge and consent of the essor, [HDSJ]." 12 Thereafter, HDSJ refused to accept
Ramons tender of payment of rentals.13
On 3 March 2005, HDSJ sent a letter to Ramon: (1) reiterating its stand that the lease contract was
terminated effective 31 March 2001;(2) demanding payment of P756,449.26 as unrealized fruits; and
(3) giving him 30 days to vacate the property.14 The sublessees were given written notices to vacate
within 30 days.15 HDSJ also posted a Patalastas stating that it is willing to work out an amicable
arrangement with the sublessees, although the latter are not considered as legal occupants or
tenants of the property.16 Because of this, some of the sublessees refused to pay rentals to Ramon. 17
HDSJ also entered into lease contracts with: (1) Harish Chetandas on 25 May 2005; 18 (2) Enrique
Negare on 12 April 2005;19 (3) Lamberto Estefa on 25 May 2005;20 and (4) Sofronio Chavez, Jr. on 21
May 2005.21
On 28 June 2005, HDSJ filed a Complaint before Branch 48 of the Metropolitan Trial Court of Pasay
(MeTC-Pasay) for unlawful detainer against Ramon and his sublessees. 22 The complaint alleged that

Ramon and his sublessees have been illegally occupying the leased premises since 31 March 2001.
HDSJ sought the following damages:
17.1 Actual damages, in the amount of Php552,195.36, equivalent to the reasonable value of the
use and occupation of the premises from the period of 31 March 2001 until the present; and
17.2 Attorneys fees in the amount of Php50,000.00, for defendants refusal to vacate the property
and for compelling plaintiff to incur expenses to protect its interests. Furthermore, it is clear that
defendants acted in gross and evident bad faith in refusing to satisfy plaintiffs plainly valid, just, and
demandable claim.23
In his Answer dated 1 August 2005,24 Ramon claimed that:
(1) German was the owner of the two buildings constructed on the leased property as evidenced by
the building permits obtained from the government agencies and the tax declarations covering the
buildings;
(2) The Spanish lease contract, which was not translated into English or Filipino should not be
admitted as evidence in view of Section 33 of Rule 133 of the Rules on Evidence;
(3) HDSJ is estopped from raising the issue of non-transferability of the lease contract because it
admitted in its letter to Ramon that there is an existing lease agreement between the parties, even
after Germans death:
Your Lease Contract with [HDSJ], which is an implied month-to-month contract, has to be terminate
defective March 31, 2001, because by your own admission, you have continuously subleased the
subject premises to about 20 families including a commercial establishment).This was done without
the knowledge and consent of the lessor, [HDSJ], and is in violation of the Lease Contract your
father signed with them.25 x x x.
(4) There is no prohibition against subleasing in the lease contract. Thus, under Article 1650 of the
Civil Code, Ramon is permitted to sublease the premises; and
(5) The letters sent by HDSJ to the Inocencios sometime in1990 revealed that the former already
knew that the premises were being subleased.
Ramon also claimed that HDSJ interfered with the contractual relations between him and his
sublessees.26
While the case was being tried before the MeTC-Pasay, Ramon passed away. In an Order dated 23
August 2006, the MeTC-Pasay allowed the substitution of Ramon by his wife, Analita. 27
The Ruling of the MeTC-Pasay
The MeTC-Pasay ruled in favor of HDSJ. In its Decision dated 22May 2008, the MeTC-Pasay held
that the lease contract could not be transmitted to Ramon as Germans heir in view of the express

stipulation found therein. Since there was "no lease contract between [HDSJ] and Ramon x x x the
latter cannot sublease the property."28The dispositive portion of the MeTC-Pasay Decision reads:
Premises considered, judgment is hereby rendered in favor of plaintiff and against defendant as
follows:
1. Ordering defendant Ramon Inocencio, substituted by AnalitaP. Inocencio, and Felipe Enar, and all
persons claiming rights under them to immediately vacate the premises located at 61-CSta.
Escolastica cor. F.B. Harrison St., Pasay City and to peacefully turn over the same to plaintiff;
2. Ordering the defendants to pay plaintiff reasonable compensation of P552,195.36 for the use and
occupation of the property from 01 April 2001 to 31 March 2005, and the amount of P10,512.00 a
month from 01 April 2005 up to the present, plus twelve per cent 12% interest per annum until the
premises shall have been vacated;
3.Ordering the defendants to pay plaintiff the amount of P50,000.00 as attorneys fees and costs of
suit.29
Aggrieved, Analita filed an appeal before the RTC-Pasay.
The Ruling of the RTC-Pasay
On 21 January 2009, the RTC-Pasay dismissed Analitas appeal and affirmed in toto the decision of
the MeTC-Pasay.30 It held that "even before the termination of the contract, [Ramon] had no right to
sublease the said property due to the intransferability clause in the contract." 31
Analita moved for reconsideration, but it was denied in an Order dated 25 October 2010. 32 Analita
then filed a petition for review under Rule 42 of the Rules of Court before the CA.
The Ruling of the CA
The CA affirmed the decision of the RTC-Pasay but modified the award for damages. The dispositive
portion of the Decision reads:
WHEREFORE, foregoing considered, the assailed Decision dated21 January 2009 of the Regional
Trial Court, Branch 119, Pasay City is AFFIRMED with the MODIFICATION that the award for
reasonable compensation in paragraph 2 is pegged at Five Hundred Four Thousand Five Hundred
Seventy Six Pesos (P504,576.00) representing the accumulated rentals for the period from 01 April
2001 up to 31 March2005 with six percent (6%) interest per annum, plus the further amount of Ten
Thousand Five Hundred Twelve Pesos (P10,512.00) per month from 01 April 2005 until possession
is restored to respondent, also with six percent (6%) interest per annum, up to the finality of this
Decision. Thereafter, the interest shall be twelve percent (12%) until the amount is fully paid. 33
Hence, this petition.
The Issues

The petition questions the following rulings made by the CA:

(1) The sublease contracts were invalid;
(2) There was no tortious interference on the part of HDSJ;
(3) Ramon did not own the buildings erected on the leased premises;
(4) HDSJ is entitled to reasonable compensation in the amount of P504,576.00 and
attorneys fees; and
(5) HDSJs action for unlawful detainer was not barred by prescription.
The Ruling of this Court
Article 1311 of the Civil Code provides:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case
where the rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. The heir is not liable beyond the value of the property he received
from the decedent.
xxxx
We have previously ruled that lease contracts, by their nature, are not personal. The general rule,
therefore, is lease contracts survive the death of the parties and continue to bind the heirs except if
the contract states otherwise.34 In Sui Man Hui Chan v. Court of Appeals,35 we held that:
A lease contract is not essentially personal in character. Thus, the rights and obligations therein are
transmissible to the heirs. The general rule, therefore, is that heirs are bound by contracts entered
into by their predecessors-in-interest except when the rights and obligations arising therefrom are
not transmissible by (1) their nature, (2) stipulation or (3) provision of law. In the subject Contract of
Lease, not only were there no stipulations prohibiting any transmission of rights, but its very terms
and conditions explicitly provided for the transmission of the rights of the lessor and of the lessee to
their respective heirs and successors. The contract is the law between the parties. The death of a
party does not excuse nonperformance of a contract, which involves a property right, and the rights
and obligations thereunder pass to the successors or representatives of the deceased. Similarly,
nonperformance is not excused by the death of the party when the other party has a property
interest in the subject matter of the contract.
Section 6 of the lease contract provides that "this contract is nontransferable unless prior consent of
the lessor is obtained in writing."36 Section 6 refers to transfers inter vivos and not transmissions
mortis causa. What Section 6 seeks to avoid is for the lessee to substitute a third party in place of
the lessee without the lessors consent. This merely reiterates what Article 1649 of the 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.
In any case, HDSJ also acknowledged that Ramon is its month-to-month lessee. Thus, the death of
German did not terminate the lease contract executed with HDSJ, but instead continued with Ramon
as the lessee. HDSJ recognized Ramon as its lessee in a letter dated 1 March 2001:
We acknowledge the fact that Hospicio de San Jose has been accepting the payment of your rentals
since the demise of Mr. [German] Inocencio. Hence, an implied contract of lease between the two of
you exists. However, since there is no stipulation as to the period of the contract and you are paying
a monthly rental to our client, the period for the lease is on a month-to-month basis (Art. 1687). Thus
as of this date, your contract should expire on March 31, 2001.37
Section 6 of the lease contract requires written consent of the lessor before the lease may be
assigned or transferred. In Tamio v. Tecson,38 we explained the nature of an assignment of lease:
In the case of cession or assignment of lease rights on real property, there is a novation by the
substitution of the person of one of the parties the lessee. The personality of the lessee, who
dissociates from the lease, disappears; only two persons remain in the juridical relation the lessor
and the assignee who is converted into the new lessee.39
Assignment or transfer of lease, which is covered by Article 1649 of the Civil Code, is different from a
sublease arrangement, which is governed by Article 1650 of the same Code. In a sublease, the
lessee becomes in turn a lessor to a sublessee. The sublessee then becomes liable to pay rentals to
the original lessee. However, the juridical relation between the lessor and lessee is not dissolved.
The parties continue to be bound by the original lease contract. Thus, in a sublease arrangement,
there are at least three parties and two distinct juridical relations.40
Ramon had a right to sublease the premises since the lease contract did not contain any stipulation
forbidding subleasing. Article 1650 of the Civil Code states:
Art. 1650. When in the contract of lease of things there is no express prohibition, the lessee may
sublet the thing leased, in whole or in part, without prejudice to his responsibility for the performance
of the contract toward the lessor.
Therefore, we hold that the sublease contracts executed by Ramon were valid.
We also find that HDSJ did not commit tortious interference. Article1314 of the Civil Code states:
Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to
the other contracting party.
As correctly pointed out by the Inocencios, tortious interference has the following elements: (1)
existence of a valid contract; (2) knowledge on the part of the third person of the existence of the
contract; and (3) interference of the third person without legal justification or excuse. 41

The facts of the instant case show that there were valid sublease contracts which were known to
HDSJ. However, we find that the third element is lacking in this case.
In So Ping Bun v. Court of Appeals,42 we held that there was no tortious interference if the intrusion
was impelled by purely economic motives. In So Ping Bun, we explained that:
Authorities debate on whether interference may be justified where the defendant acts for the sole
purpose of furthering his own financial or economic interest. One view is that, as a general rule,
justification for interfering with the business relations of another exists where the actors motive is to
benefit himself. Such justification does not exist where his sole motive is to cause harm to the other.
Added to this, some authorities believe that it is not necessary that the interferers interest outweighs
that of the party whose rights are invaded, and that an individual acts under an economic interest
that is substantial, not merely de minimis, such that wrongful and malicious motives are negatived,
for he acts in self- protection. Moreover, justification for protecting ones financial position should not
be made to depend on a comparison of his economic interest in the subject matter with that of
others. It is sufficient if the impetus of his conduct lies in a proper business interest rather than in
wrongful motives.43
The evidence shows that HDSJ entered into agreements with Ramons former sublessees for purely
economic reasons (payment of rentals). HDSJ had a right to collect the rentals from the sublessees
upon termination of the lease contract. It does not appear that HDSJ was motivated by spite or ill will
towards the Inocencios.
The Inocencios claim ownership over the buildings since these are separate and distinct from the
land on which they are erected. Thus, as owners of the buildings, they have a right to lease the
buildings to third persons, even after termination of the lease contract with HDSJ. To bolster their
claim of ownership, the Inocencios presented the following evidence: (1) the building permit; 44
(2) the receipt for the payment of the permit fee; 45 (3) the Tax Declarations; and (4) the proof of
payment of insurance.46 The Inocencios also claimed that:
as the Inocencios owned the Subject Buildings, it is respectfully submitted, and it should be clear
that when they entered into lease contracts with tenants for the lease of portions of the said
buildings, these contracts were independent contracts of lease over their own building and not subleases of the parcel of land which they leased from Respondent. It is Respondents inaccurate
characterization of the leasing by the Inocencios of portions of their own building that has obfuscated
the legal issues in this case and partially led to the incorrect decisions of the courts a quo. 47
We do not agree. In Duellome v. Gotico48 and Caleon v. Agus Development Corporation,49
we held that the lease of a building includes the lease of the lot and consequently, the rentals of the
building include the rentals of the lot. As correctly pointed out by HDSJ in its Comment: 50
x x x When the Inocencios leased the buildings to third parties, they also "leased" to the third parties
the plot of land on which the buildings stood either by implied transfer of the lease covering the
plot of the land, or by sublease. Either way, x x x the Inocencios themselves must have a valid lease

contract with [HDSJ] over the land. However, when the lease contract x x x with HDSJ ended on
31March 2001, Ramon lost his status as lessee of the land, and therefore, had no authority to
transfer the lease or sublease the land. x x x.51
However, we find that the CA erred in not applying Article 1678 of the Civil Code which provides:
Art. 1678. If the lessee makes, in good faith, useful improvements which are suitable to the use for
which the lease is intended, without altering the form or substance of the property leased, the lessor
upon the termination of the lease shall pay the lessee one-half of the value of the improvements at
that time. Should the lessor refuse to reimburse said amount, the lessee may remove the
improvements, even though the principal thing may suffer damage thereby. He shall not, however,
cause any more impairment upon the property leased than is necessary.
With regard to ornamental expenses, the lessee shall not be entitled to any reimbursement, but he
may remove the ornamental objects, provided no damage is caused to the principal thing, and the
lessor does not choose to retain them by paying their value at the time the lease is extinguished.
The foregoing provision applies if the improvements were: (1) introduced in good faith; (2) useful;
and (3) suitable to the use for which the lease is intended, without altering the form and substance. 52
We find that the aforementioned requisites are satisfied in this case. The buildings were constructed
before Germans demise, during the subsistence of a valid contract of lease. It does not appear that
HDSJ prohibited German from constructing the buildings. Thus, HDSJ should have reimbursed
German (or his estate) half of the value of the improvements as of 2001. If HDSJ is not willing to
reimburse the Inocencios, then the latter should be allowed to demolish the buildings.
1wphi1

We also find that the action for unlawful detainer was not barred by prescription. Section 1, Rule 70
of the Rules of Court provides that actions for unlawful detainer must be filed "within one (1) year
after such unlawful deprivation or withholding of possession." In interpreting the foregoing provision,
this Court, in Republic v. Sunvar Realty Development Corporation, 53 held that:
The one-year period to file an unlawful detainer case is not counted from the expiration of the lease
contract on 31 December 2002. Indeed, the last demand for petitioners to vacate is the reckoning
period for determining the one-year period in an action for unlawful detainer. "Such one year period
should be counted from the date of plaintiffs last demand on defendant to vacate the real property,
because only upon the lapse of that period does the possession become unlawful." 54
HDSJs last demand was made on 3 March 2005, and it filed the complaint for unlawful detainer on
28 June 2005. Thus, the complaint was filed within the period provided under the Rules of Court.
WHEREFORE, the petition is PARTLY GRANTED. The Decision dated 12 January 2012 of the Court
of Appeals in CA-G.R. SP No. 117009 is AFFIRMED with modification. The case is hereby
REMANDED to the Metropolitan Trial Court of Pasay, Branch 48, for determination of the value or
the improvements to be paid to the lnocencios, if Hospicio de San Jose desires to keep the
improvements. Otherwise, the Inocencios shall be allowed to demolish the buildings at their
expense.

SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:

G.R. No. 158676

November 27, 2006

BPI-FAMILY SAVINGS BANK, INC., Petitioner,

vs.
SPS. ZENAIDA DOMINGO & ABUNDIO S. DOMINGO, BENJAMIN VILLA1 and SPS. JULIAN
CRUZ,Respondents.
DECISION
GARCIA, J.:
In this petition for review under Rule 45 of the Rules of Court, petitioner BPI-Family Savings Bank,
Inc. assails and seeks to set aside the following issuances of the Court of Appeals (CA) in CA-G.R.
CV No. 60994, to wit:
1. Decision2 dated May 30, 2002, affirming in toto an earlier decision3 of the Regional Trial
Court (RTC) of Quezon City, Branch 81, in its Civil Case No. Q-90-6402, which adjudged
petitioner solidarily liable with Benjamin Villa to the spouses Zenaida Domingo and Abundio
S. Domingo for actual, moral and exemplary damages and attorney's fees, subject to
reimbursement by the spouses Julian Cruz; and
2. Resolution4 dated June 10, 2003, denying the separate motions for reconsideration filed
by the petitioner, Benjamin Villa and the Cruz spouses.
The facts:
Respondent Julian Cruz is the owner of a commercial lot and building located at No. 977 E. Quirino
Ave., Novaliches, Quezon City. Sometime in April 1976, he leased out the premises to the Family
Savings Bank (FSB). In April 1989, after the Bank of the Philippine Islands (BPI) acquired FSB but
before the expiration of the original lease contract between Cruz and FSB, a new lease agreement
over the same property was executed, this time between BPI-FSB and Cruz.
Both the original and the new lease contracts contained the following stipulation:

Assignment and Sublease The lessee has the right to sublease the premises or any portion
thereof to a third party. The lessee may not, however, assign or transfer its right or interest under this
lease without the written consent of the lessor.
On February 23, 1989, while the original lease agreement between FSB and Cruz was still
subsisting, BPI-FSB subleased the same premises to respondent Benjamin Villa (now deceased), a
former Vice President of BPI-FSB. While BPI-FSB apparently did not secure the written consent of
Julian Cruz, it appears that the latter was aware of the sublease and acceded to it because he made
neither an objection nor a protest thereto.
The aforementioned sublease contract between BPI-FSB and Benjamin Villa embodied the following
clause:
The sublessee shall not assign this contract of sublease or sublease any part of the premises to any
person or entity.
Benjamin Villa occupied and used the premises as a restaurant, operating thereat the "Carousel
Food House." His restaurant business, however, failed to prosper. Hence, after only about a year of
operation, Villa decided to close it down.
On or about June 4, 1990, while still operating the "Carousel Food House" at the premises, Villa
learned that Mrs. Zenaida Domingo was interested in taking over his restaurant business thereat.
Negotiations pushed through and the price of P650,000.00 was agreed upon between the two. Villa,
however, informed Mrs. Domingo that as a mere sublessee under his sublease contract with BPIFSB, he was prohibited from assigning his rights as a sublessee. It was, therefore, necessary to
rescind his sublease contract with BPI-FSB so that the latter could directly execute a sublease
contract with the Domingo spouses. Villa informed the principal lessee BPI-FSB about the
arrangement and the latter acceded.
On June 15, 1990, Villa received from the Domingos the amount of P300,000.00 as partial payment
for his rights over the premises. The receipt Villa issued therefor reads:
Received from Mrs. Zenaida Domingo the amount of three hundred thousand pesos (P300,000.00)
as partial payment for my giving up my rights on the premises presently occupied by Carousel Food
House and certain equipments and improvements in the same premises.
On June 18, 1990, BPI-FSB executed a sublease contract in favor of the Domingos. Three days
later, or on June 21, 1990, a Deed of Rescission of the sublease agreement between BPI-FSB and
Villa was executed and signed by BPI-FSB and Villa.
On June 26, 1990, Villa received from the Domingos the amount of P350,000.00, representing the
full payment of the amount due under their agreement. As before, Villa issued the corresponding
receipt, to wit:
For and in consideration of the sum of Three Hundred Fifty Thousand Pesos (P350,000.00),
Philippine Currency, receipt of which in full is hereby acknowledged, the undersigned hereby

assigns, cedes and transfers and sets over to Ms. Zenaida G. Domingo the goodwill, all rights and
interest over the premises located at 977 Quirino Avenue, Novaliches, Quezon City, the permanent
improvements and certain equipments thereon, free on any lien or encumbrance except the legal
rights of the owner of the building thereon...
On the very same day, Villa vacated the subject premises and turned over the key thereof to the
Domingos.
The following day - June 27, 1990 - the Domingos went to clean and fix the premises but could not
enter because the door was padlocked. Moreover, there was posted at the glass window of the
commercial building a sign to the effect that the place was not for lease or sublease. Apparently,
Julian Cruz, the owner-lessor, preempted the Domingos' visit in order to padlock the premises and
post said notice the day previous.
The Domingos thus demanded of Villa either compliance with their contract of sublease or the return
of their payment of P650,000.00. Efforts exerted by Villa and BPI-FSB to place the Domingos in
possession of the subject premises proved futile due to the refusal of Cruz to open the same.
On account of Villas failure to return their total payment of P650,000.00 for the place, the Domingos
filed suit in the RTC of Quezon City for a sum of money with damages against both Villa and BPIFSB. In turn, Villa and BPI-FSB filed their respective third-party complaints against Cruz.
In their complaint, docketed as Civil Case No. Q-90-6402 and raffled to Branch 81 of the trial court,
the Domingos maintained that both Villa and BPI-FSB assured them that they would be placed in
possession of the subject premises as a sublessee. Hence, the failure of both to comply with said
undertaking makes them jointly and severally liable to them for the return of the P650,000.00 they
paid to Villa, plus damages.
For their part, Villa and BPI-FSB laid the blame on Cruz. They posited that they failed to comply with
their promise to the plaintiffs-spouses because of Cruz's illegal, unreasonable and unjustified action
in padlocking the premises. Hence, they argued that should they be made to return the amount
of P650,000.00 which the spouses Domingo paid to Villa, Cruz should be simultaneously ordered to
reimburse them for the same amount. Additionally, BPI-FSB contended that under its lease contract
with Cruz, it had the right to sublease the subject premises to a third person even without the
consent of the latter.
On the other hand, Cruz, as third-party defendant in this case, claimed that he had every right to
close down the premises and to refuse the entry thereto of the Domingos because under his lease
agreement with BPI-FSB, the latter cannot sublease the premises without his written consent.
Purportedly, BPI-FSB violated this condition when it subleased the premises to the Domingos
without his written consent.
In a decision5 dated June 8, 1998, the trial court found for the Domingos, and accordingly rendered
judgment, to wit:
WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Ordering defendants BPI-Family Savings Bank and Benjamin Villa to pay the plaintiffs,
jointly and severally, the following amounts:
1.1 P650,000.00 as actual damages, representing the amount paid by plaintiffs to
defendant Villa, with interest at the legal rate from the filing of the complaint until fully
paid;
1.2 P100,000.00 as moral damages;
1.3 P50,000.00 as exemplary damages;
1.4 P25,000.00 as attorney's fees.
2. Ordering third-party defendant Julian Cruz to reimburse third-party plaintiffs BPI-FSB and
Villa for whatever amounts said defendants/third-party plaintiffs will pay the plaintiffs by virtue
of this judgment;
3. Ordering third-party defendant Cruz to pay third-party plaintiff BPI-FSB the amount of
P25,000.00 as attorney's fees;
4. Ordering third-party defendant Cruz to pay third-party plaintiff Villa the amounts of
P50,000.00 as moral damages and P25,000.00 as attorney's fees;
5. Dismissing for lack of merit the counterclaims and cross-claims of defendants BPI-FSB
and Villa, and the counterclaims of third-party defendant Cruz.
Costs against third-party defendant Cruz.
IT IS SO ORDERED.
From the foregoing decision, a common appeal was interposed by BPI-FSB and Villa to the CA.
Separate appeal was also taken by the spouses Cruz, all of which appeals were consolidated and
docketed in the CA as CA-G.R. CV No. 60994.
As stated at the threshold hereof, the CA, in its decision6 of May 30, 2002, affirmed in toto that of the
trial court, and denied in its resolution of June 10, 2003, the appellants respective motions for
reconsideration.
Of the parties below, only petitioner BPI-FSB elevated the case to this Court via the instant petition
for review on the following grounds:
A. The CA gravely abused its discretion and committed a reversible error in NOT applying the
provisions of Articles 1207 and 1311 of the Civil Code under which, contrary to its decision, BPI-FSB
could not be held solidarily liable with VILLA for the return to the DOMINGOS of the amount of
P650,000.00.

B. The action of the DOMINGOS being as it is indisputably an action for recovery of a sum of money
and not an action for specific performance and there being no dispute that the amount of
P650,000.00 was received by VILLA and VILLA alone, the Court of Appeals gravely abused its
discretion and committed a reversible error in holding NOT only VILLA liable for the return of the
money but also BPI-FSB as well.
C. The Court of Appeals gravely abused its discretion and committed a reversible error in affirming
the decision of the trial court holding that BPI-FSB is solidarily liable with VILLA for other damages. 7
We AFFIRM but minus the award of moral and exemplary damages.
In a nutshell, petitioner BPI-FSB denies knowledge of, let alone having anything to do with, the
transaction between Villa and the Domingos. It points to the express admission of both the
Domingos and Villa that BPI-FSB did not receive any portion of the amount of P650,000.00 as it was
Villa alone who received the same from the Domingos. As petitioner further claims, it came to know
of such payment only when the case at bar was filed. Not being a privy to the agreement between
the Domingos and Villa, petitioner contends that it cannot be found solidarily liable with Villa for the
latters breach of his sublease agreement with the Domingos. In support thereof, petitioner invokes
the following provisions of the Civil Code:
Article 1311. Contracts take effect only between the parties, their assigns and heirs x x x.
xxx

xxx

xxx

Article 1207. x x x There is solidary liability only when the obligation expressly so states or when the
law or the nature of the obligation requires solidarity.
Hence, it is petitioner's submission that it should not be held solidarily liable with Villa for "a
transaction that was entered exclusively between Zenaida Domingo and VILLA," allegedly "without
the knowledge, consent or participation of BPI-FSB." 8
Ironically, Villa, in his memorandum9 before the Court, uses the same logic in arguing that he should
not be held solidarily liable with BPI-FSB. Villa points out that, not being a party to the second
sublease contract between BPI-FSB and the Domingos, he cannot be held responsible for the
Domingos' failure to occupy the premises. He also alleged having informed the Domingos
beforehand that he had no right to sublease the premises under his sublease agreement with BPIFSB, hence the need for the deed of rescission of said sublease contract, which deed was in fact
executed. To Villa, the second sublease contract was solely between BPI-FSB and the Domingos.
We rule and so hold, as did the CA, that neither BPI-FSB nor Villa can escape liability by disclaiming
privity to an agreement with the Domingos. There are more than one, indeed several, relevant
agreements involved in this case. To waylay any possibility of confusion, we shall enumerate them to
distinguish one from the other:
1. The original lease agreement between Julian Cruz and BPI-FSB;

2. The first sublease contract between BPI-FSB and Villa;

3. The sale of goodwill of the Carousel Food House, and the assignment and transfer of all of
Villa's rights and interests to the premises and improvements thereon, between Villa and the
Domingos;
4. The second sublease contract between BPI-FSB and the Domingos; and
5. The Deed of Rescission of the first sublease contract between Villa and BPI-FSB.
The CA found no cogent reason to disturb the trial court's finding that both BPI-FSB and Villa
assured the Domingos that they would eventually be placed in possession of the premises in
question as sublessee. Nor do we. Not only is there evidence to corroborate this finding; it is likewise
the version more consistent with common human experience. Finding no reversible error in the trial
courts appraisal and appreciation of the facts and evidence on record, it was not amiss for the CA to
adhere to the well-entrenched precept that factual findings of trial courts are entitled to great weight
and respect, even finality in certain cases.10 This Court can do no less.
Both BPI-FSB and Villa each had their own respective agreements with the Domingos, albeit for a
single purpose. Villa sold to the Domingos the goodwill of his restaurant business, as well as all his
rights and interests in the premises and its improvements. BPI-FSB, on the other hand, subleased
the same premises to the Domingos. These two contracts are intertwined. Indeed, the Domingos'
enjoyment of the goodwill and business of Villa would be an impossibility without the BPI-FSB
Domingos sublease contract.
The Court cannot give credence to BPI-FSB's posture that it had nothing to do with, nor even had
knowledge of, the agreement between Villa and the Domingos. This scenario is far-fetched, what
with the fact that BPI-FSB is a party to the sublease contract with the Domingos, and, in pursuance
thereof, even executed a deed of rescission of its earlier sublease agreement with Villa. It had also
exerted efforts, along with Villa, towards putting the Domingos in possession of the premises by
seeking out Cruz. With such a factual backdrop, it is difficult to grasp how BPI-FSB could not have
taken part and assured the Domingos of possession of the premises, as found by the two (2) courts
below. Indeed, it insults ones credulity for the petitioner to feign ignorance of the sublease
agreement between Villa and the Domingos. In any event, it is clear that BPI-FSBs failure to put the
Domingos in possession of the premises as its sublessees, in breach of its own contract with them,
makes the petitioner solidarily liable with Villa for the amount the Domingos had paid to enjoy the
premises.
Villa, on the other hand, though not a privy to the second (BPI-FSB Domingos) sublease contract,
had his owncontract with the Domingos which he had breached. We refer to the sale by Villa
for P650,000.00, of the goodwill of his restaurant business in the premises and the assignment of all
his rights and interests thereon, including the equipment and improvements made thereat. To cap it
all, Villa cannot possibly escape liability for said amount as it was he who had received the same and
even issued a receipt therefor.

Clearly, then, the two (2) courts below had not erred in holding that both BPI-FSBs and Villa's failure
to comply with their respective undertakings to place the Domingos in possession of the subject
premises renders them accountable for breach of contract. As decreed by statute, those who in any
manner contravenes the tenor of their obligations are liable for damages. 11
The Court agrees, however, with petitioner BPI-FSB that it was due to Cruz's actions of padlocking
the premises and posting notices thereat that prevented the Domingos from taking possession of the
place. It is precisely for this reason why the two (2) courts below correctly adjudged Cruz to be
ultimately liable for what is due the Domingos and thus directed him to reimburse what Villa and BPIFSB must pay the spouses.
As found by the trial court, Cruz himself was guilty of breach with respect to his basic lease
agreement with BPI-FSB. Concededly, said agreement contained the following stipulation:
Assignment and Sublease The lessee has the right to sublease the premises or any portion
thereof to a third party. The lessee may not, however, assign or transfer its right or interest under this
lease without the written consent of the lessor. (Emphasis supplied.)
On surface, the foregoing stipulation seemingly insulates Cruz from any liability in this case.
However, basic is the rule that in the construction of an instrument where there are several
provisions or particulars, such a construction is, if possible, to be adopted as will give effect to
all.12 The trial court was quick to point out, and rightly so, that the first sentence of the aforequoted
covenant speaks of what the lessee can do, while the second sentence refers to what it cannot do
without the consent of the lessor. This is evident from the phrase "may not however" found in the
second sentence, which means that the act of sub-leasing in the first sentence may be done by the
lessee without the consent of the lessor but the act of assignment or transfer of rights in the second
sentence cannot be done by the lessee without the consent of the lessor. Clearly, the parties
intended a distinction between a sublease and an assignment of rights.
Under the aforequoted contractual stipulation, BPI-FSB, as lessee, is possessed of the authority to
sublease the subject premises. No mention is made of obtaining any written consent of the lessor
(Cruz) as a condition sine qua non for the validity of a sublease agreement. What necessitates the
prior written consent of lessor Cruz is the assignment or transfer by BPI-FSB as lessee of its right or
interest under the lease agreement.
To our mind, the CA was correct in affirming the trial court's distinguishing between a sublease and
an assignment of rights. In a sublease situation, the lessee (BPI-FSB, in this case) continues to be
liable to the lessor (Cruz) for the payment of rent. The sublessee (the Domingos in this case) pays
rent not to the lessor (Cruz) but to the lessee/sub-lessor (BPI-FSB). On the other hand, in an
assignment of rights, the assignee steps into the shoes of the lessee who is thereupon freed from
his obligations under the lease because from then on it is the assignee who is liable to the lessor for
rental payment. In other words, in an assignment of rights, there is a change of lessor, which is not
so in a sublease situation. It is thus understandable why it is not necessary for the lessor to give his
consent to a sublease, while in an assignment of rights, it is a necessity for the lessor to require his
prior consent. This is for the lessor's own protection.

For sure, in the very memorandum13 he filed with the Court, Cruz in fact admits that the trial court
was correct in making a distinction between a sublease and an assignment of rights. In Cruzs own
words:
The Honorable Trial Court correctly ruled on page 25 of its assailed decision that, "It is clear that the
parties made a distinction between "sublease" and an "assignment of rights." Is there a difference
between the two? BPI-FSB believes so and this Court (i.e., trial court) agrees."14
It is Cruzs contention, however, that the sublease agreement between BPI-FSB and the Domingos
was in fact an assignment of rights, and not a sublease, as held by the two (2) courts below. In
support thereof, Cruz utilizes the following distinctions between a sublease and an assignment of
rights:
SUBLEASE

ASSIGNMENT

(a) the lessee retains an interest in the lease; he

remains a party to the contract;

(a) the lessee makes an absolute transfer of his

interest as lessee; thus, he disassociates himself
from the original contract of lease;

(b) the sublessee does not have any direct action

against the lessor;

(b) the assignee has a direct action against the

lessor;

(c) can be done without the permission of the

lessor (unless there be an express prohibition).

(c) cannot be done unless the lessor consents.15

To respondent Cruz, all the foregoing three elements of an assignment of rights are present in this
case. Anent the first element, Cruz points to BPI-FSB allegedly having no "knowledge, consent or
participation"16 in the contract between Villa and the spouses Domingo. Hence, BPI-FSB must have
made an absolute transfer of its interest, disassociating itself from the original contract of lease. Said
denial of knowledge or participation by BPI-FSB upon which Cruz relies cannot, however, be given
credence and has, in fact, already been struck down in the instant decision. Besides, as already
pointed out, more than one contract is involved herein. Evidently, the contract alluded to by Cruz is
the assignment of goodwill of Villa's restaurant business executed between Villa and the Domingos.
Separate therefrom is the contract of sublease between the Domingos and BPI-FSB for which the
rescission of the first sublease contract between BPI-FSB and Villa was necessary. Clearly, BPI-FSB
made no absolute transfer of interest as the lessee of Cruz.
Cruz goes on to argue that the case filed by the Domingos only proves that the latter have direct
action against him, thereby a showing that the sublease agreement between BPI-FSB and the
Domingos was one of assignment of rights. Again, this argument is faulty. The Domingos had no
direct cause of action against Cruz. That is precisely why they filed their action against Villa and BPIFSB, having privity of contract only with the latter two. It was BPI-FSB that filed a third-party
complaint against Cruz, which is only proper, because BPI-FSB is a party to the lease contract with
Cruz. Indeed, if the Domingos had a direct action against Cruz, the two courts below would have
simply ordered Cruz to pay the Domingos directly instead of choosing the more circuitous route of

ordering BPI-FSB and Villa to pay the Domingos and for Cruz to reimburse them for the amount they
were adjudged to pay.
Cruz ends his line of reasoning by saying that the final element is present: that such assignment
could not be done without his written consent. Clearly, this final stab at the dark is a round-about
argument unworthy of appreciation. It has already been shown that the subject agreement
was not an assignment. Had it been one, then a written consent of Cruz would have been required;
but it was a mere sublease, as correctly ruled by the two (2) courts below.
To us, however, the imposition by the trial court, as affirmed by the CA, of moral and exemplary
damages against petitioner BPI-FSB is rather harsh. As borne by the facts on record, the failure of
BPI-FSB and Villa to comply with their obligations under their respective contracts with the
Domingos was not due to any fault of their own, but to the acts of Cruz in refusing to allow the
Domingos access to the premises. For his part, it is entirely possible that Cruz's actions stemmed
from his misinterpretation of his lease agreement with BPI-FSB.
Article 201 of the Civil Code provides:
Art. 201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith
is liable shall be those that are the natural and probable consequences of the breach of the
obligation, and which the parties have foreseen or could have reasonably foreseen at the time the
obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages
which may be reasonably attributed to the non-performance of the obligation.
1wphi1

For evident absence of bad faith on the part of BPI-FSB, Villa and Cruz, the award of moral and
exemplary damages in favor of the Domingos must be, as it is hereby, deleted.
WHEREFORE, minus the award of moral and exemplary damages in favor of the Domingos, the
assailed decision of the CA is AFFIRMED in all aspects.
No pronouncement as to costs.
SO ORDERED.
CANCIO C. GARCIA
Associate Justice
WE CONCUR:

G.R. No. 174978

July 31, 2013

SALLY YOSHIZAKI, Petitioner,

vs.
JOY TRAINING CENTER OF AURORA, INC., Respondent.
DECISION
BRION, J.:
We resolve the petition for review on certiorari1 filed by petitioner Sally Yoshizaki to challenge the
February 14, 2006 Decision2 and the October 3, 2006 Resolution3 of the Court of Appeals (CA) in
CA-G.R. CV No. 83773.
The Factual Antecedents
Respondent Joy Training Center of Aurora, Inc. (Joy Training) is a non-stock, non-profit religious
educational institution. It was the registered owner of a parcel of land and the building thereon (real
properties) located in San Luis Extension Purok No. 1, Barangay Buhangin, Baler, Aurora. The
parcel of land was designated as Lot No. 125-L and was covered by Transfer Certificate of Title
(TCT) No. T-25334.4
On November 10, 1998, the spouses Richard and Linda Johnson sold the real properties, a
Wrangler jeep, and other personal properties in favor of the spouses Sally and Yoshio Yoshizaki. On
the same date, a Deed of Absolute Sale5 and a Deed of Sale of Motor Vehicle6 were executed in
favor of the spouses Yoshizaki. The spouses Johnson were members of Joy Trainings board of
trustees at the time of sale. On December 7, 1998, TCT No. T-25334 was cancelled and TCT No. T260527 was issued in the name of the spouses Yoshizaki.
On December 8, 1998, Joy Training, represented by its Acting Chairperson Reuben V. Rubio, filed
an action for the Cancellation of Sales and Damages with prayer for the issuance of a Temporary
Restraining Order and/or Writ of Preliminary Injunction against the spouses Yoshizaki and the
spouses Johnson before the Regional Trial Court of Baler, Aurora (RTC).8 On January 4, 1999, Joy
Training filed a Motion to Amend Complaint with the attached Amended Complaint. The amended
complaint impleaded Cecilia A. Abordo, officer-in-charge of the Register of Deeds of Baler, Aurora,
as additional defendant. The RTC granted the motion on the same date. 9
In the complaint, Joy Training alleged that the spouses Johnson sold its properties without the
requisite authority from the board of directors.10 It assailed the validity of a board resolution dated

September 1, 199811 which purportedly granted the spouses Johnson the authority to sell its real
properties. It averred that only a minority of the board, composed of the spouses Johnson and
Alexander Abadayan, authorized the sale through the resolution. It highlighted that the Articles of
Incorporation provides that the board of trustees consists of seven members, namely: the spouses
Johnson, Reuben, Carmencita Isip, Dominador Isip, Miraflor Bolante, and Abelardo Aquino. 12
Cecilia and the spouses Johnson were declared in default for their failure to file an Answer within the
reglementary period.13 On the other hand, the spouses Yoshizaki filed their Answer with Compulsory
Counterclaims on June 23, 1999. They claimed that Joy Training authorized the spouses Johnson to
sell the parcel of land. They asserted that a majority of the board of trustees approved the resolution.
They maintained that the actual members of the board of trustees consist of five members, namely:
the spouses Johnson, Reuben, Alexander, and Abelardo. Moreover, Connie Dayot, the corporate
secretary, issued a certification dated February 20, 1998 14 authorizing the spouses Johnson to act on
Joy Trainings behalf. Furthermore, they highlighted that the Wrangler jeep and other personal
properties were registered in the name of the spouses Johnson.15 Lastly, they assailed the RTCs
jurisdiction over the case. They posited that the case is an intra-corporate dispute cognizable by the
Securities and Exchange Commission (SEC).16
After the presentation of their testimonial evidence, the spouses Yoshizaki formally offered in
evidence photocopies of the resolution and certification, among others. 17 Joy Training objected to the
formal offer of the photocopied resolution and certification on the ground that they were not the best
evidence of their contents.18 In an Order19 dated May 18, 2004, the RTC denied the admission of the
offered copies.
The RTC Ruling
The RTC ruled in favor of the spouses Yoshizaki. It found that Joy Training owned the real
properties. However, it held that the sale was valid because Joy Training authorized the spouses
Johnson to sell the real properties. It recognized that there were only five actual members of the
board of trustees; consequently, a majority of the board of trustees validly authorized the sale. It also
ruled that the sale of personal properties was valid because they were registered in the spouses
Johnsons name.20
Joy Training appealed the RTC decision to the CA.
The CA Ruling
The CA upheld the RTCs jurisdiction over the case but reversed its ruling with respect to the sale of
real properties. It maintained that the present action is cognizable by the RTC because it involves
recovery of ownership from third parties.
It also ruled that the resolution is void because it was not approved by a majority of the board of
trustees. It stated that under Section 25 of the Corporation Code, the basis for determining the
composition of the board of trustees is the list fixed in the articles of incorporation. Furthermore,
Section 23 of the Corporation Code provides that the board of trustees shall hold office for one year

and until their successors are elected and qualified. Seven trustees constitute the board since Joy
Training did not hold an election after its incorporation.
The CA did not also give any probative value to the certification. It stated that the certification failed
to indicate the date and the names of the trustees present in the meeting. Moreover, the spouses
Yoshizaki did not present the minutes that would prove that the certification had been issued
pursuant to a board resolution.21 The CA also denied22 the spouses Yoshizakis motion for
reconsideration, prompting Sally23 to file the present petition.
The Petition
Sally avers that the RTC has no jurisdiction over the case. She points out that the complaint was
principally for the nullification of a corporate act. The transfer of the SECs original and exclusive
jurisdiction to the RTC24 does not have any retroactive application because jurisdiction is a
substantive matter.
She argues that the spouses Johnson were authorized to sell the parcel of land and that she was a
buyer in good faith because she merely relied on TCT No. T-25334. The title states that the spouses
Johnson are Joy Trainings representatives.
She also argues that it is a basic principle that a party dealing with a registered land need not go
beyond the certificate of title to determine the condition of the property. In fact, the resolution and the
certification are mere reiterations of the spouses Johnsons authority in the title to sell the real
properties. She further claims that the resolution and the certification are not even necessary to
clothe the spouses Johnson with the authority to sell the disputed properties. Furthermore, the
contract of agency was subsisting at the time of sale because Section 108 of Presidential Decree
No. (PD) 1529 requires that the revocation of authority must be approved by a court of competent
jurisdiction and no revocation was reflected in the certificate of title. 25
The Case for the Respondent
In its Comment26 and Memorandum,27 Joy Training takes the opposite view that the RTC has
jurisdiction over the case. It posits that the action is essentially for recovery of property and is
therefore a case cognizable by the RTC. Furthermore, Sally is estopped from questioning the RTCs
jurisdiction because she seeks to reinstate the RTC ruling in the present case.
Joy Training maintains that it did not authorize the spouses Johnson to sell its real properties. TCT
No. T-25334 does not specifically grant the authority to sell the parcel of land to the spouses
Johnson. It further asserts that the resolution and the certification should not be given any probative
value because they were not admitted in evidence by the RTC. It argues that the resolution is void
for failure to comply with the voting requirements under Section 40 of the Corporation Code. It also
posits that the certification is void because it lacks material particulars.
The Issues
The case comes to us with the following issues:

1) Whether or not the RTC has jurisdiction over the present case; and
2) Whether or not there was a contract of agency to sell the real properties between Joy
Training and the spouses Johnson.
3) As a consequence of the second issue, whether or not there was a valid contract of sale
of the real properties between Joy Training and the spouses Yoshizaki.
Our Ruling
We find the petition unmeritorious.
The RTC has jurisdiction over disputes concerning the application of the Civil Code
Jurisdiction over the subject matter is the power to hear and determine cases of the general class to
which the proceedings before a court belong.28 It is conferred by law. The allegations in the complaint
and the status or relationship of the parties determine which court has jurisdiction over the nature of
an action.29 The same test applies in ascertaining whether a case involves an intra-corporate
controversy.30
The CA correctly ruled that the RTC has jurisdiction over the present case. Joy Training seeks to
nullify the sale of the real properties on the ground that there was no contract of agency between Joy
Training and the spouses Johnson. This was beyond the ambit of the SECs original and exclusive
jurisdiction prior to the enactment of Republic Act No. 8799 which only took effect on August 3, 2000.
The determination of the existence of a contract of agency and the validity of a contract of sale
requires the application of the relevant provisions of the Civil Code. It is a well-settled rule that
"disputes concerning the application of the Civil Code are properly cognizable by courts of general
jurisdiction."31 Indeed, no special skill requiring the SECs technical expertise is necessary for the
disposition of this issue and of this case.
The Supreme Court may review questions of fact in a petition for review on certiorari when the
findings of fact by the lower courts are conflicting
We are aware that the issues at hand require us to review the pieces of evidence presented by the
parties before the lower courts. As a general rule, a petition for review on certiorari precludes this
Court from entertaining factual issues; we are not duty-bound to analyze again and weigh the
evidence introduced in and considered by the lower courts. However, the present case falls under
the recognized exception that a review of the facts is warranted when the findings of the lower courts
are conflicting.32 Accordingly, we will examine the relevant pieces of evidence presented to the lower
court.
There is no contract of agency between Joy Training and the spouses Johnson to sell the parcel of
land with its improvements
Article 1868 of the Civil Code defines a contract of agency as a contract whereby a person "binds
himself to render some service or to do something in representation or on behalf of another, with the

consent or authority of the latter." It may be express, or implied from the acts of the principal, from
his silence or lack of action, or his failure to repudiate the agency, knowing that another person is
acting on his behalf without authority.
As a general rule, a contract of agency may be oral. However, it must be written when the law
requires a specific form.33 Specifically, Article 1874 of the Civil Code provides that the contract of
agency must be written for the validity of the sale of a piece of land or any interest therein.
Otherwise, the sale shall be void. A related provision, Article 1878 of the Civil Code, states that
special powers of attorney are necessary to convey real rights over immovable properties.
The special power of attorney mandated by law must be one that expressly mentions a sale or that
includes a sale as a necessary ingredient of the authorized act. We unequivocably declared in
Cosmic Lumber Corporation v. Court of Appeals34 that a special power of attorneymust express the
powers of the agent in clear and unmistakable language for the principal to confer the right upon an
agent to sell real estate. When there is any reasonable doubt that the language so used conveys
such power, no such construction shall be given the document. The purpose of the law in requiring a
special power of attorney in the disposition of immovable property is to protect the interest of an
unsuspecting owner from being prejudiced by the unwarranted act of another and to caution the
buyer to assure himself of the specific authorization of the putative agent. 35
In the present case, Sally presents three pieces of evidence which allegedly prove that Joy Training
specially authorized the spouses Johnson to sell the real properties: (1) TCT No. T-25334, (2) the
resolution, (3) and the certification. We quote the pertinent portions of these documents for a
thorough examination of Sallys claim. TCT No. T-25334, entered in the Registry of Deeds on March
5, 1998, states:
A parcel of land x x x is registered in accordance with the provisions of the Property Registration
Decree in the name of JOY TRAINING CENTER OF AURORA, INC., Rep. by Sps. RICHARD A.
JOHNSON and LINDA S. JOHNSON, both of legal age, U.S. Citizen, and residents of P.O. Box
3246, Shawnee, Ks 66203, U.S.A.36(emphasis ours)
On the other hand, the fifth paragraph of the certification provides:
Further, Richard A. and Linda J. Johnson were given FULL AUTHORITY for ALL SIGNATORY
purposes for the corporation on ANY and all matters and decisions regarding the property and
ministry here. They will follow guidelines set forth according to their appointment and ministerial and
missionary training and in that, they will formulate and come up with by-laws which will address and
serve as governing papers over the center and corporation. They are to issue monthly and quarterly
statements to all members of the corporation.37 (emphasis ours)
The resolution states:
We, the undersigned Board of Trustees (in majority) have authorized the sale of land and building
owned by spouses Richard A. and Linda J. Johnson (as described in the title SN No. 5102156 filed
with the Province of Aurora last 5th day of March, 1998. These proceeds are going to pay

outstanding loans against the project and the dissolution of the corporation shall follow the sale. This
is a religious, non-profit corporation and no profits or stocks are issued. 38 (emphasis ours)
The above documents do not convince us of the existence of the contract of agency to sell the real
properties. TCT No. T-25334 merely states that Joy Training is represented by the spouses Johnson.
The title does not explicitly confer to the spouses Johnson the authority to sell the parcel of land and
the building thereon. Moreover, the phrase "Rep. by Sps. RICHARD A. JOHNSON and LINDA S.
JOHNSON"39 only means that the spouses Johnson represented Joy Training in land registration.
The lower courts should not have relied on the resolution and the certification in resolving the
case. The spouses Yoshizaki did not produce the original documents during trial. They also failed to
show that the production of pieces of secondary evidence falls under the exceptions enumerated in
Section 3, Rule 130 of the Rules of Court.40 Thus, the general rule that no evidence shall be
admissible other than the original document itself when the subject of inquiry is the contents of a
document applies.41
1wphi1

Nonetheless, if only to erase doubts on the issues surrounding this case, we declare that even if we
consider the photocopied resolution and certification, this Court will still arrive at the same
conclusion.
The resolution which purportedly grants the spouses Johnson a special power of attorney is negated
by the phrase "land and building owned by spouses Richard A. and Linda J. Johnson." 42 Even if we
disregard such phrase, the resolution must be given scant consideration. We adhere to the CAs
position that the basis for determining the board of trustees composition is the trustees as fixed in
the articles of incorporation and not the actual members of the board. The second paragraph of
Section 2543 of the Corporation Code expressly provides that a majority of the number of trustees as
fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate
business.
Moreover, the certification is a mere general power of attorney which comprises all of Joy Trainings
business.44Article 1877 of the Civil Code clearly states that "an agency couched in general terms
comprises only acts of administration, even if the principal should state that he withholds no power
or that the agent may execute such acts as he may consider appropriate, or even though the agency
should authorize a general and unlimited management."45
The contract of sale is unenforceable
Necessarily, the absence of a contract of agency renders the contract of sale unenforceable; 46 Joy
Training effectively did not enter into a valid contract of sale with the spouses Yoshizaki. Sally cannot
also claim that she was a buyer in good faith. She misapprehended the rule that persons dealing
with a registered land have the legal right to rely on the face of the title and to dispense with the
need to inquire further, except when the party concerned has actual knowledge of facts and
circumstances that would impel a reasonably cautious man to make such inquiry.47 This rule applies
when the ownership of a parcel of land is disputed and not when the fact of agency is contested.

At this point, we reiterate the established principle that persons dealing with an agent must ascertain
not only the fact of agency, but also the nature and extent of the agents authority.48 A third person
with whom the agent wishes to contract on behalf of the principal may require the presentation of the
power of attorney, or the instructions as regards the agency.49 The basis for agency is representation
and a person dealing with an agent is put upon inquiry and must discover on his own peril the
authority of the agent.50 Thus, Sally bought the real properties at her own risk; she bears the risk of
injury occasioned by her transaction with the spouses Johnson.
WHEREFORE, premises considered, the assailed Decision dated February 14, 2006 and Resolution
dated October 3, 2006 of the Court of Appeals are hereby AFFIRMED and the petition is hereby
DENIED for lack of merit.
SO ORDERED.
ARTURO D. BRION
Associate Justice
WE CONCUR:

G.R. No. 166044

June 18, 2012

COUNTRY BANKERS INSURANCE CORPORATION, Petitioner,

vs.
KEPPEL CEBU SHIPYARD, UNIMARINE SHIPPING LINES, INC., PAUL RODRIGUEZ, PETER
RODRIGUEZ, ALBERT HONTANOSAS, and BETHOVEN QUINAIN, Respondents.

DECISION
LEONARDO-DE CASTRO, J.:
This is a petition for review on certiorari1 to reverse and set aside the January 29, 2004
Decision2 and October 28, 2004 Resolution3 of the Court of Appeals in CA-G.R. CV No. 58001,
wherein the Court of Appeals affirmed with modification the February 10, 1997 Decision 4 of the
Regional Trial Court (RTC) of Cebu City, Branch 7, in Civil Case No. CBB-13447.
Hereunder are the undisputed facts as culled from the records of the case.
On January 27, 1992, Unimarine Shipping Lines, Inc. (Unimarine), a corporation engaged in the
shipping industry, contracted the services of Keppel Cebu Shipyard, formerly known as Cebu
Shipyard and Engineering Works, Inc. (Cebu Shipyard), for dry docking and ship repair works on its
vessel, the M/V Pacific Fortune.5
On February 14, 1992, Cebu Shipyard issued Bill No. 26035 to Unimarine in consideration for its
services, which amounted to P4,486,052.00.6 Negotiations between Cebu Shipyard and Unimarine
led to the reduction of this amount to P3,850,000.00. The terms of this agreement were embodied in
Cebu Shipyards February 18, 1992 letter to the President/General Manager of Unimarine, Paul
Rodriguez, who signed his conformity to said letter, quoted in full below:
18 February 1992
Ref No.: LL92/0383
UNIMARINE SHIPPING LINES, INC.
C/O Autographics, Inc.
Gorordo Avenue, Lahug, Cebu City
Attention: Mr. Paul Rodriguez
President/General Manager
This is to confirm our agreement on the shiprepair bills charged for the repair of MV Pacific Fortune,
our invoice no. 26035.
The shiprepair bill (Bill No. 26035) is agreed at a negotiated amount of P3,850,000.00 excluding
VAT.
Unimarine Shipping Lines, Inc. ("Unimarine") will pay the above amount of [P3,850,000.00] in US
Dollars to be fixed at the prevailing USDollar to Philippine Peso exchange rate at the time of
payment. The payment terms to be extended to Unimarine is as follows:
Installments
1st Installment

Amount
P2,350,000.00

Due Date
30 May 1992

2nd Installment

P1,500,000.00

30 Jun 1992

Unimarine will deposit post-dated checks equivalent to the above amounts in Philippine Peso and an
additional check amount of P385,000.00, representing 10% [Value Added Tax] VAT on the above bill
of P3,850,000.00. In the event that Unimarine fails to make full payment on the above due dates in
US Dollars, the post-dated checks will be deposited by CSEW in payment of the amounts owned by
Unimarine and Unimarine agree that the 10% VAT (P385,000.00) shall also become payable to
CSEW.
Unimarine in consideration of the credit terms extended by CSEW and the release of the vessel
before full payment of the above debt, agree to present CSEW surety bonds equal to 120% of the
value of the credit extended. The total bond amount shall be P4,620,000.00.
Yours faithfully,
CEBU SHIPYARD & ENG'G WORKS, INC.
(SGD)
SEET KENG TAT
Treasurer/VP-Admin.

Conforme:
(SGD)

PAUL RODRIGUEZ
Unimarine Shipping
Lines, Inc.7
In compliance with the agreement, Unimarine, through Paul Rodriguez, secured from Country
Bankers Insurance Corp. (CBIC), through the latters agent, Bethoven Quinain (Quinain), CBIC
Surety Bond No. G (16) 294198 (the surety bond) on January 15, 1992 in the amount
of P3,000,000.00. The expiration of this surety bond was extended to January 15, 1993, through
Endorsement No. 331529 (the endorsement), which was later on attached to and formed part of the
surety bond. In addition to this, Unimarine, on February 19, 1992, obtained another bond from
Plaridel Surety and Insurance Co. (Plaridel), PSIC Bond No. G (16)-0036510 in the amount
ofP1,620,000.00.
On February 17, 1992, Unimarine executed a Contract of Undertaking in favor of Cebu Shipyard.
The pertinent portions of the contract read as follows:
Messrs, Uni-Marine Shipping Lines, Inc. ("the Debtor") of Gorordo Avenue, Cebu City hereby
acknowledges that in consideration of Cebu Shipyard & Engineering Works, Inc. ("Cebu Shipyard")
at our request agreeing to release the vessel specified in part A of the Schedule ("name of vessel")
prior to the receipt of the sum specified in part B of the Schedule ("Moneys Payable") payable in
respect of certain works performed or to be performed by Cebu Shipyard and/or its subcontractors
and/or material and equipment supplied or to be supplied by Cebu Shipyard and/or its
subcontractors in connection with the vessel for the party specified in part C of the Schedule ("the
Debtor"), we hereby unconditionally, irrevocably undertake to make punctual payment to Cebu

Shipyard of the Moneys Payable on the terms and conditions as set out in part B of the Schedule.
We likewise hereby expressly waive whatever right of excussion we may have under the law and
equity.
This contract shall be binding upon Uni-Marine Shipping Lines, Inc., its heirs, executors,
administrators, successors, and assigns and shall not be discharged until all obligation of this
contract shall have been faithfully and fully performed by the Debtor.11
Because Unimarine failed to remit the first installment when it became due on May 30, 1992, Cebu
Shipyard was constrained to deposit the peso check corresponding to the initial installment
of P2,350,000.00. The check, however, was dishonored by the bank due to insufficient funds. 12 Cebu
Shipyard faxed a message to Unimarine, informing it of the situation, and reminding it to settle its
account immediately.13
On June 24, 1992, Cebu Shipyard again faxed a message 14 to Unimarine, to confirm Paul
Rodriguezs promise that Unimarine will pay in full the P3,850,000.00, in US Dollars on July 1, 1992.
Since Unimarine failed to deliver on the above promise, Cebu Shipyard, on July 2, 1992, through a
faxed letter, asked Unimarine if the payment could be picked up the next day. This was followed by
another faxed message on July 6, 1992, wherein Cebu Shipyard reminded Unimarine of its promise
to pay in full on July 28, 1992. On August 24, 1992, Cebu Shipyard again faxed 15 Unimarine, to
inform it that interest charges will have to be imposed on their outstanding debt, and if it still fails to
pay before August 28, 1992, Cebu Shipyard will have to enforce payment against the sureties and
take legal action.
On November 18, 1992, Cebu Shipyard, through its counsel, sent Unimarine a letter,16 demanding
payment, within seven days from receipt of the letter, the amount of P4,859,458.00, broken down as
follows:
B#26035 MV PACIFIC FORTUNE
LESS: ADJUSTMENT:
CN#00515-03/19/92

4,486,052.00

(636,052.00)
-------------------3,850,000.00

Add: VAT on repair bill no. 26035

385,000.00
-------------------4,235,000.00

Add: Interest/penalty charges:

Debit Note No. 02381

189,888.00

Debit Note No. 02382

434,570.00
-------------------4,859,458.0017

Due to Unimarines failure to heed Cebu Shipyards repeated demands, Cebu Shipyard, through
counsel, wrote the sureties CBIC18 on November 18, 1992, and Plaridel,19 on November 19, 1992, to
inform them of Unimarines nonpayment, and to ask them to fulfill their obligations as sureties, and to
respond within seven days from receipt of the demand.
However, even the sureties failed to discharge their obligations, and so Cebu Shipyard filed a
Complaint dated January 8, 1993, before the RTC, Branch 18 of Cebu City, against Unimarine,
CBIC, and Plaridel. This was docketed as Civil Case No. CBB-13447.
CBIC, in its Answer,20 said that Cebu Shipyards complaint states no cause of action. CBIC alleged
that the surety bond was issued by its agent, Quinain, in excess of his authority. CBIC claimed that
Cebu Shipyard should have doubted the authority of Quinain to issue the surety bond based on the
following:
1. The nature of the bond undertaking (guarantee payment), and the amount involved.
2. The surety bond could only be issued in favor of the Department of Public Works and
Highways, as stamped on the upper right portion of the face of the bond. 21 This stamp was
covered by documentary stamps.
3. The issuance of the surety bond was not reported, and the corresponding premiums were
not remitted to CBIC.22
CBIC added that its liability was extinguished when, without its knowledge and consent, Cebu
Shipyard and Unimarine novated their agreement several times. Furthermore, CBIC stated that
Cebu Shipyards claim had already been paid or extinguished when Unimarine executed an
Assignment of Claims23 of the proceeds of the sale of its vessel M/V Headline in favor of Cebu
Shipyard. CBIC also averred that Cebu Shipyards claim had already prescribed as the endorsement
that extended the surety bonds expiry date, was not reported to CBIC. Finally, CBIC asseverated
that if it were held to be liable, its liability should be limited to the face value of the bond and not for
exemplary damages, attorneys fees, and costs of litigation. 24
Subsequently, CBIC filed a Motion to Admit Cross and Third Party Complaint25 against Unimarine, as
cross defendant; Paul Rodriguez, Albert Hontanosas, and Peter Rodriguez, as signatories to the
Indemnity Agreement they executed in favor of CBIC; and Bethoven Quinain, as the agent who
issued the surety bond and endorsement in excess of his authority, as third party defendants. 26
CBIC claimed that Paul Rodriguez, Albert Hontanosas, and Peter Rodriguez executed an Indemnity
Agreement, wherein they bound themselves, jointly and severally, to indemnify CBIC for any amount
it may sustain or incur in connection with the issuance of the surety bond and the endorsement. 27 As
for Quinain, CBIC alleged that he exceeded his authority as stated in the Special Power of Attorney,
wherein he was authorized to solicit business and issue surety bonds not exceeding P500,000.00

but only in favor of the Department of Public Works and Highways, National Power Corporation, and
other government agencies.28
On August 23, 1993, third party defendant Hontanosas filed his Answer with Counterclaim, to the
Cross and Third Party Complaint. Hontanosas claimed that he had no financial interest in Unimarine
and was neither a stockholder, director nor an officer of Unimarine. He asseverated that his
relationship to Unimarine was limited to his capacity as a lawyer, being its retained counsel. He
further denied having any participation in the Indemnity Agreement executed in favor of CBIC, and
alleged that his signature therein was forged, as he neither signed it nor appeared before the Notary
Public who acknowledged such undertaking.29
Various witnesses were presented by the parties during the course of the trial of the case. Myrna
Obrinaga testified for Cebu Shipyard. She was the Chief Accountant in charge of the custody of the
documents of the company. She corroborated Cebu Shipyards allegations and produced in court the
documents to support Cebu Shipyards claim. She also testified that while it was true that the
proceeds of the sale of Unimarines vessel, M/V Headline, were assigned to Cebu Shipyard, nothing
was turned over to them.30
Paul Rodriguez admitted that Unimarine failed to pay Cebu Shipyard for the repairs it did on M/V
Pacific Fortune, despite the extensions granted to Unimarine. He claimed that he signed the
Indemnity Agreement because he trusted Quinain that it was a mere pre-requisite for the issuance of
the surety bond. He added that he did not bother to read the documents and he was not aware of
the consequences of signing an Indemnity Agreement. Paul Rodriguez also alleged to not having
noticed the limitation "Valid only in favor of DPWH" stamped on the surety bond. 31 However, Paul
Rodriguez did not contradict the fact that Unimarine failed to pay Cebu Shipyard its obligation. 32
CBIC presented Dakila Rianzares, the Senior Manager of its Bonding Department. Her duties
included the evaluation and approval of all applications for and reviews of bonds issued by their
agents, as authorized under the Special Power of Attorney and General Agency Contract of CBIC.
Rianzares testified that she only learned of the existence of CBIC Surety Bond No. G (16) 29419
when she received the summons for this case. Upon investigation, she found out that the surety
bond was not reported to CBIC by Quinain, the issuing agent, in violation of their General Agency
Contract, which provides that all bonds issued by the agent be reported to CBICs office within one
week from the date of issuance. She further stated that the surety bond issued in favor of Unimarine
was issued beyond Quinains authority. Rianzares added that she was not aware that an
endorsement pertaining to the surety bond was also issued by Quinain. 33
After the trial, the RTC was faced with the lone issue of whether or not CBIC was liable to Cebu
Shipyard based on Surety Bond No. G (16) 29419.34
On February 10, 1997, the RTC rendered its Decision, the fallo of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff Cebu Shipyard & Engineering
Works, Incorporated and against the defendants:

1. Ordering the defendants Unimarine Shipping Lines, Incorporated, Country Bankers

Insurance Corporation and Plaridel Surety and Insurance Corporation to pay plaintiff jointly
and severally the amount of P4,620,000.00 equivalent to the value of the surety bonds;
2. Ordering further defendant Unimarine to pay plaintiff the amount of P259,458.00 to
complete its entire obligation of P4,859,458.00;
3. To pay plaintiff jointly and severally the amount of P100,000.00 in attorneys fees and
litigation expenses;
4. For Cross defendant Unimarine Shipping Lines, Incorporated and Third party defendants
Paul Rodriguez, Peter Rodriguez and Alber[t] Hontanosas: To indemnify jointly and severally,
cross plaintiff and third party plaintiff Country Bankers Insurance Corporation whatever
amount the latter is made to pay to plaintiff.35
The RTC held that CBIC, "in its capacity as surety is bound with its principal jointly and severally to
the extent of the surety bond it issued in favor of [Cebu Shipyard]" because "although the contract of
surety is in essence secondary only to a valid principal obligation, his liability to [the] creditor is said
to be direct, primary[,] and absolute, in other words, he is bound by the principal." 36 The RTC added:
Solidary obligations on the part of Unimarine and CBIC having been established and expressly
stated in the Surety Bond No. 29419 (Exh. "C"), [Cebu Shipyard], therefore, is entitled to collect and
enforce said obligation against any and or both of them, and if and when CBIC pays, it can compel
its co-defendant Unimarine to reimburse to it the amount it has paid. 37
The RTC found CBICs contention that Quinain acted in excess of his authority in issuing the surety
bond untenable. The RTC held that CBIC is bound by the surety bond issued by its agent who acted
within the apparent scope of his authority. The RTC said:
[A]s far as third persons are concerned, an act is deemed to have been performed within the scope
of the agents authority, if such act is within the terms of the powers of attorney as written, even if the
agent has in fact exceeded the limits of his authority according to an understanding between the
principal and the agent.38
All the defendants appealed this Decision to the Court of Appeals.
Unimarine, Paul Rodriguez, Peter Rodriguez, and Albert Hontanosas argued that Unimarines
obligation under Bill No. 26035 had been extinguished by novation, as Cebu Shipyard had agreed to
accept the proceeds of the sale of the M/V Headline as payment for the ship repair works it did on
M/V Pacific Fortune. Paul Rodriguez and Peter Rodriguez added that such novation also freed them
from their liability under the Indemnity Agreement they signed in favor of CBIC. Albert Hontanosas in
turn reiterated that he did not sign the Indemnity Agreement.39[SC1
CBIC, in its Appellants Brief,40 claimed that the RTC erred in enforcing its liability on the surety bond
as it was issued in excess of Quinains authority. Moreover, CBIC averred, its liability under such
surety had been extinguished by reasons of novation, payment, and prescription. CBIC also

questioned the RTCs order, holding it jointly and severally liable with Unimarine and Plaridel for the
amount of P4,620,000.00, a sum larger than the face value of CBIC Surety Bond No. G (16) 29419,
and why the RTC did not hold Quinain liable to indemnify CBIC for whatever amount it was ordered
to pay Cebu Shipyard.
On January 29, 2004, the Court of Appeals promulgated its decision, with the following dispositive
portion:
WHEREFORE, in view of the foregoing, the respective appeal[s] filed by Defendants-Appellants
Unimarine Shipping Lines, Inc. and Country Bankers Insurance Corporation; Cross-DefendantAppellant Unimarine Shipping Lines, Inc. and; Third-Party Defendants-Appellants Paul Rodriguez,
Peter Rodriguez and Albert Hontanosas are hereby DENIED. The decision of the RTC in Civil Case
No. CEB-13447 dated February 10, 1997 is AFFIRMED with modification that Mr. Bethoven Quinain,
CBICs agent is hereby held jointly and severally liable with CBIC by virtue of Surety Bond No.
29419 executed in favor of plaintiff-appellee CSEW.41
In its decision, the Court of Appeals resolved the following issues, as it had summarized from the
parties pleadings:
I. Whether or not UNIMARINE is liable to [Cebu Shipyard] for a sum of money arising from
the ship-repair contract;
II. Whether or not the obligation of UNIMARINE to [Cebu Shipyard] has been extinguished by
novation;
III. Whether or not Defendant-Appellant CBIC, allegedly being the Surety of UNIMARINE is
liable under Surety Bond No. 29419[;]
IV. Whether or not Cross Defendant-Appellant UNIMARINE and Third-Party DefendantsAppellants Paul Rodriguez, Peter Rodriguez, Albert Hontanosas and Third-Party Defendant
Bethoven Quinain are liable by virtue of the Indemnity Agreement executed between them
and Cross and Third Party Plaintiff CBIC;
V. Whether or not Plaintiff-Appellee [Cebu Shipyard] is entitled to the award of P100,000.00
in attorneys fees and litigation expenses.42
The Court of Appeals held that it was duly proven that Unimarine was liable to Cebu Shipyard for the
ship repair works it did on the formers M/V Pacific Fortune. The Court of Appeals dismissed CBICs
contention of novation for lack of merit.43 CBIC was held liable under the surety bond as there was
no novation on the agreement between Unimarine and Cebu Shipyard that would discharge CBIC
from its obligation. The Court of Appeals also did not allow CBIC to disclaim liability on the ground
that Quinain exceeded his authority because third persons had relied upon Quinains representation,
as CBICs agent.44 Quinain was, however, held solidarily liable with CBIC under Article 1911 of the
Civil Code.45

Anent the liability of the signatories to the Indemnity Agreement, the Court of Appeals held Paul
Rodriguez, Peter Rodriguez, and Albert Hontanosas jointly and severally liable thereunder. The
Court of Appeals rejected Hontanosass claim that his signature in the Indemnity Agreement was
forged, as he was not able to prove it.46
The Court of Appeals affirmed the award of attorneys fees and litigation expenses to Cebu Shipyard
since it was able to clearly establish the defendants liability, which they tried to dodge by setting up
defenses to release themselves from their obligation.47
CBIC48and Unimarine, together with third party defendants-appellants 49 filed their respective Motions
for Reconsideration. This was, however, denied by the Court of Appeals in its October 28, 2004
Resolution for lack of merit.
Unimarine elevated its case to this Court via a petition for review on certiorari, docketed as G.R. No.
166023, which was denied in a Resolution dated January 19, 2005. 50
The lone petitioner in this case, CBIC, is now before this Court, seeking the reversal of the Court of
Appeals decision and resolution on the following grounds:
A.
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN APPLYING THE
PROVISIONS OF ARTICLE 1911 OF THE CIVIL CODE TO HOLD PETITIONER LIABLE
FOR THE ACTS DONE BY ITS AGENT IN EXCESS OF AUTHORITY.
B.
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN HOLDING THAT AN
EXTENSION OF THE PERIOD FOR THE PERFORMANCE OF AN OBLIGATION
GRANTED BY THE CREDITOR TO THE PRINCIPAL DEBTOR IS NOT SUFFICIENT TO
RELEASE THE SURETY.
C.
ASSUMING THAT PETITIONER IS LIABLE UNDER THE BOND, THE HONORABLE
COURT OF APPEALS NONETHELESS SERIOUSLY ERRED IN AFFIRMING THE
SOLIDARY LIABILITY OF PETITIONER BEYOND THE VALUE OF THE BOND.
D.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING PETITIONER JOINTLY
AND SEVERALLY LIABLE FOR ATTORNEYS FEES IN THE AMOUNT OF P100,000.00.51
Issue

The crux of the controversy lies in CBICs liability on the surety bond Quinain issued to Unimarine, in
favor of Cebu Shipyard.
CBIC avers that the Court of Appeals erred in interpreting and applying the rules governing the
contract of agency. It argued that the Special Power of Attorney granted to Quinain clearly set forth
the extent and limits of his authority with regard to businesses he can transact for and in behalf of
CBIC. CBIC added that it was incumbent upon Cebu Shipyard to inquire and look into the power of
authority conferred to Quinain. CBIC said:
The authority to bind a principal as a guarantor or surety is one of those powers which requires a
Special Power of Attorney pursuant to Article 1878 of the Civil Code. Such power could not be simply
assumed or inferred from the mere existence of an agency. A person who enters into a contract of
suretyship with an agent without confirming the extent of the latters authority does so at his peril. x x
x.52
CBIC claims that the foregoing is true even if Quinain was granted the authority to transact in the
business of insurance in general, as "the authority to bind the principal in a contract of suretyship
could nonetheless never be presumed."53 Thus, CBIC claims, that:
[T]hird persons seeking to hold the principal liable for transactions entered into by an agent should
establish the following, in case the same is controverted:
6.6.1. The fact or existence of the agency.
6.6.2. The nature and extent of authority.54
To go a little further, CBIC said that the correct Civil Code provision to apply in this case is Article
1898. CBIC asserts that "Cebu Shipyard was charged with knowledge of the extent of the authority
conferred on Mr. Quinain by its failure to perform due diligence investigations." 55
Cebu Shipyard, in its Comment56 first assailed the propriety of the petition for raising factual issues.
In support, Cebu Shipyard claimed that the Court of Appeals application of Article 1911 of the Civil
Code was founded on findings of facts that CBIC now disputes. Thus, the question is not purely of
law.
Discussion
The fact that Quinain was an agent of CBIC was never put in issue. What has always been debated
by the parties is the extent of authority or, at the very least, apparent authority, extended to Quinain
by CBIC to transact insurance business for and in its behalf.
In a contract of agency, a person, the agent, binds himself to represent another, the principal, with
the latters consent or authority.57 Thus, agency is based on representation, where the agent acts for
and in behalf of the principal on matters within the scope of the authority conferred upon him. 58 Such
"acts have the same legal effect as if they were personally done by the principal. By this legal fiction

of representation, the actual or legal absence of the principal is converted into his legal or juridical
presence."59
The RTC applied Articles 1900 and 1911 of the Civil Code in holding CBIC liable for the surety bond.
It held that CBIC could not be allowed to disclaim liability because Quinains actions were within the
terms of the special power of attorney given to him.60 The Court of Appeals agreed that CBIC could
not be permitted to abandon its obligation especially since third persons had relied on Quinains
representations. It based its decision on Article 1911 of the Civil Code and found CBIC to have been
negligent and less than prudent in conducting its insurance business for its failure to supervise and
monitor the acts of its agents, to regulate the distribution of its insurance forms, and to devise
schemes to prevent fraudulent misrepresentations of its agents.61
This Court does not agree. Pertinent to this case are the following provisions of the Civil Code:
Art. 1898. If the agent contracts in the name of the principal, exceeding the scope of his authority,
and the principal does not ratify the contract, it shall be void if the party with whom the agent
contracted is aware of the limits of the powers granted by the principal. In this case, however, the
agent is liable if he undertook to secure the principals ratification.
Art. 1900. So far as third persons are concerned, an act is deemed to have been performed within
the scope of the agents authority, if such act is within the terms of the power of attorney, as written,
even if the agent has in fact exceeded the limits of his authority according to an understanding
between the principal and the agent.
Art. 1902. A third person with whom the agent wishes to contract on behalf of the principal may
require the presentation of the power of attorney, or the instructions as regards the agency. Private
or secret orders and instructions of the principal do not prejudice third persons who have relied upon
the power of attorney or instructions shown to them.
Art. 1910. The principal must comply with all the obligations which the agent may have contracted
within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not bound except
when he ratifies it expressly or tacitly.
Art. 1911. Even when the agent has exceeded his authority, the principal is solidarily liable with the
agent if the former allowed the latter to act as though he had full powers.
Our law mandates an agent to act within the scope of his authority.62 The scope of an agents
authority is what appears in the written terms of the power of attorney granted upon him. 63 Under
Article 1878(11) of the Civil Code, a special power of attorney is necessary to obligate the principal
as a guarantor or surety.
In the case at bar, CBIC could be held liable even if Quinain exceeded the scope of his authority only
if Quinains act of issuing Surety Bond No. G (16) 29419 is deemed to have been performed within
the written terms of the power of attorney he was granted. 64

However, contrary to what the RTC held, the Special Power of Attorney accorded to Quinain clearly
states the limits of his authority and particularly provides that in case of surety bonds, it can only be
issued in favor of the Department of Public Works and Highways, the National Power Corporation,
and other government agencies; furthermore, the amount of the surety bond is limited
to P500,000.00, to wit:
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That, COUNTRY BANKERS INSURANCE CORPORATION, a corporation duly organized and
existing under and by virtue of the laws of the Philippines, with head offices at 8th Floor, G.F.
Antonino Building, T.M. Kalaw Street, Ermita, Manila, now and hereinafter referred to as "the
Company" hereby appoints BETHOVEN B. QUINAIN with address at x x x to be its General Agent
and Attorney-in-Fact, for and in its place, name and stead, and for its own use and benefit, to do and
perform the following acts and things:
1. To conduct, manage, carry on and transact insurance business as usually pertains to a
General Agency of Fire, Personal Accident, Bond, Marine, Motor Car (Except Lancer).
2. To accept, underwrite and subscribe policies of insurance for and in behalf of the
Company under the terms and conditions specified in the General Agency Contract executed
and entered into by and between it and its said Attorney-in-Fact subject to the following
Schedule of Limits:
- SCHEDULE OF LIMITS a. FIRE:
xxxx
b. PERSONAL ACCIDENT:
xxxx
c. MOTOR CAR:
xxxx
d. MARINE:
xxxx
e. BONDS:
xxxx

Surety Bond (in favor of Dept. of Pub. Works and

Highways, Natl. Power Corp. & other. 500,000.00
Government agencies)65
CBIC does not anchor its defense on a secret agreement, mutual understanding, or any verbal
instruction to Quinain. CBICs stance is grounded on its contract with Quinain, and the clear, written
terms therein. This Court finds that the terms of the foregoing contract specifically provided for the
extent and scope of Quinains authority, and Quinain has indeed exceeded them.
Under Articles 1898 and 1910, an agents act, even if done beyond the scope of his authority, may
bind the principal if he ratifies them, whether expressly or tacitly. It must be stressed though that only
the principal, and not the agent, can ratify the unauthorized acts, which the principal must have
knowledge of.66 Expounding on the concept and doctrine of ratification in agency, this Court said:
Ratification in agency is the adoption or confirmation by one person of an act performed on his
behalf by another without authority. The substance of the doctrine is confirmation after conduct,
amounting to a substitute for a prior authority. Ordinarily, the principal must have full knowledge at
the time of ratification of all the material facts and circumstances relating to the unauthorized act of
the person who assumed to act as agent. Thus, if material facts were suppressed or unknown, there
can be no valid ratification and this regardless of the purpose or lack thereof in concealing such facts
and regardless of the parties between whom the question of ratification may arise. Nevertheless, this
principle does not apply if the principals ignorance of the material facts and circumstances was
willful, or that the principal chooses to act in ignorance of the facts. However, in the absence of
circumstances putting a reasonably prudent man on inquiry, ratification cannot be implied as against
the principal who is ignorant of the facts.67 (Emphases supplied.)
Neither Unimarine nor Cebu Shipyard was able to repudiate CBICs testimony that it was unaware of
the existence of Surety Bond No. G (16) 29419 and Endorsement No. 33152. There were no
allegations either that CBIC should have been put on alert with regard to Quinains business
transactions done on its behalf. It is clear, and undisputed therefore, that there can be no ratification
in this case, whether express or implied.
Article 1911, on the other hand, is based on the principle of estoppel, which is necessary for the
protection of third persons. It states that the principal is solidarily liable with the agent even when the
latter has exceeded his authority, if the principal allowed him to act as though he had full powers.
However, for an agency by estoppel to exist, the following must be established:
1. The principal manifested a representation of the agents authority or knowingly allowed the
agent to assume such authority;
2. The third person, in good faith, relied upon such representation; and
3. Relying upon such representation, such third person has changed his position to his
detriment.68

In Litonjua, Jr. v. Eternit Corp.,69 this Court said that "[a]n agency by estoppel, which is similar to the
doctrine of apparent authority, requires proof of reliance upon the representations, and that, in turn,
needs proof that the representations predated the action taken in reliance." 70
This Court cannot agree with the Court of Appeals pronouncement of negligence on CBICs part.
CBIC not only clearly stated the limits of its agents powers in their contracts, it even stamped its
surety bonds with the restrictions, in order to alert the concerned parties. Moreover, its company
procedures, such as reporting requirements, show that it has designed a system to monitor the
insurance contracts issued by its agents. CBIC cannot be faulted for Quinains deliberate failure to
notify it of his transactions with Unimarine. In fact, CBIC did not even receive the premiums paid by
Unimarine to Quinain.
Furthermore, nowhere in the decisions of the lower courts was it stated that CBIC let the public, or
specifically Unimarine, believe that Quinain had the authority to issue a surety bond in favor of
companies other than the Department of Public Works and Highways, the National Power
Corporation, and other government agencies. Neither was it shown that CBIC knew of the existence
of the surety bond before the endorsement extending the life of the bond, was issued to Unimarine.
For one to successfully claim the benefit of estoppel on the ground that he has been misled by the
representations of another, he must show that he was not misled through his own want of
reasonable care and circumspection.71
It is apparent that Unimarine had been negligent or less than prudent in its dealings with Quinain. In
Manila Memorial Park Cemetery, Inc. v. Linsangan,72 this Court held:
It is a settled rule that persons dealing with an agent are bound at their peril, if they would hold the
principal liable, to ascertain not only the fact of agency but also the nature and extent of authority,
and in case either is controverted, the burden of proof is upon them to establish it. The basis for
agency is representation and a person dealing with an agent is put upon inquiry and must discover
upon his peril the authority of the agent. If he does not make such an inquiry, he is chargeable with
knowledge of the agents authority and his ignorance of that authority will not be any excuse.
In the same case, this Court added:
[T]he ignorance of a person dealing with an agent as to the scope of the latters authority is no
excuse to such person and the fault cannot be thrown upon the principal. A person dealing with an
agent assumes the risk of lack of authority in the agent. He cannot charge the principal by relying
upon the agents assumption of authority that proves to be unfounded. The principal, on the other
hand, may act on the presumption that third persons dealing with his agent will not be negligent in
failing to ascertain the extent of his authority as well as the existence of his agency.73
Unimarine undoubtedly failed to establish that it even bothered to inquire if Quinain was authorized
to agree to terms beyond the limits indicated in his special power of attorney. While Paul Rodriguez
stated that he has done business with Quinain more than once, he was not able to show that he was
misled by CBIC as to the extent of authority it granted Quinain. Paul Rodriguez did not even allege
that he asked for documents to prove Quinains authority to contract business for CBIC, such as their
contract of agency and power of attorney. It is also worthy to note that even with the Indemnity

Agreement, Paul Rodriguez signed it on Quinains mere assurance and without truly understanding
the consequences of the terms of the said agreement. Moreover, both Unimarine and Paul
Rodriguez could have inquired directly from CBIC to verify the validity and effectivity of the surety
bond and endorsement; but, instead, they blindly relied on the representations of Quinain. As this
Court held in Litonjua, Jr. v. Eternit Corp.74:
A person dealing with a known agent is not authorized, under any circumstances, blindly to trust the
agents; statements as to the extent of his powers; such person must not act negligently but must use
reasonable diligence and prudence to ascertain whether the agent acts within the scope of his
authority. The settled rule is that, persons dealing with an assumed agent are bound at their peril,
and if they would hold the principal liable, to ascertain not only the fact of agency but also the nature
and extent of authority, and in case either is controverted, the burden of proof is upon them to prove
it. In this case, the petitioners failed to discharge their burden; hence, petitioners are not entitled to
damages from respondent EC.75
In light of the foregoing, this Court is constrained to release CBIC from its liability on Surety Bond
No. G (16) 29419 and Endorsement No. 33152. This Court sees no need to dwell on the other
grounds propounded by CBIC in support of its prayer.
WHEREFORE, this petition is hereby GRANTED and the complaint against CBIC is DISMISSED for
lack of merit. The January 29, 2004 Decision and October 28, 2004 Resolution of the Court of
Appeals in CA-G.R. CV No. 58001 is MODIFIED insofar as it affirmed CBICs liability on Surety Bond
No. G (16) 29419 and Endorsement No. 33152.
SO ORDERED.
TERESITA J. LEONARDO-DE CASTRO*
Associate Justice
Acting Chairperson, First Division
WE CONCUR:

G.R. No. 195481

July 10, 2013

ORIENTAL PETROLEUM AND MINERALS CORPORATION, PETITIONER,

vs.
TUSCAN REALTY, INC., RESPONDENT.
DECISION
ABAD, J.:
This case is about a brokers claim for commission for having referred a possible buyer who later
served as an intermediary to the eventual sale of the property to a third party.
The Facts and the Case
On June 9, 1999 respondent Tuscan Realty, Inc. (Tuscan Realty) filed a complaint for sum of money
with application for preliminary attachment against petitioner Oriental Petroleum and Minerals
Corporation (Oriental Petroleum) before the Makati Regional Trial Court (RTC).
Oriental Petroleum owned two condominium units at Corinthian Plaza in Makati City. On August 13,
1996 it gave Tuscan Realty a "non-exclusive authority to offer" these units for sale. On August 14,
1996 Tuscan Realty submitted an initial list of its prospective client-buyers that included Gateway
Holdings Corporation (Gateway). Tuscan Realty updated this list on September 18, 1996.
Subsequently, Oriental Petroleum advised Tuscan Realty that it would undertake direct negotiation
with a certain Gene de los Reyes of Gateway for the sale of the units. This resulted in a contract to
sell between Oriental Petroleum and Gateway on August 1, 1997.
Meantime, Gateway apparently turned around nearly two months later on September 29, 1997 and
assigned its rights as buyer of the units to Alonzo Ancheta in whose favor Oriental Petroleum
executed a deed of absolute sale on December 10, 1997 for the price of P69,595,400.00. Prompted
by this development, Tuscan Realty demanded payment of its brokers commission
of P2,087,862.00 by Oriental Petroleum. The latter refused to pay, however, claiming that Tuscan
Realty did nothing to close its deal with Gateway and Ancheta.
On July 28, 1999 the RTC granted Tuscan Realtys application for preliminary attachment but
rendered a decision six years later or on November 2, 2005, dismissing the complaint on the ground
of Tuscan Realtys failure to substantiate its allegation that it was responsible for closing the sale of
the subject condominium units. Tuscan Realty appealed the RTC decision to the Court of Appeals
(CA).
On August 11, 2010 the CA granted the appeal and set aside the RTC decision. The CA ordered
Oriental Petroleum to pay Tuscan Realty its brokers commission of P2,087,862.00, which is 3% of

the final purchase price, plus 6% interest from the finality of its decision until actual payment. Hence,
the present petition.
The Issue Presented
The issue in this case is whether or not Tuscan Realty is entitled to a brokers commission for the
sale of Oriental Petroleums condominium units to Ancheta.
The Ruling of the Court
The CA invoked the principle of "procuring cause" in ordering the payment of brokers commission to
Tuscan Realty. The term "procuring cause" refers to a cause which starts a series of events and
results, without break in their continuity, in the accomplishment of a brokers prime objective of
producing a purchaser who is ready, willing, and able to buy on the owners terms. 1 This is similar to
the concept of proximate cause in Torts, without which the injury would not have occurred. To be
regarded as the procuring cause of a sale, a brokers efforts must have been the foundation of the
negotiations which subsequently resulted in a sale. 2
Here, it was Tuscan Realty that introduced Gateway to Oriental Petroleum as an interested buyer of
its condominium units. Oriental Petroleums own Executive Vice-President attested to this, saying
that they learned of Gateways interest in the properties from Mr. Capotosto of Tuscan Realty. Thus:
Q:
So you are saying that it was Mr. Capotosto of plaintiff who introduced or who manifested that
Gateway Holdings is interested in buying the properties?
A:
Yes, Maam. I never denied that.3
The evidence shows that on August 14, 1996 Tuscan Realty submitted an initial list 4 of prospective
buyers with contact details. It twice updated this list5 with Gateway always on top of the lists. Clearly
then, it was on account of Tuscan Realtys effort that Oriental Petroleum got connected to Gateway,
the prospective buyer, resulting in the latter two entering into a contract to sell involving the two
condominium units. Although Gateway turned around and sold the condominium units to Ancheta,
the fact is that such ultimate sale could not have happened without Gateways indispensable
intervention as intermediate buyer. Applying the principle of procuring cause, therefore, Tuscan
Realty should be given its brokers commission.
Oriental Petroleum of course claims that Gateway was not a ready, willing, and able purchaser and
that it in fact assigned its right to Ancheta who became the ultimate buyer and that, moreover, it was
not Tuscan Realty that introduced Ancheta to Oriental Petroleum. But there is no question that the
contract to sell that Oriental Petroleum concluded with Gateway was a valid and binding contract to
sell, which precluded Oriental Petroleum from peddling the properties to others. Indeed, Oriental
Petroleum executed a deed of absolute sale in Anchetas favor by virtue of Gateways assignment to

him of its rights under the contract to sell. Consequently, it cannot be said that Oriental Petroleum
found a direct buyer in Ancheta without the intermediate contract to sell in favor of Gateway, Tuscan
Realtys proposed buyer.
Oriental Petroleum further points out that Tuscan Realty took no part in its negotiation with
Gateway. That may be the case but the reason why Tuscan Realty refrained from doing so was
because of Oriental Petroleums advice that it would henceforth directly negotiate the sale with
Gateway. Besides, assuming that the advice amounted to a revocation of Tuscan Realtys authority
to sell, the Court has always recognized the brokers right to his commission, although the owner
revoked his authority and directly negotiated with the buyer whom he met through the brokers
efforts.6 It would be unfair not to give the broker the reward he had earned for helping the owner find
a buyer who would pay the price.
1wphi1

Lastly, Oriental Petroleum is convinced that this is just a simple case of non-fulfillment of a
suspensive condition. It claims that the commission is only to be awarded if the properties were sold
at a minimum of P120,000.00 per square meter and that the delivery must be made within the first
week of January 1997. But these are just lame excuses to avoid liability. As the CA correctly noted,
Oriental Petroleum did not raise the issue regarding the delivery deadline in its Answer. As for the
fact that the properties were eventually sold for less than the original asking price, that action was
within Oriental Petroleums discretion. It decided the matter unilaterally without consulting its broker.
Consequently, it should be deemed to have waived its own minimum price requirement.
WHEREFORE, the Court DENIES the petition and AFFIRMS the Decision of the Court of Appeals in
CA-G.R. CV 86417 dated August 11, 2010.
SO ORDERED.

G.R. No. 185891

June 26, 2013

CATHAY PACIFIC AIRWAYS, Petitioner,

vs.
JUANITA REYES, WILFREDO REYES, MICHAEL ROY REYES, SIXTA LAPUZ, and
SAMPAGUITA TRAVEL CORP., Respondents.
DECISION
PEREZ, J.:
Assailed in this petition for review are the Decision1 dated 22 October 2008 in CA-G.R. CV. No.
86156 and the 6 January 2009 Resolution2 in the same case of the Court of Appeals.
This case started as a complaint for damages tiled by respondents against Cathay Pacific Airways
(Cathay Pacific) and Sampaguita Travel Corp. (Sampaguita Travel), now joined as a respondent.
The factual backdrop leading to the filing of the complaint is as follows:
Sometime in March 1997, respondent Wilfredo Reyes (Wilfredo) made a travel reservation with
Sampaguita Travel for his familys trip to Adelaide, Australia scheduled from 12 April 1997 to 4 May
1997. Upon booking and confirmation of their flight schedule, Wilfredo paid for the airfare and was
issued four (4) Cathay Pacific round-trip airplane tickets for Manila-HongKong-Adelaide-HongKongManila with the following record locators:
1wphi1

Name of Passenger

PNR OR RECORD LOCATOR NOS.3

Reyes, Wilfredo

J76TH

Reyes, Juanita

HDWC3

Reyes, Michael Roy

H9VZF

Lapuz, Sixta

HTFMG4

On 12 April 1997, Wilfredo, together with his wife Juanita Reyes (Juanita), son Michael Roy Reyes
(Michael) and mother-in-law Sixta Lapuz (Sixta), flew to Adelaide, Australia without a hitch.
One week before they were scheduled to fly back home, Wilfredo reconfirmed his familys return
flight with the Cathay Pacific office in Adelaide. They were advised that the reservation was "still
okay as scheduled."
On the day of their scheduled departure from Adelaide, Wilfredo and his family arrived at the airport
on time. When the airport check-in counter opened, Wilfredo was informed by a staff from Cathay
Pacific that the Reyeses did not have confirmed reservations, and only Sixtas flight booking was
confirmed. Nevertheless, they were allowed to board the flight to HongKong due to adamant pleas
from Wilfredo. When they arrived in HongKong, they were again informed of the same problem.
Unfortunately this time, the Reyeses were not allowed to board because the flight to Manila was fully
booked. Only Sixta was allowed to proceed to Manila from HongKong. On the following day, the
Reyeses were finally allowed to board the next flight bound for Manila.
Upon arriving in the Philippines, Wilfredo went to Sampaguita Travel to report the incident. He was
informed by Sampaguita Travel that it was actually Cathay Pacific which cancelled their bookings.
On 16 June 1997, respondents as passengers, through counsel, sent a letter to Cathay Pacific
advising the latter of the incident and demanding payment of damages.
After a series of exchanges and with no resolution in sight, respondents filed a Complaint for
damages against Cathay Pacific and Sampaguita Travel and prayed for the following relief:
a) P1,000,000.00 as moral damages; b)P300,000.00 as actual damages; c) P100,000.00 as
exemplary damages; and d) P100,000.00 as attorneys fees.5
In its Answer, Cathay Pacific alleged that based on its computerized booking system, several and
confusing bookings were purportedly made under the names of respondents through two (2) travel
agencies, namely: Sampaguita Travel and Rajah Travel Corporation. Cathay Pacific explained that
only the following Passenger Name Records (PNRs) appeared on its system: PNR No. H9V15, PNR
No. HTFMG, PNR No. J9R6E, PNR No. J76TH, and PNR No. H9VSE. Cathay Pacific went on to
detail each and every booking, to wit:
1. PNR No. H9V15
Agent: Sampaguita Travel Corp.
Party: Ms. J Reyes, Mr. M R Reyes, Mr. W Reyes

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

The itinerary listed above was confirmed booking. However, the itinerary did not include booking for
the return flights. From information retrieved from ABACUS (the booking system used by agents),
the agent has, on 10 April, added segments CX104/CX905 ADL/HKG/MNL 04 MAY on MK status,
which was not a confirmed booking. MK function is used for synchronizing records or for ticketing
purposes only. It does not purport to be a real booking. As a result, no booking was transmitted into
CPAs system.
2. PNR No. HTFMG
Agent: Sampaguita Travel Corp.
Party: Mrs. Sixta Lapuz
Itinerary: CX902/CX105 MNL/HKG/ADL 12 APR, CX104/CX907 ADL/HKG/MNL 04/05 MAY.
The above itinerary is the actual itinerary that the passenger has flown. However, for the return
sector, HKG/MNL, the original booking was on CX905 of 04 May. This original booking was
confirmed on 21 Mar. and ticketed on 11 Apr.
This booking was cancelled on 04 May at 9:03 p.m. when CX905 was almost scheduled to leave at
the behest of the passenger and she was re-booked on CX907 of 05 May at the same time.
3. PNR No. J9R6E
Agent: Rajah Travel Corp.
Party: Mrs. Julieta Gaspar, Mrs. Sixta Lapuz, Mrs. Juanita Reyes,
Mr. Michael Roy Reyes, Mr. Wilfredo Reyes.
Itinerary: CX900 & CX902 MNL/HKG 12 APR, CX105 HKG/ADL 12 APR, CX104/CX905
ADL/HKG/MNL 04 MAY & 07 MAY
The party was confirmed initially on CX900/12 Apr, CX105/12 Apr, CX104/CX9095 07 May and on
waiting list for CX902/12 Apr, CX104/CX905 04 May.
However, on 31 Mar., the booking was cancelled by the agent.
4. PNR No. J76TH
Agent: Sampaguita Travel Corp.
Party: Mr. W Reyes

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

The booking on the above itinerary was confirmed initially. When the agent was asked for the ticket
number as the flight CX905 04 May was very critical, the agent has inputted the ticket number on 10
Apr. but has removed the record on 11 April. Since the booking was reflected as not ticketed, the
booking was cancelled on 18 Apr. accordingly.
This PNR was split from another PNR record, H9VSE.
5. PNR No. H9VSE
Agent: Sampaguita Travel Corp.
Party: Ms. R Lapuz, Mr. R Lapuz, Mr. A Samson, originally Mr. W Reyes was included in this party as
well
Itinerary: CX104/CX905 ADL/HKG/MNL 04 MAY.
The booking was confirmed initially but were not ticketed by 11 Apr. and was cancelled accordingly.
However, the PNR of Mr. W Reyes who was originally included in this party was split to a separate
record of J76TH.6
Cathay Pacific asserted that in the case of Wilfredo with PNR No. J76TH, no valid ticket number was
inputted within a prescribed period which means that no ticket was sold. Thus, Cathay Pacific had
the right to cancel the booking. Cathay Pacific found that Sampaguita Travel initially inputted a ticket
number for PNR No. J76TH and had it cancelled the following day, while the PNR Nos. HDWC3 and
HTFMG of Juanita and Michael do not exist.
The Answer also contained a cross-claim against Sampaguita Travel and blamed the same for the
cancellation of respondents return flights. Cathay Pacific likewise counterclaimed for payment of
attorneys fees.
On the other hand, Sampaguita Travel, in its Answer, denied Cathay Pacifics claim that it was the
cause of the cancellation of the bookings. Sampaguita Travel maintained that it made the necessary
reservation with Cathay Pacific for respondents trip to Adelaide. After getting confirmed bookings
with Cathay Pacific, Sampaguita Travel issued the corresponding tickets to respondents. Their
confirmed bookings were covered with the following PNRs:
PASSENGER NAME

PNR No.

Lapuz, Sixta

H9V15/ J76TH

Reyes, Wilfredo

H9V15/HDWC3

Reyes, Michael Roy

H9V15/H9VZF

Reyes, Juanita

HTFMG7

Sampaguita Travel explained that the Reyeses had two (2) PNRs each because confirmation from
Cathay Pacific was made one flight segment at a time. Sampaguita Travel asserted that it only
issued the tickets after Cathay Pacific confirmed the bookings. Furthermore, Sampaguita Travel
exonerated itself from liability for damages because respondents were claiming for damages arising
from a breach of contract of carriage. Sampaguita Travel likewise filed a cross-claim against Cathay
Pacific and a counterclaim for damages.
During the pre-trial, the parties agreed on the following stipulation of facts:
1. That the plaintiffs did not deal directly with Cathay Pacific Airways;
2. That the plaintiffs did not make their bookings directly with Cathay Pacific Airways;
3. That the plaintiffs did not purchase and did not get their tickets from Cathay Pacific
Airways;
4. That Cathay Pacific Airways has promptly replied to all communications sent by the
plaintiffs through their counsel;
5. That the plane tickets issued to plaintiffs were valid, which is why they were able to depart
from Manila to Adelaide, Australia and that the reason why they were not able to board their
return flight from Adelaide was because of the alleged cancellation of their booking by
Cathay Pacific Airways at Adelaide, save for that of Sixta Lapuz whose booking was
confirmed by Cathay Pacific Airways;
6. That several reservations and bookings for the plaintiffs were done by defendant
Sampaguita Travel Corporation through the computer reservation system and each of such
request was issued a PNR;
7. That, as a travel agent, defendant Sampaguita Travel Corporation merely acts as a
booking/sales/ticketing arm for airline companies and it has nothing to do with the airline
operations;
8. That in the travel industry, the practice of reconfirmation of return flights by passengers is
coursed or done directly with the airline company and not with the travel agent, which has no
participation, control or authority in making such reconfirmations.
9. That in the travel industry, the practice of cancellation of flights is within the control of the
airline and not of the travel agent, unless the travel agent is requested by the passengers to
make such cancellations; and,
10. That defendant Cathay Pacific Airways has advertised that "there is no need to confirm
your flight when travelling with us", although Cathay Pacific Airways qualifies the same to the
effect that in some cases there is a need for reconfirmations.8

After trial on the merits, the Regional Trial Court (RTC) rendered a Decision, 9 the dispositive part of
which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the defendants and
against the herein plaintiff. Accordingly, plaintiffs complaint is hereby ordered DISMISSED for lack of
merit. Defendants counterclaims and cross-claims are similarly ordered dismissed for lack of merit.
No pronouncement as to cost.10
The trial court found that respondents were in possession of valid tickets but did not have confirmed
reservations for their return trip to Manila. Additionally, the trial court observed that the several PNRs
opened by Sampaguita Travel created confusion in the bookings. The trial court however did not find
any basis to establish liability on the part of either Cathay Pacific or Sampaguita Travel considering
that the cancellation was not without any justified reason. Finally, the trial court denied the claims for
damages for being unsubstantiated.
Respondents appealed to the Court of Appeals. On 22 October 2008, the Court of Appeals ordered
Cathay Pacific to pay P25,000.00 each to respondents as nominal damages.
Upon denial of their motion for reconsideration, Cathay Pacific filed the instant petition for review
assigning the following as errors committed by the Court of Appeals:
A.
WHETHER OR NOT THE COURT OF APPEALS COMMITTED A CLEAR AND
REVERSIBLE ERROR IN HOLDING THAT CATHAY PACIFIC AIRWAYS IS LIABLE FOR
NOMINAL DAMAGES FOR ITS ALLEGED INITIAL BREACH OF CONTRACT WITH THE
PASSENGERS EVEN THOUGH CATHAY PACIFIC AIRWAYS WAS ABLE TO PROVE
BEYOND REASONABLE DOUBT THAT IT WAS NOT AT FAULT FOR THE PREDICAMENT
OF THE RESPONDENT PASSENGERS.
B.
WHETHER OR NOT THE COURT OF APPEALS COMMITTED A CLEAR AND
REVERSIBLE ERROR IN RELYING ON MATTERS NOT PROVED DURING THE TRIAL
AND NOT SUPPORTED BY THE EVIDENCE AS BASIS FOR HOLDING CATHAY PACIFIC
AIRWAYS LIABLE FOR NOMINAL DAMAGES.
C.
WHETHER OR NOT THE COURT OF APPEALS COMMITTED A CLEAR AND
REVERSIBLE ERROR IN HOLDING CATHAY PACIFIC AIRWAYS LIABLE FOR NOMINAL
DAMAGES TO RESPONDENT SIXTA LAPUZ.
D.

WHETHER OR NOT THE COURT OF APPEALS COMMITTED A CLEAR AND

REVERSIBLE ERROR IN NOT HOLDING SAMPAGUITA TRAVEL CORP. LIABLE TO
CATHAY PACIFIC AIRWAYS FOR WHATEVER DAMAGES THAT THE AIRLINE COMPANY
WOULD BE ADJUDGED THE RESPONDENT PASSENGERS.
E.
ALTERNATIVELY, WHETHER OR NOT THE COURT OF APPEALS COMMITTED A CLEAR
AND REVERSIBLE ERROR WHEN IT FAILED TO APPLY THE DOCTRINE OF STARE
DECISIS IN FIXING THE AMOUNT OF NOMINAL DAMAGES TO BE AWARDED.11
Cathay Pacific assails the award of nominal damages in favor of respondents on the ground that its
action of cancelling the flight bookings was justifiable. Cathay Pacific reveals that upon investigation,
the respondents had no confirmed bookings for their return flights. Hence, it was not obligated to
transport the respondents. In fact, Cathay Pacific adds, it exhibited good faith in accommodating the
respondents despite holding unconfirmed bookings.
Cathay Pacific also scores the Court of Appeals in basing the award of nominal damages on the
alleged asthmatic condition of passenger Michael and old age of Sixta. Cathay Pacific points out that
the records, including the testimonies of the witnesses, did not make any mention of Michaels
asthma. And Sixta was in fact holding a confirmed booking but she refused to take her confirmed
seat and instead stayed in HongKong with the other respondents.
Cathay Pacific blames Sampaguita Travel for negligence in not ensuring that respondents had
confirmed bookings for their return trips.
Lastly, assuming arguendo that the award of nominal damages is proper, Cathay Pacific contends
that the amount should be reduced to P5,000.00 for each passenger.
At the outset, it bears pointing out that respondent Sixta had no cause of action against Cathay
Pacific or Sampaguita Travel. The elements of a cause of action consist of: (1) a right existing in
favor of the plaintiff, (2) a duty on the part of the defendant to respect the plaintiffs right, and (3) an
act or omission of the defendant in violation of such right. 12 As culled from the records, there has
been no violation of any right or breach of any duty on the part of Cathay Pacific and Sampaguita
Travel. As a holder of a valid booking, Sixta had the right to expect that she would fly on the flight
and on the date specified on her airplane ticket. Cathay Pacific met her expectations and Sixta was
indeed able to complete her flight without any trouble. The absence of any violation to Sixtas right as
passenger effectively deprived her of any relief against either Cathay Pacific or Sampaguita Travel.
With respect to the three remaining respondents, we rule as follows:
The determination of whether or not the award of damages is correct depends on the nature of the
respondents contractual relations with Cathay Pacific and Sampaguita Travel. It is beyond dispute
that respondents were holders of Cathay Pacific airplane tickets and they made the booking through
Sampaguita Travel.

Respondents cause of action against Cathay Pacific stemmed from a breach of contract of carriage.
A contract of carriage is defined as one whereby a certain person or association of persons obligate
themselves to transport persons, things, or news from one place to another for a fixed price. 13 Under
Article 1732 of the Civil Code, this "persons, corporations, firms, or associations engaged in the
business of carrying or transporting passengers or goods or both, by land, water, or air, for
compensation, offering their services to the public" is called a common carrier.
Respondents entered into a contract of carriage with Cathay Pacific. As far as respondents are
concerned, they were holding valid and confirmed airplane tickets. The ticket in itself is a valid
written contract of carriage whereby for a consideration, Cathay Pacific undertook to carry
respondents in its airplane for a round-trip flight from Manila to Adelaide, Australia and then back to
Manila. In fact, Wilfredo called the Cathay Pacific office in Adelaide one week before his return flight
to re-confirm his booking. He was even assured by a staff of Cathay Pacific that he does not need to
reconfirm his booking.
In its defense, Cathay Pacific posits that Wilfredos booking was cancelled because a ticket number
was not inputted by Sampaguita Travel, while bookings of Juanita and Michael were not honored for
being fictitious. Cathay Pacific clearly blames Sampaguita Travel for not finalizing the bookings for
the respondents return flights. Respondents are not privy to whatever misunderstanding and
confusion that may have transpired in their bookings. On its face, the airplane ticket is a valid written
contract of carriage. This Court has held that when an airline issues a ticket to a passenger
confirmed on a particular flight, on a certain date, a contract of carriage arises, and the passenger
has every right to expect that he would fly on that flight and on that date. If he does not, then the
carrier opens itself to a suit for breach of contract of carriage.14
As further elucidated by the Court of Appeals:
Now, Article 1370 of the Civil Code mandates that "if the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall
control." Under Section 9, Rule 130 of the Rules of Court, once the terms of an agreement have
been reduced to writing, it is deemed to contain all the terms agreed upon by the parties and no
evidence of such terms other than the contents of the written agreement shall be admissible. The
terms of the agreement of appellants and appellee Cathay Pacific embodied in the tickets issued by
the latter to the former are plain appellee Cathay Pacific will transport appellants to Adelaide,
Australia from Manila via Hongkong on 12 April 1991 and back to Manila from Adelaide, Australia
also via Hongkong on 4 May 1997. In addition, the tickets reveal that all appellants have confirmed
bookings for their flight to Adelaide, Australia and back to Manila as manifested by the words "Ok"
indicated therein. Arlene Ansay, appellee Cathay Pacifics Reservation Supervisor, validated this fact
in her testimony saying that the return flights of all appellants to the Philippines on 4 May 1997 were
confirmed as appearing on the tickets. Indubitably, when appellee Cathay Pacific initially refused to
transport appellants to the Philippines on 4 May 1997 due to the latters lack of reservation, it has, in
effect, breached their contract of carriage. Appellants, however, were eventually accommodated and
transported by appellee Cathay Pacific to Manila. 15
Cathay Pacific breached its contract of carriage with respondents when it disallowed them to board
the plane in Hong Kong going to Manila on the date reflected on their tickets. Thus, Cathay Pacific

opened itself to claims for compensatory, actual, moral and exemplary damages, attorneys fees and
costs of suit.
In contrast, the contractual relation between Sampaguita Travel and respondents is a contract for
services. The object of the contract is arranging and facilitating the latters booking and ticketing. It
was even Sampaguita Travel which issued the tickets.
Since the contract between the parties is an ordinary one for services, the standard of care required
of respondent is that of a good father of a family under Article 1173 of the Civil Code. This connotes
reasonable care consistent with that which an ordinarily prudent person would have observed when
confronted with a similar situation. The test to determine whether negligence attended the
performance of an obligation is: did the defendant in doing the alleged negligent act use that
reasonable care and caution which an ordinarily prudent person would have used in the same
situation? If not, then he is guilty of negligence.16
There was indeed failure on the part of Sampaguita Travel to exercise due diligence in performing its
obligations under the contract of services. It was established by Cathay Pacific, through the
generation of the PNRs, that Sampaguita Travel failed to input the correct ticket number for
Wilfredos ticket. Cathay Pacific even asserted that Sampaguita Travel made two fictitious bookings
for Juanita and Michael.
The negligence of Sampaguita Travel renders it also liable for damages.
For one to be entitled to actual damages, it is necessary to prove the actual amount of loss with a
reasonable degree of certainty, premised upon competent proof and the best evidence obtainable by
the injured party. To justify an award of actual damages, there must be competent proof of the actual
amount of loss. Credence can be given only to claims which are duly supported by receipts. 17
We echo the findings of the trial court that respondents failed to show proof of actual damages.
Wilfredo initially testified that he personally incurred losses amounting to P300,000.00 which
represents the amount of the contract that he was supposedly scheduled to sign had his return trip
not been cancelled. During the cross-examination however, it appears that the supposed contractsigning was a mere formality and that an agreement had already been hatched beforehand. Hence,
we cannot fathom how said contract did not materialize because of Wilfredos absence, and how
Wilfredo incurred such losses when he himself admitted that he entered into said contract on behalf
of Parsons Engineering Consulting Firm, where he worked as construction manager. Thus, if indeed
there were losses, these were losses suffered by the company and not by Wilfredo. Moreover, he did
not present any documentary evidence, such as the actual contract or affidavits from any of the
parties to said contract, to substantiate his claim of losses. With respect to the remaining
passengers, they likewise failed to present proof of the actual losses they suffered.
Under Article 2220 of the Civil Code of the Philippines, an award of moral damages, in breaches of
contract, is in order upon a showing that the defendant acted fraudulently or in bad faith. 18 What the
law considers as bad faith which may furnish the ground for an award of moral damages would be
bad faith in securing the contract and in the execution thereof, as well as in the enforcement of its

terms, or any other kind of deceit. In the same vein, to warrant the award of exemplary damages,
defendant must have acted in wanton, fraudulent, reckless, oppressive, or malevolent manner.19
In the instant case, it was proven by Cathay Pacific that first, it extended all possible
accommodations to respondents. They were promptly informed of the problem in their bookings
while they were still at the Adelaide airport. Despite the non-confirmation of their bookings,
respondents were still allowed to board the Adelaide to Hong Kong flight. Upon arriving in Hong
Kong, they were again informed that they could not be accommodated on the next flight because it
was already fully booked. They were however allowed to board the next available flight on the
following day. Second, upon receiving the complaint letter of respondents, Cathay Pacific
immediately addressed the complaint and gave an explanation on the cancellation of their flight
bookings.
1wphi1

The Court of Appeals is correct in stating that "what may be attributed to x x x Cathay Pacific is
negligence concerning the lapses in their process of confirming passenger bookings and
reservations, done through travel agencies. But this negligence is not so gross so as to amount to
bad faith."20 Cathay Pacific was not motivated by malice or bad faith in not allowing respondents to
board on their return flight to Manila. It is evident and was in fact proven by Cathay Pacific that its
refusal to honor the return flight bookings of respondents was due to the cancellation of one booking
and the two other bookings were not reflected on its computerized booking system.
Likewise, Sampaguita Travel cannot be held liable for moral damages. True, Sampaguita Travel was
negligent in the conduct of its booking and ticketing which resulted in the cancellation of flights. But
its actions were not proven to have been tainted with malice or bad faith. Under these
circumstances, respondents are not entitled to moral and exemplary damages. With respect to
attorneys fees, we uphold the appellate courts finding on lack of factual and legal justification to
award attorneys fees.
1wphi1

We however sustain the award of nominal damages in the amount of P25,000.00 to only three of the
four respondents who were aggrieved by the last-minute cancellation of their flights. Nominal
damages are recoverable where a legal right is technically violated and must be vindicated against
an invasion that has produced no actual present loss of any kind or where there has been a breach
of contract and no substantial injury or actual damages whatsoever have been or can be
shown.21 Under Article 2221 of the Civil Code, nominal damages may be awarded to a plaintiff whose
right has been violated or invaded by the defendant, for the purpose of vindicating or recognizing
that right, not for indemnifying the plaintiff for any loss suffered.
Considering that the three respondents were denied boarding their return flight from HongKong to
Manila and that they had to wait in the airport overnight for their return flight, they are deemed to
have technically suffered injury. Nonetheless, they failed to present proof of actual damages.
Consequently, they should be compensated in the form of nominal damages.
The amount to be awarded as nominal damages shall be equal or at least commensurate to the
injury sustained by respondents considering the concept and purpose of such damages. The amount
of nominal damages to be awarded may also depend on certain special reasons extant in the case. 22

The amount of such damages is addressed to the sound discretion of the court and taking into
account the relevant circumstances,23 such as the failure of some respondents to board the flight on
schedule and the slight breach in the legal obligations of the airline company to comply with the
terms of the contract, i.e., the airplane ticket and of the travel agency to make the correct bookings.
We find the award of P25,000.00 to the Reyeses correct and proper.
Cathay Pacific and Sampaguita Travel acted together in creating the confusion in the bookings
which led to the erroneous cancellation of respondents bookings. Their negligence is the proximate
cause of the technical injury sustained by respondents. Therefore, they have become joint
tortfeasors, whose responsibility for quasi-delict, under Article 2194 of the Civil Code, is solidary.
Based on the foregoing, Cathay Pacific and Sampaguita Travel are jointly and solidarily liable for
nominal damages awarded to respondents Wilfredo, Juanita and Michael Roy.
WHEREFORE, the Petition is DENIED. The 22 October 2008 Decision of the Court of Appeals is
AFFIRMED with MODIFICATION that Sampaguita Travel is held to be solidarily liable with Cathay
Pacific in the payment of nominal damages of ~25,000.00 each for Wilfredo Reyes, Juanita Reyes,
and Michael Rox Reyes. The complaint of respondent Sixta
Lapuz is DISMISSED for lack of cause of action.
SO ORDERED.

G.R. No. 170141

April 22, 2008

JAPAN AIRLINES, petitioner,

vs.
JESUS SIMANGAN, respondent.
DECISION
REYES R.T., J.:
WHEN an airline issues a ticket to a passenger confirmed on a particular flight on a certain date, a
contract of carriage arises, and the passenger has every right to expect that he would fly on that
flight and on that date. If he does not, then the carrier opens itself to a suit for breach of contract of
carriage.1
The power to admit or not an alien into the country is a sovereign act which cannot be interfered with
even by Japan Airlines (JAL).2
In this petition for review on certiorari,3 petitioner JAL appeals the: (1) Decision4 dated May 31, 2005
of the Court of Appeals (CA) ordering it to pay respondent Jesus Simangan moral and exemplary
damages; and (2) Resolution5 of the same court dated September 28, 2005 denying JAL's motion for
reconsideration.
The Facts
In 1991, respondent Jesus Simangan decided to donate a kidney to his ailing cousin, Loreto
Simangan, in UCLA School of Medicine in Los Angeles, California, U.S.A. Upon request of UCLA,
respondent undertook a series of laboratory tests at the National Kidney Institute in Quezon City to
verify whether his blood and tissue type are compatible with Loreto's. 6 Fortunately, said tests proved
that respondent's blood and tissue type were well-matched with Loreto's. 7
Respondent needed to go to the United States to complete his preliminary work-up and donation
surgery. Hence, to facilitate respondent's travel to the United States, UCLA wrote a letter to the
American Consulate in Manila to arrange for his visa. In due time, respondent was issued an
emergency U.S. visa by the American Embassy in Manila.8

Having obtained an emergency U.S. visa, respondent purchased a round trip plane ticket from
petitioner JAL for US$1,485.00 and was issued the corresponding boarding pass. 9 He was
scheduled to a particular flight bound for Los Angeles, California, U.S.A. via Narita, Japan. 10
On July 29, 1992, the date of his flight, respondent went to Ninoy Aquino International Airport in the
company of several relatives and friends.11 He was allowed to check-in at JAL's counter.12 His plane
ticket, boarding pass, travel authority and personal articles were subjected to rigid immigration and
security routines.13 After passing through said immigration and security procedures, respondent was
allowed by JAL to enter its airplane.14
While inside the airplane, JAL's airline crew suspected respondent of carrying a falsified travel
document and imputed that he would only use the trip to the United States as a pretext to stay and
work in Japan.15 The stewardess asked respondent to show his travel documents. Shortly after, the
stewardess along with a Japanese and a Filipino haughtily ordered him to stand up and leave the
plane.16 Respondent protested, explaining that he was issued a U.S. visa. Just to allow him to board
the plane, he pleaded with JAL to closely monitor his movements when the aircraft stops over in
Narita.17 His pleas were ignored. He was then constrained to go out of the plane. 18 In a nutshell,
respondent was bumped off the flight.
Respondent went to JAL's ground office and waited there for three hours. Meanwhile, the plane took
off and he was left behind.19 Afterwards, he was informed that his travel documents were, indeed, in
order.20 Respondent was refunded the cost of his plane ticket less the sum of US$500.00 which was
deducted by JAL.21 Subsequently, respondent's U.S. visa was cancelled.22
Displeased by the turn of events, respondent filed an action for damages against JAL with the
Regional Trial Court (RTC) in Valenzuela City, docketed as Civil Case No. 4195-V-93. He claimed he
was not able to donate his kidney to Loreto; and that he suffered terrible embarrassment and mental
anguish.23 He prayed that he be awarded P3 million as moral damages, P1.5 million as exemplary
damages and P500,000.00 as attorney's fees.24
JAL denied the material allegations of the complaint. It argued, among others, that its failure to allow
respondent to fly on his scheduled departure was due to "a need for his travel documents to be
authenticated by the United States Embassy"25 because no one from JAL's airport staff had
encountered a parole visa before.26 It posited that the authentication required additional time; that
respondent was advised to take the flight the following day, July 30, 1992. JAL alleged that
respondent agreed to be rebooked on July 30, 1992.27
JAL also lodged a counterclaim anchored on respondent's alleged wrongful institution of the
complaint. It prayed for litigation expenses, exemplary damages and attorney's fees. 28
On September 21, 2000, the RTC presided by Judge Floro P. Alejo rendered its decision in favor of
respondent (plaintiff), disposing as follows:
WHEREFORE, judgment is hereby rendered ordering the defendant to pay the plaintiff the
amount ofP1,000,000.00 as moral damages, the amount of P500,000.00 as exemplary
damages and the amount ofP250,000.00 as attorney's fees, plus the cost of suit.29

The RTC explained:

In summarily and insolently ordering the plaintiff to disembark while the latter was already
settled in his assigned seat, the defendant violated the contract of carriage; that when the
plaintiff was ordered out of the plane under the pretext that the genuineness of his travel
documents would be verified it had caused him embarrassment and besmirched reputation;
and that when the plaintiff was finally not allowed to take the flight, he suffered more
wounded feelings and social humiliation for which the plaintiff was asking to be awarded
moral and exemplary damages as well as attorney's fees.
The reason given by the defendant that what prompted them to investigate the genuineness
of the travel documents of the plaintiff was that the plaintiff was not then carrying a regular
visa but just a letter does not appear satisfactory. The defendant is engaged in transporting
passengers by plane from country to country and is therefore conversant with the travel
documents. The defendant should not be allowed to pretend, to the prejudice of the plaintiff
not to know that the travel documents of the plaintiff are valid documents to allow him entry
in the United States.
The foregoing act of the defendant in ordering the plaintiff to deplane while already settled in
his assigned seat clearly demonstrated that the defendant breached its contract of carriage
with the plaintiff as passenger in bad faith and as such the plaintiff is entitled to moral and
exemplary damages as well as to an award of attorney's fees.30
Disagreeing with the RTC judgment, JAL appealed to the CA contending that it is not guilty of breach
of contract of carriage, hence, not liable for damages. 31 It posited that it is the one entitled to recover
on its counterclaim.32
CA Ruling
In a Decision33 dated May 31, 2005, the CA affirmed the decision of the RTC with modification in that
it lowered the amount of moral and exemplary damages and deleted the award of attorney's fees.
The fallo of the CA decision reads:
WHEREFORE, the appealed Decision is AFFIRMED with MODIFICATION. Appellant JAPAN
AIR LINES is ordered to pay appellee JESUS SIMANGAN the reduced sums, as follows:
Five Hundred Thousand Pesos (P500,000.00) as moral damages, and Two Hundred Fifty
Thousand Pesos (P250,000.00) as exemplary damages. The award of attorney's fees is
hereby DELETED.34
The CA elucidated that since JAL issued to respondent a round trip plane ticket for a lawful
consideration, "there arose a perfected contract between them." 35 It found that respondent was
"haughtily ejected"36 by JAL and that "he was certainly embarrassed and humiliated" 37 when, in the
presence of other passengers, JAL's airline staff "shouted at him to stand up and arrogantly asked
him to produce his travel papers, without the least courtesy every human being is entitled to"; 38 and
that "he was compelled to deplane on the grounds that his papers were fake." 39

The CA ratiocinated:
While the protection of passengers must take precedence over convenience, the implementation of
security measures must be attended by basic courtesies.
In fact, breach of the contract of carriage creates against the carrier a presumption of liability,
by a simple proof of injury, relieving the injured passenger of the duty to establish the fault of
the carrier or of his employees; and placing on the carrier the burden to prove that it was due
to an unforeseen event or toforce majeure.
That appellee possessed bogus travel documents and that he might stay illegally in Japan
are allegations without substantiation. Also, appellant's attempt to rebook appellee the
following day was too late and did not relieve it from liability. The damage had been
done. Besides, its belated theory of novation, i.e., that appellant's original obligation to carry
appellee to Narita and Los Angeles on July 29, 1992 was extinguished by novation when
appellant and appellant agreed that appellee will instead take appellant's flight to Narita on
the following day, July 30, 1992, deserves little attention. It is inappropriate at bar. Questions
not taken up during the trial cannot be raised for the first time on appeal. 40 (Underscoring
ours and citations were omitted)
Citing Ortigas, Jr. v. Lufthansa German Airlines,41 the CA declared that "(i)n contracts of common
carriage, inattention and lack of care on the part of the carrier resulting in the failure of the
passenger to be accommodated in the class contracted for amounts to bad faith or fraud which
entitles the passengers to the award of moral damages in accordance with Article 2220 of the Civil
Code."42
Nevertheless, the CA modified the damages awarded by the RTC. It explained:
Fundamental in the law on damages is that one injured by a breach of a contract, or by a
wrongful or negligent act or omission shall have a fair and just compensation commensurate
to the loss sustained as consequence of the defendant's act. Being discretionary on the
court, the amount, however, should not be palpably and scandalously excessive.
Here, the trial court's award of P1,000,000.00 as moral damages appears to be overblown.
No other proof of appellee's social standing, profession, financial capabilities was presented
except that he was single and a businessman. To Us, the sum of 500,000.00 is just and fair.
For, moral damages are emphatically not intended to enrich a complainant at the expense of
the defendant. They are awarded only to enable the injured party to obtain means, diversion
or amusements that will serve to alleviate the moral suffering he has undergone, by reason
of the defendant's culpable action.
Moreover, the grant of P500,000.00 as exemplary damages needs to be reduced to a
reasonable level. The award of exemplary damages is designed to permit the courts to
mould behavior that has socially deleterious consequences and its imposition is required by
public policy to suppress the wanton acts of the offender. Hence, the sum of P250,000.00 is
adequate under the circumstances.

The award of P250,000.00 as attorney's fees lacks factual basis. Appellee was definitely
compelled to litigate in protecting his rights and in seeking relief from appellant's misdeeds.
Yet, the record is devoid of evidence to show the cost of the services of his counsel and/or
the actual expenses incurred in prosecuting his action.43 (Citations were omitted)
When JAL's motion for reconsideration was denied, it resorted to the petition at bar.
Issues
JAL poses the following issues I.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT RESPONDENT
WAS ENTITLED TO MORAL DAMAGES, CONSIDERING THAT:
A. JAL WAS NOT GUILTY OF BREACH OF CONTRACT.
B. MORAL DAMAGES MAY BE AWARDED IN BREACH OF CONTRACT CASES
ONLY WHEN THE BREACH IS ATTENDED BY FRAUD OR BAD FAITH.
ASSUMING ARGUENDO THAT JAL WAS GUILTY OF BREACH, JAL DID NOT ACT
FRAUDULENTLY OR IN BAD FAITH AS TO ENTITLE RESPONDENT TO MORAL
DAMAGES.
C. THE LAW DISTINGUISHES A CONTRACTUAL BREACH EFFECTED IN GOOD
FAITH FROM ONE ATTENDED BY BAD FAITH.
II.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT RESPONDENT
WAS ENTITLED TO EXEMPLARY DAMAGES CONSIDERING THAT:
A. EXEMPLARY DAMAGES ARE NOT RECOVERABLE IN BREACH OF
CONTRACT OF CARRIAGE UNLESS THE CARRIER IS GUILTY OF WANTON,
FRAUDULENT, RECKLESS, OPPRESSIVE OR MALEVOLENT CONDUCT.
B. ASSUMING ARGUENDO THAT JAL WAS GUILTY OF BREACH, JAL DID NOT
ACT IN A WANTON FRAUDULENT, RECKLESS, OPPRESSIVE OR MALEVOLENT
MANNER AS TO ENTITLE RESPONDENT TO EXEMPLARY DAMAGES.
III.
ASSUMING ARGUENDO THAT RESPONDENT WAS ENTITLED TO AN AWARD OF
DAMAGES, WHETHER OR NOT THE COURT OF APPEALS AWARD OF P750,000 IN
DAMAGES WAS EXCESSIVEAND UNPRECEDENTED.

IV.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT FINDING FOR JAL ON
ITSCOUNTERCLAIM.44 (Underscoring Ours)
Basically, there are three (3) issues to resolve here: (1) whether or not JAL is guilty of contract of
carriage; (2) whether or not respondent is entitled to moral and exemplary damages; and (3) whether
or not JAL is entitled to its counterclaim for damages.
Our Ruling
This Court is not a trier of facts.
Chiefly, the issues are factual. The RTC findings of facts were affirmed by the CA. The CA also gave
its nod to the reasoning of the RTC except as to the awards of damages, which were reduced, and
that of attorney's fees, which was deleted.
We are not a trier of facts. We generally rely upon, and are bound by, the conclusions on this matter
of the lower courts, which are better equipped and have better opportunity to assess the evidence
first-hand, including the testimony of the witnesses.45
We have repeatedly held that the findings of fact of the CA are final and conclusive and cannot be
reviewed on appeal to the Supreme Court provided they are based on substantial evidence. 46 We
have no jurisdiction, as a rule, to reverse their findings.47 Among the exceptions to this rule are: (a)
when the conclusion is a finding grounded entirely on speculations, surmises or conjectures; (b)
when the inference made is manifestly mistaken, absurd or impossible; (c) where there is grave
abuse of discretion; (d) when the judgment is based on a misapprehension of facts; (e) when the
findings of facts are conflicting; (f) when the CA, in making its findings, went beyond the issues of the
case and the same is contrary to the admissions of both appellant and appellee. 48
The said exceptions, which are being invoked by JAL, are not found here. There is no indication that
the findings of the CA are contrary to the evidence on record or that vital testimonies of JAL's
witnesses were disregarded. Neither did the CA commit misapprehension of facts nor did it fail to
consider relevant facts. Likewise, there was no grave abuse of discretion in the appreciation of facts
or mistaken and absurd inferences.
We thus sustain the coherent facts as established by the courts below, there being no sufficient
showing that the said courts committed reversible error in reaching their conclusions.
JAL is guilty of breach of
contract of carriage.
That respondent purchased a round trip plane ticket from JAL and was issued the corresponding
boarding pass is uncontroverted.49 His plane ticket, boarding pass, travel authority and personal
articles were subjected to rigid immigration and security procedure. 50 After passing through said
immigration and security procedure, he was allowed by JAL to enter its airplane to fly to Los

Angeles, California, U.S.A. via Narita, Japan.51 Concisely, there was a contract of carriage between
JAL and respondent.
Nevertheless, JAL made respondent get off the plane on his scheduled departure on July 29, 1992.
He was not allowed by JAL to fly. JAL thus failed to comply with its obligation under the contract of
carriage.
JAL justifies its action by arguing that there was "a need to verify the authenticity of respondent's
travel document."52 It alleged that no one from its airport staff had encountered a parole visa
before.53 It further contended that respondent agreed to fly the next day so that it could first verify his
travel document, hence, there was novation.54 It maintained that it was not guilty of breach of
contract of carriage as respondent was not able to travel to the United States due to his own
voluntary desistance.55
We cannot agree. JAL did not allow respondent to fly. It informed respondent that there was a need
to first check the authenticity of his travel documents with the U.S. Embassy.56 As admitted by JAL,
"the flight could not wait for Mr. Simangan because it was ready to depart." 57
Since JAL definitely declared that the flight could not wait for respondent, it gave respondent no
choice but to be left behind. The latter was unceremoniously bumped off despite his protestations
and valid travel documents and notwithstanding his contract of carriage with JAL. Damage had
already been done when respondent was offered to fly the next day on July 30, 1992. Said offer did
not cure JAL's default.
Considering that respondent was forced to get out of the plane and left behind against his will, he
could not have freely consented to be rebooked the next day. In short, he did not agree to the
alleged novation. Since novation implies a waiver of the right the creditor had before the novation,
such waiver must be express.58 It cannot be supposed, without clear proof, that respondent had
willingly done away with his right to fly on July 29, 1992.
Moreover, the reason behind the bumping off incident, as found by the RTC and CA, was that JAL
personnel imputed that respondent would only use the trip to the United States as a pretext to stay
and work in Japan.59
Apart from the fact that respondent's plane ticket, boarding pass, travel authority and personal
articles already passed the rigid immigration and security routines,60 JAL, as a common carrier, ought
to know the kind of valid travel documents respondent carried. As provided in Article 1755 of the
New Civil Code: "A common carrier is bound to carry the passengers safely as far as human care
and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for
all the circumstances."61 Thus, We find untenable JAL's defense of "verification of respondent's
documents" in its breach of contract of carriage.
It bears repeating that the power to admit or not an alien into the country is a sovereign act which
cannot be interfered with even by JAL.62

In an action for breach of contract of carriage, all that is required of plaintiff is to prove the existence
of such contract and its non-performance by the carrier through the latter's failure to carry the
passenger safely to his destination.63 Respondent has complied with these twin requisites.
Respondent is entitled to moral and exemplary damages and attorney's fees plus legal
interest.
With reference to moral damages, JAL alleged that they are not recoverable in actions ex contractu
except only when the breach is attended by fraud or bad faith. It is contended that it did not act
fraudulently or in bad faith towards respondent, hence, it may not be held liable for moral damages.
As a general rule, moral damages are not recoverable in actions for damages predicated on a
breach of contract for it is not one of the items enumerated under Article 2219 of the Civil Code. 64 As
an exception, such damages are recoverable: (1) in cases in which the mishap results in the death
of a passenger, as provided in Article 1764, in relation to Article 2206(3) of the Civil Code; and (2) in
the cases in which the carrier is guilty of fraud or bad faith, as provided in Article 2220. 65
The acts committed by JAL against respondent amounts to bad faith. As found by the RTC, JAL
breached its contract of carriage with respondent in bad faith. JAL personnel summarily and
insolently ordered respondent to disembark while the latter was already settled in his assigned seat.
He was ordered out of the plane under the alleged reason that the genuineness of his travel
documents should be verified.
These findings of facts were upheld by the CA, to wit:
x x x he was haughtily ejected by appellant. He was certainly embarrassed and humiliated
when, in the presence of other passengers, the appellant's airline staff shouted at him to
stand up and arrogantly asked him to produce his travel papers, without the least courtesy
every human being is entitled to. Then, he was compelled to deplane on the grounds that his
papers were fake. His protestation of having been issued a U.S. visa coupled with his plea to
appellant to closely monitor his movements when the aircraft stops over in Narita, were
ignored. Worse, he was made to wait for many hours at the office of appellant only to be told
later that he has valid travel documents.66 (Underscoring ours)
Clearly, JAL is liable for moral damages. It is firmly settled that moral damages are recoverable in
suits predicated on breach of a contract of carriage where it is proved that the carrier was guilty of
fraud or bad faith, as in this case. Inattention to and lack of care for the interests of its passengers
who are entitled to its utmost consideration, particularly as to their convenience, amount to bad faith
which entitles the passenger to an award of moral damages. What the law considers as bad faith
which may furnish the ground for an award of moral damages would be bad faith in securing the
contract and in the execution thereof, as well as in the enforcement of its terms, or any other kind of
deceit.67
JAL is also liable for exemplary damages as its above-mentioned acts constitute wanton, oppressive
and malevolent acts against respondent. Exemplary damages, which are awarded by way of

example or correction for the public good, may be recovered in contractual obligations, as in this
case, if defendant acted in wanton, fraudulent, reckless, oppressive, or malevolent manner.68
Exemplary damages are designed by our civil law to permit the courts to reshape behaviour that is
socially deleterious in its consequence by creating negative incentives or deterrents against such
behaviour. In requiring compliance with the standard of extraordinary diligence, a standard which is,
in fact, that of the highest possible degree of diligence, from common carriers and in creating a
presumption of negligence against them, the law seeks to compel them to control their employees,
to tame their reckless instincts and to force them to take adequate care of human beings and their
property.69
Neglect or malfeasance of the carrier's employees could give ground for an action for damages.
Passengers have a right to be treated by the carrier's employees with kindness, respect, courtesy
and due consideration and are entitled to be protected against personal misconduct, injurious
language, indignities and abuses from such employees. 70
The assessment of P500,000.00 as moral damages and P100,000.00 as exemplary damages in
respondent's favor is, in Our view, reasonable and realistic. This award is reasonably sufficient to
indemnify him for the humiliation and embarrassment he suffered. This also serves as an example to
discourage the repetition of similar oppressive acts.
With respect to attorney's fees, they may be awarded when defendant's act or omission has
compelled plaintiff to litigate with third persons or to incur expenses to protect his interest. 71 The
Court, in Construction Development Corporation of the Philippines v. Estrella,72 citing Traders Royal
Bank Employees Union-Independent v. National Labor Relations Commission,73 elucidated thus:
There are two commonly accepted concepts of attorney's fees, the so-called ordinary and
extraordinary. In its ordinary concept, an attorney's fee is the reasonable compensation paid
to a lawyer by his client for the legal services he has rendered to the latter. The basis of this
compensation is the fact of his employment by and his agreement with the client.
In its extraordinary concept, an attorney's fee is an indemnity for damages ordered by
the court to be paid by the losing party in a litigation. The basis of this is any of the
cases provided by law where such award can be made, such as those authorized in Article
2208, Civil Code, and is payable not to the lawyer but to the client, unless they have
agreed that the award shall pertain to the lawyer as additional compensation or as
part thereof.74
It was therefore erroneous for the CA to delete the award of attorney's fees on the ground that the
record is devoid of evidence to show the cost of the services of respondent's counsel. The amount is
actually discretionary upon the Court so long as it passes the test of reasonableness. They may be
recovered as actual or compensatory damages when exemplary damages are awarded and
whenever the court deems it just and equitable,75 as in this case.
Considering the factual backdrop of this case, attorney's fees in the amount of P200,000.00 is
reasonably modest.

The above liabilities of JAL in the total amount of P800,000.00 earn legal interest pursuant to the
Court's ruling inConstruction Development Corporation of the Philippines v. Estrella,76 citing Eastern
Shipping Lines, Inc. v. Court of Appeals,77 to wit:
Regarding the imposition of legal interest at the rate of 6% from the time of the filing of the
complaint, we held in Eastern Shipping Lines, Inc. v. Court of Appeals, that when an
obligation, regardless of its source,i.e., law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for payment of interest in the concept of
actual and compensatory damages, subject to the following rules, to wit 1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of
the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached,
an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin
to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality
until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.78 (Emphasis supplied and citations omitted)
Accordingly, in addition to the said total amount of P800,000.00, JAL is liable to pay respondent legal
interest. Pursuant to the above ruling of the Court, the legal interest is 6% and it shall be reckoned
from September 21, 2000 when the RTC rendered its judgment. From the time this Decision
becomes final and executory, the interest rate shall be 12% until its satisfaction.
JAL is not entitled to its counterclaim for damages.
The counterclaim of JAL in its Answer79 is a compulsory counterclaim for damages and attorney's
fees arising from the filing of the complaint. There is no mention of any other counter claims.

This compulsory counterclaim of JAL arising from the filing of the complaint may not be granted
inasmuch as the complaint against it is obviously not malicious or unfounded. It was filed by
respondent precisely to claim his right to damages against JAL. Well-settled is the rule that the
commencement of an action does not per se make the action wrongful and subject the action to
damages, for the law could not have meant to impose a penalty on the right to litigate. 80
We reiterate case law that if damages result from a party's exercise of a right, it is damnum absque
injuria.81Lawful acts give rise to no injury. Walang perhuwisyong maaring idulot ang paggamit sa
sariling karapatan.
During the trial, however, JAL presented a witness who testified that JAL suffered further damages.
Allegedly, respondent caused the publications of his subject complaint against JAL in the newspaper
for which JAL suffered damages.82
Although these additional damages allegedly suffered by JAL were not incorporated in its Answer as
they arose subsequent to its filing, JAL's witness was able to testify on the same before the
RTC.83 Hence, although these issues were not raised by the pleadings, they shall be treated in all
respects as if they had been raised in the pleadings.
As provided in Section 5, Rule 10 of the Rules of Court, "(w)hen issues not raised by the pleadings
are tried with the express or implied consent of the parties, they shall be treated in all respects as if
they had been raised in the pleadings."
Nevertheless, JAL's counterclaim cannot be granted.
JAL is a common carrier. JAL's business is mainly with the traveling public. It invites people to avail
themselves of the comforts and advantages it offers.84 Since JAL deals with the public, its bumping
off of respondent without a valid reason naturally drew public attention and generated a public issue.
The publications involved matters about which the public has the right to be informed because they
relate to a public issue. This public issue or concern is a legitimate topic of a public comment that
may be validly published.
Assuming that respondent, indeed, caused the publication of his complaint, he may not be held
liable for damages for it. The constitutional guarantee of freedom of the speech and of the press
includes fair commentaries on matters of public interest. This is explained by the Court in Borjal v.
Court of Appeals,85 to wit:
To reiterate, fair commentaries on matters of public interest are privileged and constitute a
valid defense in an action for libel or slander. The doctrine of fair comment means that while
in general every discreditable imputation publicly made is deemed false, because every man
is presumed innocent until his guilt is judicially proved, and every false imputation is deemed
malicious, nevertheless, when the discreditable imputation is directed against a public
person in his public capacity, it is not necessarily actionable. In order that such discreditable
imputation to a public official may be actionable, it must either be a false allegation of fact or
a comment based on a false supposition. If the comment is an expression of opinion, based

on established facts, then it is immaterial that the opinion happens to be mistaken, as long
as it might reasonably be inferred from the facts.86 (Citations omitted and underscoring ours)
Even though JAL is not a public official, the rule on privileged commentaries on matters of public
interest applies to it. The privilege applies not only to public officials but extends to a great variety of
subjects, and includes matters of public concern, public men, and candidates for office. 87
Hence, pursuant to the Borjal case, there must be an actual malice in order that a discreditable
imputation to a public person in his public capacity or to a public official may be actionable. To be
considered malicious, the libelous statements must be shown to have been written or published with
the knowledge that they are false or in reckless disregard of whether they are false or not. 88
Considering that the published articles involve matters of public interest and that its expressed
opinion is not malicious but based on established facts, the imputations against JAL are not
actionable. Therefore, JAL may not claim damages for them.
WHEREFORE, the petition is DENIED. The appealed Decision of the Court of Appeals
is AFFIRMED WITH MODIFICATION. As modified, petitioner Japan Airlines is ordered to pay
respondent Jesus Simangan the following: (1) P500,000.00 as moral damages; (2) P100,000.00 as
exemplary damages; and (3) P200,000.00 as attorney's fees.
The total amount adjudged shall earn legal interest at the rate of 6% per annum from the date of
judgment of the Regional Trial Court on September 21, 2000 until the finality of this Decision. From
the time this Decision becomes final and executory, the unpaid amount, if any, shall earn legal
interest at the rate of 12% per annum until its satisfaction.
SO ORDERED.

G.R. No. 178312

January 30, 2013

LAND BANK OF THE PHILIPPINES, Petitioner,

vs.
HEIRS OF SPOUSES JORJA RIGOR-SORIANO AND MAGIN SORIANO, NAMELY: MARIVEL S.
CARANDANG AND JOSEPH SORIANO, Respondents.
DECISION
BERSAMIN, J.:
In this appeal via petition for review -on certiorari, Land Bank of the Philippines (Land Bank) seeks
the review and reversal of the decision1 of the Court of Appeals (CA) promulgated on January 18,
2007 in CA-G.R. SP No. 91192, affirming the judgment rendered on January 31, 2005 by the
Regional Trial Court (RTC), Branch 23, in Cabanatuan City, Nueva Ecija, sitting as a Special
Agrarian Court (SAC), ordering Land Bank to pay to the respondents as the landowners just
compensation amounting to P1,227,571.10 for the properties covered by TCT No. NT-146092(2839)
situated in Poblacion/Talabutab, Gen. Natividad, Nueva Ecija with an area of 10.9635 hectares, and
by TCT No. NT-61608 situated in Macabucod, Aliaga, Nueva Ecija with an area of 4.1224 hectares,
plus 6% per annum legal interest from date of taking (which the RTC determined to be October 25,
1999) until fully paid.
Antecedents
The respondents are the children of the late Spouses Jorja Rigor-Soriano and Magin Soriano, the
owners of the two parcels of land covered by TCT No. NT 146092 (2839) and TCT NO. NT-61608,
both of the Registry of Deeds of Nueva Ecija, containing an area of 10.9635 hectares located in

Poblacion/Talabutab, Gen. Natividad, Nueva Ecija and 4.1224 hectares located in Macabucod,
Aliaga, Nueva Ecija, respectively.
The properties became subject to Operation Land Transfer (OLT) and were valued by the Land Bank
and the Department of Agrarian Reform (DAR) at P10,000.00/hectare. Contending, however, that
such valuation was too low compared to existing valuations of agricultural lands, the respondents
commenced this action for just compensation, claiming that the properties were irrigated lands that
usually yielded 150 cavans per hectare per season at a minimum of two seasons per year. They
asked that a final valuation of the properties be pegged atP1,800,000.00, based on Administrative
Order No. 61, Series of 1992 and Republic Act No. 6657. 2
Land Bank disagreed, insisting that Presidential Decree No. 27 and Executive Order No. 228
governed the fixing of just compensation for the properties; that the Government, through the DAR
as the lead agency in the implementation of all agrarian laws, had taken the properties in 1972
pursuant to Presidential Decree No. 27, and had since then redistributed the properties to farmerbeneficiaries; and that in all cases under Presidential Decree No. 27 and Executive Order No. 228,
its participation was only to pay the landowners accepting the valuations fixed by the DAR, upon the
latters direction and in the amounts the DAR determined. It prayed that the
valuation by the DAR be retained or that a valuation be made judicially.3
Ruling of the RTC as SAC
After trial, on January 31, 2005, the RTC rendered its decision, decreeing:
WHEREFORE, all premises considered, judgment is hereby rendered ordering the defendant Land
Bank of the Philippines to pay petitioner Manolo Goduco the total amount of One Million Two
Hundred Twenty Seven Thousand Five Hundred Seventy One & 10/100 (P1,227,571.10), Philippine
Currency, representing the just compensation of the properties covered by TCT No. NT-146092
(2839), situated at Poblacion/Talabutab, Gen. Natividad, Nueva Ecija x x x with an area of 10.9635
hectares, and TCT No. NT-61608, situated at Macabucod, Aliaga, Nueva Ecija, with an area of
4.1224 hectares, with 6% legal interest per annum from date of taking (which the Court determines
to be October 25, 1999) until fully paid.
SO ORDERED.4
Land Bank and the respondents filed separate motions for reconsideration, but the RTC denied their
motions on August 4, 2005. It should be mentioned that the clerical error appearing in the dispositive
portion of the decision as to the name of the landowner was corrected from "Manolo Goduco" to
"Marivel S. Carandang" and "Joseph Soriano." 5
Ruling of the CA
Land Bank appealed the decision dated January 31, 2005 to the CA, which sustained the RTC
through the decision promulgated on January 18, 2007,6 pertinently holding and disposing as
follows:

The petition is unimpressed with merit.

xxxx
Under the factual circumstances of this case, the agrarian reform process is still incomplete as the
just compensation to be paid has yet to be settled. As mentioned earlier, the court a quo set the date
of taking on 25 October 1999. During this time, Republic Act No. 6657 which took effect on 15 June
1988 was already operational. Thus, the ruling of the Supreme Court in Land Bank of the Philippines
v. Natividad, supra, is highly relevant thus:
Considering the passage of Republic Act No. 6657 (RA 6657) before the completion of this process,
the just compensation should be determined and the process concluded under the said law. Indeed,
RA 6657 is the applicable law, with PD 27 and EO 228 having only
suppletory effect, conformably without our ruling in Paris v. Alfeche.
xxxx
A perusal of the records, however, disclosed that in the valuation of the subject properties, the court
a quo utilized the formula:
LV = Average Gross Production (AGP) x 2.5 x the
Government Support Price (GSP)
xxxx
Under Section 17 of RA No. 6657, infra, the Congress enumerated certain factors to be considered
in ascertaining just compensation of properties covered under the CARP. x x x.
Significantly, the court a quos valuation of the properties in question finds support under Section 17
of RA 6657, thus:
SECTION 17. Determination of Just Compensation. In determining just compensation, the cost of
acquisition of the land, the current value of like properties, its nature, actual use and income, the
sworn valuation by the owner, tax declarations, and the assessment made by government assessors
shall be considered. The social and economic benefits contributed by the farmers and the
farmworkers and by the government to the property as well as the non-payment of taxes or loans
secured from any government financing institution shall be considered additional factors to
determine its valuation.
In the case at bar, as can be gleaned from the recorded evidence, hearings were had and there
were presentation of the parties evidence. Hence, it can be safely assumed that the court a quo has
aptly considered the factors provided under Section 17, supra, in its determination of just
compensation.

xxxx
In sum, We find that the just compensation which the court a quo fixed is within the bounds of what
the law considers as full and fair equivalent of the properties taken.
xxxx
WHEREFORE, premises considered, instant Petition is DENIED. The assailed Decision of the court
a quo dated 31 January 2005 is AFFIRMED.7
On June 8, 2007, the CA denied Land Banks motion for reconsideration. 8
Issues
Hence, Land Bank appeals via petition for review on certiorari, assailing the decision of the CA upon
the following issues:
I.
WHETHER OR NOT THE CA COMMITTED SERIOUS ERRORS OF LAW IN THE
FOLLOWING INSTANCES: (A) THE QUESTIONED DECISION DISREGARDS [SIC] THE
SUPREME COURT RULING ON THE DATE OF TAKING OF LANDS UNDER P.D. NO. 27/
E.O. NO. 228 WHICH WAS ENUNCIATED IN G.R. NO. 148223 TITLED "FERNANDO
GABATIN, ET AL., VS. LAND BANK OF THE PHILIPPINES" (25 NOVEMBER 2005); (B)
THE QUESTIONED DECISION DISREGARDED THE GOVERNMENT SUPPORT PRICE
(GSP) FOR PALAY PRESCRIBED IN P.D. NO. 27/E.O. NO. 228 AMOUNTING TO THIRTY
FIVE PESOS (PHP35.00), WHICH AMOUNT IS SUBJECT TO MANDATORY JUDICIAL
NOTICE;
II.
WHETHER OR NOT UNDER PD NO. 27, THE LANDS WERE DEEMED TAKEN BY
OPERATION OF LAW ON 21 OCTOBER 1972, THE DATE OF EFFECTIVITY OF SAID
PRESIDENTIAL DIRECTIVE;
III.
WHETHER OR NOT THE GOVERNMENT SUPPORT PRICE (GSP) FOR PALAY
PRESCRIBED IN P.D. NO. 27/E.O. NO. 228 AMOUNTING TO PHP35 IS SUBJECT TO
MANDATORY JUDICIAL NOTICE.9
Ruling
On February 29, 2012, Land Bank submitted to the Court a so-called Joint Manifestation and Motion
(Re: Unconditional Acceptance of Revaluation) dated February 9, 2012, stating that the approval by

Land Banks responsible officers of the revaluation of the properties pursuant to DAR Administrative
Order No. 1 dated February 18, 2010, Series of 2010, as follows:
(a) P229,799.42, for the acquired area consisting of 2.3539 hectares located in Macabucod,
Aliaga, Nueva Ecija and covered by TCT No. NT 61608; and
(b) P2,260,725.87 for the acquired area consisting of 10.4795 hectares located in Talubatab,
Gen. Natividad, Nueva Ecija and covered by TCT No. NT-146092,
was communicated to the respondents for their unconditional acceptance. It prayed that the appeal
be now resolved on the basis of the acceptance of payment by the respondents. 10
Under the resolution dated March 12, 2012, the Court required the respondents to comment on Land
Banks submission of the Joint Manifestation and Motion (Re: Unconditional Acceptance of
Revaluation) dated February 29, 2012; directed the parties to submit their formal written agreement
within 15 days from notice; and deferred action on the Joint Manifestation and Motion (Re:
Unconditional Acceptance of Revaluation) dated February 29, 2012 pending compliance by the
parties.11
On December 4, 2012, Land Bank submitted a Manifestation,12 informing the Court that the parties
had filed by registered mail their Joint Motion to Approve the Attached Agreement, submitting
therewith their Agreement dated November 29, 2012.
On December 7, 2012, the Court received the Joint Motion to Approve the Attached Agreement 13 and
the Agreement dated November 29, 2012.14 Thereby, the parties prayed that the Court consider and
approve the Agreement as its disposition of the petition for review on certiorari, and render its
judgment in accordance with the terms of the Agreement.
The Agreement is reproduced in full below:
REPUBLIC OF THE PHILIPPINES)
CITY OF MANILA
) S.S.
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This agreement made and executed by and between:
LAND BANK OF THE PHILIPPINES, with principal place of business at 1598 M.H. del Pilar cor.
Quintos Sts., Malate, Manila, hereinafter called the "First Party," and
HEIRS OF SPOUSES JORJA RIGOR-SORIANO and MAGIN SORIANO, NAMELY: MARIVEL S.
CARANDANG and JOSEPH SORIANO, hereinafter called the "Second Party,"
WITNESSETH:

1. That the First Party, in a Memorandum from Lily M. San Luis, Officer-in Charge, AOC III-A,
Land Bank of the Philippines, City of San Fernando, Pampanga, revalued the acquired area
belonging to the Second Party, consisting of 2.3539 hectares located at Macabucad, Aliaga,
Nueva Ecija, covered by TCT No. NT - 61608 pursuant to DAR Administrative Order No. 1,
Series of 2010, in the amount of Two Hundred Twenty Nine Thousand Seven Hundred
Ninety Nine Pesos & 42/100 (Php 229,799.42).
2. That on 04 August 2011, the above-stated revaluation for subject property was duly
approved by the First Partys approving authorities, as indicated in the Memorandum and
thereafter communicated to the Second Party for unconditional acceptance.
3. That the First Party, in a subsequent Memorandum from Lily M. San Luis, Officer-inCharge, AOC III-A, Land Bank of the Philippines, City of San Fernando, Pampanga, revalued
another acquired area belonging to the Second Party, consisting of 10.4795 hectares located
at Talubatab, Gen. Natividad, Nueva Ecija, covered by TCT No. NT - 146092 pursuant to the
above-stated DAR Administrative Order in the amount of Two Million Two Hundred Sixty
Thousand Seven Hundred Twenty Five Pesos & 87 (Php 2,260,725.87).
4. That on 18 January 2011, the above-stated revaluation for the subject property was duly
approved by the First Partys approving authorities as indicated in the Memorandum and
thereafter communicated to the Second party for unconditional acceptance.
1wphi1

5. That for the above-stated claims, the amounts of Php 210,884.03 for TCT No. NT 61608
and Php 2,073,339.00 for TCT No. NT-146092, representing the increase in valuation are
due to the Second Party, receipt of which is hereby acknowledged.
6. That the above-stated revalued amounts, which the Second Party have received, are
completely satisfactory to the Second Party who manifest unconditional acceptance thereof,
representing as they do, the fair, full and just compensation for subject properties.
7. That in view of the Second Partys unconditional or absolute acceptance and full receipt of
the foregoing amounts as just compensation for subject properties the First Party and the
Second Party hereby consider the case titled "Land Bank of the Philippines v. Heirs of
Spouses Jorja Rigor-Soriano and Magin Soriano, namely: Marivel S. Carandang and Joseph
Soriano (G.R. No. 178312) pending before the Supreme Court, closed and terminated.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands this NOV 29 2012 day of
November, 2012, in CITY OF MANILA, Philippines.
FIRST PARTY:
LAND BANK OF THE PHILIPPINES

SECOND PARTY:
(Sgd.)
MARIVEL S. CARANDANG
(Sgd.)

JOSEPH SORIANO
REPRESENTED/ASSISTED BY:

ASSISTED BY:

NOEL B. MARQUEZ
VP - Head, CLSD/Counsel

(Sgd.)
FELIPE R. DE BELEN
Counsel

(Sgd.)
MYLENE R. PACASUM/
Counsel

(Sgd.)
JOSE M. A. QUIMBOY
Counsel

Signed in the presence of:

(Sgd.)
SYLVIA M. EUSEBIO

(Sgd.)
RENAN B. UMALI

There is no question that the foregoing Agreement was a compromise that the parties freely and
voluntarily entered into for the purpose of finally settling their dispute in this case. Under Article 2028
of the Civil Code, a compromise is a contract whereby the parties, by making reciprocal
concessions, avoid a litigation or put an end to one already commenced. Accordingly, a compromise
is either judicial, if the objective is to put an end to a pending litigation, or extrajudicial, if the
objective is to avoid a litigation. As a contract, a compromise is perfected by mutual consent.
However, a judicial compromise, while immediately binding between the parties upon its execution,
is not executory until it is approved by the court and reduced to a judgment. 15 The validity of a
compromise is dependent upon its compliance with the requisites and principles of contracts dictated
by law. Also, the terms and conditions of a compromise must not be contrary to law, morals, good
customs, public policy and public order.16
A review of the terms of the Agreement, particularly paragraph 6 and paragraph 7, indicates that it is
a judicial compromise because the parties intended it to terminate their pending litigation by fully
settling their dispute. Indeed, with the respondents thereby expressly signifying their "unconditional
or absolute acceptance and full receipt of the foregoing amounts as just compensation for subject
properties the First Party and the Second Party hereby consider the case titled "Land Bank of the
Philippines v. Heirs of Spouses Jorja Rigor-Soriano and Magin Soriano, namely: Marivel S.
Carandang and Joseph Soriano (G.R. No. 178312) pending before the Supreme Court, closed and
terminated," the ultimate objective of the action to determine just compensation for the landowners
was achieved.
WHEREFORE, finding the Agreement to have been validly and voluntarily executed by the parties in
compliance with the requirements of law, the Court hereby APPROVES it.
Considering that the Agreement shows that the payment of just compensation was already fully
executed, and that the affected properties were already delivered to Land Bank of the Philippines,

thereby leaving nothing further to be complied with by the parties, the Court declares this appeal
CLOSED and TERMINATED, without pronouncements as to costs of suit.
SO ORDERED.
LUCAS P. BERSAMIN
Associate Justice
WE CONCUR:

G.R. No. 141273

May 17, 2005

JOSE RIVERO, JESSIE RIVERO and AMALIA RIVERO, petitioners,

vs.
COURT OF APPEALS, MARY JANE DY CHIAO*-DE GUZMAN, and BENITO DY CHIAO, JR.,
represented by his uncle HENRY S. DY CHIAO, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in CA-G.R. SP
No. 44261 annulling the decision of the Regional Trial Court (RTC) of Naga City, Branch 19, in Civil
Case No. RTC'96-3612.
The Antecedents
On August 27, 1996, Benedick Arevalo filed a Complaint 2 against Mary Jane Dy Chiao-De Guzman,
Benito Dy Chiao, Jr., and Benson Dy Chiao, in the Regional Trial Court (RTC) of Naga City, for
compulsory recognition as the illegitimate child of their father, Benito Dy Chiao, Sr., and for the
administration and partition of his estate as he had died intestate on July 27, 1995. Since Benedick
was a minor, his natural mother and guardian ad litem,Shirley Arevalo, filed the complaint on his
behalf. Concepcion, Benito Sr.'s wife, was not impleaded as she had died on July 7, 1995. The case
was docketed as Civil Case No. RTC 96-3612 and raffled to Branch 19 of the court. 3
Benedick, whose counsel was Atty. Amador L. Simando, made the following allegations in his
complaint:
During his lifetime, Benito Dy Chiao, Sr. was engaged in business, under the business name Benito
Commercial in Naga City. He courted Shirley Arevalo (Benedick's mother) in 1991, assuring her of
his sincere love, likewise promising that her college education would be financed and that she would
be provided with a better life. Blinded by his promises and assurances of his love for her, Shirley
agreed to an amorous relationship with Benito, Sr. True to his word, Benito, Sr. then provided her
with a residential house and lot located in Canaman, Camarines Sur, where they cohabited and
resided; he also financed her college education in midwifery. On October 5, 1995, "Benedick Arevalo
Dy Chiao, Jr.," the plaintiff, was born, the product of the amorous relationship, whom Benito, Sr.
acknowledged as his son. He also continued to give Shirley and their son financial and moral
support.
It was also alleged that the Dy Chiao siblings recognized Benedick as the illegitimate son of their
father. Moreover, when he died intestate, Benito, Sr. left behind residential lands and commercial
buildings worthP100,000,000.00, more or less; as such, there was a need for the appointment of an
administrator of the estate to preserve his (Benedick's) rights over the same before its partition. It
was prayed that upon the filing of the complaint, Benedick's mother be appointed as his guardian ad
litem, that an administrator of the estate of the deceased be appointed, and that after due
proceedings, judgment be rendered in favor of Benedick, as follows:
a. declaring the Plaintiff as the illegitimate son of the late Benito Dy Chiao.

b. ordering herein Defendants to recognize and acknowledge the Plaintiff as the illegitimate
son of the late Benito Dy Chiao.
c. ordering the Partition of the Estate of Benito Dy Chiao and distributing the same in favor of
the Defendants and herein Plaintiff in a manner provided for by law.
d. granting the Plaintiff such other reliefs as may be just and equitable under the law.4
In an answer to the complaint, Mary Jane, through counsel, for herself, and purportedly in behalf of
her brothers, denied the allegations that Shirley and her father had an amorous relationship and that
Benedick was the illegitimate son of their father for want of knowledge or information; the allegation
that they had recognized Benedick as the illegitimate son of their father was, likewise, specifically
denied. Finally, she alleged that the plaintiff's action was for a claim against the estate of their father,
which should be filed in an action for the settlement of the estate of their deceased parents. 5
On October 28, 1996, Benedick filed a Motion,6 praying that the court order a mental examination of
the Dy Chiao brothers, who were patients at the Don Susano J. Rodriguez Mental Hospital, and for
the appointment of their sister as their guardian ad litem in the case. It was, likewise, prayed that the
director of the hospital be summoned to appear before the court to inform it of the mental condition
of the Dy Chiao brothers.
On December 6, 1996, Benedick filed a Motion7 set for hearing on December 9, 1996, reiterating his
plea for the appointment of Mary Jane as guardian ad litem of her brothers. That same day, however,
the plaintiff, through counsel, filed a "Compromise Agreement" dated November 24, 1996, with the
following signatories to the agreement: Shirley Arevalo, for the plaintiff and assisted by counsel, Atty.
Amador L. Simando; and Mary Jane Dy Chiao-De Guzman, assisted by counsel, Atty. Adan Marcelo
B. Botor, purportedly for and in behalf of her brothers.
Appended to the agreement was a photocopy of a Special Power of Attorney (SPA) 8 dated
September 20, 1995, notarized and certified by Atty. Edmundo L. Simando, purportedly signed by
the Dy Chiao brothers, who were then still confined in the hospital. Mary Jane was therein appointed
to be their attorney-in-fact, with the following powers:
1. To represent us in negotiations and be our representative with power to sign Agreements
or Contracts of Lease involving property and/or assets belonging to the estate of our late
father Benito Dy Chiao, Sr. while said estate is not yet settled between (sic) all heirs; as well
as to collect rentals and other money due to the estate by reason of said agreements or
contracts;
2. To file or cause to be filed the necessary proceedings for the settlement of the estate of
our late father, and to ask for letters of administration in her favor as a next of kin or as
someone selected by us, next of kin, to be the administrator.
On December 13, 1996, the trial court approved the agreement and rendered judgment on the basis
thereof, quoted as follows:

Before this Court is a COMPROMISE AGREEMENT entered into by and between the parties
in this case which is herein below quoted, thus:
"COMPROMISE AGREEMENT
Plaintiff and defendant Maryjane Dy Chiao-De Guzman duly assisted by their
respective counsels hereby submit the following Compromise Agreement:
1. That the defendant Maryjane Dy Chiao-De Guzman hereby recognizes the plaintiff
as the illegitimate son of her deceased father Benito Dy Chiao, Sr.;
2. That in full satisfaction and settlement of plaintiff's claim from the estate of the late
Benito Dy Chiao, Sr., defendant Maryjane Dy Chiao De Guzman for herself and in
behalf of her brothers, who are likewise defendants in this case, hereby agree and
bind herself to pay the plaintiff the amount ofP6,000,000.00 which shall be taken
from the estate of the late Benito Dy Chiao, Sr., which amount shall be payable under
the following terms and conditions:
a. The amount of P1,500,000.00 shall be payable upon signing of this
Compromise Agreement;
b. The balance of P4,500,000.00 shall be payable within the period of one
year from the date of signing of this Compromise Agreement and for which
the defendant Maryjane Dy Chiao-De Guzman shall issue twelve (12) checks
corresponding to the said balance in the amount ofP375,000.00 per check;
3. That the parties hereby waive other claims and counterclaims against each other;
4. That any violation of this Compromise Agreement shall render the same to be
immediately executory.
WHEREFORE, it is respectfully prayed of this Honorable Court that the foregoing
Compromise Agreement be approved and a decision be rendered in accordance
therewith.
Naga City, Philippines, November 24, 1996.
(SGD.)
BENEDICK AREVALO
Plaintiff
represented by:
(SGD.)

MARYJANE DY CHIAO-DE GUZMAN

Defendant

SHIRLEY AREVALO
Natural Guardian & Guardian
Ad Litem
Assisted by:
(SGD.)
AMADOR L. SIMANDO
Counsel for the Plaintiff

(SGD.)
ADAN MARCELO BOTOR
Counsel for the Defendants"

WHEREFORE, finding the foregoing Compromise Agreement to be the law between the
parties, not being tainted with infirmities, irregularities, fraud and illegalities, and the same
not being contrary to law, public order, public policy, morals and good customs, JUDGMENT
is hereby rendered APPROVING the same.
Parties are hereby enjoined to faithfully abide by the terms and conditions of the foregoing
Compromise Agreement.
No pronouncement as to costs.
SO ORDERED.9
It appears that a copy of the decision was sent by registered mail to the Dy Chiao brothers to the
"Benito Commercial Building, Naga City."
On December 17, 1996, Mary Jane, through Atty. Simando, (the counsel for Benedick in Civil Case
No. RTC'96-3612), filed a petition with the RTC for the settlement of the estate of her father and for
her appointment as administrator thereto. The case was docketed as Special Proceedings No. RTC
96-684 and raffled to Branch 20 of the court; it was later transferred to Branch 19.
On April 3, 1997, Benedick filed a Motion for Execution, 10 of the Decision dated November 24, 1996,
on the allegation that the defendants had failed to comply with their obligations under the
compromise agreement. The trial court granted the motion in an Order 11 dated April 7, 1997.
Conformably, it issued a Writ of Execution12 for the enforcement of the said decision.
On April 18, 1997, Benedick terminated the services of Atty. Simando since he was Mary Jane's
counsel in Special Proceedings No. 96-684.
On April 28, 1997, the sheriff issued a Notice of Sale on Execution of Real Property 13 over five
parcels of land titled under Benito Dy Chiao, Sr., including the improvements thereon.
The Dy Chiao brothers, represented by their uncle, Henry S. Dy Chiao, then filed with the CA a
Petition for Annulment of Judgment with Urgent Prayer for the Issuance of a Temporary Restraining
Order dated May 27, 1997, assailing the decision of the RTC in Civil Case No. RTC'96-3612, as well
as the writ of execution issued pursuant thereto. The petition alleged that the Dy Chiao brothers had
no legal capacity to be sued because they were of unsound mind, which impelled their uncle Henry

to file a petition for guardianship over their person and property, now pending in the RTC of Naga
City, Branch 61, docketed as Special Proceedings No. RTC'97-695. They did not authorize their
sister Mary Jane to execute any compromise agreement for and in their behalf; yet, in confabulation
with Benedick's counsel, she was able to secure a judgment based on a void compromise
agreement. It was further alleged that the Dy Chiao brothers were unaware of the complaint against
them and that they did not engage the services of the law firm of Botor, Hidalgo & Fernando
Associates to represent them as counsel in said cases. As such, the said counsel had no authority to
file the answer to the complaint for and in their behalf. It was further pointed out that less than a
month before the said compromise agreement was executed by their sister, she filed purportedly in
their behalf, on November 22, 1996, a petition for the settlement of the estate of their parents in the
RTC of Naga City, with the assistance of Atty. Simando (Benedick's counsel), as well as for the
issuance of letters of administration in her favor, docketed as Special Proceedings No. RTC'96684.14 There was thus collusion between Mary Jane and Atty. Simando.
The Dy Chiao brothers, likewise, opposed the appointment of their sister as the administrator of their
parents' estate.15 The verification and certification of non-forum shopping in the petition was signed
by their uncle Henry as their representative.
On May 29, 1997, the CA issued a status quo order. However, before the said order was served on
Benedick, several lots covered by Transfer Certificate of Title (TCT) No. 16931 in the name of
Benito, Sr. had already been sold at public auction: Lot No. 3, to Jose Rivero for P6,400,000.00; Lot
No. 4 to Jessie Rivero for P7,600,000.00 and Lot No. 5, for P7,000,000.00, to Amalia Rivero.
Another property covered by TCT No. 5299 had also been sold to Consuelo Dy
for P310,000.00.16 The buyers at public auction had already remitted the amounts ofP15,319,364.00
and P162,836.00 to the executing sheriffs,17 who later remitted P5,711,164.00 to Benedick through
his mother, Shirley, in satisfaction of the decision,18 and the remainder given to the Clerk of Court of
the RTC.
On June 3, 1997, Sheriffs Arthur S. Cledera and Arnel Jose A. Rubio executed a Provisional
Certificate of Sale19over the property to the buyers at public auction.
The Dy Chiao brothers, through their uncle Henry, then filed a motion for the issuance of a writ of
preliminary mandatory injunction with urgent prayer for the issuance of a temporary restraining order,
informing the CA of the recent developments in the case below. In a Resolution 20 dated July 14,
1997, the appellate court granted their plea for a writ of preliminary injunction upon the filing of
a P500,000.00 bond, directing as follows:
(a) the private respondents and/or the sheriffs of the respondent court to deposit before the
Branch Clerk of Court of the Regional Trial Court, Branch 19, Naga City, the proceeds of the
public auction sale held on June 3, 1997 and to submit to this Court within five (5) days from
notice, proof of compliance therewith;
(b) Sheriffs Arnel Jose Rubio and Arthur Cledera, through the respondent court, to refrain
from issuing any certificate of sale over the properties sold at the public auction sale
conducted on the aforementioned date;

(c) the respondent court to issue a notice of lis pendens on all the properties affected by [the]
public auction sale conducted on June 3, 1997 and cause its registration with the Register of
Deeds concerned within five (5) days from notice.
The sheriff was, likewise, directed to refrain and/or cease and desist from issuing/effecting any
further certificate of sale over the affected properties.21 On August 15, 1997, the RTC issued an
Order22 directing the Register of Deeds of Naga City to comply with the CA resolution.
Meantime, Benson died intestate on June 25, 1997. 23 His brother, Benito, Jr. then filed a Notice of
Death and Substitution, and thereafter, a Motion to Admit an Amended Petition to drop Benson as
petitioner, and the inclusion of his sister Mary Jane, as party respondent, as well as those who
participated in the public auction, namely, Jose Rivero, Jessie Rivero, Amalia Rivero and Consuelo
Dy. The CA granted the motion in a Resolution24 dated January 14, 1998.
Thereafter, Atty. Botor, Mary Jane's new counsel, filed an Entry of Appearance with Motion to
Dismiss,25 alleging,inter alia, that an extrajudicial settlement between the heirs of the spouses Dy
Chiao had already been executed. Benito, Jr., represented by his uncle Henry, opposed the
motion,26 alleging that a dismissal grounded on the extrajudicial settlement alone was improper,
since what was being assailed was a decision of a court based on a compromise agreement
involving one who is not a party thereto, with third-party bidders acting in bad faith. In a
Resolution27 dated February 27, 1998, the CA directed Mary Jane to submit her reply to the
opposition to the motion to dismiss filed by Henry on behalf of Benito, Jr.
In her compliance and comment/manifestation,28 Mary Jane declared that there appeared to be a
sound basis for the nullification of the assailed decision since the illegitimate filiation of Benedick
could not be the subject of a compromise agreement. She further alleged that the parties thereunder
did not recognize the validity of the compromise agreement, as in fact she and the petitioners were
exploring the possibility of modifying their extrajudicial settlement. 29
Benedick, represented by his mother Shirley, presented before the appellate court an SPA dated
October 31, 1996 executed by Benito, Jr., prepared by Atty. Simando, authorizing Atty. Botor to enter
into a compromise agreement in the RTC.30
On March 31, 1999, the CA rendered judgment in favor of Benito, Jr., granting the petition and
nullifying the assailed decision and writ of execution issued by the RTC, including the sale at public
auction of the property of the deceased. The appellate court ruled that the RTC had no jurisdiction
over Benedick's action for recognition as the illegitimate son of Benito, Sr. and for the partition of his
estate. It further held that the filiation of a person could not be the subject of a compromise
agreement; hence, the RTC acted without jurisdiction in rendering judgment based thereon. It
concluded that the said compromise agreement was procured through extrinsic fraud.
The CA ordered the Clerk of Court of the RTC of Naga City to deliver to the trial court within ten days
from finality of said judgment, the amount of P15,482,200.00, together with all interests earned
therefrom, and to thereafter distribute the aggregate amount to the buyers of the said properties, in
proportion to the amounts they had paid. It also ordered Benedick, through his mother Shirley, to
turn over to the trial court, within ten days from finality of judgment, the amount of P5,711,164.00

received from Sheriffs Rubio and Cledera, together with all other amounts that she might have been
paid pursuant to the compromise agreement. This was, however, without prejudice to the buyers'
right of recourse against Mary Jane, who was declared subsidiarily liable therefor. The RTC was,
likewise, directed to return to the buyers the aggregate amount in the same proportion as above
stated; thereafter, the properties would be delivered to the intestate estate of Benito, Sr. for proper
disposition by the intestate court.31
Jose Rivero, Jessie Rivero and Amalia Rivero filed a motion for the reconsideration of the decision,
on the following grounds:
I. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE COMPROMISE
AGREEMENT IS INVALID DUE TO EXTRINSIC FRAUD;
II. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
RESPONDENT COURT ACTED WITHOUT JURISDICTION IN RENDERING THE
ASSAILED JUDGMENT IN THIS CASE;
III. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PUBLIC
AUCTION SALE CONDUCTED ON JUNE 2, 1997 WAS VOID; AND
IV. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PRIVATE
RESPONDENTS JOSE, JESSIE AND AMALIA, ALL SURNAMED RIVERO COULD NOT
HAVE LEGALLY BECOME THE OWNERS OF THE PROPERTIES SOLD AT THE PUBLIC
AUCTION SALE.32
Upon the denial of their motion for reconsideration thereof, they filed the present petition for review
on certiorari.
The Present Petition
The petitioners raise the following issues: (1) whether or not Henry Dy Chiao had the authority to file
the amended petition for Benito Dy Chiao, Jr.; (2) whether or not the RTC had jurisdiction over the
action of Benedick Arevalo for recognition as the illegitimate son of the deceased Benito Dy Chiao,
Sr., as well as the action for partition and distribution of the latter's estate; and (3) whether the
decision of the RTC based on the compromise agreement is null and void for extrinsic fraud and lack
of jurisdiction.33
On the first issue, the petitioners aver that the verification and certification of non-forum shopping
contained in the petition with the CA was executed by Henry; hence, it was he and not Benson or
Benito, Jr. who filed the petition. Moreover, Henry had no proof of his authority to file the petition for
and in behalf of the brothers. The petitioners assert that there was no need for Henry to file the
petition with the CA, since the Dy Chiao brothers had the legal capacity to do so, as admitted by
their counsel, and Henry himself. Moreover, there was no law mandating Henry to represent his
nephews in all actions which may redound to their benefit.

The petitioners point out that although Henry sought to remedy the situation by filing an amended
petition praying that he be appointed as guardian ad litem for the Dy Chiao brothers, the CA did not
take cognizance of the allegations in the petition. The CA was correct in so doing, since the matter of
whether one is incompetent should be threshed out in the guardianship proceedings, Special
Proceedings No. RTC'97-695, and not in the CA via a petition to annul the judgment of the RTC,
where Benito, Jr. is also a party respondent.
On the other issues, the petitioners maintain that the CA erred in annulling the decision of the RTC
based on the compromise agreement on the ground of extrinsic fraud; the alleged fraud was
committed by Mary Jane as an incident to the trial. What the CA should have done was to dismiss
the petition, without prejudice to the rights of the Dy Chiao brothers to file an action against their
sister. The latter was herself a party to the compromise agreement and also a principal party to the
case; hence, was bound by it. As a matter of fact, the petitioners aver, Mary Jane was appointed by
her brothers as their attorney-in-fact to negotiate for and execute the compromise agreement in their
behalf.
The petitioners further assert that the RTC had jurisdiction over the petition filed by Benedick in the
RTC, and that the latter's recourse was based on paragraph 1, Article 172 of the Family Code,
although his putative father, Benito Dy Chiao, Sr., was already dead when the complaint was filed.
The petitioners thus insist that the public auction sale conducted by the sheriff on the subject
properties was valid.
In her comment on the petition, Mary Jane avers that the decision of the CA holding that the
compromise agreement was vitiated by extrinsic fraud is correct. She claims that she was made to
sign the agreement, but was not informed of its intricacies. She insists that she does not have any
liability to Benedick in Civil Case No. RTC'96-3612, despite her being a signatory to the said
agreement.
For his part, respondent Benito, Jr., through his uncle Henry, avers that the latter's authority to file
the amended petition before the CA in their behalf was never questioned by the petitioners. He
asserts that the CA admitted the amended petition containing the prayer that his uncle Henry be
appointed as his guardian ad litem. Besides, the CA found that he and his brothers were not of
sound and disposing minds; hence, the need for a guardian ad litem in the person of his uncle. He
further alleges that the compromise agreement was the product of connivance between his sister
and Benedick, and their respective counsels. He further points out that Atty. Simando, Benedick's
counsel in the RTC, was likewise the counsel for Mary Jane when she filed her petition for letters of
administration in the RTC of Naga City on December 17, 1996. He further insists that the ruling of
the CA on the issues of extrinsic fraud and lack of jurisdiction of the RTC is in accord with law, and
that the decision based on the compromise agreement was null and void for lack of jurisdiction. 34
The Ruling of the Court
The petition is denied for lack of merit.

On the first issue, we reject the petitioners' contention that Henry was the petitioner who filed the
amended petition before the CA. As gleaned from said petition, the petitioners were "Benito Dy
Chiao, Jr. and Benson Dy Chiao, represented by their uncle Henry S. Dy Chiao." Moreover, Henry
had the authority to file the amended petition and sign the requisite certification on non-forum
shopping when the CA admitted the amended petition and appointed him as guardian ad litem of his
nephews. This was in the January 14, 1998 Resolution of the CA, where the following findings were
made:
x x x We find the opposition to be devoid of merit, firstly because there is an obvious
necessity to amend the petition; and secondly, because the representation of an incompetent
need not be by a duly appointed judicial guardian. A guardian ad litem may be appointed by
the court. In the instant case, the members of this Court who conducted the several hearings
herein, are convinced from an observation of the petitioners that they are not of a sound or
disposing mind. x x x35
In resolving whether to appoint a guardian ad litem for the respondent, the appellate court needed
only to determine whether the individual for whom a guardian was proposed was so incapable of
handling personal and financial affairs as to warrant the need for the appointment of a temporary
guardian. It only needed to make a finding that, based on clear and convincing evidence, the
respondent is incompetent and that it is more likely than not that his welfare requires the immediate
appointment of a temporary guardian.36 A finding that the person for whom a guardian ad litem is
proposed is incapable of managing his own personal and financial affairs by reason of his mental
illness is enough.37
Guardians ad litem are considered officers of the court in a limited sense, and the office of such
guardian is to represent the interest of the incompetent or the minor.38 Whether or not to appoint
a guardian ad litem for the petitioners is addressed to the sound discretion of the court where the
petition was filed, taking into account the best interest of the incompetent or the minor.39 The court
has discretion in appointing a guardian ad litem that will best promote the interest of justice.40 The
appointment of a guardian ad litem is designed to assist the court in its determination of the
incompetent's best interest.41
The records will show that no less than Benedick Arevalo sought the appointment of Mary Jane Dy
Chiao-De Guzman as guardian ad litem for respondent Benito Dy Chiao, Jr. and his brother, Benson
Dy Chiao, before the RTC in Civil Case No. RTC'96-3612.
It must be stressed that the appellate court was not proscribed from appointing Henry as guardian
ad litem for the respondents, merely because of the pendency of his petition for appointment as
guardian over their person and property before Branch 61 of the RTC. Time was of the essence; the
RTC had issued a writ of execution for the enforcement of its decision based on the compromise
agreement; the plaintiff therein, Benedick Arevalo, was bent on enforcing the same, and had in fact
caused the sale of five parcels of land belonging to the estate of Benito, Sr. worth millions of pesos.
Indeed, the sheriff was able to sell at public auction prime real property of the estate of the deceased
for P20,000,000.00 before the status quo order of the CA reached him.

It goes without saying that the finding of the CA on the mental capacity of the respondents is without
prejudice to the outcome of the petition in Special Proceedings No. RTC'97-695.
The petitioners' claims that there was no factual basis for the appellate court's finding that the
respondents were incompetent cannot prevail. It must be stressed that the CA conducted a hearing
before arriving at the conclusion that respondent Benito, Jr. was incompetent. More importantly, such
claim involves a factual issue which cannot be raised before this Court under Rule 45 of the Rules of
Court.
On the issue of jurisdiction, case law has it that the jurisdiction of the tribunal over the nature and
subject matter of an action is to be determined by the allegations of the complaint, the law in effect
when the complaint was filed and the character of the relief prayed for by the plaintiff. The caption of
the complaint is not determinative of the nature of the action. If a court is authorized by statute to
entertain jurisdiction in a particular case only and undertakes to exercise jurisdiction in a particular
case to which the statute has no application, the judgment rendered is void. The lack of statutory
authority to make a particular judgment is akin to lack of subject-matter jurisdiction.42
The CA nullified the decision of the RTC on the ground, inter alia, that the filiation of Benedick could
not be the subject of a compromise, and that Mary Jane had no authority to execute the compromise
agreement for and in behalf of her brothers.
The petitioners, for their part, maintain that Mary Jane's recognition of Benedick as the illegitimate
son of her father was not a compromise, but an affirmation of the allegations in the complaint that
the Dy Chiao siblings had, in effect, recognized him as the illegitimate son of their deceased father.
The petitioners posit that the admissions in the compromise agreement are likewise binding on the
Dy Chiao siblings.
The contention of the petitioners is bereft of merit. The Court finds and so holds that the decision of
the RTC based on the compromise agreement executed by Mary Jane is null and void.
Article 2035(1) of the New Civil Code provides that no compromise upon the civil status of persons
shall be valid. As such, paternity and filiation, or the lack of the same, is a relationship that must be
judicially established, and it is for the court to determine its existence or absence. It cannot be left to
the will or agreement of the parties.43
A compromise is a contract whereby parties, making reciprocal concerns, avoid litigation or put an
end to one already commenced.44 Like any other contract, it must comply with the requisite
provisions in Article 1318 of the New Civil Code, to wit: (a) consent of the contracting parties; (b)
object certain which is the subject matter of the contract; and (c) cause of the obligation which is
established. Like any other contract, the terms and conditions of a compromise agreement must not
be contrary to law, morals, good customs, public policy and public order.45Any compromise
agreement which is contrary to law or public policy is null and void, and vests no rights and holds no
obligation to any party. It produces no legal effect at all.46 Considering all these, there can be no
other conclusion than that the decision of the RTC on the basis of a compromise agreement where
Benedick was recognized as the illegitimate child of Benito, Sr. is null and void.

Article 1878 of the New Civil Code provides that an SPA is required for a compromise. Furthermore,
the power of attorney should expressly mention the action for which it is drawn; as such, a
compromise agreement executed by one in behalf of another, who is not duly authorized to do so by
the principal, is void and has no legal effect, and the judgment based on such compromise
agreement is null and void.47 The judgment may thus be impugned and its execution may be
enjoined in any proceeding by the party against whom it is sought to be enforced. 48 A compromise
must be strictly construed and can include only those expressly or impliedly included therein. 49
As previously stated, the Court is convinced that the compromise agreement signed by Mary Jane
and Benedick was a compromise relating to the latter's filiation. Mary Jane recognized Benedick as
the illegitimate son of her deceased father, the consideration for which was the amount
of P6,000,000.00 to be taken from the estate, the waiver of other claims from the estate of the
deceased, and the waiver by the Dy Chiao siblings of their counterclaims against Benedick. This is
readily apparent, considering that the compromise agreement was executed despite the siblings'
unequivocal allegations in their answer to the complaint filed only two months earlier, that Benedick
was merely an impostor:
11. That paragraph 11 is DENIED for the truth of the matter is that they have not recognized
any person or impostor who pretends having a filial relation with their deceased father by
reason of herein Defendant's father's incapacity to bear children or to engage in any carnal
act considering the age and physical state of their father at that time alluded to by the
Plaintiff .50
To stress, the compromise agreement executed by Benedick and Mary Jane is null and void; as
such, the decision of the RTC based thereon is also without force and effect.
It is, likewise, plain as day that only Mary Jane recognized Benedick as the illegitimate son of her
deceased father
1. That the defendant Maryjane Dy Chiao-De Guzman hereby recognizes the plaintiff as the
illegitimate son of her deceased father Benito Dy Chiao, Sr.51
Such recognition, however, is ineffectual, because under the law, the recognition must be made
personally by the putative parent and not by any brother, sister or relative.52
It is conceded that Mary Jane, in her behalf, and purportedly in behalf of her brothers, agreed and
bound herself to pay Benedick the amount of P6,000,000.00 to be taken from the estate of their
deceased father. However, a cursory reading of the SPA on record will show that the Dy Chiao
brothers did not authorize their sister to recognize Benedick as the illegitimate son of their father.
They could not have agreed to pay P6,000,000.00 to be taken from the estate, because they had
denied that Benedick was the illegitimate son of their father in their answer to the complaint.
On the assumption that the Dy Chiao brothers had signed the SPA on September 20, 1995, a
cursory reading of the compromise agreement will show that they did not specifically empower their
sister to enter into a compromise agreement with Benedick in Civil Case No. RTC'96-3612. It bears

stressing that the SPA was executed as early as September 20, 1995, while the complaint was filed
with the RTC almost a year thereafter, or on August 27, 1996.
The trial court acted with precipitate and inordinate speed in approving the compromise agreement.
The records show that at about the time when it was executed by Mary Jane, her brothers were
patients at the Don Susano J. Rodriguez Mental Hospital, and Benedick had accused her of being a
spendthrift by reason of her alleged addiction to drugs.53
On his belief that the Dy Chiao brothers were incompetent, Benedick even filed a motion for the
appointment of aguardian ad litem for them, and for the examination of Mary Jane for drug addiction,
as follows:
WHEREFORE, it is most respectfully prayed of this Honorable Court that after hearing, an
order be issued, as follows:
1. Appointing a Special Administrator and/or Receiver over the Estate of Benito Dy Chiao
[Sr.];
2. Appointing Guardian Ad Litem over the person of Defendants Benito, Jr. and Benson DyChiao;
3. Ordering defendant Maryjane Dy Chiao to submit a medical examination by a medical
expert on drugs to be commissioned by the Honorable Court to determine whether or not
said defendant is a drug dependent.54
Indeed, Benedick filed a Motion on November 14, 1996, for the Dy Chiao siblings to appear before
the RTC at 8:30 a.m. of November 18, 1996. He, likewise, prayed that the Director of the Don
Susano J. Rodriguez Mental Hospital be directed to bring the clinical records of the brothers, which
the trial court granted per its Order dated November 12, 1996. 55
Upon Mary Jane's failure to appear for the hearing, Benedick even sought to have her cited in
contempt of court. Despite his charge that Mary Jane was a drug addict and a spendthrift, he,
nevertheless, prayed in his Motion dated December 5, 1996, that she be appointed the special
administratrix of the estate of Benito, Sr. and theguardian ad litem of her brothers, thus:
WHEREFORE, in light of all the foregoing considerations, it is most respectfully prayed of
this Honorable Court that Maryjane Dy Chiao- De Guzman be appointed as Special
Administrator over the Estate of the late Benito Dy Chiao, Sr., and as Guardian Ad Litem of
defendants Benito, Jr., and Benson Dy Chiao.56
Barely two weeks earlier, or on November 24, 1996, Mary Jane Dy Chiao-De Guzman (whom
Benedick branded as a spendthrift and a drug addict), executed the compromise agreement, not
only in her behalf, but also in behalf of her brothers, who were confined in the hospital and whom
Benedick considered as mentally incompetent, and needed a guardian ad litem. The trial court
ignored all the foregoing proceedings and approved the compromise agreement without bothering to

resolve the issue of whether the Dy Chiao brothers were indeed incompetent, and whether there
was a need to appoint a guardian ad litem for them.
What is so worrisome is that the counsel of the Dy Chiao siblings, Atty. Botor, did not even bother to
file any pleading in his clients' behalf, relative to the motions filed by Benedick. Despite the
allegations that the Dy Chiao brothers were in the mental hospital and needed a guardian ad litem,
and that Mary Jane was a spendthrift and a drug addict, Atty. Botor still proceeded to sign the
compromise agreement as their counsel. More ominously, the said counsel knew that it was he who
had been empowered by the Dy Chiao brothers to compromise Civil Case No. RTC'96-3612 (based
on the SPA dated October 31, 1996); yet, he still allowed Mary Jane to execute the same based on
an SPA dated September 20, 1995 notarized by no less than Benedick's counsel, Atty. Amador
Simando.
The Court is convinced that the compromise agreement was the handiwork of Atty. Simando,
because it was he who notarized the SPA dated September 20, 1995 purportedly executed by the
Dy Chiao brothers. He later became the counsel of Benedick against the Dy Chiao siblings in Civil
Case No. RTC'96-3612. He signed the compromise agreement as Benedick's counsel, despite his
incessant claim that the brothers were incompetent and needed a guardian ad litem. Barely 11 days
after the execution of the compromise agreement, Atty. Simando filed a Petition for the Settlement of
the Estate of Benito Dy Chiao, Sr., this time as counsel of Mary Jane. It bears stressing that Mary
Jane was the defendant in Civil Case No. RTC'96-3612, and that as counsel of Benedick, the
plaintiff in the said civil case, Atty. Simando had accused her of being a drug addict and a spendthrift.
By then of course, his client (Benedick) had already received P6,000,000.00 from the estate of his
alleged putative father.
Since the decision of the RTC is null and void, the writ of execution issued pursuant thereto and the
subsequent sale at public auction of the properties belonging to the estate of Benito Dy Chiao, Sr.
are null and void.
Considering our foregoing disquisitions, the Court no longer finds the need to still resolve the other
issues that were raised.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the
petitioners.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Tinga, and Chico-Nazario, JJ., concur.

G.R. No. 189871

August 13, 2013

DARIO NACAR, PETITIONER,

vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the Decision1 dated September 23, 2008 of the
Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution 2 dated October 9, 2009 denying
petitioners motion for reconsideration.
The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of
the National Labor Relations Commission (NLRC) against respondents Gallery Frames (GF) and/or
Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found that he
was dismissed from employment without a valid or just cause. Thus, petitioner was awarded
backwages and separation pay in lieu of reinstatement in the amount of P158,919.92. The
dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of showing
that complainant was dismissed from employment for a just or valid cause. All the more, it is clear

from the records that complainant was never afforded due process before he was terminated. As
such, we are perforce constrained to grant complainants prayer for the payments of separation pay
in lieu of reinstatement to his former position, considering the strained relationship between the
parties, and his apparent reluctance to be reinstated, computed only up to promulgation of this
decision as follows:
SEPARATION PAY
Date Hired

August 1990

Rate

P198/day

Date of Decision

Aug. 18, 1998

Length of Service

8 yrs. & 1 month

P198.00 x 26 days x 8 months = P41,184.00

BACKWAGES
Date Dismissed

January 24, 1997

Rate per day

P196.00

Date of Decisions

Aug. 18, 1998

a) 1/24/97 to 2/5/98 = 12.36 mos.

P196.00/day x 12.36 mos.

= P62,986.56

b) 2/6/98 to 8/18/98 = 6.4 months

Prevailing Rate per day

= P62,986.00

P198.00 x 26 days x 6.4 mos.

= P32,947.20
T O TAL

= P95.933.76

xxxx
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of
constructive dismissal and are therefore, ordered:

To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eightysix pesos and 56/100 (P62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred
thirty-three and 36/100 (P95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.
SO ORDERED.4
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution 5 dated
February 29, 2000. Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents
filed a motion for reconsideration, but it was denied. 6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24,
2000, the CA issued a Resolution dismissing the petition. Respondents filed a Motion for
Reconsideration, but it was likewise denied in a Resolution dated May 8, 2001. 7
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding
no reversible error on the part of the CA, this Court denied the petition in the Resolution dated April
17, 2002.8
An Entry of Judgment was later issued certifying that the resolution became final and executory on
May 27, 2002.9 The case was, thereafter, referred back to the Labor Arbiter. A pre-execution
conference was consequently scheduled, but respondents failed to appear.10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages
be computed from the date of his dismissal on January 24, 1997 up to the finality of the Resolution
of the Supreme Court on May 27, 2002.11 Upon recomputation, the Computation and Examination
Unit of the NLRC arrived at an updated amount in the sum of P471,320.31.12
On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the Sheriff to
collect from respondents the total amount of P471,320.31. Respondents filed a Motion to Quash Writ
of Execution, arguing, among other things, that since the Labor Arbiter awarded separation pay
of P62,986.56 and limited backwages ofP95,933.36, no more recomputation is required to be made
of the said awards. They claimed that after the decision becomes final and executory, the same
cannot be altered or amended anymore.14 On January 13, 2003, the Labor Arbiter issued an
Order15 denying the motion. Thus, an Alias Writ of Execution16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a
Resolution17 granting the appeal in favor of the respondents and ordered the recomputation of the
judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be
final and executory. Consequently, another pre-execution conference was held, but respondents

failed to appear on time. Meanwhile, petitioner moved that an Alias Writ of Execution be issued to
enforce the earlier recomputed judgment award in the sum of P471,320.31.18
The records of the case were again forwarded to the Computation and Examination Unit for
recomputation, where the judgment award of petitioner was reassessed to be in the total amount of
only P147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original
amount as determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the final
computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment
award that was due to petitioner in the amount of P147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary
award to include the appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to the amount
ofP11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be
enforced considering that it was the one that became final and executory. However, the Labor Arbiter
reasoned that since the decision states that the separation pay and backwages are computed only
up to the promulgation of the said decision, it is the amount of P158,919.92 that should be executed.
Thus, since petitioner already receivedP147,560.19, he is only entitled to the balance of P11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its
Resolution22 dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was
likewise denied in the Resolution23dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined that
since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which
already became final and executory, a belated correction thereof is no longer allowed. The CA stated
that there is nothing left to be done except to enforce the said judgment. Consequently, it can no
longer be modified in any respect, except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated October 9,
2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED,
COMMITTED GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN
UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED

THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION
OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN
OPINION EXPRESSED IN THE BODY OF THE SAME DECISION.26
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the
Labor Arbiters decision, the same is not final until reinstatement is made or until finality of the
decision, in case of an award of separation pay. Petitioner maintains that considering that the
October 15, 1998 decision of the Labor Arbiter did not become final and executory until the April 17,
2002 Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of Entries on
May 27, 2002, the reckoning point for the computation of the backwages and separation pay should
be on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on October 15,
1998. Further, petitioner posits that he is also entitled to the payment of interest from the finality of
the decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were
awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more recomputation
is required to be made of said awards. Respondents insist that since the decision clearly stated that
the separation pay and backwages are "computed only up to [the] promulgation of this decision,"
and considering that petitioner no longer appealed the decision, petitioner is only entitled to the
award as computed by the Labor Arbiter in the total amount ofP158,919.92. Respondents added that
it was only during the execution proceedings that the petitioner questioned the award, long after the
decision had become final and executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to petitioner at this point of the proceedings would
substantially vary the decision of the Labor Arbiter as it violates the rule on immutability of
judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of
Appeals (Sixth Division),27 wherein the issue submitted to the Court for resolution was the propriety
of the computation of the awards made, and whether this violated the principle of immutability of
judgment. Like in the present case, it was a distinct feature of the judgment of the Labor Arbiter in
the above-cited case that the decision already provided for the computation of the payable
separation pay and backwages due and did not further order the computation of the monetary
awards up to the time of the finality of the judgment. Also in Session Delights, the dismissed
employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the labor
arbiter's original computation of the awards made, pegged as of the time the decision was rendered
and confirmed with modification by a final CA decision, is legally proper. The question is posed,
given that the petitioner did not immediately pay the awards stated in the original labor arbiter's
decision; it delayed payment because it continued with the litigation until final judgment at the CA
level.
A source of misunderstanding in implementing the final decision in this case proceeds from the way
the original labor arbiter framed his decision. The decision consists essentially of two parts.

The first is that part of the decision that cannot now be disputed because it has been confirmed with
finality. This is the finding of the illegality of the dismissal and the awards of separation pay in lieu of
reinstatement, backwages, attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the labor
arbiter made shows that it was time-bound as can be seen from the figures used in the computation.
This part, being merely a computation of what the first part of the decision established and declared,
can, by its nature, be re-computed. This is the part, too, that the petitioner now posits should no
longer be re-computed because the computation is already in the labor arbiter's decision that the CA
had affirmed. The public and private respondents, on the other hand, posit that a re-computation is
necessary because the relief in an illegal dismissal decision goes all the way up to reinstatement if
reinstatement is to be made, or up to the finality of the decision, if separation pay is to be given in
lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken
place, also made a computation of the award, is understandable in light of Section 3, Rule VIII of the
then NLRC Rules of Procedure which requires that a computation be made. This Section in part
states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as
practicable, shall embody in any such decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor arbiter's
decision. As we noted above, this implication is apparent from the terms of the computation itself,
and no question would have arisen had the parties terminated the case and implemented the
decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding of
illegality as well as on all the consequent awards made. Hence, the petitioner appealed the case to
the NLRC which, in turn, affirmed the labor arbiter's decision. By law, the NLRC decision is final,
reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a
timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC exceeded its authority
in affirming the payment of 13th month pay and indemnity, lapsed to finality and was subsequently
returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the
original labor arbiter's decision, the implementing labor arbiter ordered the award re-computed; he
apparently read the figures originally ordered to be paid to be the computation due had the case
been terminated and implemented at the labor arbiter's level. Thus, the labor arbiter re-computed the
award to include the separation pay and the backwages due up to the finality of the CA decision that
fully terminated the case on the merits. Unfortunately, the labor arbiter's approved computation went
beyond the finality of the CA decision (July 29, 2003) and included as well the payment for awards
the final CA decision had deleted - specifically, the proportionate 13th month pay and the indemnity
awards. Hence, the CA issued the decision now questioned in the present petition.

We see no error in the CA decision confirming that a re-computation is necessary as it essentially

considered the labor arbiter's original decision in accordance with its basic component parts as we
discussed above. To reiterate, the first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the awards or monetary consequences of the
illegal dismissal, computed as of the time of the labor arbiter's original decision. 28
Consequently, from the above disquisitions, under the terms of the decision which is sought to be
executed by the petitioner, no essential change is made by a recomputation as this step is a
necessary consequence that flows from the nature of the illegality of dismissal declared by the Labor
Arbiter in that decision.29 A recomputation (or an original computation, if no previous computation has
been made) is a part of the law specifically, Article 279 of the Labor Code and the established
jurisprudence on this provision that is read into the decision. By the nature of an illegal dismissal
case, the reliefs continue to add up until full satisfaction, as expressed under Article 279 of the Labor
Code. The recomputation of the consequences of illegal dismissal upon execution of the decision
does not constitute an alteration or amendment of the final decision being implemented. The illegal
dismissal ruling stands; only the computation of monetary consequences of this dismissal is
affected, and this is not a violation of the principle of immutability of final judgments. 30
That the amount respondents shall now pay has greatly increased is a consequence that it cannot
avoid as it is the risk that it ran when it continued to seek recourses against the Labor Arbiter's
decision. Article 279 provides for the consequences of illegal dismissal in no uncertain terms,
qualified only by jurisprudence in its interpretation of when separation pay in lieu of reinstatement is
allowed. When that happens, the finality of the illegal dismissal decision becomes the reckoning
point instead of the reinstatement that the law decrees. In allowing separation pay, the final decision
effectively declares that the employment relationship ended so that separation pay and backwages
are to be computed up to that point.31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v.
Court of Appeals,32 the Court laid down the guidelines regarding the manner of computing legal
interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall

begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit. 33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No.
796 dated May 16, 2013, approved the amendment of Section 234 of Circular No. 905, Series of 1982
and, accordingly, issued Circular No. 799,35 Series of 2013, effective July 1, 2013, the pertinent
portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions
governing the rate of interest in the absence of stipulation in loan contracts, thereby amending
Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be
six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks and
Sections 4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank Financial
Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance of any money, goods or
credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum - as
reflected in the case of Eastern Shipping Lines40 and Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for
Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No. 799 - but will now be
six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new rate
could only be applied prospectively and not retroactively. Consequently, the twelve percent (12%)
per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six
percent (6%) per annum shall be the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v.
Bangko Sentral Monetary Board,41 this Court affirmed the authority of the BSP-MB to set interest
rates and to issue and enforce Circulars when it ruled that "the BSP-MB may prescribe the maximum
rate or rates of interest for all loans or renewals thereof or the forbearance of any money, goods or

credits, including those for loans of low priority such as consumer loans, as well as such loans made
by pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to July 1,
2013, said judgments shall not be disturbed and shall continue to be implemented applying the rate
of interest fixed therein.
1awp++i1

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines42 are accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in determining the measure of
recoverable damages.
1wphi1

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.

WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of
Appeals in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED and
SET ASIDE. Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24,
1997 up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became
final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month
pay per year of service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from
May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their
full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary
benefits awarded and due to petitioner in accordance with this Decision.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
WE CONCUR:

G.R. No. 192986

January 15, 2013

ADVOCATES FOR TRUTH IN LENDING, INC. and EDUARDO B. OLAGUER, Petitioners,

vs.
BANGKO SENTRAL MONETARY BOARD, represented by its Chairman, GOVERNOR
ARMANDO M. TETANGCO, JR., and its incumbent members: JUANITA D. AMATONG,
ALFREDO C. ANTONIO, PETER FA VILA, NELLY F. VILLAFUERTE, IGNACIO R. BUNYE and
CESAR V. PURISIMA, Respondents.
DECISION
REYES, J.:
Petitioners, claiming that they are raising issues of transcendental importance to the public, filed
directly with this Court this Petition for Certiorari under Rule 65 of the 1997 Rules of Court, seeking
to declare that the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), replacing the Central
Bank Monetary Board (CB-MB) by virtue of Republic Act (R.A.) No. 7653, has no authority to
continue enforcing Central Bank Circular No. 905,1 issued by the CB-MB in 1982, which "suspended"
Act No. 2655, or the Usury Law of 1916.
Factual Antecedents
Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a non-profit, non-stock corporation
organized to engage in pro bono concerns and activities relating to money lending issues. It was
incorporated on July 9, 2010,2 and a month later, it filed this petition, joined by its founder and
president, Eduardo B. Olaguer, suing as a taxpayer and a citizen.
R.A. No. 265, which created the Central Bank (CB) of the Philippines on June 15, 1948, empowered
the CB-MB to, among others, set the maximum interest rates which banks may charge for all types
of loans and other credit operations, within limits prescribed by the Usury Law. Section 109 of R.A.
No. 265 reads:
Sec. 109. Interest Rates, Commissions and Charges. The Monetary Board may fix the maximum
rates of interest which banks may pay on deposits and on other obligations.

The Monetary Board may, within the limits prescribed in the Usury Law fix the maximum rates of
interest which banks may charge for different types of loans and for any other credit operations, or
may fix the maximum differences which may exist between the interest or rediscount rates of the
Central Bank and the rates which the banks may charge their customers if the respective credit
documents are not to lose their eligibility for rediscount or advances in the Central Bank.
Any modifications in the maximum interest rates permitted for the borrowing or lending operations of
the banks shall apply only to future operations and not to those made prior to the date on which the
modification becomes effective.
In order to avoid possible evasion of maximum interest rates set by the Monetary Board, the Board
may also fix the maximum rates that banks may pay to or collect from their customers in the form of
commissions, discounts, charges, fees or payments of any sort. (Underlining ours)
On March 17, 1980, the Usury Law was amended by Presidential Decree (P.D.) No. 1684, giving the
CB-MB authority to prescribe different maximum rates of interest which may be imposed for a loan or
renewal thereof or the forbearance of any money, goods or credits, provided that the changes are
effected gradually and announced in advance. Thus, Section 1-a of Act No. 2655 now reads:
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of
interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to
change such rate or rates whenever warranted by prevailing economic and social conditions:
Provided, That changes in such rate or rates may be effected gradually on scheduled dates
announced in advance.
In the exercise of the authority herein granted the Monetary Board may prescribe higher maximum
rates for loans of low priority, such as consumer loans or renewals thereof as well as such loans
made by pawnshops, finance companies and other similar credit institutions although the rates
prescribed for these institutions need not necessarily be uniform. The Monetary Board is also
authorized to prescribe different maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries. (Underlining and emphasis
ours)
In its Resolution No. 2224 dated December 3, 1982,3 the CB-MB issued CB Circular No. 905, Series
of 1982, effective on January 1, 1983. Section 1 of the Circular, under its General Provisions,
removed the ceilings on interest rates on loans or forbearance of any money, goods or credits, to wit:
Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or
forbearance of any money, goods, or credits, regardless of maturity and whether secured or
unsecured, that may be charged or collected by any person, whether natural or juridical, shall not be
subject to any ceiling prescribed under or pursuant to the Usury Law, as amended. (Underscoring
and emphasis ours)
The Circular then went on to amend Books I to IV of the CBs "Manual of Regulations for Banks and
Other Financial Intermediaries" (Manual of Regulations) by removing the applicable ceilings on
specific interest rates. Thus, Sections 5, 9 and 10 of CB Circular No. 905 amended Book I,

Subsections 1303, 1349, 1388.1 of the Manual of Regulations, by removing the ceilings for interest
and other charges, commissions, premiums, and fees applicable to commercial banks; Sections 12
and 17 removed the interest ceilings for thrift banks (Book II, Subsections 2303, 2349); Sections 19
and 21 removed the ceilings applicable to rural banks (Book III, Subsection 3152.3-c); and, Sections
26, 28, 30 and 32 removed the ceilings for non-bank financial intermediaries (Book IV, Subsections
4303Q.1 to 4303Q.9, 4303N.1, 4303P).4
On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653 establishing the Bangko
Sentral ng Pilipinas (BSP) to replace the CB. The repealing clause thereof, Section 135, reads:
Sec. 135. Repealing Clause. Except as may be provided for in Sections 46 and 132 of this Act,
Republic Act No. 265, as amended, the provisions of any other law, special charters, rule or
regulation issued pursuant to said Republic Act No. 265, as amended, or parts thereof, which may
be inconsistent with the provisions of this Act are hereby repealed. Presidential Decree No. 1792 is
likewise repealed.
Petition for Certiorari
To justify their skipping the hierarchy of courts and going directly to this Court to secure a writ of
certiorari, petitioners contend that the transcendental importance of their Petition can readily be seen
in the issues raised therein, to wit:
a) Whether under R.A. No. 265 and/or P.D. No. 1684, the CB-MB had the statutory or
constitutional authority to prescribe the maximum rates of interest for all kinds of credit
transactions and forbearance of money, goods or credit beyond the limits prescribed in the
Usury Law;
b) If so, whether the CB-MB exceeded its authority when it issued CB Circular No. 905,
which removed all interest ceilings and thus suspended Act No. 2655 as regards usurious
interest rates;
c) Whether under R.A. No. 7653, the new BSP-MB may continue to enforce CB Circular No.
905.5
Petitioners attached to their petition copies of several Senate Bills and Resolutions of the 10th
Congress, which held its sessions from 1995 to 1998, calling for investigations by the Senate
Committee on Banks and Financial Institutions into alleged unconscionable commercial rates of
interest imposed by these entities. Senate Bill (SB) Nos. 37 6 and 1860,7 filed by Senator Vicente C.
Sotto III and the late Senator Blas F. Ople, respectively, sought to amend Act No. 2655 by fixing the
rates of interest on loans and forbearance of credit; Philippine Senate Resolution (SR) No.
1053,8 10739 and 1102,10 filed by Senators Ramon B. Magsaysay, Jr., Gregorio B. Honasan and
Franklin M. Drilon, respectively, urged the aforesaid Senate Committee to investigate ways to curb
the high commercial interest rates then obtaining in the country; Senator Ernesto Maceda filed SB
No. 1151 to prohibit the collection of more than two months of advance interest on any loan of
money; and Senator Raul Roco filed SR No. 114411 seeking an investigation into an alleged cartel of
commercial banks, called "Club 1821", reportedly behind the regime of high interest rates. The

petitioners also attached news clippings12 showing that in February 1998 the banks prime lending
rates, or interests on loans to their best borrowers, ranged from 26% to 31%.
Petitioners contend that under Section 1-a of Act No. 2655, as amended by P.D. No. 1684, the CBMB was authorized only to prescribe or set the maximum rates of interest for a loan or renewal
thereof or for the forbearance of any money, goods or credits, and to change such rates whenever
warranted by prevailing economic and social conditions, the changes to be effected gradually and on
scheduled dates; that nothing in P.D. No. 1684 authorized the CB-MB to lift or suspend the limits of
interest on all credit transactions, when it issued CB Circular No. 905. They further insist that under
Section 109 of R.A. No. 265, the authority of the CB-MB was clearly only to fix the banks maximum
rates of interest, but always within the limits prescribed by the Usury Law.
Thus, according to petitioners, CB Circular No. 905, which was promulgated without the benefit of
any prior public hearing, is void because it violated Article 5 of the New Civil Code, which provides
that "Acts executed against the provisions of mandatory or prohibitory laws shall be void, except
when the law itself authorizes their validity."
They further claim that just weeks after the issuance of CB Circular No. 905, the benchmark 91-day
Treasury bills (T-bills),13 then known as "Jobo" bills14 shot up to 40% per annum, as a result. The
banks immediately followed suit and re-priced their loans to rates which were even higher than those
of the "Jobo" bills. Petitioners thus assert that CB Circular No. 905 is also unconstitutional in light of
Section 1 of the Bill of Rights, which commands that "no person shall be deprived of life, liberty or
property without due process of law, nor shall any person be denied the equal protection of the
laws."
Finally, petitioners point out that R.A. No. 7653 did not re-enact a provision similar to Section 109 of
R.A. No. 265, and therefore, in view of the repealing clause in Section 135 of R.A. No. 7653, the
BSP-MB has been stripped of the power either to prescribe the maximum rates of interest which
banks may charge for different kinds of loans and credit transactions, or to suspend Act No. 2655
and continue enforcing CB Circular No. 905.
Ruling
The petition must fail.
A. The Petition is procedurally infirm.
The decision on whether or not to accept a petition for certiorari, as well as to grant due course
thereto, is addressed to the sound discretion of the court. 15 A petition for certiorari being an
extraordinary remedy, the party seeking to avail of the same must strictly observe the procedural
rules laid down by law, and non-observance thereof may not be brushed aside as mere technicality.16
As provided in Section 1 of Rule 65, a writ of certiorari is directed against a tribunal exercising
judicial or quasi-judicial functions.17 Judicial functions are exercised by a body or officer clothed with
authority to determine what the law is and what the legal rights of the parties are with respect to the
matter in controversy. Quasi-judicial function is a term that applies to the action or discretion of public

administrative officers or bodies given the authority to investigate facts or ascertain the existence of
facts, hold hearings, and draw conclusions from them as a basis for their official action using
discretion of a judicial nature.18
The CB-MB (now BSP-MB) was created to perform executive functions with respect to the
establishment, operation or liquidation of banking and credit institutions, and branches and agencies
thereof.19 It does not perform judicial or quasi-judicial functions. Certainly, the issuance of CB Circular
No. 905 was done in the exercise of an executive function. Certiorari will not lie in the instant case. 20
B. Petitioners have no locus standi to file the Petition
Locus standi is defined as "a right of appearance in a court of justice on a given question." In private
suits, Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides that "every action must be
prosecuted or defended in the name of the real party in interest," who is "the party who stands to be
benefited or injured by the judgment in the suit or the party entitled to the avails of the suit."
Succinctly put, a partys standing is based on his own right to the relief sought. 21
Even in public interest cases such as this petition, the Court has generally adopted the "direct injury"
test that the person who impugns the validity of a statute must have "a personal and substantial
interest in the case such that he has sustained, or will sustain direct injury as a result." 22 Thus, while
petitioners assert a public right to assail CB Circular No. 905 as an illegal executive action, it is
nonetheless required of them to make out a sufficient interest in the vindication of the public order
and the securing of relief. It is significant that in this petition, the petitioners do not allege that they
sustained any personal injury from the issuance of CB Circular No. 905.
Petitioners also do not claim that public funds were being misused in the enforcement of CB Circular
No. 905. In Kilosbayan, Inc. v. Morato,23 involving the on-line lottery contract of the PCSO, there was
no allegation that public funds were being misspent, which according to the Court would have made
the action a public one, "and justify relaxation of the requirement that an action must be prosecuted
in the name of the real party-in-interest." The Court held, moreover, that the status of Kilosbayan as
a peoples organization did not give it the requisite personality to question the validity of the contract.
Thus:
Petitioners do not in fact show what particularized interest they have for bringing this suit. It does not
detract from the high regard for petitioners as civic leaders to say that their interest falls short of that
required to maintain an action under the Rule 3, Sec. 2.24
C. The Petition raises no issues of transcendental importance.
In the 1993 case of Joya v. Presidential Commission on Good Government, 25 it was held that no
question involving the constitutionality or validity of a law or governmental act may be heard and
decided by the court unless there is compliance with the legal requisites for judicial inquiry, namely:
(a) that the question must be raised by the proper party; (b) that there must be an actual case or
controversy; (c) that the question must be raised at the earliest possible opportunity; and (d) that the
decision on the constitutional or legal question must be necessary to the determination of the case
itself.

In Prof. David v. Pres. Macapagal-Arroyo,26 the Court summarized the requirements before
taxpayers, voters, concerned citizens, and legislators can be accorded a standing to sue, viz:
(1) the cases involve constitutional issues;
(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that the tax
measure is unconstitutional;
(3) for voters, there must be a showing of obvious interest in the validity of the election law in
question;
(4) for concerned citizens, there must be a showing that the issues raised are of
transcendental importance which must be settled early; and
(5) for legislators, there must be a claim that the official action complained of infringes upon
their prerogatives as legislators.
While the Court may have shown in recent decisions a certain toughening in its attitude concerning
the question of legal standing, it has nonetheless always made an exception where the
transcendental importance of the issues has been established, notwithstanding the petitioners
failure to show a direct injury.27 In CREBA v. ERC,28the Court set out the following instructive guides
as determinants on whether a matter is of transcendental importance, namely: (1) the character of
the funds or other assets involved in the case; (2) the presence of a clear case of disregard of a
constitutional or statutory prohibition by the public respondent agency or instrumentality of the
government; and (3) the lack of any other party with a more direct and specific interest in the
questions being raised. Further, the Court stated in Anak Mindanao Party-List Group v. The
Executive Secretary29 that the rule on standing will not be waived where these determinants are not
established.
In the instant case, there is no allegation of misuse of public funds in the implementation of CB
Circular No. 905. Neither were borrowers who were actually affected by the suspension of the Usury
Law joined in this petition. Absent any showing of transcendental importance, the petition must fail.
More importantly, the Court notes that the instant petition adverted to the regime of high interest
rates which obtained at least 15 years ago, when the banks prime lending rates ranged from 26% to
31%,30 or even 29 years ago, when the 91-day Jobo bills reached 40% per annum. In contrast,
according to the BSP, in the first two (2) months of 2012 the bank lending rates averaged 5.91%,
which implies that the banks prime lending rates were lower; moreover, deposit interests on savings
and long-term deposits have also gone very low, averaging 1.75% and 1.62%, respectively.31
Judging from the most recent auctions of T-bills, the savings rates must be approaching 0%. In the
auctions held on November 12, 2012, the rates of 3-month, 6-month and 1-year T-bills have dropped
to 0.150%, 0.450% and 0.680%, respectively.32 According to Manila Bulletin, this very low interest
regime has been attributed to "high liquidity and strong investor demand amid positive economic
indicators of the country."33
1wphi1

While the Court acknowledges that cases of transcendental importance demand that they be settled
promptly and definitely, brushing aside, if we must, technicalities of procedure, 34 the delay of at least
15 years in the filing of the instant petition has actually rendered moot and academic the issues it
now raises.
For its part, BSP-MB maintains that the petitioners allegations of constitutional and statutory
violations of CB Circular No. 905 are really mere challenges made by petitioners concerning the
wisdom of the Circular. It explains that it was in view of the global economic downturn in the early
1980s that the executive department through the CB-MB had to formulate policies to achieve
economic recovery, and among these policies was the establishment of a market-oriented interest
rate structure which would require the removal of the government-imposed interest rate ceilings. 35
D. The CB-MB merely suspended the effectivity of the Usury Law when it issued CB Circular No.
905.
The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long been
recognized and upheld in many cases. As the Court explained in the landmark case of Medel v.
CA,36 citing several cases, CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law
but simply suspended the latters effectivity;"37 that "a CB Circular cannot repeal a law, [for] only a
law can repeal another law;"38 that "by virtue of CB Circular No. 905, the Usury Law has been
rendered ineffective;"39 and "Usury has been legally non-existent in our jurisdiction. Interest can now
be charged as lender and borrower may agree upon."40
In First Metro Investment Corp. v. Este Del Sol Mountain Reserve, Inc.41 cited in DBP v. Perez,42 we
also belied the contention that the CB was engaged in self-legislation. Thus:
Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply
suspended the latters effectivity. The illegality of usury is wholly the creature of legislation. A Central
Bank Circular cannot repeal a law. Only a law can repeal another law. x x x. 43
In PNB v. Court of Appeals,44 an escalation clause in a loan agreement authorized the PNB to
unilaterally increase the rate of interest to 25% per annum, plus a penalty of 6% per annum on past
dues, then to 30% on October 15, 1984, and to 42% on October 25, 1984. The Supreme Court
invalidated the rate increases made by the PNB and upheld the 12% interest imposed by the CA, in
this wise:
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely
regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance
of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest
previously stipulated. x x x.45
Thus, according to the Court, by lifting the interest ceiling, CB Circular No. 905 merely upheld the
parties freedom of contract to agree freely on the rate of interest. It cited Article 1306 of the New
Civil Code, under which 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.

E. The BSP-MB has authority to enforce CB Circular No. 905.

Section 1 of CB Circular No. 905 provides that "The rate of interest, including commissions,
premiums, fees and other charges, on a loan or forbearance of any money, goods, or credits,
regardless of maturity and whether secured or unsecured, that may be charged or collected by any
person, whether natural or juridical, shall not be subject to any ceiling prescribed under or pursuant
to the Usury Law, as amended." It does not purport to suspend the Usury Law only as it applies to
banks, but to all lenders.
Petitioners contend that, granting that the CB had power to "suspend" the Usury Law, the new BSPMB did not retain this power of its predecessor, in view of Section 135 of R.A. No. 7653, which
expressly repealed R.A. No. 265. The petitioners point out that R.A. No. 7653 did not reenact a
provision similar to Section 109 of R.A. No. 265.
A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended by banks,
whereas under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the
maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any money,
goods or credits, including those for loans of low priority such as consumer loans, as well as such
loans made by pawnshops, finance companies and similar credit institutions. It even authorizes the
BSP-MB to prescribe different maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries.
Act No. 2655, an earlier law, is much broader in scope, whereas R.A. No. 265, now R.A. No. 7653,
merely supplemented it as it concerns loans by banks and other financial institutions. Had R.A. No.
7653 been intended to repeal Section 1-a of Act No. 2655, it would have so stated in unequivocal
terms.
Moreover, the rule is settled that repeals by implication are not favored, because laws are presumed
to be passed with deliberation and full knowledge of all laws existing pertaining to the subject. 46 An
implied repeal is predicated upon the condition that a substantial conflict or repugnancy is found
between the new and prior laws. Thus, in the absence of an express repeal, a subsequent law
cannot be construed as repealing a prior law unless an irreconcilable inconsistency and repugnancy
exists in the terms of the new and old laws.47 We find no such conflict between the provisions of Act
2655 and R.A. No. 7653.
F. The lifting of the ceilings for interest rates does not authorize stipulations charging excessive,
unconscionable, and iniquitous interest.
It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets.48 As held in Castro v. Tan:49
The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in
principles of justice, or in the human conscience nor is there any reason whatsoever which may

justify such imposition as righteous and as one that may be sustained within the sphere of public or
private morals.50
Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down for
being contrary to morals, if not against the law.51 Indeed, under Article 1409 of the Civil Code, these
contracts are deemed inexistent and void ab initio, and therefore cannot be ratified, nor may the right
to set up their illegality as a defense be waived.
Nonetheless, the nullity of the stipulation of usurious interest does not affect the lenders right to
recover the principal of a loan, nor affect the other terms thereof.52 Thus, in a usurious loan with
mortgage, the right to foreclose the mortgage subsists, and this right can be exercised by the
creditor upon failure by the debtor to pay the debt due. The debt due is considered as without the
stipulated excessive interest, and a legal interest of 12% per annum will be added in place of the
excessive interest formerly imposed,53following the guidelines laid down in the landmark case of
Eastern Shipping Lines, Inc. v. Court of Appeals,54 regarding the manner of computing legal interest:
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit. 55 (Citations omitted)
The foregoing rules were further clarified in Sunga-Chan v. Court of Appeals,

56

as follows:

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the
applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to
loans or forbearance of money, goods, or credits, as well as to judgments involving such loan or
forbearance of money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code
applies "when the transaction involves the payment of indemnities in the concept of damage arising
from the breach or a delay in the performance of obligations in general," with the application of both
rates reckoned "from the time the complaint was filed until the [adjudged] amount is fully paid." In
either instance, the reckoning period for the commencement of the running of the legal interest shall
be subject to the condition "that the courts are vested with discretion, depending on the equities of
each case, on the award of interest."57 (Citations omitted)
WHEREFORE, premises considered, the Petition for certiorari is DISMISSED.
SO ORDERED.
BIENVENIDO L. REYES
Associate Justice
WE CONCUR:

G.R. No. 197861

June 5, 2013

SPOUSES FLORENTINO T. MALLARI and AUREA V. MALLARI, Petitioners,

vs.
PRUDENTIAL BANK (now BANK OF THE PHILIPPINE ISLANDS), Respondent.
DECISION
PERALTA, J.:
Before us is a Petition for Review on Certiorari under Rule 45, assailing the Decision 1 dated June 17,
2010 and the Resolution2 dated July 20, 2011 of the Court of Appeals (CA) in CA-G.R. CV No.
65993.
The antecedent facts are as follows:
On December 11, 1984, petitioner Florentino T. Mallari (Florentino) obtained from respondent
Prudential Bank-Tarlac Branch (respondent bank), a loan in the amount of P300,000.00 as
evidenced by Promissory Note (PN) No. BD 84-055. 3 Under the promissory note, the loan was
subject to an interest rate of 21% per annum (p.a.), attorney's fees equivalent to 15% of the total
amount due but not less than P200.00 and, in case of default, a penalty and collection charges of
12% p.a. of the total amount due. The loan had a maturity date of January 10, 1985, but was
renewed up to February 17, 1985. Petitioner Florentino executed a Deed of Assignment 4 wherein he
authorized the respondent bank to pay his loan with his time deposit with the latter in the amount
ofP300,000.00.
On December 22, 1989, petitioners spouses Florentino and Aurea Mallari (petitioners) obtained
again from respondent bank another loan of P1.7 million as evidenced by PN No. BDS 606-895 with
a maturity date of March 22, 1990. They stipulated that the loan will bear 23% interest p.a.,
attorney's fees equivalent to 15% p.a. of the total amount due, but not less than P200.00, and
penalty and collection charges of 12% p.a. Petitioners executed a Deed of Real Estate Mortgage 6 in
favor of respondent bank covering petitioners' property under Transfer Certificate of Title (TCT) No.
T-215175 of the Register of Deeds of Tarlac to answer for the said loan.
Petitioners failed to settle their loan obligations with respondent bank, thus, the latter, through its
lawyer, sent a demand letter to the former for them to pay their obligations, which when computed up

to January 31, 1992, amounted to P571,218.54 for PN No. BD 84-055 and P2,991,294.82 for PN
No. BDS 606-89.
On February 25, 1992, respondent bank filed with the Regional Trial Court (RTC) of Tarlac, a petition
for the extrajudicial foreclosure of petitioners' mortgaged property for the satisfaction of the latter's
obligation ofP1,700,000.00 secured by such mortgage, thus, the auction sale was set by the
Provincial Sheriff on April 23, 1992.7
On April 10, 1992, respondent bank's Assistant Manager sent petitioners two (2) separate
Statements of Account as of April 23, 1992, i.e., the loan of P300,000.00 was increased
to P594,043.54, while the P1,700,000.00 loan was already P3,171,836.18.
On April 20, 1992, petitioners filed a complaint for annulment of mortgage, deeds, injunction,
preliminary injunction, temporary restraining order and damages claiming, among others, that: (1)
the P300,000.00 loan obligation should have been considered paid, because the time deposit with
the same amount under Certificate of Time Deposit No. 284051 had already been assigned to
respondent bank; (2) respondent bank still added theP300,000.00 loan to the P1.7 million loan
obligation for purposes of applying the proceeds of the auction sale; and (3) they realized that there
were onerous terms and conditions imposed by respondent bank when it tried to unilaterally
increase the charges and interest over and above those stipulated. Petitioners asked the court to
restrain respondent bank from proceeding with the scheduled foreclosure sale.
Respondent bank filed its Answer with counterclaim arguing that: (1) the interest rates were clearly
provided in the promissory notes, which were used in computing for interest charges; (2) as early as
January 1986, petitioners' time deposit was made to apply for the payment of interest of
their P300,000.00 loan; and (3) the statement of account as of April 10, 1992 provided for a
computation of interest and penalty charges only from May 26, 1989, since the proceeds of
petitioners' time deposit was applied to the payment of interest and penalty charges for the
preceding period. Respondent bank also claimed that petitioners were fully apprised of the bank's
terms and conditions; and that the extrajudicial foreclosure was sought for the satisfaction of the
second loan in the amount of P1.7 million covered by PN No. BDS 606-89 and the real estate
mortgage, and not the P300,000.00 loan covered by another PN No. 84-055.
In an Order8 dated November 10, 1992, the RTC denied the Application for a Writ of Preliminary
Injunction. However, in petitioners' Supplemental Motion for Issuance of a Restraining Order and/or
Preliminary Injunction to enjoin respondent bank and the Provincial Sheriff from effecting or
conducting the auction sale, the RTC reversed itself and issued the restraining order in its
Order9 dated January 14, 1993.
Respondent bank filed its Motion to Lift Restraining Order, which the RTC granted in its
Order10 dated March 9, 1993. Respondent bank then proceeded with the extrajudicial foreclosure of
the mortgaged property. On July 7, 1993, a Certificate of Sale was issued to respondent bank being
the highest bidder in the amount ofP3,500,000.00.

Subsequently, respondent bank filed a Motion to Dismiss Complaint11 for failure to prosecute action
for unreasonable length of time to which petitioners filed their Opposition. 12 On November 19, 1998,
the RTC issued its Order13 denying respondent bank's Motion to Dismiss Complaint.
Trial thereafter ensued. Petitioner Florentino was presented as the lone witness for the plaintiffs.
Subsequently, respondent bank filed a Demurrer to Evidence.
On November 15, 1999, the RTC issued its Order14 granting respondent's demurrer to evidence, the
dispositive portion of which reads:
WHEREFORE, this case is hereby ordered DISMISSED. Considering there is no evidence of bad
faith, the Court need not order the plaintiffs to pay damages under the general concept that there
should be no premium on the right to litigate.
NO COSTS.
SO ORDERED.15
The RTC found that as to the P300,000.00 loan, petitioners had assigned petitioner Florentino's time
deposit in the amount of P300,000.00 in favor of respondent bank, which maturity coincided with
petitioners' loan maturity. Thus, if the loan was unpaid, which was later extended to February 17,
1985, respondent bank should had just applied the time deposit to the loan. However, respondent
bank did not, and allowed the loan interest to accumulate reaching the amount of P594,043.54 as of
April 10, 1992, hence, the amount of P292,600.00 as penalty charges was unjust and without basis.
As to the P1.7 million loan which petitioners obtained from respondent bank after the P300,000.00
loan, it had reached the amount of P3,171,836.18 per Statement of Account dated April 27, 1993,
which was computed based on the 23% interest rate and 12% penalty charge agreed upon by the
parties; and that contrary to petitioners' claim, respondent bank did not add the P300,000.00 loan to
the P1.7 million loan obligation for purposes of applying the proceeds of the auction sale.
The RTC found no legal basis for petitioners' claim that since the total obligation was P1.7 million
and respondent bank's bid price was P3.5 million, the latter should return to petitioners the difference
of P1.8 million. It found that since petitioners' obligation had reached P2,991,294.82 as of January
31, 1992, but the certificate of sale was executed by the sheriff only on July 7, 1993, after the
restraining order was lifted, the stipulated interest and penalty charges from January 31, 1992 to July
7, 1993 added to the loan already amounted to P3.5 million as of the auction sale.
The RTC found that the 23% interest rate p.a., which was then the prevailing loan rate of interest
could not be considered unconscionable, since banks are not hospitable or equitable institutions but
are entities formed primarily for profit. It also found that Article 1229 of the Civil Code invoked by
petitioners for the reduction of the interest was not applicable, since petitioners had not paid any
single centavo of the P1.7 million loan which showed they had not complied with any part of the
obligation.

Petitioners appealed the RTC decision to the CA. A Comment was filed by respondent bank and
petitioners filed their Reply thereto.
On June 17, 2010, the CA issued its assailed Decision, the dispositive portion of which reads:
WHEREFORE, the instant appeal is hereby DENIED. The Order dated November 15, 1999 issued
by the Regional Trial Court (RTC), Branch 64, Tarlac City, in Civil Case No. 7550 is hereby
AFFIRMED.16
The CA found that the time deposit of P300,000.00 was equivalent only to the principal amount of
the loan ofP300,000.00 and would not be sufficient to cover the interest, penalty, collection charges
and attorney's fees agreed upon, thus, in the Statement of Account dated April 10, 1992, the
outstanding balance of petitioners' loan was P594,043.54. It also found not persuasive petitioners'
claim that the P300,000.00 loan was added to the P1.7 million loan. The CA, likewise, found that the
interest rates and penalty charges imposed were not unconscionable and adopted in toto the
findings of the RTC on the matter.
Petitioners filed their Motion for Reconsideration, which the CA denied in a Resolution dated July 20,
2011.
Hence, petitioners filed this petition for review arguing that:
THE HON. COURT OF APPEALS ERRED IN AFFIRMING THE ORDER OF THE RTC-BRANCH 64,
TARLAC CITY, DATED NOVEMBER 15, 1999, DESPITE THE FACT THAT THE SAME IS
CONTRARY TO SETTLED JURISPRUDENCE ON THE MATTER.17
The issue for resolution is whether the 23% p.a. interest rate and the 12% p.a. penalty charge on
petitioners'P1,700,000.00 loan to which they agreed upon is excessive or unconscionable under the
circumstances.
Parties are free to enter into agreements and stipulate as to the terms and conditions of their
contract, but such freedom is not absolute. As Article 1306 of the Civil Code provides, "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." Hence, if the stipulations in the contract are valid, the parties thereto are bound to comply
with them, since such contract is the law between the parties. In this case, petitioners and
respondent bank agreed upon on a 23% p.a. interest rate on the P1.7 million loan. However,
petitioners now contend that the interest rate of 23% p.a. imposed by respondent bank is excessive
or unconscionable, invoking our ruling in Medel v. Court of Appeals, 18 Toring v. Spouses GanzonOlan,19 and Chua v. Timan.20
We are not persuaded.
In Medel v. Court of Appeals,21 we found the stipulated interest rate of 66% p.a. or a 5.5% per month
on aP500,000.00 loan excessive, unconscionable and exorbitant, hence, contrary to morals if not
against the law and declared such stipulation void. In Toring v. Spouses Ganzon-Olan, 22 the

stipulated interest rates involved were 3% and 3.81% per month on a P10 million loan, which we find
under the circumstances excessive and reduced the same to 1% per month. While in Chua v.
Timan,23 where the stipulated interest rates were 7% and 5% a month, which are equivalent to 84%
and 60% p.a., respectively, we had reduced the same to 1% per month or 12% p.a. We said that we
need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of
3% per month and higher are excessive, unconscionable and exorbitant, hence, the stipulation was
void for being contrary to morals.24
In this case, the interest rate agreed upon by the parties was only 23% p.a., or less than 2% per
month, which are much lower than those interest rates agreed upon by the parties in the abovementioned cases. Thus, there is no similarity of factual milieu for the application of those cases.
We do not consider the interest rate of 23% p.a. agreed upon by petitioners and respondent bank to
be unconscionable.
In Villanueva v. Court of Appeals,25 where the issue raised was whether the 24% p.a. stipulated
interest rate is unreasonable under the circumstances, we answered in the negative and held:
In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino Savings and Mortgage Bank,
Dagupan City Branch, this Court held that the interest rate of 24% per annum on a loan
of P244,000.00, agreed upon by the parties, may not be considered as unconscionable and
excessive. As such, the Court ruled that the borrowers cannot renege on their obligation to comply
with what is incumbent upon them under the contract of loan as the said contract is the law between
the parties and they are bound by its stipulations.
Also, in Garcia v. Court of Appeals, this Court sustained the agreement of the parties to a 24% per
annum interest on an P8,649,250.00 loan finding the same to be reasonable and clearly evidenced
by the amended credit line agreement entered into by the parties as well as two promissory notes
executed by the borrower in favor of the lender.
Based on the above jurisprudence, the Court finds that the 24% per annum interest rate, provided
for in the subject mortgage contracts for a loan of P225,000.00, may not be considered
unconscionable. Moreover, considering that the mortgage agreement was freely entered into by both
parties, the same is the law between them and they are bound to comply with the provisions
contained therein.26
Clearly, jurisprudence establish that the 24% p.a. stipulated interest rate was not considered
unconscionable, thus, the 23% p.a. interest rate imposed on petitioners' loan in this case can by no
means be considered excessive or unconscionable.
We also do not find the stipulated 12% p.a. penalty charge excessive or unconscionable.
In Ruiz v. CA,27 we held:
The 1% surcharge on the principal loan for every month of default is valid. This surcharge or penalty
stipulated in a loan agreement in case of default partakes of the nature of liquidated damages under
1wphi1

Art. 2227 of the New Civil Code, and is separate and distinct from interest payment. Also referred to
as a penalty clause, it is expressly recognized by law. It is an accessory undertaking to assume
greater liability on the part of an obligor in case of breach of an obligation. The obligor would then be
bound to pay the stipulated amount of indemnity without the necessity of proof on the existence and
on the measure of damages caused by the breach. x x x28 And in Development Bank of the
Philippines v. Family Foods Manufacturing Co., Ltd.,29 we held that:
x x x The enforcement of the penalty can be demanded by the creditor only when the nonperformance is due to the fault or fraud of the debtor. The non-performance gives rise to the
presumption of fault; in order to avoid the payment of the penalty, the debtor has the burden of
proving an excuse - the failure of the performance was due to either force majeure or the acts of the
creditor himself.30
Here, petitioners defaulted in the payment of their loan obligation with respondent bank and their
contract provided for the payment of 12% p.a. penalty charge, and since there was no showing that
petitioners' failure to perform their obligation was due to force majeure or to respondent bank's acts,
petitioners cannot now back out on their obligation to pay the penalty charge. A contract is the law
between the parties and they are bound by the stipulations therein.
WHEREFORE, the petition for review is DENIED. The Decision dated June 17, 2010 and the
Resolution dated July 20, 2011 of the Court of Appeals are hereby AFFIRMED.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
WE CONCUR:

G.R. No. 131622 November 27, 1998

LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners,
vs.
COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR.
doing lending business under the trade name and style "GONZALES CREDIT
ENTERPRISES", respondents.

PARDO, J.:
The case before the Court is a petition for review on certiorari, under Rule 45 of the Revised Rules
of Court, seeking to set aside the decision of the Court of Appeals, 1 and its resolution denying
reconsideration, 2 the dispositive portion of which decision reads as follows:
WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants
are hereby-ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5% per month
interest and 2% service charge per annum effective July 23, 1986, plus 1% per
month of the total amount due and demandable as penalty charges effective August
23, 1986, until the entire amount is fully paid.
The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is the
imposition of costs against the defendants.
SO ORDERED. 3
The Court required the respondents to comment on the petition, 4 which was filed on April 3,
1998, 5 and the petitioners to reply thereto, which was filed on May 29, 1998. 6 We now resolve to give due
course to the petition and decide the case.
The facts of the case, as found by the Court of Appeals in its decision, which are considered binding
and conclusive on the parties herein, as the appeal is limited to questions of law, are as follows:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money
lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00,
payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she
retained P3,000.00, as advance interest for one month at 6% per month. Servando and Leticia
executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.
On November 19, 1985, Servando and Liticia obtained from Veronica another loan in the amount of
P90,000.00, payable in two months, at 6% interest per month. They executed a promissory note to
evidence the loan, maturing on Janaury 19, 1986. They received only P84,000.00, out of the
proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amout of
P300,000.00, maturing in one month, secured by a real estate mortgage over a property belonging
to Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of Leticia Medel,
authorizing her to execute the mortgage. Servando and Leticia executed a promissory note in favor
of Veronica to pay the sum of P300,000.00, after a month, or on July 11, 1986. However, only the
sum of P275.000.00, was given to them out of the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity.

On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all
their previous unpaid loans totaling P440,000.00, and sought from Veronica another loan in the
amount of P60,000.00, bringing their indebtedness to a total of P500,000.00, payable on August 23,
1986. They executed a promissory note, reading as follows:
Baliwag, Bulacan July 23, 1986
Maturity Date Augsut 23, 1986
P500,000.00
FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of
VERONICA R. GONZALES doing business in the business style of GONZALES
CREDIT ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of
Baliwag, Bulacan, the sum of PESOS . . . FIVE HUNDRED THOUSAND . . .
(P500,000.00) Philippine Currency with interest thereon at the rate of 5.5 PER CENT
per month plus 2% service charge per annum from date hereof until fully paid
according to the amortization schedule contained herein. (Emphasis supplied)
Payment will be made in full at the maturity date.
Should I/WE fail to pay any amortization or portion hereof when due, all the other
installments together with all interest accrued shall immediately be due and payable
and I/WE hereby agree to pay an additional amount equivalent to one per cent (1%)
per month of the amount due and demandable as penalty charges in the form of
liquidated damages until fully paid; and the furthersum of TWENTY FIVE PER CENT
(25%) thereof in full, without deductions as Attorney's Fee whether actually incurred
or not, of the total amount due and demandable, exclusive of costs and judicial or
extra judicial expenses. (Emphasis supplied).
I, WE further agree that in the event the present rate of interest on loan is increased
by law or the Central Bank of the Philippines, the holder shall have the option to
apply and collect the increased interest charges without notice although the original
interest have already been collected wholly or partially unless the contrary is required
by law.
It is also a special condition of this contract that the parties herein agree that the
amount of peso-obligation under this agreement is based on the present value of the
peso, and if there be any change in the value thereof, due to extraordinary inflation or
deflation, or any other cause or reason, then the peso-obligation herein contracted
shall be adjusted in accordance with the value of the peso then prevailing at the time
of the complete fulfillment of the obligation.
Demand and notice of dishonor waived. Holder may accept partial payments and
grant renewals of this note or extension of payments, reserving rights against each
and all indorsers and all parties to this note.

IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors
waive all his/their rights under the provisions of Section 12, Rule 39, of the Revised
Rules of Court.
On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus interests
and penalties, evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with
the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the
full amount of the loan including interests and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged
that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel
who borrowed from the plaintiffs the sum of P500,000.00, and actually received the amount and
benefited therefrom; that the loan was secured by a real estate mortgage executed in favor of the
plaintiffs, and that he (Servando Franco) signed the promissory note only as a witness.
In their separate answer filed on April 10, 1990, defendants Leticia and Rafael Medel alleged that the
loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs
over a parcel of real estate situated in San Juan, Batangas; that the interest rate is excessive at
5.5% per month with additional service charge of 2% per annum, and penalty charge of 1% per
month; that the stipulation for attorney's fees of 25% of the amount due is unconscionable, illegal
and excessive, and that substantial payments made were applied to interest, penalties and other
charges.
After due trial, the lower court declared that the due execution and genuineness of the four
promissory notes had been duly proved, and ruled that although the Usury Law had been repealed,
the interest charged by the plaintiffs on the loans was unconscionable and "revolting to the
conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the "legal rate
of interest for loan or forbearance of money, goods or credit is 12% per annum." 7
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which
reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered, as follows:
1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally,
to pay plaintiffs the amount of P47,000.00 plus 12% interest per annum from
November 7, 1985 and 1% per month as penalty, until the entire amount is paid in
full.
2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly
and severally the amount of P84,000.00 with 12% interest per annum and 1% per
cent per month as penalty from November 19, 1985 until the whole amount is fully
paid;

3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of
P285,000.00 plus 12% interest per annum and 1% per month as penalty from July
11, 1986, until the whole amount is fully paid;
4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of
P50,000.00 as attorney's fees;
5. All counterclaims are hereby dismissed.
With costs against the defendants. 8
In due time, both plaintiffs and defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the
unpaid loans of the defendants, is the law that governs the parties. They further argued that Circular
No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of money, goods
or credit at 12% per annum, applies only in the absence of a stipulation on interest rate, but not
when the parties agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law
having become 'legally inexistent' with the promulgation by the Central Bank in 1982 of Circular No.
905, the lender and borrower could agree on any interest that may be charged on the loan". 9 The
Court of Appeals further held that "the imposition of 'an additional amount equivalent to 1% per month of
the amount due and demandable as penalty charges in the form of liquidated damages until fully paid'
was allowed by
law". 10
Accordingly, on March 21, 1997, the Court of Appeals promulgated its decision reversing that of the
Regional Trial Court, disposing as follows:
WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants
are hereby ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per
month interest and 2% service charge per annum effective July 23, 1986, plus 1%
per month of the total amount due and demandable as penalty charges effective
August 24, 1986, until the entire amount is fully paid.
The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the
imposition of costs against the defendants.
SO ORDERED. 11
On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By
resolution dated November 25, 1997, the Court of Appeals denied the motion. 12
Hence, defendants interposed the present recourse via petition for review on certiorari. 13

We find the petition meritorious.

Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the question
presented is whether or not the stipulated rate of interest at 5.5% per month on the loan in the sum
of P500,000.00, that plaintiffs extended to the defendants is usurious. In other words, is the Usury
Law still effective, or has it been repealed by Central Bank Circular No. 905, adopted on December
22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D. No. 1684?
We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00
loan is excessive, iniquitous, unconscionable and exorbitant. 13 However, we can not consider the rate
"usurious" because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on
December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law 14 and that
the Usury Law is now "legally inexistent". 15
In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 16 the Court held
that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended the
latter's effectivity." Indeed, we have held that "a Central Bank Circular can not repeal a law. Only a law
can repeal another law." 17 In the recent case ofFlorendo vs. Court of Appeals 18, the Court reiterated the
ruling that "by virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usury has been
legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree
upon." 19
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the
parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra
bonos mores"), if not against the law. 20 The stipulation is void. 21 The courts shall reduce equitably
liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or
unconscionable. 22
Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we
agree with the trial court that, under the circumstances, interest at 12% per annum, and an additional
1% a month penalty charge as liquidated damages may be more reasonable.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals
promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we render
judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the Regional Trial
Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same
parties.
No pronouncement as to costs in this instance.
SO ORDERED.

G.R. No. 168782

October 10, 2008

SPOUSES JOVENAL TORING and CECILIA ESCALONA-TORING, petitioners,

vs.
SPOUSES ROSALIE GANZON-OLAN and GILBERT OLAN, and ROWENA OLAN, respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari assails the Decision1 and Resolution,2 dated March 28, 2005 and
June 30, 2005, respectively, of the Court of Appeals in CA-G.R. CV No. 76831. The Court of Appeals
affirmed the Resolution3 dated June 10, 2002 of the Regional Trial Court, Branch 276, Muntinlupa
City, in Civil Case No. 00-137 which had ordered petitioners to pay respondents the sum
of P20,000,000 representing the total amount of petitioners' loan and interest due.
The facts are as follows:
On September 4, 1998, petitioner Jovenal Toring obtained from respondents a loan amounting
to P6,000,000 at 3% interest per month. The loan was secured by a mortgage on a parcel of land
covered by Transfer Certificate of Title No. T-27418,4 as evidenced by a Deed of Real Estate
Mortgage5 dated September 8, 1998.
On September 23, 1998, the parties executed a Deed of Absolute Sale6 conveying the mortgaged
property in favor of respondents. Subsequently, respondents gave petitioners an exclusive option to
repurchase the land forP10,000,000. This was embodied in a document denominated as an Option
to Buy7 dated September 28, 1998. On this same document, respondents acknowledged receipt of a
total sum of P10,000,000 as consideration for the purchase of the land. 8 The Option to Buy provided
that if the option is exercised after December 5, 1998, the purchase price shall increase at the rate
of P300,000 or 3% of the purchase price every month until September 5, 1999 and thereafter at the
rate of P381,000 or 3.81% of the purchase price every month, with the fifth of every month as the
cut-off date for said increases.9
On July 28, 2000, petitioners filed a Complaint10 docketed as Civil Case No. 00-137 for reformation
of instruments, abuse of rights and damages against respondents. Petitioners prayed that the Deed
of Absolute Sale dated September 23, 1998 and Option to Buy dated September 28, 1998, be
treated as an equitable mortgage instead of a sale.

At the pre-trial, the parties made the following stipulations: (1) the principal amount of
<4strike>P10,000,000 has long become overdue; (2) no payment has been made; (3) the parties
had agreed on an equitable mortgage and not a sale.11 The parties limited the issues on the amount
of interest due and the time of payment of the entire obligation. Thereafter, the court ordered the
parties to submit their respective position papers, but only respondents complied. All other claims for
damages were waived by the parties.12
On June 10, 2002, the trial court issued its Resolution, the pertinent portion of which reads:
...the document of mortgage specified the interest at 3.81% per month from the time it was
obtained, and which was now estimated to be P7,239,000.00. This sum should be added to
the total loan of TEN MILLION PESOS, . . .
xxxx
Therefore, judgment is rendered for defendants ROSALIE GANZON OLAN and GILBERT
OLAN [and] ROWENA GANZON since the loan is not denied, directing spouses
[p]laintiffs JOVENAL TORING and CECILIA ESCALONA TORING, to pay the sum of
TWENTY MILLION PESOS within one month from receipt of this decision.
xxxx
It [i]s SO ORDERED.13 (Emphasis supplied.)
Petitioners appealed, contending that the trial court erred in awarding interest. Petitioners stress that
Article 160214 of the Civil Code governing equitable mortgages provides that any money, fruits or
other benefit to be received by the vendee as rent or otherwise shall be considered as interest which
shall be subject to the usury laws. Thus, there should have been no award of interest.
On March 28, 2005, the Court of Appeals affirmed the trial court's ruling, as follows:
WHEREFORE, the June 10, 2002 Resolution of the Regional Trial Court, Branch 276,
Muntinlupa City, is hereby AFFIRMED.
SO ORDERED.15
Their motion for reconsideration having been denied, petitioners now come before us raising the
sole issue:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED A
REVERSIBLE ERROR IN DENYING PETITIONERS' APPEAL AND IN AFFIRMING THE
DECISION OF [THE] TRIAL COURT DATED JUNE 10, 2002.16
Simply put, the issue is: Did the Court of Appeals err in sustaining the trial court's ruling upholding
the 3% and 3.81% stipulated monthly interest?

Petitioners contend that they are not liable to pay interest as the stipulated monthly rates of 3% and
3.81%17 are unconscionable. Petitioners further contend that the reformed instrument, i.e., the Option
to Buy dated September 28, 1998, did not mention any rate of interest chargeable to the loan but
rather, an escalation18 of the purchase price.
On the other hand, respondents maintain that petitioners are liable to pay interest based on the
Deed of Absolute Sale and Option to Buy executed by the parties. Respondents assert that
the P300,000 and P381,000 differences per month as stated in the Option to Buy represents the 3%
or 3.81% interest to be charged on the loan. Respondents further assert that the 3% or 3.81%
interest is not usurious since Central Bank Circular No. 905-8219 removed the ceiling on interest
rates on secured and unsecured loans.
In resolving the issue in this controversy, we have agreed to focus our attention on the basic
provisions of statutes as well as the prior decisions of this Court bearing on rates of interest on
monetary obligations.
In a loan or forbearance of money, according to the Civil Code, the interest due should be that
stipulated in writing,20 and in the absence thereof, the rate shall be 12% per annum.21
The first time that the parties in this case entered into a loan transaction was on September 4, 1998
when petitioners obtained the P6,000,000 loan from respondents. Based on the Deed of Real Estate
Mortgage dated September 8, 1998 embodying the promissory note dated September 4, 1998, the
parties agreed on an interest rate of 3% per month.
The second and third times that the parties transacted were on September 23 and 28, 1998 when
they executed the Deed of Absolute Sale and the Option to Buy, respectively. These two documents
were the instruments reformed in Civil Case No. 00-137, where both parties agreed that the
transactions embodied therein were really that of an equitable mortgage. The stipulation in a
contract sharply escalating the repurchase price every month is for the purpose of securing the
return of money invested with substantial profit or interest. 22 Undoubtedly, theP300,000
and P381,000 successive increases stated in the Option to Buy represent the monthly interest which
respondents sought to recover from petitioners.
While the parties are free to stipulate on the interest to be imposed on monetary obligations, the
Court will temper interest rates if they are unconscionable.23 Even if the Usury Law has been
suspended by Central Bank Circular No. 905-82, and parties to a loan agreement have been given
wide latitude to agree on any interest rate, we have held that stipulated interest rates are illegal if
they are unconscionable.24 Consequently, in our view, the Court of Appeals erred in sustaining the
trial court's decision upholding the stipulated interest of 3% and 3.81%. Thus, we are unanimous
now in our ruling to reduce the above stipulated interest rates to 1% per month, in conformity with
our ruling in Ruiz v. Court of Appeals.25 For as well stressed in that case:
... Nothing in the said circular [CB Circular No. 905, s. 1982] grants lenders carte blanche
authority to raise interest rates to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets.

Undeniably, in the present case, petitioners failed to pay the principal loan on its maturity and upon
demand by respondents, as well as the interest payments thereafter. Indeed, petitioners cannot turn
their backs on their obligation; they have to comply with what is incumbent upon them. All other
claims for damages having been waived by the parties, petitioners are bound to pay respondents the
principal loan of P10,000,000, plus what we have repeatedly held as the appropriate rate of interest
of 1% per month, from December 6, 199826 until fully paid.
WHEREFORE, the assailed Decision and Resolution dated March 28, 2005 and June 30, 2005,
respectively, of the Court of Appeals in CA-G.R. CV No. 76831 are MODIFIED to the effect that the
stipulated interest rate of 3% or 3.81% per month on the subject equitable mortgage is hereby
ordered REDUCED to 1% per month only. No pronouncement as to costs.
SO ORDERED.

G.R. No. 170452

August 13, 2008

SALVADOR CHUA and VIOLETA CHUA, petitioners,

vs.
RODRIGO TIMAN, MA. LYNN TIMAN and LYDIA TIMAN, respondents.
DECISION
QUISUMBING, J.:
Before us is a petition for review on certiorari assailing the Decision1 and
Resolution2 dated March 9, 2005 and November 24, 2005, respectively, of the
Court of Appeals in CA-G.R. CV No. 82865, which had affirmed the
Decision3 dated May 14, 2004 of the Regional Trial Court (RTC) of Quezon
City, Branch 86, in Civil Case No. Q-00-41276. The Court of Appeals reduced
the stipulated original interest rates of 7% and 5% per month to only 1% per
month or 12% per annum and ordered petitioners to refund the excess
interest payments by respondents.

The pertinent facts are as follows:

In February and March 1999, petitioners Salvador and Violeta Chua granted
respondents Rodrigo, Ma. Lynn and Lydia Timan the following loans:
a) P100,000; b) P200,000; c) P150,000; d) P107,000; e) P200,000; and
f) P107,000. These loans were evidenced by promissory notes with interest of
7% per month, which was later reduced to 5% per month. Rodrigo and Ma.
Lynn issued five (5) postdated checks to secure the loans, except for
the P150,000 loan which was secured by a postdated check issued by Lydia.
Respondents paid the loans initially at 7% interest rate per month until
September 1999 and then at 5% interest rate per month from October to
December 1999. Sometime in March 2000, respondents offered to pay the
principal amount of the loans through a Philippine National Bank managers
check worth P764,000, but petitioners refused to accept the same insisting
that the principal amount of the loans totalled P864,000.
On May 3, 2000, respondents deposited P864,000 with the Clerk of Court of
the RTC of Quezon City. Later, they filed a case for consignation and
damages. Petitioners moved to dismiss the case, but the RTC denied the
motion, as well as the subsequent motion for reconsideration.
By virtue of an order of Partial Judgment4 dated October 16, 2002, the Clerk
of Court of the RTC of Quezon City released the amount of P864,000 to
petitioners.
Trial on the validity of the stipulated interests on the subject loans, as well as
on the issue of damages, then proceeded.
On May 14, 2004, the RTC rendered a decision in favor of respondents. It
ruled that the original stipulated interest rates of 7% and 5% per month were
excessive. It further ordered petitioners to refund to respondents all interest
payments in excess of the legal rate of 1% per month or 12% per annum.
However, the RTC denied petitioners claim for damages.
On appeal, the Court of Appeals affirmed the trial courts decision. The Court
of Appeals declared illegal the stipulated interest rates of 7% and 5% per

month for being excessive, iniquitous, unconscionable and exorbitant.

Accordingly, the Court of Appeals reduced the stipulated interest rates of 7%
and 5% per month (equivalent to 84% and 60% per annum, respectively) to a
fair and reasonable rate of 1% per month or 12% per annum. The Court of
Appeals also ordered petitioners to refund to respondents all interest
payments in excess of 12% per annum. Petitioners sought reconsideration,
but it was denied.
Hence, this petition raising the lone issue of:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED A REVERSIBLE ERROR OR ACTED NOT IN ACCORD
WITH THE LAW AND JURISPRUDENCE WHEN IT AFFIRMED THE
JUDGMENT OF THE REGIONAL TRIAL COURT ORDERING THE
RETURN OF THE EXCESS INTEREST TO RESPONDENTS.5
Essentially, the main issue is: (1) Did the Court of Appeals err in ruling that the
original stipulated interest rates of 7% and 5%, equivalent to 84% and 60%
per annum, are unconscionable, and in ordering petitioners to refund to
respondents all payments of interest in excess of 12% per annum?
Petitioners aver that the stipulated interest of 5% monthly and higher cannot
be considered unconscionable because these rates are not usurious by virtue
of Central Bank (C.B.) Circular No. 905-826 which had expressly removed the
interest ceilings prescribed by the Usury Law. Petitioners add that
respondents were in pari delicto since they agreed on the stipulated interest
rates of 7% and 5% per month. They further aver they honestly believed that
the interest rates they imposed on respondents loans were not usurious.
Respondents, invoking Medel v. Court of Appeals,7 counter that the stipulated
interest rates of 7% and 5% per month are iniquitous, unconscionable and
exorbitant, thus, they are entitled to the return of the excessive interest paid.
They also contend that petitioners cannot raise the defense of in pari
delicto for the first time on appeal. They further contend that the defense of
good faith is a factual issue which cannot be raised by petitioners in a petition
for review under Rule 45 of the Rules of Civil Procedure.

The petition is patently devoid of merit.

The stipulated interest rates of 7% and 5% per month imposed on
respondents loans must be equitably reduced to 1% per month or 12% per
annum.8 We need not unsettle the principle we had affirmed in a plethora of
cases that stipulated interest rates of 3%9 per month and higher10 are
excessive, iniquitous, unconscionable and exorbitant. Such stipulations are
void for being contrary to morals, if not against the law.11 While C.B. Circular
No. 905-82, which took effect on January 1, 1983, effectively removed the
ceiling on interest rates for both secured and unsecured loans, regardless of
maturity,12 nothing in the said circular could possibly be read as granting carte
blanche authority to lenders to raise interest rates to levels which would either
enslave their borrowers or lead to a hemorrhaging of their assets.13
Petitioners cannot also raise the defenses of in pari delicto and good faith.
The defense of in pari delicto was not raised in the RTC, hence, such an issue
cannot be raised for the first time on appeal. Petitioners must have
seasonably raised it in the proceedings before the lower court, because
questions raised on appeal are confined only within the issues framed by the
parties.14 The defense of good faith must also fail because such an issue is a
question of fact15 which may not be properly raised in a petition for review
under Rule 45 of the Rules of Civil Procedure which allows only questions of
law.16
As well set forth in Medel:17
We agree that the stipulated rate of interest at 5.5% per month on
the P500,000.00 loan is excessive, iniquitous, unconscionable and
exorbitant. However, we can not consider the rate "usurious" because
this Court has consistently held that Circular No. 905 of the Central
Bank, adopted on December 22, 1982, has expressly removed the
interest ceilings prescribed by the Usury Law and that the Usury Law is
now "legally inexistent."
In Security Bank and Trust Company vs. Regional Trial Court of Makati,
Branch 61, the Court held that CB Circular No. 905 "did not repeal nor in
any way amend the Usury Law but simply suspended the latters

effectivity." Indeed, we have held that "a Central Bank Circular can not
repeal a law. Only a law can repeal another law." In the recent case
of Florendo vs. Court of Appeals, the Court reiterated the ruling that "by
virtue of CB Circular 905, the Usury Law has been rendered ineffective."
"Usury has been legally non-existent in our jurisdiction. Interest can now
be charged as lender and borrower may agree upon."
Nevertheless, we find the interest at 5.5% per month, or 66% per
annum, stipulated upon by the parties in the promissory note iniquitous
or unconscionable, and, hence, contrary to morals ("contra bonos
mores"), if not against the law. The stipulation is void.
WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision
and Resolution dated March 9, 2005 and November 24, 2005, respectively, of
the Court of Appeals in CA-G.R. CV No. 82865 are hereby AFFIRMED. Costs
against petitioners.
SO ORDERED.

G.R. No. 182976

January 14, 2013

MANILA ELECTRIC COMPANY (MERALCO), Petitioner,

vs.

ATTY. PABLITO M. CASTILLO, doing business under the trade name and style of
PERMANENT LIGHT MANUFACTURING ENTERPRISES and GUIA S. CASTILLO, Respondents.
DECISION
VILLARAMA, JR., J.:
Before us is a petition1 for review on certiorari seeking to set aside the Decision 2 dated May 21, 2008
of the Court of Appeals in CA-G.R. CV No. 80572. The Court of Appeals had affirmed with
modification the Decision3dated July 9, 2003 of the Regional Trial Court (RTC) of Pasig City, Branch
168, in Civil Case No. 65224. The appellate court deleted the award to petitioner Manila Electric
Company (Meralco) of the amount of P1, 138,898.86, representing overpaid electric bills, and
ordered petitioner to pay temperate damages to respondents in the amount of P500,000.
The facts follow.
Respondents Pablito M. Castillo and Guia S. Castillo are spouses engaged in the business of
manufacturing and selling fluorescent fixtures, office steel cabinets and related metal fabrications
under the name and style of Permanent Light Manufacturing Enterprises (Permanent Light).
On March 2, 1994, the Board of Trustees of the Government Service Insurance System (GSIS)
approved the award to Permanent Light of a contract for the supply and installation of 1,200 units of
lateral steel filing cabinets worth P7,636,800.4 Immediately, Permanent Light began production of the
steel cabinets so that it can obtain the award for the supply of 500 additional units.
In the afternoon of April 19, 1994, Joselito Ignacio and Peter Legaspi, Fully Phased Inspectors of
petitioner Meralco, sought permission to inspect Permanent Lights electric meter. Said inspection
was carried out in the presence of Mike Malikay, an employee of respondents.
The results of the inspection, which are contained in a Special Investigation Report, 5 show that the
terminal seal of Permanent Lights meter was deformed, its meter seal was covered with fake lead,
and the 100th dial pointer was misaligned. On the basis of these findings, Ignacio concluded that the
meter was tampered with and electric supply to Permanent Light was immediately disconnected.
The questioned meter was then taken to Meralcos laboratory for verification.
By petitioner Meralcos claim, it sustained losses in the amount of P126,319.92 over a 24-month
period,6 on account of Permanent Lights tampered meter. The next day, in order to secure the
reconnection of electricity to Permanent Light, respondents paid P50,000 as down payment on the
differential bill to be rendered by Meralco.7
Thereafter, Meralco performed a Polyphase Meter Test on the disputed meter and made the
following findings:
1. The ST-5 seal#A217447 padlock type was tampered by forcibly pulling out the sealing hasp while
the lead cover seals (ERB#1 (1989) and Meralco#21) were found fake.

2. The meshing adjustment between the 1st driven gear and the rotating disc was found altered
causing the said gear to [disengage] totally from the driving gear of the same disc. Under this
condition, the meter failed to register, hence, had not been registering the energy (KWhrs) and kw
demand used by the customer.
3. The 100th dial pointer of the register was found out of alignment which indicates that the meter
had been opened to manipulate said dial pointer and set manually to the desired reading. 8
Petitioner Meralco billed Permanent Light the amount of P61,709.11, representing the latters
unregistered electric consumption for the period of September 20, 1993 to March 22, 1994. Meralco,
however, credited the initial payment of P50,000 made by respondents. It assessed respondents a
balance of P11,709.11, but later reduced said amount to P5,538.20 after petitioner allowed
respondents a 10% discount on their total bill. Then, petitioner received the amount of P5,538.20 as
full settlement of the remaining balance.
Subsequently, respondents received an electric bill in the amount of P38,693.53 for the period of
March 22, 1994 to April 21, 1994. This was followed by another bill for P192,009.64 covering the
period from November 19, 1993 to April 21, 1994. Respondents contested both assessments in a
Letter dated October 12, 1994.9 They likewise complained of a significant increase in their electric
bills since petitioner installed the replacement meter on April 20, 1994.
In a Letter dated December 7, 1994,10 petitioner Meralco explained that the bill for P38,693.53 was
already a "corrected bill." According to petitioner, the bill for P192,009.64 was adjusted on August 25,
1994 to reflect respondents payment of P61,709.11 as settlement of Permanent Lights electric bills
from September 20, 1993 to March 22, 1994. It assured respondents that Permanent Lights meter
has been tested on November 29, 1994 and was found to be in order. In the same letter, petitioner
informed respondents that said meter was replaced anew on December 1, 1994 after it sustained a
crack during testing. While respondents continued to pay, allegedly under protest, the succeeding
bills of Permanent Light, they refused to pay the bill for P38,693.53.
On August 2, 1995, respondents filed against Meralco a Petition 11 for Injunction, Recovery of a Sum
of Money and Damages with Prayer for the Issuance of a Temporary Restraining Order (TRO) and
Writ of Preliminary Injunction. The case was raffled to Branch 162 of the Pasig RTC, which was
presided over by Judge Manuel S. Padolina, and docketed as Civil Case No. 65224.
Mainly, respondents prayed for the issuance of a permanent injunction to enjoin petitioner from
cutting power supply to Permanent Light, refrain from charging them unrecorded electric
consumption and demanding payment of P38,693.53, representing their bill for March 22, 1994 to
April 21, 1994. Corollary to this, respondents sought reimbursement of the P55,538.20 that they had
paid as the estimated electric bill of Permanent Light from September 20, 1993 to March 22, 1994.
They likewise prayed for the reinstatement of their old meter, which respondents believe accurately
records Permanent Lights electric consumption.
In an Order12 dated August 29, 1995, the RTC directed the issuance of a TRO to restrain petitioner
Meralco from disconnecting electricity to Permanent Light. Later, in an Order 13 dated September 8,

1995, the RTC directed the issuance of a writ of preliminary injunction upon the posting of a bond in
the amount of P95,000.
While trial was pending, respondents reiterated their request for a replacement meter. According to
them, the meters installed by Meralco ran faster than the one it confiscated following the
disconnection on April 19, 1994.
In 1997, Judge Manuel S. Padolina retired. Thus, the case was heard by Pairing Judge Aurelio C.
Trampe until the parties had presented all their witnesses. On October 30, 1998, respondents rested
their case and submitted a Written Offer of Exhibits.14 Meanwhile, petitioner filed a Formal Offer of
Evidence15 on September 22, 1999. By then, a regular presiding judge had been appointed to
Branch 162 in the person of Hon. Erlinda Piera Uy. However, on November 8, 1999, respondents
filed an Urgent Motion to Inhibit Ad Cautelam.16 Judge Uy voluntarily recused herself from hearing
the case by Order17 dated November 10, 1999. Eventually, the case was raffled to Branch 168 of the
Pasig RTC presided by Judge Leticia Querubin Ulibarri.
On November 28, 2001, Meralco installed a new electric meter at the premises of Permanent Light.
Following this, on January 29, 2002, respondents filed an Urgent Motion to Proffer and Mark the
Latest Meralco Bill of P9,318.65 which was Reflected in the 3rd Meralco Electric Meter
Recently Installed by Defendant Meralco.18 Despite petitioners opposition, the RTC admitted said bill
into evidence.
On July 9, 2003, the Pasig RTC, Branch 168, rendered judgment in favor of respondents. The fallo
of said Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the petitioners and
against the respondent ordering the latter to pay the former the following:
1. P1,138,898.86 representing overpayments made by the petitioners from May 1994 to November
2001;
2. P200,000.00 as and for moral damages;
3. P100,000.00 as and for exemplary damages;
4. P100,000.00 as and for attorneys fees; and
5. the costs of this suit.
On the other hand, petitioners are hereby ordered to pay to the respondent the amount of
P38,693.53 representing the billing differential.
The Preliminary Injunction issued by the Court is hereby made PERMANENT.
SO ORDERED.19

The trial court ruled that petitioner failed to observe due process when it disconnected electricity to
Permanent Light. It explained that under Section 4 of Republic Act No. 7832 20 (RA 7832), in order
that a tampered meter may constitute prima facie evidence of illegal use of electricity by the person
benefited thereby, the discovery thereof must have been witnessed by an officer of the law or an
authorized representative of the Energy Regulatory Board (ERB). In this case, however, the RTC
noted that no officer of the law or authorized ERB representative was present when the tampered
meter was discovered. Moreover, the trial court found no direct evidence to prove that respondents
were responsible for tampering with said meter.
On the basis of the proffered bill dated December 29, 2001, 21 the RTC concluded that the
replacement meter installed by Meralco did not accurately register Permanent Lights electric
consumption. Consequently, it ordered petitioner to reimburse respondents in the amount of
P1,138,898.86, representing the supposed overpayment from April 1994 to November 2001. For
failure to observe due process in disconnecting electricity to Permanent Light, the trial court likewise
imposed upon petitioner Meralco moral and exemplary damages in the amount of P200,000 and
P100,000, respectively.
In the assailed Decision dated May 21, 2008, the Court of Appeals affirmed with modification the
Decision of the RTC. It deleted the award of P1,138,898.86 in favor of respondents and instead
ordered petitioner to pay temperate damages in the amount of P500,000.
The Court of Appeals held that petitioner abused its right when it disconnected the electricity of
Permanent Light. The appellate court upheld the validity of the provision in petitioners service
contract which allows the utility company to disconnect service upon a customers failure to pay the
differential billing. It however stressed that under Section 9722 of Revised Order No. 1 of the Public
Service Commission, the right of a public utility to discontinue its service to a customer is subject to
the requirement of a 48-hour written notice of disconnection. Petitioners failure in this regard,
according to the appellate court, justifies the award of moral and exemplary damages to
respondents.
The Court of Appeals ordered petitioner to reimburse respondents for overpayment on their electric
bills. It sustained the finding of the trial court that the electric meter installed by petitioner in
Permanent Lights premises on April 20, 1994 was registering a higher reading than usual. The
appellate court based its conclusion on the marked difference between Permanent Lights net billing
from 1985 to 2001 compared to its consumption after the new meter was installed, and the
consequent decrease after said meter was replaced on November 28, 2001. However, instead of
actual damages, the Court of Appeals awarded respondents temperate damages in the amount of
P500,000.
Hence, this petition.
Petitioner submits the following assignment of errors:
I.

THE COURT OF APPEALS SERIOUSLY ERRED AND COMMITTED GRAVE ABUSE OF

DISCRETION IN AFFIRMING THE AWARD OF MORAL AND EXEMPLARY DAMAGES IN FAVOR
OF THE RESPONDENTS;23
II.
THE COURT OF APPEALS SERIOUSLY ERRED AND COMMITTED GRAVE ABUSE OF
DISCRETION IN AWARDING P500,000.00 FOR AND AS TEMPERATE DAMAGES IN FAVOR OF
THE RESPONDENTS.24
Amplified, the issues for our resolution are two-fold: (1) Are respondents entitled to claim damages
for petitioners act of disconnecting electricity to Permanent Light on April 19, 1994? and (2) Are
respondents entitled to actual damages for the supposed overbilling by petitioner Meralco of their
electric consumption from April 20, 1994 to November 28, 2001?
Petitioner faults the Court of Appeals for affirming the award of moral and exemplary damages to
respondents. It argues that respondents failed to establish how the disconnection of electricity to
Permanent Light for one day compromised its production. Petitioner cites respondents admission
that soon after the power went out, they used generators to keep the operations of Permanent Light
on track.
Petitioner further negates bad faith in discontinuing service to Permanent Light without notice to
respondents. It contends that the 48-hour notice requirement in Section 97 of Revised General
Order No. 1 applies only to a customer who fails to pay the regular bill. Petitioner insists that the
discovery by its Fully Phased Inspectors of Permanent Lights tampered meter justified
disconnection of electricity to the latter.
Also, petitioner challenges the award of temperate damages to respondents for the alleged
overbilling. It objects to the admission into evidence of Permanent Lights December 29, 2001
electric bill, which respondents proffered two years after the case was submitted for decision by the
court a quo. Petitioner disputes the finding of the RTC and the Court of Appeals that respondents
overpaid on Permanent Lights electric bill. It reasons that the volume of business of any
establishment varies from season to season such that it cannot be expected to constantly register
the same electric consumption. Lastly, petitioner protests the award of P500,000 in temperate
damages as excessive and unconscionable.
In a Memorandum dated May 27, 2009, respondents denied any involvement in the tampering of
Permanent Lights electric meter. Respondents reiterate that petitioner violated their right to due
process when it disconnected electricity to Permanent Light without apprising them of their violation
and affording them an opportunity to pay the differential bill within the 10-day grace period provided
by law. Respondents claim that such disconnection imperiled the prompt completion of Permanent
Lights contract with GSIS, thereby causing them anxiety. They believe that the "embarrassment,
humiliation and pain" brought about by such disconnection justify the award of moral damages in
their favor. Respondents invoke Article 2425 of the Civil Code on parens patriae against the alleged
abuse by petitioner Meralco of its monopoly as an electric service provider.

Respondents also rely on the testimony of Enrique Katipunan, Meralco Billing Expert, to prove that
the sudden increase in Permanent Lights electric consumption was caused by the "high-speed"
replacement meter installed by petitioner. They reiterate their claim for actual damages, arguing that
absolute certainty as to its amount need not be shown since the loss has been established.
Upon a careful consideration of the circumstances of this case, the Court resolves to deny the
petition.
The pertinent law relative to the immediate disconnection of electricity is Section 4, RA 7832, which
reads:
SEC. 4. Prima Facie Evidence.(a) The presence of any of the following circumstances shall
constitute prima facie evidence of illegal use of electricity, as defined in this Act, by the person
benefitted thereby, and shall be the basis for: (1) the immediate disconnection by the electric utility to
such person after due notice, x x x
(iv) The presence of a tampered, broken, or fake seal on the meter, or mutilated, altered, or
tampered meter recording chart or graph, or computerized chart, graph, or log;
xxxx
(viii) x x x Provided, however, That the discovery of any of the foregoing circumstances, in order to
constitute prima facie evidence, must be personally witnessed and attested to by an officer of the
law or a duly authorized representative of the Energy Regulatory Board (ERB).
Thus, in order for the discovery of a tampered, broken or fake seal on the meter to constitute prima
facie evidence of illegal use of electricity by the person who benefits from such illegal use, the
discovery thereof must have been personally witnessed and attested to by an officer of the law or a
duly authorized representative of the ERB.
Citing Quisumbing v. Manila Electric Company,26 we reiterated the significance of this requirement in
Manila Electric Company (MERALCO) v. Chua,27 thus:
The presence of government agents who may authorize immediate disconnections go into the
essence of due process. Indeed, we cannot allow respondent to act virtually as prosecutor and judge
in imposing the penalty of disconnection due to alleged meter tampering. That would not sit well in a
democratic country. After all, Meralco is a monopoly that derives its power from the government.
Clothing it with unilateral authority to disconnect would be equivalent to giving it a license to
tyrannize its hapless customers.
On cross-examination, Meralcos Fully Phased Inspector, Joselito M. Ignacio, recounted who were
present during the inspection:
Q. Mr. Ignacio, let us reconstruct the evidence on April 19, 1994. Before you came across the
Meralco meter of the plaintiffs, where did you come from?

A. We were inspecting other meters within that vicinity.

Q. So you mean to tell us that you were cruising in the vicinity of Cubao, Quezon City on April 19?
A. Yes, sir.
Q. And were you alone?
A. No, sir, we were two.
Q. Who was with you?
A. Mr. Peter Legaspi, sir.28
On further cross-examination by Atty. Pablito M. Castillo, Ignacio confirmed that only he and another
Fully Phased Inspector were present when they discovered Permanent Lights tampered meter:
Q. Who was with you when you entered the compound of the plaintiffs?
ATTY. BONA: Already answered, Mr. Legaspi.
ATTY. CASTILLO: No. They were both on board but the question now is more particular.
ATTY. BONA: At what particular time?
WITNESS:
A. Mr. Legaspi.
COURT: Only?
WITNESS: Yes, sir.29
Absent any showing that an officer of the law or a duly authorized representative of the ERB
personally witnessed and attested to the discovery of Permanent Lights tampered electric meter,
such discovery did not constitute prima facie evidence of illegal use of electricity that justifies
immediate disconnection of electric service.
Besides, even if there is prima facie evidence of illegal use of electricity, Section 4, RA 7832 requires
due notice to the person benefited before disconnection of electricity can be effected. Specifically,
Section 6 of RA 7832 calls for prior written notice or warning, thus:
SEC. 6. Disconnection of Electric Service. - The private electric utility or rural electric cooperative
concerned shall have the right and authority to disconnect immediately the electric service after
serving a written notice or warning to that effect, without the need of a court or administrative order,
and deny restoration of the same, when the owner of the house or establishment concerned or

someone acting in his behalf shall have been caught in flagrante delicto doing any of the acts
enumerated in Section 4(a) hereof, or when any of the circumstances so enumerated shall have
been discovered for the second time: Provided, That in the second case, a written notice or warning
shall have been issued upon the first discovery: x x x (Emphasis supplied)
Thus, even when the consumer, or someone acting in his behalf, is caught in flagrante delicto or in
the act of doing any of the acts enumerated in Section 4 of RA 7832, petitioner may not immediately
disconnect electricity without serving a written notice or warning to the owner of the house or
establishment concerned.
Petitioner Meralco submitted a memorandum with Control No. 6033-9430 dated April 19, 1994 to
prove that respondents were duly notified of the disconnection. Notwithstanding, petitioner maintains
that the 48-hour notice of disconnection does not apply in this case since Section 97 of Revised
Order No. 1 of the Public Service Commission pertains to nonpayment of bills while the cause for
discontinuing service to Permanent Light was the discovery of the tampered meter.
We do not agree.
On February 9, 1987, the Bureau of Energy approved31 the Revised Terms and Conditions of Service
and Revised Standard Rules and Regulations of Meralcos Electric Service Contract. Pertinent to
this case, the provision on Discontinuance of Service under the Revised Terms and Conditions of
Service states:
DISCONTINUANCE OF SERVICE:
The Company reserves the right to discontinue service in case the Customer is in arrears in the
payment of bills or for failure to pay the adjusted bills in those cases where the meter stopped or
failed to register the correct amount of energy consumed, or for failure to comply with any of these
terms and conditions, or in case of or to prevent fraud upon the Company. Before disconnection is
made in case of or to prevent fraud, the Company may adjust the bill of said Customer accordingly
and if the adjusted bill is not paid, the Company may disconnect the same. In case of disconnection,
the provisions of Revised Order No. 1 of the former Public Service Commission (now the Board of
Energy) shall be observed. Any such suspension of service shall not terminate the contract between
the Company and the Customer.32 (Emphasis supplied)
On August 3, 1995, the ERB passed Resolution No. 95-21 or the Standard Rules and Regulations
Governing the Operation of Electrical Power Services which superseded and revoked Revised Order
No. 1, which the Public Service Commission adopted on November 27, 1941. The relevant provision
on disconnection of service is found in Section 48 of ERB Resolution No. 95-21, which reads:
SEC. 48. Refusal or Discontinuance of Service. An electric utility shall not refuse or discontinue
service to an applicant, or customer, who is not in arrears to the electric utility, even though there are
unpaid charges due from the premises occupied by the applicant, or customer, on account of unpaid
bill of a prior tenant, unless there is evidence of conspiracy between them to defraud the electric
utility.

Service may be discontinued for the nonpayment of bills as provided for in Section 43 hereof,
provided that a forty eight (48)-hour written notice of such disconnection has been given the
customer; Provided, however, that disconnections of service shall not be made on Fridays,
Saturdays, Sundays and official holidays; Provided, further, that if at the moment of the
disconnection is to be made the customer tenders payment of the unpaid bill to the agent or
employee of the electric utility who is to effect the disconnection, the said agent, or employee shall
be obliged to accept tendered payment and issue a temporary receipt for the amount and shall
desist from disconnecting the service.
The electric utility may discontinue service in case the customer is in arrear(s) in the payment of
bill(s). Any such suspension of service shall not terminate the contract between the electric utility and
the customer.
In the case of arrear(s) in the payment of bill(s), the electric utility may discontinue the service
notwithstanding the existence of the customers deposit with the electric utility which will serve as
guarantee for the payment of future bill(s) after service is reconnected. (Emphasis supplied)
True, Section 48 of ERB Resolution No. 95-21 expressly provides for the application of the 48-hour
notice rule to Section 43 on Payment of Bills. However, petitioner Meralco, through its Revised
Terms and Conditions of Service, adopted said notice requirement where disconnection of service is
warranted because (1) the consumer failed to pay the adjusted bill after the meter stopped or failed
to register the correct amount of energy consumed, (2) or for failure to comply with any of the terms
and conditions, (3) or in case of or to prevent fraud upon the Company.
Considering the discovery of the tampered meter by its Fully Phased Inspectors, petitioner Meralco
could have disconnected electricity to Permanent Light for no other reason but to prevent fraud upon
the Company. Therefore, under the Revised Terms and Conditions of Service vis-a-vis Section 48 of
ERB Resolution No. 95-21, petitioner is obliged to furnish respondents with a 48-hour notice of
disconnection. Having failed in this regard, we find basis for the award of moral and exemplary
damages in favor of respondents for the unceremonious disconnection of electricity to Permanent
Light.
Moral damages are awarded to compensate the claimant for physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and
similar injury.33Jurisprudence has established the following requisites for the award of moral
damages: (1) there is an injury whether physical, mental or psychological, which was clearly
sustained by the claimant; (2) there is a culpable act or omission factually established; (3) the
wrongful act or omission of the defendant is the proximate cause of the injury sustained by the
claimant; and (4) the award of damages is predicated on any of the cases stated in Article 2219 of
the Civil Code.34
Pertinent to the case at hand, Article 32 of the Civil Code provides for the award of moral damages
in cases where the rights of individuals, including the right against deprivation of property without
due process of law, are violated.35 In Quisumbing v. Manila Electric Company, this Court treated the
immediate disconnection of electricity without notice as a form of deprivation of property without due
process of law, which entitles the subscriber aggrieved to moral damages. We stressed:

More seriously, the action of the defendant in maliciously disconnecting the electric service
constitutes a breach of public policy. For public utilities, broad as their powers are, have a clear duty
to see to it that they do not violate nor transgress the rights of the consumers. Any act on their part
that militates against the ordinary norms of justice and fair play is considered an infraction that gives
rise to an action for damages. Such is the case at bar.36
Here, petitioner failed to establish factual basis for the immediate disconnection of electricity to
Permanent Light and to comply with the notice requirement provided by law. As the court a quo
correctly observed, there is no direct evidence that points to respondents as the ones who tampered
with Permanent Lights electric meter. Notably, the latters meter is located outside its premises
where it is readily accessible to anyone.
In addition to moral damages, exemplary damages are imposed by way of example or correction for
the public good. In this case, to serve as an example - that before disconnection of electric supply
can be effected by a public utility, the requisites of law must be complied with - we sustain the award
of exemplary damages to respondents.
In the assailed Decision dated May 21, 2008, the Court of Appeals affirmed the award of moral
damages and exemplary damages to respondents in the amount of P200,000 and P100,000,
respectively. In line with prevailing jurisprudence, however, this Court deems the award of moral
damages in the amount of P100,00037 and exemplary damages in the amount of
P50,00038 appropriate in cases where Meralco has wrongfully disconnected electric service to its
customer.
Nonetheless, the Court finds no reason to order the reimbursement to respondents of the
P55,538.20, which petitioner received as full settlement of Permanent Lights "differential billing" for
its unregistered consumption from September 20, 1993 to March 22, 1994. At this point, it is well to
clarify that RA 7832 assigns a specific meaning to "differential billing" and utilizes various
methodologies as basis for determining the same. More particularly, Section 6 39 of RA 7832 defines
"differential billing" as the amount to be charged to the person concerned for the unbilled electricity
illegally consumed by him. However, since RA 7832 was approved only on December 8, 1994 and
introduced such concept only on said date, it would be improper to treat the term "differential billing"
as used by Meralco in this case in such context. Rather, we shall treat the same as a generic term to
refer to the unbilled electricity use of Permanent Light from September 20, 1993 to March 22, 1994.
The Computation Worksheet40 of said "differential billing" shows that the amount of P61,709.11 was
derived based on Permanent Lights average KWhour consumption for the six months immediately
preceding September 20, 1993. We find such method of computation in accord with the Terms of
Service approved by the Bureau of Energy on February 9, 1987, thus:
PAYMENTS:
Bills will be rendered by the Company to the Customer monthly in accordance with the applicable
rate schedule. Said bills are payable to collectors or at the main or branch offices of the Company or
at its authorized banks within ten (10) days after the regular reading date of the electric meters. The
word "month" as used herein and in the rate schedule is hereby defined to be the elapsed time

between two succeeding meter readings approximately thirty (30) days apart. In the event of the
stoppage or the failure by any meter to register the full amount of energy consumed, the Customer
shall be billed for such period on an estimated consumption based upon his use of energy in a
similar period of like use or the registration of a check meter.41 (Emphasis supplied)
Spreading the P61,709.11 over the 6-month period covered by the "differential billing" will yield a
monthly rate of P10,284.85 - well within Permanent Lights average net bill for the previous months.
It is undisputed by respondents that from September 20, 1993 to March 22, 1994, Permanent Light
continued to enjoy petitioners services even as its electric meter stopped functioning and no
monthly electric bills were issued to it. We cannot therefore allow respondents to enrich themselves
unjustly at the expense of petitioner public utility.
However, we are at a loss as to how petitioner Meralco arrived at the second "differential billing" for
P38,693.53, which represents Permanent Lights unregistered consumption from March 22, 1994 to
April 21, 1994. It bears mentioning that it was not until April 19, 1994 that petitioners Fully Phased
Inspectors replaced Permanent Lights electric meter. In months prior to that, Permanent Lights
electric meter had been stationary; hence, the first differential bill for its consumption from
September 20, 1993 to March 22, 1994. The first differential bill was computed in accordance with
the Terms of Service approved by the Bureau of Energy. It is only proper that the same standard be
used in estimating Permanent Lights consumption for the period of March 22, 1994 to April 21,
1994.
Considering, however, that Permanent Lights electric meter had stopped registering its consumption
for months prior to April 20, 1994, we shall base our estimate on Permanent Lights use of energy in
a similar period. Permanent Lights Bill History42 shows that from March 19, 1992 to April 20, 1992, it
consumed 3,648 KWhours of electricity. It last posted the same level of consumption for the period of
July 20, 1993 to August 19, 1993, for which it was billed P10,834.58. We deem this amount a
reasonable approximation of the net bill that respondents should pay for Permanent Lights use of
electricity from March 22, 1994 to April 21, 1994.
We now turn to the question of whether respondents are entitled to actual damages for the
supposed overbilling by petitioner Meralco of their electric consumption from April 20, 1994 to
November 28, 2001.
Actual damages are compensation for an injury that will put the injured party in the position where it
was before the injury. They pertain to such injuries or losses that are actually sustained and
susceptible of measurement. Except as provided by law or by stipulation, a party is entitled to
adequate compensation only for such pecuniary loss as is duly proven. Basic is the rule that to
recover actual damages, not only must the amount of loss be capable of proof; it must also be
actually proven with a reasonable degree of certainty premised upon competent proof or the best
evidence obtainable.43
Respondents anchor their claim for actual damages on the alleged overbilling by petitioner Meralco
of Permanent Lights electricity use from April 20, 1994 to November 28, 2001. In support,
respondents presented in evidence the Comparative Monthly Meralco Bills of Permanent Light Mfg.
Enterprises from 1985-2001.44 Said document lists the amounts which respondents supposedly paid

based on Permanent Lights electric bills from the year 1985 to 2001 for a total of P2,466,941.22. In
particular, respondents submitted "representative Meralco bills" of Permanent Light for the years
1985 to 1987, 1993 to 1997 and 2001 to 2002.
On January 29, 2002, respondents filed with the court a quo an Urgent Motion to Proffer and Mark
the Latest Meralco Bill of P9,318.65 which was Reflected in the 3rd Meralco Electric Meter Recently
Installed by Defendant Meralco. Attached to said pleading is a copy of Permanent Lights electric bill
for the period of November 29, 2001 to December 29, 2001 for P9,318.65. Apparently, Meralco
installed a new electric meter at the premises of Permanent Light on November 28, 2001.
Respondents claim that the bill for P9,318.65 more accurately reflects Permanent Lights normal
consumption, consistent with the latters electric bills before its meter was first replaced on April 20,
1994. Respondents argue that, at most, their net bill should be at par with those of Permanent
Lights neighboring establishments, Eureka Steel and Asiatic Steel Manufacturing Co., (Asiatic Steel)
which are purportedly engaged in the same business. For the courts reference, respondents
submitted "representative Meralco bills" of Eureka Steel for 1996 to 1997 and Asiatic Steel for the
years 1994 to 1998. Using the figures in the latter bills vis-a-vis Permanent Lights "comparative bills"
from 1986 to 2001, respondents seek the refund of P1,138,898.86, representing their alleged
overpayment to Meralco.
However, Section 34,45 Rule 132 of the 1997 Rules of Civil Procedure, as amended, dictates that the
court shall consider no evidence which has not been formally offered. In this case, respondents rely
heavily on the bill for P9,318.65 covering the period of November 29, 2001 to December 29, 2001 to
demonstrate a defect in the replacement meter installed at Permanent Light on April 20, 1994.
However, said bill was not included in the Written Offer of Exhibits which respondents filed much
earlier, on October 30, 1998. To be sure, it could not have been made part thereof.
Yet, even if we disregard the bill for P9,318.65, we cannot ignore the sudden and unexplainable
increase in Permanent Lights electric consumption following the replacement of its broken meter.
Normally, when a tampered electric meter is replaced, assuming the same amount of monthly rate of
usage, the new electric meter will register the increased use of electricity that had previously been
concealed by the tampered meter.46 While Permanent Lights electric meter, indeed, registered a
sharp increase in its electricity use after being replaced on April 20, 1994, there is no direct evidence
to suggest that respondents tampered with said meter. Truth be told, respondents repeatedly sought
technical assistance from Meralco after Permanent Lights electric meter stopped working on
December 7, 1993,47 albeit, without success. This fact remains undisputed by petitioner.
Based on Permanent Lights Meralco bills of record, its electricity use has increased by
approximately 96.3% from an average of 1,672 KWhours per month in 1985 to 3,282 KWhours per
month in 1993. On the other hand, the last recorded electric consumption of Permanent Light before
its meter broke, that is, from August 19, 1993 to September 20, 1993, was 3,432 KWhours while it
registered a reading of 11,904 KWhours from June 20, 1994 to July 20, 1994 a 246.85% increase
in consumption over a period of nine (9) months.
This inordinate surge in electric reading is inconsistent with the pattern of steady but gradual rise in
Permanent Lights consumption over the years. To our mind, the fact that Permanent Light registered

a significant increase in its electric use after the replacement meter was installed is no reason to
automatically conclude that its meter had been running tampered long before the same stopped
working. From 1985 to 1993, petitioner Meralco has observed nothing irregular with Permanent
Lights recorded electric use such as a drastic and unexplainable drop in its consumption to arouse
suspicion that its meter has been tampered. As the appellate court correctly observed, petitioner did
not even present an iota of proof to refute the claim that the replacement meter was running at an
unusually high speed.48 It must be underscored that petitioner has the imperative duty to make a
reasonable and proper inspection of its apparatus and equipment to ensure that they do not
malfunction, and the due diligence to discover and repair defects therein. 49
Notably, respondents complained of a sudden spike in Permanent Lights net bill in their Letter 50 to
Meralco dated December 7, 1993 - two days before Permanent Lights meter stopped working. Thus,
if it is true that there was evidence of tampering found on April 19, 1994 yet Permanent Light
continued to register an increased consumption even after its meter was replaced, the better view
would be that the defective meter was not actually corrected after the first inspection.
Be that as it may, we cannot award actual damages to respondents.
We reiterate that actual or compensatory damages cannot be presumed, but must be duly proved
with a reasonable degree of certainty. The award is dependent upon competent proof of the damage
suffered and the actual amount thereof. The award must be based on the evidence presented, not
on the personal knowledge of the court; and certainly not on flimsy, remote, speculative and
unsubstantial proof.51
In this case, respondents presented a summary of Permanent Lights electric bills from the years
1986 to 2001. Said list contains the amounts which respondents allegedly paid on Permanent Lights
from 1986 to 2001. Curiously, respondents submitted mere "representative samples" of
Permanent Lights electric bills for the years 1985 to 1987 and from 1993 to 1997. It appears,
however, that respondents conveniently selected the bills which cover the period from December to
mid-March - months in which demand for electricity is normally less. To our mind, respondents did
this for no other reason than to magnify the disparity between Permanent Lights net bill before and
after its meter was replaced on April 20, 1994 so that it can demand greater in damages.
Nonetheless, in the absence of competent proof on the amount of actual damages suffered, a party
is entitled to temperate damages.52 Temperate or moderate damages, which are more than nominal
but less than compensatory damages, may be recovered when the court finds that some pecuniary
loss has been suffered but its amount cannot, from the nature of the case, be proved with
certainty.53 The amount thereof is usually left to the discretion of the courts but the same should be
reasonable, bearing in mind that temperate damages should be more than nominal but less than
compensatory.
In this case, we are convinced that respondents sustained damages from the abnormal increase in
Permanent Lights electric bills after petitioner replaced the latters meter on April 19, 1994. However,
respondents failed to establish the exact amount thereof by competent evidence. Considering the

attendant circumstances, an award of temperate damages in the amount of P300,000 is just and
reasonable.
Finally, we delete the award of attorneys fees for lack of basis.
An award of attorneys fees has always been the exception rather than the rule. Attorneys fees are
not awarded every time a party prevails in a suit. The policy of the Court is that no premium should
be placed on the right to litigate.54 The trial court must make express findings of fact and law that
bring the suit within the exception. What this demands is that factual, legal or equitable justifications
for the award must be set forth not only in the fallo but also in the text of the decision, or else, the
award should be thrown out for being speculative and conjectural. 55
1wphi1

Here, the award of attorneys fees in favor of respondents appeared only in the fallo of the trial
courts Decision dated July 9, 2003. Neither did the appellate court proffer any justification for
sustaining said award.
WHEREFORE, the Decision dated May 21, 2008 of the Court of Appeals in CA-G.R. CV No. 80572
is AFFIRMED with MODIFICATIONS, as follows:
(a) Petitioner is ordered to pay respondents ;P300,000 as temperate damages, ;PI 00,000 as
moral damages and ;P50,000 as exemplary damages;
(b) Respondents are ordered to pay petitioner ; PI 0,834.58, representing the estimate of its
unregistered consumption for the period from March 22, 1994 to April 21, 1994; and
(c) The award of attorney's fees is DELETED for lack of basis.
Costs against petitioner.
SO ORDERED.
MARTIN S. VILLARAMA, JR.
Associate Justice
WE CONCUR:

G.R. No. 142943

April 3, 2002

Spouses ANTONIO and LORNA QUISUMBING, petitioners,

vs.
MANILA ELECTRIC COMPANY (MERALCO), respondent.
PANGANIBAN, J.:
Under the law, the Manila Electric Company (Meralco) may immediately disconnect electric service
on the ground of alleged meter tampering, but only if the discovery of the cause is personally
witnessed and attested to by an officer of the law or by a duly authorized representative of the
Energy Regulatory Board.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the February 1,
2000 Decision1and the April 10, 2000 Resolution2 of the Court of Appeals (CA) in CA-GR SP No.
49022. The decretal portion of the said Decision reads as follows:
"WHEREFORE, the challenged decision in Civil Case No. Q-95-23219 is hereby SET
ASIDE and the complaint against defendant-appellant MERALCO is hereby DISMISSED.
Plaintiffs-appellees are herebyORDERED to pay defendant-appellant MERALCO the
differential billing of P193,332.00 representing the value of used but unregistered electrical
consumption."3
The assailed Resolution denied petitioner's Motion for Reconsideration.
The Facts
The facts of the case are summarized by the Court of Appeals in this wise:
"Defendant-appellant Manila Electric Company (MERALCO) is a private corporation,
authorized by law to charge all persons, including the government, for the consumption of

electric power at rates duly authorized and approved by the Board of Energy (now the
Energy Regulatory Board).
"Plaintiffs-appellees Spouses Antonio and Lorna Quisumbing are owners of a house and lot
located at No. 94 Greenmeadows Avenue, Quezon City, which they bought on April 7, 1994
from Ms. Carmina Serapio Santos. They alleged to be business entrepreneurs engaged in
the export of furnitures under the business name 'Loran Industries' and recipient of the 1993
Agora Award and 1994 Golden Shell Award. Mrs. Quisumbing is a member of the Innerwheel
Club while Mr. Quisumbing is a member of the Rotary Club, Chairman of Cebu Chamber of
Commerce, and Director of Chamber of Furniture.
"On March 3, 1995 at around 9:00 a.m., defendant-appellant's inspectors headed by
Emmanuel C. Orlino were assigned to conduct a routine-on-the-spot inspection of all single
phase meters at Greenmeadows Avenue. House no. 94 of Block 8, Lot 19 Greenmeadows
Avenue owned by plaintiffs-appellees was inspected after observing a standard operating
procedure of asking permission from plaintiffs-appellees, through their secretary which was
granted. The secretary witnessed the inspection. After the inspection, defendant-appellant's
inspectors discovered that the terminal seal of the meter was missing; the meter cover seal
was deformed; the meter dials of the meter was mis-aligned and there were scratches on the
meter base plate. Defendant-appellant's inspectors relayed the matter to plaintiffs-appellees'
secretary, who in turn relayed the same to plaintiff-appellee, Lorna Quisumbing, who was
outraged of the result of the inspection and denied liability as to the tampering of the meter.
Plaintiffs-appellees were advised by defendant-appellant's inspectors that they had to detach
the meter and bring it to their laboratory for verification/confirmation of their findings. In the
event the meter turned out to be tampered, defendant-appellant had to temporarily
disconnect the electric services of plaintiffs-appellees. The laboratory testing conducted on
the meter has the following findings to wit:
'1. Terminal seal was missing.
'2. Lead cover seals ('90 ERB 1-Meralco 21) were tampered by forcibly pulling out
from the sealing wire.
'3. The 1000th, 100th and 10th dial pointers of the register were found out of
alignment and with circular scratches at the face of the register which indicates that
the meter had been opened to manipulate the said dial pointers and set manually to
the desired reading. In addition to this, the meter terminal blades were found full of
scratches.'
"After an hour, defendant-appellant's head inspector, E. Orlina returned to the residence of
plaintiffs-appellees and informed them that the meter had been tampered and unless they
pay the amount ofP178,875.01 representing the differential billing, their electric supply would
be disconnected. Orlina informed plaintiffs-appellees that they were just following their
standard operating procedure. Plaintiffs-appellees were further advised that questions
relative to the results of the inspection as well as the disconnection of her electrical services
for Violation of Contract (VOC) may be settled with Mr. M. Manuson of the Special Accounts,

Legal Service Department. However, on the same day at around 2:00 o'clock in the
afternoon defendant-appellant's officer through a two-way radio instructed its service
inspector headed by Mr. Orlino to reconnect plaintiffs-appellees' electric service which the
latter faithfully complied.
"On March 6, 1995, plaintiffs-appellees filed a complaint for damages with prayer for the
issuance of a writ of preliminary mandatory injunction, despite the immediate reconnection,
to order defendant-appellant to furnish electricity to the plaintiffs-appellees alleging that
defendant-appellant acted with wanton, capricious, malicious and malevolent manner in
disconnecting their power supply which was done without due process, and without due
regard for their rights, feelings, peace of mind, social and business reputation.
"In its Answer, defendant-appellant admitted disconnecting the electric service at the
plaintiffs-appellees' house but denied liability citing the 'Terms and Conditions of Service,'
and Republic Act No. 7832 otherwise known a 'Anti-Electricity and Electric Transmission
Lines/Materials Pilferage Act of 1994.'
"After trial on the merits, the lower court rendered judgment, ruling in favor of plaintiffsappellees."4(Citations omitted)
Ruling of the Trial Court
The trial court held that Meralco (herein respondent) should have given the Quisumbing spouses
(herein petitioners) ample opportunity to dispute the alleged meter tampering.
It held that respondent had acted summarily and without procedural due process in immediately
disconnecting the electric service of petitioners. Respondent's action, ruled the RTC, constituted
a quasi delict.
Ruling of the Court of Appeals
The Court of Appeals overturned the trial court's ruling and dismissed the Complaint. It held that
respondent's representatives had acted in good faith when they disconnected petitioners' electric
service. Citing testimonial and documentary evidence, it ruled that the disconnection was made only
after observing due process. Further, it noted that petitioners had not been able to prove their claim
for damages. The appellate court likewise upheld respondent's counterclaim for the billing differential
in the amount of P193,3325 representing the value of petitioners' used but unregistered electrical
consumption, which had been established without being controverted.
Hence, this Petition.6
The Issues
In their Memorandum,7 petitioners submit the following issues for our consideration:

"4.1 Whether a prima facie presumption of tampering of electrical meter enumerated under
Sec. 4 (a) iv of RA 7832 (Anti-Electricity and Electric Transmission Lines/Materials Pilferage
Act of 1994) may be had despite the absence of an ERB representative or an officer of the
law?
"4.2 Whether the enumeration of instances to establish a prima facie presumption of
tampering of electrical meter enumerated under Sec. 4 (a) iv of RA 7832 (Anti-Electricity and
Electric Transmission Lines/Materials Pilferage Act of 1994) is exclusive?
"4.3 What constitutes notice prior to disconnection of electricity service? Corollarily, whether
the definition of notice under Meralco v. Court of Appeals (157 SCRA 243) applies to the
case at bar?
"4.4 Whether a prima facie presumption may contradict logic?
"4.5 Whether documentary proof is pre-requisite for award of damages?" 8
In sum, this Petition raises three (3) main issues which this Court will address: (1) whether
respondent observed the requisites of law when it disconnected the electrical supply of petitioners,
(2) whether such disconnection entitled petitioners to damages, and (3) whether petitioners are liable
for the billing differential computed by respondent.
The Court's Ruling
The Petition is partly meritorious.
First Issue:
Compliance with Requisites of Law
Petitioners contend that the immediate disconnection of electrical service was not validly effected
because of respondent's noncompliance with the relevant provisions of RA 7832, the "Anti-Electricity
and Electric Transmission Lines/Materials Pilferage Act of 1994." They insist that the immediate
disconnection of electrical supply may only be validly effected only when there is prima facie
evidence of its illegal use. To constitute prima facie evidence, the discovery of the illegal use must be
"personally witnessed and attested to by an officer of the law or a duly authorized representative of
the Energy Regulatory Board (ERB)."
Respondent, on the other hand, points out that the issue raised by petitioners is a question of fact
which this Court cannot pass upon. It argues further that this issue, which was not raised in the court
below, can no longer be taken up for the first time on appeal. Assuming arguendo that the issue was
raised below, it also contends that petitioners were not able to specifically prove the absence of an
officer of the law or a duly authorized representative of the ERB when the discovery was made.
1wphi1.nt

Prima facie Evidence of Illegal Use of Electricity

We agree with petitioners. Section 4 of RA 7832 states:

(a) The presence of any of the following circumstances shall constitute prima facie evidence
of illegal use of electricity, as defined in this Act, by the person benefitted thereby, and shall
be the basis for: (1) the immediate disconnection by the electric utility to such person after
due notice, x x x
xxx

xxx

xxx

(viii) x x x Provided, however, That the discovery of any of the foregoing circumstances, in
order to constitute prima facie evidence, must be personally witnessed and attested to by an
officer of the law or a duly authorized representative of the Energy Regulatory Board
(ERB)."9 (Italics supplied)
Under the above provision, the prima facie presumption that will authorize immediate disconnection
will arise only upon the satisfaction of certain requisites. One of these requisites is the personal
witnessing and attestation by an officer of the law or by an authorized ERB representative when the
discovery was made.
As a rule, this Court reviews only questions of law, not of facts. However, it may pass upon the
evidence when the factual findings of the trial court are different from those of the Court of Appeals,
as in this case.10
A careful review of the evidence on record negates the appellate court's holding that "the actions of
defendant-appellant's service inspectors were all in accord with the requirement of the law." 11
Respondent's own witnesses provided the evidence on who were actually present when the
inspection was made. Emmanuel C. Orlino, the head of the Meralco team, testified:
"Q
When you were conducting this inspection, and you discovered these findings you
testified earlier, who was present?
A

The secretary, sir."12

"ATTY. REYES - Who else were the members of your team that conducted this inspection at
Greenmeadows Avenue on that day, March 3, 1995?
A

The composition of the team, sir?

Yes.

Including me, we are about four (4) inspectors, sir.

You were four (4)?

Yes, sir.

Who is the head of this team?

I was the head of the team, sir."13

Further, Catalino A. Macaraig, the area head of the Orlino team, stated that only Meralco personnel
had been present during the inspection:
"Q

By the way you were not there at Green Meadows on that day, right?

Yes, sir.

Only Mr. Orlino and who else were there?

Two or three of his men.

All members of the inspection team?

Yes, sir."14

These testimonies clearly show that at the time the alleged meter tampering was discovered, only
the Meralco inspection team and petitioners' secretary were present. Plainly, there was no officer of
the law or ERB representative at that time. Because of the absence of government representatives,
the prima facie authority to disconnect, granted to Meralco by RA 7832, cannot apply.
Neither can respondent find solace in the fact that petitioners' secretary was present at the time the
inspection was made. The law clearly states that for the prima facie evidence to apply, the discovery
"must be personally witnessed and attested to by an officer of the law or a duly authorized
representative of the Energy Regulatory Board (ERB)." 15 Had the law intended the presence of the
owner or his/her representative to suffice, then it should have said so. Embedded in our
jurisprudence is the rule that courts may not construe a statute that is free from doubt. 16 Where the
law is clear and unambiguous, it must be taken to mean exactly what it says, and courts have no
choice but to see to it that the mandate is obeyed.17
In fact, during the Senate deliberations on RA 7832, Senator John H. Osmea, its author, stressed
the need for the presence of government officers during inspections of electric meters. He said:
"Mr. President, if a utility like MERALCO finds certain circumstances or situations which are
listed in Section 2 of this bill to be prima facie evidence, I think they should be prudent
enough to bring in competent authority, either the police or the NBI, to verify or substantiate
their finding. If they were to summarily proceed to disconnect on the basis of their findings
and later on there would be a court case and the customer or the user would deny the
existence of what is listed in Section 2, then they could be in a lot of trouble." 18 (Italics
supplied)
Neither can we accept respondent's argument that when the alleged tampered meter was brought to
Meralco's laboratory for testing, there was already an ERB representative present.

The law says that before immediate disconnection may be allowed, the discovery of the illegal use of
electricity must have been personally witnessed and attested to by an officer of the law or by an
authorized ERB representative. In this case, the disconnection was effected immediately after the
discovery of the alleged meter tampering, which was witnessed only by Meralco's employees. That
the ERB representative was allegedly present when the meter was examined in the Meralco
laboratory will not cure the defect.
It is undisputed that after members of the Meralco team conducted their inspection and found
alleged meter tampering, they immediately disconnected petitioners' electrical supply. Again, this
verity is culled from the testimony of Meralco's Orlina:
"A
When she went inside then she came out together with Mrs. Lourdes Quis[u]mbing at
that time. We did tell our findings regarding the meter and the consequence with it. And she
was very angry with me.
Q
When you say consequence of your findings, what exactly did you tell Mrs.
Quisumbing?
A
We told her that the service will be temporarily disconnected and that we are referring
to our Legal Department so could know the violation, sir."19
"A

Yes, sir. At that time, I referred her to Mr. Macaraig, sir.

What is the fist name of this supervisor?

Mr. Catalino Macara[i]g, sir.

Q
Then after talking to Mr. Catalino Macara[i]g, this is over the telephone, what
happened?
A
The supervisor advised her that the service will be temporarily disconnected and she
has to go to our Legal Department where she could settle the VOC, sir.
Q

You are talking of 'VOC,' what is this all about Mr. Orlino?

'VOC' is violation of contract, sir."20

As to respondent's argument that the presence of an authorized ERB representative had not been
raised below, it is clear, however, that the issue of due process was brought up by petitioners as a
valid issue in the CA. The presence of government agents who may authorize immediate
disconnections go into the essence of due process. Indeed, we cannot allow respondent to act
virtually as prosecutor and judge in imposing the penalty of disconnection due to alleged meter
tampering. That would not sit well in a democratic country. After all, Meralco is a monopoly that
derives its power from the government. Clothing it with unilateral authority to disconnect would be
equivalent to giving it a license to tyrannize its hapless customers.

Besides, even if not specifically raised, this Court has already ruled that "[w]here the issues already
raised also rest on other issues not specifically presented, as long as the latter issues bear
relevance and close relation to the former and as long as they arise from matters on record, the
Court has the authority to include them in its discussion of the controversy as well as to pass upon
them."21
Contractual Right to Disconnect
Electrical Service
Neither may respondent rely on its alleged contractual right to disconnect electrical service based on
Exhibits "10"22 and "11,"23 or on Decisions of the Board of Energy (now the Energy Regulatory
Board). The relevant portion of these documents concerns discontinuance of service. It provides:
"The Company reserves the right to discontinue service in case the Customer is in arrears in
the payment of bills or for failure to pay the adjusted bills in those cases where the meter
stopped or failed to register the correct amount of energy consumed, or for failure to comply
with any of these terms and conditions, or in case of or to prevent fraud upon the Company.
Before disconnection is made in case of or to prevent fraud, the Company may adjust the bill
of said Customer accordingly and if the adjusted bill is not paid, the Company may
disconnect the same. In case of disconnection, the provisions of Revised Order No. 1 of the
former Public Service Commission (now the Board of Energy) shall be observed. Any such
suspension of service shall not terminate the contract between the Company and the
Customer."24
Petitioners' situation can fall under disconnection only "in case of or to prevent fraud upon the
Company." However, this too has requisites before a disconnection may be made. An adjusted bill
shall be prepared, and only upon failure to pay it may the company discontinue service. This is also
true in regard to the provisions of Revised Order No. 1 of the former Public Service Commission,
which requires a 48-hour written notice before a disconnection may be justified. In the instant case,
these requisites were obviously not complied with.
Second Issue
Damages
Having ruled that the immediate disconnection effected by Meralco lacks legal, factual or contractual
basis, we will now pass upon on the right of petitioners to recover damages for the improper
disconnection.
Petitioners are asking for the reinstatement of the RTC Decision, which awarded them actual, moral
and exemplary damages as well as attorney's fees. All these were overturned by the CA.
As to actual damages, we agree with the CA that competent proof is necessary before our award
may be made. The appellate court ruled as follows:

"Considering further, it is a settled rule that in order for damages to be recovered, the best
evidence obtainable by the injured party must be presented. Actual and compensatory
damages cannot be presumed but must be duly proved and proved with reasonable degree
and certainty. A court cannot rely on speculation, conjecture or guess work as to the fact and
amount of damages, but must depend upon competent proof that they have been suffered
and on evidence of actual amount thereof. If the proof is flimsy and unsubstantial, no
damages will be awarded."25
Actual damages are compensation for an injury that will put the injured party in the position where it
was before it was injured.26 They pertain to such injuries or losses that are actually sustained and
susceptible of measurement.27 Except as provided by law or by stipulation, a party is entitled to an
adequate compensation only for such pecuniary loss as it has duly proven. 28
Basic is the rule that to recover actual damages, not only must the amount of loss be capable of
proof; it must also be actually proven with a reasonable degree of certainty, premised upon
competent proof or the best evidence obtainable. 29
Petitioners' claim for actual damages was premised only upon Lorna Quisumbing's bare testimony
as follows:
"A
Actually that da[y] I was really scheduled to go to that furniture exhibit. That furniture
exhibit is only once a year.
Q

What is this furniture exhibit?

A
The SITEM, that is a government agency that takes care of exporters and exclusive
marketing of our products around the world. We always have that once a year and that's the
time when all our buyers are here for us to show what we had that was exhibited to go
around. So, my husband had to [fly] from Cebu to Manila just for this occasion. So we have
an appointment with our people and our buyers with SITEM and also that evening we will
have to treat them [to] dinner.
Q

Whereat?

At our residence, we were supposed to have a dinner at our residence.

What happened to this occasion?

A
So when they disconnected our electric power we had to get in touch with them and
change the venue.
Q

Which venue did you transfer your dinner for your buyers?

A
We brought them in a restaurant in Makati at Season's Restaurant. But it was very
embar[r]assing for us because we faxed them ahead of time before they came to Manila.

Q
Now as a result of this change of your schedule because of the disconnection of the
electric power on that day, Friday, what damage did you suffer?
A
I cancelled the catering service and that is so much of a h[a]ssle it was so
embarras[s]ing for us.
Q

Can you tell us how much amount?

Approximately P50,000.00."30

No other evidence has been proffered to substantiate her bare statements. She has not shown how
she arrived at the amount of P50,000; it is, at best, speculative. Her self-serving testimonial
evidence, if it may be called such, is insufficient to support alleged actual damages.
While respondent does not rebut this testimony on the expenses incurred by the spouses in moving
the dinner out of their residence due to the disconnection, no receipts covering such expenditures
have been adduced in evidence. Neither is the testimony corroborated. To reiterate, actual or
compensatory damages cannot be presumed, but must be duly proved with a reasonable degree of
certainty. It is dependent upon competent proof of damages that petitioners have suffered and of the
actual amount thereof.31 The award must be based on the evidence presented, not on the personal
knowledge of the court; and certainly not on flimsy, remote, speculative and unsubstantial
proof.32 Consequently, we uphold the CA ruling denying the grant of actual damages.
Having said that, we agree with the trial court, however, that petitioners are entitled to moral
damages, albeit in a reduced amount.
The RTC opined as follows:
"This Court agrees with the defendant regarding [its] right by law and equity to protect itself
from any fraud. However, such right should not be exercised arbitrarily but with great caution
and with due regard to the rights of the consumers. Meralco having a virtual monopoly of the
supply of electric power should refrain from taking drastic actions against the consumers
without observing due process. Even assuming that the subject meter has had history of
meter tampering, defendant cannot simply assume that the present occupants are the ones
responsible for such tampering. Neither does it serve as a license to deprive the plaintiffs of
their right to due process. Defendant should have given the plaintiffs simple opportunity to
dispute the electric charges brought about by the alleged meter-tampering, which were not
included in the bill rendered them. Procedural due process requires reasonable notice to pay
the bill and reasonable notice to discontinue supply. Absent due process the defendant may
be held liable for damages. While this Court is aware of the practice of unscrupulous
individuals of stealing electric curre[n]t which causes thousands if not millions of pesos in lost
revenue to electric companies, this does not give the defendant the right to trample upon the
rights of the consumers by denying them due process." 33

Article 2219 of the Civil Code lists the instances when moral damages may be recovered. One such
case34 is when the rights of individuals, including the right against deprivation of property without due
process of law, are violated.35
Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury.36 Although incapable
of pecuniary computation, such damages may be recovered if they are the proximate results of the
defendant's wrongful act or omission.37
Case law establishes the following requisites for the award of moral damages: (1) there is an injury -whether physical, mental or psychological -- clearly sustained by the claimant; (2) there is a culpable
act or omission factually established; (3) the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) the award of damages is predicated
on any of the cases stated in Article 2219 of the Civil Code.38
To reiterate, respondent had no legal right to immediately disconnect petitioners' electrical supply
without observing the requisites of law which, in turn, are akin to due process. Had respondent been
more circumspect and prudent, petitioners could have been given the opportunity to controvert the
initial finding of alleged meter tampering. Said the RTC:
"More seriously, the action of the defendant in maliciously disconnecting the electric service
constitutes a breach of public policy. For public utilities, broad as their powers are, have a
clear duty to see to it that they do not violate nor transgress the rights of the consumers. Any
act on their part that militates against the ordinary norms of justice and fair play is considered
an infraction that gives rise to an action for damages. Such is the case at bar." 39
Indeed, the Supreme Court has ruled in Meralco v. CA40 that respondent is required to give notice of
disconnection to an alleged delinquent customer. The Court said:
"x x x One can not deny the vital role which a public utility such as MERALCO, having a
monopoly of the supply of electrical power in Metro Manila and some nearby municipalities,
plays in the life of people living in such areas. Electricity has become a necessity to most
people in these areas, justifying the exercise by the State of its regulatory power over the
business of supplying electrical service to the public, in which petitioner MERALCO is
engaged. Thus, the state may regulate, as it has done through Section 97 of the Revised
Order No. 1 of the Public Service Commission, the conditions under which and the manner
by which a public utility such as MERALCO may effect a disconnection of service to a
delinquent customer. Among others, a prior written notice to the customer is required before
disconnection of the service. Failure to give such prior notice amounts to a tort." 41
Observance of the rights of our people is sacred in our society. We cannot allow such rights to be
trifled with or trivialized. Although the Court sympathizes with respondent's efforts to stamp out the
illegal use of electricity, such action must be done only with strict observance of the rights of our
people. As has been we succinctly said: "there is a right way to do the right thing at the right time for
the right reason."42

However, the amount of moral damages, which is left largely to the sound discretion of the courts,
should be granted in reasonable amounts, considering the attendant facts and
circumstances.43 Moral damages, though incapable of pecuniary estimation, are designed to
compensate the claimant for actual injury suffered and not to impose a penalty.44 Moral damages are
not intended to enrich a plaintiff at the expense of the defendant.45 They are awarded only to obtain a
means, a diversion or an amusement that will serve to alleviate the moral suffering the injured party
has undergone by reason of the defendant's culpable action. 46 They must be proportionate to the
suffering inflicted.47
It is clear from the records that respondent was able to restore the electrical supply of petitioners on
the same day. Verily, the inconvenience and anxiety they suffered as a result of the disconnection
was thereafter corrected. Thus, we reduce the RTC's grant of moral damages to the more equitable
amount of P100,000.
Exemplary damages, on the other hand, are imposed by way of example or correction for the public
good in addition to moral, temperate, liquidated or compensatory damages. 48 It is not given to enrich
one party and impoverish another, but to serve as a deterrent against or as a negative incentive to
socially deleterious actions.49 In this case, to serve an example -- that before a disconnection of
electrical supply can be effected by a public utility like Meralco, the requisites of law must be
faithfully complied with -- we award the amount of P50,000 to petitioners.
Finally, with the award of exemplary damages, the award of attorney's fees is likewise granted. 50 It is
readily apparent that petitioners needed the services of a lawyer to argue their cause, even to the
extent of elevating the matter to this Court;51 thus, an award of P50,000 is considered sufficient.
Final Issue:
Billing Differential
Finally, this Court holds that despite the basis for the award of damages -- the lack of due process in
immediately disconnecting petitioners' electrical supply -- respondent's counterclaim for the billing
differential is still proper. We agree with the CA that respondent should be given what it rightfully
deserves. The evidence it presented, both documentary and testimonial, sufficiently proved the
amount of the differential.
Not only did respondent show how the meter examination had been conducted by its experts, but it
also established the amount of P193,332.96 that petitioners owed respondent. The procedure
through which this amount was arrived at was testified to by Meralco's Senior Billing Computer
Enrique Katipunan. His testimony was corroborated by documentary evidence showing the account's
billing history and the corresponding computations. Neither do we doubt the documents of
inspections and examinations presented by respondent to prove that, indeed there had been meter
tampering that resulted in unrecorded and unpaid electrical consumption.
The mere presentation by petitioners of a Contract to Sell with Assumption of Mortgage 52 does not
necessarily mean that they are no longer liable for the billing differential. There was no sufficient
evidence to show that they had not been actually residing in the house before the date of the said

document. Lorna Quisumbing herself admitted53 that they did not have any contract for electrical
service in their own name. Hence, petitioners effectively assumed the bills of the former occupants
of the premises.
Finally, the CA was correct in ruling that the convincing documentary and testimonial evidence
presented by respondent, was not controverted by petitioners.
1wphi1.nt

WHEREFORE, the Petition is hereby PARTLY GRANTED. The assailed CA Decision

is MODIFIED as follows: petitioners are ORDERED to pay respondent the billing differential
of P193,332.96; while respondent is ordered to pay petitioners P100,000 as moral
damages, P50,000 as exemplary damages, and P50,000 as attorney's fees. No pronouncement as
to costs.
SO ORDERED.
Melo, Sandoval-Gutierrez, and Carpio, JJ., concur.
Vitug, J., abroad on official business.

MANILA ELECTRIC
COMPANY (MERALCO),

G.R. NO. 160422

Petiti

oner,

Present:

CARPIO MORALES, J., Chairperson,

-

versus

BRION,

BERSAMIN,
ABAD,* and
VILLARAMA, JR., JJ.

SPS. EDITO and FELICIDAD

CHUA,
and
JOSEFINA
PAQUEO,
Respo
ndents.

Promulgated:

July 5, 2010

x------------------------------------------------------------------------------------------------------- x

DECISION
BRION, J.:

Manila Electric Company (MERALCO or petitioner) assails in

this petition for review on certiorari[1] the decision of the Court of
Appeals (CA or appellate court), dated October 20, 2003, [2] in CAG.R. SP No. 77034, affirming with modification the March 26, 2003
decision of the Regional Trial Court (RTC) of Quezon City, Branch
82, in Civil Case No. Q-97-30503.[3]

The affirmed RTC decision ordered the petitioner to restore

the electric power connection of spouses Edito and Felicidad Chua
(Chuas) at their residence, and awardedP300,000.00 as moral
damages. The CA affirmed the restoration of electric power
connection but reduced the awarded moral damages
to P100,000.00.

BACKGROUND FACTS

The facts, as found by the RTC and affirmed by the CA, are
summarized below.

MERALCO is a utility company engaged in the business of

sale and distribution of electricity within its franchise area. The
Chuas are the beneficial users at their residence of electric
service provided by MERALCO, registered under the name of
respondent Josefina Paqueo with Account Number 05091-4038-14.
MERALCO installed an electric meter with number Co. No. 33 SPN
46170 in front of the Chuas home to record the Chuas electric
consumption. The meter was in a concrete post outside the
Chuas perimeter fence.[4]

From June 11, 1996 to September 11, 1996, the Chuas

consumed between 231 to 269 kilowatt hours of electricity per
month, with their corresponding monthly electric bills ranging
from P747.84 to P887.27. In October 1996, the Chuas were
surprised to receive an electricity bill for the amount of P4,906.87
for the period of September 11 to October 11, 1996 (September
1996 bill). According to this bill, they consumed 1,297 kilowatt
hours for this one month period, or approximately 553% higher
than their previous monthly bill. [5] Alarmed by the significant
increase, Florence Chua (the Chuas daughter) went to the
MERALCO office to question the bill. Florence paid the bill under
protest to avoid disconnection.

On October 31, 1996, MERALCO responded to the Chuas

complaint by sending a representative, Francisco Jose Albano, to
their residence to inspect the electric meter. Albano filed a
Meter/Socket Inspection Report stating that he replaced the old
meter[6] and installed a new one[7] because the old meters
terminal seal was missing, the cover seal was broken, and the
meter had a broken sealing wire.[8]

The Chuas were billed based on the new meter and its
readings from October 11, 1996 to January 24, 1997, with an
average usage ranging from 227 to 254 kilowatt hours, with
corresponding monthly electric bills ranging from P700.00
to P800.00.[9]

On January 3, 1997, the Chuas received a letter from

MERALCO, stating that:

Our Inspection Office has referred to us for

appropriate action the following finding(s) of our service
inspectors and meter laboratory technicians after your
metering installation at the above address was inspected
on OCTOBER 31, 1996:

1.

THE TERMINAL SEAL WAS MISSING.

2.

THE SEALING WIRE OF THE ERB AND MERALCO

LEAD COVER SEALS WAS CUT.

3.

THE 1000TH, 100TH AND 10TH DIAL POINTERS OF

THE REGISTER WERE OUT OF ALIGNMENT.

Given
the
above
condition(s)
and
in
accordance with the rules implementing Republic
Act 7832, you are billed the amount of P183,983.66
(rate charge of P179,353.26 and energy tax
of P4,630.40). Furthermore, the company is now
allowed to collect Surcharges as a penalty for all Violation
of Contract cases apprehended effective January 17,
1995, which would be collected later.

This is a formal demand upon you to pay the above

stated amount at this office within ten days from your
receipt of this letter; if no settlement is made within the
given grace period, your service shall be disconnected
and the necessary criminal or civil action initiated against
you for violation of Republic Act 7832.[10]

The Chuas refused to pay as demanded. On January 24,

1997, MERALCO returned to their residence and removed Meter
No. 33RZN80082, thereby disconnecting their electric supply.

On February 5, 1997, MERALCO sent the Chuas another

demand letter stating that it had re-evaluated the Chuas case
based on field findings and the documents they furnished, and
reduced the amount they had to pay from P183,983.66
to P71,737.49.[11]

On March 11, 1997, the Chuas filed a complaint for

mandamus and damages,[12] praying that they be granted a
preliminary mandatory injunction to compel MERALCO to restore
the electrical connection to their residence. The Chuas also asked
the court to award them moral and exemplary damages,
attorneys fees, and litigation expenses.

After trial, the RTC rendered its decision, whose dispositive

portion states:

WHEREFORE, premises considered, judgment is

hereby rendered in favor of the plaintiffs and against the
defendant ordering the latter as follows:

1)

To restore to plaintiffs at their residence at #9 Hukvet

St., Area I, Veterans Village, Quezon City their electric
power connection and/or services;

2)

To pay the plaintiffs the sum of P300,000.00 as and

by way of moral damages;

3)
4)

To pay the plaintiffs the sum of P30,000.00 as and by

way of attorneys fees;
To pay the cost of suit.

SO ORDERED.[13]

MERALCO appealed the trial courts decision to the CA.

The CA affirmed the RTC decision.[14] The appellate court

confirmed that the meter had been tampered, but found that the
tampering was mitigated by the Chuas voluntary act of going to
MERALCO to report the possible defect in their meter. The
voluntary act, according to the court, constituted good faith as
MERALCO would not have discovered the defects in the meter if
the Chuas had not reported the matter.

The appellate court also noted that while Section 6 of

Republic Act No. 7832 (RA 7832), or the Anti-Electricity and
Electric Transmission Lines/Materials Pilferage Act of 1994,
allows MERALCO to immediately disconnect electric service, it
may only do so when the owner of the house has either been
caught in flagrante delicto in any of the acts constituting prima
facie evidence of illegal use, or has been discovered a second
time in any of the enumerated circumstances. In the Chuas case,
they were not caught in flagrante delicto as they in fact reported
the defect in their meter. This was the first instance, too, that
MERALCO had discovered any tampering in the Chuas meter.
Under these circumstances, the appellate court concluded that
MERALCO had no legal right to disconnect the Chuas electrical
service.

While upholding the RTCs factual findings, the CA modified

the RTC decision by reducing the awarded moral damages
from P300,000.00 to P100,000.00.

THE PETITION

MERALCO filed the present petition, raising the following

arguments:[15]

I.

The CA erred in ruling that MERALCO had no right to

disconnect the electric service of the Chuas.

II.

MERALCO is entitled to collect the differential billing

of P183,983.66.

III.

Even assuming that MERALCO had no right to disconnect

the Chuas electric service, they are nevertheless not
entitled to moral damages in the absence of evidence of
damages they sustained.

MERALCO points out that it did not immediately disconnect

electric service to the Chuas. It first sent several demand letters
explaining the meter tampering and demanding payment for the
billed differential in the sum of P183,983.66. It was only after the
Chuas refused to pay the differential billing that MERALCO
disconnected their electric service.

Additionally, MERALCO contends that based on Section 9 of

RA 7832, no writs of injunction shall be issued by any court

against any private electric utility exercising its right and

authority to disconnect electric service unless there is prima
facie evidence that the disconnection was made with evident bad
faith or grave abuse of authority. Since the Chuas failed to prove
MERALCOs evident bad faith in disconnecting their electric
service, they are not entitled to an injunctive writ.

MERALCO further posits that the deliberate manipulation of

the dial pointers prevented the full and correct billing of the
electric energy actually delivered to and consumed by the Chuas.
The differential billing represents the monetary equivalent of the
electricity used by the Chuas but not registered by the meter.

Lastly, MERALCO maintains that even if it had no right to

disconnect the Chuas electric service, the Chuas nevertheless
are not entitled to moral damages. The Chuas did not sustain
damages after the disconnection since they sourced their electric
supply from another electric meter within the premises.

THE COURTS RULING

We deny the petition for lack of merit.

Prima facie evidence of

illegal use of electricity

MERALCO claims that the meter tampering in this case

stands undisputed in the evidence on record. Under RA 7832, the

law presumes that the person benefited by the unlawful use of

electricity is the perpetrator of the meter tampering. Thus, no
need arose for MERALCO to prove that the Chuas actually
tampered with their meter; pursuant to Section 4 of RA 7832,
Meralco had the right to immediately disconnect the Chuas
electric service.

We find MERALCOs position legally incorrect. Essential to the

resolution of this issue is Section 4 of RA 7832, which reads:

SEC. 4. Prima Facie Evidence.

(a) The presence of any of the following circumstances
shall constitute prima facie evidence of illegal use
of electricity, as defined in this Act, by the person
benefited thereby, and shall be the basis for: (1)
the immediate disconnection by the electric utility
to such person after due notice, x x x
(iv) The presence of a tampered, broken, or fake
seal on the meter, or mutilated, altered, or
tampered meter recording chart or graph or
computerized chart, graph, or log.
xxx
(viii) x x x Provided, however, That the discovery
of any of the foregoing circumstances, in order to
constitute prima
facie evidence, must
be
personally witnessed and attested to by an
officer of the law or a duly authorized
representative of the Energy Regulatory
Board (ERB).

To reiterate, the discovery of a tampered, broken, or fake

seal on the meter shall only constitute prima facie evidence of
illegal use of electricity by the person who benefits from the
illegal use if such discovery is personally witnessed and
attested to by an officer of the law or a duly
authorized representative of the Energy Regulatory
Board(ERB). With such prima facie evidence, MERALCO is within
its rights to immediately disconnect the electric service of the
consumer after due notice.

Section 1, Rule III of the Rules and Regulations

Implementing RA 7832 (IRR) defines an officer of the law as one
who, by direct supervision of law or by election or by
appointment by competent authority, is charged with the
maintenance of public order and the protection and security of
life and property, such as barangay captain, barangay chairman,
barangay councilman, barangay leader, officer or member of
Barangay Community Brigades, barangay policeman, PNP
policeman, municipal councilor, municipal mayor and provincial
fiscal.

The importance of having an authorized government

representative present during an inspection was highlighted
during the Senate deliberations on RA 7832 when Senator John H.
Osmea, the laws author, explained:

Mr. President, if a utility like MERALCO finds certain

circumstances or situations which are listed in Section 2
of this bill to be prima facie evidence, I think they
should be prudent enough to bring in competent
authority, either the police or the NBI, to verify or
substantiate their finding. If they were to summarily

proceed to disconnect on the basis of their findings and

later on there would be a court case and the customer or
the user would deny the existence of what is listed in
Section 2, then they could be in a lot of trouble.[16]

We emphasized the significance of this requirement in Sps.

Quisumbing v. MERALCO,[17] when we said:

The presence of government agents who may

authorize immediate disconnections go into the
essence of due process. Indeed, we cannot allow
respondent to act virtually as prosecutor and judge in
imposing the penalty of disconnection due to alleged
meter tampering. That would not sit well in a democratic
country. After all, Meralco is a monopoly that derives its
power from the government. Clothing it with unilateral
authority to disconnect would be equivalent to giving it a
license to tyrannize its hapless customers.[18]

After thoroughly examining the records of this case, we find

no proof that MERALCO ever complied with the required presence
of an officer of the law. In his testimony, Albano never
mentioned that he was accompanied by an authorized
government representative during the inspection. As evident from
the Meter/Socket Inspection Report, only Albano inspected the
Chuas electric meter; no evidence shows that he was
accompanied by anyone else. Most telling of all, MERALCO does
not even allege in its submissions with this Court that an ERB

representative or an officer of the law ever accompanied its

representative during the inspection of the Chuas electric meter.

We note, too, that while MERALCO claimed in its Answer that

an ERB representative was present and witnessed the testing of
the Chuas electric meter at the MERALCO laboratory, [19] it never
once identified this ERB representative. MERALCO did not allege
in either the present petition or in the Memorandum it filed with
this Court that an ERB representative witnessed the laboratory
testing of the Chuas electric meter. The Meter Verification Report,
[20]
the document that contains the results of the laboratory
testing, was also not signed by either an ERB representative or by
any officer of the law.

For lack of any evidence showing that a government

representative personally witnessed and attested to the discovery
of the Chuas tampered electric meter, no supportingprima
facie evidence can be invoked for the immediate disconnection of
the Chuas electric service pursuant to Section 4 of RA 7832.

Consumer not the proper witness to

inspection

Rule III, Section 1 of the IRR provides: In order to constitute prima

facie evidence, the discovery of any of the circumstances enumerated in Section 1
hereof, must be personally witnessed and attested to by the consumer
concerned or a duly authorized ERB representative or any officer of the law, as the
case may be.

We hold the view, however, that the inclusion of the phrase by the
consumer concerned in the IRR is invalid because it is in excess of what the
law being implemented provides. As RA 7832 stands, only the presence of an
authorized government agent, either an officer of the law or an authorized
representative of the ERB, during the MERALCO inspection would allow any of
the circumstances enumerated in Section 4 of RA 7832 to be considered prima
facie evidence of illegal use of electricity by the benefited party. The law does not
include the consumer or the consumers representative in this enumeration.

In legal contemplation, the ERBs inclusion of the phrase by the consumer

concerned in Rule III, Section 1 of the IRR expanded the clear wording of the
law and violated the recognized principle that an administrative agencys rulemaking power is confined to filling in the gaps and the necessary details in
carrying into effect the law as enacted; rule-making cannot extend, amend, or
expand statutory requirements or embrace matters not covered by the law being
implemented. Administrative regulations must always be in harmony with the
provisions of the law because any resulting discrepancy between the two will
always be resolved in favor of the basic law.[21] In the present case, the consumer
cannot in any way be considered to be in the same classification as the named
government representatives so that his or her presence can be a substitute for the
presence of these representatives.

For this reason, even if Florence Chua, the Chuas daughter, acknowledged
that she witnessed Albanos examination of the electric meter outside their house
so that she signed the Meter/Socket Inspection Report, her presence did not
characterize the discovered broken meter seal as prima facie evidence of illegal use
of electricity justifying immediate disconnection.

Legal requirements for authority

to disconnect electricity

Section 6 of RA 7832 provides another mandatory

requirement before MERALCO can immediately disconnect a
consumers electric service. The provision reads:

SEC. 6. Disconnection of Electric Service. - The

private electric utility or rural electric cooperative
concerned shall have the right and authority to
disconnect immediately the electric service after serving
the written notice or warning to the effect, without the
need of a court or administrative order, and deny
restoration of the same, when the owner of the house
or establishment concerned or someone acting in
his behalf shall have been caught en flagrante
delicto doing any of the acts enumerated in section
4 (a) hereof, or when any of the circumstances so
enumerated shall have been discovered for the
second time: Provided, That in the second case, a
written notice or warning shall have been issued upon the
first discovery: Provided, further, That the electric service
shall not be immediately disconnected or shall be
immediately restored upon the deposit of the amount
representing the differential billing by the person denied
the service, with the private electric utility or the rural
cooperative concerned or with the competent court as the
case may be: Provided, furthermore, That if the court
finds that illegal use of electricity has not been committed
by the same person, the amount deposited shall be
credited against future billings, with legal interest thereon
chargeable against the private utility or rural electric
cooperative, and the utility or cooperative shall be made
to immediately pay such person double the value of the
payment or deposit with legal interest, which amount
shall likewise be creditable against immediate future
billings, without prejudice to any criminal, civil or

administrative action that such person may be entitled to

file under existing laws, rules and regulations:Provided,
finally, That if the court finds the same person guilty of
such illegal use of electricity, he shall, upon final
judgment, be made to pay the electric utility or the rural
electric cooperative concerned double the value of the
estimated electricity illegally used which is referred to in
this section as differential billing.

In other words, MERALCO is authorized to immediately

disconnect the electric service of its consumers without the
need of a court or administrative order when: (a) the consumer,
or someone acting in his behalf, is caught in flagrante delicto in
any of the acts enumerated in Section 4 of RA 7832; or (b)
when
any
of
the
circumstances
constitutingprima
facie evidence of illegal use of electricity is discovered for the
second time.
In flagrante delicto means [i]n the very act of committing
the crime.[22] To be caught in flagrante delicto, therefore,
necessarily implies positive identification by an eyewitness or
eyewitnesses to the act of tampering so that there is direct
evidence of culpability, or that which proves the fact in
dispute without the aid of any inference or presumption. [23]
In the present case, however, MERALCO presented no
proof that it ever caught the Chuas, or anyone acting in the
Chuas behalf, in the act of tampering with their electric meter.
As correctly observed by the CA, the Chuas could not have
been caught in flagrante delicto committing the tampering
since in the first place, they were the ones who reported the
defect in their meter. Moreover, the presence of a broken cover
seal, broken sealing wire, and a missing terminal seal, is not
enough to declare the Chuas in flagrante delicto tampering

with the electric meter. As the basic complaint for mandamus

alleged, without any serious refutation from the petitioner, the
electric meter is in a concrete post outside of the Chuas
perimeter fence; hence, in a location accessible to the
public. We note, too, that MERALCO did not present any
evidence that it caught the Chuas committing any of the acts
constituting prima facie evidence of illegal use of electricity for
the second time.
In view of MERALCOs failure to comply with both Section
4 and Section 6 of RA 7832, MERALCO obviously had no
authority to immediately disconnect the Chuas electric service.

Writ of Mandatory Injunction

On the validity of the injunctive writ the lower court
issued in the Chuas favor, MERALCO submits that the Chuas
were not entitled to an injunctive writ since it had a right, under
the law, to automatically disconnect the latters electric
service. Furthermore, Section 9 of RA 7832 prohibits courts
from issuing injunctions or restraining orders against electric
utilities from disconnecting service unless the consumer proves
that the electric utility acted with evident bad faith in
disconnecting the electric service. This cited provision states:
Section 9. Restriction on the Issuance of Restraining
Orders or Writs of Injunction. No writ of injunction or
restraining order shall be issued by any court against any
private

electric

utility

or

rural

electric

cooperative

exercising the right and authority to disconnect electric

service as provided in this Act, unless there is prima
facie evidence that the disconnection was made with
evident bad faith or grave abuse of authority.

We have fully discussed above why MERALCO was not in

the position under RA 7832 to immediately disconnect the
Chuas electric service. We add that while electricity is
property[24] whose enjoyment, as a general rule, the owner may
extend or deny to others, [25] electricity is not an ordinary kind of
property that a service provider may grant or withhold to
consumers at will. Electricity is a basic necessity whose
generation and distribution is imbued with public interest, and
its provider is a public utility subject to strict regulation by the
State in the exercise of police power. [26] In view of the serious
consequences resulting from immediate disconnection of
electric service, the law provides strict requisites that MERALCO
must follow before it can be granted authority to undertake
instant disconnection of electric service due to its consumers.
In view of MERALCOs dominance over its market and its
customers and the latters relatively weak bargaining position
as against MERALCO, and in view too of the serious
consequences and hardships a customer stands to suffer upon
service disconnection, MERALCOs failure to strictly observe
these legal requirements can be equated to the bad faith or
abuse of right[27] that the law speaks of.
Under the circumstances, we cannot but conclude that
MERALCO abused its superior and dominant position as well as
the authority granted to it by law as a service provider when it
persisted in disconnecting the Chuas electric service. Hence,
the general prohibition against the issuance of a restraining
order or an injunction under Section 9 of RA 7832 cannot
apply. Rather, what must prevail is the exception: an
injunction can issue when a disconnection has been attended
by bad faith or grave abuse of authority.
As to whether the Chuas are entitled to a writ of
mandatory injunction, we rule in the affirmative. An
injunctive writ issues only upon a showing that: a) the applicant
possesses a clear and unmistakable right; b) there is a material

and substantial invasion of such right; and c) there is urgent

and permanent necessity for an injunctive writ to prevent
serious damage.[28]
In the present case, the Chuas have established that they
are paying MERALCO customers. In the absence of the prima
facie evidence required by Section 4 and by the requirements
of Section 6 of RA 7832 that the Chuas tampered with their
electric meter, and in light as well of the merits of the Chuas
case as discussed below, the Chuas have an unmistakable right
to be provided with continuous power supply a right
MERALCO obviously invaded when it cut off the Chuas electric
service. Electricity being what it is and has been in modern
day living, an urgent and permanent need exists to
prevent MERALCO from cutting off the Chuas electric service
under the circumstances that gave rise to the present dispute.
Accordingly, we uphold the RTC and CA decisions ordering
MERALCO to immediately restore the Chuas electric service.

Differential billing

MERALCO further asserts that the Chuas should be made

to pay the differential billing for the electricity that they
actually consumed but which was not reflected on their electric
bills due to the tampered electric meter. Since the prima
facie presumption afforded by Section 4 of RA 7832 does not
apply, it falls upon MERALCO to first prove that the Chuas
actually manipulated the dial pointers on their meter before it
can hold them accountable for the differential billing. The

circumstances discussed below, however, cast serious doubt on

the allegation and assumption that the Chuas ever tampered
with their electric meter.
First, we stress once again that the Chuas themselves
requested MERALCO to inspect their meter for possible defects
after they received their unusually high September 1996 bill;
the Chuas themselves were instrumental in discovering the
tampered condition of their electric meter. Had the Chuas been
guilty of tampering as MERALCO assumed, they would not have
drawn attention to themselves by reporting the problem with
their meter; as the beneficial users of the electric service, they
would have been MERALCOs main suspects once the
tampering came to light. We thus find it highly illogical for the
Chuas to be guilty of actual tampering given their actions on
record on the discovery of the tampered condition of their
meter.
Second, we observe that based on the Chuas billing
record, no discernable difference exists between the
Chuas electric bills before and after MERALCO had
replaced their tampered meter. The Chuas consumed
between 231 to 269 kilowatt hours of electricity per month
from June 11, 1996 to September 11, 1996, with their
corresponding monthly electric bills ranging from P747.84
to P887.27. (Their long-term usage record is further reflected
in the appropriate footnoted table below.) The following usage
record is undisputed after MERALCO installed a new meter to
replace the tampered one.
Date

Kilowatt

Amount Paid

hours

(pesos)

October 1996

1,297

4,906.87

November

227

781.86

December

228

806.19

January 1997

254

898.89

January 24, 1997

96

331.04

Tampering with the electric meter is committed by the

consumer to prevent the meter from registering the correct
amount of electric consumed; thus, while using the same
regular power supply, they are billed for less than what they
actually consumed. Tampering affects only the registered
usage as reflected in the electric meter, not the amount of
electricity actually used, assuming a more or less uniform
monthly usage of electricity.[29] Stated otherwise, when an
electric meter is tampered, the recorded consumption is less
than the electricity actually used. Consequently, when a
tampered electric meter is replaced, assuming the same
amount of monthly rate of usage, the new electric meter
will register the increased use of electricity that had
previously been concealed by the tampered meter. [30]
If the Chuas had truly tampered with their electric meter,
it stands to reason that after MERALCO replaced the tampered
electric meter with a new one, the Chuas electric bills would
have gone up to reflect the electricity they were actually
consuming. That
the
Chuas
monthly
electric
consumption remained virtually unchanged even after
the defective electric meter had been replaced strongly
disproves the contentions that the Chuas tampered with
their electric meter and that the Chuas electric meter
registered less than the electricity they had actually
consumed. Given the surrounding circumstance, the
sequence of events, and the electric meter readings, i.e., the
exposed location of the Chuas electric meter, the long-term
consumption record shown below, the unusual upward spike of
the meter reading in September 1996, the inspection and the
replacement by a new electric meter, and the continued
readings consistent with the readings prior to the September
1996 spike, it would not be surprising if the tampering of the
seals came immediately before September 1996 and were
made by parties other than the Chuas for their own reasons. To

be sure, the Chuas would not have tampered with their own
meter to increase their meter reading.
Aside from the doubtful veracity of the allegation and
assumption that the Chuas tampered with their meter, we also
consider that MERALCO did not provide any factual or legal
basis for its differential billing. Section 6 of RA 7832 supplies
the manner by which a public utility can compute the
differential billing.
SEC. 6. Disconnection of Electric Service. x x x

For purposes of this Act, differential billing shall refer to

the amount to be charged to the person concerned for the
unbilled electricity illegally consumed by him as determined
through the use of methodologies which utilize, among
other, as basis for determining the amount of monthly
electric consumption in kilowatt-hours to be billed either:
(a) the highest recorded monthly consumption within
the five-year billing period preceding the time of the
discovery, (b) the estimated monthly consumption as per
the report of load inspection conducted during the time of
the discovery, (c) the higher consumption between the
average consumption before or after the highest drastic
drop in consumption within the five year billing period
preceding the discovery, (d) the highest recorded monthly
consumption within four (4) months after the time of
discovery, or (e) the result of the ERB test during the time of
discovery and, as basis for determining the period to
be recovered by the differential billing, either: (1) the
time when the electric service of the person concerned
recorded an abrupt or abnormal drop in consumption,
or (2) when there was change in his service
connection such as a change in his service connection such

as a change of meter, change of seal or reconnection, or in

the absence thereof, a maximum of sixty (60) billing
months, up to the time of discovery: Provided, however,
That such period shall, in no case, be less than one (1) year
preceding the date of discovery of the illegal use of
electricity.

According to MERALCOs witness, Enrique Katipunan, the

period affected by the Chuas tampered electric meter was
from August 17, 1992 to October 11, 1996 (affected period).
[31]
In line with the fundamental rule that the burden of
evidence lies with the person who asserts the affirmative
allegation,[32] MERALCO thus carried the burden to prove that
the Chuas electric meter had been tampered with as early
as August 17, 1992.
Significantly, while Katipunan stated that he studied the
Chuas billing history to establish the affected period
from August 17, 1992 to October 11, 1996,[33] we find
conspicuously absent from his testimony any statement
explaining how he established this four-year period as
the period affected by the tampered electric meter.
Katipunan did not mention any abrupt or abnormal drop in the
Chuas electric consumption, nor did he identify anything
suspicious in the Chuas billing history that would lead him to
conclude that the tampering began on August 17, 1992. All we
have to rely on is Katipunans assurance that the Chuas
electric meter existed in a tampered state for this whole fouryear period. This testimony, however, is uncorroborated by
evidence.
We are not unaware that MERALCO used the Chuas
September 1996 bill to compute the differential billing the

same bill that the Chuas protested with Meralco for being
extraordinarily high. While Section 6 of RA 7832 does
allow MERALCO to use the consumers highest recorded
monthly consumption as the basis to compute the differential
billing, still, Meralco after examining the Chuas records for
the past four years[34] should have noticed that the September
1996 bill was truly unusual. As seen from their billing history,
while the Chuas consistently consumed no more than 300
kilowatt hours of electricity every month for the past four
years, in their September bill, their usage dramatically spiked
to 1,297 kilowatt hours, or a difference of more than
400%. Even more telling is that after MERALCO replaced
the alleged tampered electric meter, the Chuas
continued to consume the same amount of electricity
they had consumed prior to the September 1996 bill.
Given the strange circumstances surrounding the
September 1996 bill, MERALCO should have exercised
prudence and employed another method to compute the
Chuas differential billing, such as using the estimated monthly
consumption based on a load inspection report. At the very
least, MERALCO should have exerted efforts to investigate the
Chuas complaint regarding the sudden increase in their
electric bill, especially considering the Chuas claim that they
had not done anything new or used any additional appliances
during the period covered by the September 1996 bill. [35] We
find it significant that nothing in the record suggests that
MERALCO even attempted to study, or even tried to explain,
the sudden surge in the Chuas September 1996 bill.
We highlight another important point to consider - that
MERALCO sent the Chuas another letter dated February 5,
1997, where it reduced the Chuas differential billing
from P183,983.66 to P71,737.49.[36] While MERALCO admitted
the existence of this letter in the proceedings before the lower
courts, it chose to ignore the existence of this February

5, 1997 letter in its submissions with this Court; instead,

in the Petition and Memorandum it filed with this Court,
MERALCO reverted to its demand that the Chuas pay the
original differential billing of P183,983.66. This unexplained and
inconsistent MERALCO posture further strengthens our doubts
on to the legitimacy and correctness of the Chuas differential
billing.
MERALCO is duty bound to explain to its customers the
basis for arriving at any given billing, particularly in cases of
unregistered consumptions. Otherwise, consumers will stand
piteously at the public utilitys mercy. [37] Courts cannot and will
not in any way blindly grant a public utilitys claim for
differential billing if there is no sufficient evidence to prove
entitlement.[38] As MERALCO has failed to substantiate its claim
for the differential billing, we rule that the Chuas cannot be
held to account for the billed amount.

MERALCO guilty of inexcusable negligence

Apart from lacking factual or legal basis, another reason
for us not to hold the Chuas accountable for MERALCOs
differential billing is our previous ruling in Ridjo Tape &
Chemical Corp. v. CA,[39] where we said:
It has been held that notice of a defect need not
be direct and express; it is enough that the same had
existed for such a length of time that it is
reasonable to presume that it had been detected,
and the presence of a conspicuous defect which

has existed for a considerable length of time will

create

presumption

of

constructive

notice

thereof. Hence,MERALCOs failure to discover the

defect, if any, considering the length of time,
amounts to inexcusable negligence. Furthermore, we
need not belabor the point that as a public utility,
MERALCO has the obligation to discharge its functions
with utmost care and diligence.

Accordingly, we are left with no recourse but to

conclude that this is a case of negligence on the part of
MERALCO for which it must bear the consequences. Its
failure to make the necessary repairs and replacement of
the defective electric meter installed within the premises
of petitioners was obviously the proximate cause of the
instant dispute between the parties.

Indeed, if an unusual electric consumption was

not reflected in the statements of account of petitioners,
MERALCO, considering its technical knowledge and vast
experience in providing electric service, could have easily

verified any possible error in the meter reading. In the

absence

of

such

mistake,

the

electric

meters

themselves should be inspected for possible defects or

breakdowns and forthwith repaired and, if necessary,
replaced. x x x

The rationale behind this ruling is that public

utilities should be put on notice, as a deterrent,
that if they completely disregard their duty of
keeping

their

electric

meters

in

serviceable

condition, they run the risk of forfeiting, by reason

of their negligence, amounts originally due from
their

customers. Certainly,

we

cannot

sanction

situation wherein the defects in the electric meter are

allowed to continue indefinitely until suddenly the public
utilities concerned demand payment for the unrecorded
electricity utilized when, in the first place, they should
have remedied the situation immediately. If we turn a
blind eye on MERALCOs omission, it may encourage
negligence on the part of public utilities, to the detriment
of the consuming public.[40]

While Ridjo involved a defective meter, we have, on

occasion, applied this same doctrine to cases that involved
allegations of meter tampering. In both Manila Electric
Company v. Macro Textile Mills, Corp. [41] and Davao Light &
Power Co., Inc. v. Opena,[42] we faulted the electric companies
involved for not immediately inspecting the electric meters
after they noted a sudden drop in the consumers registered
electric consumption. Since, in both cases, the public utility
companies allowed several years to lapse before deciding to
conduct an inspection of the electric meters, we ruled that they
were both negligent and consequently barred them from
collecting their claims of differential billing against the
consumers.
With these rulings in mind, we held in MERALCO v. Wilcon
Builders Supply, Inc.[43] that the use of the words defect and
defective in Ridjo does not restrict the inexcusable
negligence doctrine to cases of mechanical defects in
installed electric meters. We said:
The Ridjo doctrine simply states that the public
utility has the imperative duty to make a reasonable and
proper inspection of its apparatus and equipment to
ensure that they do not malfunction. Its failure to discover
the defect, if any, considering the length of time, amounts
to inexcusable negligence; its failure to make the
necessary repairs and replace the defective electric meter

installed within the consumers premises limits the

latters liability. The use of the words defect and
defective in the above-cited case does not restrict the
application of the doctrine to cases of mechanical
defects

in

the

installed

electric

meters. A

more

plausible interpretation is to apply the rule on

negligence

whether

inherent, intentional or

the

defect

is

unintentional, which

therefore covers tampering, mechanical defects

and mistakes in the computation of the consumers
billing.[44]

The production and distribution of electricity is a highly

technical business undertaking. In conducting its operation, it
is only logical for a public utility, such as MERALCO, to employ
mechanical devices and equipment for the orderly pursuit of its
business.[45] MERALCO has the imperative duty to make a
reasonable and proper inspection of its apparatus and
equipment to ensure that they do not malfunction, and the due
diligence to discover and repair defects therein. Failure to
perform such duties constitutes negligence. [46]
True, consumers who tamper with their electric meter do
so surreptitiously to avoid being detected by the public utility
providing the service; hence, at first glance, it may seem
unreasonable for us to chastise MERALCO for not detecting the
alleged tampering sooner. However, what stands out in this

case is the sheer length of time that the Chuas electric

meter allegedly existed in a tampered state without being
discovered by MERALCO if indeed the electric meter had been
defective since 1992. If we presume MERALCOs findings to be
correct, MERALCO discovered the broken seals in the Chuas
meter after more than four years (from August 1992 to
October 1996), and only because the Chuas reported a possible
defect with their electric meter to the public utility company.
Aside from the long period of time involved, we also
underscore the fact that the alleged tampering in this case did
not require special training or knowledge to be detected.
Certainly, the missing terminal seal, the broken cover seal, and
the broken sealing wire of the meter [47] are visible to the naked
eye and would have caught the attention of MERALCOs
personnel in the course of their meter readings.
As in Ridjo, we take judicial notice that during this long
period of time, MERALCOs personnel had the opportunity to
inspect and examine the Chuas electric meter for the purpose
of determining the monthly dues payable. Even if MERALCO did
not conduct these regular monthly inspections, we find it
reasonable
to
expect
that
within
this
four-year
period, MERALCO would, at the very least, annually examine
the electric meter to verify its condition and to determine the
accuracy of its readings if ordinary examination shows defects
as in the case of the Chuas meter. That it failed to do so
constitutes negligence on its part, and bars it from collecting its
claim for differential billing.
On the issue of moral damages
Article 32 of the Civil Code provides that moral damages
are proper when the rights of individuals, including the right
against deprivation of property without due process of law, are
violated. Jurisprudence has established the following requisites

for the award of moral damages: (1) there is an injury

whether physical, mental, or psychological clearly sustained
by the claimant; (2) there is a culpable act or omission factually
established; (3) the wrongful act or omission of the defendant
is the proximate cause of the injury sustained by the claimant;
and (4) the award of damages is predicated on any of the cases
stated in Article 2219 of the Civil Code.[48]
Considering the manner MERALCO disconnected the
Chuas electric service, we find the award of moral damages
proper. Apart from the havoc wreaked on the Chuas daily lives
when MERALCO abruptly and without legal basis cut off their
electricity, the removal of the electric meter also caused the
Chuas extreme social humiliation and embarrassment as they
were subjected to speculations in their neighborhood of being
power thieves. As Mrs. Felicidad Chua testified, she suffered
sleepless nights and felt serious anxiety after the removal of
their electric meter came to the attention of the barangay. In
fact, she even had to consult a doctor for this anxiety. [49] Thus,
even if the Chuas did subsequently obtain their electricity from
another source,[50] the damage to the Chuas reputation and
social standing had already been done.
However, moral damages, which are left largely to the
sound discretion of the courts, should be granted in reasonable
amounts, considering the attendant facts and circumstances.
[51]
Moral damages, though incapable of pecuniary estimation,
are designed to compensate the claimant for actual injury
suffered and not to impose a penalty.[52]As prevailing
jurisprudence[53] deems the award of moral damages in the
amount
of P100,000.00
appropriate
in
cases
where MERALCO wrongfully disconnected electric service, we
uphold the CA ruling, reducing the moral damages awarded
from P300,000.00 to P100,000.00.

WHEREFORE, the petition is hereby DENIED. The assailed

decision of the Court of Appeals dated October 20, 2003 in CAG.R. SP No. 77034 is AFFIRMED in toto.

SO ORDERED.

ARTURO
BRION
Associate
Justice

WE CONCUR:

D.