[G.R.

ILDEFONSO

No.

4045.

DORONILA, Plaintiff-Appellee,

Jose
Montinola

August
v.

GRACIANO

Lopez
&

23,

1909.

GONZAGA, Defendant-Appellant.

Vito
De

for Appellant.

la

Rama

for Appellee.

SYLLABUS
1. ACCOUNT; ACTION TO RECOVER; INTEREST. D. became the owner of an account of L. v. G., by
virtue of an agreement by which he (D.) paid to the heirs of L. the amount of said account. D. was the
tutor of the heirs of L. and was managing the estate of the said heirs: Held, That D. was entitled to
recover the amount of said account with interest from the date of the demand for payment, which was
the commencement of the present action. When a contract contains no provision for the payment of
interest (art. 1755, Civil Code) no interest can be collected thereon until a judicial or extrajudicial
demand has been made. (Art. 1100, Civil Code.)
JOHNSON, J. :
It appears from the record that some time prior to the commencement of this action the plaintiff
herein had been tutor of the minor heirs of one Pablo Ledesma (see Doronila v. Lopez, 3 Phil. Rep.,
360; Jalbuena v. Ledesma, 8 Phil. Rep., 601; Ledesma v. Doronila, 9 Phil. Rep., 119); that, after
Doronila had administered the property of said minor heirs for a number of years, a settlement was
made between him and the said minor heirs, which was acceded to and accepted by the family
council, by which agreement he (Doronila) became obligated to pay to the said minor heirs a certain
sum covering all of his obligation to the said minor heirs, by virtue of his management of their estate;
that, by virtue of this agreement, Doronila became the owner of all the accounts uncollected in favor
of
the
estate
of
the
said
Pablo
Ledesma.

sum of P3,208.50 was due his estate. This balance had never been paid, and was due the estate
together with interest thereon at the rate of 6 per cent from the 1st of January, 1897, making a grand
total
of
P5,117.55
on
December
1,
1900.
"Inasmuch as the papers were lost by the plaintiff in the manner mentioned above, he was required to
account for the property received by him as guardian of the heirs. Extensive litigation followed before
the superior provost court under the military government of the United States in these Islands, which
practically resulted in a settlement of the claim of the estate against the plaintiff herein, as shown by
Exhibit 1 which is attached to the record. Under the conditions of said settlement the plaintiff agreed
to pay to said estate the sum of P16,000 in order to extinguish his liability. Said agreement was made
by the president of the family council who, in accordance with the Spanish regulations, had charge of
the settlement. It was subsequently approved by the superior provost court, and since the
inauguration of the civil government has been ratified in a suit in connection with said Exhibit 1 which
resulted in a judgment in favor of the said estate for the amount stipulated in said agreement,
together
with
interest
thereon.
"At the trial of the case the defendant alleged that the plaintiff had no legal capacity to bring this
action, because the said president of the family council had no authority to enter into such an
agreement, but I believe that the actions of the representatives of the estate have repeatedly ratified
the said agreement, even though the president of the family council had no authority to make it, and
that this defendant is so connected with the events that he is not entitled to question the legal
capacity of this plaintiff to maintain an action against him."cralaw virtua1aw library

It appears that among the accounts of which the said Doronila became the owner by virtue of his
settlement with the said minor heirs, was the account upon which the present action is based. This
action
was
brought
in
the
month
of
May,
1905.

With reference to the first assignment of error to wit, that the court committed an error in deciding
that the plaintiff was the proper person to bring the present action it appears that the lower court
held that the agreement above referred to, by which the plaintiff became the owner of the account
upon which the present action was based, was agreed to an accepted not only by the heirs of Pablo
Ledesma, but also by the family council. By this agreement the account was transferred to and
became the property of the plaintiff herein, he having settled his responsibility to the heirs by paying
an amount agreed upon. He being the owner, therefore, by reason of this agreement, he certainly was
entitled to maintain an action to cover the said account. The lower court, therefore, committed no
error in holding that the plaintiff was the proper party to maintain the present action.

After hearing the evidence adduced during the trial of the cause, the lower court rendered a judgment
in favor of the plaintiff and against the defendant for the sum of P5,117.55 and costs. From this
judgment the defendant duly excepted and presented a motion for a new trial in the lower court,
which
was
denied;
to
which
ruling
the
defendant
also
excepted.

With reference to the second assignment of error to wit, that the lower court committed an error in
deciding that the defendant was indebted to the plaintiff in the sum of P3,208.50 the lower court
made an express finding upon this question in the first paragraph of the decision above quoted. The
appellant not having brought the evidence to this court, we are bound by this finding of fact.

The defendant presents three

follows:jgc:chanrobles.com.ph

With reference to the third assignment of error to wit, that the lower court committed an error in
rendering a judgment against the defendant for the payment of interest upon the said amount of
P3,208.50, from the 1st of January, 1897 we are of the opinion, and so hold, that there are no facts
in the decision to justify this conclusion. Under the provisions of the Civil Code, the contract itself
containing no provision for the payment of interest, no interest could be collected upon the same
until after a judicial or extrajudicial demand had been made for the payment of the same. (Arts. 1755
and 1100, Civil Code; Manresas Commentaries on the Civil Code, vol. 8, page 56; La Compaia
General
de
Tabacos
de
Filipinas
v.
Araza,
7
Phil.
Rep.,
455.)

assignments

of

error

in

this

court.

They

are

as

"1. The court below erred in considering that the plaintiff had legal capacity to bring the present
action
against
the
defendant.
"2. The court below erred in holding that the defendant is indebted capacity to bring the present
action
against
the
defendant.
"3. The court below erred in sentencing the defendant to pay the legal interest on the capital of
P3,208.50
from
January
1,
1897.
While the defendant presented a motion for a new trial in the lower court, he has not brought the
proof to this court. In our conclusion, therefore, we are governed by the facts stated in the decision of
the lower court, for the reason that the defendant filed, among his other defenses, a general denial.
The
lower
court
in
its
decision
made
the
following
findings:
"In view of all the evidence offered in this case I fine that, at the time of the death of Ledesma, the

In the present case it does not appear that the account bore interest; neither does it appear that there
was any judicial or extrajudicial demand made for the payment of the same until the commencement
of the present action, which was in the month of May, 1905. Therefore the plaintiff is not entitled to
interest for any period prior to the demand made by the commencement of the present action.
(Bautista
v.
Calixto,
7
Phil.
Rep.,
733.)
The facts set out by the judge in his decision are not sufficient, therefore, to justify his conclusion
that the plaintiff was entitled to interest upon the said amount of P3, 208.50, from the 1st of January,
1897.

The judgment of the lower court is, therefore, hereby modified, and it is hereby directed that a
judgment be entered in favor of the plaintiff and against the defendant for the sum of P3,208.50, with
interest at the rate of 6 per cent per annum, from the 31st day of May, 1905, and costs.
G.R. No. 77648 August 7, 1989
CETUS
DEVELOPMENT,
INC., petitioner,
vs.
COURT OF APPEALS and ONG TENG, respondents.
G.R. No. 77647 August 7, 1989
CETUS
DEVELOPMENT,
INC., petitioner,
vs.
COURT OF APPEALS and EDERLINA NAVALTA, respondents.
G.R. No. 77649 August 7, 1989
CETUS
DEVELOPMENT,
INC., petitioner,
vs.
COURT OF APPEALS and JOSE LIWANAG, respondents.
G.R. No. 77650 August 7, 1989
CETUS
DEVELOPMENT,
INC., petitioner,
vs.
COURT OF APPEALS and LEANDRO CANLAS, respondents.
G.R. No. 77651 August 7, 1989
CETUS
DEVELOPMENT,
INC., petitioner,
vs.
COURT OF APPEALS and VICTORIA SUDARIO respondents.
G.R. No.77652 August 7, 1989
CETUS
DEVELOPMENT,
INC., petitioner,
vs.
COURT OF APPEALS and FLORA NAGBUYA respondents.
MEDIALDEA, J.:
This is a petition for review on certiorari of the decision dated January 30, 1987 of the Court of
Appeals in CA-GR Nos. SP-07945-50 entitled, "Cetus Development, Inc., Petitioner vs. Hon. Conrado T.
Limcaoco, Presiding Judge, Regional Trial Court of Manila, Branch Ederlina Navalta, et. al.,
respondents.
The following facts appear in the records:
The private respondents, Ederlina Navalta, Ong Teng, Jose Liwanag, Leandro Canlas, Victoria
Sudario, and Flora Nagbuya were the lessees of the premises located at No. 512 Quezon Boulevard,
Quiapo, Manila, originally owned by the Susana Realty. These individual verbal leases were on a
month-to month basis at the following rates: Ederlina Navalta at the rate of P80.50; Ong Teng at the
rate of P96.10; Jose Liwanag at the rate of P40.35; Leandro Canlas at the rate of P80.55; Victoria
Sudario at the rate of P50.45 and Flora Nagbuya at the rate of P80.55. The payments of the rentals
were paid by the lessees to a collector of the Susana Realty who went to the premises monthly.
Sometime in March, 1984, the Susana Realty sold the leased premises to the petitioner, Cetus
Development, Inc., a corporation duly organized and existing under the laws of the Philippines. From
April to June, 1984, the private respondents continued to pay their monthly rentals to a collector sent
by the petitioner. In the succeeding months of July, August and September 1984, the respondents
failed to pay their monthly individual rentals as no collector came.
On October 9, 1984, the petitioner sent a letter to each of the private respondents demanding that they
vacate the subject premises and to pay the back rentals for the months of July, August and
September, 1984, within fifteen (15) days from the receipt thereof. Immediately upon the receipt of the
said demand letters on October 10, 1984, the private respondents paid their respective arrearages in
rent which were accepted by the petitioner subject to the unilateral condition that the acceptance was
without prejudice to the filing of an ejectment suit. Subsequent monthly rental payments were
likewise accepted by the petitioner under the same condition.
For failure of the private respondents to vacate the premises as demanded in the letter dated October
9, 1984, the petitioner filed with the Metropolitan Trial Court of Manila complaints for ejectment

against the manner, as follows: (1) 105972-CV, against Ederlina Navalta (2) 105973-CV, against Jose
Liwanag; (3) 105974-CV, against Flora Nagbuya; (4) 105975-CV, against Leandro Canlas; (5) 105976CV, against Victoria Sudario and (6) 105977-CV, against Ong Teng.
In their respective answers, the six (6) private respondents interposed a common defense. They
claimed that since the occupancy of the premises they paid their monthly rental regularly through a
collector of the lessor; that their non-payment of the rentals for the months of July, August and
September, 1984, was due to the failure of the petitioner (as the new owner) to send its collector; that
they were at a loss as to where they should pay their rentals; that sometime later, one of the
respondents called the office of the petitioner to inquire as to where they would make such payments
and he was told that a collector would be sent to receive the same; that no collector was ever sent by
the petitioner; and that instead they received a uniform demand letter dated October 9, 1984.
The private respondents, thru counsel, later filed a motion for consolidation of the six cases and as a
result thereof, the said cases were consolidated in the Metropolitan Trial Court of Manila, Branch XII,
presided over by Judge Eduardo S. Quintos, Jr. On June 4, 1985, the trial court rendered its decision
dismissing the six cases, a pertinent portion of which reads, as follows:
The records of this case show that at the time of the filing of this complaint, the rentals had all been
paid. Hence, the plaintiff cannot eject the defendants from the leased premises, because at the time
these cases were instituted, there are no rentals in arrears.
The acceptance of the back rental by the plaintiff before the filing of the complaint, as in these case,
the alleged rental arrearages were paid immediately after receipt of the demand letter, removes its
cause of action in an unlawful detainer case, even if the acceptance was without prejudice.
x x x.
Furthermore, the court has observed that the account involved which constitutes the rentals of the
tenants are relatively small to which the ejectment may not lie on grounds of equity and for
humanitarian reasons.
Defendants' counterclaim for litigation expenses has no legal and factual basis for assessing the
same against plaintiff.
WHEREFORE, judgment is hereby rendered dismissing these cases, without pronouncement as to
costs.
Defendants' counterclaim is likewise dismissed.
SO ORDERED. (pp. 32-33, Rollo, G.R. No. 77647)
Not satisfied with the decision of the Metropolitan Trial Court, the petitioner appealed to the Regional
Trial Court of Manila and the same was assigned to Branch IX thereof presided over by Judge
Conrado T. Limcaoco (now Associate Justice of the Court of Appeals). lwph1.t In its decision
dated November 19, 1985, the Regional Trial Court dismissed the appeal for lack of merit.
In due time, a petition for review of the decision of the Regional Trial Court was filed by the petitioner
with the Court of Appeals. Said petition was dismissed on January 30, 1987, for lack of merit.
Aggrieved by the decision of the Court of Appeals, petitioner now comes to Us in this petition,
assigning the following errors:
ASSIGNMENT OF ERRORS
I
RESPONDENT COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION, AMOUNTING TO
LACK OF JURISDICTION, WHEN IT ERRED IN HOLDING THAT THE CAUSE OF ACTION FOR
UNLAWFUL DETAINER IN THESE CASES DID NOT EXIST WHEN THE COMPLAINTS WERE FILED
BECAUSE PRIVATE RESPONDENTS TENDERED, AND PETITIONER ACCEPTED, THE PAYMENT OF
THE THREE (3) MONTHS RENTAL IN ARREARS WITHIN THE FIFTEEN (15) DAY PERIOD FROM
PRIVATE RESPONDENTS' RECEIPT OF PETITIONER'S DEMAND LETTERS TO VACATE THE SUBJECT
PREMISES AND TO PAY THE RENTALS IN ARREARS.
II
RESPONDENT COURT OF APPEALS COMMITTED A GRAVEABUSE OF DISCRETION, AMOUNTING TO
LACK OF JURISDICTION COMMITTED A GRAVE WHEN IT ERRED IN AFFIRMING THE DISMISSAL OF
THE COMPLAINTS IN THESE CASES NOTWITHSTANDING THE EXISTENCE OF VALID GROUNDS FOR
THE JUDICIAL EJECTMENT OF PRIVATE RESPONDENT.
III

RESPONDENT COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION, AMOUNTING TO

LACK OF JURISDICTION, WHEN IT ERRED IN HOLDING THAT THESE CASES ARE CLASSIC
EXAMPLES TO CIRCUMVENT THE RENT CONTROL LAW. (pp. 164-165, Rollo, G.R. No. 77647)
The Court of Appeals defined the basic issue in this case as follows: whether or not there exists a
cause of action when the complaints for unlawful detainer were filed considering the fact that upon
demand by petitioner from private respondents for payment of their back rentals, the latter
immediately tendered payment which was accepted by petitioner.
In holding that there was no cause of action, the respondent Court relied on Section 2, Rule 70 of the
Rules of Court, which provides:
Sec. 2. Landlord to proceed against tenant only after demand. No landlord or his legal
representative or assign, shall be such action against a tenant for failure to pay rent due or to comply
with the conditions of his lease, unless the tenant shall have failed to pay such rent or comply with
such conditions for a period of fifteen (15) days or five (5) days in case of building, after demand
therefor, made upon qqqm personally, or by serving written notice of such demand upon the person
found on the premises, or by posting such notice on the premises if no persons be found thereon.
It interpreted the said provision as follows:
.....the right to bring an action of ejectment or unlawful detainer must be counted from the time the
defendants failed to pay rent after the demand therefor. It is not the failure per se to pay rent as
agreed in the contract, but the failure to pay the rent after a demand therefor is made, that entitles the
lessor to bring an action for unlawful detainer. In other words, the demand contemplated by the
above-quoted provision is not a demand to vacate, but a demand made by the landlord upon his
tenant for the latter to pay the rent due if the tenant fails to comply with the said demand with the
period provided, his possession becomes unlawful and the landlord may then bring the action for
ejectment. (p. 28, , G.R. No. 77647)
We hold that the demand required and contemplated in Section 2, aforequoted, is a jurisdictional
requirement for the purpose of bringing an unlawful detainer suit for failure to pay rent or comply with
the conditions of lease. It partakes of an extrajudicial remedy that must be pursued before resorting
for judicial action so much so that when there is full compliance with the demand, there arises no
necessity for court action.
As to whether this demand is merely a demand to pay rent or comply with the conditions of the lease
or also a demand to vacate, the answer can be gleaned from said Section 2. This section presupposes
the existence of a cause of action for unlawful detainer as it speaks of "failure to pay rent due or
comply with the conditions of the lease." The existence of said cause of action gives the lessor the
right under Article 1659 of the New Civil Code to ask for the rescission of the contract of lease and
indemnification for damages, or only the latter, allowing the contract to remain in force. Accordingly, if
the option chosen is for specific performance, then the demand referred to is obviously to pay rent or
to comply with the conditions of the lease violated. However, if rescission is the option chosen, the
demand must be for the lessee to pay rents or to comply with the conditions of the lease and to
vacate. Accordingly, the rule that has been followed in our jurisprudence where rescission is clearly
the option taken, is that both demands to pay rent and to vacate are necessary to make a lessee a
deforciant in order that an ejectment suit may be filed (Casilan et al. vs. Tomassi, L-16574, February
28,1964, 10 SCRA 261; Rickards vs. Gonzales, 109 Phil. 423, Dikit vs. Icasiano, 89 Phil. 44).lwph1.t
Thus, for the purpose of bringing an ejectment suit, two requisites must concur, namely: (1) there
must be failure to pay rent or comply with the conditions of the lease and (2) there must be demand
both to pay or to comply and vacate within the periods specified in Section 2, Rule 70, namely 15 days
in case of lands and 5 days in case of buildings. The first requisite refers to the existence of the cause
of action for unlawful detainer while the second refers to the jurisdictional requirement of demand in
order that said cause of action may be pursued.
It is very clear that in the case at bar, no cause of action for ejectment has accrued. There was no
failure yet on the part of private respondents to pay rents for three consecutive months. As the terms
of the individual verbal leases which were on a month-to-month basis were not alleged and proved,
the general rule on necessity of demand applies, to wit: there is default in the fulfillment of an
obligation when the creditor demands payment at the maturity of the obligation or at anytime
thereafter. This is explicit in Article 1169, New Civil Code which provides that "(t)hose obliged to
deliver or to do something incur in delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation." Petitioner has not shown that its case falls on

any of the following exceptions where demand is not required: (a) when the obligation or the law so
declares; (b) when from the nature and circumstances of the obligation it can be inferred that time is
of the essence of the contract; and (c) when demand would be useless, as when the obligor has
rendered it beyond his power to perform.
The demand required in Article 1169 of the Civil Code may be in any form, provided that it can be
proved. The proof of this demand lies upon the creditor. Without such demand, oral or written, the
effects of default do not arise. This demand is different from the demand required under Section 2,
Rule 70, which is merely a jurisdictional requirement before an existing cause of action may be
pursued.
The facts on record fail to show proof that petitioner demanded the payment of the rentals when the
obligation matured. Coupled with the fact that no collector was sent as previously done in the past,
the private respondents cannot be held guilty of mora solvendi or delay in the payment of rentals.
Thus, when petitioner first demanded the payment of the 3-month arrearages and private respondents
lost no time in making tender and payment, which petitioner accepted, no cause of action for
ejectment accrued. Hence, its demand to vacate was premature as it was an exercise of a non-existing
right to rescind.
In contradistinction, where the right of rescission exists, payment of the arrearages in rental after the
demand to pay and to vacate under Section 2, Rule 70 does not extinguish the cause of action for
ejectment as the lessor is not only entitled to recover the unpaid rents but also to eject the lessee.
Petitioner correctly argues that acceptance of tendered payment does not constitute a waiver of the
cause of action for ejectment especially when accepted with the written condition that it was "without
prejudice to the filing of an ejectment suit". Indeed, it is illogical or ridiculous not to accept the tender
of payment of rentals merely to preserve the right to file an action for unlawful detainer. However, this
line of argument presupposes that a cause of action for ejectment has already accrued, which is not
true in the instant case.
Petitioner likewise claims that its failure to send a collector to collect the rentals cannot be
considered a valid defense for the reason that sending a collector is not one of the obligations of the
lessor under Article 1654. While it is true that a lessor is not obligated to send a collector, it has been
duly established that it has been customary for private respondents to pay the rentals through a
collector. Besides Article 1257, New Civil Code provides that where no agreement has been
designated for the payment of the rentals, the place of payment is at the domicile of the defendants.
Hence, it could not be said that they were in default in the payment of their rentals as the delay in
paying the same was not imputable to them. Rather, it was attributable to petitioner's omission or
neglect to collect.
Petitioner also argues that neither is its refused to accept the rentals a defense for non-payment as
Article 1256 provides that "[i]f the creditor to whom the 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 due." It bears emphasis that in this case there was no unjustified refusal on the part of
petitioner or non-acceptance without reason that would constitute mora accipiendi and warrant
consignation. There was simply lack of demand for payment of the rentals.
In sum, We hold that respondent Court of Appeals did not commit grave abuse of discretion
amounting to lack of jurisdiction in its conclusion affirming the trial court's decision dismissing
petitioner's complaint for lack of cause of action. We do not agree, however, with the reasons relied
upon.
ACCORDINGLY, the petition for review on certiorari is hereby DENIED for lack of merit and the
decision dated January 30, 1987 of respondent Court of Appeals is hereby AFFIRMED.
[G.R. No. 108129. September 23, 1999]
AEROSPACE CHEMICAL INDUSTRIES, INC., petitioner, vs. COURT OF APPEALS, PHILIPPINE
PHOSPHATE FERTILIZER, CORP., respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Decision [1] dated August 19, 1992, of the Court of Appeals, which
set aside the judgment of the Regional Trial Court of Pasig, Branch 151. The case stemmed from a
complaint filed by the buyer (herein petitioner) against the seller (private respondent) for alleged
breach of contract. Although petitioner prevailed in the trial court, the appellate court reversed and
instead found petitioner guilty of delay and therefore liable for damages, as follows:

WHEREFORE, the Decision of the court a quo is SET ASIDE and a new one rendered, dismissing the
complaint with costs against the plaintiff (herein petitioner) and, on the counterclaim, ordering the
plaintiff Aerospace Chemical Industries, Inc. to pay the defendant, Philippine Phosphate Fertilizer
Corporation the sum of P324,516.63 representing the balance of the maintenance cost and tank rental
charges incurred by the defendant for the failure of the plaintiff to haul the rest of the sulfuric acid on
the designated date.
Costs against plaintiff-appellee. [2]
As gleaned from the records, the following are the antecedents:
On June 27, 1986, petitioner Aerospace Industries, Inc. (Aerospace) purchased five hundred (500)
metric tons of sulfuric acid from private respondent Philippine Phosphate Fertilizer Corporation
(Philphos). The contract[3] was in letter-form as follows:
27 June 1986
AEROSPACE INDUSTRIES INC.
203 E. Fernandez St.
San Juan, Metro Manila
Attention : Mr. Melecio Hernandez
Manager.
Subject
: Sulfuric Acid Shipment
Gentlemen:
This is to confirm our agreement to supply your Sulfuric Acid requirement under the following terms
and conditions:
A. Commodity
: Sulfuric Acid in Bulk
B. Concentration
: 98-99% H2SO4
C. Quantity
: 500MT -100 MT Ex-Basay
400 MT Ex-Sangi
D. Price
: US$50.00/MT - FOB Cotcot, Basay, Negros Or.
US$54.00/MT - FOB Sangi, Cebu
E. Payment
: Cash in Philippine currency payable to Philippine Phosphate Fertilizer
Corp. (MAKATI) at PCIB selling rate at the time of payment at least five (5) days prior to shipment date
F. Shipping Conditions
1. Laycan
: July
2. Loadport
: Cotcot, Basay, Negros Or. and
Atlas Pier, Sangi, Cebu
xxx
11. Other terms and Conditions: To be mutually agreed upon.
Very truly yours,
Philippine Phosphate Fertilizer Corp.
Signed: Herman J. Rustia
Sr. Manager, Materials & Logistics
CONFORME:
AEROSPACE INDUSTRIES, INC.
Signed: Mr. Melecio Hernandez
Manager
Initially set beginning July 1986, the agreement provided that the buyer shall pay its purchases in
equivalent Philippine currency value, five days prior to the shipment date. Petitioner as buyer
committed to secure the means of transport to pick-up the purchases from private respondents
loadports. Per agreement, one hundred metric tons (100 MT) of sulfuric acid should be taken from
Basay, Negros Oriental storage tank, while the remaining four hundred metric tons (400 MT) should be
retrieved from Sangi, Cebu.
On August 6, 1986, private respondent sent an advisory letter [4] to petitioner to withdraw the sulfuric
acid purchased at Basay because private respondent had been incurring incremental expense of two
thousand (P2,000.00) pesos for each day of delay in shipment.
On October 3, 1986, petitioner paid five hundred fifty-three thousand, two hundred eighty
(P553,280.00) pesos for 500 MT of sulfuric acid.
On November 19, 1986, petitioner chartered M/T Sultan Kayumanggi, owned by Ace Bulk Head
Services. The vessel was assigned to carry the agreed volumes of freight from designated loading

areas. M/T Kayumanggi withdrew only 70.009 MT of sulfuric acid from Basay because said vessel
heavily tilted on its port side. Consequently, the master of the ship stopped further
loading. Thereafter, the vessel underwent repairs.
In a demand letter[5] dated December 12, 1986, private respondent asked petitioner to retrieve the
remaining sulfuric acid in Basay tanks so that said tanks could be emptied on or before December 15,
1986. Private respondent said that it would charge petitioner the storage and consequential costs for
the Basay tanks, including all other incremental expenses due to loading delay, if petitioner failed to
comply.
On December 18, 1986, M/T Sultan Kayumanggi docked at Sangi, Cebu, but withdrew only 157.51 MT
of sulfuric acid. Again, the vessel tilted. Further loading was aborted. Two survey reports conducted
by the Societe Generale de Surveillance (SGS) Far East Limited, dated December 17, 1986 and
January 2, 1987, attested to these occurrences.
Later, on a date not specified in the record, M/T Sultan Kayumanggi sank with a total of 227.51 MT of
sulfuric acid on board.
Petitioner chartered another vessel, M/T Don Victor, with a capacity of approximately 500 MT.[6] On
January 26 and March 20, 1987, Melecio Hernandez, acting for the petitioner, addressed letters to
private respondent, concerning additional orders of sulfuric acid to replace its sunken purchases,
which letters are hereunder excerpted:
January 26, 1987
xxx
We recently charter another vessel M/T DON VICTOR who will be authorized by us to lift the balance
approximately 272.49 MT.
We request your goodselves to grant us for another Purchase Order with quantity of 227.51 MT and
we are willing to pay the additional order at the prevailing market price, provided the lifting of the total
500 MT be centered/confined to only one safe berth which is Atlas Pier, Sangi, Cebu.[7]
March 20, 1987
This refers to the remaining balance of the above product quantity which were not loaded to the
authorized cargo vessel, M/T Sultan Kayumanggi at your loadport - Sangi, Toledo City.
Please be advised that we will be getting the above product quantity within the month of April 1987
and we are arranging for a 500 MT Sulfuric Acid inclusive of which the remaining balance: 272.49
MT an additional product quantity thereof of 227.51 MT.[8]
Petitioners letter[9] dated May 15, 1987, reiterated the same request to private respondent.
On January 25, 1988, petitioners counsel, Atty. Pedro T. Santos, Jr., sent a demand letter [10] to private
respondent for the delivery of the 272.49 MT of sulfuric acid paid by his client, or the return of the
purchase price of three hundred seven thousand five hundred thirty (P307,530.00) pesos. Private
respondent in reply,[11] on March 8, 1988, instructed petitioner to lift the remaining 30 MT of sulfuric
acid from Basay, or pay maintenance and storage expenses commencing August 1, 1986.
On July 6, 1988, petitioner wrote another letter, insisting on picking up its purchases consisting of
272.49 MT and an additional of 227.51 MT of sulfuric acid. According to petitioner it had paid the
chartered vessel for the full capacity of 500 MT, stating that:
With regard to our balance of sulfuric acid - product at your shore tank/plant for 272.49 metric ton
that was left by M/T Sultana Kayumanggi due to her sinking, we request for an additional quantity of
227.51 metric ton of sulfuric acid, 98% concentration.
The additional quantity is requested in order to complete the shipment, as the chartered vessel
schedule to lift the high grade sulfuric acid product is contracted for her full capacity/load which is
500 metric tons more or less.
We are willing to pay the additional quantity - 227.51 metric tons high grade sulfuric acid in the
prevailing price of the said product. [12]
xxx
By telephone, petitioner requested private respondents Shipping Manager, Gil Belen, to get its
additional order of 227.51 MT of sulfuric acid at Isabel, Leyte. [13] Belen relayed the information to his
associate, Herman Rustia, the Senior Manager for Imports and International Sales of private
respondent. In a letter dated July 22, 1988, Rustia replied:
Subject: Sulfuric Acid Ex-Isabel
Gentlemen:

Confirming earlier telcon with our Mr. G.B. Belen, we regret to inform you that we cannot
accommodate your request to lift Sulfuric Acid ex-Isabel due to Pyrite limitation and delayed arrival of
imported Sulfuric Acid from Japan. [14]
On July 25, 1988, petitioners counsel wrote to private respondent another demand letter for the
delivery of the purchases remaining, or suffer tedious legal action his client would commence.
On May 4, 1989, petitioner filed a complaint for specific performance and/or damages before the
Regional Trial Court of Pasig, Branch 151. Private respondent filed its answer with counterclaim,
stating that it was the petitioner who was remiss in the performance of its obligation in arranging the
shipping requirements of its purchases and, as a consequence, should pay damages as computed
below:
Advanced Payment by Aerospace (Oct. 3, 1986)
P553,280.00
Less Shipments
70.009 MT sulfuric acid
P 72,830.36
151.51 MT sulfuric acid
176,966.27
(249,796.63)
Balance
P303,483.37
Less Charges
Basay Maintenance Expense
from Aug. 15 to Dec. 15, 1986
(P2,000.00/day x 122 days)
P244,000.00
Sangi - Tank Rental
from Aug. 15, 1986 to Aug. 15, 1987
(P32,000.00/mo. x 12 mos.)
384,000.00
(628,000.00)
Receivable/Counterclaim
(P324,516.63)
Trial ensued and after due proceedings, judgment was rendered by the trial court in petitioners favor,
disposing as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, directing the
latter to pay the former the following sums:
1. P306,060.77 - representing the value of the undelivered 272.49 metric tons of sulfuric acid plaintiff
paid to defendant;
2. P91,818.23 - representing unrealized profits, both items with 12% interest per annum from May 4,
1989, when the complaint was filed until fully paid;
3. P30,000.00 - as exemplary damages; and
4. P30,000.00 - as attorneys fees and litigation expenses, both last items also with 12% interest per
annum from date hereof until fully paid.
Defendants counterclaims are hereby dismissed for lack of merit.
Costs against defendant.[15]
In finding for the petitioner, the trial court held that the petitioner was absolved in its obligation to
pick-up the remaining sulfuric acid because its failure was due to force majeure. According to the trial
court, it was private respondent who committed a breach of contract when it failed to accommodate
the additional order of the petitioner, to replace those that sank in the sea, thus:
To begin with, even if we assume that it is incumbent upon the plaintiff to lift the sulfuric acid it
ordered from defendant, the fact that force majeure intervened when the vessel which was previouly
(sic) listing, but which the parties, including a representative of the defendant, did not mind, sunk, has
the effect of absolving plaintiff from lifting the sulfuric acid at the designated load port. But even
assuming the plaintiff cannot be held entirely blameless, the allegation that plaintiff agreed to a
payment of a 2,000-peso incremental expenses per day to defendant for delayed lifting has not been
proven. ...
Also, if it were true that plaintiff is indebted to defendant, why did defendant accept a second
additional order after the transaction in litigation? Why also, did defendant not send plaintiff
statements of account until after 3 years?
All these convince the Court that indeed, defendant must return what plaintiff has paid it for the
goods which the latter did not actually receive. [16]
On appeal by private respondent, the Court of Appeals reversed the decision of the trial court, as
follows:
Based on the facts of this case as hereinabove set forth, it is clear that the plaintiff had the obligation
to withdraw the full amount of 500 MT of sulfuric acid from the defendants loadport at Basay and

Sangi on or before August 15, 1986. As early as August 6, 1986 it had been accordingly warned by the
defendant that any delay in the hauling of the commodity would mean expenses on the part of the
defendant amounting to P2,000.00 a day. The plaintiff sent its vessel, the M/T Sultan Kayumanggi,
only on November 19, 1987. The vessel, however, was not capable of loading the entire 500 MT and in
fact, with its load of only 227.519 MT, it sank.
Contrary to the position of the trial court, the sinking of the M/T Sultan Kayumanggi did not absolve
the plaintiff from its obligation to lift the rest of the 272.481 MT of sulfuric acid at the agreed time. It
was the plaintiffs duty to charter another vessel for the purpose. It did contract for the services of a
new vessel, the M/T Don Victor, but did not want to lift the balance of 272.481 MT only but insisted
that its additional order of 227.51 MT be also given by the defendant to complete 500 MT. apparently
so that the vessel may be availed of in its full capacity.
xxx
We find no basis for the decision of the trial court to make the defendant liable to the plaintiff not only
for the cost of the sulfuric acid, which the plaintiff itself failed to haul, but also for unrealized profits
as well as exemplary damages and attorneys fees. [17]
Respondent Court of Appeals found the petitioner guilty of delay and negligence in the performance
of its obligation. It dismissed the complaint of petitioner and ordered it to pay damages representing
the counterclaim of private respondent.
The motion for reconsideration filed by petitioner was denied by respondent court in its Resolution
dated December 21, 1992, for lack of merit.
Petitioner now comes before us, assigning the following errors:
I.
RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT TO HAVE
COMMITTED A BREACH OF CONTRACT WHEN IT IS NOT DISPUTED THAT PETITIONER PAID IN FULL
THE VALUE OF 500 MT OF SULFURIC ACID TO PRIVATE RESPONDENT BUT THE LATTER WAS ABLE
TO DELIVER TO PETITIONER ONLY 227.51 M.T.
II.
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN HOLDING PETITIONER LIABLE FOR
DAMAGES TO PRIVATE RESPONDENT ON THE BASIS OF A XEROX COPY OF AN ALLEGED
AGREEMENT TO HOLD PETITIONER LIABLE FOR DAMAGES FOR THE DELAY WHEN PRIVATE
RESPONDENT FAILED TO PRODUCE THE ORIGINAL IN CONTRAVENTION OF THE RULES ON
EVIDENCE.
III.
RESPONDENT COURT OF APPEALS ERRED IN FAILING TO CONSIDER THE UNDISPUTED FACTS
THAT PETITIONERS PAYMENT FOR THE GOODS WAS RECEIVED BY PRIVATE RESPONDENT
WITHOUT ANY QUALIFICATION AND THAT PRIVATE RESPONDENT ENTERED INTO ANOTHER
CONTRACT TO SUPPLY PETITIONER 227.519 MT OF SULFURIC ACID IN ADDITION TO THE
UNDELIVERED BALANCE AS PROOF THAT ANY DELAY OF PETITIONER WAS DEEMED WAIVED BY
SAID ACTS OF RESPONDENT.
IV.
RESPONDENT COURT OF APPEALS ERRED IN NOT CONSIDERING THE LAW THAT WHEN THE SALE
INVOLVES FUNGIBLE GOODS AS IN THIS CASE THE EXPENSES FOR STORAGE AND MAINTENANCE
ARE FOR THE ACCOUNT OF THE SELLER (ARTICLE 1504 CIVIL CODE).
V.
RESPONDENT COURT OF APPEALS ERRED IN FAILING TO RENDER JUDGMENT FOR PETITIONER
AFFIRMING THE DECISION OF THE TRIAL COURT.
From the assigned errors, we synthesize the pertinent issues raised by the petitioner as follows:
1. Did the respondent court err in holding that the petitioner committed breach of contract,
considering that:
a)
the petitioner allegedly paid the full value of its purchases, yet received only a portion of said
purchases?
b)
petitioner and private respondent allegedly had also agreed for the purchase and supply of an
additional 227.519 MT of sulfuric acid, hence prior delay, if any, had been waived?
2. Did the respondent court err in awarding damages to private respondent?
3. Should expenses for the storage and preservation of the purchased fungible goods, namely
sulfuric acid, be on sellers account pursuant to Article 1504 of the Civil Code?

To resolve these issues, petitioner urges us to review factual findings of respondent court and its
conclusion that the petitioner was guilty of delay in the performance of its obligation. According to
petitioner, that conclusion is contrary to the factual evidence. It adds that respondent court
disregarded the rule that findings of the trial court are given weight, with the highest degree of
respect. Claiming that respondent courts findings conflict with those of the trial court, petitioner
prays that the trial courts findings be upheld over those of the appellate court.
Petitioner argues that it paid the purchase price of sulfuric acid, five (5) days prior to the withdrawal
thereof, or on October 3, 1986, hence, it had complied with the primary condition set in the sales
contract. Petitioner claims its failure to pick-up the remaining purchases on time was due to a storm,
a force majeure, which sank the vessel. It thus claims exemption from liability to pay
damages. Petitioner also contends that it was actually the private respondents shipping officer, who
advised petitioner to buy the additional 227.51 MT of sulfuric acid, so as to fully utilize the capacity of
the vessel it chartered. Petitioner insists that when its ship was ready to pick-up the remaining
balance of 272.49 MT of sulfuric acid, private respondent could not comply with the contract
commitment due to pyrite limitation.
While we agree with petitioner that when the findings of the Court of Appeals are contrary to those of
the trial court,[18] this Court may review those findings, we find the appellate courts conclusion that
petitioner violated the subject contract amply supported by preponderant evidence. Petitioners claim
was predicated merely on the allegations of its employee, Melecio Hernandez, that the storm or force
majeure caused the petitioners delay and failure to lift the cargo of sulfuric acid at the designated
loadports. In contrast, the appellate court discounted Hernandez assertions. For on record, the
storm was not the proximate cause of petitioners failure to transport its purchases on time. The
survey report submitted by a third party surveyor, SGS Far East Limited, revealed that the vessel,
which was unstable, was incapable of carrying the full load of sulfuric acid. Note that there was a
premature termination of loading in Basay, Negros Oriental. The vessel had to undergo several
repairs before continuing its voyage to pick-up the balance of cargo at Sangi, Cebu. Despite repairs,
the vessel still failed to carry the whole lot of 500 MT of sulfuric acid due to ship defects like listing to
one side. Its unfortunate sinking was not due to force majeure. It sunk because it was, based on SGS
survey report, unstable and unseaworthy.
Witness surveyor Eugenio Rabes incident report, dated December 13, 1986 in Basay, Negros Oriental,
elucidated this point:
Loading was started at 1500hrs. November 19. At 1600Hrs. November 20, loading operation was
temporarily stopped by the vessels master due to ships stability was heavily tilted to port side, ships
had tried to transfer the loaded acid to stbdside but failed to do so, due to their auxiliary pump on
board does not work out for acid.
xxx
Note. Attending surveyor arrived BMC Basay on November 22, due to delayed advice of said vessel
Declared quantity loaded onboard based on datas provided by PHILPHOS representative.
On November 26, two representative of shipping company arrived Basay to assist the situation, at
1300Hrs repairing and/or welding of tank number 5 started at 1000Hrs November 27, repairing and/or
welding was suspended due to the explosion of tank no. 5. Explosion ripped about two feet of the
double bottom tank.
November 27 up to date no progress of said vessel [19]
While at Sangi, Cebu, the vessels condition (listing) did not improve as the survey report therein
noted:
Declared quantity loaded on board was based on shore tank withdrawal due to ships incomplete
tank calibration table. Barge displacement cannot be applied due to ship was listing to Stboard side
which has been loaded with rocks to control her stability. [20]
These two vital pieces of information were totally ignored by trial court. The appellate court correctly
took these into account, significantly. As to the weather condition in Basay, the appellate court
accepted surveyor Rabes testimony, thus:
Q. Now, Mr. Witness, what was the weather condition then at Basay, Negros Oriental during the
loading operation of sulfuric acid on board the Sultana Kayumanggi?
A. Fair, sir.[21]
Since the third party surveyor was neither petitioners nor private respondents employee, his
professional report should carry more weight than that of Melecio Hernandez, an employee of

petitioner. Petitioner, as the buyer, was obligated under the contract to undertake the shipping
requirements of the cargo from the private respondents loadports to the petitioners designated
warehouse. It was petitioner which chartered M/T Sultan Kayumanggi. The vessel was petitioners
agent. When it failed to comply with the necessary loading conditions of sulfuric acid, it was
incumbent upon petitioner to immediately replace M/T Sultan Kayumanggi with another seaworthy
vessel. However, despite repeated demands, petitioner did not comply seasonably.
Additionally, petitioner claims that private respondents employee, Gil Belen, had recommended to
petitioner to fully utilize the vessel, hence petitioners request for an additional order to complete the
vessels 500 MT capacity. This claim has no probative pertinence nor solid basis. A party who
asserts that a contract of sale has been changed or modified has the burden of proving the change or
modification by clear and convincing evidence. [22] Repeated requests and additional orders were
contained in petitioners letters to private respondent. In contrast, Belens alleged action was only
verbal; it was not substantiated at all during the trial. Note that, using the vessel to full capacity could
redound to petitioners advantage, not the other partys. If additional orders were at the instance of
private respondent, the same must be properly proved together with its relevance to the question of
delay. Settled is the principle in law that proof of verbal agreements offered to vary the terms of
written agreements is inadmissible, under the parol evidence rule. [23] Belens purported
recommendation could not be taken at face value and, obviously, cannot excuse petitioners default.
Respondent court found petitioners default unjustified, and on this conclusion we agree:
It is not true that the defendant was not in a position to deliver the 272.481 MT which was the balance
of the original 500 MT purchased by the plaintiff. The whole lot of 500 MT was ready for lifting as early
as August 15, 1986. What the defendant could not sell to the plaintiff was the additional 227.51 MT
which said plaintiff was ordering, for the reason that the defendant was short of the supply
needed. The defendant, however, had no obligation to agree to this additional order and may not be
faulted for its inability to meet the said additional requirements of the plaintiff. And the defendants
incapacity to agree to the delivery of another 227.51 MT is not a legal justification for the plaintiffs
refusal to lift the remaining 272.481.
It is clear from the plaintiffs letters to the defendant that it wanted to send the M/T Don Victor only if
the defendant would confirm that it was ready to deliver 500 MT. Because the defendant could not sell
another 227.51 MT to the plaintiff, the latter did not send a new vessel to pick up the balance of the
500 MT originally contracted for by the parties. This, inspite the representations made by the
defendant for the hauling thereof as scheduled and its reminders that any expenses for the delay
would be for the account of the plaintiff. [24]
We are therefore constrained to declare that the respondent court did not err when it absolved private
respondent from any breach of contract.
Our next inquiry is whether damages have been properly awarded against petitioner for its unjustified
delay in the performance of its obligation under the contract. Where there has been breach of
contract by the buyer, the seller has a right of action for damages. Following this rule, a cause of
action of the seller for damages may arise where the buyer refuses to remove the goods, such that
buyer has to remove them.[25] Article 1170 of the Civil Code provides:
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.
Delay begins from the time the obligee judicially or extrajudicially demands from the obligor the
performance of the obligation.[26] Art. 1169 states:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
In order that the debtor may be in default, it is necessary that the following requisites be present: (1)
that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and
(3) that the creditor requires the performance judicially or extrajudicially.[27]
In the present case, private respondent required petitioner to ship out or lift the sulfuric acid as
agreed, otherwise petitioner would be charged for the consequential damages owing to any delay. As
stated in private respondents letter to petitioner, dated December 12, 1986:
Subject
:
M/T KAYUMANGGI
Gentlemen:
This is to reiterate our telephone advice and our letter HJR-8612-031 dated 2 December 1986
regarding your sulfuric acid vessel, M/T KAYUMANGGI.

As we have, in various instances, advised you, our Basay wharf will have to be vacated 15th
December 1986 as we are expecting the arrival of our chartered vessel purportedly to haul our
equipments and all other remaining assets in Basay. This includes our sulfuric acid tanks. We regret,
therefore, that if these tanks are not emptied on or before the 15th of December, we either have to
charge you for the tanks waiting time at Basay and its consequential costs (i.e. chartering of another
vessel for its second pick-up at Basay, handling, etc.) as well as all other incremental costs on
account of the protracted loading delay. [28] (Italics supplied)
Indeed the above demand, which was unheeded, justifies the finding of delay. But when did such
delay begin? The above letter constitutes private respondents extrajudicial demand for the petitioner
to fulfill its obligation, and its dateline is significant. Given its date, however, we cannot sustain the
finding of the respondent court that petitioners delay started on August 6, 1986. The Court of Appeals
had relied on private respondents earlier letter to petitioner of that date for computing the
commencement of delay. But as averred by petitioner, said letter of August 6th is not a categorical
demand. What it showed was a mere statement of fact, that [F]for your information any delay in
Sulfuric Acid withdrawal shall cost us incremental expenses of P2,000.00 per day. Noteworthy,
private respondent accepted the full payment by petitioner for purchases on October 3, 1986, without
qualification, long after the August 6th letter. In contrast to the August 6th letter, that of December
12th was a categorical demand.
Records reveal that a tanker ship had to pick-up sulfuric acid in Basay, then proceed to get the
remaining stocks in Sangi, Cebu. A period of three days appears to us reasonable for a vessel to
travel between Basay and Sangi. Logically, the computation of damages arising from the shipping
delay would then have to be from December 15, 1986, given said reasonable period after the
December 12th letter. More important, private respondent was forced to vacate Basay wharf only on
December 15th. Its Basay expenses incurred before December 15, 1986, were necessary and regular
business expenses for which the petitioner should not be obliged to pay.
Note that private respondent extended its lease agreement for Sangi, Cebu storage tank until August
31, 1987, solely for petitioners sulfuric acid. It stands to reason that petitioner should reimburse
private respondents rental expenses of P32,000 monthly, commencing December 15, 1986, up to
August 31, 1987, the period of the extended lease. Note further that there is nothing on record
refuting the amount of expenses abovecited. Private respondent presented in court two supporting
documents: first, the lease agreement pertaining to the equipment, and second a letter dated June
15, 1987, sent by Atlas Fertilizer Corporation to private respondent representing the rental charges
incurred. Private respondent is entitled to recover the payment for these charges. It should be
reimbursed the amount of two hundred seventy two thousand (P272,000.00) [29] pesos, corresponding
to the total amount of rentals from December 15, 1986 to August 31, 1987 of the Sangi, Cebu storage
tank.
Finally, we note also that petitioner tries to exempt itself from paying rental expenses and other
damages by arguing that expenses for the preservation of fungible goods must be assumed by the
seller. Rental expenses of storing sulfuric acid should be at private respondents account until
ownership is transferred, according to petitioner. However, the general rule that before delivery, the
risk of loss is borne by the seller who is still the owner, is not applicable in this case because
petitioner had incurred delay in the performance of its obligation. Article 1504 of the Civil Code
clearly states:
Unless otherwise agreed, the goods remain at the sellers risk until the ownership therein is
transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at
the buyers risk whether actual delivery has been made or not, except that:
xxx
(2) Where actual delivery has been delayed through the fault of either the buyer or seller the goods
are at the risk of the party at fault. (italics supplied)
On this score, we quote with approval the findings of the appellate court, thus:
. . . The defendant [herein private respondent] was not remiss in reminding the plaintiff that it would
have to bear the said expenses for failure to lift the commodity for an unreasonable length of time.
But even assuming that the plaintiff did not consent to be so bound, the provisions of Civil Code
come in to make it liable for the damages sought by the defendant.
Article 1170 of the Civil Code provides:

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..
Certainly, the plaintiff [herein petitioner] was guilty of negligence and delay in the performance of its
obligation to lift the sulfuric acid on August 15, 1986 and had contravened the tenor of its lettercontract with the defendant.[30]
As pointed out earlier, petitioner is guilty of delay, after private respondent made the necessary
extrajudicial demand by requiring petitioner to lift the cargo at its designated loadports. When
petitioner failed to comply with its obligations under the contract it became liable for its
shortcomings. Petitioner is indubitably liable for proven damages.
Considering, however, that petitioner made an advance payment for the unlifted sulfuric acid in the
amount of three hundred three thousand, four hundred eighty three pesos and thirty seven centavos
(P303,483.37), it is proper to set-off this amount against the rental expenses initially paid by private
respondent. It is worth noting that the adjustment and allowance of private respondents
counterclaim or set-off in the present action, rather than by another independent action, is
encouraged by the law. Such practice serves to avoid circuitry of action, multiplicity of suits,
inconvenience, expense, and unwarranted consumption of the courts time. [31] The trend of judicial
decisions is toward a liberal extension of the right to avail of counterclaims or set-offs. [32] The rules on
counterclaims are designed to achieve the disposition of a whole controversy involving the
conflicting claims of interested parties at one time and in one action, provided all parties can be
brought before the court and the matter decided without prejudicing the right of any party. [33] Set-off in
this case is proper and reasonable. It involves deducting P272,000.00 (rentals) from P303,483.37
(advance payment), which will leave the amount of P31,483.37 refundable to petitioner.
WHEREFORE, the petition is hereby DENIED. The assailed decision of the Court of Appeals in CA
G.R. CV No. 33802 is AFFIRMED, with MODIFICATION that the amount of damages awarded in favor of
private respondent is REDUCED to Two hundred seventy two thousand pesos (P272,000.00). It is also
ORDERED that said amount of damages be OFFSET against petitioners advance payment of Three
hundred three thousand four hundred eighty three pesos and thirty-seven centavos (P303,483.37)
representing the price of the 272.481 MT of sulfuric acid not lifted. Lastly, it is ORDERED that the
excess amount of thirty one thousand, four hundred eighty three pesos and thirty seven centavos
(P31,483.37) be RETURNED soonest by private respondent to herein petitioner.
Costs against the petitioner.
SO ORDERED.
[G.R. No. 153004. November 5, 2004]
SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner, vs. ERNESTO V. SANTOS and
RIVERLAND, INC., respondents
DECISION
QUISUMBING, J.:
Subject of the present petition for review on certiorari is the Decision,[1] dated January 30, 2002, as
well as the April 12, 2002, Resolution[2] of the Court of Appeals in CA-G.R. CV No. 55122. The
appellate
court
reversed
the
Decision, [3] dated October
4,
1996,
of
the Regional Trial Court of Makati City, Branch 148, in Civil Case No. 95-811, and likewise denied
petitioners Motion for Reconsideration.
The facts of this case are undisputed.
Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were the plaintiff and
defendant, respectively, in several civil cases filed in different courts in thePhilippines. On October
26, 1990, the parties executed a Compromise Agreement[4] which amicably ended all their pending
litigations. The pertinent portions of the Agreement read as follows:
1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million in the following manner:
a.
P1.5 Million immediately upon the execution of this agreement;
b.
The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the
discretion of the Foundation, within a period of not more than two (2) years from the execution of this
agreement; provided, however, that in the event that the Foundation does not pay the whole or any
part of such balance, the same shall be paid with the corresponding portion of the land or real
properties subject of the aforesaid cases and previously covered by the notices of lis pendens, under
such terms and conditions as to area, valuation, and location mutually acceptable to both parties; but

in no case shall the payment of such balance be later than two (2) years from the date of this
agreement; otherwise, payment of any unpaid portion shall only be in the form of land aforesaid;
2. Immediately upon the execution of this agreement (and [the] receipt of the P1.5 Million), plaintiff
Santos shall cause the dismissal with prejudice of Civil Cases Nos. 88-743, 1413OR, TC-1024, 45366
and 18166 and voluntarily withdraw the appeals in Civil Cases Nos. 4968 (C.A.-G.R. No. 26598) and 8845366 (C.A.-G.R. No. 24304) respectively and for the immediate lifting of the aforesaid various notices
of lis pendens on the real properties aforementioned (by signing herein attached corresponding
documents, for such lifting); provided, however, that in the event that defendant Foundation shall sell
or dispose of any of the lands previously subject of lis pendens, the proceeds of any such sale, or
any part thereof as may be required, shall be partially devoted to the payment of the Foundations
obligations under this agreement as may still be subsisting and payable at the time of any such sale
or sales;
...
5. Failure of compliance of any of the foregoing terms and conditions by either or both parties to this
agreement shall ipso facto and ipso jure automatically entitle the aggrieved party to a writ of
execution for the enforcement of this agreement. [Emphasis supplied][5]
In compliance with the Compromise Agreement, respondent Santos moved for the dismissal of the
aforesaid civil cases. He also caused the lifting of the notices of lis pendens on the real properties
involved. For its part, petitioner SVHFI, paid P1.5 million to respondent Santos, leaving a balance
of P13 million.
Subsequently, petitioner SVHFI sold to Development Exchange Livelihood Corporation two real
properties, which were previously subjects of lis pendens. Discovering the disposition made by the
petitioner, respondent Santos sent a letter to the petitioner demanding the payment of the
remaining P13 million, which was ignored by the latter. Meanwhile, on September 30, 1991,
the Regional Trial Court of Makati City, Branch 62, issued a Decision[6] approving the compromise
agreement.
On October 28, 1992, respondent Santos sent another letter to petitioner inquiring when it would pay
the balance of P13 million. There was no response from petitioner. Consequently,
respondent Santos applied with the Regional Trial Court of Makati City, Branch 62, for the issuance of
a writ of execution of its compromise judgment datedSeptember 30, 1991. The RTC granted the
writ. Thus, on March 10, 1993, the Sheriff levied on the real properties of petitioner, which were
formerly subjects of the lis pendens. Petitioner, however, filed numerous motions to block the
enforcement of the said writ. The challenge of the execution of the aforesaid compromise judgment
even reached the Supreme Court. All these efforts, however, were futile.
On November 22, 1994, petitioners real properties located in Mabalacat, Pampanga were
auctioned. In the said auction, Riverland, Inc. was the highest bidder for P12 million and it was issued
a Certificate of Sale covering the real properties subject of the auction sale. Subsequently, another
auction sale was held on February 8, 1995, for the sale of real properties of petitioner
in Bacolod City. Again, Riverland, Inc. was the highest bidder. The Certificates of Sale issued for
both properties provided for the right of redemption within one year from the date of registration of
the said properties.
On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief and
Damages[7] alleging that there was delay on the part of petitioner in paying the balance of P13
million. They further alleged that under the Compromise Agreement, the obligation became due
on October 26, 1992, but payment of the remaining P12 million was effected only on November 22,
1994. Thus, respondents prayed that petitioner be ordered to pay legal interest on the obligation,
penalty, attorneys fees and costs of litigation. Furthermore, they prayed that the aforesaid sales be
declared final and not subject to legal redemption.
In its Answer,[8] petitioner countered that respondents have no cause of action against it since it had
fully paid its obligation to the latter. It further claimed that the alleged delay in the payment of the
balance was due to its valid exercise of its rights to protect its interests as provided under the
Rules. Petitioner counterclaimed for attorneys fees and exemplary damages.
On October 4, 1996, the trial court rendered a Decision[9] dismissing herein respondents complaint
and ordering them to pay attorneys fees and exemplary damages to petitioner. Respondents then
appealed to the Court of Appeals. The appellate court reversed the ruling of the trial court:

WHEREFORE, finding merit in the appeal, the appealed Decision is hereby REVERSED and judgment
is hereby rendered ordering appellee SVHFI to pay appellants Santos and Riverland, Inc.: (1) legal
interest on the principal amount of P13 million at the rate of 12% per annum from the date of demand
on October 28, 1992 up to the date of actual payment of the whole obligation; and (2) P20,000 as
attorneys fees and costs of suit.
SO ORDERED.
Hence this petition for review on certiorari where petitioner assigns the following issues:
I
WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT
AWARDED LEGAL INTEREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND,
INC., NOTWITHSTANDING THE FACT THAT NEITHER IN THE COMPROMISE AGREEMENT NOR IN THE
COMPROMISE JUDGEMENT OF HON. JUDGE DIOKNO PROVIDES FOR PAYMENT OF INTEREST TO
THE RESPONDENT
II
WHETHER OF NOT THE COURT OF APPEALS ERRED IN AWARDING LEGAL IN[T]EREST IN FAVOR
OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT
THE OBLIGATION OF THE PETITIONER TO RESPONDENT SANTOS TO PAY A SUM OF MONEY HAD
BEEN CONVERTED TO AN OBLIGATION TO PAY IN KIND DELIVERY OF REAL PROPERTIES OWNED
BY THE PETITIONER WHICH HAD BEEN FULLY PERFORMED
III
WHETHER OR NOT RESPONDENTS ARE BARRED FROM DEMANDING PAYMENT OF INTEREST BY
REASON OF THE WAIVER PROVISION IN THE COMPROMISE AGREEMENT, WHICH BECAME THE
LAW AMONG THE PARTIES[10]
The only issue to be resolved is whether the respondents are entitled to legal interest.
Petitioner SVHFI alleges that where a compromise agreement or compromise judgment does not
provide for the payment of interest, the legal interest by way of penalty on account of fault or delay
shall not be due and payable, considering that the obligation or loan, on which the payment of legal
interest could be based, has been superseded by the compromise agreement. [11] Furthermore, the
petitioner argues that the respondents are barred by res judicata from seeking legal interest on
account of the waiver clause in the duly approved compromise agreement. [12] Article 4 of the
compromise agreement provides:
Plaintiff Santos waives and renounces any and all other claims that he and his family may have on the
defendant Foundation arising from and in connection with the aforesaid civil cases, and defendant
Foundation, on the other hand, also waives and renounces any and all claims that it may have against
plaintiff Santos in connection with such cases.[13] [Emphasis supplied.]
Lastly, petitioner alleges that since the compromise agreement did not provide for a period within
which the obligation will become due and demandable, it is incumbent upon respondent Santos to
ask for judicial intervention for purposes of fixing the period. It is only when a fixed period exists that
the legal interests can be computed.
Respondents profer that their right to damages is based on delay in the payment of the obligation
provided in the Compromise Agreement. The Compromise Agreement provides that payment must be
made within the two-year period from its execution. This was approved by the trial court and became
the law governing their contract. Respondents posit that petitioners failure to comply entitles them to
damages, by way of interest.[14]
The petition lacks merit.
A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation
or put an end to one already commenced. [15] It is an agreement between two or more persons, who, for
preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner
which they agree on, and which everyone of them prefers in the hope of gaining, balanced by the
danger of losing.[16]
The general rule is that a compromise has upon the parties the effect and authority of res
judicata, with respect to the matter definitely stated therein, or which by implication from its terms
should be deemed to have been included therein. [17] This holds true even if the agreement has not
been judicially approved.[18]
In the case at bar, the Compromise Agreement was entered into by the parties on October 26, 1990.
[19]
It was judicially approved on September 30, 1991.[20] Applying existing jurisprudence, the

compromise agreement as a consensual contract became binding between the parties upon its
execution and not upon its court approval. From the time a compromise is validly entered into, it
becomes the source of the rights and obligations of the parties thereto. The purpose of the
compromise is precisely to replace and terminate controverted claims. [21]
In accordance with the compromise agreement, the respondents asked for the dismissal of the
pending civil cases. The petitioner, on the other hand, paid the initial P1.5 million upon the execution
of the agreement. This act of the petitioner showed that it acknowledges that the agreement was
immediately executory and enforceable upon its execution.
As to the remaining P13 million, the terms and conditions of the compromise agreement are clear and
unambiguous. It provides:
...
b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the
discretion of the Foundation, within a period of not more than two (2) years from the execution of this
agreement[22] [Emphasis supplied.]
...
The two-year period must be counted from October 26, 1990, the date of execution of the compromise
agreement, and not on the judicial approval of the compromise agreement on September 30,
1991. When respondents wrote a demand letter to petitioner on October 28, 1992, the obligation was
already due and demandable. When the petitioner failed to pay its due obligation after the demand
was made, it incurred delay.
Article 1169 of the New Civil Code provides:
Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation. [Emphasis supplied]
Delay as used in this article is synonymous to default or mora which means delay in the fulfillment of
obligations. It is the non-fulfillment of the obligation with respect to time. [23]
In order for the debtor to be in default, it is necessary that the following requisites be present: (1) that
the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3)
that the creditor requires the performance judicially or extrajudicially.[24]
In the case at bar, the obligation was already due and demandable after the lapse of the two-year
period from the execution of the contract. The two-year period ended onOctober 26, 1992. When the
respondents gave a demand letter on October 28, 1992, to the petitioner, the obligation was already
due and demandable. Furthermore, the obligation is liquidated because the debtor knows precisely
how much he is to pay and when he is to pay it.
The second requisite is also present. Petitioner delayed in the performance. It was able to fully settle
its outstanding balance only on February 8, 1995, which is more than two years after the extra-judicial
demand. Moreover, it filed several motions and elevated adverse resolutions to the appellate court to
hinder the execution of a final and executory judgment, and further delay the fulfillment of its
obligation.
Third, the demand letter sent to the petitioner on October 28, 1992, was in accordance with an extrajudicial demand contemplated by law.
Verily, the petitioner is liable for damages for the delay in the performance of its obligation. This is
provided for in Article 1170[25] of the New Civil Code.
When the debtor knows the amount and period when he is to pay, interest as damages is generally
allowed as a matter of right.[26] The complaining party has been deprived of funds to which he is
entitled by virtue of their compromise agreement. The goal of compensation requires that the
complainant be compensated for the loss of use of those funds. This compensation is in the form of
interest.[27] In the absence of agreement, the legal rate of interest shall prevail. [28] The legal interest for
loan as forbearance of money is 12% per annum [29] 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. [30]
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 30, 2002 of the
Court of Appeals and its April 12, 2002 Resolution in CA-G.R. CV No. 55122 are AFFIRMED. Costs
against petitioner.
SO ORDERED.
[G.R. No. 149734. November 19, 2004]
DR.
DANIEL
VAZQUEZ
and
MA.
LUIZA
M.
VAZQUEZ, petitioners
vs. AYALA
CORPORATION, respondent.

DECISION
TINGA, J.:
The rise in value of four lots in one of the countrys prime residential developments, Ayala Alabang
Village in Muntinlupa City, over a period of six (6) years only, represents big money. The huge price
difference lies at the heart of the present controversy. Petitioners insist that the lots should be sold
to them at 1984 prices while respondent maintains that the prevailing market price in 1990 should be
the selling price.
Dr. Daniel Vazquez and Ma. Luisa Vazquez [1] filed this Petition for Review on Certiorari [2] dated October
11, 2001 assailing the Decision[3] of the Court of Appeals dated September 6, 2001 which reversed
the Decision[4] of the Regional Trial Court (RTC) and dismissed their complaint for specific
performance and damages against Ayala Corporation.
Despite their disparate rulings, the RTC and the appellate court agree on the following antecedents: [5]
On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M. Vasquez (hereafter, Vasquez spouses)
entered into a Memorandum of Agreement (MOA) with Ayala Corporation (hereafter, AYALA) with
AYALA buying from the Vazquez spouses, all of the latters shares of stock in Conduit Development,
Inc. (hereafter, Conduit). The main asset of Conduit was a 49.9 hectare property in Ayala Alabang,
Muntinlupa, which was then being developed by Conduit under a development plan where the land
was divided into Villages 1, 2 and 3 of the Don Vicente Village. The development was then being
undertaken for Conduit by G.P. Construction and Development Corp. (hereafter, GP Construction).
Under the MOA, Ayala was to develop the entire property, less what was defined as the Retained
Area consisting of 18,736 square meters. This Retained Area was to be retained by the Vazquez
spouses. The area to be developed by Ayala was called the Remaining Area. In this Remaining
Area were 4 lots adjacent to the Retained Area and Ayala agreed to offer these lots for sale to the
Vazquez spouses at the prevailing price at the time of purchase. The relevant provisions of the MOA
on this point are:
5.7. The BUYER hereby commits that it will develop the Remaining Property into a first class
residential subdivision of the same class as its New Alabang Subdivision, and that it intends to
complete the first phase under its amended development plan within three (3) years from the date of
this Agreement. x x x
5.15. The BUYER agrees to give the SELLERS a first option to purchase four developed lots next to
the Retained Area at the prevailing market price at the time of the purchase.
The parties are agreed that the development plan referred to in paragraph 5.7 is not Conduits
development plan, but Ayalas amended development plan which was still to be formulated as of the
time of the MOA. While in the Conduit plan, the 4 lots to be offered for sale to the Vasquez Spouses
were in the first phase thereof or Village 1, in the Ayala plan which was formulated a year later, it was
in the third phase, or Phase II-c.
Under the MOA, the Vasquez spouses made several express warranties, as follows:
3.1. The SELLERS shall deliver to the BUYER:
xxx
3.1.2. The true and complete list, certified by the Secretary and Treasurer of the Company showing:
xxx
D. A list of all persons and/or entities with whom the Company has pending contracts, if any.
xxx
3.1.5. Audited financial statements of the Company as at Closing date.
4. Conditions Precedent
All obligations of the BUYER under this Agreement are subject to fulfillment prior to or at the Closing,
of the following conditions:
4.1. The representations and warranties by the SELLERS contained in this Agreement shall be true
and correct at the time of Closing as though such representations and warranties were made at such
time; and
xxx
6. Representation and Warranties by the SELLERS
The SELLERS jointly and severally represent and warrant to the BUYER that at the time of the
execution of this Agreement and at the Closing:
xxx

6.2.3. There are no actions, suits or proceedings pending, or to the knowledge of the SELLERS,
threatened against or affecting the SELLERS with respect to the Shares or the Property; and
7. Additional Warranties by the SELLERS
7.1. With respect to the Audited Financial Statements required to be submitted at Closing in
accordance with Par. 3.1.5 above, the SELLER jointly and severally warrant to the BUYER that:
7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the Company shall
own the Remaining Property, free from all liens and encumbrances and that the Company shall
have no obligation to any party except for billings payable to GP Construction & Development
Corporation and advances made by Daniel Vazquez for which BUYER shall be responsible in
accordance with Par. 2 of this Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited Financial Statements of the Company
as of Closing, and those disclosed to BUYER, the Company as of the date thereof, has no liabilities of
any nature whether accrued, absolute, contingent or otherwise, including, without limitation, tax
liabilities due or to become due and whether incurred in respect of or measured in respect of the
Companys income prior to Closing or arising out of transactions or state of facts existing prior
thereto.
7.2 SELLERS do not know or have no reasonable ground to know of any basis for any assertion
against the Company as at closing or any liability of any nature and in any amount not fully reflected
or reserved against such Audited Financial Statements referred to above, and those disclosed to
BUYER.
xxx xxx
xxx
7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the Closing, the Company is
not engaged in or a party to, or to the best of the knowledge of the SELLERS, threatened with, any
legal action or other proceedings before any court or administrative body, nor do the SELLERS know
or have reasonable grounds to know of any basis for any such action or proceeding or of any
governmental investigation relative to the Company.
7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due performance and
observance by the Company of any term, covenant or condition of any instrument or agreement to
which the company is a party or by which it is bound, and no condition exists which, with notice or
lapse of time or both, will constitute such default or breach.
After the execution of the MOA, Ayala caused the suspension of work on Village 1 of the Don Vicente
Project. Ayala then received a letter from one Maximo Del Rosario of Lancer General Builder
Corporation informing Ayala that he was claiming the amount of P1,509,558.80 as the subcontractor
of G.P. Construction...
G.P. Construction not being able to reach an amicable settlement with Lancer, on March 22, 1982,
Lancer sued G.P. Construction, Conduit and Ayala in the then Court of First Instance of Manila in Civil
Case No. 82-8598. G.P. Construction in turn filed a cross-claim against Ayala. G.P. Construction and
Lancer both tried to enjoin Ayala from undertaking the development of the property. The suit was
terminated only on February 19, 1987, when it was dismissed with prejudice after Ayala paid both
Lancer and GP Construction the total of P4,686,113.39.
Taking the position that Ayala was obligated to sell the 4 lots adjacent to the Retained Area within 3
years from the date of the MOA, the Vasquez spouses sent several reminder letters of the
approaching so-called deadline. However, no demand after April 23, 1984, was ever made by the
Vasquez spouses for Ayala to sell the 4 lots. On the contrary, one of the letters signed by their
authorized agent, Engr. Eduardo Turla, categorically stated that they expected development of Phase
1 to be completed by February 19, 1990, three years from the settlement of the legal problems with the
previous contractor.
By early 1990 Ayala finished the development of the vicinity of the 4 lots to be offered for sale. The
four lots were then offered to be sold to the Vasquez spouses at the prevailing price in 1990. This was
rejected by the Vasquez spouses who wanted to pay at 1984 prices, thereby leading to the suit below.
After trial, the court a quo rendered its decision, the dispositive portion of which states:
THEREFORE, judgment is hereby rendered in favor of plaintiffs and against defendant, ordering
defendant to sell to plaintiffs the relevant lots described in the Complaint in the Ayala Alabang Village
at the price of P460.00 per square meter amounting to P1,349,540.00; ordering defendant to reimburse
to plaintiffs attorneys fees in the sum of P200,000.00 and to pay the cost of the suit.

In its decision, the court a quo concluded that the Vasquez spouses were not obligated to disclose
the potential claims of GP Construction, Lancer and Del Rosario; Ayalas accountants should have
opened the records of Conduit to find out all claims; the warranty against suit is with respect to the
shares of the Property and the Lancer suit does not affect the shares of stock sold to Ayala; Ayala
was obligated to develop within 3 years; to say that Ayala was under no obligation to follow a time
frame was to put the Vasquezes at Ayalas mercy; Ayala did not develop because of a slump in the
real estate market; the MOA was drafted and prepared by the AYALA who should suffer its
ambiguities; the option to purchase the 4 lots is valid because it was supported by consideration as
the option is incorporated in the MOA where the parties had prestations to each other. [Emphasis
supplied]
Ayala Corporation filed an appeal, alleging that the trial court erred in holding that petitioners did not
breach their warranties under the MOA[6] dated April 23, 1981; that it was obliged to develop the land
where the four (4) lots subject of the option to purchase are located within three (3) years from the
date of the MOA; that it was in delay; and that the option to purchase was valid because it was
incorporated in the MOA and the consideration therefor was the commitment by Ayala Corporation to
petitioners embodied in the MOA.
As previously mentioned, the Court of Appeals reversed the RTC Decision. According to the
appellate court, Ayala Corporation was never informed beforehand of the existence of the Lancer
claim. In fact, Ayala Corporation got a copy of the Lancer subcontract only on May 29, 1981 from G.P.
Constructions lawyers. The Court of Appeals thus held that petitioners violated their warranties
under the MOA when they failed to disclose Lancers claims. Hence, even conceding that Ayala
Corporation was obliged to develop and sell the four (4) lots in question within three (3) years from
the date of the MOA, the obligation was suspended during the pendency of the case filed by Lancer.
Interpreting the MOAs paragraph 5.7 above-quoted, the appellate court held that Ayala Corporation
committed to develop the first phase of its own amended development plan and not Conduits
development plan. Nowhere does the MOA provide that Ayala Corporation shall follow Conduits
development plan nor is Ayala Corporation prohibited from changing the sequence of the phases of
the property it will develop.
Anent the question of delay, the Court of Appeals ruled that there was no delay as petitioners never
made a demand for Ayala Corporation to sell the subject lots to them. According to the appellate
court, what petitioners sent were mere reminder letters the last of which was dated prior to April 23,
1984 when the obligation was not yet demandable. At any rate, the Court of Appeals found that
petitioners in fact waived the three (3)-year period when they sent a letter through their agent, Engr.
Eduardo Turla, stating that they expect that the development of Phase I will be completed by 19
February 1990, three years from the settlement of the legal problems with the previous contractor. [7]
The appellate court likewise ruled that paragraph 5.15 above-quoted is not an option contract but a
right of first refusal there being no separate consideration therefor. Since petitioners refused Ayala
Corporations offer to sell the subject lots at the reduced 1990 price of P5,000.00 per square meter,
they have effectively waived their right to buy the same.
In the instant Petition, petitioners allege that the appellate court erred in ruling that they violated their
warranties under the MOA; that Ayala Corporation was not obliged to develop the Remaining
Property within three (3) years from the execution of the MOA; that Ayala was not in delay; and that
paragraph 5.15 of the MOA is a mere right of first refusal. Additionally, petitioners insist that the Court
should review the factual findings of the Court of Appeals as they are in conflict with those of the trial
court.
Ayala Corporation filed a Comment on the Petition[8] dated March 26, 2002, contending that the
petition raises questions of fact and seeks a review of evidence which is within the domain of the
Court of Appeals. Ayala Corporation maintains that the subcontract between GP Construction, with
whom Conduit contracted for the development of the property under a Construction Contract dated
October 10, 1980, and Lancer was not disclosed by petitioners during the negotiations. Neither was
the liability for Lancers claim included in the Audited Financial Statements submitted by petitioners
after the signing of the MOA. These justify the conclusion that petitioners breached their warranties
under the afore-quoted paragraphs of the MOA. Since the Lancer suit ended only in February 1989,
the three (3)-year period within which Ayala Corporation committed to develop the property should
only be counted thence. Thus, when it offered the subject lots to petitioners in 1990, Ayala
Corporation was not yet in delay.

In response to petitioners contention that there was no action or proceeding against them at the time
of the execution of the MOA on April 23, 1981, Ayala Corporation avers that the facts and
circumstances which gave rise to the Lancer claim were already extant then. Petitioners warranted
that their representations under the MOA shall be true and correct at the time of Closing which shall
take place within four (4) weeks from the signing of the MOA. [9] Since the MOA was signed on April 23,
1981, Closing was approximately the third week of May 1981. Hence, Lancers claims, articulated in
a letter which Ayala Corporation received on May 4, 1981, are among the liabilities warranted against
under paragraph 7.1.2 of the MOA.
Moreover, Ayala Corporation asserts that the warranties under the MOA are not just against suits but
against all kinds of liabilities not reflected in the Audited Financial Statements. It cannot be faulted
for relying on the express warranty that except for billings payable to GP Construction and advances
made by petitioner Daniel Vazquez in the amount of P38,766.04, Conduit has no other liabilities.
Hence, petitioners cannot claim that Ayala Corporation should have examined and investigated the
Audited Financial Statements of Conduit and should now assume all its obligations and liabilities
including the Lancer suit and the cross-claim of GP Construction.
Furthermore, Ayala Corporation did not make a commitment to complete the development of the first
phase of the property within three (3) years from the execution of the MOA. The provision refers to a
mere declaration of intent to develop the first phase of its (Ayala Corporations) own development
plan and not Conduits. True to its intention, Ayala Corporation did complete the development of the
first phase (Phase II-A) of its amended development plan within three (3) years from the execution of
the MOA. However, it is not obliged to develop the third phase (Phase II-C) where the subject lots are
located within the same time frame because there is no contractual stipulation in the MOA therefor. It
is free to decide on its own the period for the development of Phase II-C. If petitioners wanted to
impose the same three (3)-year timetable upon the third phase of the amended development plan,
they should have filed a suit to fix the time table in accordance with Article 1197 [10] of the Civil Code.
Having failed to do so, Ayala Corporation cannot be declared to have been in delay.
Ayala Corporation further contends that no demand was made on it for the performance of its alleged
obligation. The letter dated October 4, 1983 sent when petitioners were already aware of the Lancer
suit did not demand the delivery of the subject lots by April 23, 1984. Instead, it requested Ayala
Corporation to keep petitioners posted on the status of the case. Likewise, the letter dated March 4,
1984 was merely an inquiry as to the date when the development of Phase 1 will be completed. More
importantly, their letter dated June 27, 1988 through Engr. Eduardo Turla expressed petitioners
expectation that Phase 1 will be completed by February 19, 1990.
Lastly, Ayala Corporation maintains that paragraph 5.15 of the MOA is a right of first refusal and not
an option contract.
Petitioners filed their Reply[11] dated August 15, 2002 reiterating the arguments in their Petition and
contending further that they did not violate their warranties under the MOA because the case was
filed by Lancer only on April 1, 1982, eleven (11) months and eight (8) days after the signing of the
MOA on April 23, 1981. Ayala Corporation admitted that it received Lancers claim before the
Closing date. It therefore had all the time to rescind the MOA. Not having done so, it can be
concluded that Ayala Corporation itself did not consider the matter a violation of petitioners warranty.
Moreover, petitioners submitted the Audited Financial Statements of Conduit and allowed an
acquisition audit to be conducted by Ayala Corporation. Thus, the latter bought Conduit with open
eyes.
Petitioners also maintain that they had no knowledge of the impending case against Conduit at the
time of the execution of the MOA. Further, the MOA makes Ayala Corporation liable for the payment of
all billings of GP Construction. Since Lancers claim was actually a claim against GP Construction
being its sub-contractor, it is Ayala Corporation and not petitioners which is liable.
Likewise, petitioners aver that although Ayala Corporation may change the sequence of its
development plan, it is obliged under the MOA to develop the entire area where the subject lots are
located in three (3) years.
They also assert that demand was made on Ayala Corporation to comply with their obligation under
the MOA. Apart from their reminder letters dated January 24, February 18 and March 5, 1984, they also
sent a letter dated March 4, 1984 which they claim is a categorical demand for Ayala Corporation to
comply with the provisions of the MOA.

The parties were required to submit their respective memoranda in the Resolution[12] dated November
18, 2002. In compliance with this directive, petitioners submitted theirMemorandum[13] dated February
14, 2003 on even date, while Ayala Corporation filed its Memorandum[14] dated February 14, 2003 on
February 17, 2003.
We shall first dispose of the procedural question raised by the instant petition.
It is well-settled that the jurisdiction of this Court in cases brought to it from the Court of Appeals by
way of petition for review under Rule 45 is limited to reviewing or revising errors of law imputed to it,
its findings of fact being conclusive on this Court as a matter of general principle. However, since in
the instant case there is a conflict between the factual findings of the trial court and the appellate
court, particularly as regards the issues of breach of warranty, obligation to develop and incurrence
of delay, we have to consider the evidence on record and resolve such factual issues as an exception
to the general rule.[15] In any event, the submitted issue relating to the categorization of the right to
purchase granted to petitioners under the MOA is legal in character.
The next issue that presents itself is whether petitioners breached their warranties under the MOA
when they failed to disclose the Lancer claim. The trial court declared they did not; the appellate
court found otherwise.
Ayala Corporation summarizes the clauses of the MOA which petitioners allegedly breached when
they failed to disclose the Lancer claim:
a) Clause 7.1.1. that Conduit shall not be obligated to anyone except to GP Construction for
P38,766.04, and for advances made by Daniel Vazquez;
b) Clause 7.1.2. that except as reflected in the audited financial statements Conduit had no other
liabilities whether accrued, absolute, contingent or otherwise;
c) Clause 7.2. that there is no basis for any assertion against Conduit of any liability of any value not
reflected or reserved in the financial statements, and those disclosed to Ayala;
d) Clause 7.6.3. that Conduit is not threatened with any legal action or other proceedings; and
e) Clause 7.6.4. that Conduit had not breached any term, condition, or covenant of any instrument or
agreement to which it is a party or by which it is bound. [16]
The Court is convinced that petitioners did not violate the foregoing warranties.
The exchanges of communication between the parties indicate that petitioners substantially apprised
Ayala Corporation of the Lancer claim or the possibility thereof during the period of negotiations for
the sale of Conduit.
In a letter[17] dated March 5, 1984, petitioner Daniel Vazquez reminded Ayala Corporations Mr. Adolfo
Duarte (Mr. Duarte) that prior to the completion of the sale of Conduit, Ayala Corporation asked for
and was given information that GP Construction sub-contracted, presumably to Lancer, a greater
percentage of the project than it was allowed. Petitioners gave this information to Ayala Corporation
because the latter intimated a desire to break the contract of Conduit with GP. Ayala Corporation did
not deny this. In fact, Mr. Duartes letter [18] dated March 6, 1984 indicates that Ayala Corporation had
knowledge of the Lancer subcontract prior to its acquisition of Conduit. Ayala Corporation even
admitted that it tried to explorelegal basis to discontinue the contract of Conduit with GP but
found this not feasible when information surfaced about the tacit consent of Conduit to the subcontracts of GP with Lancer.
At the latest, Ayala Corporation came to know of the Lancer claim before the date of Closing of the
MOA. Lancers letter[19] dated April 30, 1981 informing Ayala Corporation of its unsettled claim with
GP Construction was received by Ayala Corporation on May 4, 1981, well before the
Closing[20] which occurred four (4) weeks after the date of signing of the MOA on April 23, 1981, or
on May 23, 1981.
The full text of the pertinent clauses of the MOA quoted hereunder likewise indicate that certain
matters pertaining to the liabilities of Conduit were disclosed by petitioners to Ayala Corporation
although the specifics thereof were no longer included in the MOA:
7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the Company shall
own the Remaining Property, free from all liens and encumbrances and that the Company shall
have no obligation to any party except for billings payable to GP Construction & Development
Corporation and advances made by Daniel Vazquez for which BUYER shall be responsible in
accordance with Paragraph 2 of this Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited Financial Statements of the Company
as of Closing, and those disclosed to BUYER, the Company as of the date hereof, has no liabilities of

any nature whether accrued, absolute, contingent or otherwise, including, without limitation, tax
liabilities due or to become due and whether incurred in respect of or measured in respect of the
Companys income prior to Closing or arising out of transactions or state of facts existing prior
thereto.
7.2 SELLERS do not know or have no reasonable ground to know of any basis for any assertion
against the Company as at Closing of any liability of any nature and in any amount not fully reflected
or reserved against such Audited Financial Statements referred to above, and those disclosed to
BUYER.
xxx xxx
xxx
7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the Closing, the Company is
not engaged in or a party to, or to the best of the knowledge of the SELLERS, threatened with, any
legal action or other proceedings before any court or administrative body, nor do the SELLERS know
or have reasonable grounds to know of any basis for any such action or proceeding or of any
governmental investigation relative to the Company.
7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due performance and
observance by the Company of any term, covenant or condition of any instrument or agreement to
which the Company is a party or by which it is bound, and no condition exists which, with notice or
lapse of time or both, will constitute such default or breach. [21] [Emphasis supplied]
Hence, petitioners warranty that Conduit is not engaged in, a party to, or threatened with any legal
action or proceeding is qualified by Ayala Corporations actual knowledge of the Lancer claim which
was disclosed to Ayala Corporation before the Closing.
At any rate, Ayala Corporation bound itself to pay all billings payable to GP Construction and the
advances made by petitioner Daniel Vazquez. Specifically, under paragraph 2 of the MOA referred to
in paragraph 7.1.1, Ayala Corporation undertook responsibility for the payment of all billings of the
contractor GP Construction & Development Corporation after the first billing and any payments made
by the company and/or SELLERS shall be reimbursed by BUYER on closing which advances to date
isP1,159,012.87.[22]
The billings knowingly assumed by Ayala Corporation necessarily include the Lancer claim for which
GP Construction is liable. Proof of this is Ayala Corporations letter [23]to GP Construction dated before
Closing on May 4, 1981, informing the latter of Ayala Corporations receipt of the Lancer claim
embodied in the letter dated April 30, 1981, acknowledging that it is taking over the contractual
responsibilities of Conduit, and requesting copies of all sub-contracts affecting the Conduit property.
The pertinent excerpts of the letter read:

In this connection, we wish to inform you that this morning we received a letter from Mr. Maximo D.
Del Rosario, President of Lancer General Builders Corporation apprising us of the existence of
subcontracts that they have with your corporation. They have also furnished us with a copy of their
letter to you dated 30 April 1981.
Since we are taking over the contractual responsibilities of Conduit Development, Inc., we believe that
it is necessary, at this point in time, that you furnish us with copies of all your subcontracts affecting
the property of Conduit, not only with Lancer General Builders Corporation, but all subcontracts with
other parties as well[24]
Quite tellingly, Ayala Corporation even attached to its Pre-Trial Brief[25] dated July 9, 1992 a copy of the
letter[26] dated May 28, 1981 of GP Constructions counsel addressed to Conduit furnishing the latter
with copies of all sub-contract agreements entered into by GP Construction. Since it was addressed
to Conduit, it can be presumed that it was the latter which gave Ayala Corporation a copy of the letter
thereby disclosing to the latter the existence of the Lancer sub-contract.
The ineluctable conclusion is that petitioners did not violate their warranties under the MOA. The
Lancer sub-contract and claim were substantially disclosed to Ayala Corporation before the Closing
date of the MOA. Ayala Corporation cannot disavow knowledge of the claim.
Moreover, while in its correspondence with petitioners, Ayala Corporation did mention the filing of the
Lancer suit as an obstacle to its development of the property, it never actually brought up nor sought
redress for petitioners alleged breach of warranty for failure to disclose the Lancer claim until it filed
its Answer[27] dated February 17, 1992.

We now come to the correct interpretation of paragraph 5.7 of the MOA. Does this paragraph express
a commitment or a mere intent on the part of Ayala Corporation to develop the property within three
(3) years from date thereof? Paragraph 5.7 provides:
5.7. The BUYER hereby commits that it will develop the Remaining Property into a first class
residential subdivision of the same class as its New Alabang Subdivision, and that it intends to
complete the first phase under its amended development plan within three (3) years from the date of
this Agreement.[28]
Notably, while the first phrase of the paragraph uses the word commits in reference to the
development of the Remaining Property into a first class residential subdivision, the second phrase
uses the word intends in relation to the development of the first phase of the property within three
(3) years from the date of the MOA. The variance in wording is significant. While
commit[29] connotes a pledge to do something, intend [30] merely signifies a design or proposition.
Atty. Leopoldo Francisco, former Vice President of Ayala Corporations legal division who assisted in
drafting the MOA, testified:
COURT
You only ask what do you mean by that intent. Just answer on that point.
ATTY. BLANCO
Dont talk about standard.
WITNESS
A
Well, the word intent here, your Honor, was used to emphasize the tentative character of the
period of development because it will be noted that the sentence refers to and I quote to complete
the first phase under its amended development plan within three (3) years from the date of this
agreement, at the time of the execution of this agreement, your Honor. That amended development
plan was not yet in existence because the buyer had manifested to the seller that the buyer could
amend the subdivision plan originally belonging to the seller to conform with its own standard of
development and second, your Honor, (interrupted) [31]
It is thus unmistakable that this paragraph merely expresses an intention on Ayala Corporations part
to complete the first phase under its amended development plan within three (3) years from the
execution of the MOA. Indeed, this paragraph is so plainly worded that to misunderstand its import is
deplorable.
More focal to the resolution of the instant case is paragraph 5.7s clear reference to the first phase of
Ayala Corporations amended development plan as the subject of the three (3)-year intended
timeframe for development. Even petitioner Daniel Vazquez admitted on cross-examination that the
paragraph refers not to Conduits but to Ayala Corporations development plan which was yet to be
formulated when the MOA was executed:
Q: Now, turning to Section 5.7 of this Memorandum of Agreement, it is stated as follows: The Buyer
hereby commits that to develop the remaining property into a first class residential subdivision of the
same class as New Alabang Subdivision, and that they intend to complete the first phase under its
amended development plan within three years from the date of this agreement.
Now, my question to you, Dr. Vasquez is that there is no dispute that the amended development plan
here is the amended development plan of Ayala?
A: Yes, sir.
Q: In other words, it is not Exhibit D-5 which is the original plan of Conduit?
A: No, it is not.
Q: This Exhibit D-5 was the plan that was being followed by GP Construction in 1981?
A: Yes, sir.
Q: And point of fact during your direct examination as of the date of the agreement, this amended
development plan was still to be formulated by Ayala?
A: Yes, sir.[32]
As correctly held by the appellate court, this admission is crucial because while the subject lots to be
sold to petitioners were in the first phase of the Conduit development plan, they were in the third or
last phase of the Ayala Corporation development plan. Hence, even assuming that paragraph 5.7
expresses a commitment on the part of Ayala Corporation to develop the first phase of its amended
development plan within three (3) years from the execution of the MOA, there was no parallel
commitment made as to the timeframe for the development of the third phase where the subject lots
are located.

Lest it be forgotten, the point of this petition is the alleged failure of Ayala Corporation to offer the
subject lots for sale to petitioners within three (3) years from the execution of the MOA. It is not that
Ayala Corporation committed or intended to develop the first phase of its amended development plan
within three (3) years. Whether it did or did not is actually beside the point since the subject lots are
not located in the first phase anyway.
We now come to the issue of default or delay in the fulfillment of the obligation.
Article 1169 of the Civil Code provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears that the designation of
the time when the thing is to be delivered or the service is to be rendered was a controlling motive for
the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to
perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins.
In order that the debtor may be in default it is necessary that the following requisites be present: (1)
that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and
(3) that the creditor requires the performance judicially or extrajudicially.[33]
Under Article 1193 of the Civil Code, obligations for whose fulfillment a day certain has been fixed
shall be demandable only when that day comes. However, no such day certain was fixed in the MOA.
Petitioners, therefore, cannot demand performance after the three (3) year period fixed by the MOA for
the development of the first phase of the property since this is not the same period contemplated for
the development of the subject lots. Since the MOA does not specify a period for the development of
the subject lots, petitioners should have petitioned the court to fix the period in accordance with
Article 1197[34] of the Civil Code. As no such action was filed by petitioners, their complaint for specific
performance was premature, the obligation not being demandable at that point. Accordingly, Ayala
Corporation cannot likewise be said to have delayed performance of the obligation.
Even assuming that the MOA imposes an obligation on Ayala Corporation to develop the subject lots
within three (3) years from date thereof, Ayala Corporation could still not be held to have been in
delay since no demand was made by petitioners for the performance of its obligation.
As found by the appellate court, petitioners letters which dealt with the three (3)-year timetable were
all dated prior to April 23, 1984, the date when the period was supposed to expire. In other words, the
letters were sent before the obligation could become legally demandable. Moreover, the letters were
mere reminders and not categorical demands to perform. More importantly, petitioners waived the
three (3)-year period as evidenced by their agent, Engr. Eduardo Turlas letter to the effect that
petitioners agreed that the three (3)-year period should be counted from the termination of the case
filed by Lancer. The letter reads in part:
I. Completion of Phase I
As per the memorandum of Agreement also dated April 23, 1981, it was undertaken by your
goodselves to complete the development of Phase I within three (3) years. Dr. & Mrs. Vazquez were
made to understand that you were unable to accomplish this because of legal problems with the
previous contractor. These legal problems were resolved as of February 19, 1987, and Dr. & Mrs.
Vazquez therefore expect that the development of Phase I will be completed by February 19, 1990,
three years from the settlement of the legal problems with the previous contractor. The reason for this
is, as you know, that security-wise, Dr. & Mrs. Vazquez have been advised not to construct their
residence till the surrounding area (which is Phase I) is developed and occupied. They have been
anxious to build their residence for quite some time now, and would like to receive assurance from
your goodselves regarding this, in compliance with the agreement.
II. Option on the adjoining lots
We have already written your goodselves regarding the intention of Dr. & Mrs. Vazquez to exercise
their option to purchase the two lots on each side (a total of 4 lots) adjacent to their Retained Area.
They are concerned that although over a year has elapsed since the settlement of the legal problems,

you have not presented them with the size, configuration, etc. of these lots. They would appreciate
being provided with these at your earliest convenience. [35]
Manifestly, this letter expresses not only petitioners acknowledgement that the delay in the
development of Phase I was due to the legal problems with GP Construction, but also their
acquiescence to the completion of the development of Phase I at the much later date of February 19,
1990. More importantly, by no stretch of semantic interpretation can it be construed as a categorical
demand on Ayala Corporation to offer the subject lots for sale to petitioners as the letter merely
articulates petitioners desire to exercise their option to purchase the subject lots and concern over
the fact that they have not been provided with the specifications of these lots.
The letters of petitioners children, Juan Miguel and Victoria Vazquez, dated January 23, 1984 [36] and
February 18, 1984[37] can also not be considered categorical demands on Ayala Corporation to develop
the first phase of the property within the three (3)-year period much less to offer the subject lots for
sale to petitioners. The letter dated January 23, 1984 reads in part:
You will understand our interest in the completion of the roads to our property, since we cannot
develop it till you have constructed the same. Allow us to remind you of our Memorandum of
Agreement, as per which you committed to develop the roads to our property as per the original
plans of the company, and that
1.
The back portion should have been developed before the front portion which has not been the
case.
2.
The whole project front and back portions be completed by 1984. [38]
The letter dated February 18, 1984 is similarly worded. It states:
In this regard, we would like to remind you of Articles 5.7 and 5.9 of our Memorandum of Agreement
which states respectively: [39]
Even petitioner Daniel Vazquez letter[40] dated March 5, 1984 does not make out a categorical demand
for Ayala Corporation to offer the subject lots for sale on or before April 23, 1984. The letter reads in
part:
and that we expect from your goodselves compliance with our Memorandum of Agreement, and a
definite date as to when the road to our property and the development of Phase I will be completed. [41]
At best, petitioners letters can only be construed as mere reminders which cannot be considered
demands for performance because it must appear that the tolerance or benevolence of the creditor
must have ended.[42]
The petition finally asks us to determine whether paragraph 5.15 of the MOA can properly be
construed as an option contract or a right of first refusal. Paragraph 5.15 states:
5.15 The BUYER agrees to give the SELLERS first option to purchase four developed lots next to the
Retained Area at the prevailing market price at the time of the purchase. [43]
The Court has clearly distinguished between an option contract and a right of first refusal. An option
is a preparatory contract in which one party grants to another, for a fixed period and at a determined
price, the privilege to buy or sell, or to decide whether or not to enter into a principal contract. It
binds the party who has given the option not to enter into the principal contract with any other person
during the period designated, and within that period, to enter into such contract with the one to whom
the option was granted, if the latter should decide to use the option. It is a separate and distinct
contract from that which the parties may enter into upon the consummation of the option. It must be
supported by consideration.[44]
In a right of first refusal, on the other hand, while the object might be made determinate, the exercise
of the right would be dependent not only on the grantors eventual intention to enter into a binding
juridical relation with another but also on terms, including the price, that are yet to be firmed up. [45]
Applied to the instant case, paragraph 5.15 is obviously a mere right of first refusal and not an option
contract. Although the paragraph has a definite object, i.e., the sale of subject lots, the period within
which they will be offered for sale to petitioners and, necessarily, the price for which the subject lots
will be sold are not specified. The phrase at the prevailing market price at the time of the purchase
connotes that there is no definite period within which Ayala Corporation is bound to reserve the
subject lots for petitioners to exercise their privilege to purchase. Neither is there a fixed or
determinable price at which the subject lots will be offered for sale. The price is considered certain if
it may be determined with reference to another thing certain or if the determination thereof is left to
the judgment of a specified person or persons. [46]

Further, paragraph 5.15 was inserted into the MOA to give petitioners the first crack to buy the subject
lots at the price which Ayala Corporation would be willing to accept when it offers the subject lots for
sale. It is not supported by an independent consideration. As such it is not governed by Articles 1324
and 1479 of the Civil Code, viz:
Art. 1324. When the offeror has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except when the option
is founded upon a consideration, as something paid or promised.
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.
Consequently, the offer may be withdrawn anytime by communicating the withdrawal to the other
party.[47]
In this case, Ayala Corporation offered the subject lots for sale to petitioners at the price
of P6,500.00/square meter, the prevailing market price for the property when the offer was made on
June 18, 1990.[48] Insisting on paying for the lots at the prevailing market price in 1984
of P460.00/square meter, petitioners rejected the offer. Ayala Corporation reduced the price
to P5,000.00/square meter but again, petitioners rejected the offer and instead made a counter-offer in
the amount of P2,000.00/square meter.[49]Ayala Corporation rejected petitioners counter-offer. With
this rejection, petitioners lost their right to purchase the subject lots.
It cannot, therefore, be said that Ayala Corporation breached petitioners right of first refusal and
should be compelled by an action for specific performance to sell the subject lots to petitioners at the
prevailing market price in 1984.
WHEREFORE, the instant petition is DENIED. No pronouncement as to costs.
SO ORDERED.
[G.R.
No.
32336.
December
20,
1930.]

hectare, the balance being due on or before the fifteenth day of December, 1928, extendible fifteen
days thereafter. (Sgd.) G. B. FRANCISCO P500 Phone 67125."cralaw virtua1aw library

JULIO

The court below absolved the defendant from the complaint, and the plaintiff appealed.

C.

ABELLA, Plaintiff-Appellant,

Antonio

GUILLERMO

Carrascoso

B.

FRANCISCO, Defendant-Appellee.

SYLLABUS
1. CONTRACT OF SALE; PERIOD FOR PAYMENT OF SELLING PRICE; RESOLUTION OF CONTRACT.
Having agreed that the selling price (even supposing it was a contract of sale) would be paid not
later than December, 1928, and in view of the fact that the vendor executed said contract in order to
pay off with the proceeds thereof certain obligations which fell due in the same month of December, it
is held that the time fixed for the payment of the selling price was essential in the transaction, and,
therefore, the vendor, under article 1124 of the Civil Code, is entitled to resolve the contract for failure
to pay the price within the time specified.

It is to be noted that in the document signed by the defendant, the 15th of December was fixed as the
date, extendible for fifteen days, for the payment by the plaintiff of the balance of the selling price. It
has been admitted that the plaintiff did not offer to complete the payment until January 9, 1929. He
contends that Mabanta, as attorney-in-fact for the defendant in this transaction, granted him an
extension of time until the 9th of January. But Mabanta has stated that he only extended the time until
the 5th of that month. Mabantas testimony on this point is corroborated by that of Paz Vicente and by
the plaintiffs own admission to Narciso Javier that his option to purchase those lots expired on
January
5,
1929.

Delgado

for Appellant.

The plaintiff brought this action to compel the defendant to execute the deed of sale of the lots in
question, upon receipt of the balance of the price, and asks that he be judicially declared the owner of
said
lots
and
that
the
defendant
be
ordered
to
deliver
them
to
him.

Mooney.

&

jr.,

Besides the P500 which, according to the instrument quoted above, the plaintiff paid, he made
another payment of P415.31 on November 13, 1928, upon demand made by the defendant. On
December 27th of the same year, the defendant, being in the Province of Cebu, wrote to Roman
Mabanta of this City of Manila, attaching a power of attorney authorizing him to sign in behalf of the
defendant all the documents required by the Bureau of Lands for the transfer of the lots to the
plaintiff. In that letter the defendant instructed Roman Mabanta, in the event that the plaintiff failed to
pay the remainder of the selling price, to inform him that the option would be considered cancelled,
and to return to him the amount of P915.31 already delivered. On January 3, 1929, Mabanta notified
the plaintiff that he had received the power of attorney to sign the deed of conveyance of the lots to
him, and that he was willing go execute the proper deed of sale upon payment of the balance due. The
plaintiff asked for a few days time, but Mabanta, following the instructions he had received from the
defendant, only gave him until the 5th of that month. The plaintiff did not pay the rest of the price on
the 5th of January, but on the 9th of the month attempted to do so; Mabanta, however, refused to
accept it, and gave him to understand that he regarded the contract as rescinded. On the same day,
Mabanta returned by check the sum of P915.31 which the plaintiff had paid.

In rendering that judgment, the court relied on the fact that the plaintiff had failed to pay the price of
the lots within the stipulated time; and that since the contract between plaintiff and defendant was an
option for the purchase of the lots, time was an essential element in it.

Camus

T.

v.

After having made this agreement, the plaintiff proposed the sale of these lots at a higher price to
George C. Sellner, collecting P10,000 on account thereof on December 29, 1928.

for

DECISION
AVANCEA, C.J. :

Defendant Guillermo B. Francisco purchased from the Government on installments, lots 937 to 945 of
the Tala Estate in Novaliches, Caloocan, Rizal. He was in arrears for some of these installments. On
the 31st of October, 1928, he signed the following document:jgc:chanrobles.com.ph
"MANILA,

October

31,

1928

"Received from Mr. Julio C. Abella the amount of five hundred pesos (500), payment on account of
lots Nos. 937, 938, 939, 940, 941, 942, 943, 944, and 945 of the Tala Estate, barrio of Novaliches,
Caloocan, Rizal, containing an area of about 221 hectares, at the rate of one hundred pesos (P100) per

In holding that the period was an essential element of the transaction between plaintiff and defendant,
the trial court considered that the contract in question was an option for the purchase that the
contract in question was an option for the purchase of the lots, and that in an agreement of this
nature the period is deemed essential. The opinion of the court is divided upon the question of
whether the agreement was an option or a sale, but even supposing it was a sale, the court holds that
time was an essential element in the transaction. The defendant wanted to sell those lots to the
plaintiff in order to pay off certain obligation which fell due in the month of December, 1928. The time
fixed for the payment of the price was therefore essential for the defendant, and this view in borne out
by his letter to his representative Mabanta instructing him to consider the contract rescinded if the
price was not completed in time. In accordance with article 1124 of the Civil Code, the defendant is
entitled to resolve the contract for failure to pay the price within the time specified.
The judgment appealed from is affirmed, with costs against the appellant. So ordered.
G.R. No. L-8024
November 29, 1955

EUSEBIO
DE
LA
CRUZ, plaintiff-appellee,
vs.
APOLONIO LEGASPI and CONCORDIA SAMPEROY, defendants-appellants.
Jose
A.
Fornier
for
appellants.
Ramon Maza for appellee.
BENGZON, J.:
In the Court of First Instance of Antique, in November, 1950, Eusebio de la Cruz sued Apolonio
Legaspi and his wife to compel delivery of the parcel of land they had sold to him in December, 1949.
The complaint alleged the execution of the contract, the terms thereof, the refusal of defendants to
accept payment of the purchse price of P450 which he had tendered, and undue retention of the
realty.
The defendants, in their answer, admitted the sale and the price; but they alleged that before the
document (of sale) "was made, the plaintiff agreed to pay the defendants the amount of P450 right
after the document is executed that very day December 5, 1949, but after the document was signed
and ratified by the Notary Public and after the plaintiff has taken the original of the said document, the
sad plaintiff refused to pay the sum of P450 which is the purchase price of the said land in question."
They asserted that for lack of consideration and for deceit, the document of sald should be annulled.
Plaintiff's next move was a petition for judgment on the pleadings, contending that the allegations of
the answer gave the defendants no excuse to retain the property, rejecting the price.
Joining the motion for judgment on the pleadings, the defendants maintained that the sale should be
annulled pursuant to their answer's allegatios.
The Honorable F. Imperial Reyes, Judge, rendered judgment (a) ordering plaintiff to pay the price of
P450 to defendants: (b) ordering the latter to receive such price and immediately after such receipt, to
deliver possession of the property to plaintiff.
Having failed in a motion to reconsider, defendants appealed in due time. The seven errors assigned
in their printed brief, assail the correctness of the judgment, maintaining two principal propositions,
namely: (1) the trial judge erroneously disregarded their allegations, in their answer, of non-payment
of the price, as hereinbefore quoted; (2) such allegations which must be deemed admitted by plaintiff
when he moved for judgment on the pleadings established a good defense, because the contract
was without consideration, and was resolved by plaintiff's failure to pay the price "right after the
document was executed.
As to the first proposition, the decision does not say so, but there is no reason to doubt that as
requested in the plaintiff's motion, His Honor considered the allegations made both in the complaint
and in the answer.
However, he found that defendants' allegations constituted no defense. He read the law correctly, as
we shall forthwith explain.
On the second proposition, appellants rightly say that the Civil Code not the New Civil Code
regulates the transaction, which occurred in 1949. Yet they err in the assertion that as plaintiff failed
to pay the price after the execution of the document of sale as agreed previously, the contract became
null and void for lack of consideration. It cannot be denied that when the document was signed the
cause or consideration existed: P450. The document specifically said so; and such was undoubtedly
the agreement. Subsequent non-payment of the price at the time agreed upon did not convert the
contract into one without cause or consideration: a nudum pactum. (Levy vs. Johnson, 4 Phil. 650;
Puato vs. Mendoza, 64 Phil, 457.) The situation was rather one in which there is failure to pay the
consideration, with its resultant consequences. In other words, when after the notarization of the
contract, plaintiff fialed to hand the money to defendants as he previously promised, there was
default on his part at most, and defendants' right was to demand interest legal interest for the
delay, pursuant to article 1501 (3) of the Civil Code (Villaruel vs. Tan King, 43 Phil. 251), or to demand
rescission in court. (Escueta vs. Pardo, 42 Off. Gaz. 2759; Cortes vs. Bibano, 41 Phil. 298.) Such
failure, however, did not ipso facto resolve the contract, no stipulation to that effect having been
alleged. (Cf. Warner Barnes & Co. vs. Inza, 43 Phil., 505.) Neither was there any agreement nor
allegation that payment on time was essential. (Cf. Abella vs. Francisco, 55 Phil., 447; Berg vs.
Magdalena Estate, 92 Phil., 110.
Indeed, even if the contract of sale herein question had expressly provided for "automatic rescission
upon failure to pay the price," the trial judge could allow plaintiff to enforce the contract, as the

judgment does, in effect because defendants had not made a previous demand on him, by suit or
notarial act.
In the sale of real property, even though it may have been stipulated that in default of the price within
the time agreed upon, the resolution of the contract shall take place ipso facto, the vendee may pay
even after the expiration of the period, at any time before demand has been made upon him either by
suit or by notarial act. After such demand has been made the judge cannot grant him further time.
(Art. 1504 Civil Code.).
By the way, this previous demand, Manresa explains, is a demand for rescission. (Manresa Civil Code,
Vol. 10, p. 288, 2d Ed.; Villaruel vs. Tan King, 43 Phil. 251.).
The appealed judgment will therefore be affirmed, with costs against appellants. So ordered.
[G.R.
No.
L-10394.
December
13,
1958.]
CLAUDINA VDA. DE VILLARUEL, ET AL., Plaintiffs-Appellees, v. MANILA MOTOR CO., INC. and
ARTURO
COLMENARES, Defendants-Appellants.
Hilado
Ozaeta,

&
Gibbs

Hilado
&

Ozaeta

for

for Appellees.
appellant

company.

Jose L. Gamboa and Napoleon Garcia for appellant Arturo Colmenares.

SYLLABUS

1. INTERNATIONAL LAW; SEQUESTRATION OF PRIVATE PROPERTY BY BELLIGERENT OCCUPANT

RECOGNIZED; LESSOR OF SEIZED PROPERTY LIABLE FOR DISTURBANCE. Under the generally
accepted principles of international law, which are made part of the law of the Philippines, a
belligerent occupant (like the Japanese) may legitimately billet or quarter its troops in privately owned
land and buildings for the duration of its military operations, or as military necessity should demand.
Thus, when the Japanese forces evicted appellant lessee company from the leased buildings and
occupied the same as quarters for its troops, the Japanese authorities acted pursuant to a right
recognized by international and domestic law. Its act of dispossession, therefore, did not constitute a
mere act of trespass (perturbacion de mero hecho) but a trespass under color of title (perturbacion de
derecho) chargeable to the lessors of the seized premises, since the belligerent occupant acted
pursuant
to
a
right
that
the
law
recognizes.
2. ID.; ID.; ID.; LIABILITY OF LESSEE FOR RENTS DURING OCCUPATION OF PROPERTY. Such
dispossession, though not due to the fault of the lessors or lessee nevertheless deprived the lessee
of the enjoyment of the thing leased. Wherefore, the lessees corresponding obligation to pay rentals
ceased
during
such
deprivation.
3. ID.; ID.; ID.; IMPORTER REFUSAL TO ACCEPT RENTS PLACES LESSORS IN DEFAULT; LIABILITY
FOR SUPERVENING RISK. Since the lessee was exempt from paying the rents for the period of its
ouster, the insistence of the lessors to collect the rentals corresponding to said period was
unwarranted and their refusal to accept the currant rents tendered by the lessee was unjustified. Such
refusal places the lessors in default (mora) and they must shoulder the subsequent accidental loss of
the
premises
leased.
4. ID.; ID.; ID.; ID.; ID.; MORA OF LESSORS NOT CURED BY FAILURE OF LESSEE TO CONSIGN
RENTS IN COURT. The mora of the lessors was not cured by the failure of the lessee to make the
consignation of the rejected payments, but the lessee remained obligated to pay the amounts
tendered
and
not
consigned
by
it
in
court.
5. PLEADING AND PRACTICE; CHANGE IN THE RELIEF PRAYED DURING THE PENDENCY OF THE

ACTION. A change in the relief prayed, brought about by circumstances occurring during the
pendency of the action, is not improper. This is justified under Section 2, Rule 17 of the Rules of Court
(on amendments) "to the end that the real matter in dispute and all matters in the action in dispute
between the parties may, as far as possible be completely determined in a single proceeding."cralaw
virtua1aw
library
6. ID.; DISMISSAL WITHOUT PREJUDICE. The dismissal of plaintiffs two causes of action in the
case at bar was premised on the existence of the "Debt Moratorium" which suspended the
enforcement of the obligation up to a certain time. The reference thereto by the court amounted to a
dismissal "without prejudice", since in effect it ruled that the plaintiffs could not, at the time they
sought it, enforce their right of action against the defendants, but they must wait until the moratorium
was lifted. In this way, the court qualified its dismissal.

DECISION

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

Manila Motor Co., Inc., and Arturo Colmenares interpose this appeal against the decision of the Court
of First Instance of Negros Occidental, in its Civil Case No. 648, ordering the defendant Manila Motor
Co., Inc. to pay to the plaintiffs Villaruel the sum of (a) P11,900 with legal interest from May 18, 1953,
on which date, the court below declared invalid the continued operation of the Debt Moratorium,
under the first cause of action; (b) P38,395 with legal interest from the date of filing of the original
complaint on April 26, 1947, on the second cause of action; and against both the Manila Motor Co.,
Inc. and its co-defendant, Arturo Colmenares, the sum of P30,000 to be paid, jointly and severally, with
respect
to
the
third
cause
of
action.
On May 31, 1940, the plaintiffs Villaruel and the defendant Manila Motor Co., Inc. entered into a
contract (Exhibit "A") whereby, the former agreed to convey by way of lease to the latter the following
described
premises;
(a) Five hundred (500) square meters of floor space of a building of strong materials for automobile
showroom,
offices,
and
store
room
for
automobile
spare
parts;
(b)

Another

building

of

strong

materials

for

automobile

repair

shop;

and

(c) A 5-bedroom house of strong materials for residence of the Bacolod Branch Manager of the
defendant
company.
The term of the lease was five (5) years, to commence from the time that the building were delivered
and placed at the disposal of the lessee company, ready for immediate occupancy. The contract was
renewable for an additional period of five (5) years. The Manila Motor Company, in consideration of
the above covenants, agreed to pay to the lessors, or their duly authorized representative, a monthly
rental of Three Hundred (P300) pesos payable in advance before the fifth day of each month, and for
the residential house of its branch manager, a monthly rental not to exceed Fifty (P50) pesos "payable
separately
by
the
Manager."
The leased premises were placed in the possession of the lessee on the 31st day of October, 1940,
from which date, the period of the lease started to run under their agreement.
This situation, the Manila Motor Co., Inc. and its branch manager enjoying the premises, and the
lessors receiving the corresponding rentals as stipulated, continued until the invasion of 1941; and
shortly after the Japanese military occupation of the Provincial Capital of Bacolod the enemy forces

held and used the properties leased as part of their quarters from June 1, 1942 to March 29, 1945,
ousting the lessee therefrom. No payment of rentals were made at any time during the said period.
Immediately upon the liberation of the said city in 1945, the American Forces occupied the same
buildings that were vacated by the Japanese, including those leased by the plaintiffs, until October
31, 1945. Monthly rentals were paid by the said occupants to the owners during the time that they
were in possession, as the same rate that the defendant company used to pay.
Thereafter, when the United States Army finally gave up the occupancy the premises, the Manila
Motor Co., Inc., through their branch manager, Rafael B. Grey, decided to exercise their option to
renew the contract for the additional period of five (5) years, and the parties agreed that the seven
months occupancy by the U. S. Army would not be counted as part of the new 5-year term.
Simultaneously with such renewal, the company sublet the same buildings, except that used for the
residence of the branch manager, to the other defendant, Arturo Colmenares.
However, before resuming the collection of rentals, Dr. Alfredo Villaruel, who was entrusted with the
same, consulted Atty. Luis Hilado on whether they (the lessors) had the right to collect, from the
defendant company, rentals corresponding to the time during which the Japanese military forces had
control over the leased premises. Upon being advised that they had such a right, Dr. Villaruel
demanded payment thereof, but the defendant company refused to pay. As a result, Dr. Villaruel gave
notice seeking the rescission of the contract of lease and the payment of rentals from June 1, 1942 to
March 31, 1945 totalling P11,900. This was also rejected by the defendant company in its letter to
Villaruel,
dated
July
27,
1946.
Sometime on that same month of July, Rafael B. Grey offered to pay to Dr. Villaruel the sum of P350,
for which, tenderer requested a receipt that would state that it was in full payment for the said month.
The latter expressed willingness to accept the tendered amount provided, however, that his
acceptance should be understood to be without prejudice to their demand for the rescission of the
contract, and for increased rentals until their buildings were returned to them. Later, Dr. Villaruel
indicated his willingness to limit the condition of his acceptance to be that "neither the lessee nor the
lessors admit the contention of the other by the mere fact of payment." As no accord could still be
reached between the parties as to the context of the receipt, no payment was thereafter tendered until
the end of November, 1946. On December 4, 1946 (the day after the defendant company notified Dr.
Villaruel by telegram, that it cancelled the power of attorney given to Grey, and that it now authorized
Arturo Colmenares, instead, to pay the rent of P350 each month), the Manila Motor Co., Inc. remitted
to Dr. Villaruel by letter, the sum of P350.90. For this payment, the latter issued a receipt stating that it
was "without prejudice" to their demand for rents in arrears and for the rescission of the contract of
lease.
After it had become evident that the parties could not settle their case amicably, the lessors
commenced this action on April 26, 1947 with the Court of First Instance of Negros Occidental against
the appellants herein. During the pendency of the case, a fire originating from the projection room of
the City Theatre, into which Arturo Colmenares, (the sublessee) had converted the former repair shop
of the Manila Motor Co. Inc., completely razed the building, engulfing also the main building where
Colmenares had opened a soda fountain and refreshment parlor, and made partitions for store spaces
which
he
rented
to
other
persons.
Because of the aforesaid occurrence, plaintiffs demanded reimbursement from the defendants, but
having been refused, they filed a supplemental complaint to include as their third cause of action, the
recovery
of
the
value
of
the
burned
buildings.
Defendants filed their amended answer and also moved for the dismissal of the plaintiffs first and
second causes of action invoking the Debt Moratorium that was then in force. The dismissal was
granted by the trial court on February 5, 1951, but hearing was set as regards the third cause of
action.

On August 11, 1952, the defendant company filed a motion for summary judgment dismissing the
plaintiffs, third cause of action, to which plaintiffs registered objection coupled with a petition for
reconsideration of the order of the court dismissing the first and second causes of action. Pending
the resolution of this incident, plaintiffs, on October 2, 1953, called the courts attention to the
decision in the case of Rutter v. Esteban (93 Phil., 68; 49 Off. Gaz. [5] 1807) invalidating the continued
effectivity of the Moratorium Law (R. A. 342). On November 25, 1953, the trial court denied the
defendant companys motion for summary judgment and set aside its previous order dismissing the
first and second causes of action. The case was accordingly heard and thereafter, judgment was
rendered in plaintiffs favor in the terms set in the opening paragraph of this decision. Thereafter, the
defendants
regularly
appealed
to
this
Court.
The defendants-appellants raise a number of procedural points. The first of these relates to their
contention that the supplemental complaint which included a third cause of action, should not have
been admitted, as it brought about a change in the original theory of the case and that it raised new
issues not theretofore considered. This argument cannot be sustained under the circumstances. This
action was inceptionally instituted for the rescission of the contract of lease and for the recovery of
unpaid rentals before and after liberation. When the leased buildings were destroyed, the plaintiffslessors demanded from the defendants-lessees, instead, the value of the burned premises, basing
their right to do so on defendants alleged default in the payment of post-liberation rentals (which was
also their basis in formerly seeking for rescission). This cannot be considered as already altering the
theory of the case which is merely a change in the relief prayed for, brought about by circumstances
occurring during the pendency of the action, and is not improper. (Southern Pacific Co. v. Conway,
115 F. 2d 746; Suburban Improvement Company v. Scott Lumber Co., 87 A.L.R. 555, 59 F. 2d 711). The
filing of the supplemental complaint can well be justified also under section 2, Rule 17 of the Rules of
Court (on amendments) "to the end that the real matter in dispute and all matters in the action in
dispute between the parties may, as far as possible be completely determined in a single
proceedings." It is to be noted furthermore, that the admission or rejection of this kind of pleadings is
within the sound discretion of the court that will not be disturbed on appeal in the absence of abuse
thereof (see Sec. 5, Rule 17, Rules of Court), especially so, as in this case, where no substantial
procedural
prejudice
is
caused
to
the
adverse
party.
It is urged that the dismissal of the first and second causes of action on February 5, 1951 had the
effect of a dismissal "with prejudice" as the court did not make any qualification in its dismissal order.
Appellants, apparently, lost sight of the fact that the dismissal was premised on the existence of the
"Debt Moratorium" which suspended the enforcement of the obligation up to a certain time. The
reference thereto by the lower court amounted to a dismissal "without prejudice", since in effect it
ruled that the plaintiffs could not, at the time they sought it, enforce their right of action against the
defendants, but plaintiffs must wait until the moratorium was lifted. In this way, the court qualified its
dismissal.
Taking up the case on its merits, it is readily seen that the key to the entire dispute is the question
whether the defendant-appellant Manila Motor Co., Inc. should be held liable for the rentals of the
premises leased corresponding to the lapse of time that they were occupied as quarters or barracks
by the invading Japanese army, and whether said appellant was placed in default by its refusal to
comply with the demand to pay such rents. For if the Motor Company was not so liable, then it never
was in default nor was it chargeable for the accidental lose of the buildings, nor for any damages
except the rental at the contract rate from its reoccupation of the premises leased until the same were
accidentally
destroyed
by
fire
on
March
2,
1948.
The appellees contended, and the court below has held, that the ouster of the lessee company by the
Japanese occupation forces from 1942 until liberation, while operating to deprive the lessee of the
enjoyment of the thing leased, was, nevertheless, a mere act of trespass ("perturbacion de mero
hecho") that, under the Spanish Civil Code of 1889 (in force here until 1950), did not exempt the
lessee from the duty to pay rent. We find that contention and ruling erroneous and untenable.
The pertinent articles of the Civil Code of Spain of 1889 provide:jgc:chanrobles.com.ph

"ART.
1.

1554.

To deliver

to

It
the

shall
lessee

the

be
thing

the
which

is

duty
the

subject

of
matter

the
of

the

lessor;
contract;

2. To make thereon, during the lease, all repairs necessary in order to keep it in serviceable condition
for
the
purpose
for
which
it
was
intended;
3. To maintain the lessee in the peaceful enjoyment of the lease during the entire term of the
contract."cralaw
virtua1aw
library
"ART. 1560. The lessor shall not be liable for any act of mere disturbance of a third person of the use
of the leased property; but the lessee shall have a direct action against the trespasser.
If the third person, be it the Government or a private individual, has acted in reliance upon a right,
such action shall not be deemed a mere act of disturbance." ( Italics supplied)
Under the first paragraph of article 1560 the lessor does not answer for a mere act of trespass
(perturbacion de mero hecho) as distinguished from trespass under color of title (perturbacion de
derecho). As to what would constitute a mere act of trespass, this Court in the case of Goldstein v.
Roces
(34
Phil.
562),
made
this
pronouncement:jgc:chanrobles.com.ph
"Si el hecho perturbador no va acompaado ni precedido de nada que revele una intencion
propiamente juridica en el que lo realiza, de tal suerte que el arrendatario solo pueda apreciar el
hecho material desnudo de toda forma o motivacion de derecho, entendemos que se trata de una
perturbacion
de
mero
hecho."cralaw
virtua1aw
library
Upon the basis of the distinction thus established between the perturbacion de hecho and the
perturbacion de derecho, it is demonstrable that the ouster of the appellant by the Japanese
occupying forces belongs to the second class of disturbances, de derecho. For under the generally
accepted principles of international law (and it must be remembered that those principles are made by
our Constitution a part of the law of our nation 1) a belligerent occupant (like the Japanese in 19421945) may legitimately billet or quarter its troops in privately owned land and buildings for the
duration of its military operations, or as military necessity should demand. The well known writer
Oppenheim, discoursing on the laws of war on land, says upon this topic;
"Immovable private enemy property may under no circumstances or conditions be appropriated by an
invading belligerent. Should he confiscate and sell private land or buildings, the buyer would acquire
no right whatever to the property. Article 46 of the Hague Regulations expressly enacts that private
property may not be confiscated. But confiscation differs from the temporary use of private land and
building for all kinds of purposes demanded by the necessities of war. What has been said above with
regard to utilization of public buildings applies equally to private buildings. If necessary, they may be
converted into hospitals, barracks, and stables without compensation for the proprietors, and they
may also be converted into fortifications. A humane belligerent will not drive the wretched inhabitants
into the street if he can help it. But under the pressure of necessity he may be obliged to do this, and
he is certainly not prohibited from doing it. (Italics supplied) (Oppenheim & Lauterpach, International
Law,
Vol.
II,
p.
312,
1944
Ed.)
The view thus expressed is concurred in by other writers. Hyde (International Law, Vol. 3, p. 1893, 2nd
Rev. Ed.) quotes the U. S. War Department 1940 Rules of Land Warfare (Rule No. 324) to the effect that

"The measure of permissible devastation is found in the strict necessities of war. As an end in itself,
as a separate measure of war, devastation is not sanctioned by the law of war. There must be some
reasonably close connection between the destruction of property and the overcoming of the enemys
army. Thus the rule requiring respect for private property is not violated through damage resulting

from operations, movements, or combats of the army; that is, real estate may be utilized for marches,
camp sites, construction of trenches, etc. Building may be used for shelter for troops, the sick and
wounded, for animals, for reconnaisance, cover defense, etc. Fences, woods, crops, buildings, etc.,
may be demolished, cut down, and removed to clear a field of fire, to construct bridges, to furnish fuel
if
imperatively
needed
for
the
army."
(Emphasis
supplied)
Reference

may

also

be

made

to

Rule

336:jgc:chanrobles.com.ph

"What may be requisitioned. Practically everything may be requisitioned under this article (art. LII
of the regulations above quoted) that is necessary for the maintenance of the army and not of direct
military use, such as fuel, food, forage, clothing, tobacco, printing presses, type, leather, cloth, etc.
Billeting of troops for quarters and subsistence is also authorized." (Emphasis supplied)
And

Forest

and

Tucker

culpa, asi del arrendatario como del arrendador, se vio aqel privado del posible disfrute de la finca
arrendada, y de si por virtud de esta circunstancia este o no exento de la obligacion de abonar la
renta pactada durante el tiempo que subsistio la incautacion; y es indudable la afirmativa en cuanto al
primer extremo, puesto que la sentencia recurrida establece que el hecho de que no funcionase la
industria y estuvieran los locales cerrados no actuo como causa de la requisa de estos por el
Ejercito."cralaw
virtua1aw
library

state:jgc:chanrobles.com.ph

"The belligerent occupant may destroy or appropriate public property which may have a hostile
purpose, as forts, arms, armories, etc. The occupying force may enjoy the income from the public
sources. Strictly private property should be inviolable, exce pt so for as the necessity of war requires
contrary action." (Forest and Tucker, International Law, 9th Ed., p. 277) (Emphasis supplied)
The distinction between confiscation and temporary sequestration of private property by a belligerent
occupant was also passed upon by this Court in Haw Pia v. China Banking Corporation, 80 Phil. 604,
wherein the right of Japan to sequester or take temporary control over enemy private property in the
interest
of
its
military
effort
was
expressly
recognized.
We are thus forced to conclude that in evicting the lessee, Manila Motor Co., Inc. from the leased
buildings and occupying the same as quarters for troops, the Japanese authorities acted pursuant to
a right recognized by international and domestic law. Its act of dispossession, therefore, did not
constitute perturbacion de hecho but a perturbacion de derecho for which the lessors Villaruel (and
not the appellants lessees) were liable (Art. 1560, su pra) and for the consequences of which said
lessors must respond, since the result of the disturbance was the deprivation of the lessee of the
peaceful use and enjoyment of the property leased. Wherefore, the latters corresponding obligation
to
pay
rentals
ceased
during
such
deprivation.
The Supreme Court of Spain, in its Sentencia of 6 December 1944, squarely declared the resolutory
effect of the military sequestration of properties under lease upon the lessees obligation to pay rent
(Jurisprudencia Civil, Segunda Serie, Tomo 8, pp. 583, 608):jgc:chanrobles.com.ph
"Considerando que para resolver acerca de la procedencia del presente recurso es preciso partir de
las bases de hecho sentadas en la sentencia recurrida, y no impugnadas al amparo del nmero 7.
del articulo 1.692 de la Ley de Enjuiciamiento civil, es decir, de que hallandose vigente el contrato de
arrendamiento celebrado entre actor y demandada, en fecha que no se precisa, entre los dias del 18
al 31 de julio de 1936, los locales objeto de dicho contrato de arrendamiento, y en los que no
funcionaba de tiempo anterior la industria para cuyo ejercicio se arrendaron, fueron requisados por el
Ejercito Nacional, con motivo de la guerra civil, para que se instalara en los mismos la Junta de
Donativos al Ejercito del Sur, aun cundo en dicha incautacion, que se hizo a la propiedad de la finca,
no se observaron las formalidades legales, a causa de las circunstancias extraordinarias por que a la
sazon atravesaba Sevilla, hecho que no consta se hiciera saber por los arrendatarios demandados al
actor, pero que fue notorio en aquella capital, donde residia el actor, que de el debio tener
concoimiento. Se estima igualmente por la Sala que el hecho de que la industria no funcionara en el
local no tuvo iufluencia alguna sobre su incautacion por el Ejercito."cralaw virtua1aw library
"Considerando que sobre tales bases de hecho es de desestimar el primer motivo del recurso:
violacion de los articulos 1.254, 1.278 y 1.091 del Codigo civil, que sancionan, en terminos generales,
la eficacia de los contratos, puesto que en el presente caso de los que se trata en definitiva es de
determinar si por virtud de fuerza mayor, la requisa a que se hace referencia, ajena, por lo tanto, a

"Considerando que la sentencia recurrida, en cuanto no da lugar al pago de las rentas

correspondientes al tiempo que duro la incautacion, lejos de infringir, por aplicacion indebida, el art.
1.568 del Codigo civil, se ajusta a la orientacion marcada en el mismo, puesto que este precepto legal
dispone que el arrendatario tiene accion contra el tercero perturbador de mero hecho en la posesion
de la finca arrendada, pero no contra la Administracion o contra los que obran en virtud de un
derecho que les corresponde; y aqui la perturbacion que experimento el arrendador en su posesion,
como consecuencia de la requisa, no puede calificarse como de mero hecho, conforme al citado
articulo, puesto que la finca fue requisada por la autoridad militar para fines de guerra, de donde se
sigue que el arrendatario tenia que soportar la privacion de su tenencia material a traves del
arrendador, con quien ha de entenderse la requisa de la cosa arrendada."cralaw virtua1aw library
In addition, the text of Art. 1560, in its first paragraph (jam quot.) assumes that in case of mere
disturbance (perturbacion de mero hecho) "the lessee shall have a direct action against the
trespasser." This assumption evidently does not contemplate the case of dispossession of the lessee
by a military occupant, as pointed out by Mr. Chief Justice Paras in his dissenting opinion in Reyes v.
Caltex (Phil.) Inc., 84 Phil. 669; for the reason that the lessee could not have a direct action against the
military occupant. It would be most unrealistic to expect that the occupation courts, placed under the
authority of the occupying belligerent, should entertain at the time a suit for forcible entry against the
Japanese army. The plaintiffs, their lawyers, and in all probability, the Judge and court personnel,
would
face
"severest
penalties"
for
such
defiance
of
the
invader.
The present case is distinguishable from Lo Ching v. Archbishop of Manila (81 Phil., 601) in that the
act of the Japanese military involved in the latter case clearly went beyond the limits set by the Hague
Conventions, in seizing the property and delivering it to another private party; and from Reyes v.
Caltex (Phil.) Inc., 84 Phil. 654, in that the rights of the military occupant under international law were
not raised or put in issue in said case; and moreover, the lessee there, by failing to rescind the lease
upon seizure of the premises by the Japanese military, despite the stipulated power to do so,
resumed business and decided to hold unto the long term lease for the balance of its 20-year period,
starting from December 23, 1940. In the case before us, the occupation of the leased property by the
Japanese army covered the major portion of the five-year contractual period, without any option to
rescind
by
the
lessee.
The lessors position is not improved by regarding the military seizure of the property under lease as
a case of force majeure or fortuitous event. Ordinarily, a party may not be held responsible therefor,
despite the fact that it prevented compliance of its obligations. But lease being a contract that calls
for prestations that are both reciprocal and repetitive (tractum successivum), the obligations of either
party are not discharged at any given moment, but must be fulfilled all throughout the term of the
contract. As a result, any substantial failure by one party to fulfill its commitments at any time during
the contract period gives rise to a failure of consideration (causa) for the obligations of the other
party and excuses the latter from the correlative performance, because the causa in lease must exist
not only at the perfection but throughout the term of the contract. No lessee would agree to pay rent
for premises he could not enjoy. As expressed by Marcel Planiol (quoted in 4 Castan, Derecho Civil,
7th
Edition,
p.
264)

"Como la obligacion del arrendador es sucesiva y se renueva todos los dias, la subsistencia del
arrendamiento se hace imposible cuando, por cualquier razon, el arrendador no puede ya procurar al
arrendatario
el
disfrute
de
la
cosa."cralaw
virtua1aw
library
This effect of the failure of reciprocity appears whether the failure is due to fault or to fortuitous

event; the only difference being that in case of fault, the other party is entitled to rescind the contract
in toto, and collect damages, while in casual non-performance it becomes entitled only to a
suspension pro tanto of its own commitments. This rule is recognized in par. 2 of Art. 1558,
authorizing the lessee to demand reduction of the rent in case of repairs depriving him of the
possession of part of the property; and in Art. 1575, enabling the lessee of rural property to demand
reduction of the rent if more than one-half of the fruits are lost by extraordinary fortuitous event. Of
course, where it becomes immediately apparent that the loss of possession or enjoyment will be
permanent, as in the case of accidental destruction of a leased building, the lease contract
terminates.
Applying these principles, the Sentencia of December 1944, already adverted to, ruled as
follows:jgc:chanrobles.com.ph
"Considerando que privado el arrendador, por tal hecho, del disfrute de esta, es menifiesta la
imposibilidad en que se vio de cumplir la tercera de las obligaciones que el impone el articulo 1.554
del Codigo Civil, obligacion (la de mantener al arrendatario en el disfrute de la cosa arrendada) que ha
de entenderse reciproca de la de pago de renta pactada, que impone al arrendatario el nmero
primero del art. 1.555 de dicho Cuerpo legal, y por ello no puede ser exigida."cralaw virtua1aw library
"Considerando que, aunque no sean estrictamente aplicables al caso los articulos 1.124, 1.556 y
1.568, que se citan como infringidos por el recurrente, suponiendo que a ellos ha entendido referirse
la Audiencia (lo que impediria, en todo caso, la estimacion del recurso por este motivo, ya que dichos
articulos no se citan en la sentencia de instancia), es evidente que ellos proclaman la reciprocidad de
las obligaciones entre arrendatario y arrendador, y en este sentido, tratandose de un incumplimiento
inculpable de contrato, pueden servir, como tambien el 1.558, en cuanto preven la reduccion de
rentas o posible restriccion del contrato cuando el arrendatario se ve privado, por obras realizadas en
la finca arrendada, del disfrute de este, de fundamento, con los demas preceptos invocados, a una
extencion de renta mientras subsiste la imposibilidad de utilizar la cosa arrendada, sobre todo
cuando los articulos 157 y 158 del Reglamento de Requisas de 13 de enero de 1921 estatuyen
claramente que les requisas de edificio se hacen a la propiedad, y es el propietario el que puede pedir
indemnizacion, uno de cuyos elementos es el precio del alquiler que le sea satisfecho por el inmueble
incautado."cralaw
virtua1aw
library
We are aware that the rule in the common law is otherwise, due to its regarding a lease as a
conveyance to the lessee of a temporary estate or title to the leased property so that loss of
possession due to war or other fortuitous event leaves the tenant liable for the rent in the absence of
stipulation. The fundamental difference between the common law and the civil law concepts has been
outlined by the United States in Viterbo v. Friedlander, 30 L. Ed. (U.S.) pp. 776, 778, in this
wise:jgc:chanrobles.com.ph
"But as to the nature and effect of a lease for years, at a certain rent which the lessee agrees to pay,
and containing no express covenant on the part of the lessor, the two systems differ materially. The
common law regards such a lease as the grant of an estate for years, which the lessee takes a title in,
end is bound to pay the stipulated rent for, notwithstanding any injury by flood, fire or external
violence, at least unless the injury is such a destruction of the lend as to amount to an eviction; end
by that law the lessor is under no implied covenant to repair, or even that the premises shall be fit for
the purpose for which they are leased. Fowler v. Bott, 6 Mass. 63; 3 Kent, Com. 465, 466; Broom, Legal
Maxims, 3d ed. 213, 214; Doupe v. Genin, 45 N. Y. 119; Kingbury v. Westfall, 61 N. Y. 356. Naumberg v.
Young, 15 Vroom, 331; Bowe v. Hunking, 135 Mass. 380; Manchester Warehouse Co. v. Carr, L.R. 5
C.P.D.
507.
The civil law, on the other hand, regards a lease for years as a mere transfer of the use and enjoyment
of the property; and holds the landlord bound, without any express covenant, to keep it in repair and
otherwise fit for use and enjoyment for the purpose for which it is leased, even when the need of
repair or the unfitness is caused by an inevitable accident, and if he does not do so, the tenant may
have the lease annulled, or the rent abated. Dig. 19, 2, 9, 2; 19, 2, 15, 1, 2; 19, 2, 25, 2; 19, 2, 39; 2

Gomez, Variae Resolutiones c. 3, secs. 1-3, 18, 19: Gregorio Lopes in 5 Partidas, tit. 8, 11. 8, 22;
Domat, Droit Civil, pt. 1, lib. 1, tit. 4, sec. 1, no. 1; sec. 3 nos. 1, 3, 6, Pothier, Contract de Louage, nos.
3,
6,
11,
22,
53,
103,
106,
139-155.
It is accordingly laid down in the Pandects, on the authority of Julian, If anyone has let an estate,
that, even if anything happens by vis major, he must make it good, he must stand by his contract, si
quis fundum locaverit, ut, etiamsi quid vi majore accidisset, hoc ei praestaretur, pacto standum esse;
Dig. 19, 2, 9, 2; and on the authority of Ulpian, that A lease does not change the ownership, non solet
locatio dominium mutare; Dig. 19, 2, 39; and that the lessee has a right of action, if he cannot enjoy
the thing which he has hired, si re quam conduxit frui non liceat, whether because his possession,
either of the whole or of part of the field, is not made good, or a house, or stable or sheepfold, is not
repaired; and the landlord ought to warrant the tenant, dominum colono praestare debere, against
every irresistible force, omnim vim cui resisti non potest, such as floods, flocks of birds, or any like
cause, or invasion of enemies; and if the whole crop should be destroyed by a heavy rainfall, or the
olives should be spoiled by blight, or by extraordinary heat of the sun, solis fervore non assueto, it
would be the loss of the landlord, damnum domini futurum; and so if the field falls in by an
earthquake, for there must be made good to the tenant a field that he can enjoy, o portere enim agrum
praestari conductori, ut frui possit; but if any loss arises from defects in the thing itself, si qua tamen
vitia ex i psa re oriantur, as if wine turns sour, or standing corn is spoiled by worms or weeds, or if
nothing extraordinary happens, si vero nihil extra consuetudinem acciderit, it is the loss of the tenant,
damnum
coloni
asse.
Dig.
19,
2;
15,
1,
2."
(Emphasis
supplied)
In short, the law applies to leases the rule enunciated by the Canonists and the Bartolist School of
Post glossatorse, that "contractus qui tractum successivum habent et de pendentiam de futuro, sub
conditione rebus sic stantibus intelliguntur," they are understood entered subject to the condition
that
things
will
remain
as
they
are,
without
material
change.
It is also worthy of note that the lessors, through Dr. Javier Villaruel, agreed after liberation to a
renewal of the contract of lease for another five years (from June 1, 1946 to May 31 of 1951) without
making any reservation regarding the alleged liability of the lessee company for the rentals
corresponding to the period of occupancy of the premises by the Japanese army, and without
insisting that the non-payment of such rental was a breach of the contract of lease. This passivity of
the lessors strongly supports the claim of the lessees that the rentals in question were verbally
waived. The proffered explanation is that the lessors could not refuse to renew the lease, because the
privilege of renewal had been granted to the lessees in the original contract. Such excuse is
untenable: if the lessors deemed that the contract had been breached by the lessees non-payment of
the occupation rents how could they admit the lessees right to renew a contract that the lessee itself
had
violated?
But this is not all. The lessors accepted payment of current rentals from October 1945 to June 1946. It
was only in July 1946 that they insisted upon collecting also the 1942-1945 rents, and refused to
accept further payments tendered by the lessee unless their right to collect the occupation rental was
recognized or reserved. After refusing the rents from July to November 1946, unless the lessee
recognized their right to occupation rentals, the appellees (lessors) demanded rescission of the
contract and a rental of P1,740 monthly in lieu of the stipulated P350 per month. (Exhibit "C").
This attitude of the lessors was doubly wrongful: first, because as already shown, the dispossession
by the Japanese army exempted the lessee from his obligation to pay rent for the period of its ouster;
and second, because even if the lessee had been liable for that rent, its collection in 1946 was barred
by the moratorium order, Executive Order No. 32, that remained in force until replaced by Rep. Act 342
in 1948. To apply the current rentals to the occupation obligations would amount to enforcing them
contrary
to
the
moratorium
decreed
by
the
government.
Clearly, then, the lessor insistence upon collecting the occupation rentals for 1942-1945 was
unwarranted in law. Hence, their refusal to accept the current rentals without qualification placed
them in default (mora creditoris or acci piendi) with the result that thereafter, they had to bear all

supervening risks of accidental injury or destruction of the leased premises. While not expressly
declared by the Code of 1889, this result is clearly inferable from the nature and effects of mora, and
from
Articles
1185,
1452
[par.
3]
and
1589).

(d) That the lessors were not justified in refusing to accept the tender of current rentals unless the
lessee should recognize their right to the rents corresponding to the period that the lessee was not in
possession;

"ART. 1185. When the obligation to deliver a certain and determinate thing arises from the
commission of a crime or misdemeanor the obligor shall not be exempted from the payment of its
value, whatever the cause of its loss may have been, unless, having offered the thing to the person
entitled to receive it, the latter should have refused without reason to accept it."cralaw virtua1aw
library

(e) That by their improper refusal to accept the current rents tendered by the lessee, the lessors
incurred in default (mora) and they must shoulder the subsequent accidental loss of the premises
leased;

"Art.

(f) That the mora of the lessors was not cured by the failure of the lessee to make the consignation of
the rejected payments, but the lessee remained obligated to pay the amounts tendered and not
consigned
by
it
in
court.

1452.

If fungible things should be sold for a price fixed with relation to weight, number, or measure, they
shall not be at the purchasers risk until they have been weighed, counted, or measured, unless the
purchaser
should
be
in
default."cralaw
virtua1aw
library
"ART. 1589. If the person who contracted to do the work bound himself to furnish the materials, he
shall bear the loss in case of the destruction of the work before it is delivered, unless its acceptance
has been delayed by the default of the other party."cralaw virtua1aw library
While there is a presumption that the loss of the thing leased is due to the fault of the lessee (Civil
Code of 1889, Art. 1563), it is noteworthy that the lessors have not invoked that presumption either
here or in the court below. On the contrary, the parties and the trial court have all proceeded and
discussed the issues taking for granted that the destruction of the leased buildings was purely
fortuitous. We see no reason for departing from that assumption and further prolonging this litigation.
That the lessee and sublessee did not consign or deposit in court the rentals tendered to and
improperly rejected by the lessors, did not render the debtor liable for default (mora solvendi) nor
answerable for fortuitous events because, as explained by the Supreme Court of Spain in its
Sentencia
of
5
June
1944

"Al exigir el art. 1176 del Codigo Civil la consignacion para liberar al deudor no quiere decir que
necesariamente haya de practicarse, y no baste el ofrecimiento de pago que de aquella no fuere
seguido, a efectos de exclusion ds las consecuencias de la mora solvendi." (8 Manresa, Comentarios,
5th
Ed.,
Vol.
I,
p.
136).
In other words, the only effect of the failure to consign the rentals in court was that the obligation to
pay them subsisted (P.N.B. v. Relativo, 92 Phil., 203) and the lessee remained liable for the amount of
the unpaid contract rent, corresponding to the period from July to November, 1946; it being
undisputed that, from December 1946 up to March 2, 1948, when the commercial buildings were
burned, the defendants-appellants have paid the contract rentals at the rate of P350 per month. But
the failure to consign did not eradicate the default (mora) of the lessors nor the risk of loss that lay
upon them. (3 Castan, Der. Civ., 8th Ed., p. 145; 4 Puig Pea, Der. Civ., part. 1, p. 234; Diaz Pairo, Teoria
Gen.
de
las
Obligaciones
[3rd
Ed.
],
Vol.
1,
pp.
192-193).
In

view

of

the

foregoing,

we

hold:chanrob1es

virtual

1aw

library

(a) That the dispossession of the lessee from the premises by the Japanese army of occupation was
not an act of mere trespass (perturbacion de mero hecho) but one de derecho chargeable to the
lessors;
(b) That such dispossession, though not due to fault of lessors or lessee, nevertheless resulted in the
exemption of the lessee from its obligation to pay rent during the period that it was deprived of the
possession
and
enjoyment
of
the
premises
leased;
(c)

That

the

insistence

of

the

lessors

to

collect

such

rentals

was

unwarranted;

Consequently, it was reversible error to sentence the appellants to pay P2,165 a month as reasonable
value of the occupation of the premises from July 1946, and the value of the destroyed buildings
amounting
to
P30,000.
Wherefore, the decision appealed from is modified in the sense that the appellant Manila Motor
Company should pay to the appellees Villaruel only the rents for the leased premises corresponding
to the period from July up to November 1946, at the rate of P350 a month, or a total of P1,750. Costs
against
appellees
in
both
instances.
So
ordered.
Paras, C.J., Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion and Endencia, JJ.,
concur.
G.R. No. L-45710 October 3, 1985
CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE
DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island
Savings
Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the decision of the Court of
Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February 15,
1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent Sulpicio M.
Tolentino for injunction, specific performance or rescission, and damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las
Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title
the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semiannual installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M.
Tolentino shall use the loan proceeds solely as an additional capital to develop his other property into
a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and
Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12%
annual interest, payable within 3 years from the date of execution of the contract at semi-annual
installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a 6-month
period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this prededucted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the
Bank that there was no fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The
Bank, thru its vice-president and treasurer, promised repeatedly the release of the P63,000.00 balance
(p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was
suffering liquidity problems, issued Resolution No. 1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities,
the Board, by unanimous vote, decided as follows:
1) To prohibit the bank from making new loans and investments [except investments in government
securities] excluding extensions or renewals of already approved loans, provided that such
extensions or renewals shall be subject to review by the Superintendent of Banks, who may impose
such limitations as may be necessary to insure correction of the bank's deficiency as soon as
possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the
required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings
Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to
take charge of the assets of Island Savings Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage
covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for
January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan
for injunction, specific performance or rescission and damages with preliminary injunction, alleging
that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is
entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with
interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the
real estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary
restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the
mortgage (pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of
the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central
Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the
amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining
order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of
First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific
performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor
collect the P17,000.00 loan pp. 30-:31. rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be
foreclosed to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on
April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46
[1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready
and willing to perform his part of the contract, the other party who has not performed or is not ready
and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he
signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings
Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan
started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central
Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing
further business. Such prohibition made it legally impossible for Island Savings Bank to furnish the

P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent
banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect
on June 15, 1948, the validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans and investments, and nowhere did it
prohibit island Savings Bank from releasing the balance of loan agreements previously contracted.
Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the
contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs.
Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an
excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract by
him (vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken
as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the
advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that only
P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a
non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was an
exercise of his right to it, which right exist independently of his right to demand the completion of the
P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the exercise of the
other.
The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot
exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This
Court previously ruled that bank officials and employees are expected to exercise caution and
prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151
[1981]). It is the obligation of the bank's officials and employees that before they approve the loan
application of their customers, they must investigate the existence and evaluation of the properties
being offered as a loan security. The recent rush of events where collaterals for bank loans turn out to
be non-existent or grossly over-valued underscore the importance of this responsibility. The mere
reliance by bank officials and employees on their customer's representation regarding the loan
collateral being offered as loan security is a patent non-performance of this responsibility. If ever
bank officials and employees totally reIy on the representation of their customers as to the valuation
of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued. The
representation made by the customer is immaterial to the bank's responsibility to conduct its own
investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined
petitioners from presenting proof on the alleged over-valuation because of their failure to raise the
same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by
the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded either in
a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same
issue before the Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case. But since Island Savings Bank is now
prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant
specific performance in favor of Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such amount
is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the partial
release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note to cover
it, the bank was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan.
The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00
loan when it falls due. His failure to pay the overdue amortizations under the promissory note made
him a party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If there is a
right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings
Bank. If Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within

3 years, he would be entitled to ask for rescission of the entire loan because he cannot possibly be in
default as there was no date for him to perform his reciprocal obligation to pay.
Since both parties were in default in the performance of their respective reciprocal obligations, that is,
Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated,
they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE
rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by
the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not
paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00
debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino
derived some benefit for his use of the P17,000.00, it is just that he should account for the interest
thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed
to satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same as that of the
principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration
of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate
mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid,
voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was
then in existence, as there was no debt yet because Island Savings Bank had not made any release on
the loan, does not make the real estate mortgage void for lack of consideration. It is not necessary
that any consideration should pass at the time of the execution of the contract of real mortgage
(Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the
consideration is subsequent to the mortgage, the mortgage can take effect only when the debt
secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in
the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration, the
mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p.
82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the
mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more
than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed.,
Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75%
of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of
78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the
P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be divided among the successors in
interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of other heirs who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes
several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of
indivisibility of a mortgage cannot apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY
MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE
SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE

PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT
COUNTED FROM AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25
HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN
FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.
NO COSTS. SO ORDERED.
[G.R.
No.
L-27454.
April
30,
1970.]
ROSENDO

O.

Chaves,

CHAVES, Plaintiff-Appellant,
Elio,

Chaves

v.
&

FRUCTUOSO

GONZALES, Defendant-Appellee.

Associates,

for Plaintiff-Appellant.

Sulpicio E. Platon, for Defendant-Appellee.

SYLLABUS

1. CIVIL LAW; CONTRACTS; BREACH OF CONTRACT FOR NON-PERFORMANCE; FIXING OF PERIOD

BEFORE FILING OF COMPLAINT FOR NON-PERFORMANCE, ACADEMIC. Where the time for
compliance had expired and there was breach of contract by non-performance, it was academic for
the plaintiff to have first petitioned the court to fix a period for the performance of the contract before
filing
his
complaint.
2. ID.; ID.; ID.; DEFENDANT CANNOT INVOKE ARTICLE 1197 OF THE CIVIL CODE OF THE
PHILIPPINES. Where the defendant virtually admitted non-performance of the contract by returning
the typewriter that he was obliged to repair in a non-working condition, with essential parts missing,
Article 1197 of the Civil Code of the Philippines cannot be invoked. The fixing of a period would thus
be
a
mere
formality
and
would
serve
no
purpose
than
to
delay.
3. ID.; ID.; ID.; DAMAGES RECOVERABLE; CASE AT BAR. Where the defendant-appellee
contravened the tenor of his obligation because he not only did not repair the typewriter but returned
it "in shambles, he is liable for the cost of the labor or service expended in the repair of the
typewriter, which is in the amount of P58.75, because the obligation or contract was to repair it. In
addition, he is likewise liable under Art. 1170 of the Code, for the cost of the missing parts, in the
amount of P31.10, for in his obligation to repair the typewriter he was bound, but failed or neglected,
to
return
it
in
the
same
condition
it
was
when
he
received
it.
4. ID.; ID.; ID.; CLAIMS FOR DAMAGES OR ATTORNEYS FEES NOT RECOVERABLE; NOT ALLEGED
OR PROVED IN INSTANT CASE. Claims for damages and attorneys fees must be pleaded, and the
existence of the actual basis thereof must be proved. As no findings of fact were made on the claims
for damages and attorneys fees, there is no factual basis upon which to make an award therefor.
5. REMEDIAL LAW; APPEALS; APPEAL FROM COURT OF FIRST INSTANCE TO SUPREME COURT;
ONLY QUESTIONS OF LAW REVIEWABLE. Where the appellant directly appeals from the decision
of the trial court to the Supreme Court on questions of law, he is bound by the judgment of the court a
quo on its findings of fact.

DECISION

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

This is a direct appeal by the party who prevailed in a suit for breach of oral contract and recovery of
damages but was unsatisfied with the decision rendered by the Court of First Instance of Manila, in its
Civil Case No. 65138, because it awarded him only P31.10 out of his total claim of P690 00 for actual,
temperate
and
moral
damages
and
attorneys
fees.
The appealed judgment, which is brief, is hereunder quoted in full:jgc:chanrobles.com.ph
"In the early part of July, 1963, the plaintiff delivered to the defendant, who is a typewriter repairer, a
portable typewriter for routine cleaning and servicing. The defendant was not able to finish the job
after some time despite repeated reminders made by the plaintiff. The defendant merely gave
assurances, but failed to comply with the same. In October, 1963, the defendant asked from the
plaintiff the sum of P6.00 for the purchase of spare parts, which amount the plaintiff gave to the
defendant. On October 26, 1963, after getting exasperated with the delay of the repair of the
typewriter, the plaintiff went to the house of the defendant and asked for the return of the typewriter.
The defendant delivered the typewriter in a wrapped package. On reaching home, the plaintiff
examined the typewriter returned to him by the defendant and found out that the same was in
shambles, with the interior cover and some parts and screws missing. On October 29, 1963. the
plaintiff sent a letter to the defendant formally demanding the return of the missing parts, the interior
cover and the sum of P6.00 (Exhibit D). The following day, the defendant returned to the plaintiff some
of
the
missing
parts,
the
interior
cover
and
the
P6.00.
"On August 29, 1964, the plaintiff had his typewriter repaired by Freixas Business Machines, and the
repair job cost him a total of P89.85, including labor and materials (Exhibit C).
"On August 23, 1965, the plaintiff commenced this action before the City Court of Manila, demanding
from the defendant the payment of P90.00 as actual and compensatory damages, P100.00 for
temperate damages, P500.00 for moral damages, and P500.00 as attorneys fees.
"In his answer as well as in his testimony given before this court, the defendant made no denials of
the facts narrated above, except the claim of the plaintiff that the typewriter was delivered to the
defendant through a certain Julio Bocalin, which the defendant denied allegedly because the
typewriter
was
delivered
to
him
personally
by
the
plaintiff.
"The repair done on the typewriter by Freixas Business Machines with the total cost of P89.85 should
not, however, be fully chargeable against the defendant. The repair invoice, Exhibit C, shows that the
missing
parts
had
a
total
value
of
only
P31.10.
"WHEREFORE, judgment is hereby rendered ordering the defendant to pay the plaintiff the sum of
P31.10,
and
the
costs
of
suit.
"SO

ORDERED."cralaw

virtua1aw

library

The error of the court a quo, according to the plaintiff-appellant, Rosendo O. Chaves, is that it
awarded only the value of the missing parts of the typewriter, instead of the whole cost of labor and
materials that went into the repair of the machine, as provided for in Article 1167 of the Civil Code,
reading
as
follows:jgc:chanrobles.com.ph
"ART. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the obligation.
Furthermore it may be decreed that what has been poorly done he undone."cralaw virtua1aw library
On the other hand, the position of the defendant-appellee, Fructuoso Gonzales, is that he is not liable
at all, not even for the sum of P31.10, because his contract with plaintiff-appellant did not contain a

period, so that plaintiff-appellant should have first filed a petition for the court to fix the period, under
Article 1197 of the Civil Code, within which the defendant appellee was to comply with the contract
before
said
defendant-appellee
could
be
held
liable
for
breach
of
contract.
Because the plaintiff appealed directly to the Supreme Court and the appellee did not interpose any
appeal, the facts, as found by the trial court, are now conclusive and non-reviewable. 1
The appealed judgment states that the "plaintiff delivered to the defendant . . . a portable typewriter
for routine cleaning and servicing" ; that the defendant was not able to finish the job after some time
despite repeated reminders made by the plaintiff" ; that the "defendant merely gave assurances, but
failed to comply with the same" ; and that "after getting exasperated with the delay of the repair of the
typewriter", the plaintiff went to the house of the defendant and asked for its return, which was done.
The inferences derivable from these findings of fact are that the appellant and the appellee had a
perfected contract for cleaning and servicing a typewriter; that they intended that the defendant was
to finish it at some future time although such time was not specified; and that such time had passed
without the work having been accomplished, far the defendant returned the typewriter cannibalized
and unrepaired, which in itself is a breach of his obligation, without demanding that he should be
given more time to finish the job, or compensation for the work he had already done. The time for
compliance having evidently expired, and there being a breach of contract by non-performance, it was
academic for the plaintiff to have first petitioned the court to fix a period for the performance of the
contract before filing his complaint in this case. Defendant cannot invoke Article 1197 of the Civil
Code for he virtually admitted non-performance by returning the typewriter that he was obliged to
repair in a non-working condition, with essential parts missing. The fixing of a period would thus be a
mere formality and would serve no purpose than to delay (cf. Tiglao. Et. Al. V. Manila Railroad Co. 98
Phil.
18l).
It is clear that the defendant-appellee contravened the tenor of his obligation because he not only did
not repair the typewriter but returned it "in shambles", according to the appealed decision. For such
contravention, as appellant contends, he is liable under Article 1167 of the Civil Code. jam quot, for
the cost of executing the obligation in a proper manner. The cost of the execution of the obligation in
this case should be the cost of the labor or service expended in the repair of the typewriter, which is
in the amount of P58.75. because the obligation or contract was to repair it.
In addition, the defendant-appellee is likewise liable, under Article 1170 of the Code, for the cost of the
missing parts, in the amount of P31.10, for in his obligation to repair the typewriter he was bound, but
failed or neglected, to return it in the same condition it was when he received it.
Appellants claims for moral and temperate damages and attorneys fees were, however, correctly
rejected by the trial court, for these were not alleged in his complaint (Record on Appeal, pages 1-5).
Claims for damages and attorneys fees must be pleaded, and the existence of the actual basis
thereof must be proved. 2 The appealed judgment thus made no findings on these claims, nor on the
fraud or malice charged to the appellee. As no findings of fact were made on the claims for damages
and attorneys fees, there is no factual basis upon which to make an award therefor. Appellant is
bound by such judgment of the court, a quo, by reason of his having resorted directly to the Supreme
Court
on
questions
of
law.
IN VIEW OF THE FOREGOING REASONS, the appealed judgment is hereby modified, by ordering the
defendant-appellee to pay, as he is hereby ordered to pay, the plaintiff-appellant the sum of P89.85,
with interest at the legal rate from the filing of the complaint. Costs in all instances against appellee
Fructuoso Gonzales.
G.R. No. 73867 February 29, 1988
TELEFAST
COMMUNICATIONS/PHILIPPINE
WIRELESS,
INC., petitioner,
vs.
IGNACIO CASTRO, SR., SOFIA C. CROUCH, IGNACIO CASTRO JR., AURORA CASTRO, SALVADOR
CASTRO, MARIO CASTRO, CONRADO CASTRO, ESMERALDA C. FLORO, AGERICO CASTRO,

ROLANDO CASTRO, VIRGILIO CASTRO AND GLORIA CASTRO, and HONORABLE INTERMEDIATE
APPELLATE COURT, respondents.
PADILLA, J.:
Petition for review on certiorari of the decision * of the Intermediate Appellate Court, dated 11
February 1986, in AC-G.R. No. CV-70245, entitled "Ignacio Castro, Sr., et al., PlaintiffsAppellees, versus Telefast Communication/Philippine Wireless, Inc., Defendant-Appellant."
The facts of the case are as follows:
On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr. and mother of the
other plaintiffs, passed away in Lingayen, Pangasinan. On the same day, her daughter Sofia C.
Crouch, who was then vacationing in the Philippines, addressed a telegram to plaintiff Ignacio Castro,
Sr. at 685 Wanda, Scottsburg, Indiana, U.S.A., 47170 announcing Consolacion's death. The telegram
was accepted by the defendant in its Dagupan office, for transmission, after payment of the required
fees or charges.
The telegram never reached its addressee. Consolacion was interred with only her daughter Sofia in
attendance. Neither the husband nor any of the other children of the deceased, then all residing in the
United States, returned for the burial.
When Sofia returned to the United States, she discovered that the wire she had caused the defendant
to send, had not been received. She and the other plaintiffs thereupon brought action for damages
arising from defendant's breach of contract. The case was filed in the Court of First Instance of
Pangasinan and docketed therein as Civil Case No. 15356. The only defense of the defendant was that
it was unable to transmit the telegram because of "technical and atmospheric factors beyond its
control." 1 No evidence appears on record that defendant ever made any attempt to advise the plaintiff
Sofia C. Crouch as to why it could not transmit the telegram.
The Court of First Instance of Pangasinan, after trial, ordered the defendant (now petitioner) to pay the
plaintiffs (now private respondents) damages, as follows, with interest at 6% per annum:
1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and P20,000.00 as moral
damages.
2. Ignacio Castro Sr., P20,000.00 as moral damages.
3. Ignacio Castro Jr., P20,000.00 as moral damages.
4. Aurora Castro, P10,000.00 moral damages.
5. Salvador Castro, P10,000.00 moral damages.
6. Mario Castro, P10,000.00 moral damages.
7. Conrado Castro, P10,000 moral damages.
8. Esmeralda C. Floro, P20,000.00 moral damages.
9. Agerico Castro, P10,000.00 moral damages.
10. Rolando Castro, P10,000.00 moral damages.
11. Virgilio Castro, P10,000.00 moral damages.
12. Gloria Castro, P10,000.00 moral damages.
Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in the amount of
P1,000.00 to each of the plaintiffs and costs. 2
On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's decision but
eliminated the award of P16,000.00 as compensatory damages to Sofia C. Crouch and the award of
P1,000.00 to each of the private respondents as exemplary damages. The award of P20,000.00 as
moral damages to each of Sofia C. Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also
reduced to P120,000. 00 for each. 3
Petitioner appeals from the judgment of the appellate court, contending that the award of moral
damages should be eliminated as defendant's negligent act was not motivated by "fraud, malice or
recklessness."
In other words, under petitioner's theory, it can only be held liable for P 31.92, the fee or charges paid
by Sofia C. Crouch for the telegram that was never sent to the addressee thereof.
Petitioner's contention is without merit.
Art. 1170 of the Civil Code provides that "those who in the performance of their obligations are guilty
of fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable for
damages." Art. 2176 also provides that "whoever by act or omission causes damage to another, there
being fault or negligence, is obliged to pay for the damage done."

In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a contract whereby,
for a fee, petitioner undertook to send said private respondent's message overseas by telegram. This,
petitioner did not do, despite performance by said private respondent of her obligation by paying the
required charges. Petitioner was therefore guilty of contravening its obligation to said private
respondent and is thus liable for damages.
This liability is not limited to actual or quantified damages. To sustain petitioner's contrary position in
this regard would result in an inequitous situation where petitioner will only be held liable for the
actual cost of a telegram fixed thirty (30) years ago.
We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral damages include
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation,
moral damages may be recovered if they are the proximate results of the defendant's wrongful act or
omission." (Emphasis supplied).
Here, petitioner's act or omission, which amounted to gross negligence, was precisely the cause of
the suffering private respondents had to undergo.
As the appellate court properly observed:
[Who] can seriously dispute the shock, the mental anguish and the sorrow that the overseas children
must have suffered upon learning of the death of their mother after she had already been interred,
without being given the opportunity to even make a choice on whether they wanted to pay her their
last respects? There is no doubt that these emotional sufferings were proximately caused by
appellant's omission and substantive law provides for the justification for the award of moral
damages. 4
We also sustain the trial court's award of P16,000.00 as compensatory damages to Sofia C. Crouch
representing the expenses she incurred when she came to the Philippines from the United States to
testify before the trial court. Had petitioner not been remiss in performing its obligation, there would
have been no need for this suit or for Mrs. Crouch's testimony.
The award of exemplary damages by the trial court is likewise justified and, therefore, sustained in the
amount of P1,000.00 for each of the private respondents, as a warning to all telegram companies to
observe due diligence in transmitting the messages of their customers.
WHEREFORE, the petition is DENIED. The decision appealed from is modified so that petitioner is
held liable to private respondents in the following amounts:
(1) P10,000.00 as moral damages, to each of private respondents;
(2) P1,000.00 as exemplary damages, to each of private respondents;
(3) P16,000.00 as compensatory damages, to private respondent Sofia C. Crouch;
(4) P5,000.00 as attorney's fees; and
(5) Costs of suit.
SO ORDERED.
G.R. No. L-15645
January 31, 1964
PAZ
P.
ARRIETA
and
VITALIADO
ARRIETA, plaintiffs-appellees,
vs.
NATIONAL
RICE
AND
CORN
CORPORATION, defendant-appellant,
MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee.
Teehankee
and
Carreon
for
plaintiffs-appellees.
The
Government
Corporate
Counsel
for
defendant-appellant.
Isidro A. Vera for defendant-appellee.
REGALA, J.:
This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated February
20, 1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages for breach of
contract and dismissing the counterclaim and third party complaint of the defendant-appellant NARIC.
In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn Administration
(NARIC) is hereby abolished and all its assets, liabilities, functions, powers which are not inconsistent
with the provisions of this Act, and all personnel are transferred "to the Rice and Corn Administration
(RCA).
All references, therefore, to the NARIC in this decision must accordingly be adjusted and read as RCA
pursuant to the aforementioned law.

On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the
supply of 20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the lowest, she
was awarded the contract for the same. Accordingly, on July 1, 1952, plaintiff-appellee Paz P. Arrieta
and the appellant corporation entered into a Contract of Sale of Rice, under the terms of which the
former obligated herself to deliver to the latter 20,000 metric tons of Burmess Rice at $203.00 per
metric ton, CIF Manila. In turn, the defendant corporation committed itself to pay for the imported rice
"by means of an irrevocable, confirmed and assignable letter of credit in U.S. currency in favor of the
plaintiff-appellee and/or supplier in Burma, immediately." Despite the commitment to pay immediately
"by means of an irrevocable, confirmed and assignable Letter of Credit," however, it was only on July
30, 1952, or a full month from the execution of the contract, that the defendant corporation, thru its
general manager, took the first to open a letter of credit by forwarding to the Philippine National Bank
its Application for Commercial Letter Credit. The application was accompanied by a transmittal letter,
the relevant paragraphs of which read:
In view of the fact that we do not have sufficient deposit with your institution with which to cover the
amount required to be deposited as a condition for the opening of letters of credit, we will appreciate
it if this application could be considered special case.
We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August 4, 1952,
and in order to comply therewith, it is imperative that the L/C be opened prior to that date. We would
therefore request your full cooperation on this matter.
On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the appellant corporation of
the extreme necessity for the immediate opening of the letter credit since she had by then made a
tender to her supplier in Rangoon, Burma, "equivalent to 5% of the F.O.B. price of 20,000 tons at
$180.70 and in compliance with the regulations in Rangoon this 5% will be confiscated if the required
letter of credit is not received by them before August 4, 1952."
On August 4, 1952, the Philippine National Bank informed the appellant corporation that its
application, "for a letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by the
Board of Directors with the condition that marginal cash deposit be paid and that drafts are to be paid
upon presentment." (Exh. J-pl.; Exh. 10-def., p. 19, Folder of Exhibits). Furthermore, the Bank
represented that it "will hold your application in abeyance pending compliance with the above stated
requirement."
As it turned out, however, the appellant corporation not in any financial position to meet the
condition. As matter of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the
appellee its dilemma: "In this connection, please be advised that our application for opening of the
letter of credit has been presented to the bank since July 30th but the latter requires that we first
deposit 50% of the value of the letter amounting to aproximately $3,614,000.00 which we are not in a
position to meet." (Emphasis supplied. Exh. 9-Def.; Exh. 1-Pe., p. 18, Folder of Exhibits)
Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor of
Thiri Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than two months
from the execution of the contract) the party named by the appellee as beneficiary of the letter of
credit.1wph1.t
As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the 5%
deposit, amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this connection, it
must be made of record that although the Burmese authorities had set August 4, 1952, as the deadline
for the remittance of the required letter of credit, the cancellation of the allocation and the
confiscation of the 5% deposit were not effected until August 20, 1952, or, a full half month after the
expiration of the deadline. And yet, even with the 15-day grace, appellant corporation was unable to
make good its commitment to open the disputed letter of credit.
The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the
futility of reinstating the same became apparent, she offered to substitute Thailand rice instead to the
defendant NARIC, communicating at the same time that the offer was "a solution which should be
beneficial to the NARIC and to us at the same time." (Exh. X-Pe., Exh. 25Def., p. 38, Folder of
Exhibits). This offer for substitution, however, was rejected by the appellant in a resolution dated
November 15, 1952.
On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the
damages caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit. The
demand having been rejected she instituted this case now on appeal.

At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance
Company was brought to the suit as a third party defendant to hold it liable on the performance bond
it executed in favor of the plaintiff-appellee.
We find for the appellee.
It is clear upon the records that the sole and principal reason for the cancellation of the allocation
contracted by the appellee herein in Rangoon, Burma, was the failure of the letter of credit to be
opened with the contemplated period. This failure must, therefore, be taken as the immediate cause
for the consequent damage which resulted. As it is then, the disposition of this case depends on a
determination of who was responsible for such failure. Stated differently, the issue is whether
appellant's failure to open immediately the letter of credit in dispute amounted to a breach of the
contract of July 1, 1952 for which it may be held liable in damages.
Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit. On
the contrary, it insists that the fault lies with the appellee. Appellant contends that the disputed
negotiable instrument was not promptly secured because the appellee , failed to seasonably furnish
data necessary and required for opening the same, namely, "(1) the amount of the letter of credit, (2)
the person, company or corporation in whose favor it is to be opened, and (3) the place and bank
where it may be negotiated." Appellant would have this Court believe, therefore, that had these
informations been forthwith furnished it, there would have been no delay in securing the instrument.
Appellant's explanation has neither force nor merit. In the first place, the explanation reaches into an
area of the proceedings into which We are not at liberty to encroach. The explanation refers to a
question of fact. Nothing in the record suggests any arbitrary or abusive conduct on the part of the
trial judge in the formulation of the ruling. His conclusion on the matter is sufficiently borne out by
the evidence presented. We are denied, therefore, the prerogative to disturb that finding, consonant to
the time-honored tradition of this Tribunal to hold trial judges better situated to make conclusions on
questions of fact. For the record, We quote hereunder the lower court's ruling on the point:
The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff to
name the supplier, the amount and the bank is not tenable. Plaintiff stated in Court that these facts
were known to defendant even before the contract was executed because these facts were
necessarily revealed to the defendant before she could qualify as a bidder. She stated too that she
had given the necessary data immediately after the execution of Exh. "A" (the contract of July 1, 1952)
to Mr. GABRIEL BELMONTE, General Manager of the NARIC, both orally and in writing and that she
also pressed for the opening of the letter of credit on these occasions. These statements have not
been controverted and defendant NARIC, notwithstanding its previous intention to do so, failed to
present Mr. Belmonte to testify or refute this. ...
Secondly, from the correspondence and communications which form part of the record of this case, it
is clear that what singularly delayed the opening of the stipulated letter of credit and which, in turn,
caused the cancellation of the allocation in Burma, was the inability of the appellant corporation to
meet the condition importation by the Bank for granting the same. We do not think the appellant
corporation can refute the fact that had it been able to put up the 50% marginal cash deposit
demanded by the bank, then the letter of credit would have been approved, opened and released as
early as August 4, 1952. The letter of the Philippine National Bank to the NARIC was plain and explicit
that as of the said date, appellant's "application for a letter of credit ... has been approved by the
Board of Directors with the condition that 50% marginal cash deposit be paid and that drafts are to be
paid upon presentment." (Emphasis supplied)
The liability of the appellant, however, stems not alone from this failure or inability to satisfy the
requirements of the bank. Its culpability arises from its willful and deliberate assumption of
contractual obligations even as it was well aware of its financial incapacity to undertake the
prestation. We base this judgment upon the letter which accompanied the application filed by the
appellant with the bank, a part of which letter was quoted earlier in this decision. In the said
accompanying correspondence, appellant admitted and owned that it did "not have sufficient deposit
with your institution (the PNB) with which to cover the amount required to be deposited as a condition
for the opening of letters of credit. ... .
A number of logical inferences may be drawn from the aforementioned admission. First, that the
appellant knew the bank requirements for opening letters of credit; second, that appellant also knew it
could not meet those requirement. When, therefore, despite this awareness that was financially
incompetent to open a letter of credit immediately, appellant agreed in paragraph 8 of the contract to

pay immediately "by means of an irrevocable, confirm and assignable letter of credit," it must be
similarly held to have bound itself to answer for all and every consequences that would result from
the representation. aptly observed by the trial court:
... Having called for bids for the importation of rice involving millions, $4,260,000.00 to be exact, it
should have a certained its ability and capacity to comply with the inevitably requirements in cash to
pay for such importation. Having announced the bid, it must be deemed to have impliedly assured
suppliers of its capacity and facility to finance the importation within the required period, especially
since it had imposed the supplier the 90-day period within which the shipment of the rice must be
brought into the Philippines. Having entered in the contract, it should have taken steps immediately to
arrange for the letter of credit for the large amount involved and inquired into the possibility of its
issuance.
In relation to the aforequoted observation of the trial court, We would like to make reference also to
Article 11 of the Civil Code which provides:
Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof, are liable in damages.
Under this provision, not only debtors guilty of fraud, negligence or default in the performance of
obligations a decreed liable; in general, every debtor who fails in performance of his obligations is
bound to indemnify for the losses and damages caused thereby (De la Cruz Seminary of Manila, 18
Phil. 330; Municipality of Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz, 37 Phil. 982;
Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando v. Gimenez, 54 Phil.
459; Acme Films v. Theaters Supply, 63 Phil. 657). The phrase "any manner contravene the tenor" of
the obligation includes any illicit act which impairs the strict and faithful fulfillment of the obligation
or every kind or defective performance. (IV Tolentino, Civil Code of the Philippines, citing authorities,
p. 103.)
The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for
the originally contracted Burmese rice amounted to a waiver by the appellee of whatever rights she
might have derived from the breach of the contract. We disagree. Waivers are not presumed, but must
be clearly and convincingly shown, either by express stipulation or acts admitting no other
reasonable explanation. (Ramirez v. Court of Appeals, 52 O.G. 779.) In the case at bar, no such intent
to waive has been established.
We have carefully examined and studied the oral and documentary evidence presented in this case
and upon which the lower court based its award. Under the contract, the NARIC bound itself to buy
20,000 metric tons of Burmese rice at "$203.00 U.S. Dollars per metric ton, all net shipped weight, and
all in U.S. currency, C.I.F. Manila ..." On the other hand, documentary and other evidence establish
with equal certainty that the plaintiff-appellee was able to secure the contracted commodity at the
cost price of $180.70 per metric ton from her supplier in Burma. Considering freights, insurance and
charges incident to its shipment here and the forfeiture of the 5% deposit, the award granted by the
lower court is fair and equitable. For a clearer view of the equity of the damages awarded, We
reproduce below the testimony of the appellee, adequately supported by the evidence and record:
Q. Will you please tell the court, how much is the damage you suffered?
A. Because the selling price of my rice is $203.00 per metric ton, and the cost price of my rice is
$180.00 We had to pay also $6.25 for shipping and about $164 for insurance. So adding the cost of the
rice, the freight, the insurance, the total would be about $187.99 that would be $15.01 gross profit per
metric ton, multiply by 20,000 equals $300,200, that is my supposed profit if I went through the
contract.
The above testimony of the plaintiff was a general approximation of the actual figures involved in the
transaction. A precise and more exact demonstration of the equity of the award herein is provided by
Exhibit HH of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far as germane.
It is equally of record now that as shown in her request dated July 29, 1959, and other
communications subsequent thereto for the opening by your corporation of the required letter of
credit, Mrs. Arrieta was supposed to pay her supplier in Burma at the rate of One Hundred Eighty
Dollars and Seventy Cents ($180.70) in U.S. Currency, per ton plus Eight Dollars ($8.00) in the same
currency per ton for shipping and other handling expenses, so that she is already assured of a net
profit of Fourteen Dollars and Thirty Cents ($14.30), U.S., Currency, per ton or a total of Two Hundred
and Eighty Six Thousand Dollars ($286,000.00), U.S. Currency, in the aforesaid transaction. ...

Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of
unrealized profit damages in the total sum of $406,000.00 from the failure of the projected contract to
materialize. This counterclaim was supported by a cost study made and submitted by the appellant
itself and wherein it was illustrated how indeed had the importation pushed thru, NARIC would have
realized in profit the amount asserted in the counterclaim. And yet, the said amount of P406,000.00
was realizable by appellant despite a number of expenses which the appellee under the contract, did
not have to incur. Thus, under the cost study submitted by the appellant, banking and unloading
charges were to be shouldered by it, including an Import License Fee of 2% and superintendence fee
of $0.25 per metric ton. If the NARIC stood to profit over P400 000.00 from the disputed transaction
inspite of the extra expenditures from which the herein appellee was exempt, we are convicted of the
fairness of the judgment presently under appeal.
In the premises, however, a minor modification must be effected in the dispositive portion of the
decision appeal from insofar as it expresses the amount of damages in U.S. currency and not in
Philippine Peso. Republic Act 529 specifically requires the discharge of obligations only "in any coin
or currency which at the time of payment is legal tender for public and private debts." In view of that
law, therefore, the award should be converted into and expressed in Philippine Peso.
This brings us to a consideration of what rate of exchange should apply in the conversion here
decreed. Should it be at the time of the breach, at the time the obligation was incurred or at the rate of
exchange prevailing on the promulgation of this decision.
In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of damages
for breach of contract, even if the obligation assumed by the defendant was to pay the plaintiff a sum
of money expressed in American currency, the indemnity to be allowed should be expressed in
Philippine currency at the rate of exchange at the time of the judgment rather than at the rate of
exchange prevailing on the date of defendant's breach. This ruling, however, can neither be applied
nor extended to the case at bar for the same was laid down when there was no law against stipulating
foreign currencies in Philippine contracts. But now we have Republic Act No. 529 which expressly
declares such stipulations as contrary to public policy, void and of no effect. And, as We already
pronounced in the case of Eastboard Navigation, Ltd. v. Juan Ysmael & Co., Inc., G.R. No. L-9090,
September 10, 1957, if there is any agreement to pay an obligation in a currency other than Philippine
legal tender, the same is null and void as contrary to public policy (Republic Act 529), and the most
that could be demanded is to pay said obligation in Philippine currency "to be measured in the
prevailing rate of exchange at the time the obligation was incurred (Sec. 1, idem)."
UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole
modification that the award should be converted into the Philippine peso at the rate of exchange
prevailing at the time the obligation was incurred or on July 1, 1952 when the contract was executed.
The appellee insurance company, in the light of this judgment, is relieved of any liability under this
suit. No pronouncement as to costs.
G.R.
No.
L-37120.
April
20,
1983.]
VICTORINO D. MAGAT, Petitioner,
GUERRERO,Respondents.
Sinesio

S.

v.

HON.

LEO

D.

MEDIALDEA

Vergara

and

SANTIAGO

A.

for Petitioner.

Eladio B. Samson for Respondents.

SYLLABUS

1. REMEDIAL LAW; ACTION; CAUSE OF ACTION; SUFFICIENCY THEREOF DETERMINED ON BASIS

OF FACTS ALLEGED IN THE COMPLAINT; REQUISITES; CASE AT BAR. Both parties are in accord
with the view that when a motion to dismiss is based on the ground of lack of cause of action, the
sufficiency of the cause of action can only be determined on the basis of the facts alleged in the
complaint; that the facts alleged are deemed hypothetically admitted, including those which are fairly

deducible therefrom; and that, admitting the facts as alleged, whether or not the court can render a
valid judgment against the defendant upon said facts in accordance with the prayer in the complaint.
After a thorough examination of the complaint at bar, the Supreme Court finds the test of legal
sufficiency of the cause of action adequately satisfied. In a methodical and logical sequence, the
complaint recites the circumstances that led to the perfection of the contract entered into by the
parties. It further avers that while petitioner had fulfilled his part of the bargain (paragraph 8 of the
Complaint), private respondent failed to comply with his correlative obligation by refusing to open a
letter of credit to cover payment of the goods ordered by him (paragraphs 11 & 12 of the
Complainant), and that consequently, petitioner suffered not only loss of his expected profits, but
moral and exemplary damages as well. From these allegations, the essential elements of a cause of
action are present, to wit: (1) the existence of a legal right of the plaintiff; (2) a correlative duty of the
defendant; and (3) an act or omission of the defendant in violation of the plaintiffs right, with
consequent injury or damage to the latter for which he may maintain an action for recovery of
damages or other appropriate relief. In fine, the Supreme Court holds that on the basis of the facts
alleged in the complaint, the Court could render a valid judgment in accordance with the prayer
thereof.
2. CIVIL LAW; DAMAGES; BREACH OF CONTRACT; LOSS SUFFERED BY VIRTUE THEREOF
BECOMES REAL, FIXED AND VESTED AT THE VERY MOMENT OF BREACH. Indisputably, the
parties, both businessman, entered into the aforesaid contract with the evident intention of deriving
some profits therefrom. Upon breach of the contract by either of them, the other would necessarily
suffer loss of his expected profits. Since the loss comes into being at the very moment of breach,
such loss is real, "fixed and vested and therefore, recoverable under the law.
3. ID.; ID.; ARTICLE 11700 of N.C.C.; PROVIDES FOR RECOVERY OF DAMAGES; PHRASE "IN ANY
MANNER CONTRAVENE THE TENOR" CONSTRUED. Article 1170 of the Civil Code provides:
"Those who in the performance of their obligation are guilty of fraud, negligence, or delay and those
who in any manner contravene the tenor thereof are liable for damages." The phrase "in any manner
contravene the tenor" of the obligation includes any illicit act or omission which impairs the strict and
faithful
fulfillment
of
the
obligation
and
every kind
of
defective
performance.
4. ID.; ID.; EXTENT OF DAMAGES RECOVERABLE DEPENDS ON THE PRESENCE OR ABSENCE OF
BAD FAITH ATTENDANT IN THE BREACH. The damages which the obligor is liable for includes not
only the value of the loss suffered by the obligee (dao emergente) but also the profits which the
latter failed to obtain (lucro cesante). If the obligor acted in good faith, he shall be liable for those
damages 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; and in case of fraud, bad faith, malice or wanton attitude, he shall be liable for all
damages which may be reasonably attributed to the non- performance of the obligation.
5. ID.; ID.; MORAL AND EXEMPLARY DAMAGES; RECOVERABLE IN CASES OF BAD FAITH. The
same is true with respect to moral and exemplary damages. The applicable legal provisions on the
matter, Articles 2220 and 2232 of the Civil Code, allow the award of such damages in breaches of
contract where the defendant acted in bad faith. The Supreme Court finds that the complaint
sufficiently alleges bad faith on the part of the defendant.

DECISION

ESCOLIN, J.:

Put to test in this petition for review on certiorari is the sufficiency of the averments contained in the
complaint for alleged breach of contract filed by petitioner Victorino D. Magat against respondent

Santiago A. Guerrero in Civil Case No. 17827 of the Court of First Instance of Rizal, presided by
respondent Judge Leo D. Medialdea, now Deputy Judicial Administrator, which complaint was
dismissed
for
failure
to
state
a
cause
of
action.chanrobles
virtual
lawlibrary
The

pertinent

allegations

in

the

complaint,

subject

of

inquiry,

are

as

follows:

"3. That sometime in September 1972, the defendant entered into a contract with the U.S. Navy
Exchange, Subic Bay, Philippines, for the operation of a fleet of taxicabs, each taxicab to be provided
with the necessary taximeter and a radio transceiver for receiving and sending of messages from
mobile taxicab to fixed base stations within the Naval Base at Subic Bay, Philippines;
"4. That Isidro Q. Aligada, acting as agent of the defendant herein conducted the necessary project
studies on how best the defendant may meet the requirements of his contract with the U.S. Navy
Exchange, Subic Bay, Philippines, and because of the experience of the plaintiff in connection with
his various contracts with the U.S. Navy, Subic Bay, Philippines, and his goodwill already established
with the Naval personnel of Subic Bay, Philippines, especially in providing the U.S. Navy with needed
materials or goods on time as specified by the U.S. Navy, be they of local origin or imported either
from the United States or from Japan, the said Isidro Q. Aligada approached the plaintiff herein in
behalf of the defendant and proposed to import from Japan thru the plaintiff herein or thru plaintiffs
Japanese business associates, all taximeters and radio transceivers needed by the defendant in
connection with his contract with the U.S. Navy Exchange, Subic Bay, Philippines;
"5. That the defendant herein and his aforesaid agent Isidro Q. Aligada were able to import from Japan
with the assistance of the plaintiff and his Japanese business associates the necessary taximeters for
defendants taxicabs in partial fulfillment of defendants commitments with the U.S. Navy Exchange,
Subic Bay, Philippines, the plaintiffs assistance in this matter having been given to the defendant
gratis
et
amore;
"6. That Isidro Q. Aligada, also acting as agent of the defendant, made representations with the
plaintiff herein to the effect that defendant desired to procure from Japan thru the plaintiff herein the
needed radio transceivers and to this end, Isidro Q. Aligada secured a firm offer in writing dated
September 25, 1972, a copy of which is hereto attached marked as Annex A and made an integral
part of this complaint, wherein the plaintiff quoted in his offer a total price of $77,620.59 [U.S. dollars]
FOB Yokohama, the goods or articles therein offered for sale by the plaintiff to the defendant to be
delivered sixty to ninety [60-90] days after receipt of advice from the defendant of the radio frequency
assigned
to
the
defendant
by
the
proper
authorities;
"7. That the plaintiff received notice of the fact that the defendant accepted plaintiffs offer to sell to
the defendant the items specified in Annex A, as well as the terms and conditions of said offer, as
shown by the signed conformity of the defendant appearing on Annex A which was duly delivered by
the defendants agent to the plaintiff herein, whereupon all that the plaintiff had to do in the meantime
was to await advice from the defendant as to the radio frequency to be assigned by the proper
authorities
to
the
defendant;
"8. That believing that the defendant would faithfully fulfill his contract with the plaintiff herein,
considering his signed conformity appearing in Annex A hereof as well as the letter dated October 4,
1972, of his agent aforementioned which is attached hereto and marked as Annex B and made an
integral part of this complaint, and in order that plaintiffs promised delivery would not be delayed, the
plaintiff herein took steps to advise the Japanese entity entrusted with the manufacture of the items
listed in Annex A to the effect that the contract between the defendant herein and the plaintiff has
been perfected and that advice with regards to radio frequency would follow as soon as same is
received
by
the
plaintiff
from
the
defendant;
"9. That in his letter dated October 6, 1972, a copy of which is hereto attached marked as Annex C,
the defendant advised his aforementioned agent to the effect that the U.S. Navy provided him with the
radio frequency of 34.2 MHZ [Megahertz] and defendant requested his said agent to proceed with his

order placed with the plaintiff herein, which fact was duly communicated to the plaintiff by the
defendants
aforementioned
agent;
"10. That by his letter dated October 7, 1972, addressed to the plaintiff by the defendants agent, a
copy of which is hereto attached and marked as Annex D, defendants agent qualified defendants
instructions contained in his letter of October 6, 1972 [Annex C] in the sense that plaintiff herein
should proceed to fulfill defendants order only upon receipt by the plaintiff of the defendants letter of
credit;
"11. That it being normal business practice in case of foreign importation that the buyer opens a letter
of credit in favor of the foreign supplier before delivery of the goods sold, the plaintiff herein awaited
the
opening
of
such
a
letter
of
credit
by
the
defendant;
"12. That the defendant and his agent have repeatedly assured plaintiff herein of the defendants
financial capabilities to pay for the goods ordered by him and in fact he accomplished the necessary
application for a letter of credit with his banker, but he subsequently instructed his banker not to give
due course to his application for a letter of credit and that for reasons only known to the defendant,
he fails and refuses to open the necessary letter of credit to cover payment of the goods ordered by
him;
"13. That it has come to the knowledge of the plaintiff herein that the defendant has been operating
his taxicabs without the required radio transceivers and when the U.S. Navy Authorities of Subic Bay,
Philippines, were pressing defendant for compliance with his commitments with respect to the
installations of radio transceivers on his taxicabs, he impliedly laid the blame for the delay upon the
plaintiff herein, thus destroying the reputation of the plaintiff herein with the said Naval Authorities of
Subic
Bay,
Philippines,
with
whom
plaintiff
herein
transacts
business;

the

sum

of

P200,000.00

as

moral

"15. That the defendant herein entered into a contract with the plaintiff herein as set forth in Annex A
without the least intention of faithfully complying with his obligations thereunder, but he did so only
in order to obtain the concession from the U.S. Navy Exchange, Subic Bay, Philippines, of operating a
fleet of taxicabs inside the U.S. Naval Base to hi financial benefit and at the expense and prejudice of
third
parties
such
as
the
plaintiff
herein;
"16. That in view of the defendants failure to fulfill his contractual obligations with the plaintiff herein,
the
plaintiff
will
suffer
the
following
damages:.
[a] As the radio transceivers ordered by the defendant are now in the hands of the plaintiffs Japanese
representative, the plaintiff will have to pay for them, thus he will have to suffer as total loss to him
the amount of P523,938.98 (converting the amount of $77,620.59 to pesos at the rate of P6.75 to the
dollar) as said radio transceivers were purposely made or manufactured solely for the use of the
defendant herein and cannot possibly be marketed by the plaintiff herein to the general public;
[b] The amount of P52,393.89 or 10% of the purchase price by way of loss of expected profits from the
transaction
or
contract
between
plaintiff
and
the
defendant;
[c] Loss of confidence in him and goodwill of the plaintiff which will result in the impairment of his
business dealings with Japanese firms, thereby resulting also in loss of possible profits in the future
which
plaintiff
assess
at
no
less
than
P200,000.00;
[d] That in view of the defendants bad faith in inducing plaintiff to enter into the contract with him as
set forth hereinabove, defendant should be assessed by this Honorable Court in favor of the plaintiff

exemplary

damages;

[e] That in view of the defendants fault and to protect his interests, plaintiff herein is constrained to
retain the services of counsel with whom he agreed to pay by way of attorneys fees the sum of
P50,000.00."
Respondent Guerrero filed a motion to dismiss said complaint for lack of cause of action, which
ground
is
propounded
by
respondents
counsel
thus:
2
". . . it is clear that plaintiff was merely anticipating his loss or damage which might result from the
alleged failure of defendant to comply with the terms of the alleged contract. Hence, plaintiffs right of
recovery under his cause of action is premised not on any loss or damage which he is expecting to
incur in the near future. Plaintiffs right therefore under his cause of action is not yet fixed or vested.
"Inasmuch as there is no other allegation in the present Complaint wherein the same could be
maintained against defendant, the present Complaint should be dismissed for its failure to state a
cause
of
action
against
defendant."
The respondent judge, over petitioners opposition, issued a minute order dismissing the complaint
as
follow:
3
"Acting upon the Motion to Dismiss filed by the defendant, through counsel, date June 7, 1973, as
well as the opposition thereto filed by the plaintiff, through counsel, dated June 14, 1973, for the
reasons therein alleged, this Court hereby grants said motion and, as prayed for, the complaint in the
above-entitled
case
is
dismissed.
"SO

"14. That on March 27, 1973, plaintiff wrote a letter thru his counsel, copy attached marked as Annex
E, to ascertain from the defendant as to whether it is his intention to fulfill his part of the agreement
with the plaintiff herein or whether he desired to have the contract between them definitely cancelled,
but defendant did not even have the courtesy to answer plaintiffs demand;

and

ORDERED."

Both parties are in accord with the view that when a motion to dismiss is based on the ground of lack
of cause of action, the sufficiency of the case of action can only be determined on the basis of the
facts alleged in the complaint 4; that the facts alleged are deemed hypothetically admitted, including
those which are fairly deducible therefrom 5; and that, admitting the facts as alleged, whether or not
the Court can render a valid judgment against the defendant upon said facts in accordance with the
prayer
in
the
complaint
6
After a thorough examination of the complaint at bar, We find the test of legal sufficiency of the cause
of action adequately satisfied. In a methodical and logical sequence, the complaint recites the
circumstances that led to the perfection of the contract entered into by the parties. It further avers
that while petitioner had fulfilled his part of the bargain [paragraph 8 of the Complaint], private
respondent failed to comply with his correlative obligation by refusing to open a letter of credit to
cover payment of the goods ordered by him [paragraphs 11 & 12 of the Complaint], and that
consequently, petitioner suffered not only loss of his expected profits, but moral and exemplary
damages as well. From these allegations, the essential elements of a cause of action are present, to
wit: [1] the existence of a legal right to the plaintiff; [2] a correlative duty of the defendant and [3] an
act or omission of the defendant in violation of the plaintiffs right, with consequent injury or damage
to the latter for which he may maintain an action for recovery of damages or other appropriate relief.
7
Indisputably, the parties, both businessmen, entered into the aforesaid contract with the evident
intention of deriving some profits therefrom. Upon breach of the contract by either of them, the other
would necessarily suffer loss of his expected profits. Since the loss comes into being at the very
moment of breach, such loss is real, "fixed and vested" and, therefore, recoverable under the
law.chanrobles.com:cralaw:red
Article

1170

of

the

Civil

Code

provides:jgc:chanrobles.com.ph

"Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof are liable for damages."cralaw virtua1aw library
The phrase "in any manner contravene the tenor" of the obligation includes any illicit act or omission
which impairs the strict and faithful fulfillment of the obligation and every kind of defective
performance.
8
The damages which the obligor is liable for includes not only the value of the loss suffered by the
obligee [dao emergente] but also the profits which the latter failed to obtain [lucro cesante] 9 . If the
obligor acted in good faith, he shall be liable for those damages 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; and in case of fraud, bad faith, malice
or wanton attitude, he shall be liable for all damages which may be reasonably attributed to the
nonperformance
of
the
obligation
10
The same is true with respect to moral and exemplary damages. The applicable legal provisions on
the matter, Articles 2220 and 2232 of the Civil Code, allow the award of such damages in breaches of
contract where the defendant acted in bad faith. To Our mind, the complaint sufficiently alleges bad
faith
on
the
part
of
the
defendant.
In fine, We hold that on the basis of the facts alleged in the complaint, the court could render a valid
judgment
in
accordance
with
the
prayer
thereof.chanrobles
law
library
ACCORDINGLY, the questioned order of dismissal is hereby set aside and the case ordered remanded
to
the
court
of
origin
for
further
proceedings.
No
costs.
SO ORDERED.
G.R. No. L-47851 October 3, 1986
JUAN
F.
NAKPIL
&
SONS,
and
JUAN
F.
NAKPIL, petitioners,
vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and the
PHILIPPINE BAR ASSOCIATION, respondents.
G.R. No. L-47863 October 3, 1986
THE
UNITED
CONSTRUCTION
CO.,
INC.,
petitioner,
vs.
COURT OF APPEALS, ET AL., respondents.
G.R. No. L-47896 October 3, 1986
PHILIPPINE
BAR
ASSOCIATION,
ET
AL.,
petitioners,
vs.
COURT OF APPEALS, ET AL., respondents.
PARAS, J.:
These are petitions for review on certiorari of the November 28, 1977 decision of the Court of Appeals
in CA-G.R. No. 51771-R modifying the decision of the Court of First Instance of Manila, Branch V, in
Civil Case No. 74958 dated September 21, 1971 as modified by the Order of the lower court dated
December 8, 1971. The Court of Appeals in modifying the decision of the lower court included an
award of an additional amount of P200,000.00 to the Philippine Bar Association to be paid jointly and
severally by the defendant United Construction Co. and by the third-party defendants Juan F. Nakpil
and Sons and Juan F. Nakpil.
The dispositive portion of the modified decision of the lower court reads:
WHEREFORE, judgment is hereby rendered:
(a) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman
Ozaeta) to pay the plaintiff, jointly and severally, the sum of P989,335.68 with interest at the legal rate
from November 29, 1968, the date of the filing of the complaint until full payment;
(b) Dismissing the complaint with respect to defendant Juan J. Carlos;
(c) Dismissing the third-party complaint;

(d) Dismissing the defendant's and third-party defendants' counterclaims for lack of merit;
(e) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman
Ozaeta) to pay the costs in equal shares.
SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the judgment appealed from is modified to include an award of P200,000.00 in favor of
plaintiff-appellant Philippine Bar Association, with interest at the legal rate from November 29, 1968
until full payment to be paid jointly and severally by defendant United Construction Co., Inc. and third
party defendants (except Roman Ozaeta). In all other respects, the judgment dated September 21,
1971 as modified in the December 8, 1971 Order of the lower court is hereby affirmed with COSTS to
be paid by the defendant and third party defendant (except Roman Ozaeta) in equal shares.
SO ORDERED.
Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J. Carlos in
L-47863 seek the reversal of the decision of the Court of Appeals, among other things, for exoneration
from liability while petitioner Philippine Bar Association in L-47896 seeks the modification of
aforesaid decision to obtain an award of P1,830,000.00 for the loss of the PBA building plus four (4)
times such amount as damages resulting in increased cost of the building, P100,000.00 as exemplary
damages; and P100,000.00 as attorney's fees.
These petitions arising from the same case filed in the Court of First Instance of Manila were
consolidated by this Court in the resolution of May 10, 1978 requiring the respective respondents to
comment. (Rollo, L-47851, p. 172).
The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269-348; pp.
520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are as follows:
The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under the
Corporation Law, decided to construct an office building on its 840 square meters lot located at the
comer of Aduana and Arzobispo Streets, Intramuros, Manila. The construction was undertaken by the
United Construction, Inc. on an "administration" basis, on the suggestion of Juan J. Carlos, the
president and general manager of said corporation. The proposal was approved by plaintiff's board of
directors and signed by its president Roman Ozaeta, a third-party defendant in this case. The plans
and specifications for the building were prepared by the other third-party defendants Juan F. Nakpil &
Sons. The building was completed in June, 1966.
In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its environs and
the building in question sustained major damage. The front columns of the building buckled, causing
the building to tilt forward dangerously. The tenants vacated the building in view of its precarious
condition. As a temporary remedial measure, the building was shored up by United Construction, Inc.
at the cost of P13,661.28.
On November 29, 1968, the plaintiff commenced this action for the recovery of damages arising from
the partial collapse of the building against United Construction, Inc. and its President and General
Manager Juan J. Carlos as defendants. Plaintiff alleges that the collapse of the building was accused
by defects in the construction, the failure of the contractors to follow plans and specifications and
violations by the defendants of the terms of the contract.
Defendants in turn filed a third-party complaint against the architects who prepared the plans and
specifications, alleging in essence that the collapse of the building was due to the defects in the said
plans and specifications. Roman Ozaeta, the then president of the plaintiff Bar Association was
included as a third-party defendant for damages for having included Juan J. Carlos, President of the
United Construction Co., Inc. as party defendant.
On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F. Nakpil
presented a written stipulation which reads:
1. That in relation to defendants' answer with counterclaims and third- party complaints and the thirdparty defendants Nakpil & Sons' answer thereto, the plaintiff need not amend its complaint by
including the said Juan F. Nakpil & Sons and Juan F. Nakpil personally as parties defendant.
2. That in the event (unexpected by the undersigned) that the Court should find after the trial that the
above-named defendants Juan J. Carlos and United Construction Co., Inc. are free from any blame
and liability for the collapse of the PBA Building, and should further find that the collapse of said
building was due to defects and/or inadequacy of the plans, designs, and specifications p by the
third-party defendants, or in the event that the Court may find Juan F. Nakpil and Sons and/or Juan F.

Nakpil contributorily negligent or in any way jointly and solidarily liable with the defendants, judgment
may be rendered in whole or in part. as the case may be, against Juan F. Nakpil & Sons and/or Juan F.
Nakpil in favor of the plaintiff to all intents and purposes as if plaintiff's complaint has been duly
amended by including the said Juan F. Nakpil & Sons and Juan F. Nakpil as parties defendant and by
alleging causes of action against them including, among others, the defects or inadequacy of the
plans, designs, and specifications prepared by them and/or failure in the performance of their
contract with plaintiff.
3. Both parties hereby jointly petition this Honorable Court to approve this stipulation. (Record on
Appeal, pp. 274-275; Rollo, L-47851,p.169).
Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which among
others, the parties agreed to refer the technical issues involved in the case to a Commissioner. Mr.
Andres O. Hizon, who was ultimately appointed by the trial court, assumed his office as
Commissioner, charged with the duty to try the following issues:
1. Whether the damage sustained by the PBA building during the August 2, 1968 earthquake had been
caused, directly or indirectly, by:
(a) The inadequacies or defects in the plans and specifications prepared by third-party defendants;
(b) The deviations, if any, made by the defendants from said plans and specifications and how said
deviations contributed to the damage sustained;
(c) The alleged failure of defendants to observe the requisite quality of materials and workmanship in
the construction of the building;
(d) The alleged failure to exercise the requisite degree of supervision expected of the architect, the
contractor and/or the owner of the building;
(e) An act of God or a fortuitous event; and
(f) Any other cause not herein above specified.
2. If the cause of the damage suffered by the building arose from a combination of the aboveenumerated factors, the degree or proportion in which each individual factor contributed to the
damage sustained;
3. Whether the building is now a total loss and should be completely demolished or whether it may
still be repaired and restored to a tenantable condition. In the latter case, the determination of the cost
of such restoration or repair, and the value of any remaining construction, such as the foundation,
which may still be utilized or availed of (Record on Appeal, pp. 275-276; Rollo, L-47851, p. 169).
Thus, the issues of this case were divided into technical issues and non-technical issues. As
aforestated the technical issues were referred to the Commissioner. The non-technical issues were
tried by the Court.
Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may topple
down in case of a strong earthquake. The motions were opposed by the defendants and the matter
was referred to the Commissioner. Finally, on April 30, 1979 the building was authorized to be
demolished at the expense of the plaintiff, but not another earthquake of high intensity on April 7,
1970 followed by other strong earthquakes on April 9, and 12, 1970, caused further damage to the
property. The actual demolition was undertaken by the buyer of the damaged building. (Record on
Appeal, pp. 278-280; Ibid.)
After the protracted hearings, the Commissioner eventually submitted his report on September 25,
1970 with the findings that while the damage sustained by the PBA building was caused directly by
the August 2, 1968 earthquake whose magnitude was estimated at 7.3 they were also caused by the
defects in the plans and specifications prepared by the third-party defendants' architects, deviations
from said plans and specifications by the defendant contractors and failure of the latter to observe
the requisite workmanship in the construction of the building and of the contractors, architects and
even the owners to exercise the requisite degree of supervision in the construction of subject
building.
All the parties registered their objections to aforesaid findings which in turn were answered by the
Commissioner.
The trial court agreed with the findings of the Commissioner except as to the holding that the owner
is charged with full nine supervision of the construction. The Court sees no legal or contractual basis
for such conclusion. (Record on Appeal, pp. 309-328; Ibid).
Thus, on September 21, 1971, the lower court rendered the assailed decision which was modified by
the Intermediate Appellate Court on November 28, 1977.

All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence, these
petitions.
On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers, and the
Philippine Institute of Architects filed with the Court a motion to intervene as amicus curiae. They
proposed to present a position paper on the liability of architects when a building collapses and to
submit likewise a critical analysis with computations on the divergent views on the design and plans
as submitted by the experts procured by the parties. The motion having been granted, the amicus
curiaewere granted a period of 60 days within which to submit their position.
After the parties had all filed their comments, We gave due course to the petitions in Our Resolution
of July 21, 1978.
The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted.
The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not
defective. But the Commissioner, when asked by Us to comment, reiterated his conclusion that the
defects in the plans and specifications indeed existed.
Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No. 4131)
and the 1966 Asep Code, the Commissioner added that even if it can be proved that the defects in
theconstruction alone (and not in the plans and design) caused the damage to the building, still the
deficiency in the original design and jack of specific provisions against torsion in the original plans
and the overload on the ground floor columns (found by an the experts including the original
designer) certainly contributed to the damage which occurred. (Ibid, p. 174).
In their respective briefs petitioners, among others, raised the following assignments of errors:
Philippine Bar Association claimed that the measure of damages should not be limited to
P1,100,000.00 as estimated cost of repairs or to the period of six (6) months for loss of rentals while
United Construction Co., Inc. and the Nakpils claimed that it was an act of God that caused the failure
of the building which should exempt them from responsibility and not the defective construction,
poor workmanship, deviations from plans and specifications and other imperfections in the case of
United Construction Co., Inc. or the deficiencies in the design, plans and specifications prepared by
petitioners in the case of the Nakpils. Both UCCI and the Nakpils object to the payment of the
additional amount of P200,000.00 imposed by the Court of Appeals. UCCI also claimed that it should
be reimbursed the expenses of shoring the building in the amount of P13,661.28 while the Nakpils
opposed the payment of damages jointly and solidarity with UCCI.
The pivotal issue in this case is whether or not an act of God-an unusually strong earthquake-which
caused the failure of the building, exempts from liability, parties who are otherwise liable because of
their negligence.
The applicable law governing the rights and liabilities of the parties herein is Article 1723 of the New
Civil Code, which provides:
Art. 1723. The engineer or architect who drew up the plans and specifications for a building is liable
for damages if within fifteen years from the completion of the structure the same should collapse by
reason of a defect in those plans and specifications, or due to the defects in the ground. The
contractor is likewise responsible for the damage if the edifice fags within the same period on
account of defects in the construction or the use of materials of inferior quality furnished by him, or
due to any violation of the terms of the contract. If the engineer or architect supervises the
construction, he shall be solidarily liable with the contractor.
Acceptance of the building, after completion, does not imply waiver of any of the causes of action by
reason of any defect mentioned in the preceding paragraph.
The action must be brought within ten years following the collapse of the building.
On the other hand, the general rule is that no person shall be responsible for events which could not
be foreseen or which though foreseen, were inevitable (Article 1174, New Civil Code).
An act of God has been defined as an accident, due directly and exclusively to natural causes without
human intervention, which by no amount of foresight, pains or care, reasonably to have been
expected, could have been prevented. (1 Corpus Juris 1174).
There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of God.
To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation
due to an "act of God," the following must concur: (a) the cause of the breach of the obligation must
be independent of the will of the debtor; (b) the event must be either unforseeable or unavoidable; (c)
the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal

manner; and (d) the debtor must be free from any participation in, or aggravation of the injury to the
creditor. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v.
Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279;
Lasam v. Smith, 45 Phil. 657).
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding
fraud, negligence, delay or violation or contravention in any manner of the tenor of the obligation as
provided for in Article 1170 of the Civil Code, which results in loss or damage, the obligor cannot
escape liability.
The principle embodied in the act of God doctrine strictly requires that the act must be one
occasioned exclusively by the violence of nature and all human agencies are to be excluded from
creating or entering into the cause of the mischief. When the effect, the cause of which is to be
considered, is found to be in part the result of the participation of man, whether it be from active
intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were, and
removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).
Thus it has been held that when the negligence of a person concurs with an act of God in producing a
loss, such person is not exempt from liability by showing that the immediate cause of the damage
was the act of God. To be exempt from liability for loss because of an act of God, he must be free from
any previous negligence or misconduct by which that loss or damage may have been occasioned.
(Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v.
Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657).
The negligence of the defendant and the third-party defendants petitioners was established beyond
dispute both in the lower court and in the Intermediate Appellate Court. Defendant United
Construction Co., Inc. was found to have made substantial deviations from the plans and
specifications. and to have failed to observe the requisite workmanship in the construction as well as
to exercise the requisite degree of supervision; while the third-party defendants were found to have
inadequacies or defects in the plans and specifications prepared by them. As correctly assessed by
both courts, the defects in the construction and in the plans and specifications were the proximate
causes that rendered the PBA building unable to withstand the earthquake of August 2, 1968. For this
reason the defendant and third-party defendants cannot claim exemption from liability. (Decision,
Court of Appeals, pp. 30-31).
It is well settled that the findings of facts of the Court of Appeals are conclusive on the parties and on
this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs. Sandiganbayan, January 17,
1985, 134 SCRA 105, 121), unless (1) the conclusion is a finding grounded entirely on speculation,
surmise and conjectures; (2) the inference made is manifestly mistaken; (3) there is grave abuse of
discretion; (4) the judgment is based on misapprehension of facts; (5) the findings of fact are
conflicting , (6) the Court of Appeals went beyond the issues of the case and its findings are contrary
to the admissions of both appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co., February 8,
1967, 19 SCRA 289, 291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings of
facts of the Court of Appeals are contrary to those of the trial court; (8) said findings of facts are
conclusions without citation of specific evidence on which they are based; (9) the facts set forth in
the petition as well as in the petitioner's main and reply briefs are not disputed by the respondents
(Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals, July 30, 1979, 92 SCRA
322, 366); (10) the finding of fact of the Court of Appeals is premised on the supposed absence of
evidence and is contradicted by evidence on record (Salazar vs. Gutierrez, May 29, 1970, 33 SCRA
243, 247; Cited in G.R. No. 66497-98, Sacay v. Sandiganbayan, July 10, 1986).
It is evident that the case at bar does not fall under any of the exceptions above-mentioned. On the
contrary, the records show that the lower court spared no effort in arriving at the correct appreciation
of facts by the referral of technical issues to a Commissioner chosen by the parties whose findings
and conclusions remained convincingly unrebutted by the intervenors/amicus curiae who were
allowed to intervene in the Supreme Court.
In any event, the relevant and logical observations of the trial court as affirmed by the Court of
Appeals that "while it is not possible to state with certainty that the building would not have collapsed
were those defects not present, the fact remains that several buildings in the same area withstood the
earthquake to which the building of the plaintiff was similarly subjected," cannot be ignored.
The next issue to be resolved is the amount of damages to be awarded to the PBA for the partial
collapse (and eventual complete collapse) of its building.

The Court of Appeals affirmed the finding of the trial court based on the report of the Commissioner
that the total amount required to repair the PBA building and to restore it to tenantable condition was
P900,000.00 inasmuch as it was not initially a total loss. However, while the trial court awarded the
PBA said amount as damages, plus unrealized rental income for one-half year, the Court of Appeals
modified the amount by awarding in favor of PBA an additional sum of P200,000.00 representing the
damage suffered by the PBA building as a result of another earthquake that occurred on April 7, 1970
(L-47896, Vol. I, p. 92).
The PBA in its brief insists that the proper award should be P1,830,000.00 representing the total value
of the building (L-47896, PBA's No. 1 Assignment of Error, p. 19), while both the NAKPILS and UNITED
question the additional award of P200,000.00 in favor of the PBA (L- 47851, NAKPIL's Brief as
Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The PBA further urges that the unrealized rental
income awarded to it should not be limited to a period of one-half year but should be computed on a
continuing basis at the rate of P178,671.76 a year until the judgment for the principal amount shall
have been satisfied L- 47896, PBA's No. 11 Assignment of Errors, p. 19).
The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial and it is
undisputed that the building could then still be repaired and restored to its tenantable condition. The
PBA, however, in view of its lack of needed funding, was unable, thru no fault of its own, to have the
building repaired. UNITED, on the other hand, spent P13,661.28 to shore up the building after the
August 2, 1968 earthquake (L-47896, CA Decision, p. 46). Because of the earthquake on April 7, 1970,
the trial court after the needed consultations, authorized the total demolition of the building (L-47896,
Vol. 1, pp. 53-54).
There should be no question that the NAKPILS and UNITED are liable for the damage resulting from
the partial and eventual collapse of the PBA building as a result of the earthquakes.
We quote with approval the following from the erudite decision penned by Justice Hugo E. Gutierrez
(now an Associate Justice of the Supreme Court) while still an Associate Justice of the Court of
Appeals:
There is no question that an earthquake and other forces of nature such as cyclones, drought, floods,
lightning, and perils of the sea are acts of God. It does not necessarily follow, however, that specific
losses and suffering resulting from the occurrence of these natural force are also acts of God. We are
not convinced on the basis of the evidence on record that from the thousands of structures in Manila,
God singled out the blameless PBA building in Intramuros and around six or seven other buildings in
various parts of the city for collapse or severe damage and that God alone was responsible for the
damages and losses thus suffered.
The record is replete with evidence of defects and deficiencies in the designs and plans, defective
construction, poor workmanship, deviation from plans and specifications and other imperfections.
These deficiencies are attributable to negligent men and not to a perfect God.
The act-of-God arguments of the defendants- appellants and third party defendants-appellants
presented in their briefs are premised on legal generalizations or speculations and on theological
fatalism both of which ignore the plain facts. The lengthy discussion of United on ordinary
earthquakes and unusually strong earthquakes and on ordinary fortuitous events and extraordinary
fortuitous events leads to its argument that the August 2, 1968 earthquake was of such an
overwhelming and destructive character that by its own force and independent of the particular
negligence alleged, the injury would have been produced. If we follow this line of speculative
reasoning, we will be forced to conclude that under such a situation scores of buildings in the vicinity
and in other parts of Manila would have toppled down. Following the same line of reasoning, Nakpil
and Sons alleges that the designs were adequate in accordance with pre-August 2, 1968 knowledge
and appear inadequate only in the light of engineering information acquired after the earthquake. If
this were so, hundreds of ancient buildings which survived the earthquake better than the two-year
old PBA building must have been designed and constructed by architects and contractors whose
knowledge and foresight were unexplainably auspicious and prophetic. Fortunately, the facts on
record allow a more down to earth explanation of the collapse. The failure of the PBA building, as a
unique and distinct construction with no reference or comparison to other buildings, to weather the
severe earthquake forces was traced to design deficiencies and defective construction, factors which
are neither mysterious nor esoteric. The theological allusion of appellant United that God acts in
mysterious ways His wonders to perform impresses us to be inappropriate. The evidence reveals
defects and deficiencies in design and construction. There is no mystery about these acts of

negligence. The collapse of the PBA building was no wonder performed by God. It was a result of the
imperfections in the work of the architects and the people in the construction company. More relevant
to our mind is the lesson from the parable of the wise man in the Sermon on the Mount "which built
his house upon a rock; and the rain descended and the floods came and the winds blew and beat
upon that house; and it fen not; for it was founded upon a rock" and of the "foolish upon the sand.
And the rain descended and man which built his house the floods came, and the winds blew, and beat
upon that house; and it fell and great was the fall of it. (St. Matthew 7: 24-27)." The requirement that a
building should withstand rains, floods, winds, earthquakes, and natural forces is precisely the
reason why we have professional experts like architects, and engineers. Designs and constructions
vary under varying circumstances and conditions but the requirement to design and build well does
not change.
The findings of the lower Court on the cause of the collapse are more rational and accurate. Instead of
laying the blame solely on the motions and forces generated by the earthquake, it also examined the
ability of the PBA building, as designed and constructed, to withstand and successfully weather
those forces.
The evidence sufficiently supports a conclusion that the negligence and fault of both United and
Nakpil and Sons, not a mysterious act of an inscrutable God, were responsible for the damages. The
Report of the Commissioner, Plaintiff's Objections to the Report, Third Party Defendants' Objections
to the Report, Defendants' Objections to the Report, Commissioner's Answer to the various
Objections, Plaintiffs' Reply to the Commissioner's Answer, Defendants' Reply to the Commissioner's
Answer, Counter-Reply to Defendants' Reply, and Third-Party Defendants' Reply to the
Commissioner's Report not to mention the exhibits and the testimonies show that the main
arguments raised on appeal were already raised during the trial and fully considered by the lower
Court. A reiteration of these same arguments on appeal fails to convince us that we should reverse or
disturb the lower Court's factual findings and its conclusions drawn from the facts, among them:
The Commissioner also found merit in the allegations of the defendants as to the physical evidence
before and after the earthquake showing the inadequacy of design, to wit:
Physical evidence before the earthquake providing (sic) inadequacy of design;
1. inadequate design was the cause of the failure of the building.
2. Sun-baffles on the two sides and in front of the building;
a. Increase the inertia forces that move the building laterally toward the Manila Fire Department.
b. Create another stiffness imbalance.
3. The embedded 4" diameter cast iron down spout on all exterior columns reduces the crosssectional area of each of the columns and the strength thereof.
4. Two front corners, A7 and D7 columns were very much less reinforced.
Physical Evidence After the Earthquake, Proving Inadequacy of design;
1. Column A7 suffered the severest fracture and maximum sagging. Also D7.
2. There are more damages in the front part of the building than towards the rear, not only in columns
but also in slabs.
3. Building leaned and sagged more on the front part of the building.
4. Floors showed maximum sagging on the sides and toward the front corner parts of the building.
5. There was a lateral displacement of the building of about 8", Maximum sagging occurs at the
column A7 where the floor is lower by 80 cm. than the highest slab level.
6. Slab at the corner column D7 sagged by 38 cm.
The Commissioner concluded that there were deficiencies or defects in the design, plans and
specifications of the PBA building which involved appreciable risks with respect to the accidental
forces which may result from earthquake shocks. He conceded, however, that the fact that those
deficiencies or defects may have arisen from an obsolete or not too conservative code or even a code
that does not require a design for earthquake forces mitigates in a large measure the responsibility or
liability of the architect and engineer designer.
The Third-party defendants, who are the most concerned with this portion of the Commissioner's
report, voiced opposition to the same on the grounds that (a) the finding is based on a basic
erroneous conception as to the design concept of the building, to wit, that the design is essentially
that of a heavy rectangular box on stilts with shear wan at one end; (b) the finding that there were
defects and a deficiency in the design of the building would at best be based on an approximation
and, therefore, rightly belonged to the realm of speculation, rather than of certainty and could very

possibly be outright error; (c) the Commissioner has failed to back up or support his finding with
extensive, complex and highly specialized computations and analyzes which he himself emphasizes
are necessary in the determination of such a highly technical question; and (d) the Commissioner has
analyzed the design of the PBA building not in the light of existing and available earthquake
engineering knowledge at the time of the preparation of the design, but in the light of recent and
current standards.
The Commissioner answered the said objections alleging that third-party defendants' objections were
based on estimates or exhibits not presented during the hearing that the resort to engineering
references posterior to the date of the preparation of the plans was induced by the third-party
defendants themselves who submitted computations of the third-party defendants are erroneous.
The issue presently considered is admittedly a technical one of the highest degree. It involves
questions not within the ordinary competence of the bench and the bar to resolve by themselves.
Counsel for the third-party defendants has aptly remarked that "engineering, although dealing in
mathematics, is not an exact science and that the present knowledge as to the nature of earthquakes
and the behaviour of forces generated by them still leaves much to be desired; so much so "that the
experts of the different parties, who are all engineers, cannot agree on what equation to use, as to
what earthquake co-efficients are, on the codes to be used and even as to the type of structure that
the PBA building (is) was (p. 29, Memo, of third- party defendants before the Commissioner).
The difficulty expected by the Court if tills technical matter were to be tried and inquired into by the
Court itself, coupled with the intrinsic nature of the questions involved therein, constituted the reason
for the reference of the said issues to a Commissioner whose qualifications and experience have
eminently qualified him for the task, and whose competence had not been questioned by the parties
until he submitted his report. Within the pardonable limit of the Court's ability to comprehend the
meaning of the Commissioner's report on this issue, and the objections voiced to the same, the Court
sees no compelling reasons to disturb the findings of the Commissioner that there were defects and
deficiencies in the design, plans and specifications prepared by third-party defendants, and that said
defects and deficiencies involved appreciable risks with respect to the accidental forces which may
result from earthquake shocks.
(2) (a) The deviations, if any, made by the defendants from the plans and specifications, and how said
deviations contributed to the damage sustained by the building.
(b) The alleged failure of defendants to observe the requisite quality of materials and workmanship in
the construction of the building.
These two issues, being interrelated with each other, will be discussed together.
The findings of the Commissioner on these issues were as follows:
We now turn to the construction of the PBA Building and the alleged deficiencies or defects in the
construction and violations or deviations from the plans and specifications. All these may be
summarized as follows:
a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.
(1) Wrongful and defective placing of reinforcing bars.
(2) Absence of effective and desirable integration of the 3 bars in the cluster.
(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no larger than 1 inch.
(4) Reinforcement assembly is not concentric with the column, eccentricity being 3" off when on one
face the main bars are only 1 1/2' from the surface.
(5) Prevalence of honeycombs,
(6) Contraband construction joints,
(7) Absence, or omission, or over spacing of spiral hoops,
(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5, ground floor,
(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground floor,
(10) Undergraduate concrete is evident,
(11) Big cavity in core of Column 2A-4, second floor,
(12) Columns buckled at different planes. Columns buckled worst where there are no spirals or where
spirals are cut. Columns suffered worst displacement where the eccentricity of the columnar
reinforcement assembly is more acute.
b. Summary of alleged defects as reported by Engr. Antonio Avecilla.
Columns are first (or ground) floor, unless otherwise stated.
(1) Column D4 Spacing of spiral is changed from 2" to 5" on centers,

(2) Column D5 No spiral up to a height of 22" from the ground floor,

(3) Column D6 Spacing of spiral over 4 l/2,
(4) Column D7 Lack of lateral ties,
(5) Column C7 Absence of spiral to a height of 20" from the ground level, Spirals are at 2" from the
exterior column face and 6" from the inner column face,
(6) Column B6 Lack of spiral on 2 feet below the floor beams,
(7) Column B5 Lack of spirals at a distance of 26' below the beam,
(8) Column B7 Spirals not tied to vertical reinforcing bars, Spirals are uneven 2" to 4",
(9) Column A3 Lack of lateral ties,
(10) Column A4 Spirals cut off and welded to two separate clustered vertical bars,
(11) Column A4 (second floor Column is completely hollow to a height of 30"
(12) Column A5 Spirals were cut from the floor level to the bottom of the spandrel beam to a height
of 6 feet,
(13) Column A6 No spirals up to a height of 30' above the ground floor level,
(14) Column A7 Lack of lateralties or spirals,
c. Summary of alleged defects as reported by the experts of the Third-Party defendants.
Ground floor columns.
(1) Column A4 Spirals are cut,
(2) Column A5 Spirals are cut,
(3) Column A6 At lower 18" spirals are absent,
(4) Column A7 Ties are too far apart,
(5) Column B5 At upper fourth of column spirals are either absent or improperly spliced,
(6) Column B6 At upper 2 feet spirals are absent,
(7) Column B7 At upper fourth of column spirals missing or improperly spliced.
(8) Column C7 Spirals are absent at lowest 18"
(9) Column D5 At lowest 2 feet spirals are absent,
(10) Column D6 Spirals are too far apart and apparently improperly spliced,
(11) Column D7 Lateral ties are too far apart, spaced 16" on centers.
There is merit in many of these allegations. The explanations given by the engineering experts for the
defendants are either contrary to general principles of engineering design for reinforced concrete or
not applicable to the requirements for ductility and strength of reinforced concrete in earthquakeresistant design and construction.
We shall first classify and consider defects which may have appreciable bearing or relation to' the
earthquake-resistant property of the building.
As heretofore mentioned, details which insure ductility at or near the connections between columns
and girders are desirable in earthquake resistant design and construction. The omission of spirals
and ties or hoops at the bottom and/or tops of columns contributed greatly to the loss of earthquakeresistant strength. The plans and specifications required that these spirals and ties be carried from
the floor level to the bottom reinforcement of the deeper beam (p. 1, Specifications, p. 970, Reference
11). There were several clear evidences where this was not done especially in some of the ground
floor columns which failed.
There were also unmistakable evidences that the spacings of the spirals and ties in the columns were
in many cases greater than those called for in the plans and specifications resulting again in loss of
earthquake-resistant strength. The assertion of the engineering experts for the defendants that the
improper spacings and the cutting of the spirals did not result in loss of strength in the column
cannot be maintained and is certainly contrary to the general principles of column design and
construction. And even granting that there be no loss in strength at the yield point (an assumption
which is very doubtful) the cutting or improper spacings of spirals will certainly result in the loss of
the plastic range or ductility in the column and it is precisely this plastic range or ductility which is
desirable and needed for earthquake-resistant strength.
There is no excuse for the cavity or hollow portion in the column A4, second floor, and although this
column did not fail, this is certainly an evidence on the part of the contractor of poor construction.
The effect of eccentricities in the columns which were measured at about 2 1/2 inches maximum may
be approximated in relation to column loads and column and beam moments. The main effect of
eccentricity is to change the beam or girder span. The effect on the measured eccentricity of 2 inches,
therefore, is to increase or diminish the column load by a maximum of about 1% and to increase or

diminish the column or beam movements by about a maximum of 2%. While these can certainly be
absorbed within the factor of safety, they nevertheless diminish said factor of safety.
The cutting of the spirals in column A5, ground floor is the subject of great contention between the
parties and deserves special consideration.
The proper placing of the main reinforcements and spirals in column A5, ground floor, is the
responsibility of the general contractor which is the UCCI. The burden of proof, therefore, that this
cutting was done by others is upon the defendants. Other than a strong allegation and assertion that
it is the plumber or his men who may have done the cutting (and this was flatly denied by the
plumber) no conclusive proof was presented. The engineering experts for the defendants asserted
that they could have no motivation for cutting the bar because they can simply replace the spirals by
wrapping around a new set of spirals. This is not quite correct. There is evidence to show that the
pouring of concrete for columns was sometimes done through the beam and girder reinforcements
which were already in place as in the case of column A4 second floor. If the reinforcement for the
girder and column is to subsequently wrap around the spirals, this would not do for the elasticity of
steel would prevent the making of tight column spirals and loose or improper spirals would result.
The proper way is to produce correct spirals down from the top of the main column bars, a procedure
which can not be done if either the beam or girder reinforcement is already in place. The engineering
experts for the defendants strongly assert and apparently believe that the cutting of the spirals did
not materially diminish the strength of the column. This belief together with the difficulty of slipping
the spirals on the top of the column once the beam reinforcement is in place may be a sufficient
motivation for the cutting of the spirals themselves. The defendants, therefore, should be held
responsible for the consequences arising from the loss of strength or ductility in column A5 which
may have contributed to the damages sustained by the building.
The lack of proper length of splicing of spirals was also proven in the visible spirals of the columns
where spalling of the concrete cover had taken place. This lack of proper splicing contributed in a
small measure to the loss of strength.
The effects of all the other proven and visible defects although nor can certainly be accumulated so
that they can contribute to an appreciable loss in earthquake-resistant strength. The engineering
experts for the defendants submitted an estimate on some of these defects in the amount of a few
percent. If accumulated, therefore, including the effect of eccentricity in the column the loss in
strength due to these minor defects may run to as much as ten percent.
To recapitulate: the omission or lack of spirals and ties at the bottom and/or at the top of some of the
ground floor columns contributed greatly to the collapse of the PBA building since it is at these
points where the greater part of the failure occurred. The liability for the cutting of the spirals in
column A5, ground floor, in the considered opinion of the Commissioner rests on the shoulders of the
defendants and the loss of strength in this column contributed to the damage which occurred.
It is reasonable to conclude, therefore, that the proven defects, deficiencies and violations of the
plans and specifications of the PBA building contributed to the damages which resulted during the
earthquake of August 2, 1968 and the vice of these defects and deficiencies is that they not only
increase but also aggravate the weakness mentioned in the design of the structure. In other words,
these defects and deficiencies not only tend to add but also to multiply the effects of the
shortcomings in the design of the building. We may say, therefore, that the defects and deficiencies in
the construction contributed greatly to the damage which occurred.
Since the execution and supervision of the construction work in the hands of the contractor is direct
and positive, the presence of existence of all the major defects and deficiencies noted and proven
manifests an element of negligence which may amount to imprudence in the construction work. (pp.
42-49, Commissioners Report).
As the parties most directly concerned with this portion of the Commissioner's report, the defendants
voiced their objections to the same on the grounds that the Commissioner should have specified the
defects found by him to be "meritorious"; that the Commissioner failed to indicate the number of
cases where the spirals and ties were not carried from the floor level to the bottom reinforcement of
the deeper beam, or where the spacing of the spirals and ties in the columns were greater than that
called for in the specifications; that the hollow in column A4, second floor, the eccentricities in the
columns, the lack of proper length of splicing of spirals, and the cut in the spirals in column A5,
ground floor, did not aggravate or contribute to the damage suffered by the building; that the defects

in the construction were within the tolerable margin of safety; and that the cutting of the spirals in
column A5, ground floor, was done by the plumber or his men, and not by the defendants.
Answering the said objections, the Commissioner stated that, since many of the defects were minor
only the totality of the defects was considered. As regards the objection as to failure to state the
number of cases where the spirals and ties were not carried from the floor level to the bottom
reinforcement, the Commissioner specified groundfloor columns B-6 and C-5 the first one without
spirals for 03 inches at the top, and in the latter, there were no spirals for 10 inches at the bottom. The
Commissioner likewise specified the first storey columns where the spacings were greater than that
called for in the specifications to be columns B-5, B-6, C-7, C-6, C-5, D-5 and B-7. The objection to the
failure of the Commissioner to specify the number of columns where there was lack of proper length
of splicing of spirals, the Commissioner mentioned groundfloor columns B-6 and B-5 where all the
splices were less than 1-1/2 turns and were not welded, resulting in some loss of strength which
could be critical near the ends of the columns. He answered the supposition of the defendants that
the spirals and the ties must have been looted, by calling attention to the fact that the missing spirals
and ties were only in two out of the 25 columns, which rendered said supposition to be improbable.
The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate or
contribute to the damage, but averred that it is "evidence of poor construction." On the claim that the
eccentricity could be absorbed within the factor of safety, the Commissioner answered that, while the
same may be true, it also contributed to or aggravated the damage suffered by the building.
The objection regarding the cutting of the spirals in Column A-5, groundfloor, was answered by the
Commissioner by reiterating the observation in his report that irrespective of who did the cutting of
the spirals, the defendants should be held liable for the same as the general contractor of the
building. The Commissioner further stated that the loss of strength of the cut spirals and inelastic
deflections of the supposed lattice work defeated the purpose of the spiral containment in the column
and resulted in the loss of strength, as evidenced by the actual failure of this column.
Again, the Court concurs in the findings of the Commissioner on these issues and fails to find any
sufficient cause to disregard or modify the same. As found by the Commissioner, the "deviations
made by the defendants from the plans and specifications caused indirectly the damage sustained
and that those deviations not only added but also aggravated the damage caused by the defects in
the plans and specifications prepared by third-party defendants. (Rollo, Vol. I, pp. 128-142)
The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and the thirdparty defendants in effecting the plans, designs, specifications, and construction of the PBA building
and We hold such negligence as equivalent to bad faith in the performance of their respective tasks.
Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380) which may be
in point in this case reads:
One who negligently creates a dangerous condition cannot escape liability for the natural and
probable consequences thereof, although the act of a third person, or an act of God for which he is
not responsible, intervenes to precipitate the loss.
As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of ancient
buildings in the vicinity were hardly affected by the earthquake. Only one thing spells out the fatal
difference; gross negligence and evident bad faith, without which the damage would not have
occurred.
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and
environmental circumstances of this case, We deem it reasonable to render a decision imposing, as
We do hereby impose, upon the defendant and the third-party defendants (with the exception of
Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in favor of the Philippine Bar
Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception of
attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals)
and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total
sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%)
per cent interest per annum shall be imposed upon afore-mentioned amounts from finality until paid.
Solidary costs against the defendant and third-party defendants (except Roman Ozaeta).
SO ORDERED.
KENG
HUA
PAPER
PRODUCTS
CO.
INC.
v.
COURT
OF
APPEALS
(Remedies
for
Breach

Performance

To
deliver
all
its
accessions)
February
12,
1998

Ponente:
J.
Panganiban
FACTS:- Characters:
a) Keng Hua Paper Products consignee, receiver of shipment
b) Sea-Land Service Inc. shipping company, transporter of waste paper
c) Ho Kee Waste Paper shipper- Definitions:
a) Bill of lading - document issued by a carrier to a shipper, acknowledging that specified
goods
have been received on board as cargo for conveyance to a named place for delivery to the
consignee who is usually identified.
b) Demurrage an allowance or compensation for the delay or detention of a ship/vessel;
has
reference to the ships expenses, wear and tear, and common employment.
- Keng Hua purchased from Ho Kee fifty tons of waste paper, with partial shipment permitted.
- On June 29, 1982, Sea-Land received at its Hong Kong terminal a sealed container containing 67
bales of unsorted waste paper for shipment to Keng Hua in Manila. A bill of lading to cover the
shipment was issued by Sea-Land.
- However, the June 29 shipment was 10 tons more than the remaining balance of the purchase/order,
as manifested under the letter of credit. (Keng Hua ordered 50 tons. 10 tons na lang dapat yung
kulang/balance. Pero yung June 29 shipment, 20 tons of waste paper.)
- On July 9, 1982, the shipment was discharged at the Manila International Container Port. Notices of
arrival were transmitted to Keng Hua but it failed to discharge the shipment from the container during
the free time or grace period. The waste paper remained inside Sea-Lands container from the
expiration of the free time period (July 29) until the shipment was unloaded on November 22, 1983
(481 days).
- During the 481-day period, demurrage charges accrued. Numerous demands for Keng Hua to pay
but it refused to settle its obligation.
PROCEDURAL HISTORY:
- Sea-Land sued Keng Hua for collection and damages.
- The Regional Trial Court of Manila rendered judgment in favor of Sea-Land, and ordered Keng Hua to
pay P67,340 as demurrage charges with interest at the legal rate from the date of the extrajudicial
demand. Also, Keng Hua must pay 10% of the total amount due as attorneys fees/litigation expenses.
- Court of Appeals affirmed in toto the RTC.
ISSUES:
1) WoN Keng Hua accepted the bill of lading.
2) WoN the award of P67,340 to Sea-Land was proper
3) WoN Keng Hua was correct in not accepting the overshipment
4) WoN the award of legal interest from the date of Sea-Lands extrajudicial demand was proper
PETITIONERS ARGUMENTS:
- If Keng Hua accepted the shipment, it would be violating Central Bank rules and regulations and
custom and tariff laws. It would be tantamount to smuggling. It would make Keng Hua vulnerable to
legal sanctions.
- Sea-Land has no cause of action against Keng Hua because Keng Hua did not hire Sea-Land. The
cause of action should be against the shipper, Ho Kee. The demurrage was a consequence of the
shippers mistake of shipping more than wahat was bought.
- Keng Hua duly notified Sea-Land about the wrong shipment through a letter dated January 24, 1983.
- Keng Hua is not bound by the bill of lading because it never gave its consent. It admits physical
acceptance of the bill of lading, but argues that its subsequent actions belie the finding that it
accepted
the
terms.
- Notice of Refused or On Hand Freight: proof that Keng Hua declined to accept the shipment.
RESPONDENTS ARGUMENTS:
- None really, just that Keng Hua should pay demurrage charges since it delayed Sea-Lands vessel by
failing to unload the shipment during the free time period.

RATIO:
1) YES, Keng Hua accepted and is thus bound by the bill of lading.
- A bill of lading has two functions:
a) receipt for the goods shipped,
b) a contract by which three parties (shipper, carrier, and consignee) undertake specific
responsibilities and assume stipulated obligations.
- A bill of lading delivered and accepted constitutes the contract of carriage even though not signed
because the acceptance of a paper containing the terms of a proposed contract generally constitutes
an acceptance of the contract and of all its terms and conditions of which the acceptor has actual or
constructive notice.
- Acceptance = perfect and binding contract
- The bill of lading between Ho Kee, Keng Hua, and Sea-Land was a valid and PERFECTED contract.
Section 17 of the bill of lading provides that the shipper and consignee were liable for demurrage
charges for the failure to discharge the shipment within the grace period.
- SC not persuaded by Keng Huas arguments. Keng Hua did not immediately object to or dissent
from any term or stipulated in the bill of lading. It waited for SIX MONTHS to send a letter to Sea-Land
saying that it would not accept the shipment.
- The inaction for such a long period conveys the clear inference that it accepted the terms and
conditions of the bill of lading.
- Re: Notice of Refused or On Hand Freight: said notice was not written by Keng Hua; it was sent by
Sea-Land to Keng Hua four months after it received the bill of lading. Its only significance is to
highlight Keng Huas prolonged failure to object to the bill of lading.
- Issue of WoN Keng Hua accepted the bill of lading is raised for the first time in the SC (not raised in
the lower courts). Hence, it is barred by estoppel.
- Prolonged failure to receive and discharge cargo -> violation of terms of bill of lading -> liability for
demurrage
2) YES, it is proper
- Keng Hua argued that Sea-Land made no demand for the sum of P67,340. Also, Sea-Lands loss and
prevention manager (P50,260) and its counsel (P37,800) asked for different amounts.
- The amount fo P67,340 was a factual conclusion of the trial court, affirmed by the Court of Appeals,
and is therefore binding on the SC. Such finding is supported by extant evidence.
- Re: discrepancy in amounts demanded: result of the variance of dates when the demands were
made. The longer the cargo remained unclaimed, the higher the demurrage. Thus when counsel
demanded on April 24, 1983 P37,800, it already ballooned to P67,340 by November 22.
3) NO.
- Re: violation of laws: mere apprehension of violating said laws, without a clear demonstration that
taking delivery of the shipment has become legally impossible, cannot defeat Keng Huas obligations
under the bill of lading.
4) NO.
- Based on NCC 2209: interest rate is six percent per annum.
- Bill of lading did not specify the amount of demurrage; this was only established during the trial
court decision. Hence, the rate is 6% to be computed from the trial court decision (Sept. 28, 1990),
plus 12% on the total then outstanding from the time judgment becomes final and executory until its
satisfaction.
* In a letter of credit, there are three distinct and independent contracts:
a) contract of sale between buyer and seller
b) contract of buyer with issuing bank
c) letter of credit proper where bank promises to pay seller
- These three are to be maintained in perpetual separation.

- The contract of carriage in the bill of lading must be TREATED INDEPENDENTLY of the contract of
sale and contract with issuing bank. Any discrepancy between the contract of sale and letter of credit
will NOT AFFECT the validity of the contract of carriage in the bill of lading.
- The carrier cannot be expected to go beyond the representation of the shipper in the bill of lading
and to verify their accuracy vis--vis the contract of sale and the letter of credit.
- Carrier had no knowledge of the contents of the container.
DISPOSITIVE:
- CA decision is AFFIRMED, legal interest MODIFIED to 6% to be computed from the trial court
decision (Sept. 28, 1990), plus 12% on the total then outstanding from the time judgment becomes
final
and
executory
until
its
satisfaction

Manuel
Joe
CHAVEZ,
Appellant,
v.
Fred
R.
DICKSON,
Warden,
California
State
Prison
at
San
Quentin,
California,
Appellee.
Clyde
BATES,
Appellant,
v.
Fred
R.
DICKSON,
Warden,
California
State
Prison
at
San
Quentin, California, Appellee.
Nos. 17532 and 17533.
United States Court of Appeals Ninth Circuit.
March 22, 1962, Rehearing Denied May 21, 1962.
Gladstein, Anderson, Leonard & Sibbett, by Richard Gladstein, Norman Leonard, San Francisco, Cal.,
for appellant Chavez.
Ruth Jacobs, San Francisco, Cal., for appellant Bates.
Stanley Mosk, Atty. Gen. for State of California, Arlo E. Smith, Chief Asst. Atty. Gen., for appellee.
Before HAMLEY and KOELSCH, Circuit Judges, and MURRAY, District Judge.
HAMLEY, Circuit Judge. This is the second appeal in these habeas corpus proceedings. On the prior
appeal we reversed orders of denial and remanded the causes for further proceedings. Chavez v.
Dickson, 9 Cir., 280 F.2d 727. The further proceedings were had and the district court again denied the
applications. The applicants, Manuel Joe Chavez and Clyde Bates, once more appeal and have filed
joint briefs in this court. Chavez and Bates, together with one Manuel Hernandez, were jointly tried
before a jury in the Superior Court of the State of California in and for the County of Los Angeles, on
indictments charging six counts of murder and one count of arson. 1 The charges resulted from an
occurrence on April 4, 1957, when gasoline and lighted matches were thrown into a Los Angeles bar,
causing the death of six persons. All three were convicted of first degree murder on each of the
murder counts, and were also all convicted on the arson count. The jury fixed the punishment of
Chavez and Bates at death and that of Hernandez at life imprisonment. Sentences of death were
imposed on Chavez and Bates. Their convictions and sentences were upheld by the Supreme Court of
California, People v. Chavez, 50 Cal.2d 778, 329 P.2d 907, and certiorari was denied, Chavez v.
California, 358 U.S. 946, 79 S.Ct. 356, 3 L.Ed.2d 353; Bates v. California, 359 U.S. 993, 79 S.Ct. 1126, 3
L.Ed.2d 982. These habeas corpus proceedings were then instituted and were consolidated for
disposition in the district court and this court. On the prior appeal we rejected a number of
contentions advanced by appellants, but found merit in two of their arguments. One of these had to
do with the fact that, in the state court trial, John A. Tidyman, a police officer, was permitted to read
two statements which were transcribed from tape recordings of conversations between Tidyman,
another police officer, appellants and others. One of these statements, herein called the Hernandez
statement, was a transcription of a tape recorded conversation between these two officers and
hernandez. The other, herein called the Brenhaug statement, was a transcription of a tape recorded
conversation between these two officers, the three codefendants, and one Oscar Brenhaug. Brenhaug
was then also under indictment for these offenses, but the indictments were later set aside as to him.
In his application, Bates alleged that the transcriptions were not accurate. At the first district court
hearing Chavez orally adopted this allegation as an amendment to his application. Amplifying this

allegation, counsel for appellants told the district court at teh first hearing that they had informed the
state trial judge that the recordings were completely unintelligible and that there were glaring
discrepancies between the recordings and the transcripts. According to the statement appellants'
counsel made to the district court, the state trial judge declined to listen to the recordings and
permitted the transcripts to be read to the jury. These representations having been made to the
district court at the first hearing, that court nevertheless declined to listen to the recordings and
compare them with the transcribed statements. We held that this was error. Remanding for further
proceedings we stated: 'At such further hearing the tape recordings should be called for and listened
to, and the trial court proceedings relative to the use of the transcribed statements should also be
examined. The fact that parts of the recordings may be unintelligible and were therefore not included
in the transcribed statement would not constitute a denial of due process unless it is apparent that
substantial prejudice resulted therefrom. But a material variance between intelligible portions of the
recordings and the transcribed statements substantially prejudicing appellants would require federal
relief, provided that the point was properly raised and preserved at the trial.' At the second district
court hearing, following this remand, the district court read the Hernandez and Brenhaug statements
while listening to the tape recordings of those conversations. The tape recordings and transcripts
were later received as exhibits. All portions of the state trial court record having to do with the
introduction of the transcripts and the state trial court's rulings thereon were also specifically called
to the district court's attention and examined. In a written opinion thereafter filed, the district court
made the following statement: 'In the main the transcribed statements appeared to be accurate as to
material matters. We found no material variances from the recordings, certainly no gross variances,
and certainly nothing even remotely approaching a failure of constitutional due process. 'There is not
the slightest merit to the contention that there was a failure of due process in any way with respect to
the transcriptions.' On the basis of this finding and conclusion the district court rejected the
contention that the application should be granted because the transcripts were not accurate
representations of the recorded conversations. On this second appeal, appellants contest this
conclusion and the findings upon which it was based. They argue that the district court erred in: (1)
failing to find that the Hernandez tape was unintelligible and in finding that there was no material
variance between it and the Hernandez transcription; (2) failing to find that there was matter on the
Brenhaug tape which was not transcribed; (3) refusing to hear evidence in connection with the
authenticity of the tape recording; and (4) preventing appellants from referring to the prosecutor's
use, on closing argument, of the transcribed statements. Concerning both the Hernandez and
Brenhaug statements, the state presents some preliminary matters which raise the question of
whether we can reach the merits of appellants' points summarized above. One of these is that, in the
state trial court, neither appellant made any objection to the reading of the Brenhaug statement on the
ground that there were substantial variances between it and the tape recording. Although the state
did not raise this point on the prior appeal it may do so now, since it presents a jurisdictional
question. If neither appellant made such an objection during the state court trial, and if such failure is
inexcusable, state remedies were not exhausted and, under 28 U.S.C.A. 2254, the district court was
without jurisdiction to entertain the applications. Before either the Brenhaug or the Chavez
statements were read to the jury, counsel for appellants were afforded an opportunity to listen to the
recordings outside of the court room, and to follow them on the transcribed statements. When the
state thereafter asked Officer Tidyman to read the Hernandez statement, counsel for appellants
objected on several grounds, one being that the Hernandez transcript was not a true and correct
record of the taped conversation. This objection was not framed in such a way that it could be held to
apply also to the Brenhaug transcript. At a later point in the trial when the state asked Tidyman to
read the Brenhaug statement, objections of counsel were to the effect that the statement was not the
best evidence, that it was not proper impeachment, that it was not an accusatory statement as the
Chavez, and that the witness had no independent recollection of the conversation. There was no
objection on the ground that the transcript was not an accurate reflection of the tape recording, 2 nor
has any excuse been offered why this objection was not made. We accordingly hold that appellants
did not exhaust their state remedies with regard to the asserted inaccuracy of the Brenhaug
statement and and the district court was therefore without jurisdiction to consider this ground for
granting the application.3 The state also points out, on the question of exhaustion of state remedies,
that Chavez did not raise the question of the accuracy of the Hernandez transcription in his petition to
the United States Supreme Court for certiorari, following the decision of the California Supreme Court

affirming his conviction and sentence. The rule thus sought to be invoked, as established in Darr v.
Burford, 339 U.S. 200, 70 S.Ct. 587, 94 L.Ed. 761, and recently applied by this court in Duncan v.
Carter, 9 Cir., 299 F.2d 179, is that, absent special circumstances, failure to petition for a writ of
certiorari with respect to a particular contention precludes district court consideration thereof in a
subsequent habeas corpus proceeding. In our opinion, special circumstances exist here which render
inapplicable the requirement, as to Chavez, that this particular point must have been raised in the
petition for a writ of certiorari. Chavez and Bates had been tried together and their appeals had been
consolidated for argument and disposition in the Supreme Court of California. Both raised the point in
the Supreme Court of California and Bates raised it in his petition for a writ of certiorari. While the two
petitions were disposed of in separate orders several months apart, they must have been pending at
the same time or very nearly the same time. As between Chavez and Bates there are no distinguishing
features which could have resulted in a holding one way as to Bates and another way as to Chavez.
Thus the denial as to Bates indicates that in all probability it would have been denied as to Chavez,
had the point been raised. Where an applicant for a writ of habeas corpus raised a particular point in
one petition for certiorari, but failed to raise it in a subsequent petition, we have held that special
circumstances existed excusing the subsequent deficiency. See Daugharty v. Gladden, 9 Cir., 257 F.2d
750, 756. By analogy we think Chavez' failure to raise the point in his petition, pending at about the
same time as that of his co-defendant wherein the point was raised, constitutes a special
circumstance excusing Chavez' failure to present the matter in his petition. A second preliminary
point raised by the state with regard to the Hernandez statement and recording is that since the jury
was expressly instructed to consider the Hernandez statement only as against Hernandez, and not as
against either Chavez or Bates, the use of that statement raises no federal question as to either
Chavez or Bates. On the prior appeal appellants advanced two reasons why use of the Hernandez
statement deprived them of due process. The first of these was that, apart from the question of
accuracy, the statement, while admissible in part as to Hernandez as an admission was in the main
accusatory of Chavez and Bates at a time when they were not present and therefore, despite the
instruction that it be considered only as to Hernandez, was prejudicial as to Chavez and Bates. We
held, however, that since this particular reason raised no question concerning a federally-significant
external event, the state court ruling that the statement was admissible as to Hernandez was not
subject to review in the federal proceeding. We further ruled that the fact that Chavez and Bates may
have been prejudiced by evidence properly admissible as to Hernandez presented no federal due
process question. The second reason advanced by appellants on the prior appeal why the use of the
Hernandez statement deprived them of due process was the same one they advance on this second
appeal-- the Hernandez statement was not an accurate representation of the recorded conversation.
Since this contention did bring into question the facts concerning an external event (the accuracy of
the transcripts) we held, in effect, that the federal court was not bound by the state court ruling on
this objection to the statement. It was also our view that if this statement was grossly inaccurate, the
question of whether the appellants were substantially prejudiced by its use should be inquired into
despite the fact taht the jury was instructed that the statement was not to be considered as against
Chavez and Bates. Accordingly we directed the district court, on remand, to inquire both as to the
accuracy of the statement and the prejudice resulting from its use. The state is therefore, in effect,
asking us to now reconsider the views expressed and directions given on our prior appeal. Bearing in
mind the fact that we limited the indicated inquiry to the objection that the statement was
substantially inaccurate, we adhere to the view previously expressed. If the statement was
substantially inaccurate it was not only inadmissible as to any defendant, including Hernandez, but
the defect may have been so grievous that the jury instruction to disregard it as to Chavez and Bates
ought not to be considered conclusive on the question of substantial prejudice. This brings us to
appellants' argument on the merits with reference to the use of the Hernandez statement. First,
appellants argue, the statement, quoted above, made by the district court in disposing of this matter,
does not constitute specific findings of fact. They contend that the words 'in the main,' 'material
matters' and 'material variances' as used therein without definition or explanation are 'merely
conclusions of law.' The district court was directed to ascertain whether there was a variance between
intelligible portions of the recording and the transcribed statement of sufficient materiality to
prejudice appellants. This presented a mixed question of fact and law and the district court's
statement was sufficiently explicit to advise us as to its views on both features of the question.
Having determined that such variance as there may have been between intelligible portions of the

recording and the transcribed statement were not 'material' in the sense that appellants were
prejudiced, the district court was not required to set out what it regarded as immaterial variances.
Rather, the burden was placed upon appellants to demonstrate on this appeal that there were material
variances of this kind. Appellants' counsel have had access to the statements and tape recordings,
but have not called our attention to a single instance, material or otherwise, in which the tape
recording indicates that one statement was made while the transcript reports that a different
statement was made. Nor do they call attention to any specific statement in the transcript which is
unsupported by an intelligible portion of the tape. Instead, appellants have been content to quote
excerpts from statements made in the second district court hearing in which attorneys, Officer
Tidyman and the district court expressed opinions as to the difficulty of understanding the tape.
Appellants also ask us to listen to the tape recording and ascertain for ourselves whether there is a
material variance. We have done so, having before us at the time the transcribed Hernandez
statement. Based thereon, we conclude that such variances as there were between the transcript and
the intelligible portions of the tape recording, were of a minor nature and did not prejudice appellants.
There are places in the tape recording that are so unintelligible that no effort was made to report them
in the transcript. But Officer Tidyman testified before the jury that there were certain portions of the
tape recording that could not be heard. Moreover, the places where the tape was unintelligible were
so indicated in the transcribed statement. As Tidyman read the statement to the jury he repeated each
such indication. The jury was therefore fully aware of the fact that the statement did not purport to be
a word-for-word transcription of all that was said during the recorded conversation. The transcript
was not offered as an independent exhibit but as a memorandum prepared to refresh the recollection
of Tidyman as to a conversation which he actually heard.4 Tidyman was subjected to unrestricted voir
dire examination concerning the conversation and the transcribing of the tape recording. He was also
subjected to cross examination. In addition, appellants were advised that they could play the tape
recording to the jury, but they chose not to do so. Had Tidyman attempted to orally testify concernign
this conversation, depending upon his recollection, the fact that he was unable to repeat the
conversation word for word, or was unable to recollect the substance of all of it, would present no
due process question. By analogy, we think the same must be said concerning a transcribed
statement used to refresh witnesses' recollection of a conversation, where the jury is made aware of
the fact that certain unintelligible portions of the tape were not transcribed. Appellants also argue that
the district court erred in refusing to receive evidence at the second hearing bearing on the
authenticity of the Hernandez tape recording. A deputy county clerk identified the Hernandez tape
recording as the one which had been introduced as an exhibit at the state court trial. Tidyman
testified that he had nothing to do with the tape after it was introduced as an exhibit at the state court
trial. Counsel for appellants sought to question him as to the custody of the tape after the
conversation and prior to the trial and whether he could testify that it was not tampered with prior to
the state trial. The district judge sustained objections to this line of questions. No allegation that the
tape was tampered with prior to the trial was made in the applications for writs of habeas corpus nor
was such a contention advanced on the prior appeal to this court. In remanding the cause we did not
ask the district court to look into the matter. Hence the issue was not before the district court on our
remand. Counsel for appellants do not represent that they have come into possession of information
indicating that the tapes were tampered with prior to the state trial. Hence they were not in a position
to raise this as a new point on the theory of amending the applications, and they did not do so. Under
these circumstances this line of questioning was not material to any issue before the district court,
and that court did not err in sustaining the objections to these questions. Appellants' final argument
with regard to the recording of the Hernandez transcription is that at the second hearing the district
court prevented appellants from referring to the prosecutor's use of that statement during his closing
argument to the jury. Appellants do not refer us to any record reference tending to support this
assertion as to what happened in the district court. In its answering brief the state calls attention to
several places in the record where the district judge inquired whether counsel desired to call attention
to any other parts of the state court record. Appellants' reply brief is silent on the point. This
argument of appellants therefore seems to rest on a faulty factual premise. In any event, having held
that the Hernandez statement was substantially accurate, the fact that the prosecutor made use of it
before the jury would be immaterial to any issue in these habeas corpus proceedings. Appellants'
second main point on this appeal is that the district court erred in failing to find and conclude that the
erroneous introduction of assertedly gruesome photographs during the state court trial constituted a

denial of due process. This problem was dealt with at considerable length in our prior decision. The
facts there recited and views there expressed need not be repeated. See 280 F.2d 727, at 738-739. We
directed that, on the remand, the district court should examine the photographs made away from the
premises for the purpose of determining whether their introduction, which the California Supreme
Court ruled was erroneous, has deprived appellants of due process. The district court found, after
examining these photographs, that one was of a similar kind to two photographs taken inside the
premises which the court had characterized as gruesome. The court concluded, however, that the
introduction of this gruesome photograph taken off the premises did not deprive appellants of due
process. Having examined all of the photographs we are of the view that none of those taken off of
the premises is as gruesome as one taken inside the premises. The latter photograph was held
admissible by the Supreme Court of California on the ground that its probative value as to relevant
issues in the case outweighed possible prejudice resulting from its tendency to arouse the passions
of the jury. The photographs taken off of the premises being, in our opinion, less gruesome than the
properly-admitted one taken inside, introduction of the outside photographs did not add appreciably
to the prejudice appellants had already sustained. We agree with the trial court that in the matter of
the reception of photographs, appellants were not deprived of due process. Finally, appellants argue,
they were denied due process of law by California's construction of Penal Code section 189, 447a,
and 448a. This same argument was made on the prior appeal and found to be without merit. We
adhere to the views there expressed. Affirmed.1
The latter count charged a violation of section 448a, Penal Code of California, characterizing the crime
as 'arson.' Appellants contend that the crime was not arson within the meaning of section 189 of the
Penal Code of California
It may be that the reason no objection of this kind was made is that Tidyman made it clear in his
testimony that the Brenhaug statement consisted partly of a transcript of the recording, and partly of
his dictated recollection of the conversion made at a time when the conversation was in his
recollection
Considering the possibility that we may be held to be in error in so concluding, we have listened to
the Brenhaug tape recording, following it on the Brenhaug transcript. We are of the view that most of
the tape recording is intelligible and that the transcript, with substantial accuracy, reflects the
intelligible part. To a minor extent the transcript contains statements not intelligible on the tape, this
no doubt being the result of Tidyman's dictated supplementation. Even if it be assumed that
Tidyman's recollection may have been faulty as to these additions, they were not, in our view, of such
a nature that substantial prejudice to appellants could have resulted
While Tidyman had no independent recollection of the conversation at the time of the state court trial,
the trial judge ruled, on the authority of People v. Vera, 131 Cal.App.2d 669, 281 P.2d 65, that the
statement could nevertheless be read to the jury. This ruling on the admissibility of evidence in a
state court trial is not subject to review here

Tanguilig vs CA266 SCRA 78

Respondent Vicente Herce Jr. contracted petitioner Jacinto Tanguilig to construct a windmill system
forhim with a one year guaranty. Respondent had paid the downpayment and an installment payment
but,failed and refused to pay the remaining balance. Respondent alleged that the balance should be
offsetby the defects in the windmill system which caused the structure to collapse. Petitioner rejected
theobligation to repair or reconstruct the system as it was delivered in good and working condition
andclaimed that its collapse was due to a typhoon which is a fortuitous event which relieved him of
anyliability. Petitioner also alleged that the respondent was in default in the payment of the balance
andhence should bear his own loss.
Issues:1.) Whether or not the petitioner can claim expemtion from liability by reason of a fortuitous
event.2.) Whether or not the respondent is in default in the payment of his outstanding balance.
Held:1.) No. The petitioner failed to show that the collapse of the windmill was due solely to a
fortuitousevent. The evidence did not disclose that there was actually a typhoon on the day the
windmillcollapsed. Petitioner merely stated that there was a strong wind. A strong wind in this case
cannot befortuitous - unforeseeable nor unavoidable. On the contrary, strong wind should be present
in placeswhere windmills are constructed, otherwise the windmills will not turn.2.) No. In reciprocal
obligations, neither party incurs in delay if the other does not comply or is not readyto comply in a

proper manner with what is incumbent upon him. When the windmill failed to functionproperly. it
became incumbent upon petitioner to institute the proper repairs in accordance with theguaranty
stated in the contract. Article 1167 of the Civil Code is explicit on this point that if a personobliged to
do something fails to do it, the same shall be executed at his cost
Boysaw vs. Interphil Promotions
Summary: A boxer signed an agreement with a promotions agency to arrange and promote a boxing
match with Flash Elorde. The boxer violated the terms of the contract, but in spite of these, the
agency proceeded except it negotiated for a new date for the match. Eventually, the match as
originally stated in the contract did not materialize. Boxer and manager is now suing the promotion
agency
for
breach
of
contract.
Rule of Law: Where one party 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 contract by the
other
party,
or
recover
damages
by
reason
of
his
own
breach.
Facts: Solomon Boysaw (P), signed with Interphil Promotions, Inc. (D), a contract to engage Gabriel
"Flash" Elorde in a boxing contest for the junior lightweight championship of the world. Thereafter,
Interphil (D) signed Gabriel "Flash" Elorde to a similar agreementthat is, to engage Boysaw in a title
fight.
The managerial rights over Boysaw (P) was assigned and eventually reassigned to Alfredo Yulo, Jr.
(P) without the consent of Interphil (D) in violation of their contract. When informed of the change,
Interphil (D) referred the matter to the Games and Amusement Board culminating to a decision by the
board to approve a new date for the match. Yulo (P) protested against the new date even when
another
proposed
date
was
within
the
30-day
allowable
postponements.
Boysaw (P) and Yulo (P) filed for breach of contract when the fight contemplated in the original
boxing
contract
did
not
materialize.
Issues: May the offending party in a reciprocal obligation compel the other party for specific
performance?
Ruling: No. Evidence established that the contract was violated by Boysaw (P) when, without the
approval or consent of Interphil (D), he fought a boxing match in Las Vegas. Another violation was the
assignment and transfer of the managerial rights over Boysaw (P) without the knowledge or consent
of
Interphil
(D).
While the contract imposed no penalty for such violation, this does not grant any of the parties the
unbridled liberty to breach it with impunity. Our law on contracts recognizes the principle that
actionable injury inheres in every contractual breach.
Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those
who
in
any
manner
contravene
the
terms
thereof,
are
liable
for
damages.
Article 1170, Civil Code.
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.
Article 1191, Civil Code.
The contract in question gave rise to reciprocal obligations.
Reciprocal obligations are those which arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of
the other. They are to be performed simultaneously, so that the performance of one is conditioned
upon
the
simultaneous
fulfillment
of
the
other.
Tolentino, Civil Code of the Philippines, Vol. IV, p. 175.

The power to rescind is given to the injured party.

Where the plaintiff is the party who 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 contract by the
defendant,
or
recover
damages
by
reason
of
his
own
breach.
Seva vs. Alfredo Berwin, 48 Phil. 581.
Under the law, when a contract is unlawfully novated by an applicable and unilateral substitution of
the obligor by another, the aggrieved creditor is not bound to deal with the substitute. However, from
the evidence, it is clear that the Interphil (D), instead of availing themselves of the options given to
them by law of rescission or refusal to recognize the substitute obligor, really wanted to postpone the
fight date owing to an injury that Elorde sustained in a recent bout. That Interphil (D) had justification
to renegotiate the original contract, particularly the fight date is undeniable from the facts. Under the
circumstances, Interphil's (D) desire to postpone the fight date could neither be unlawful nor
unreasonable.
University of the Philippines v. De Los AngelesG.R. No. L-28602 September 29, 1970
Facts:
On November 2, 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 theagreement to 31 December 1965,
extendible for a further period of five (5) years by mutualagreement, 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 UPwould rescind or terminate the logging agreement, ALUMCO executed an instrument,entitled
"Acknowledgment of Debt and Proposed Manner of Payments," dated 9 December 1964, which was
approved by the president of UP, which expressly states that, upon defaultby the debtor ALUMCO, the
creditor (UP) has the right and the power to consider theLogging Agreement as rescinded without
the necessity of any judicial suit. ALUMCO continued its logging operations, but again incurred
an unpaid account.On July 19, 1965, petitioner UP informed respondent ALUMCO that it had, as of
that date,considered as rescinded and of no further legal effect the logging agreement that they
hadentered in 1960. UP filed a complaint against ALUMCO for the collection or payment of theherein
before stated sums of money and it prayed for and obtained an order for preliminaryattachment
and preliminary injunction restraining ALUMCO from continuing its loggingoperations in the Land
Grant. Respondent ALUMCO contended that it is only after a finalcourt decree declaring the contract
rescinded for violation of its terms that U.P. coulddisregard ALUMCO's rights under the contract and
treat the agreement as breached and of no force or effect.
Issue:
Whether or not petitioner U.P. can treat its contract with ALUMCO rescinded and maydisregard the
same before any judicial pronouncement to that effect.
Held:
UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt andProposed Manner of
Payments" that, upon default by the debtor ALUMCO, the creditor (UP)has "the right and the power to
consider, the Logging Agreement as rescinded without thenecessity of any judicial suit." In
connection with Article 1191 of the Civil Code, the Courtstated in Froilan vs. Pan Oriental Shipping Co
that there is nothing in the law thatprohibits the parties from entering into agreement that violation of
the terms of the contractwould cause cancellation thereof, even without court intervention. In other
words, it is notalways necessary for the injured party to resort to court for rescission of the contract.
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 theother 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 actionin 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 besentenced to damages; in the contrary case, the resolution
will be affirmed, and theconsequent indemnity awarded to the party prejudiced.

SECOND DIVISION
[G.R. No. 124513. October 17, 2001]
ROBERTO ERQUIAGA, and GLENN OROSCO, petitioners, vs. HON. COURT OF APPEALS, REGIONAL
TRIAL COURT, Branch 24, Naga City, and PEOPLE OF THE PHILIPPINES, respondents.
DECISION
QUISUMBING, J.:
For review is the decision[1] dated August 30, 1995, of the Court of Appeals in CA-GR No. 14904
affirming with modification the judgment of the Regional Trial Court of Naga City, Branch 24, dated
March 31, 1993. The RTC of Naga City had found appellants guilty of estafa.
The facts of this case are as follows:
Honesta Bal is a businesswoman who owned a bookstore. Sometime in May 1989, she was contacted
by Manuel Dayandante @ Manny Cruz who offered to buy her land in Pili, Camarines Sur. He told
Honesta that the company he represented was interested in purchasing her property. On May 5, 1989,
Honestas daughter, Josephine Tapang, received a telegram from Dayandante informing Honesta that
the sale had been approved and that he would arrive with the inspection team on May 12, 1989. [2] On
May 19, 1989, Honesta received a call from Dayandante. Her daughter and she met Dayandante and a
certain Lawas @ Rodolfo Sevilla at the Aristocrat Hotel. Dayandante and Lawas said they were field
purchasing representative and field purchasing head, respectively, of the Taiwanese Marine
Products. They persuaded Honesta to purchase cans of a marine preservative which, could be
bought for P1,500 each from a certain peddler. In turn, they would buy these cans from her at P2,000
each.
The following day, May 20, 1989[3] Glenn Orosco, one of herein petitioners, appeared at Honestas
store and introduced himself as an agent, a.k.a. Rey, who sold said marine preservative. Like a fish
going after a bait, Honesta purchased a can which she sold to Dayandante for P1,900. The following
day, May 21, Orosco brought five more cans which Honesta bought and eventually sold to Lawas. It
was during this transaction that petitioner Roberto Erquiaga, a.k.a. Mr. Guerrerro, was introduced to
Honesta to ascertain whether the cans of marine preservative were genuine or not.[4]
On May 24, Orosco delivered 215 cans to Honesta. Encouraged by the huge profits from her previous
transactions, she purchased all 215 cans for P322,500. She borrowed the money from a Jose Bichara
at 10% interest on the advice of Erquiaga who lent her P5,000.00 as deposit or earnest money and
who promised to shoulder the 10% interest of her loan. Soon after the payment, Lawas, Dayandante,
Erquiaga, and Orosco vanished. Realizing that she was conned, Honesta reported the incident to the
National Bureau of Investigation (NBI) which, upon examination of the contents of the cans,
discovered that these were nothing more than starch. The NBI likewise uncovered that the modus
operandi and sting operation perpetrated on Honesta had been going on in other parts of the country,
in particular, Cebu, Batangas, Dagupan, Baguio and Olongapo.[5]
On December 4, 1989, an Information for Estafa under Article 315, paragraph 2 (a) of the Revised
Penal Code, was filed against Roberto Erquiaga, Glenn Orosco, Pastor Lawas and Manuel
Dayandante. Said information reads:
That on or about May 24, 1989, in the City of Naga, Philippines, and within the jurisdiction of this
Honorable Court, the above-named accused, confederating, conspiring and helping one another,
under a common design or scheme, did then and there, by means of misrepresentation and deceit,
wilfully, unlawfully and feloniously defraud herein complaining witness HONESTA P. BAL, in the
following manner, to wit: accused above-named, well knowing that the two hundred fifteen (215)
sealed tins they are selling contain only starch, misrepresented to the complaining witness that the
same is made in Singapore as marine product preservative and relying on said deceitful
misrepresentation, the latter paid the value of the two hundred fifteen (215) tins of said item at a unit
price of P1,500.00 per can or for a total price of P322,500.00, which turned out to be only starch with
no significant commercial value after the same were examined at the NBI Forensic Chemistry
Examination Division, Manila, thereby defrauding said complaining witness in the aforesaid sum of
THREE HUNDRED TWENTY TWO THOUSAND FIVE HUNDRED (P322,500.00) PESOS, Philippine
Currency, to her damage and prejudice.
CONTRARY TO LAW.[6]

Upon arraignment, Erquiaga and Orosco pleaded not guilty to the offense charged. Dayandante was
apprehended only during the latter part of 1992 and was tried separately, while Lawas is still at-large.
On March 31, 1993, the RTC promulgated its decision finding the petitioners guilty of estafa. The
dispositive portion of said decision reads:
WHEREFORE, for all the foregoing, the Court finds accused Roberto Erquiaga, a.k.a. Mr. Guerrero
and Glenn Orosco, a.k.a. Rey guilty of the offense of estafa as defined and penalized under Article
315, paragraph 2 (a) of the Revised Penal Code, beyond reasonable doubt and, in accordance with the
provisions of the Indeterminate Sentence Law, hereby sentences them to suffer the penalty of ten (10)
years of prision mayor in its medium period, as minimum penalty to seventeen (17) years and four (4)
months of reclusion temporal in its medium period, as maximum penalty. The said accused are
ordered to indemnify jointly and severally Honesta P. Bal, the herein offended party, the sum of Three
Hundred Twenty Two Thousand and Five Hundred (P322,500.00) Pesos, plus interest thereon at the
rate of twelve (12%) percent per annum computed from May 24, 1989 up to the time the said amount
shall have been paid in full, and to pay the costs.
SO ORDERED.[7]
The Court of Appeals affirmed the decision of the trial court but modified the penalty imposed. The
dispositive portion of the appellate courts decision reads:
THE FOREGOING CONSIDERED, the appealed Decision, while affirmed, should be MODIFIED. The
penalty should instead be FOUR (4) YEARS and TWO (2) MONTHS of prision correccional as the
minimum, to TWENTY (20) YEARS of reclusion temporal as maximum; to indemnify, jointly and
severally, Honesta Bal, the amount of P322,500.00 with interest at 12% per annum starting May 24,
1989 until full payment; and to pay the costs.
SO ORDERED.[8]
Petitioners filed their separate motions for reconsideration[9] which the appellate court denied for
lack of merit.[10] Petitioners now raise before us the following questions of law:
(1) Can the court validly render judgment of conviction based on mere conjectures, surmises that
there was conspiracy to commit the offense, if the evidence presented by the prosecution is not
strong enough to stand the test of reason?
(2) Can the legal maxim flight is an evidence of guilt prevail over the constitutional presumption of
innocence accorded to all accused in criminal case?
(2.1) Are the petitioners duty bound to prove their innocence?
(3) Can the loss in a consummated sale be converted to damages in a criminal case for estafa without
violating the maxim of caveat emptor?[11]
Petitioners contend that the trial court based its decision on mere conjectures and surmises and that
it was biased against them. They likewise assail the finding of conspiracy.[12] Finally, they opine that
private complainant should bear her losses under the doctrine of caveat emptor.[13]
The Office of the Solicitor General (OSG), for the State, dismisses the issues raised by petitioners as
mere rehash of their previous arguments before the Court of Appeals, hence redundant. [14] In our
view, the pertinent issue in this case is whether conspiracy to commit estafa and estafa itself had
been adequately established. That petitioners had conspired with each other must be viewed not in
isolation from but in relation to an alleged plot, a sting, or con operation known as negosyo of
their group. Further, whether such a well-planned confidence operation resulted in the consummated
crime of estafa, however, must be established by the prosecution beyond reasonable doubt.
Conspiracy, as a rule, has to be established with the same quantum of proof as the crime itself. It has
to be shown as clearly as the commission of the offense.[15] It need not be by direct evidence, but
may take the form of circumstances which, if taken together, would conclusively show that the
accused came to an agreement to commit a crime and decided to carry it out with their full
cooperation and participation.[16] It may be deduced from the acts of the perpetrators before, during
and after the commission of the crime, which are indicative of a common design, concerted action
and concurrence of sentiments.[17]
We find that the following circumstances together, conclusively show petitioner Glenn Oroscos role
in defrauding Honesta: (1) Glenn a.k.a. Rey acted as salesman of the marine preservative. (2) He
providentially surfaced after Dayandante and Lawas had already primed up Honesta regarding profits
she would make buying and selling the product. (3) He conveniently had available a can of the marine
preservative after Dayandante and Lawas told her of the business possibility. (4) He led Honesta to
believe that the contents of the cans were indeed marine preservatives. At the very least, he kept

silent on the real contents of the cans. (5) He pretended to refuse the P5,000 down payment from
Honesta while inducing her to borrow the larger sum of P322,500. (6) He assured Honesta he still had
50 cans and convinced her to shell out another P1,000 for him to deliver them. (7) He disappeared
with the other accused after their nefarious designs had been unearthed.
Petitioner Roberto Erquiaga, for his part, actively connived with Orosco. He did the following: (1) He
posed as Mr. Guerrero, a verifier of the contents of the cans allegedly containing marine
preservative. (2) He also induced complainant to borrow more money and to hold on to the 215
cans. (3) He offered the P5,000 as down payment for the 215 cans. (4) He made the deal more
enticing for Honesta by promising to pay the 10% interest rate on the loan himself.
Patently, each petitioner played a key role in their devious scheme to sell a useless product, alleged
to be a marine preservative, for which they got a substantial amount from Honesta Bal.
But did the acts of petitioners constitute estafa?
The elements of estafa or swindling under paragraph 2 (a) of Article 315 of the Revised Penal
Code[18] are the following:
1. That there must be a false pretense, fraudulent act or fraudulent means.
2. That such false pretense, fraudulent act or fraudulent means must be made or executed prior to or
simultaneously with the commission of the fraud.
3. That the offended party must have relied on the false pretense, fraudulent act, or fraudulent means,
that is, he was induced to part with his money or property because of the false pretense, fraudulent
act, or fraudulent means.
4. That as a result thereof, the offended party suffered damage.[19]
As earlier discussed, Erquiaga misrepresented himself as a verifier of the contents of the cans. He
encouraged Honesta to borrow money. Petitioner Orosco misrepresented himself as a seller of
marine preservative. They used aliases, Erquiaga as Mr. Guerrero; and Orosco as Rey. Honesta
fell for these misrepresentations and the lure of profits offered by petitioners made her borrow money
upon their inducement, and then petitioners disappeared from the scene after taking the money from
her.
Petitioners contend that the starch is a kind of marine preservative and that the failure of the
prosecution to prove otherwise should be enough reason to acquit them. [20] This argument deserves
no serious consideration by the Court. Note that what was being offered to Honesta was a
preservative from Taiwanese Marine Products. What was delivered was ordinary starch in sealed
cans. The scam is quite obvious, though suckers still fall for it.
ANGELES VS. CALASANZ
135 SCRA 323
FACTS:
On December 19, 1957, defendants-appellants
Ursula Torres Calasanz and plaintiffs-appellees
Buenaventura Angeles and Teofila Juani entered into a
contract to sell a piece of land located in Cainta, Rizal for
the amount of P3,920.00 plus 7% interest per annum. The
plaintiffs-appellees made a downpayment of P392.00 upon
the execution of the contract. They promised to pay the
balance in monthly installments of P41.20 until fully paid,
the installment being due and payable on the 19th day of
each month. The plaintiffs-appellees paid the monthly
installments until July 1966, when their aggregate
payment already amounted to P4,533.38.
On December 7, 1966, the defendants-appellants
wrote the plantiffs-appellees a letter requesting the
remittance of past due accounts. On January 28, 1967, the
defendants-appellants cancelled the said contract because
the plaintiffs failed to meet subsequent payments. The
plaintiffs letter with their plea for reconsideration of the
said cancellation was denied by the defendants.

Petitioners suggest that damages should not be awarded because Honesta was forewarned to buy at
her own risk and because the doctrine of caveat emptor placed her on guard. Petitioners apparently
misapply the doctrine. A basic premise of the doctrine of Let the buyer beware is that there be no
false representation by the seller. As discussed earlier, petitioners scheme involves a well-planned
scenario to entice the buyer to pay for the bogus marine preservative. Even the initial buy-and-sell
transactions involving one and then five cans were intended for confidence building before the big
transaction when they clinched the deal involving P322,500. Thereafter, they vanished from the
scene. These circumstances clearly show that petitioners Orosco and Erquiaga were in on the plot to
defraud Honesta. Honesta could hardly be blamed for not examining the goods. She was made to
depend on petitioners supposed expertise. She said she did not open the cans as there was a label
in each with a warning that the seal should not be broken.[21] That Honesta Bal thought the buy-andsell business would result in a profit for her is no indictment of her good faith in dealing with
petitioners. The ancient defense of caveat emptor belongs to a by-gone age, and has no place in
contemporary business ethics.
It is not true that Honesta did not suffer any damage because she merely borrowed the money, and
that she showed no proof that she issued a check to pay said debt. [22] The prosecution clearly
showed that Bichara had sent a demand letter to Honesta asking for payment. [23] Honesta had
borrowed P322,500 from Bichara for which she assuredly must repay. This constitutes business
loses to her and, in our view, actual damages as contemplated under Article 315, par. 2 (a).[24]
Given the facts established in this case, we are convinced that estafa had been consummated by
petitioners who had conspired with each other, and the guilt of petitioners had been adequately
proved beyond reasonable doubt.
WHEREFORE, the instant petition is DENIED. The appealed decision of the Regional Trial Court as
modified by the Court of Appeals is AFFIRMED. Petitioners Roberto Erquiaga and Glenn Orosco are
found guilty of estafa under Article 315, paragraph 2 (a) of the Revised Penal Code. They are
sentenced to suffer the penalty of FOUR (4) YEARS and TWO (2) MONTHS ofprision correccional as
minimum, and TWENTY (20) YEARS of reclusion temporal as maximum. Further, they are also
ordered to pay jointly and severally as indemnity to Honesta Bal the sum of P322,500 with interest of
12% per annum until fully paid.
SO ORDERED.

The plaintiffs-appellees filed a case before the

Court of First Instance to compel the defendant to execute
in their favor the final deed of sale alleging inter alia that
after computing all subsequent payments for the land in
question, they found out that they have already paid the
total amount including interests, realty taxes and
incidental expenses. The defendants alleged in their
answer that the plaintiffs violated par. 6 of the contract to
sell when they failed and refused to pay and/or offer to pay
monthly installments corresponding to the month of
August, 1966 for more than 5 months, thereby
constraining the defendants to cancel the said contract.
The Court of First Instance rendered judgment in
favor of the plaintiffs, hence this appeal.
ISSUE:
Has the Contract to Sell been automatically and
validly cancelled by the defendants-appellants?
RULING:
No. While it is true that par.2 of the contract
obligated the plaintiffs-appellees to pay the defendants the

sum of P3,920 plus 7% interest per annum, it is likewise

true that under par 12 the seller is obligated to transfer the
title to the buyer upon payment of the said price.

which, in essence, and its entirety is most unfair to the

buyers.
Thus, since the principal obligation under the
contract is only P3,920.00 and the plaintiffs-appellees
have already paid an aggregate amount of P4,533.38, the
courts should only order the payment of the few remaining
installments but not uphold the cancellation of the
contract. Upon payment of the balance of P671.67 without
any interest thereon, the defendant must immediately
execute the final deed of sale in favor of the plaintiffs and
execute the necessary transfer of documents, as provided
in par.12 of the contract.

The contract to sell, being a contract of adhesion,

must be construed against the party causing it. The
Supreme Court agree with the observation of the plaintiffsappellees
to the effect that the terms of a contract must be
interpreted against the party who drafted the same,
especially where such interpretation will help effect justice
to buyers who, after having invested a big amount of
money, are now sought to be deprived of the same thru the
prayed application of a contract clever in its phraseology,
condemnable in its lopsidedness and injurious in its effect
Republic
SUPREME
Manila
EN BANC

of

the

Philippines
COURT

G.R. No. 83851. March 3, 1993.

VISAYAN SAWMILL COMPANY, INC., and ANG TAY, petitioners, vs. THE HONORABLE COURT OF
APPEALS and RJH TRADING, represented by RAMON J. HIBIONADA, proprietor, respondents.
Saleto J. Erames and Edilberto V. Logronio for petitioners.
Eugenio O. Original for private respondent.
SYLLABUS
1. CIVIL LAW; CONTRACT TO SELL; EFFECT OF VENDEE'S FAILURE TO COMPLY WITH POSITIVE
SUSPENSIVE CONDITION; CASE AT BAR. The petitioner corporation's obligation to sell is
unequivocally subject to a positive suspensive condition, i.e., the private respondent's opening,
making or indorsing of an irrevocable and unconditional letter of credit. The former agreed to deliver
the scrap iron only upon payment of the purchase price by means of an irrevocable and unconditional
letter of credit. Otherwise stated, the contract is not one of sale where the buyer acquired ownership
over the property subject to the resolutory condition that the purchase price would be paid after
delivery. Thus, there was to be no actual sale until the opening, making or indorsing of the irrevocable
and unconditional letter of credit. Since what obtains in the case at bar is a mere promise to sell, the
failure of the private respondent to comply with the positive suspensive condition cannot even be
considered a breach casual or serious but simply an event that prevented the obligation of
petitioner corporation to convey title from acquiring binding force. In Luzon Brokerage Co., Inc. vs.
Maritime Building Co., Inc., this Court stated: ". . . The upshot of all these stipulations is that in
seeking the ouster of Maritime for failure to pay the price as agreed upon, Myers was not rescinding
(or more properly, resolving) the contract, but precisely enforcing it according to its express terms. In
its suit Myers was not seeking restitution to it of the ownership of the thing sold (since it was never
disposed of), such restoration being the logical consequence of the fulfillment of a resolutory
condition, express or implied (Article 1190); neither was it seeking a declaration that its obligation to
sell was extinguished. What it sought was a judicial declaration that because the suspensive
condition (full and punctual payment) had not been fulfilled, its obligation to sell to Maritime never
arose or never became effective and, therefore, it (Myers) was entitled to repossess the property
object of the contract, possession being a mere incident to its right of ownership. It is elementary
that, as stated by Castan, -- 'b) Si la condicion suspensiva llega a faltar, la obligacion se tiene por no
existente, y el acreedor pierde todo derecho, incluso el de utilizar las medidas conservativas.'(3
Castan, Derecho Civil, 7a Ed., p. 107). (Also Puig Pea, Der. Civ., T. IV (1), p. 113).'"
2. ID.; ID.; ID.; RESCISSION. The obligation of the petitioner corporation to sell did not arise; it
therefore cannot be compelled by specific performance to comply with its prestation. In short, Article
1191 of the Civil Code does not apply; on the contrary, pursuant to Article 1597 of the Civil Code, the
petitioner corporation may totally rescind, as it did in this case, the contract. Said Article provides:
"ART. 1597. Where the goods have not been delivered to the buyer, and the buyer has repudiated the

contract of sale, or has manifested his inability to perform his obligations, thereunder, or has
committed a breach thereof, the seller may totally rescind the contract of sale by giving notice of his
election so to do to the buyer."
3. ID.; ID.; IN CASE AT BAR, VENDOR'S CONSENT TO DIGGING UP AND GATHERING OF SCRAP IRON
NOT CONSTRUED AS DELIVERY THEREOF; REASONS THEREFOR. Paragraph 6 of the Complaint
reads: "6. That on May 17, 1983 Plaintiff with the consent of defendant Ang Tay sent his men to the
stockyard of Visayan Sawmill Co., Inc. at Cawitan, Sta. Catalina, Negros Oriental to dig and gather the
scrap iron and stock the same for weighing." This permission or consent can, by no stretch of the
imagination, be construed as delivery of the scrap iron in the sense that, as held by the public
respondent, citing Article 1497 of the Civil Code, petitioners placed the private respondent in control
and possession thereof. In the first place, said Article 1497 falls under the Chapter Obligations of the
Vendor, which is found in Title VI (Sales), Book IV of the Civil Code. As such, therefore, the obligation
imposed therein is premised on an existing obligation to deliver the subject of the contract. In the
instant case, in view of the private respondent's failure to comply with the positive suspensive
condition earlier discussed, such an obligation had not yet arisen. In the second place, it was a mere
accommodation to expedite the weighing and hauling of the iron in the event that the sale would
materialize. The private respondent was not thereby placed in possession of and control over the
scrap iron. Thirdly, We cannot even assume the conversion of the initial contract or promise to sell
into a contract of sale by the petitioner corporation's alleged implied delivery of the scrap iron
because its action and conduct in the premises do not support this conclusion. Indeed, petitioners
demanded the fulfillment of the suspensive condition and eventually cancelled the contract.
4. ID.; CONTRACTS; DAMAGES; MORAL DAMAGES; PURPOSE OF AWARD THEREOF; EXEMPLARY
DAMAGES. In contracts, such as in the instant case, moral damages may be recovered if
defendants acted fraudulently and in bad faith, while exemplary damages may only be awarded if
defendants acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. In the instant
case, the refusal of the petitioners to deliver the scrap iron was founded on the non-fulfillment by the
private respondent of a suspensive condition. It cannot, therefore, be said that the herein petitioners
had acted fraudulently and in bad faith or in a wanton, reckless, oppressive or malevolent manner.
What this Court stated in Inhelder Corp. vs. Court of Appeals needs to be stressed anew: "At this
juncture, it may not be amiss to remind Trial Courts to guard against the award of exhorbitant (sic)
damages that are way out of proportion to the environmental circumstances of a case and which, time
and again, this Court has reduced or eliminated. Judicial discretion granted to the Courts in the
assessment of damages must always be exercised with balanced restraint and measured objectivity."
For, indeed, 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 obviate the moral suffering he has undergone, by reason of the
defendant's culpable action. Its award is aimed at the restoration, within the limits of the possible, of
the spiritual status quo ante, and it must be proportional to the suffering inflicted.
ROMERO, J., dissenting:
1. CIVIL LAW; CONTRACT OF SALE; DEFINED; WHEN PERFECTED; CASE AT BAR. Article 1458 of
the Civil Code has this definition: "By a 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." Article 1475 gives the significance of this mutual
undertaking of the parties, thus: "The 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. From that moment, the
parties may reciprocally demand performance, subject to the provisions of the law governing the form
of contracts." Thus, when the parties entered into the contract entitled "Purchase and Sale of Scrap
Iron" on May 1, 1983, the contract reached the stage of perfection, there being a meeting of the' minds
upon the object which is the subject matter of the contract and the price which is the consideration.
Applying Article 1475 of the Civil Code, from that moment, the parties may reciprocally demand
performance of the obligations incumbent upon them, i.e., delivery by the vendor and payment by the
vendee.
2. ID.; ID.; DELIVERY; HOW ACCOMPLISHED; CASE AT BAR. From the time the seller gave access
to the buyer to enter his premises, manifesting no objection thereto but even sending 18 or 20 people
to start the operation, he has placed the goods in the control and possession of the vendee and
delivery is effected. For according to Article 1497, "The thing sold shall be understood as delivered
when it is placed in the control and possession of the vendee." Such action or real delivery (traditio)
is the act that transfers ownership. Under Article 1496 of the Civil Code, "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
Articles 1497 to 1501, or in any other manner signifying an agreement that the possession is
transferred from the vendor to the vendee."
3. ID.; ID.; PROVISION IN CONTRACT REGARDING MODE OF PAYMENT NOT ESSENTIAL REQUISITE
THEREOF; WHEN PROVISION CONSIDERED A SUSPENSIVE CONDITION. a provision in the
contract regarding the mode of payment, like the requirement for the opening of the Letter of Credit in
this case, is not among the essential requirements of a contract of sale enumerated in Articles 1305
and 1474, the absence of any of which will prevent the perfection of the contract from happening.
Likewise, it must be emphasized that not every provision regarding payment should automatically be
classified as a suspensive condition. To do so would change the nature of most contracts of sale into
contracts to sell. For a provision in the contract regarding the payment of the price to be considered a
suspensive condition, the parties must have made this clear in certain and unambiguous terms, such
as for instance, by reserving or withholding title to the goods until full payment by the buyer. This was
a pivotal circumstance in the Luzon Brokerage case where the contract in question was replete with
very explicit provisions such as the following: "Title to the properties subject of this contract remains
with the Vendor and shall pass to, and be transferred in the name of the Vendee only upon complete
payment of the full price . . .;" 10 the Vendor (Myers) will execute and deliver to the Vendee a definite
and absolute Deed of Sale upon full payment of the Vendee . . .; and "should the Vendee fail to pay
any of the monthly installments, when due, or otherwise fail to comply with any of the terms and
conditions herein stipulated, then this Deed of Conditional Sale shall automatically and without any
further formality, become null and void." It is apparent from a careful reading of Luzon Brokerage, as
well as the cases which preceded it and the subsequent ones applying its doctrines, that the mere
insertion of the price and the mode of payment among the terms and conditions of the agreement will
not necessarily make it a contract to sell. The phrase in the contract "on the following terms and
conditions" is standard form which is not to be construed as imposing a condition, whether
suspensive or resolutory, in the sense of the happening of a future and uncertain event upon which
an obligation is made to depend. There must be a manifest understanding that the agreement is in
what may be referred to as "suspended animation" pending compliance with provisions regarding
payment. The reservation of title to the object of the contract in the seller is one such manifestation.
Hence, it has been decided in the case of Dignos v. Court of Appeals that, absent a proviso in the
contract that the title to the property is reserved in the vendor until full payment of the purchase price
or a stipulation giving the vendor the right to unilaterally rescind the contract the moment the vendee
fails to pay within the fixed period, the transaction is an absolute contract of sale and not a contract
to sell.
4. ID.; ID.; CONTRACT OF SALE DISTINGUISHED FROM CONTRACT TO SELL; EFFECT OF NONPAYMENT OF PURCHASE PRICE; EFFECT OF DELIVERY ON OWNERSHIP OF OBJECT OF
CONTRACT. In a contract of sale, the non-payment of the price is a resolutory condition which
extinguishes the transaction that, for a time, existed and discharges the obligations created
thereunder. On the other hand, "the parties may stipulate that ownership in the thing shall not pass to
the purchaser until he has fully paid the price." In such a contract to sell, the full payment of the price

is a positive suspensive condition, such that in the event of non-payment, the obligation of the seller
to deliver and transfer ownership never arises. Stated differently, in a contract to sell, ownership is
not transferred upon delivery of property but upon full payment of the purchase price. Consequently,
in a contract of sale, after delivery of the object of the contract has been made, the seller loses
ownership and cannot recover the same unless the contract is rescinded. But in the contract to sell,
the seller retains ownership and the buyer's failure to pay cannot even be considered a breach,
whether casual or substantial, but an event that prevented the seller's duty to transfer title to the
object of the contract.
5. ID.; ID.; CASE OF SYCIP V. NATIONAL COCONUT CORPORATION, ET AL., G.R. NO. L-6618, APRIL
28, 1956, DISTINGUISHED FROM CASE AT BAR. Worthy of mention before concluding is Sycip v.
National Coconut Corporation, et al. since, like this case, it involves a failure to open on time the
Letter of Credit required by the seller. In Sycip, after the buyer offered to buy 2,000 tons of copra, the
seller sent a telegram dated December 19, 1946 to the buyer accepting the offer but on condition that
the latter opens a Letter of Credit within 48 hours. It was not until December 26, 1946, however, that
the Letter of Credit was opened. The Court, speaking through Justice Bengzon, held that because of
the delay in the opening of the Letter of Credit; the seller was not obliged to deliver the goods. Two
factors distinguish Sycip from the case at bar. First, while there has already been a perfected contract
of sale in the instant case, the parties in Sycip were still undergoing the negotiation process. The
seller's qualified acceptance in Sycip served as a counter offer which prevented the contract from
being perfected. Only an absolute and unqualified acceptance of a definite offer manifests the
consent necessary to perfect a contract. Second, the Court found in Sycip that time was of the
essence for the seller who was anxious to sell to other buyers should the offeror fail to open the
Letter of Credit within the stipulated time. In contrast, there are no indicia in this case that can lead
one to conclude that time was of the essence for petitioner as would make the eleven-day delay a
fundamental breach of the contract.
6. ID.; OBLIGATIONS AND CONTRACTS; RESCISSION UNDER ARTICLE 1191 OF THE CIVIL CODE;
WHEN PROPER; DELAY IN PAYMENT FOR TWENTY DAYS NOT CONSIDERED A SUBSTANTIAL
BREACH OF CONTRACT; CASE AT BAR. The right to rescind pursuant to Article 1191 is not
absolute. Rescission will not be permitted for slight or casual breach of the contract. Here, petitioners
claim that the breach is so substantial as to justify rescission . . . I am not convinced that the
circumstances may be characterized as so substantial and fundamental as to defeat the object of the
parties in making the agreement. None of the alleged defects in the Letter of Credit would serve to
defeat the object of the parties. It is to be stressed that the purpose of the opening of a Letter of
Credit is to effect payment. The above-mentioned factors could not have prevented such payment. It
is also significant to note that petitioners sent a telegram to private respondents on May 23, 1983
cancelling the contract. This was before they had even received on May 26, 1983 the notice from the
bank about the opening of the Letter of Credit. How could they have made a judgment on the
materiality of the provisions of the Letter of Credit for purposes of rescinding the contract even
before setting eyes on said document? To be sure, in the contract, the private respondents were
supposed to open the Letter of Credit on May 15, 1983 but, it was not until May 26, 1983 or eleven (11)
days later that they did so. Is the eleven-day delay a substantial breach of the contract as could justify
the rescission of the contract? In Song Fo and Co. v. Hawaiian-Philippine Co., it was held that a delay
in payment for twenty (20) days was not a violation of an essential condition of the contract which
would warrant rescission for non-performance. In the instant case, the contract is bereft of any
suggestion that time was of the essence. On the contrary, it is noted that petitioners allowed private
respondents' men to dig and remove the scrap iron located in petitioners' premises between May 17,
1983 until May 30, 1983 or beyond the May 15, 1983 deadline for the opening of the Letter of Credit.
Hence, in the absence of any indication that the time was of the essence, the eleven-day delay must
be deemed a casual breach which cannot justify a rescission.
DECISION
DAVIDE, JR., J p:
By this petition for review under Rule 45 of the Rules of Court, petitioners urge this Court to set aside
the decision of public respondent Court of Appeals in C.A.-G.R. CV No. 08807, 1 promulgated on 16
March 1988, which affirmed with modification, in respect to the moral damages, the decision of the
Regional Trial Court (RTC) of Iloilo in Civil Case No. 15128, an action for specific performance and

damages, filed by the herein private respondent against the petitioners. The dispositive portion of the
trial court's decision reads as follows:
"IN VIEW OF THE ABOVE FINDINGS, judgment is hereby rendered in favor of plaintiff and against the
defendants ordering the latter to pay jointly and severally plaintiff, to wit:
1) The sum of Thirty-Four Thousand Five Hundred Eighty Three and 16/100 (P34,583.16), as actual
damages;
2) The sum of One Hundred Thousand (P100,000.00) Pesos, as moral damages;
3) The sum of Ten Thousand (P10,000.00) Pesos, as exemplary damages;
4) The sum of TWENTY Five Thousand (P25,000.00) Pesos, as attorney's fees; and
5) The sum of Five Thousand (P5,000.00) Pesos as actual litis expenses." 2
The public respondent reduced the amount of moral damages to P25,000.00.
The antecedent facts, summarized by the public respondent, are as follows:
"On May 1, 1983, herein plaintiff-appellee and defendants-appellants entered into a sale involving
scrap iron located at the stockyard of defendant-appellant corporation at Cawitan, Sta. Catalina,
Negros Oriental, subject to the condition that plaintiff-appellee will open a letter of credit in the
amount of P250,000.00 in favor of defendant-appellant corporation on or before May 15, 1983. This is
evidenced by a contract entitled `Purchase and Sale of Scrap Iron' duly signed by both parties.
On May 17, 1983, plaintiff-appellee through his man (sic), started to dig and gather and (sic) scrap iron
at the defendant-appellant's (sic) premises, proceeding with such endeavor until May 30 when
defendants-appellants allegedly directed plaintiff-appellee's men to desist from pursuing the work in
view of an alleged case filed against plaintiff-appellee by a certain Alberto Pursuelo. This, however, is
denied by defendants-appellants who allege that on May 23, 1983, they sent a telegram to plaintiffappellee cancelling the contract of sale because of failure of the latter to comply with the conditions
thereof.
On May 24, 1983, plaintiff-appellee informed defendants-appellants by telegram that the letter of credit
was opened May 12, 1983 at the Bank of the Philippine Islands main office in Ayala, but then (sic) the
transmittal was delayed.
On May 26, 1983, defendants-appellants received a letter advice from the Dumaguete City Branch of
the Bank of the Philippine Islands dated May 26, 1983, the content of which is quited (sic) as follows:
'Please be advised that we have received today cable advise from our Head Office which reads as
follows:
'Open today our irrevocable Domestic Letter of Credit No. 01456-d fot (sic) P250,000.00 favor ANG TAY
c/o Visayan Sawmill Co., Inc. Dumaguete City, Negros Oriental Account of ARMACO-MARSTEEL
ALLOY CORPORATION 2nd Floor Alpap 1 Bldg., 140 Alfaro stp (sic) Salcedo Village, Makati, Metro
Manila Shipments of about 500 MT of assorted steel scrap marine/heavy equipment expiring on July
24, 1983 without recourse at sight draft drawn on Armaco Marsteel Alloy Corporation accompanied by
the following documents: Certificate of Acceptance by Armaco-Marsteel Alloy Corporation shipment
from Dumaguete City to buyer's warehouse partial shipment allowed/transhipment (sic) not allowed'.
For your information'.
On July 19, 1983, plaintiff-appellee sent a series of telegrams stating that the case filed against him by
Pursuelo had been dismissed and demanding that defendants-appellants comply with the deed of
sale, otherwise a case will be filed against them.
In reply to those telegrams, defendants-appellants' lawyer, on July 20, 1983 informed plaintiffappellee's lawyer that defendant-appellant corporation is unwilling to continue with the sale due to
plaintiff-appellee's failure to comply with essential pre-conditions of the contract.
On July 29, 1983, plaintiff-appellee filed the complaint below with a petition for preliminary
attachment. The writ of attachment was returned unserved because the defendant-appellant
corporation was no longer in operation and also because the scrap iron as well as other pieces of
machinery can no longer be found on the premises of the corporation." 3
In his complaint, private respondent prayed for judgment ordering the petitioner corporation to
comply with the contract by delivering to him the scrap iron subject thereof; he further sought an
award of actual, moral and exemplary damages, attorney's fees and the costs of the suit. 4
In their Answer with Counterclaim, 5 petitioners insisted that the cancellation of the contract was
justified because of private respondent's non-compliance with essential pre-conditions, among which
is the opening of an irrevocable and unconditional letter of credit not later than 15 May 1983.

During the pre-trial of the case on 30 April 1984, the parties defined the issues to be resolved; these
issues were subsequently embodied in the pre-trial order, to wit:
"1. Was the contract entitled Purchase and Sale of Scrap Iron, dated May 1, 1983 executed by the
parties cancelled and terminated before the Complaint was filed by anyone of the parties; if so, what
are the grounds and reasons relied upon by the cancelling parties; and were the reasons or grounds
for cancelling valid and justified?
2. Are the parties entitled to damages they respectively claim under the pleadings?" 6
On 29 November 1985, the trial court rendered its judgment, the dispositive portion of which was
quoted earlier.
Petitioners appealed from said decision to the Court of Appeals which docketed the same as C.A.G.R. CV No. 08807. In their Brief, petitioners, by way of assigned errors, alleged that the trial court
erred:
"1. In finding that there was delivery of the scrap iron subject of the sale;
2. In not finding that plaintiff had not complied with the conditions in the contract of sale;
3. In finding that defendants-appellants were not justified in cancelling the sale;
4. In awarding damages to the plaintiff as against the defendants-appellants;
5. In not awarding damages to defendants-appellants." 7
Public respondent disposed of these assigned errors in this wise:
"On the first error assigned, defendants-appellants argue that there was no delivery because the
purchase document states that the seller agreed to sell and the buyer agreed to buy 'an undetermined
quantity of scrap iron and junk which the seller will identify and designate.' Thus, it is contended,
since no identification and designation was made, there could be no delivery. In addition, defendantsappellants maintain that their obligation to deliver cannot be completed until they furnish the cargo
trucks to haul the weighed materials to the wharf.
The arguments are untenable. Article 1497 of the Civil Code states:
'The thing sold shall be understood as delivered when it is placed in the control and possession of
the vendee.'
In the case at bar, control and possession over the subject matter of the contract was given to
plaintiff-appellee, the buyer, when the defendants-appellants as the sellers allowed the buyer and his
men to enter the corporation's premises and to dig-up the scrap iron. The pieces of scrap iron then
(sic) placed at the disposal of the buyer. Delivery was therefore complete. The identification and
designation by the seller does not complete delivery.
On the second and third assignments of error, defendants-appellants argue that under Articles 1593
and 1597 of the Civil Code, automatic rescission may take place by a mere notice to the buyer if the
latter committed a breach of the contract of sale.
Even if one were to grant that there was a breach of the contract by the buyer, automatic rescission
cannot take place because, as already (sic) stated, delivery had already been made. And, in cases
where there has already been delivery, the intervention of the court is necessary to annul the contract.
As the lower court aptly stated:
'Respecting these allegations of the contending parties, while it is true that Article 1593 of the New
Civil Code provides that with respect to movable property, the rescission of the sale shall of right take
place in the interest of the vendor, if the vendee fails to tender the price at the time or period fixed or
agreed, however, automatic rescission is not allowed if the object sold has been delivered to the
buyer (Guevarra vs. Pascual, 13 Phil. 311; Escueta vs. Pando, 76 Phil 256), the action being one to
rescind judicially and where (sic) Article 1191, supra, thereby applies. There being already an implied
delivery of the items, subject matter of the contract between the parties in this case, the defendant
having surrendered the premises where the scraps (sic) were found for plaintiff's men to dig and
gather, as in fact they had dug and gathered, this Court finds the mere notice of resolution by the
defendants untenable and not conclusive on the rights of the plaintiff (Ocejo Perez vs. Int. Bank, 37
Phi. 631). Likewise, as early as in the case of Song Fo vs. Hawaiian Philippine Company, it has been
ruled that rescission cannot be sanctioned for a slight or casual breach (47 Phil. 821).'
In the case of Angeles vs. Calasanz (135 (1935) SCRA 323), the Supreme Court ruled:
'Article 1191 is explicit. In reciprocal obligations, either party has the right to rescind the contract
upon failure of the other to perform the obligation assumed thereunder.

Of course, it must be understood that the right of a 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.'
Thus, rescission in cases falling under Article 1191 of the Civil Code is always subject to review by
the courts and cannot be considered final.
In the case at bar, the trial court ruled that rescission is improper because the breach was very slight
and the delay in opening the letter of credit was only 11 days.
'Where time is not of the essence of the agreement, a slight delay by one party in the performance of
his obligation is not a sufficient ground for rescission of the agreement. Equity and justice mandates
(sic) that the vendor be given additional (sic) period to complete payment of the purchase price.'
(Taguda vs. Vda. de Leon, 132 SCRA (1984), 722).'
There is no need to discuss the fourth and fifth assigned errors since these are merely corollary to
the first three assigned errors." 8
Their motion to reconsider the said decision having been denied by public respondent in its
Resolution of 4 May 1988, 9 petitioners filed this petition reiterating the abovementioned assignment
of errors.
There is merit in the instant petition.
Both the trial court and the public respondent erred in the appreciation of the nature of the
transaction between the petitioner corporation and the private respondent. To this Court's mind, what
obtains in the case at bar is a mere contract to sell or promise to sell, and not a contract of sale.
The trial court assumed that the transaction is a contract of sale and, influenced by its view that there
was an "implied delivery" of the object of the agreement, concluded that Article 1593 of the Civil Code
was inapplicable; citing Guevarra vs. Pascual 10 and Escueta vs. Pando, 11 it ruled that rescission
under Article 1191 of the Civil Code could only be done judicially. The trial court further classified the
breach committed by the private respondent as slight or casual, foreclosing, thereby, petitioners' right
to rescind the agreement.
Article 1593 of the Civil Code provides:
"ARTICLE 1593. With respect to movable property, the rescission of the sale shall of right take place
in the interest of the vendor, if the vendee, upon the expiration of the period fixed for the delivery of
the thing, should not have appeared to receive it, or, having appeared, he should not have tendered
the price at the same time, unless a longer period has been stipulated for its payment."
Article 1191 provides:
"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 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."
xxx xxx xxx
Sustaining the trial court on the issue of delivery, public respondent cites Article 1497 of the Civil
Code which provides:
"ARTICLE 1497. The thing sold shall be understood as delivered, when it is placed in the control and
possession of the vendee."
In the agreement in question, entitled PURCHASE AND SALE OF SCRAP IRON, 12 the seller bound
and promised itself to sell the scrap iron upon the fulfillment by the private respondent of his
obligation to make or indorse an irrevocable and unconditional letter of credit in payment of the
purchase price. Its principal stipulation reads, to wit:
xxx xxx xxx
"Witnesseth:
That the SELLER agrees to sell, and the BUYER agrees to buy, an undetermined quantity of scrap iron
and junk which the SELLER will identify and designate now at Cawitan, Sta. Catalina, Negros Oriental,
at the price of FIFTY CENTAVOS (P0.50) per kilo on the following terms and conditions:
1. Weighing shall be done in the premises of the SELLER at Cawitan, Sta. Catalina, Neg. Oriental.
2. To cover payment of the purchase price, BUYER will open, make or indorse an irrevocable and
unconditional letter of credit not later than May 15, 1983 at the Consolidated Bank and Trust

Company, Dumaguete City, Branch, in favor of the SELLER in the sum of TWO HUNDRED AND FIFTY
THOUSAND PESOS (P250,000.00), Philippine Currency.
3. The SELLER will furnish the BUYER free of charge at least three (3) cargo trucks with drivers, to
haul the weighed materials from Cawitan to the TSMC wharf at Sta. Catalina for loading on BUYER's
barge. All expenses for labor, loading and unloading shall be for the account of the BUYER.
4. SELLER shall be entitled to a deduction of three percent (3%) per ton as rust allowance."
(Emphasis supplied).
The petitioner corporation's obligation to sell is unequivocally subject to a positive suspensive
condition, i.e., the private respondent's opening, making or indorsing of an irrevocable and
unconditional letter of credit. The former agreed to deliver the scrap iron only upon payment of the
purchase price by means of an irrevocable and unconditional letter of credit. Otherwise stated, the
contract is not one of sale where the buyer acquired ownership over the property subject to the
resolutory condition that the purchase price would be paid after delivery. Thus, there was to be no
actual sale until the opening, making or indorsing of the irrevocable and unconditional letter of credit.
Since what obtains in the case at bar is a mere promise to sell, the failure of the private respondent to
comply with the positive suspensive condition cannot even be considered a breach casual or
serious but simply an event that prevented the obligation of petitioner corporation to convey title
from acquiring binding force. In Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., 13 this
Court stated:
" . . . The upshot of all these stipulations is that in seeking the ouster of Maritime for failure to pay the
price as agreed upon, Myers was not rescinding (or more properly, resolving) the contract, but
precisely enforcing it according to its express terms. In its suit Myers was not seeking restitution to it
of the ownership of the thing sold (since it was never disposed of), such restoration being the logical
consequence of the fulfillment of a resolutory condition, express or implied (article 1190); neither was
it seeking a declaration that its obligation to sell was extinguished. What it sought was a judicial
declaration that because the suspensive condition (full and punctual payment) had not been fulfilled,
its obligation to sell to Maritime never arose or never became effective and, therefore, it (Myers) was
entitled to repossess the property object of the contract, possession being a mere incident to its right
of ownership. It is elementary that, as stated by Castan,
'b) Si la condicion suspensiva llega a faltar, la obligacion se tiene por no existente, y el acreedor
pierde todo derecho, incluso el de utilizar las medidas conservativas.' (3 Cast n, Derecho Civil, 7a Ed.,
p. 107). (Also Puig Pea, Der. Civ., T. IV (1), p. 113)'."
In the instant case, not only did the private respondent fail to open, make or indorse an irrevocable
and unconditional letter of credit on or before 15 May 1983 despite his earlier representation in his 24
May 1983 telegram that he had opened one on 12 May 1983, the letter of advice received by the
petitioner corporation on 26 May 1983 from the Bank of the Philippine Islands Dumaguete City branch
explicitly makes reference to the opening on that date of a letter of credit in favor of petitioner Ang
Tay c/o Visayan Sawmill Co. Inc., drawn without recourse on ARMACO-MARSTEEL ALLOY
CORPORATION and set to expire on 24 July 1983, which is indisputably not in accordance with the
stipulation in the contract signed by the parties on at least three (3) counts: (1) it was not opened,
made or indorsed by the private respondent, but by a corporation which is not a party to the contract;
(2) it was not opened with the bank agreed upon; and (3) it is not irrevocable and unconditional, for it
is without recourse, it is set to expire on a specific date and it stipulates certain conditions with
respect to shipment. In all probability, private respondent may have sold the subject scrap iron to
ARMACO-MARSTEEL ALLOY CORPORATION, or otherwise assigned to it the contract with the
petitioners. Private respondent's complaint fails to disclose the sudden entry into the picture of this
corporation.
Consequently, the obligation of the petitioner corporation to sell did not arise; it therefore cannot be
compelled by specific performance to comply with its prestation. In short, Article 1191 of the Civil
Code does not apply; on the contrary, pursuant to Article 1597 of the Civil Code, the petitioner
corporation may totally rescind, as it did in this case, the contract. Said Article provides:
"ARTICLE 1597. Where the goods have not been delivered to the buyer, and the buyer has repudiated
the contract of sale, or has manifested his inability to perform his obligations, thereunder, or has
committed a breach thereof, the seller may totally rescind the contract of sale by giving notice of his
election so to do to the buyer."

The trial court ruled, however, and the public respondent was in agreement, that there had been an
implied delivery in this case of the subject scrap iron because on 17 May 1983, private respondent's
men started digging up and gathering scrap iron within the petitioner's premises. The entry of these
men was upon the private respondent's request. Paragraph 6 of the Complaint reads:
"6. That on May 17, 1983 Plaintiff with the consent of defendant Ang Tay sent his men to the stockyard
of Visayan Sawmill Co., Inc. at Cawitan, Sta. Catalina, Negros Oriental to dig and gather the scrap iron
and stock the same for weighing." 14
This permission or consent can, by no stretch of the imagination, be construed as delivery of the
scrap iron in the sense that, as held by the public respondent, citing Article 1497 of the Civil Code,
petitioners placed the private respondent in control and possession thereof. In the first place, said
Article 1497 falls under the Chapter 15 Obligations of the Vendor, which is found in Title VI (Sales),
Book IV of the Civil Code. As such, therefore, the obligation imposed therein is premised on an
existing obligation to deliver the subject of the contract. In the instant case, in view of the private
respondent's failure to comply with the positive suspensive condition earlier discussed, such an
obligation had not yet arisen. In the second place, it was a mere accommodation to expedite the
weighing and hauling of the iron in the event that the sale would materialize. The private respondent
was not thereby placed in possession of and control over the scrap iron. Thirdly, We cannot even
assume the conversion of the initial contract or promise to sell into a contract of sale by the petitioner
corporation's alleged implied delivery of the scrap iron because its action and conduct in the
premises do not support this conclusion. Indeed, petitioners demanded the fulfillment of the
suspensive condition and eventually cancelled the contract.
All told, Civil Case No. 15128 filed before the trial court was nothing more than the private
respondent's preemptive action to beat the petitioners to the draw.
One last point. This Court notes the palpably excessive and unconscionable moral and exemplary
damages awarded by the trial court to the private respondent despite a clear absence of any legal and
factual basis therefor. In contracts, such as in the instant case, moral damages may be recovered if
defendants acted fraudulently and in bad faith, 16 while exemplary damages may only be awarded if
defendants acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. 17 In the
instant case, the refusal of the petitioners to deliver the scrap iron was founded on the non-fulfillment
by the private respondent of a suspensive condition. It cannot, therefore, be said that the herein
petitioners had acted fraudulently and in bad faith or in a wanton, reckless, oppressive or malevolent
manner. What this Court stated in Inhelder Corp. vs. Court of Appeals 18 needs to be stressed anew:
"At this juncture, it may not be amiss to remind Trial Courts to guard against the award of exhorbitant
(sic) damages that are way out of proportion to the environmental circumstances of a case and which,
time and again, this Court has reduced or eliminated. Judicial discretion granted to the Courts in the
assessment of damages must always be exercised with balanced restraint and measured objectivity."
For, indeed, 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 obviate the moral suffering he has undergone, by reason of the
defendant's culpable action. Its award is aimed at the restoration, within the limits of the possible, of
the spiritual status quo ante, and it must be proportional to the suffering inflicted. 19
WHEREFORE, the instant petition is GRANTED. The decision of public respondent Court of Appeals
in C.A.-G.R. CV No. 08807 is REVERSED and Civil Case No. 15128 of the Regional Trial Court of Iloilo
is ordered DISMISSED.
Costs against the private respondent.
SO ORDERED.
Narvasa, C .J ., Cruz, Feliciano, Padilla, Bidin and Bellosillo, JJ ., concur.
Gutierrez, Jr., J ., On terminal leave.
Melo and Quiason, JJ ., No part.
Separate Opinions
ROMERO, J., dissenting:
I vote to dismiss the petition.
Petitioner corporation, Visayan Sawmill Co., Inc., entered into a contract on May 1, 1983 with private
respondent RJH Trading Co. represented by private respondent Ramon J. Hibionada. The contract,
entitled "PURCHASE AND SALE OF SCRAP IRON," stated:

This contract for the Purchase and Sale of Scrap Iron, made and executed at Dumaguete City, Phil.,
this 1st day of May, 1983 by and between:
VISAYAN SAWMILL CO., INC., . . . hereinafter called the SELLER, and
RAMON J. HIBIONADA, . . . hereinafter called the BUYER,
witnesseth:
That the SELLER agrees to sell, and the BUYER agrees to buy, an undetermined quantity of scrap iron
and junk which the SELLER will identify and designate now at Cawitan, Sta. Catalina, Negros Oriental,
at the price of FIFTY CENTAVOS (P.50) per kilo on the following terms and conditions:
1. Weighing shall be done in the premises of the SELLER at Cawitan, Sta. Catalina, Negros Oriental.
2. To cover payment of the purchase price BUYER will open, make or indorse an irrevocable and
unconditional letter of credit not later than May 15, 1983 at the Consolidated Bank and Trust
Company, Dumaguete City Branch, in favor of the SELLER in the sum of TWO HUNDRED AND FIFTY
THOUSAND PESOS (P250,000.00), Philippine currency.
3. The SELLER will furnish the BUYER free of charge at least three (3) cargo trucks with drivers, to
haul the weighed materials from Cawitan to the TSMC wharf at Sta. Catalina for loading on BUYER'S
barge. All expenses for labor, loading and unloading shall be for the account of the BUYER.
4. SELLER shall be entitled to a deduction of three percent (3%) per ton as rust allowance.
xxx xxx xxx
On May 17, 1983, the workers of private respondents were allowed inside petitioner company's
premises in order to gather the scrap iron. However, on May 23, 1983, petitioner company sent a
telegram which stated:
"RAMON HIBIONADA
RJH TRADING
286 QUEZON STREET
ILOILO CITY
DUE YOUR FAILURE TO COMPLY WITH CONDITIONS BEFORE DEADLINE OUR CONTRACT FOR
PURCHASE SCRAP IRON CANCELLED
VISAYAN SAWMILL CO., INC."
Hibionada wired back on May 24, 1983 the following:
"ANG TAY VISAYAN SAWMILL
DUMAGUETE CITY
LETTER OF CREDIT AMOUNTING P250,000.00 OPENED MAY 12, 1983 BANK OF PI MAIN OFFICE
AYALA AVENUE MAKATI METRO MANILA BUT TRANSMITTAL IS DELAYED PLEASE CONSIDER
REASON WILL PERSONALLY FOLLOW-UP IN MANILA THANKS REGARDS.
RAMON HIBIONADA"
On May 26, 1983, petitioner company received the following advice from the Dumaguete City Branch
of The Bank of Philippine Islands: cdll
"Opened today our Irrevocable Domestic Letter of Credit 2-01456-4 for P250,000.00 in favor ANG TAY
c/o Visayan Sawmill Co., Inc. Dumaguete City Negros Oriental Account of ARMACO-MARSTEEL
ALLOW (sic) CORPORATION 2nd Floor Alpap 1 Bldg., 140 Alfaro st. Salcedo Village Makati Metro
Manila Shipments of about 500 MT of assorted steel scrap marine/heavy equipment expiring on July
23, 1983 without recourse at slight draft drawn on Armaco-Marsteel Alloy Corporation accompanied
by the following documents: Certificate of acceptance by Armaco-Marsteel Allow (sic) Corporation
shipment from Dumaguete City to buyer's warehouse partial shipment allowed/transhipment not
allowed."
Subsequently, petitioners' counsel sent another telegram to private respondents stating that:
"VISAYAN SAWMILL COMPANY UNWILLING TO CONTINUE SALE OF SCRAP IRON TO HIBIONADA
DUE TO NON COMPLIANCE WITH ESSENTIAL PRE CONDITIONS"
Consequently, private respondents filed a complaint for specific performance and damages with the
Regional Trial Court (RTC) of Iloilo (Branch XXXV) which decided in favor of private respondents. The
RTC decision having been affirmed by the Court of Appeals, the present petition was filed.
Finding the petition meritorious, the ponencia reversed the decision of the Court of Appeals. Based
on its appreciation of the contract in question, it has arrived at the conclusion that herein contract is
not a contract of sale but a contract to sell which is subject to a positive suspensive condition, i.e.,
the opening of a letter of credit by private respondents. Since the condition was not fulfilled, the
obligation of petitioners to convey title did not arise. The lengthy decision of Luzon Brokerage Co.,

Inc. v. Maritime Co. Inc. 1 penned by Justice J.B.L. Reyes, was cited as authority on the assumption
that subject contract is indeed a contract to sell but which will be shown herein as not quite accurate.
Evidently, the distinction between a contract to sell and a contract of sale is crucial in this case.
Article 1458 of the Civil Code has this definition: "By a 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."
Article 1475 gives the significance of this mutual undertaking of the parties, thus: "The 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. From that moment, the parties may reciprocally demand performance,
subject to the provisions of the law governing the form of contracts."
Thus, when the parties entered into the contract entitled "Purchase and Sale of Scrap Iron" on May 1,
1983, the contract reached the stage of perfection, there being a meeting of the' minds upon the
object which is the subject matter of the contract and the price which is the consideration. Applying
Article 1475 of the Civil Code, from that moment, the parties may reciprocally demand performance of
the obligations incumbent upon them, i.e., delivery by the vendor and payment by the vendee.
Petitioner, in its petition, admits that "[b]efore the opening of the letter of credit, buyer Ramon
Hibionada went to Mr. Ang Tay and informed him that the letter of credit was forthcoming and if it was
possible for him (buyer) to start cutting and digging the scrap iron before the letter of credit arrives
and the former (seller) manifested no objection, and he immediately sent 18 or 20 people to start the
operation." 2
From the time the seller gave access to the buyer to enter his premises, manifesting no objection
thereto but even sending 18 or 20 people to start the operation, he has placed the goods in the control
and possession of the vendee and delivery is effected. For according to Article 1497, "The thing sold
shall be understood as delivered when it is placed in the control and possession of the vendee." 3
Such action or real delivery (traditio) is the act that transfers ownership. Under Article 1496 of the
Civil Code, "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 Articles 1497 to 1501, or in any other manner
signifying an agreement that the possession is transferred from the vendor to the vendee."
That payment of the price in any form was not yet effected is immaterial to the transfer of the right of
ownership. In a contract of sale, the non-payment of the price is a resolutory condition which
extinguishes the transaction that, for a time, existed and discharges the obligations created
thereunder. 4
On the other hand, "the parties may stipulate that ownership in the thing shall not pass to the
purchaser until he has fully paid the price." 5 In such a contract to sell, the full payment of the price is
a positive suspensive condition, such that in the event of non-payment, the obligation of the seller to
deliver and transfer ownership never arises. Stated differently, in a contract to sell, ownership is not
transferred upon delivery of property but upon full payment of the purchase price. 6
Consequently, in a contract of sale, after delivery of the object of the contract has been made, the
seller loses ownership and cannot recover the same unless the contract is rescinded. But in the
contract to sell, the seller retains ownership and the buyer's failure to pay cannot even be considered
a breach, whether casual or substantial, but an event that prevented the seller's duty to transfer title
to the object of the contract.
At the outset, it must be borne in mind that a provision in the contract regarding the mode of
payment, like the requirement for the opening of the Letter of Credit in this case, is not among the
essential requirements of a contract of sale enumerated in Articles 1305 7 and 1474, 8 the absence of
any of which will prevent the perfection of the contract from happening. Likewise, it must be
emphasized that not every provision regarding payment should automatically be classified as a
suspensive condition. To do so would change the nature of most contracts of sale into contracts to
sell. For a provision in the contract regarding the payment of the price to be considered a suspensive
condition, the parties must have made this clear in certain and unambiguous terms, such as for
instance, by reserving or withholding title to the goods until full payment by the buyer. 9 This was a
pivotal circumstance in the Luzon Brokerage case where the contract in question was replete with
very explicit provisions such as the following: "Title to the properties subject of this contract remains
with the Vendor and shall pass to, and be transferred in the name of the Vendee only upon complete
payment of the full price . . .;" 10 the Vendor (Myers) will execute and deliver to the Vendee a definite
and absolute Deed of Sale upon full payment of the Vendee . . .; 11 and "should the Vendee fail to pay

any of the monthly installments, when due, or otherwise fail to comply with any of the terms and
conditions herein stipulated, then this Deed of Conditional Sale shall automatically and without any
further formality, become null and void." 12
It is apparent from a careful reading of Luzon Brokerage, as well as the cases which preceded it 13
and the subsequent ones applying its doctrines, 14 that the mere insertion of the price and the mode
of payment among the terms and conditions of the agreement will not necessarily make it a contract
to sell. The phrase in the contract "on the following terms and conditions" is standard form which is
not to be construed as imposing a condition, whether suspensive or resolutory, in the sense of the
happening of a future and uncertain event upon which an obligation is made to depend. There must
be a manifest understanding that the agreement is in what may be referred to as "suspended
animation" pending compliance with provisions regarding payment. The reservation of title to the
object of the contract in the seller is one such manifestation. Hence, it has been decided in the case
of Dignos v. Court of Appeals 15 that, absent a proviso in the contract that the title to the property is
reserved in the vendor until full payment of the purchase price or a stipulation giving the vendor the
right to unilaterally rescind the contract the moment the vendee fails to pay within the fixed period,
the transaction is an absolute contract of sale and not a contract to sell. 16
In the instant case, nowhere in the contract did it state that the petitioners reserve title to the goods
until private respondents have opened a letter of credit. Nor is there any provision declaring the
contract as without effect until after the fulfillment of the condition regarding the opening of the letter
of credit.
Examining the contemporaneous and subsequent conduct of the parties, which may be relevant in
the determination of the nature and meaning of the contract, 17 it is significant that in the telegram
sent by petitioners to Hibionada on May 23, 1983, it stated that "DUE [TO] YOUR FAILURE TO
COMPLY WITH CONDITIONS BEFORE DEADLINE OUR CONTRACT FOR PURCHASE SCRAP IRON
CANCELLED." And in some of the pleadings in the course of this litigation, petitioners referred to the
transaction as a contract of sale. 18
In light of the provisions of the contract, contemporaneous and subsequent acts of the parties and
the other relevant circumstances surrounding the case, it is evident that the stipulation for the buyer
to open a Letter of Credit in order to cover the payment of the purchase price does not bear the marks
of a suspensive condition. The agreement between the parties was a contract of sale and the "terms
and conditions" embodied therein which are standard form, are clearly resolutory in nature, the
breach of which may give either party the option to bring an action to rescind and/or seek damages.
Contrary to the conclusions arrived at in the ponencia, the transaction is not a contract to sell but a
contract of sale.
However, the determination of the nature of the contract does not settle the controversy. A breach of
the contract was committed and the rights and liabilities of the parties must be established. The
ponencia, notwithstanding its conclusion that no contract of sale existed, proceeded to state that
petitioner company may rescind the contract based on Article 1597 of the Civil Code which expressly
applies only to a contract of sale. It provides:
"ARTICLE 1597. Where the goods have not been delivered to the buyer, and the buyer has repudiated
the contract of sale, or has manifested his inability to perform his obligations, thereunder, or has
committed a breach thereof, the seller may totally rescind the contract of sale by giving notice of his
election so to do to the buyer." (Emhasis supplied).
The ponencia was then confronted with the issue of delivery since Article 1597 applies only "[w]here
the goods have not yet been delivered." In this case, as aforestated, the workers of private
respondents were actually allowed to enter the petitioners' premises, thus, giving them control and
possession of the goods. At this juncture, it is even unnecessary to discuss the issue of delivery in
relation to the right of rescission nor to rely on Article 1597. In every contract which contains
reciprocal obligations, the right to rescind is always implied under Article 1191 of the Civil Code in
case one of the parties fails to comply with his obligations. 19
The right to rescind pursuant to Article 1191 is not absolute. Rescission will not be permitted for
slight or casual breach of the contract. 20 Here, petitioners claim that the breach is so substantial as
to justify rescission, not only because the Letter of Credit was not opened on May 15, 1983 as
stipulated in the contract but also because of the following factors: (1) the Letter of Credit, although
opened in favor of petitioners was made against the account of a certain Marsteel Alloy Corporation,
instead of private respondent's account; (2) the Letter of Credit referred to "assorted steel scrap"

instead of "scrap iron and junk" as provided in the contract; (3) the Letter of Credit placed the
quantity of the goods at "500 MT" while the contract mentioned "an undetermined quantity of scrap
iron and junk"; (4) no amount from the Letter of Credit will be released unless accompanied by a
Certificate of Acceptance; and (5) the Letter of Credit had an expiry date.
I am not convinced that the above circumstances may be characterized as so substantial and
fundamental as to defeat the object of the parties in making the agreement. 21 None of the alleged
defects in the Letter of Credit would serve to defeat the object of the parties. It is to be stressed that
the purpose of the opening of a Letter of Credit is to effect payment. The above-mentioned factors
could not have prevented such payment. It is also significant to note that petitioners sent a telegram
to private respondents on May 23, 1983 cancelling the contract. This was before they had even
received on May 26, 1983 the notice from the bank about the opening of the Letter of Credit. How
could they have made a judgment on the materiality of the provisions of the Letter of Credit for
purposes of rescinding the contract even before setting eyes on said document?
To be sure, in the contract, the private respondents were supposed to open the Letter of Credit on
May 15, 1983 but, it was not until May 26, 1983 or eleven (11) days later that they did so. Is the elevenday delay a substantial breach of the contract as could justify the rescission of the contract?
In Song Fo and Co. v. Hawaiian-Philippine Co. 22 it was held that a delay in payment for twenty (20)
days was not a violation of an essential condition of the contract which would warrant rescission for
non-performance. In the instant case, the contract is bereft of any suggestion that time was of the
essence. On the contrary, it is noted that petitioners allowed private respondents' men to dig and
remove the scrap iron located in petitioners' premises between May 17, 1983 until May 30, 1983 or
beyond the May 15, 1983 deadline for the opening of the Letter of Credit. Hence, in the absence of any
indication that the time was of the essence, the eleven-day delay must be deemed a casual breach
which cannot justify a rescission.
Worthy of mention before concluding is Sycip v. National Coconut Corporation, et al. 23 since, like
this case, it involves a failure to open on time the Letter of Credit required by the seller. In Sycip, after
the buyer offered to buy 2,000 tons of copra, the seller sent a telegram dated December 19, 1946 to
the buyer accepting the offer but on condition that the latter opens a Letter of Credit within 48 hours.
It was not until December 26, 1946, however, that the Letter of Credit was opened. The Court,
speaking through Justice Bengzon, held that because of the delay in the opening of the Letter of
Credit; the seller was not obliged to deliver the goods.
Two factors distinguish Sycip from the case at bar. First, while there has already been a perfected
contract of sale in the instant case, the parties in Sycip were still undergoing the negotiation process.
The seller's qualified acceptance in Sycip served as a counter offer which prevented the contract from
being perfected. Only an absolute and unqualified acceptance of a definite offer manifests the
consent necessary to perfect a contract. 24 Second, the Court found in Sycip that time was of the
essence for the seller who was anxious to sell to other buyers should the offeror fail to open the
Letter of Credit within the stipulated time. In contrast, there are no indicia in this case that can lead
one to conclude that time was of the essence for petitioner as would make the eleven-day delay a
fundamental breach of the contract.
In sum, to my mind, both the trial court and the respondent Court of Appeals committed no reversible
error in their appreciation of the agreement in question as a contract of sale and not a contract to sell,
as well as holding that the breach of the contract was not substantial and, therefore, petitioners were
not justified in law in rescinding the agreement.
PREMISES CONSIDERED, the Petition must be DISMISSED and the decision of the Court of Appeals
AFFIRMED.
Grio-Aquino, Regalado, Nocon and Campos, Jr., JJ ., join Justice Romero's dissent.
Footnotes
1. Rollo, 18-25.
2. Rollo, 60-61.
3. Rollo, 61-62.
4. Id., 34-40.
5. Id., 44-52.
6. Rollo, 8.
7. Id., 62-63.
8. Rollo, 63-65.

9. Id., 27.
10. 12 Phil. 311 [1908].
11. 76 Phil. 256 [1946].
12. Annex "A" of Complaint; Rollo, 41.
13. 46 SCRA 381, 387 [1972].
14. Rollo, 35.
15. Chapter 4.
16. Article 2220, Civil Code; Zenith Insurance Corp. vs. Court of Appeals, 185 SCRA 398 [1990].
17. Article 2232, Id.
18. 122 SCRA 576, 585 [1983].
19. R&B Surety & Insurance Co., Inc. vs. Intermediate Appellate Court, 129 SCRA 736 [1984] citing
Grand Union Supermarket, Inc. vs. Espina, Jr., 94 SCRA 53 [1979], citing the concurring and
dissenting opinion of Justice J.B.L. Reyes in Pangasinan Transportation Company vs. Legaspi, 12
SCRA 597 [1964]; Radio Communications of the Phils., Inc. vs. Rodriguez, 182 SCRA 899 [1990].
ROMERO, J., dissenting:
1. G.R. No. L-25885, August 18, 1972, 46 SCRA 381. Hereinafter referred to as Luzon Brokerage case.
2. Rollo, p. 10; (Underscoring supplied).
3. Art. 1497, Civil Code.
4. Hanlon v. Haussermann, 40 Phil. 796 (1920).
5. Art. 1478, Civil Code.
6. Caridad Estates, Inc. v. Santero, 71 Phil. 114 (1940); Manuel v. Rodriguez, 109 Phil. 1 (1960).
7. Article 1305 of the Civil Code provides:
"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."
8. Article 1475, paragraph 1 of the Civil Code Provides:
"The 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."
9. Lim v. Court of Appeals, G.R. No. 85733, February 23, 1990, 182 SCRA 564.
10. Supra, note 1 at 386.
11. Id., at 387.
12. Id., at 386.
13. Caridad Estates, Inc. v. Santero, supra, note 3; Manuel v. Rodriguez, supra, note 3.
14. Lim v. Court of Appeals, G.R. No. 85733, February 23, 1990, 182 SCRA 564; Alfonso v. Court of
Appeals, G.R. No. 63745, June 8, 1990, 186 SCRA 400.
15. G.R. No. L-59266, February 29, 1988, 158 SCRA 375.
16. See also Taguba v. Vda., de Leon, G.R. No. L-59980, October 23, 1984, 132 SCRA 722.
17. Javier v. Court of Appeals, G.R. No. 48194, March 15, 1990, 183 SCRA 171; Universal Textile Mills,
Inc. v. NLRC, G.R. No. 87245, April 6, 1990, 184 SCRA 273.
18. Petition, p. 4, Rollo, p. 7; Reply, p. 4, Rollo, p. 107.
19. University of the Philippines v. de los Angeles, G.R. No. L-28602, September 29, 1970, 35 SCRA
102; Siy v. Court of Appeals, et al., G.R. No. L-39778, September 13, 1985, 138 SCRA 536; Lim v. Court
of Appeals, G.R. No. 85733, February 23, 1990, 182 SCRA 564.
20. Taguba v. de Leon, G.R. No. L-59980, October 23, 1984, 132 SCRA 722; Angeles v. Calasanz, G.R.
No. L-42283, March 18, 1985, 135 SCRA 323; Tan v. Court of Appeals, G.R. No. 80479, July 28, 1989,
175 SCRA 656; Jimenez v. Court of Appeals. G.R. No. 92171, March 13, 1991, 195 SCRA 205.
21. Delta Motor Corporation v. Genuino, G.R. No. 55665, February 8, 1989, 170 SCRA 29; Ang v. Court
of Appeals, G.R. No. 80058, February 13, 1989, 170 SCRA 286.
22. 47 Phil. 821 (1925).
23. G.R. No. L-6618, April 28, 1956 (Unreported).
24. Article 1319, Civil Code; Weldon Construction Corporation v. Court of Appeals, G.R. No. L-35721,
October 12, 1987, 154 SCRA 618.
DEIPARINE v. CA
Ernesto Deiparine, Jr., petitioner, vs. THE HON. COURT OF APPEALS, CESARAIO CARUNGAY
ANDENGR. NICANOR TRINIDAD, respondents.Cruz, J.

FACTS:The spouses Cesario and Teresita Carungay entered into an agreement with Ernesto
Deiparine, Jr. on August 13, 19B2, for the construction of a three-story dormitory in Cebu City. 1 The
Carungays agreed topay P970,000.00, inclusive of contractor's fee, and Deiparine bound himself
to erect the building "instrict accordance to (sic) plans and specifications." Nicanor Trinidad, Jr., a
civil engineer, was designatedas the representative of the Carungay spouses, with powers
of inspection and coordination with thecontractor.Deiparine started the construction on September 1,
1982.On November 6, 1982, Trinidad sent him a document entitled General Conditions and
Specifications which prescribed 3,000 pounds per square inch as the minimum acceptable
compressive strength of the building.In the course of the construction, Trinidad reported to Cesario
Carungay that Deiparine had beendeviating from the plans and specifications, thus impairing the
strength and safety of the building.Carungay ordered Deiparine to first secure approval from him
before pouring cement. Order was ignored.Carungay then sent another memorandum with complaints
but this was also ignored. After several conferences, the parties agreed to conduct cylinder tests to
ascertain if the structure thus far built complied with safety standards. Deiparine and Carungay
agreed on core testing. Deiparaine evenpromised that if the tests should show a total failure of if the
failure exceed 10%, he would shoulder allexpenses.The core testing was conducted by Geo-Testing
International, a Manila-based firm, on twenty-four coresamples. On the basis of 3,000 psi, all the
samples failed; on the basis of 2,500 psi, only three samplespassed; and on the basis of 2,000 psi,
nineteen samples failed. 6 This meant that the building wasstructurally defective.Spouses Carungay
filed complaint with the RTC Cebu for the rescission of the construction contract andfor damages.TC
decision:(1)Construction agreement rescinded(2)Condemning Deiparine to have forfeited his
expenses in the construction (P244, 253.70)(3)Ordering Deiparine to reimburse to the spouses
Carungay the costs of core testing (P15, 104.33)(4)Ordering Deiparine to demolish and remove all the
existing structures and restore the premises totheir former condition before construction
began(5)Ordering Deiparine to pay attorneys fees and costs of suit(P10,000)CA affirmed TC decision
in toto
ISSUE: Whether the contract may be validly rescinded under Article 1191 of the CC***Short answer:
YES
Ratio Decidendi: Rescission under Article 1191 is a remedy for breach in a reciprocal obligation.
Reasoning
Petitioner challenges the application of Article 1191 of the CC in rescinding the construction
agreement.His position is that the applicable rules are Articles 1385 and 1725 of the CC. Article 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. Article 1725: In a contract for a
piece of work, the owner may withdraw at will from the construction ofthe work, although it may have
been commenced, indemnifying the contractor for all the latter's expenses, work, and the usefulness
which the owner may obtain therefrom, and damages.The right of rescission is used in two different
contexts in the Civil Code.(1) Under the law on contracts RESCISSIBLE CONTRACTS enumerated in
Article 1381Those which are entered into by guardians whenever the wards who they represent suffer
lesion by more than one-fourth of the value of the things which are the object thereof; Those agreed
upon in representation of absentees, if the latter suffer the lesion stated in thepreceding
number:Those undertaken in fraud of creditors when the later cannot in any other manner collect
theclaims due them:Those which refer to things under litigation if they have been entered into by the
defendants without the knowledge and approval of the litigants or of competent judicial authority;All
other contracts specially declared by law to be subject to rescission. Article 1385 deals with the
rescission of the contracts under Article 1381, which do not include theconstruction agreement in
question.(2)
Under the law on obligations RIGHT OF RESCISSION as granted in Article 1191
Art. 1191 - The power to rescind obligations is implied in reciprocal ones, in case one of the
obligorsshould not comply with what is incumbent upon him.The injured party may choose between
the fulfillment and the rescission of the obligation, with thepayment 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 aperiod.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.TC correctly

applied Art 1191 which deals with reciprocal obligations.The construction contract fails squarely
under the coverage of Article 1191 because it imposes uponDeiparine the obligation to build the
structure and upon the Carungays, the obligation to pay for theproject upon its completion. Article
1191, unlike Article 1385, is not predicated on economic prejudice to one of the, parties but on breach
of faith by one of them that violates the reciprocity between them. 19 The violation of
reciprocity between Deiparine and the Carungay spouses, to wit, the breach caused by Deiparine's
failure to followthe stipulated plans and specifications, has given the Carungay spouses the right to
rescind or cancel thecontract. Article 1725 cannot support the petitioner's position either, for this
contemplates a voluntary withdrawal by the owner without fault on the part of the contractor, who is
therefore entitled to indemnity, and evendamages, for the work he has already commenced. There is
no such voluntary withdrawal in the case at bar.The other applicable provisions are: Article 1714. If
the contractor agrees to produce the work from material furnished by him, he shalldeliver the thing
produced to the employer and transfer dominion over the thing. This contract shall begoverned by the
following articles as well as by the pertinent provisions on warranty of title and againsthidden defects
and the payment of price in a contract of sale. Article 1715. The contractor shall execute the work
in such a manner that it has the qualities agreedupon and has no defects which destroy or lessen its
value or fitness for its ordinary or stipulated use.Should the work be not of such quality, the employer
may require that the contractor remove the defect orexecute another work. If the contractor fails or
refuses to comply with this obligation, the employer mayhave the defect removed or another
work executed, at the contractor's cost. Article 1727. The contractor is responsible for the work
done by persons employed by him.
Disposition WHEREFORE, the challenged decision is hereby AFFIRMED and the instant petition for
review isDENIED, with costs against the petitioner
IRINGAN V. CA
Facts:
Antonio Palao sold an undivided portion of land in Tuguegarao to Alfonso Iringan. A Deed of Sale
was executed with the purchase priceof P295,000 payable as follows: P10,000 upon
executionof thecontract, P140,000 on or before Apr. 30, 1985, and P145,000 on or before Dec. 31, 1985.
On the 2ndpayment, Iringan only paid P40,000,and Palao sent a latter on Jul. 18, 1985 stating that he
considered thecontract as rescinded. Iringan replied that they were not opposing therevocation of the
contract but asked for reimbursement of the ff.amounts: P50,000 as cash received by Palao, P3,200 as
geodeticengineers fee, attorneys fee and the current interest of P53,700. Palaoreplied that he was
not amenable to this. Iringan proposed that theP50,000 be reimbursed or a portion of the land be sold
to him. Palaoreplied that Iringans standing obligation had reached P61,600 forrental arrears. Palao
filed a complaint for Judicial Confirmation of Rescission of Contract and Damages. The RTC ruled in
favor of Palaoand affirmed the rescission of the contract, which the CA affirmed.
Issue:
(1)W/N the contract was validly rescinded.(2)W/N the award of moral and exemplary damages is
proper.
Held:(1) Art. 1592: In the sale of immovable property, even though it mayhave been stipulated that
upon failure to pay the price at thetime 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 hasbeen made upon him either judicially or by notarial act. After
thedemand, the court may not grant him a new term. When Palao filed an action for Judicial
Confirmation of Rescission and Damages, he complied with the requirement of thelaw for
judicial decree of rescission. The complaint categorically stated that the purpose was (a) to compel
appellants to formalizein a public document, their mutual agreement of revocation andrescission;
and/or (b) to have a judicial confirmation of the said revocation/rescission under terms and conditions
fair, proper and just for both parties
VDA.
DE
MISTICA
vs.
NAGUIAT
G.R. No. 137909. December 11, 2003
Facts:
Eulalio Mistica is the owner of a parcel of land located at Malhacan, Meycauayan, Bulacan. A portion
thereof was leased to respondent Naguiat. Consequently, Mistica entered into a contract to sell with

respondent over a portion of lot containing an area of 200 sq. mtrs. The agreement was reduced to
writing
in
a
document
entitled
Kasulatan
sa
Pagbibilihan
P
20k

as
the
total
purchase:
P
2k

upon
signing;
P
18k

to
be
paid
within
10yrs;
In case non payment, vendee shall pay an interest of 12% per annum.
Pursuant to said agreement, respondent gave a downpayment of P2K & made another partial payment
of P1K & thereafter failed to make any payments. Eulalio Mistica died sometime in Oct. 1986.
Petitioner claims that she is entitled to rescind the Contract under Article 1191 of the Civil Code,
because respondents committed a substantial breach when they did not pay the balance of the
purchase price within the ten-year period.
Issue:
1.
WON
the
Kasulatan
was
a
contract
to
sell?
NO
2.
WON
petitioner
is
entitled
to
rescind
the
contract?
NO
3. WON the contract is in the nature of a potestative obligation? NO
Held:
1.
The Kasulatan was clearly a Contract of Sale. A deed of sale is considered absolute in nature when
there is neither a stipulation in the deed that title to the property sold is reserved to the seller until the
full payment of the price; nor a stipulation giving the vendor the right to unilaterally resolve the
contract the moment the buyer fails to pay within a fixed period.
2.
In a contract of sale, the remedy of an unpaid seller is either specific performance or rescission.
Under Article 1191 of the Civil Code, the right to rescind an obligation is predicated on the violation of
the reciprocity between parties, brought about by a breach of faith by one of them. Rescission,
however, is allowed only where the breach is substantial and fundamental to the fulfillment of the
obligation.
In the present case, the failure of respondents to pay the balance of the purchase price within ten
years from the execution of the Deed did not amount to a substantial breach. In the Kasulatan, it was
stipulated that payment could be made even after ten years from the execution of the Contract,
provided the vendee paid 12 percent interest. The stipulations of the contract constitute the law
between the parties; thus, courts have no alternative but to enforce them as agreed upon and written.
Petitioner never made any demand for the balance of the purchase price. Petitioner even refused the
payment tendered by respondents during her husbands funeral, thus showing that she was not
exactly blameless for the lapse of the ten-year period. Had she accepted the tender, payment would
have been made well within the agreed period.
3.
The Kasulatan does not allow the it to be converted to a potestative obligation. First, nowhere is it
stated in the Deed that payment of the purchase price is dependent upon whether respondents want
to pay it or not. Second, the fact that they already made partial payment thereof only shows that the
parties intended to be bound by the Kasulatan.

Ke Hong Cheng vs CA G.R. No 144169 No.

Facts: Petitioner is the owner of Butuan Shipping Line. In one the vessels owned by the petitioner,
Philippine Agricultural Trading Corporation boarded 3,400 bags of copra to be shipped from Masbate
to Dipolog City and which said shipment of copra was insured by PhilAm. While on board, the ship
sank amounting to total loss of the shipments. Because of the loss, the insurer paid the damages to
the consignee. Having subrogated the rights of the consignee, PhilAm instituted a civil case to
recover the money paid to the consignee based on breach of contract of carriage. While the case was
pending, petitioner executed deeds of donations of parcels of land to his children. The trial court
rendered judgment against the petitioner Ke Hong Cheng in the civil case on December 29, 1993. After
the decision became final a writ of execution was issued but it was not served, Therefore an alias writ
was was applied for which was granted. The sheriff did not found any property under Butuan
Shipping Lines and/or Ke Hong Cheng. In 1997, PhilAm filed complaint for annulling the deeds of

donation made by herein petitioner to his children and alleged the donation was to defraud his
creditors including PhilAm. Petitioner filed an answer stating that the action had already prescribed.
Issue: Whether or not the action to rescind the donation had already prescribed.
Held: According to the trial court, the period began from December 29, 1993 when the civil case was
resolved. Thus, The CA maintained that, that the four year period began only on January 1997, the
time when it first learned that the judgment award could not be satisfied because the Ke Hong Cheng
had no more properties in his name. Article 1389 of the Civil Code simply provide that "The action to
claim rescission must be commenced within four years." When the law is silent as to when the
prescriptive shall commence, general rule must apply that it will commence when the moment the
action accrues. An action for rescission must be the last resort of the creditors and can only be
availed after the creditor had exhausted all the properties. The herein respondent came to know only
in January 1997 about the unlawful conveyances of the petitioner when together with the sheriff and
counsel were to attach the property of the petitioner and it was then only when they found out it is no
longer in the name of the petitioner. Since the respondent filed accion pauliana on February 1997, a
month after the discovery that petitioner had no property in his name to satisfy the judgment, action
for rescission of subject deeds had not yet prescribed.
Article 1383-Oblicon-Czarina
Maria Antonia Siguan vs. Rosa Lim, Linde Lim, Ingrid Lim and Neil Lim318 SCRA 725; G.R. No.
134685; November 19, 1999
Facts:
A criminal case was filed against LIM with RTC-Cebu city for issuing 2 bouncing checks in the
amounts of P300,000 andP241,668, respectively to Siguan. Meanwhile, on 2 July 1991, a Deed of
Donation conveying the following parcels of land and purportedly executed by LIM on 10August 1989
in favor of her children, Linde, Ingrid and Neil, was registered with the Office of the Register of Deeds
of Cebu City. Newtransfer certificates of title were thereafter issued in the names of the donees. On 23
June 1993, petitioner filed an accion pauliana against LIM and her children before RTC-Cebu City to
rescind the questioned Deed of Donation and to declare as null and void the new transfer certificates
of title issued for the lots covered by the questioned Deed.
Petitioners contention: claimed therein that sometime in July 1991, LIM, through a Deed of Donation,
fraudulently transferred all her real property to her children in bad faith and in fraud of creditors,
including her; that LIM conspired and confederated with her children in antedating the questioned
Deed of Donation, to petitioner's and other creditors' prejudice; and that LIM, at the time of the
fraudulent conveyance, left no sufficient properties to pay her obligations.
LIMs contention :As regards the questioned Deed of Donation, LIM maintained that it was not
antedated but was made in goodfaith at a time when she had sufficient property. Finally, she alleged
that the Deed of Donation was registered only on 2 July 1991because she was seriously ill.
Issue: Whether the Deed of Donation executed by Rosa Lim (LIM) in favor of her children be rescinded
for being in fraud of petitioner Maria Antonia Siguan?
Ruling: Even assuming arguendo that petitioner became a creditor of LIM prior to the celebration of
the contract of donation, still her actionfor rescission would not fare well because the third requisite
was not met. Under Article 1381 of the Civil Code, contracts enteredinto in fraud of creditors may be
rescinded only when the creditors cannot in any manner collect the claims due them. Also ,
Article1383 of the same Code provides that the action for rescission is but a subsidiary remedy which
cannot be instituted except whenthe party suffering damage has no other legal means to obtain
reparation for the same.
The term "subsidiary remedy" has beendefined as "the exhaustion of all remedies by the prejudiced
creditor to collect claims due him before rescission is resorted to." It is,therefore, "essential that the
party asking for rescission prove that he has exhausted all other legal means to obtain satisfaction of
his claim.
Petitioner neither alleged nor proved that she did so. On this score, her action for the rescission of
the questioned deedis not maintainable even if the fraud charged actually did exist.