1

G.R. Nos. L-48195 and 48196

May 1, 1942
SOFRONIO T. BAYLA, ET AL., petitioners, vs. SILANG TRAFFIC CO., INC.,
respondent.
SILANG TRAFFIC CO., petitioner, vs. SOFRONIO BAYLA, ET AL., respondents.
E. A. Beltran for petitioners.
Conrado V. Sanchez, Melchor C. Benitez, and Enrique M. Fernando for respondent.
OZAETA, J.:
Petitioners in G.R. No. 48195 instituted this action in the Court of First Instance of Cavite
against the respondent Silang Traffic Co., Inc. (cross-petitioner in G.R. No. 48196), to
recover certain sums of money which they had paid severally to the corporation on
account of shares of stock they individually agreed to take and pay for under certain
specified terms and conditions, of which the following referring to the petitioner Josefa
Naval, is typical:
AGREEMENT FOR INSTALLMENT SALE OF SHARES IN THE "SILANG TRAFFIC COMPANY,
INC.,"
Silang, Cavite, P. I.
THIS AGREEMENT, made and entered into between Mrs. Josefa Naval, of legal age,
married and resident of the Municipality of Silang, Province of Cavite, Philippine Islands,
party of the First Part, hereinafter called the subscriber, and the "Silang Traffic Company,
Inc.," a corporation duly organized and existing by virtue of and under the laws of the
Philippine Islands, with its principal office in the Municipality of Silang, Province of Cavite,
Philippine Islands, party of the Second Part, hereinafter called the seller,
WITNESSETH:
That the subscriber promises to pay personally or by his duly authorized agent to the
seller at the Municipality of Silang, Province of Cavite, Philippine Islands, the sum of one
thousand five hundred pesos (P1,500), Philippine currency, as purchase price of FIFTEEN
(15) shares of capital stock, said purchase price to be paid as follows, to wit: five (5%)
per cent upon the execution of the contract, the receipt whereof is hereby acknowledged
and confessed, and the remainder in installments of five per cent, payable within the
first month of each and every quarter thereafter, commencing on the 1st day of July,
1935, with interest on deferred payments at the rate of SIX (6%) per cent per annum
until paid.
That the said subscriber further agrees that if he fails to pay any of said installment
when due, or to perform any of the aforesaid conditions, or if said shares shall be
attached or levied upon by creditors of the said subscriber, then the said shares are to
revert to the seller and the payments already made are to be forfeited in favor of said
seller, and the latter may then take possession, without resorting to court proceedings.
The said seller upon receiving full payment, at the time and manner hereinbefore
specified, agrees to execute and deliver to said subscriber, or to his heirs and assigns,
the certificate of title of said shares, free and clear of all encumbrances.

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In testimony whereof, the parties have hereunto set their hands in the Municipality of
Silang, Province of Cavite, Philippine Islands, this 30th day of March, 1935.
(Sgd.) JOSEFA NAVAL
SILANG TRAFFIC COMPANY, INC.
Subscriber
By (Sgd.) LINO GOMEZ
President.
(Exhibit 1. Notarial acknowledgment omitted.)
The agreements signed by the other petitioners were of the same date (March 30, 1935)
and in identical terms as the foregoing except as to the number of shares and the
corresponding purchase price. The petitioners agreed to purchase the following number
of shares and, up to April 30, 1937, had paid the following sums on account thereof:
Sofronio T. Bayla.......
Venancio Toledo........
Josefa Naval..............
Paz Toledo................

8 shares
8 shares
15 shares
15 shares

P360
P375
P675
P675

Petitioners' action for the recovery of the sums above mentioned is based on a resolution
by the board of directors of the respondent corporation on August 1, 1937, of the
following tenor:
A mocion sel Sr. Marcos Caparas y secundado por el Sr. Alejandro Bayla, que para el bien
de la corporacion y la pronta terminacion del asunto civil No. 3125 titulado "Vicente F.
Villanueva et al. vs. Lino Gomez et al.," en el Juzgado de Primera Instancia de Cavite,
donde se gasto y se gastara no poca cantidad de la Corporacion, se resolvio y se aprobo
por la Junta Directiva los siguientes:
(a) Que se dejara sin efecto lo aprobado por la Junta Directiva el 3 de marzo, 1935, art.
11, sec. 162, sobre las cobranzas que se haran por el Secretario Tesorero de la
Corporacion a los accionistas que habian tomado o suscrito nuevas acciones y que se
permitia a estos pagar 20% del valor de las acciones suscritas en un ao, con interes de
6% y el pago o jornal que se hara por trimestre.
(b) Se dejara sin efecto, en vista de que aun no esta pagado todo el valor de las 123
acciones, tomadas de las acciones no expedidas (unissued stock) de la Corporacion y
que fueron suscritas por los siguienes:
a
Lino Gomez.....................
10 Acciones
Venancio Toledo.............
8 Acciones
Melchor P. Benitez........

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17 Acciones
Isaias Videa.................
14 Acciones
Esteban Velasco............
10 Acciones
Numeriano S. Aldaba....
15 Acciones
Inocencio Cruz.................
8 Acciones
Josefa Naval ..................
15 Acciones
Sofronio Bayla.................
8 Acciones
Dionisio Dungca.............
3 Acciones
y devolver a las personas arriba descritas toda la cantidad que estas habian pagado por
las 123 acciones.
(c) Que se dejara sin efecto lo aprobado por la Junta Directiva el 3 marzo, 1935, art. V.
sec. 165, sobre el cambio o trueque de las 31 acciones del Treasury Stock, contra las 32
acciones del Sr. Numeriano Aldaba, en la corporacion Northern Luzon Transportation Co.
y que se devuelva al Sr. Numeriano Aldaba las 32 acciones mencionadas despues que el
haya devuelto el certificado de las 31 acciones de la Silang Traffic Co., Inc.
(d) Permitir al Tesorero de la Corporacion para que devuelva a las personas arriba
indicadas, las cantidades pagadas por las 123 acciones. (Exhibit A-1.)
The respondent corporation set up the following defenses: (1) That the above-quoted
resolution is not applicable to the petitioners Sofronio T. Bayla, Josefa Naval, and Paz
Toledo because on the date thereof "their subscribed shares of stock had already
automatically reverted to the defendant, and the installments paid by them had already
been forfeited"; and (2) that said resolution of August 1, 1937, was revoked and
cancelled by a subsequent resolution of the board of directors of the defendant
corporation dated August 22, 1937.

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The trial court absolved the defendant from the complaint and declared canceled
(forfeited) in favor of the defendant the shares of stock in question. It held that the
resolution of August 1, 1937, was null and void, citing Velasco vs. Poizat (37 Phil., 802),
wherein this Court held that "a corporation has no legal capacity to release an original
subscriber to its capital stock from the obligation to pay for shares; and any agreement
to this effect is invalid" Plaintiffs below appealed to the Court of Appeals, which modified
of the trial court as follows:
That part of the judgment dismissing plaintiff's complaint is affirmed, but that part
thereof declaring their subscription canceled is reversed. Defendant is directed to grant
plaintiffs 30 days after final judgment within which to pay the arrears on their
subscription. Without pronouncement as to costs.
Both parties appealed to this Court by petition and cross-petition for certiorari.
Petitioners insist that they have the right to recover the amounts involved under the
resolution of August 1, 1937, while the respondent and cross-petitioner on its part
contends that said amounts have been automatically forfeited and the shares of stock
have reverted to the corporation under the agreement hereinabove quoted.
The parties litigant, the trial court, and the Court of Appeals have interpreted or
considered the said agreement as a contract of subscription to the capital stock of the
respondent corporation. It should be noted, however, that said agreement is entitled
"Agreement for Installment Sale of Shares in the Silang Traffic Company, Inc.,"; that while
the purchaser is designated as "subscriber," the corporation is described as "seller"; that
the agreement was entered into on March 30, 1935, long after the incorporation and
organization of the corporation, which took place in 1927; and that the price of the stock
was payable in quarterly installments spread over a period of five years. It also appears
that in civil case No. 3125 of the Court of First Instance of Cavite mentioned in the
resolution of August 1, 1937, the right of the corporation to sell the shares of stock to the
person named in said resolution (including herein petitioners) was impugned by the
plaintiffs in said case, who claimed a preferred right to buy said shares.
Whether a particular contract is a subscription or a sale of stock is a matter of
construction and depends upon its terms and the intention of the parties (4 Fletcher,
Cyclopedia of Corporation [permanent edition], 29, cited in Salmon, Dexter & Co. vs.
Unson (47 Phil. 649, 652). In the Unson case just cited, this Court held that a subscription
to stock in an existing corporation is, as between the subscriber and the corporation,
simply a contract of purchase and sale.
It seems clear from the terms of the contracts in question that they are contracts of sale
and not of subscription. The lower courts erred in overlooking the distinction between
subscription and purchase "A subscription, properly speaking, is the mutual agreement
of the subscribers to take and pay for the stock of a corporation, while a purchase is an
independent agreement between the individual and the corporation to buy shares of
stock from it at stipulated price." (18 C. J. S., 760.) In some particulars the rules
governing subscriptions and sales of shares are different. For instance, the provisions of
our Corporation Law regarding calls for unpaid subscription and assessment of stock
(sections 37-50) do not apply to a purchase of stock. Likewise the rule that corporation

5
has no legal capacity to release an original subscriber to its capital stock from the
obligation to pay for his shares, is inapplicable to a contract of purchase of shares.
The next question to determine is whether under the contract between the parties the
failure of the purchaser to pay any of the quarterly installments on the purchase price
automatically gave rise to the forfeiture of the amounts already paid and the reversion of
the shares to the corporation. The contract provides for interest of the rate of six per
centum per annum on deferred payments. It is also provides that if the purchaser fails to
pay any of said installments when due, the said shares are to revert to the seller and the
payments already made are to be forfeited in favor of said seller. The respondent
corporation contends that when the petitioners failed to pay the installment which fell
due on or before July 31, 1937, forfeiture automatically took place, that is to say, without
the necessity of any demand from the corporation, and that therefore the resolution of
August 1, 1937, authorizing the refund of the installments already paid was inapplicable
to the petitioners, who had already lost any and all rights under said contract. The
contention is, we think, untenable. The provision regarding interest on deferred
payments would not have been inserted if it had been the intention of the parties to
provide for automatic forfeiture and cancelation of the contract. Moreover, the contract
did not expressly provide that the failure of the purchaser to pay any installment would
give rise to forfeiture and cancelation without the necessity of any demand from the
seller; and under article 1100 of the Civil Code persons obliged to deliver or do
something are not in default until the moment the creditor demands of them judicially or
extrajudicially the fulfillment of their obligation, unless (1) the obligation or the law
expressly provides that demand shall not be necessary in order that default may arise,
(2) by reason of the nature and circumstances of the obligation it shall appear that the
designation of the time at which that thing was to be delivered or the service rendered
was the principal inducement to the creation of the obligation.
Is the resolution of August 1, 1937, valid? The contract in question being one of purchase
and not subscription as we have heretofore pointed out, we see no legal impediment to
its rescission by agreement of the parties. According to the resolution of August 1, 1937,
the recission was made for the good of the corporation and in order to terminate the
then pending civil case involving the validity of the sale of the shares in question among
others. To that rescission the herein petitioners apparently agreed, as shown by their
demand for the refund of the amounts they had paid as provided in said resolution. It
appears from the record that said civil case was subsequently dismissed, and that the
purchasers of shares of stock, other than the herein petitioners, who were mentioned in
said resolution were able to benefit by said resolution. It would be an unjust
discrimination to deny the same benefit to the herein petitioners.
We may add that there is no intimation in this case that the corporation was insolvent, or
that the right of any creditor of the same was in any way prejudiced by the rescission.
The attempted revocation of said rescission by the resolution of August 22, 1937, was
invalid, it not having been agreed to by the petitioners.
Wherefore, the judgment of the court of appeals is hereby reversed and another
judgment will be entered against the defendant Silang Traffic Co., Inc., ordering it to pay
to the plaintiffs Sofronio T. Bayla, Venancio Toledo, Josefa Naval, and Paz Toledo, the
sums of P360, P375, P675, and P675, respectively, with legal interest on each of said

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sums from May 28, 1938, the date of the filing of the complaint, until the date of
payment, and with costs in the three instances. So ordered.

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G.R. No. 108129 September 23, 1999
AEROSPACE CHEMICAL INDUSTRIES, INC., petitioner,
vs.
COURT OF APPEALS, PHILIPPINE PHOSPHATE FERTILIZER, CORP., respondents.

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 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 :
Gentlemen:

Sulfuric Acid Shipment

8
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

C.

Quantity

: 98-99% H2SO4

: 500 MT-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.

Load port

: Cotcot, Basay, Negros Or. and

Atlas Pier, Sangi, Cebu

xxx

xxx

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:

9
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 respondent's 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.1wphi1.nt
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

xxx

xxx

10
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 load port 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
Petitioner's letter 9 dated May 15, 1987, reiterated the same request to private
respondent.
On January 25, 1988, petitioner's 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

xxx

xxx

By telephone, petitioner requested private respondent's 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:

11
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, petitioner's 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 P72,830.36
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)

12
Trial ensued and after due proceedings, judgment was rendered by the trial court in
petitioner's 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 attorney's fees and litigation expenses, both last items also with
12% interest per annum from date hereof until fully paid.
Defendant's 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 defendant's
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

13
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 plaintiff's 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

xxx

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 attorney's 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 PETITIONER'S 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

14
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 seller's 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 court's findings
conflict with those of the trial court, petitioner prays that the trial court's 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 respondent's 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."

15
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 court's conclusion that petitioner violated the subject contract amply
supported by preponderant evidence. Petitioner's claim was predicated merely on the
allegations of its employee, Melecio Hernandez, that the storm or force majeure caused
the petitioner's 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 petitioner's 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 Rabe's 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 vessel's master due to ships stability was
heavily tilted to port side, ship's 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

xxx

xxx

Note. Attending surveyor arrived BMC Basay on November 22, due to delayed advice of
said vessel Declared quantity loaded onboard based on data's 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 vessel's condition (listing) did not improve as the survey report
therein noted:
Declared quantity loaded on board was based on shore tank withdrawal due to ship's
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 Rabe's testimony, thus:

16
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 petitioner's nor private respondent's
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
respondent's loadports to the petitioner's designated warehouse. It was petitioner which
chartered M/T Sultan Kayumanggi. The vessel was petitioner's 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 respondent's employee, Gil Belen, had
recommended to petitioner to fully utilize the vessel, hence petitioner's request for
additional order to complete the vessel's 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
petitioner's letters to private respondent. In contrast, Belen's 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 petitioner's advantage, not the other party's. 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 Belen's purported recommendation could
not be taken at face value and, obviously, cannot excuse petitioner's default.
Respondent court found petitioner's 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 defendant's 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 plaintiff's 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

17
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 respondent's 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 (Emphasis supplied)
Indeed the above demand, which was unheeded, justifies the finding of delay. But when
did such delay begin? The above letter constitutes private respondent's 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 petitioner's

18
delay started on August 6, 1986. The Court of Appeals had relied on private
respondent's 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 petitioner's sulfuric acid. It stands to reason that
petitioner should reimburse private respondent's 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
respondent's 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 seller's 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 buyer's risk whether actual delivery has been made or not, except
that:
xxx

xxx

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. (emphasis supplied)
On this score, we quote with approval the findings of the appellate court, thus:

19
. . . 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.
Art. 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 letter-contract 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 respondent's 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 court's 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 petitioner's 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.1wphi1.nt

20
Costs against the petitioner.

21
G.R. No. 100594. March 10, 1993.]
BINALBAGAN TECH. INC., and HERMILO J. NAVA, petitioners, vs. THE COURT OF APPEALS,
MAGDALENA L. PUENTEVELLA, ANGELINA P. ECHAUS, ROMULO L. PUENTEVELLA, RENATO
L. PUENTEVELLA, NOLI L. PUENTEVELLA and NELIA LOURDES P. JACINTO, respondents.
Mateo Valenzuela for petitioners.
Hilado, Hagad & Hilado for private respondents.
SYLLABUS
1.
CIVIL LAW; OBLIGATIONS AND CONTRACTS; PARTY CANNOT DEMAND
PERFORMANCE OF AN OBLIGATION UNLESS HE IS IN A POSITION TO COMPLY WITH HIS
OWN OBLIGATIONS. A party to a contract cannot demand performance of the other
party's obligations unless he is in a position to comply with his own obligations. Similarly,
the right to rescind a contract can be demanded only if a party thereto is ready, willing
and able to comply with his own obligations thereunder (Art. 1191, Civil Code; Seva vs.
Berwin, 48 Phil. 581 [1926]; Paras, Civil Code of the Philippines, 12th ed. Vol. IV, p. 200).
In a contract of sale, the vendor is bound to transfer the ownership of and deliver, as well
as warrant, the thing which is the object of the sale (Art. 1495, Civil Code); he warrants
that the buyer shall, from the time ownership is passed, have and enjoy the legal and
peaceful possession of the thing.
2.
ID.; PRESCRIPTIVE PERIOD WITHIN WHICH TO INSTITUTE ACTION UPON A WRITTEN
CONTRACT; CASE AT BAR. The prescriptive period within which to institute an action
upon a written contract is ten years (Art. 1144, Civil Code). The cause of action of private
respondent Echaus is based on the deed of sale executed on May 11, 1967, whereby
ownership of the subdivision lots was transferred to petitioner. She filed Civil Case No.
1354 for recovery of title and damages only on October 8, 1982. From May 11, 1967 to
October 8, 1982, more than fifteen (15) years elapsed. Seemingly, the 10-year
prescriptive period had expired before she brought her action to recover title. However,
the period 1974 to 1982 should be deducted in computing the prescriptive period for the
reason that from 1974 to 1982, private respondent Echaus was not in a legal position to
initiate action against petitioner since as aforestated, through no fault of hers, her
warranty against eviction was breached. Deducting eight years (1974 to 1982) from the
period 1967 to 1982, only seven years elapsed. Consequently, Civil Case No. 1354 was
filed within the 10-year prescriptive period.
DECISION
MELO, J p:
The petition for review on certiorari now before us seeks to reverse the decision of the
Court of Appeals promulgated on March 27, 1991 in CA-G.R. CV No. 24635 (de Pano,
Cacdac (P), and Vailoces, JJ .).
The facts of the case, as borne out by the record, are as follows:

22
On May 11, 1967, private respondents, through Angelina P. Echaus, in her capacity as
Judicial Administrator of the intestate estate of Luis B. Puentevella, executed a Contract
to Sell and a Deed of Sale of forty-two subdivision lots within the Phib-Khik Subdivision of
the Puentebella family, conveying and transferring said lots to petitioner Binalbagan
Tech., Inc. (hereinafter referred to as Binalbagan). In turn Binalbagan, through its
president, petitioner Hermilio J. Nava (hereinafter referred to as Nava), executed an
Acknowledgment of Debt with Mortgage Agreement, mortgaging said lots in favor of the
estate of Puentebella.
Upon the transfer to Binalbagan of titles to the 42 subdivision lots, said petitioner took
possession of the lots and the building and improvements thereon. Binalbagan started
operating a school on the property from 1967 when the titles and possession of the lots
were transferred to it.
It appears that there was a pending case, Civil Case No. 7435 of Regional Trial Court
stationed at Himamaylan, Negros Occidental. Relative to said case we shall quote the
findings of fact of the Court of Appeals in its decision dated October 30, 1978 in CA-G.R.
No. 4211-R:
To have a better perspective of the background facts leading to the filing of this instant
case on appeal, there is a need to make reference to the circumstances surrounding the
filing of Civil Case No. 7435, to wit:
The intestate estate of the late Luis B. Puentebella as registered owner of several
subdivision lots, specifically mentioned in paragraph 2 of plaintiffs' complaint, thru
Judicial Administratrix, Angelina L. Puentevella sold said aforementioned lots to Raul
Javellana with the condition that the vendee-promisee would not transfer his rights to
said lots without the express consent of Puentevella and that in case of the cancellation
of the contract by reason of the violation of any of the terms thereof, all payments
therefor made and all improvements introduced on the property shall pertain to the
promissor and shall be considered as rentals for the use and occupation thereof.
Javellana having failed to pay the installments for a period of five years, Civil Case No.
7435 was filed by defendant Puentevella against Raul Javellana and the Southern Negros
Colleges which was impleaded as a party defendant it being in actual possession thereof,
for the rescission of their contract to sell and the recovery of possession of the lots and
buildings with damages.
Accordingly, after trial, judgment was rendered in favor of Puentevella and thereafter,
defendants Deputy Sheriffs served a copy of the writ of execution on the Acting Director
of the Southern Negros College and delivered possession of the lots and buildings to
defendant Puentevella's representative, Mrs. Manuel Gentapanan, and further levied
execution on the books and school equipment, supplies, library, apparatus, etc. to satisfy
the monetary portion of the judgment under execution on October 27, 1967. Said books,
equipment, etc. as reflected in the Depositary Receipt, (Exh. "B") dated October 28,
1965, were delivered by the Sheriffs to the Acting Director of the Southern Negros
College as depositary of the same.
Came December 29, 1965 when the plaintiffs in the instant case on appeal filed their
Third-Party Claim based on an alleged Deed of Sale executed in their favor by spouses

23
Jose and Lolita Lopez, thus Puentevella was constrained to assert physical possession
of the premises to counteract the fictitious and unenforceable claim of herein plaintiffs.
Upon the filing of the instant case for injunction and damages on January 3, 1966, an exparte writ of preliminary injunction was issued by the Honorable Presiding Judge Carlos
Abiera, which order, however, was elevated to the Honorable Court of Appeals which
issued a writ of preliminary injunction ordering Judge Carlos Abiera or any other persons
or persons in his behalf to refrain from further enforcing the injunction issued by him in
this case and from further issuing any other writs or prohibitions which would in any
manner affect the enforcement of the judgment rendered in Civil Case 7435, pending the
finality of the decision of the Honorable Court of Appeals in the latter case. Thus,
defendant Puentevella was restored to the possession of the lots and buildings subject of
this case. However, plaintiffs filed a petition for review with the Supreme Court which
issued a restraining order against the sale of the properties claimed by the spousesplaintiffs [in Abierra vs. Court of Appeals, 45 SCRA 314].
When the Supreme Court dissolved the aforesaid injunction issued by the Court of
Appeals, possession of the building and other property was taken from petitioner
Binalbagan and given to the third-party claimants, the de la Cruz spouses. Petitioner
Binalbagan transferred its school to another location. In the meantime, an appeal was
interposed by the defendants in Civil Case No. 293 with the Court of Appeals where the
appeal was docketed as CA-G.R. No. 42211-R. On October 30, 1978, the Court of Appeals
rendered judgment, reversing the appealed decision in Civil Case No. 293. On April 29,
1981, judgment was entered in CA-G.R. No. 42211, and the record of the case was
remanded to the court of origin on December 22, 1981. Consequently, in 1982 the
judgment in Civil Case No. 7435 was finally executed and enforced, and petitioner was
restored to the possession of the subdivision lots on May 31, 1982. It will be noted that
petitioner was not in possession of the lots from 1974 to May 31, 1982.
After petitioner Binalbagan was again placed in possession of the subdivision lots,
private respondent Angelina Echaus demanded payment from petitioner Binalbagan for
the subdivision lots, enclosing in the letter of demand a statement of account as of
September 1982 showing a total amount due of P367,509.93, representing the price of
the land and accrued interest as of that date.
As petitioner Binalbagan failed to effect payment, private respondent Angelina P. Echaus
filed on October 8, 1982 Civil Case No. 1354 of the Regional Trial Court of the Sixth
Judicial Region stationed in Himamaylan, Negros Occidental against petitioners for
recovery of title and damages. An amended complaint was filed by private respondent
Angelina P. Echaus by including her mother, brothers, and sisters as co-plaintiffs, which
was admitted by the trial court on March 18, 1983.
After trial, the trial court rendered a decision on August 30, 1989, the dispositive portion
of which reads as follows:
IN VIEW OF THE FOREGOING, and inasmuch as there is no fraud and since the action on
the written contract, Exh. "C", has long prescribed, judgment is hereby rendered in favor
of the defendants and against the plaintiffs dismissing the amended complaint.

24
The counterclaim is likewise dismissed for lack of sufficient proof. Each shall bear their
respective expenses of litigation (pp. 71-72, Rollo).
Private respondents appealed to the Court of Appeals which rendered a decision on
March 27, 1991, disposing:
WHEREFORE, premises considered, the appealed decision is REVERSED and SET ASIDE
and a new one is rendered ordering the appellee Binalbagan Tech. Inc., through any of its
officers, to execute a deed of conveyance or any other instrument, transferring and
returning unto the appellants the ownership and titles of the subject 42 subdivision lots.
Costs against appellees. (pp. 51-52, Rollo)
Thus, this petition for review on certiorari wherein petitioners assign the following
alleged errors of the Court of Appeals:
First Error
The Court of Appeals erred in holding that the cause of action of the respondents has not
prescribed.
Second Error
The Court of Appeals erred in holding that Civil Case No. 293 interrupts the running of
the period of the prescription.
Third Error
The Court of Appeals erred in citing the cases of David-Garlitos and Rivero vs. Rivero to
support its contention that the period of prescription was interrupted in the case at bar.
Fourth Error
The finding of facts of the Honorable Court of Appeals in reversing the lower court
decision has no basis and is contradicted by the evidence on record of the case at bar as
well as the admission of parties." (p. 16, Rollo)
The main issue of this case is: Whether private respondents' cause of action in Civil Case
No. 1354 is barred by prescription.
On this point the Court of Appeals held:
As it is evident that there was an interruption during the period from 1974 up to 1982,
the period of prescription, as correctly maintained by the appellants, was tolled during
such period, due to the injunctive writ in Civil Case No. 293 as discussed earlier when the
vendors could not maintain the vendee in possession, and consequently was in no
position to legally demand payment of the price. Accordingly, while it may be conceded
that appellants' cause of action to demand performance had accrued on June 10, 1967
due to the appellee institution's default in the payment of the first installment which
became due on that date, the running of prescription was interrupted in 1974 when, from
the words of the lower court itself, "the Supreme Court reversed the Court of Appeal's

25
decision and dissolved the injunction which the latter court had earlier issued in Civil
Case No. 293, possession of the building and other properties was taken from defendant
Binalbagan Tech. Inc. and given to the de la Cruz spouses, through Southern Negros
College". And the period of prescription commenced to run anew only on May 31, 1982
when the appellants were finally able to fully implement the already executory judgment
in Case No. 7435, and thus restore appellees in possession of the 42 subdivision lots.
In other words, the period of prescription was interrupted, because from 1974 up to
1982, the appellants themselves could not have restored unto the appellees the
possession of the 42 subdivision lots precisely because of the preliminary injunction
mentioned elsewhere. Consequently, the appellants could not have prospered in any suit
to compel performance or payment from the appellees-buyers, because the appellants
themselves were in no position to perform their own corresponding obligation to deliver
to and maintain said buyers in possession of the lots subject matter of the sale. (Article
1458, 1495, 1537, Civil Code). (pp 49-50, Rollo)
We agree with the Court of Appeals.
A party to a contract cannot demand performance of the other party's obligations unless
he is in a position to comply with his own obligations. Similarly, the right to rescind a
contract can be demanded only if a party thereto is ready, willing and able to comply
with his own obligations thereunder (Art. 1191, Civil Code; Seva vs. Berwin, 48 Phil. 581
[1926]; Paras, Civil Code of the Philippines, 12th ed. Vol. IV, p. 200). In a contract of sale,
the vendor is bound to transfer the ownership of and deliver, as well as warrant, the
thing which is the object of the sale (Art. 1495, Civil Code); he warrants that the buyer
shall, from the time ownership is passed, have and enjoy the legal and peaceful
possession of the thing
ARTICLE 1547.

In a contract of sale, unless a contrary intention appears, there is:

(1)
An implied warranty on the part of the seller that he has a right to sell the thing at
the time when the ownership is to pass, and that the buyer shall from that time have and
enjoy the legal and peaceful possession of the thing.
xxx xxx xxx
As afore-stated, petitioner was evicted from the subject subdivision lots in 1974 by virtue
of a court order in Civil Case No. 293 and reinstated to the possession thereof only in
1982. During the period, therefore, from 1974 to 1982, seller private respondent
Angelina Echaus' warranty against eviction given to buyer petitioner was breached
though, admittedly, through no fault of her own. It follows that during that period, 1974
to 1982, private respondent Echaus was not in a legal position to demand compliance of
the prestation of petitioner to pay the price of said subdivision lots. In short, her right to
demand payment was suspended during that period, 1974-1982.
The prescriptive period within which to institute an action upon a written contract is ten
years (Art. 1144, Civil Code). The cause of action of private respondent Echaus is based
on the deed of sale aforementioned. The deed of sale whereby private respondent
Echaus transferred ownership of the subdivision lots was executed on May 11, 1967. She
filed Civil Case No. 1354 for recovery of title and damages only on October 8, 1982. From

26
May 11, 1967 to October 8, 1982, more than fifteen (15) years elapsed. Seemingly,
the 10-year prescriptive period had expired before she brought her action to recover
title. However, the period 1974 to 1982 should be deducted in computing the
prescriptive period for the reason that, as above discussed, from 1974 to 1982, private
respondent Echaus was not in a legal position to initiate action against petitioner since
as aforestated, through no fault of hers, her warranty against eviction was breached. In
the case of Daniel vs. Garlitos, (95 Phil. 387 [1954]), it was held that a court order
deferring action on the execution of judgment suspended the running of the 5-year
period for execution of a judgment. Here the execution of the judgment in Civil Case No.
7435 was stopped by the writ of preliminary injunction issued in Civil Case No. 293. It
was only when Civil Case No. 293 was dismissed that the writ of execution in Civil Case
Na. 7435 could be implemented and petitioner Binalbagan restored to the possession of
the subject lots.
Deducting eight years (1974 to 1982) from the period 1967 to 1982, only seven years
elapsed. Consequently, Civil Case No. 1354 was filed within the 10-year prescriptive
period. Working against petitioner's position too is the principle against unjust
enrichment which would certainly be the result if petitioner is allowed to own the 42 lots
without full payment thereof.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R.
CV No. 24635 is AFFIRMED.

27
G.R. No. L-30056 August 30, 1988
MARCELO AGCAOILI, plaintiff-appellee
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.
Artemio L. Agcaoili for plaintiff-appellee.
Office of the Government Corporate Counsel for defendant-appellant.

NARVASA, J.:
The appellant Government Service Insurance System, (GSIS, for short) having approved
the application of the appellee Agcaoili for the purchase of a house and lot in the GSIS
Housing Project at Nangka Marikina, Rizal, subject to the condition that the latter should
forthwith occupy the house, a condition that Agacoili tried to fulfill but could not for the
reason that the house was absolutely uninhabitable; Agcaoili, after paying the first
installment and other fees, having thereafter refused to make further payment of other
stipulated installments until GSIS had made the house habitable; and appellant having
refused to do so, opting instead to cancel the award and demand the vacation by
Agcaoili of the premises; and Agcaoili having sued the GSIS in the Court of First Instance
of Manila for specific performance with damages and having obtained a favorable
judgment, the case was appealled to this Court by the GSIS. Its appeal must fail.
The essential facts are not in dispute. Approval of Agcaoili's aforementioned application
for purchase 1 was contained in a letter 2 addressed to Agcaoili and signed by GSIS
Manager Archimedes Villanueva in behalf of the Chairman-General Manager, reading as
follows:
Please be informed that your application to purchase a house and lot in our GSIS Housing
Project at Nangka, Marikina, Rizal, has been approved by this Office. Lot No. 26, Block
No. (48) 2, together with the housing unit constructed thereon, has been allocated to
you.
You are, therefore, advised to occupy the said house immediately.
If you fail to occupy the same within three (3) days from receipt of this notice, your
application shall be considered automatically disapproved and the said house and lot will
be awarded to another applicant.
Agcaoili lost no time in occupying the house. He could not stay in it, however, and had to
leave the very next day, because the house was nothing more than a shell, in such a
state of incompleteness that civilized occupation was not possible: ceiling, stairs, double
walling, lighting facilities, water connection, bathroom, toilet kitchen, drainage, were
inexistent. Agcaoili did however ask a homeless friend, a certain Villanueva, to stay in
the premises as some sort of watchman, pending completion of the construction of the
house. Agcaoili thereafter complained to the GSIS, to no avail.

28
The GSIS asked Agcaoili to pay the monthly amortizations and other fees. Agcaoili paid
the first monthly installment and the incidental fees, 3 but refused to make further
payments until and unless the GSIS completed the housing unit. What the GSIS did was
to cancel the award and require Agcaoili to vacate the premises. 4 Agcaoili reacted by
instituting suit in the Court of First Instance of Manila for specific performance and
damages. 5 Pending the action, a written protest was lodged by other awardees of
housing units in the same subdivision, regarding the failure of the System to complete
construction of their own houses. 6 Judgment was in due course rendered , 7 on the basis
of the evidence adduced by Agcaoili only, the GSIS having opted to dispense with
presentation of its own proofs. The judgment was in Agcaoili's favor and contained the
following dispositions, 8 to wit:
1)
Declaring the cancellation of the award (of a house and lot) in favor of plaintiff
(Mariano Agcaoili) illegal and void;
2)
Ordering the defendant (GSIS) to respect and enforce the aforesaid award to the
plaintiff relative to Lot No. 26, Block No. (48) 2 of the Government Service Insurance
System (GSIS) low cost housing project at Nangka Marikina, Rizal;
3)
Ordering the defendant to complete the house in question so as to make the same
habitable and authorizing it (defendant) to collect the monthly amortization thereon only
after said house shall have been completed under the terms and conditions mentioned in
Exhibit A ;and
4)
Ordering the defendant to pay P100.00 as damages and P300.00 as and for
attorney's fees, and costs.
Appellant GSIS would have this Court reverse this judgment on the argument that
1)
Agcaoili had no right to suspend payment of amortizations on account of the
incompleteness of his housing unit, since said unit had been sold "in the condition and
state of completion then existing ... (and) he is deemed to have accepted the same in
the condition he found it when he accepted the award;" and assuming indefiniteness of
the contract in this regard, such circumstance precludes a judgment for specific
performance. 9
2)
Perfection of the contract of sale between it and Agcaoili being conditioned upon
the latter's immediate occupancy of the house subject thereof, and the latter having
failed to comply with the condition, no contract ever came into existence between them ;
10
3)
Agcaoili's act of placing his homeless friend, Villanueva, in possession, "without the
prior or subsequent knowledge or consent of the defendant (GSIS)" operated as a
repudiation by Agcaoili of the award and a deprivation of the GSIS at the same time of
the reasonable rental value of the property. 11
Agcaoili's offer to buy from GSIS was contained in a printed form drawn up by the latter,
entitled "Application to Purchase a House and/or Lot." Agcaoili filled up the form, signed
it, and submitted it. 12 The acceptance of the application was also set out in a form
(mimeographed) also prepared by the GSIS. As already mentioned, this form sent to

29
Agcaoili, duly filled up, advised him of the approval of his "application to purchase a
house and lot in our GSIS Housing Project at NANGKA, MARIKINA, RIZAL," and that "Lot
No. 26, Block No. (48) 2, together with the housing unit constructed thereon, has been
allocated to you." Neither the application form nor the acceptance or approval form of
the GSIS nor the notice to commence payment of a monthly amortizations, which
again refers to "the house and lot awarded" contained any hint that the house was
incomplete, and was being sold "as is," i.e., in whatever state of completion it might be
at the time. On the other hand, the condition explicitly imposed on Agcaoili "to occupy
the said house immediately," or in any case within three (3) days from notice, otherwise
his "application shall be considered automatically disapproved and the said house and
lot will be awarded to another applicant" would imply that construction of the house
was more or less complete, and it was by reasonable standards, habitable, and that
indeed, the awardee should stay and live in it; it could not be interpreted as meaning
that the awardee would occupy it in the sense of a pioneer or settler in a rude
wilderness, making do with whatever he found available in the envirornment.
There was then a perfected contract of sale between the parties; there had been a
meeting of the minds upon the purchase by Agcaoili of a determinate house and lot in
the GSIS Housing Project at Nangka Marikina, Rizal at a definite price payable in
amortizations at P31.56 per month, and from that moment the parties acquired the right
to reciprocally demand performance. 13 It was, to be sure, the duty of the GSIS, as seller,
to deliver the thing sold in a condition suitable for its enjoyment by the buyer for the
purpose contemplated , 14 in other words, to deliver the house subject of the contract in
a reasonably livable state. This it failed to do.
It sold a house to Agcaoili, and required him to immediately occupy it under pain of
cancellation of the sale. Under the circumstances there can hardly be any doubt that the
house contemplated was one that could be occupied for purposes of residence in
reasonable comfort and convenience. There would be no sense to require the awardee to
immediately occupy and live in a shell of a house, a structure consisting only of four
walls with openings, and a roof, and to theorize, as the GSIS does, that this was what
was intended by the parties, since the contract did not clearly impose upon it the
obligation to deliver a habitable house, is to advocate an absurdity, the creation of an
unfair situation. By any objective interpretation of its terms, the contract can only be
understood as imposing on the GSIS an obligation to deliver to Agcaoili a reasonably
habitable dwelling in return for his undertaking to pay the stipulated price. Since GSIS
did not fulfill that obligation, and was not willing to put the house in habitable state, it
cannot invoke Agcaoili's suspension of payment of amortizations as cause to cancel the
contract between them. It is axiomatic that "(i)n 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." 15
Nor may the GSIS succeed in justifying its cancellation of the award to Agcaoili by the
claim that the latter had not complied with the condition of occupying the house within
three (3) days. The record shows that Agcaoili did try to fulfill the condition; he did try to
occupy the house but found it to be so uninhabitable that he had to leave it the following
day. He did however leave a friend in the structure, who being homeless and hence
willing to accept shelter even of the most rudimentary sort, agreed to stay therein and
look after it. Thus the argument that Agcaoili breached the agreement by failing to

30
occupy the house, and by allowing another person to stay in it without the consent of
the GSIS, must be rejected as devoid of merit.
Finally, the GSIS should not be heard to say that the agreement between it and Agcaoili
is silent, or imprecise as to its exact prestation Blame for the imprecision cannot be
imputed to Agcaoili; it was after all the GSIS which caused the contract to come into
being by its written acceptance of Agcaoili's offer to purchase, that offer being contained
in a printed form supplied by the GSIS. Said appellant having caused the ambiguity of
which it would now make capital, the question of interpretation arising therefrom, should
be resolved against it.
It will not do, however, to dispose of the controversy by simply declaring that the
contract between the parties had not been validly cancelled and was therefore still in
force, and that Agcaoili could not be compelled by the GSIS to pay the stipulated price of
the house and lot subject of the contract until and unless it had first completed
construction of the house. This would leave the contract hanging or in suspended
animation, as it were, Agcaoili unwilling to pay unless the house were first completed,
and the GSIS averse to completing construction, which is precisely what has been the
state of affairs between the parties for more than twenty (20) years now. On the other
hand, assuming it to be feasible to still finish the construction of the house at this time,
to compel the GSIS to do so so that Agcaoili's prestation to pay the price might in turn be
demanded, without modifying the price therefor, would not be quite fair. The cost to the
GSIS of completion of construction at present prices would make the stipulated price
disproportionate, unrealistic.
The situation calls for the exercise by this Court of its equity jurisdiction, to the end that
it may render complete justice to both parties.
As we . . reaffirmed in Air Manila, Inc. vs. Court of Industrial Relations (83 SCRA 579, 589
[1978]). "(E)quity as the complement of legal jurisdiction seeks to reach and do complete
justice where courts of law, through the inflexibility of their rules and want of power to
adapt their judgments to the special circumstances of cases, are incompetent so to do.
Equity regards the spirit of and not the letter, the intent and not the form, the substance
rather than the circumstance, as it is variously expressed by different courts... " 16
In this case, the Court can not require specific performance of the contract in question
according to its literal terms, as this would result in inequity. The prevailing rule is that in
decreeing specific performance equity requires 17
... not only that the contract be just and equitable in its provisions, but that the
consequences of specific performance likewise be equitable and just. The general rule is
that this equitable relief will not be granted if, under the circumstances of the case, the
result of the specific enforcement of the contract would be harsh, inequitable,
oppressive, or result in an unconscionable advantage to the plaintiff . .
In the exercise of its equity jurisdiction, the Court may adjust the rights of parties in
accordance with the circumstances obtaining at the time of rendition of judgment, when
these are significantly different from those existing at the time of generation of those
rights.

31
The Court is not restricted to an adjustment of the rights of the parties as they existed
when suit was brought, but will give relief appropriate to events occuring ending the suit.
18
While equitable jurisdiction is generally to be determined with reference to the situation
existing at the time the suit is filed, the relief to be accorded by the decree is governed
by the conditions which are shown to exist at the time of making thereof, and not by the
circumstances attending the inception of the litigation. In making up the final decree in
an equity suit the judge may rightly consider matters arising after suit was brought.
Therefore, as a general rule, equity will administer such relief as the nature, rights, facts
and exigencies of the case demand at the close of the trial or at the time of the making
of the decree. 19
That adjustment is entirely consistent with the Civil Law principle that in the exercise of
rights a person must act with justice, give everyone his due, and observe honesty and
good faith. 20 Adjustment of rights has been held to be particularly applicable when
there has been a depreciation of currency.
Depreciation of the currency or other medium of payment contracted for has frequently
been held to justify the court in withholding specific performance or at least conditioning
it upon payment of the actual value of the property contracted for. Thus, in an action for
the specific performance of a real estate contract, it has been held that where the
currency in which the plaintiff had contracted to pay had greatly depreciated before
enforcement was sought, the relief would be denied unless the complaint would
undertake to pay the equitable value of the land. (Willard & Tayloe [U.S.] 8 Wall 557,19 L.
Ed 501; Doughdrill v. Edwards, 59 Ala 424) 21
In determining the precise relief to give, the Court will "balance the equities" or the
respective interests of the parties, and take account of the relative hardship that one
relief or another may occasion to them .22
The completion of the unfinished house so that it may be put into habitable condition, as
one form of relief to the plaintiff Agcaoili, no longer appears to be a feasible option in
view of the not inconsiderable time that has already elapsed. That would require an
adjustment of the price of the subject of the sale to conform to present prices of
construction materials and labor. It is more in keeping with the realities of the situation,
and with equitable norms, to simply require payment for the land on which the house
stands, and for the house itself, in its unfinished state, as of the time of the contract. In
fact, this is an alternative relief proposed by Agcaoili himself, i.e., "that judgment issue . .
(o)rdering the defendant (GSIS) to execute a deed of sale that would embody and
provide for a reasonable amortization of payment on the basis of the present actual
unfinished and uncompleted condition, worth and value of the said house. 23
WHEREFORE, the judgment of the Court a quo insofar as it invalidates and sets aside the
cancellation by respondent GSIS of the award in favor of petitioner Agcaoili of Lot No. 26,
Block No. (48) 2 of the GSIS low cost housing project at Nangka, Marikina, Rizal, and
orders the former to respect the aforesaid award and to pay damages in the amounts
specified, is AFFIRMED as being in accord with the facts and the law. Said judgments is
however modified by deleting the requirement for respondent GSIS "to complete the
house in question so as to make the same habitable," and instead it is hereby ORDERED

32
that the contract between the parties relative to the property above described be
modified by adding to the cost of the land, as of the time of perfection of the contract,
the cost of the house in its unfinished state also as of the time of perfection of the
contract, and correspondingly adjusting the amortizations to be paid by petitioner
Agcaoili, the modification to be effected after determination by the Court a quo of the
value of said house on the basis of the agreement of the parties, or if this is not possible
by such commissioner or commissioners as the Court may appoint. No pronouncement
as to costs.
SO ORDERED.

33
G.R. No. 112182 December 12, 1994
BRICKTOWN DEVELOPMENT CORP. (its new corporate name MULTINATIONAL REALTY
DEVELOPMENT CORPORATION) and MARIANO Z. VERALDE, petitioners,
vs.
AMOR TIERRA DEVELOPMENT CORPORATION and the HON. COURT OF APPEALS,
respondents.
Tabaquero, Dela Torre, Simando & Associates for petitioners.
Robles, Ricafrente & Aguirre Law Firm for private respondent.

VITUG, J.:
A contract, once perfected, has the force of law between the parties with which they are
bound to comply in good faith and from which neither one may renege without the
consent of the other. The autonomy of contracts allows the parties to establish such
stipulations, clauses, terms and conditions as they may deem appropriate provided only
that they are not contrary to law, morals, good customs, public order or public policy. The
standard norm in the performance of their respective covenants in the contract, as well
as in the exercise of their rights thereunder, is expressed in the cardinal principle that
the parties in that juridical relation must act with justice, honesty and good faith.
These basic tenets, once again, take the lead in the instant controversy.
Private respondent reminds us that the factual findings of the trial court, sustained by
the Court of Appeals, should be considered binding on this Court in this petition. We
concede to this reminder since, indeed, there appears to be no valid justification in the
case at bench for us to take an exception from the rule. We shall, therefore, momentarily
paraphrase these findings.
On 31 March 1981, Bricktown Development Corporation (herein petitioner corporation),
represented by its President and co-petitioner Mariano Z. Velarde, executed two
Contracts to Sell (Exhs. "A" and "B") in favor of Amor Tierra Development Corporation
(herein private respondent), represented in these acts by its Vice-President, Moises G.
Petilla, covering a total of 96 residential lots, situated at the Multinational Village
Subdivision, La Huerta, Paraaque, Metro Manila, with an aggregate area of 82,888
square meters. The total price of P21,639,875.00 was stipulated to be paid by private
respondent in such amounts and maturity dates, as follows: P2,200,000.00 on 31 March
1981; P3,209,968.75 on 30 June 1981; P4,729,906.25 on 31 December 1981; and the
balance of P11,500,000.00 to be paid by means of an assumption by private respondent
of petitioner corporation's mortgage liability to the Philippine Savings Bank or,
alternatively, to be made payable in cash. On even date, 31 March 1981, the parties
executed a Supplemental Agreement (Exh. "C"), providing that private respondent would
additionally pay to petitioner corporation the amounts of P55,364.68, or 21% interest on
the balance of downpayment for the period from 31 March to 30 June 1981, and of
P390,369.37 representing interest paid by petitioner corporation to the Philippine

34
Savings Bank in updating the bank loan for the period from 01 February to 31 March
1981.
Private respondent was only able to pay petitioner corporation the sum of P1,334,443.21
(Exhs. "A" to "K"). In the meanwhile, however, the parties continued to negotiate for a
possible modification of their agreement, although nothing conclusive would appear to
have ultimately been arrived at.
Finally, on 12 October 1981, petitioner corporation, through its legal counsel, sent
private respondent a "Notice of Cancellation of Contract" (Exh. "D") on account of the
latter's continued failure to pay the installment due 30 June 1981 and the interest on the
unpaid balance of the stipulated initial payment. Petitioner corporation advised private
respondent, however, that it (private respondent) still had the right to pay its arrearages
within 30 days from receipt of the notice "otherwise the actual cancellation of the
contract (would) take place."
Several months later, or on 26 September 1983, private respondent, through counsel,
demanded (Exh. "E") the refund of private respondent's various payments to petitioner
corporation, allegedly "amounting to P2,455,497.71," with interest within fifteen days
from receipt of said letter, or, in lieu of a cash payment, to assign to private respondent
an equivalent number of unencumbered lots at the same price fixed in the contracts. The
demand, not having been heeded, private respondent commenced, on 18 November
1983, its action with the court a quo. 1
Following the reception of evidence, the trial court rendered its decision, the dispositive
portion of which read:
In view of all the foregoing, judgment is hereby rendered as follows:
1.
Declaring the Contracts to Sell and the Supplemental Agreement (Exhibits "A", "B"
and "C") rescinded;
2.
Ordering the [petitioner] corporation, Bricktown Development Corporation, also
known as Multinational Realty Development Corporation, to return to the [private
respondent] the amount of One Million Three Hundred Thirty Four Thousand Four
Hundred Forty-Three Pesos and Twenty-One Centavos (P1,334,443.21) with interest at
the rate of Twelve (12%) percent per annum, starting November 18, 1983, the date when
the complaint was filed, until the amount is fully paid;
3.
Ordering the [petitioner] corporation to pay the [private respondent] the amount of
Twenty-five Thousand (P25,000.00) Pesos, representing attorney's fees;
4.

Dismissing [petitioner's] counterclaim for lack of merit; and

5.

With costs against the [petitioner] corporation.

SO ORDERED. 2
On appeal, the appellate court affirmed in toto the trial court's findings and judgment.

35
In their instant petition, petitioners contend that the Court of Appeals has erred in
ruling that
(1)
By petitioners' acts, conduct and representation, they themselves delayed or
prevented the performance of the contracts to sell and the supplemental agreement and
were thus estopped from cancelling the same.
(2)
Petitioners were no justified in resolving the contracts to sell and the supplemental
agreement.
(3)
The cancellation of the contract required a positive act on the part of petitioners
giving private respondent the sixty (60) day grace period provided in the contracts to
sell; and
(4)
In not holding that the forfeiture of the P1,378,197.48 was warranted under the
liquidated damages provisions of the contracts to sell and the supplemental agreement
and was not iniquitous nor unconscionable.
The core issues would really come down to (a) whether or not the contracts to sell were
validly rescinded or cancelled by petitioner corporation and, in the affirmative, (b)
whether or not the amounts already remitted by private respondent under said contracts
were rightly forfeited by petitioner corporation.
Admittedly, the terms of payment agreed upon by the parties were not met by private
respondent. Of a total selling price of P21,639,875.00, private respondent was only able
to remit the sum of P1,334,443.21 which was even short of the stipulated initial payment
of P2,200,000.00. No additional payments, it would seem, were made. A notice of
cancellation was ultimately made months after the lapse of the contracted grace period.
Paragraph 15 of the Contracts to Sell provided thusly:
15. Should the PURCHASER fail to pay when due any of the installments mentioned in
stipulation No. 1 above, the OWNER shall grant the purchaser a sixty (60)-day grace
period within which to pay the amount/s due, and should the PURCHASER still fail to pay
the due amount/s within the 60-day grace period, the PURCHASER shall have the right to
ex-parte cancel or rescind this contract, provided, however, that the actual cancellation
or rescission shall take effect only after the lapse of thirty (30) days from the date of
receipt by the PURCHASER of the notice of cancellation of this contract or the demand for
its rescission by a notarial act, and thereafter, the OWNER shall have the right to resell
the lot/s subject hereof to another buyer and all payments made, together with all
improvements introduced on the aforementioned lot/s shall be forfeited in favor of the
OWNER as liquidated damages, and in this connection, the PURCHASER obligates itself to
peacefully vacate the aforesaid lot/s without necessity of notice or demand by the
OWNER. 3
A grace period is a right, not an obligation, of the debtor. When unconditionally
conferred, such as in this case, the grace period is effective without further need of
demand either calling for the payment of the obligation or for honoring the right. The
grace period must not be likened to an obligation, the non-payment of which, under
Article 1169 of the Civil Code, would generally still require judicial or extrajudicial
demand before "default" can be said to arise. 4

36
Verily, in the case at bench, the sixty-day grace period under the terms of the contracts
to sell became ipso facto operative from the moment the due payments were not met at
their stated maturities. On this score, the provisions of Article 1169 of the Civil Code
would find no relevance whatsoever.
The cancellation of the contracts to sell by petitioner corporation accords with the
contractual covenants of the parties, and such cancellation must be respected. It may be
noteworthy to add that in a contract to sell, the
non-payment of the purchase price (which is normally the condition for the final sale) can
prevent the obligation to convey title from acquiring any obligatory force (Roque vs.
Lapuz, 96 SCRA 741; Agustin vs. Court of Appeals, 186 SCRA 375).
The forfeiture of the payments thus far remitted under the cancelled contracts in
question, given the factual findings of both the trial court and the appellate court, must
be viewed differently. While clearly insufficient to justify a foreclosure of the right of
petitioner corporation to rescind or cancel its contracts with private respondent, the
series of events and circumstances described by said courts to have prevailed in the
interim between the parties, however, warrant some favorable consideration by this
Court.
Petitioners do not deny the fact that there has indeed been a constant dialogue between
the parties during the period of their juridical relation. Concededly, the negotiations that
they have pursued strictly did not result in the novation, either extinctive or
modificatory, of the contracts to sell; nevertheless, this Court is unable to completely
disregard the following findings of both the trial court and the appellate court. Said the
trial court:
It has been duly established through the testimony of plaintiff's witnesses Marcosa
Sanchez and Vicente Casas that there were negotiations to enter into another agreement
between the parties, after March 31, 1981. The first negotiation took place before June
30, 1981, when Moises Petilla and Renato Dragon, Vice-President and president,
respectively, of the plaintiff corporation, together with Marcosa Sanchez, went to the
office of the defendant corporation and made some proposals to the latter, thru its
president, the defendant Mariano Velarde. They told the defendant Velarde of the
plaintiff's request for the division of the lots to be purchased into smaller lots and the
building of town houses or smaller houses therein as these kinds of houses can be sold
easily than big ones. Velarde replied that subdivision owners would not consent to the
building of small houses. He, however, made two counter-proposals, to wit: that the
defendant corporation would assign to the plaintiff a number of lots corresponding to the
amounts the latter had already paid, or that the defendant corporation may sell the
corporation itself, together with the Multinational Village Subdivision, and its other
properties, to the plaintiff and the latter's sister companies engaged in the real estate
business. The negotiations between the parties went on for sometime but nothing
definite was accomplished. 5
For its part, the Court of Appeals observed:
We agree with the court a quo that there is, therefore, reasonable ground to believe that
because of the negotiations between the parties, coupled with the fact that the plaintiff

37
never took actual possession of the properties and the defendants did not also dispose
of the same during the pendency of said negotiations, the plaintiff was led to believe that
the parties may ultimately enter into another agreement in place of the "contracts to
sell." There was, evidently, no malice or bad faith on the part of the plaintiff in
suspending payments. On the contrary, the defendants not only contributed, but had
consented to the delay or suspension of payments. They did not give the plaintiff a
categorical answer that their counter-proposals will not materialize. 6
In fine, while we must conclude that petitioner corporation still acted within its legal right
to declare the contracts to sell rescinded or cancelled, considering, nevertheless, the
peculiar circumstances found to be extant by the trial court, confirmed by the Court of
Appeals, it would be unconscionable, in our view, to likewise sanction the forfeiture by
petitioner corporation of payments made to it by private respondent. Indeed, in the
opening statement of this ponencia, we have intimated that the relationship between
parties in any contract must always be characterized and punctuated by good faith and
fair dealing. Judging from what the courts below have said, petitioners did fall well
behind that standard. We do not find it equitable, however, to adjudge any interest
payment by petitioners on the amount to be thus refunded, computed from judicial
demand, for, indeed, private respondent should not be allowed to totally free itself from
its own breach.
WHEREFORE, the appealed decision is AFFIRMED insofar as it declares valid the
cancellation of the contracts in question but MODIFIED by ordering the refund by
petitioner corporation of P1,334,443.21 with 12% interest per annum to commence only,
however, from the date of finality of this decision until such refund is effected. No costs.
SO ORDERED.

38
G.R. No. L-18077

September 29, 1962

RODRIGO ENRIQUEZ, ET AL., plaintiffs-appellants,

vs.
SOCORRO A. RAMOS, defendant-appellee.
Gelacio L. Dimaano for plaintiffs-appellants.
Vicente K. Aranda for defendant-appellee.
BAUTISTA ANGELO, J.:
This is an action for foreclosure of a real estate mortgage.
It is alleged that on November 24, 1958 defendant purchased from plaintiffs 20 parcels
of land located in Quezon City and covered by transfer certificates of title for the amount
of P235,056.00 of which only the amount of P35,056.00 was paid on the date of sale, the
balance of P200,000.00 being payable within two years from the date of sale, with 6%
interest per annum during the first year, and the remainder to draw 12% interest per
annum if paid thereafter, provided that at least P100,000.00 should be paid during the
first year, otherwise the whole unpaid balance would become immediately demandable;
that to secure the payment of the balance of P200,000.00 defendant executed a
mortgage in favor of plaintiffs upon the 20 parcels of land sold and on a half interest over
a parcel of land in Bulacan which was embodied in the same deed of sale; that said deed
of sale with mortgage was registered in the Offices of the Registers of Deeds of Quezon
City and Pampanga; and that as defendant broke certain stipulations contained in said
deed of sale with mortgage, plaintiffs instituted the present foreclosure proceedings.
Defendant set up as affirmative defense that the contract mentioned in the complaint
does not express the true agreement of the parties because certain important conditions
agreed upon were not included therein by the counsel who prepared the contract; that
the stipulation that was omitted from the contract was the promise assumed by plaintiffs
that they would construct roads in the lands which were to be subdivided for sale on or
before January, 1959; that said condition was not placed in the contract because,
according to plaintiffs' counsel, it was a superfluity, inasmuch as there is an ordinance in
Quezon City which requires the construction of roads in a subdivision before lots therein
could be sold; and that, upon the suggestion of plaintiff's counsel, their promise to
construct the roads was not included in the contract because the ordinance was deemed
part of the contract. Defendant further claims that the true purchase price of the sale
was not P235,056.00 but only P185,000.00, the difference of P50,000.00 being the
voluntary contribution of defendant to the cost of the construction of the roads which
plaintiffs assumed to do as abovementioned.
After the reception of the evidence, the trial court sustained the contention of defendant
and dismissed the complaint on the ground that the action of plaintiffs was premature. It
found that plaintiffs really assumed the construction of the roads as a condition
precedent to the fulfillment of the obligation stipulated in the contract on the part of
defendant, and since the same has not been undertaken, plaintiffs have no cause of
action. In due time, plaintiffs have appealed.

39
The evidence of record discloses the following facts: On November 6, 1966, plaintiffs
entered into a contract of conditional sale with one Pedro del Rosario covering a parcel of
land in Quezon City described in Transfer Certificate of Title No. 1148 which has a total
area of 77,772 square meters in consideration of a purchase price of P10.00 per square
meter. To guarantee the performance of the conditions stipulated therein a performance
bond in the amount of P100,000.00 was executed by Pedro del Rosario. Del Rosario was
given possession of the land for development as a subdivision at his expense. He
undertook to pay for the subdivision survey, the construction of roads, the installation of
light and water, and the income tax plaintiffs may be required to pay arising from the
transaction, in consideration of which Del Rosario was allowed to buy the property for
P600,000.00 within a period of two years from November 6, 1956 with the condition that,
upon his failure to pay said price when due, all the improvements introduced by him
would automatically become part of the property without any right on his part to
reimbursement and the conditional sale would be rescinded.
Unable to pay the consideration of P600,000.00 as agreed upon, and in order to avoid
court litigation, plaintiffs and Del Rosario, together with defendant Socorro A. Ramos,
who turned out to be a partner of the latter, entered into a contract of rescission on
November 24, 1958. To release the performance bond and to enable defendant to pay
some of the lots for her own purposes, plaintiffs allowed defendant to buy 20 of the lots
herein involved at the rate of P16.00 per square meter on condition that she will assume
the payment of P50,000.00 as her share in the construction of roads and other
improvements required in the subdivision. This situation led to the execution of the
contract of sale Exhibit A subject of the present foreclosure proceedings.
The main issues closed in this appeal are: (1) Is the purchase price of the 20 lots bought
by defendant from plaintiffs the sum of P185,000.00, as claimed by defendant, or
P235.056.00, as claimed by plaintiffs?; and (2) Was an oral agreement, coetaneous to
the execution of the contract of sale, entered into between the parties to the effect that
plaintiffs would undertake the construction of the roads on the lots sold before defendant
could be required to comply with her financial obligation?
Defendant contends that the contract of sale Exhibit A does not express the true
agreement of the parties because certain important conditions agreed upon were not
included therein by plaintiffs' counsel among which is the promise assumed by plaintiffs
that they would undertake to construct the roads that may be required in the subdivision
subject sale of the sale on or before January, 1959; that said condition was not placed in
the contract because plaintiffs' counsel said that it was a superfluity inasmuch as there
was then in Quezon City an ordinance which requires the construction of road in a
subdivision before the lots therein could be sold; and that, upon the suggestion of
plaintiffs' counsel, such commitment was not included in the contract because the
ordinance aforesaid was already deemed to be part of the contract.
Plaintiffs, on the other hand, dispute the above contention arguing that there was no
such oral agreement or understanding because all that was agreed upon between the
parties was already expressed and included in the contract of sale Exhibit A executed
between the parties, and since defendant failed to pay the balance of her obligation
within the period stipulated the whole obligation became due and demandable thus
giving plaintiffs the right to foreclose the mortgage in accordance with law.1awphl.nt

40
After considering and evaluating the evidence submitted by both parties, the court a
quo found defendant's contention well-taken, thereby concluding that the action of
plaintiffs was premature. In reaching this conclusion; the court a quo made the following
comment:
. . . The Court is of the opinion that the construction of the roads was a condition
precedent to the enforcement of the terms of Exhibit A, particularly the foreclosure of
mortgage, for the reason that the subdivision regulations of Quezon City requires, as a
matter of law, that the sellers of lands therein to be converted into subdivision lots must
construct the roads in said subdivision before the lots could be sold. This requirement
must have been uppermost in the mind of the parties in this case which led to the
execution of the so-called 'Explanation' (Exhibit 3) wherein it is stated that the sum of
P50,000.00 was a contribution of the herein defendant for the construction of the roads
which the plaintiffs would undertake 'in accordance with the provisions of the City
Ordinance of Quezon City' (Exhibit 3). It is to be noted that Exhibit 3 was executed on
November 24, 1958, the very day when Exhibit A was also executed. Exhibit 3 also
proves that the purchase price is not, as appearing in the deed of sale with mortgage
Exhibit A, actually P235,000.00 but only P185,000.00 which would approximately be the
price of the entire area of the land sold at the rate of P16.00 per square meter.
We find no error in the conclusion reached by the court a quo for indeed that is the
condition to be expected by a person who desires to purchase a big parcel of land for
purposes of subdivision. In a subdivision the main improvement to be undertaken before
it could be sold to the public is feeder roads as otherwise it would be inaccessible and
valueless and would offer no attraction to the buying public. And so it is correct to
presume was the court a quo did, that when the sale in question was being negotiated
the construction of roads in the prospective subdivision must have been uppermost in
the mind of defendant for her purpose in purchasing the property was to develop it into a
subdivision. That such requirement was uppermost in the mind of defendant is proven by
the execution by the plaintiffs of the so-called "Explanation" (Exhibit 3) on the very day
the deed of sale was executed wherein it was stated that the sum of P50,000.00 was
advanced by defendant as her contribution to the construction of the roads which
plaintiffs assumed to undertake "in accordance with the provisions of the City Ordinance
of Quezon City." It is to be noted that said document specifically states that the amount
of P50,000.00 should be deducted from the purchase price of P235,056.00 appearing in
the deed of sale, and this is a clear indication that the real purchase price is only
P185,000.00 as claimed by defendant, which would approximately be the price of the
entire area of the land at the rate of P16.00 per square meter.
A circumstance which lends cogency to defendant's claim that the commitment of
plaintiffs to construct roads was not inserted in the contract because of the insurance
made by their counsel that it would be a superfluity is the fact that in Quezon City there
was really an ordinance which requires the construction of roads it subdivision before lots
therein could be sold, and considering that this assurance came from the very counsel
who prepared the document who even intimated that ordinance was deemed part of the
contract, defendant must have agreed to the omission relying on the good faith plaintiffs
and their counsel. At any rate, the execute of the document Exhibit 3 clarifies whatever
doubt may have existed with regard to the true terms of the agreement on the matter.

41
It is argued that the court a quo erred in allowing presentation of parole evidence to
prove that a conteporaneous oral agreement was also reached between parties relative
to the construction of the roads for same is in violation of our rule which provides that
when the terms of an agreement had been reduced to writing it is to be considered as
containing all that has been agreed upon and that no evidence other than the terms
there can be admitted between the parties (Section 22, Rule 123). This rule, however,
only holds true if there is allegation that the agreement does not express the intent of
the parties. If there is and this claim is in issue in the pleadings, the same may be the
subject parole evidence (Idem.). The fact that such failure has been put in issue in this
case is patent in the answer wherein defendant has specifically pleaded that the contract
of sale in question does not express the true intent of the parties with regard to the
construction of the roads.
It appearing that plaintiffs have failed to comply with the condition precedent relative to
the construction of the roads in the subdivision in question, it follows that their action is
premature as found by the court a quo. The failure of defendant to pay the realty and
income taxes as agreed upon, as well as to register the mortgage with respect to the
Bulacan property, aside from being minor matters, appear sufficiently explained in the
brief of defendant-appellee.
WHEREFORE, the decision appealed from is affirmed, with costs against appellants.

42
[G.R. No. 129018. November 15, 2001]
CARMELITA LEAO, assisted by her husband GREGORIO CUACHON, petitioner, vs. COURT
OF APPEALS and HERMOGENES FERNANDO, respondents.
DECISION
PARDO, J.:
The Case
The case is a petition for review on certiorari of the decision[1] of the Court of Appeals
affirming that of the Regional Trial Court, Malolos, Branch 7[2] ordering petitioner Leao to
pay respondent Hermogenes Fernando the sum of P183,687.70 corresponding to her
outstanding obligations under the contract to sell, with interest and surcharges due
thereon, attorneys fees and costs.
The Facts
On November 13, 1985, Hermogenes Fernando, as vendor and Carmelita Leao, as
vendee executed a contract to sell involving a piece of land, Lot No. 876-B, with an area
of 431 square meters, located at Sto. Cristo, Baliuag, Bulacan.[3]
In the contract, Carmelita Leao bound herself to pay Hermogenes Fernando the sum of
one hundred seven thousand and seven hundred and fifty pesos (P107,750.00) as the
total purchase price of the lot. The manner of paying the total purchase price was as
follows:
The sum of TEN THOUSAND SEVEN HUNDRED SEVENTY FIVE (P10,775.00) PESOS, shall
be paid at the signing of this contract as DOWN PAYMENT, the balance of NINETY SIX
THOUSAND NINE HUNDRED SEVENTY FIVE PESOS (P96,975.00) shall be paid within a
period of TEN (10) years at a monthly amortization of P1,747.30 to begin from December
7, 1985 with interest at eighteen per cent (18%) per annum based on balances.[4]
The contract also provided for a grace period of one month within which to make
payments, together with the one corresponding to the month of grace. Should the month
of grace expire without the installments for both months having been satisfied, an
interest of 18% per annum will be charged on the unpaid installments.[5]
Should a period of ninety (90) days elapse from the expiration of the grace period
without the overdue and unpaid installments having been paid with the corresponding
interests up to that date, respondent Fernando, as vendor, was authorized to declare the
contract cancelled and to dispose of the parcel of land, as if the contract had not been
entered into. The payments made, together with all the improvements made on the
premises, shall be considered as rents paid for the use and occupation of the premises
and as liquidated damages.[6]
After the execution of the contract, Carmelita Leao made several payments in lump sum.
[7] Thereafter, she constructed a house on the lot valued at P800,000.00.[8] The last
payment that she made was on April 1, 1989.

43
On September 16, 1991, the trial court rendered a decision in an ejectment case[9]
earlier filed by respondent Fernando ordering petitioner Leao to vacate the premises and
to pay P250.00 per month by way of compensation for the use and occupation of the
property from May 27, 1991 until she vacated the premises, attorneys fees and costs of
the suit.[10] On August 24, 1993, the trial court issued a writ of execution which was
duly served on petitioner Leao.
On September 27, 1993, petitioner Leao filed with the Regional Trial Court of Malolos,
Bulacan a complaint for specific performance with preliminary injunction.[11] Petitioner
Leao assailed the validity of the judgment of the municipal trial court[12] for being
violative of her right to due process and for being contrary to the avowed intentions of
Republic Act No. 6552 regarding protection to buyers of lots on installments. Petitioner
Leao deposited P18,000.00 with the clerk of court, Regional Trial Court, Bulacan, to cover
the balance of the total cost of Lot 876-B.[13]
On November 4, 1993, after petitioner Leao posted a cash bond of P50,000.00,[14] the
trial court issued a writ of preliminary injunction[15] to stay the enforcement of the
decision of the municipal trial court.[16]
On February 6, 1995, the trial court rendered a decision, the dispositive portion of which
reads:
WHEREFORE, judgment is hereby rendered as follows:
1. The preliminary injunction issued by this court per its order dated November 4, 1993 is
hereby made permanent;
2. Ordering the plaintiff to pay to the defendant the sum of P103,090.70 corresponding
to her outstanding obligations under the contract to sell (Exhibit A Exhibit B) consisting
of the principal of said obligation together with the interest and surcharges due thereon
as of February 28, 1994, plus interest thereon at the rate of 18% per annum in
accordance with the provision of said contract to be computed from March 1, 1994, until
the same becomes fully paid;
3. Ordering the defendant to pay to plaintiff the amount of P10,000 as and by way of
attorneys fees;
4. Ordering the defendant to pay to plaintiff the costs of the suit in Civil Case No. 1680
aforementioned.
SO ORDERED.
Malolos, Bulacan, February 6, 1995.
(sgd.) DANILO A. MANALASTAS
Judge[17]
On February 21, 1995, respondent Fernando filed a motion for reconsideration[18] and
the supplement[19] thereto. The trial court increased the amount of P103,090.70 to
P183,687.00 and ordered petitioner Leao ordered to pay attorneys fees.[20]

44
According to the trial court, the transaction between the parties was an absolute sale,
making petitioner Leao the owner of the lot upon actual and constructive delivery
thereof. Respondent Fernando, the seller, was divested of ownership and cannot recover
the same unless the contract is rescinded pursuant to Article 1592 of the Civil Code
which requires a judicial or notarial demand. Since there had been no rescission,
petitioner Leao, as the owner in possession of the property, cannot be evicted.
On the issue of delay, the trial court held:
While the said contract provides that the whole purchase price is payable within a tenyear period, yet the same contract clearly specifies that the purchase price shall be
payable in monthly installments for which the corresponding penalty shall be imposed in
case of default. The plaintiff certainly cannot ignore the binding effect of such stipulation
by merely asserting that the ten-year period for payment of the whole purchase price
has not yet lapsed. In other words, the plaintiff has clearly defaulted in the payment of
the amortizations due under the contract as recited in the statement of account (Exhibit
2) and she should be liable for the payment of interest and penalties in accordance with
the stipulations in the contract pertaining thereto.[21]
The trial court disregarded petitioner Leaos claim that she made a downpayment of
P10,000.00, at the time of the execution of the contract.
The trial court relied on the statement of account[22] and the summary[23] prepared by
respondent Fernando to determine petitioner Leaos liability for the payment of interests
and penalties.
The trial court held that the consignation made by petitioner Leao in the amount of
P18,000.00 did not produce any legal effect as the same was not done in accordance
with Articles 1176, 1177 and 1178 of the Civil Code.
In time, petitioner Leao appealed the decision to the Court of Appeals.[24] On January
22, 1997, Court of Appeals promulgated a decision affirming that of the Regional Trial
Court in toto.[25] On February 11, 1997, petitioner Leao filed a motion for
reconsideration.[26] On April 17, 1997, the Court of Appeals denied the motion.[27]
Hence, this petition.[28]
The Issues
The issues to be resolved in this petition for review are (1) whether the transaction
between the parties is an absolute sale or a conditional sale; (2) whether there was a
proper cancellation of the contract to sell; and (3) whether petitioner was in delay in the
payment of the monthly amortizations.
The Courts Ruling
Contrary to the findings of the trial court, the transaction between the parties was a
conditional sale not an absolute sale. The intention of the parties was to reserve the
ownership of the land in the seller until the buyer has paid the total purchase price.

45
Consider the following:
First, the contract to sell makes the sale, cession and conveyance subject to conditions
set forth in the contract to sell.[29]
Second, what was transferred was the possession of the property, not ownership. The
possession is even limited by the following: (1) that the vendee may continue therewith
as long as the VENDEE complies with all the terms and conditions mentioned, and (2)
that the buyer may not sell, cede, assign, transfer or mortgage or in any way encumber
any right, interest or equity that she may have or acquire in and to the said parcel of
land nor to lease or to sublease it or give possession to another person without the
written consent of the seller.[30]
Finally, the ownership of the lot was not transferred to Carmelita Leao. As the land is
covered by a torrens title, the act of registration of the deed of sale was the operative
act that could transfer ownership over the lot.[31] There is not even a deed that could be
registered since the contract provides that the seller will execute such a deed upon
complete payment by the VENDEE of the total purchase price of the property with the
stipulated interest.[32]
In a contract to sell real property on installments, the full payment of the purchase price
is a positive suspensive condition, the failure of which is not considered a breach, casual
or serious, but simply an event that prevented the obligation of the vendor to convey
title from acquiring any obligatory force.[33] The transfer of ownership and title would
occur after full payment of the price.[34]
In the case at bar, petitioner Leaos non-payment of the installments after April 1, 1989,
prevented the obligation of respondent Fernando to convey the property from arising. In
fact, it brought into effect the provision of the contract on cancellation.
Contrary to the findings of the trial court, Article 1592 of the Civil Code is inapplicable to
the case at bar.[35] However, any attempt to cancel the contract to sell would have to
comply with the provisions of Republic Act No. 6552, the Realty Installment Buyer
Protection Act.
R. A. No. 6552 recognizes in conditional sales of all kinds of real estate (industrial,
commercial, residential) the right of the seller to cancel the contract upon non-payment
of an installment by the buyer, which is simply an event that prevents the obligation of
the vendor to convey title from acquiring binding force.[36] The law also provides for the
rights of the buyer in case of cancellation. Thus, Sec. 3 (b) of the law provides that:
If the contract is cancelled, the seller shall refund to the buyer the cash surrender value
of the payments on the property equivalent to fifty percent of the total payments made
and, after five years of installments, an additional five percent every year but not to
exceed ninety percent of the total payments made: Provided, That the actual
cancellation of the contract shall take place after thirty days from receipt by the buyer of
the notice of cancellation or the demand for rescission of the contract by a notarial act
and upon full payment of the cash surrender value to the buyer. [Emphasis supplied]

46
The decision in the ejectment case[37] operated as the notice of cancellation required
by Sec. 3(b). As petitioner Leao was not given the cash surrender value of the payments
that she made, there was still no actual cancellation of the contract. Consequently,
petitioner Leao may still reinstate the contract by updating the account during the grace
period and before actual cancellation.[38]
Should petitioner Leao wish to reinstate the contract, she would have to update her
accounts with respondent Fernando in accordance with the statement of account[39]
which amount was P183,687.00.[40]
On the issue of whether petitioner Leao was in delay in paying the amortizations, we rule
that while the contract provided that the total purchase price was payable within a tenyear period, the same contract specified that the purchase price shall be paid in monthly
installments for which the corresponding penalty shall be imposed in case of default.
Petitioner Leao cannot ignore the provision on the payment of monthly installments by
claiming that the ten-year period within which to pay has not elapsed.
Article 1169 of the Civil Code provides that 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 the case at bar, respondent Fernando performed his part of the obligation by allowing
petitioner Leao to continue in possession and use of the property. Clearly, when
petitioner Leao did not pay the monthly amortizations in accordance with the terms of
the contract, she was in delay and liable for damages.[41] However, we agree with the
trial court that the default committed by petitioner Leao in respect of the obligation
could be compensated by the interest and surcharges imposed upon her under the
contract in question.[42]
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulation shall control.[43] Thus, as there is no ambiguity in the
language of the contract, there is no room for construction, only compliance.
The Fallo
IN VIEW WHEREOF, we DENY the petition and AFFIRM the decision of the Court of
Appeals[44] in toto.
No costs.

47
G.R. No. 90926

July 6, 1990

ALEX G. LEE, petitioner,

vs.
HON. SALVADOR P. DE GUZMAN, JR., Regional Trial Court of Makati, Branch 142 and
MOTORCARS, INCORPORATED, respondents.
Doroteo A. Dadal for petitioner.
Benjamin S. Benito & Associates for private respondents.

PARAS, J.:
On November 8, 1983, a free-lance salesman of respondent Motorcars, Inc., (then Delta
Motors Corporation) named Arsenio Tumibay signed in behalf of Domingo Tupaz its
Branch Manager in Makati, a price quotation (Exhibit "A") and delivered to petitioner Alex
B. Lee for the sale of one (1) unit Toyota Corolla Liftback, 1983 model, with the quoted
price of P149,700.00 plus miscellaneous expenses of P10,033.00. On the same date,
petitioner Lee as customer, signed the vehicle sales order (Exhibit "C") The delivery of
the subject vehicle was within the month of November, 1983.
In view of such order, petitioner Lee deposited the amount of P1,000.00 on November
10, 1983 as required in the aforesaid price quotation, to which Tumibay wrote petitioner
the information that the Motorcars Inc., had acknowledged receipt of the delivery receipt
for petitioner. Thereupon, on December 15, 1983, petitioner's counsel, Atty. Doroteo A.
Dadal, wrote Mr. Nicolas O. Carranceja, Jr., Executive Vice-President of Motorcars,
demanding for delivery of the said Toyota car. The respondent car company replied on
December 19, 1983, through its counsel Atty. Benjamin S. Benito, that due to the sudden
change of prices by the car manufacturer, they had decided to exercise the option
contained in the vehicle sales order, (Exhibits "C") which states:
Whenever deposits are made by customers for vehicles, parts and services ordered, the
sales for such vehicles, parts or services shall be at the option of Motorcars, Inc., and
refund of the deposits shall be made upon request and without undue delay should such
option be exercised (p. 21, Rollo)
The respondent car company thus offered to refund petitioner's deposit of P1,000.00.
Part of the vehicle sales order also reads, viz:
This order is not valid unless signed and accepted by the dealer principal, President,
Executive Vice President or General Sales Manager of the dealership . . . (supra)
The trial court rendered judgment in favor of respondent car company ruling as follows:
Exhibit "A" is merely a quotation offered by defendant's sales representative. Exhibit "C",
the vehicle sales order, was not signed and accepted by defendant's President, Executive
Vice President, nor its General Sales Manager, hence, not valid because it exercised the
option in Exh. "1" beforestated due to sudden change of prices by the car manufacturer

48
(Exh. "2"). Exhibit "C" which contains; Exhibits "1" and "1-A", having been signed by
plaintiff binds him alone There was no perfected contract in accordance with Article
1318, Civil Code. (p. 21, Rollo)
Petitioner was ordered to pay respondent P5,000 for damages and attorney's fees.
Expectedly dissatisfied with the aforesaid court's ruling, petitioner appealed to the Court
of Appeals which reversed the decision appealed from ruling that there was a perfected
contract of sale, and that there was the undisputed signature of one Mr. Domingo Tapas,
the branch manager of Motorcars. Thereupon, the Court of Appeals ordered respondent
company to deliver to petitioner the subject vehicle upon payment by the latter of the
amount of P149,700.00 and the amount of P8,833.00 for Miscellaneous Expenses and/or
Incidental Charges. Thus, respondent appealed to this Court, docketed as G.R. No.
77992.
In this Court's resolution dated August 31, 1987, through the Third Division, the decision
appealed from was affirmed, and the petition was denied. This Court ruled:
The issue of whether or not there was a perfected contract of sale appears to have been
correctly decided by the respondent court. This Court also finds no reason to disturb the
ruling of the respondent court on the factual issue of whether or not the branch manager
could bind the petitioner.
It appearing that the findings of fact of the respondent court are supported by
substantial evidence and there being no showing that its decision is not in accord with
law or jurisprudence, the COURT RESOLVED to DENY the petition. (p. 32, Rollo)
When the case was remanded to the trial Court, petitioner filed a Motion for Writ of
Execution. Instead of complying with the Order of the court, respondent company filed a
motion to quash writ of execution. Said motion was anchored on the premise that the
obligation has become impossible to comply on the ground that the Delta Motors
Corporation has closed shop. Petitioner opposed the quashal of the Writ of execution and
consequently, the motion to quash was denied. An alias writ of execution was filed by
petitioner, but respondent company continued to defy the Order of the Court. Petitioner
filed a motion for contempt of court for the stance of the respondent company was
contumacious in nature. Respondent company filed an opposition thereto reiterating the
grounds relied on in the Motion to quash writ of execution. Respondent trial court issued
the questioned Order, dated August 10, 1989, which was adjudged favorably for the
respondent company, which order as alleged by the petition, was totally at war with the
previous order granting the alias writ of execution.
Hence, this petition for certiorari with mandamus.
Two issues are presented by both parties for Our consideration. They are:
1.
Whether or not the decision rendered by the Court of Appeals and affirmed by the
Supreme Court is capable of performance and can by judiciously executed; and
2.

Whether or not the corporation officers are liable for contempt.

49
The Court takes notice of the fact that as alleged in the Comment and Memorandum
of respondent company and contained in the questioned order, which is not disputed by
the petitioner, that while the Motion for Contempt was pending before the respondent
trial court, petitioner indicated his willingness to accept a second-hand car but failed to
show its availability as the classified ads refer to 1984 Models and could not be said that
they are the same models as what appears in Exhibit "C", the sales order. In addition,
respondent car company even offered the amount of P20,000 as a gesture to buy peace.
It is the contention of the petitioner that the obligation is not impossible for the 1983
Toyota cars are still available in the market today. It is however the contention of
respondent company that the obligation is impossible for the car manufacturer had
closed shop and no longer manufacturing 1983 models of Toyota much less deliver the
car specified in Exhibit "C".
The question is, should respondent Motorcars be made liable to fulfill a seemingly
impossible obligation?
It is well-settled that when after a judgment has become final and executory, facts and
circumstances transpire which render its execution impossible or unjust, the interested
party may ask a competent court to stay its execution or prevent its enforcement. 1
We find that respondent Court did not act with grave abuse of discretion in denying the
motion for contempt.
Unfortunately it is not possible for Motorcars to comply with the writ of execution since
admittedly, the then Delta Motors who manufactured 1983 models of Toyota Liftback had
already closed shop, but be this as it may, there is no question that indeed there was a
perfected contract of sale between petitioner Lee and private respondent Motorcars
pursuant to this Court's (through the Third Division) resolution dated August 31, 1987.
The relief left for petitioner Lee is that found under Article 1170 of the Civil Code which
provides: "(T)hose 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."
The reply letter of private respondent company dated December 19, 1983 which said
that "due to the sudden change of prices by the car manufacturer, they have decided to
exercise the option . . ." did not relieve Motorcars from the contract had entered into with
petitioner Lee. There was therefore delay in the delivery of the subject vehicle which
entitles petitioner to be awarded damages. The records show that the subject vehicle
should have been delivered within the month of November, 1983. (Annex C, Records).
Considering the circumstances attendant to this case, a total amount of damages worth
Fifty Thousand Pesos (P50,000.00) would be reasonable, twenty thousand pesos
(P20,000.00) of which as temperate damages 2 inclusive of attorney's fees and the
remaining thirty thousand pesos (P30,000.00) as exemplary damages. 3
PREMISES CONSIDERED, insofar as the denial of the motion for contempt by the lower
court, dated August 10, 1989 is concerned, the petition for certiorari with mandamus is

50
hereby DISMISSED, but the respondent is ordered to give to the petitioner the amount
of damages adverted to in the next preceding paragraph.
SO ORDERED.

51
G.R. No. 117190 January 2, 1997
JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND
GENERAL MERCHANDISING, petitioner,
vs.
COURT OF APPEALS and VICENTE HERCE JR., respondents.

BELLOSILLO, J.:
This case involves the proper interpretation of the contract entered into between the
parties.
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the name
and style J.M.T. Engineering and General Merchandising proposed to respondent Vicente
Herce Jr. to construct a windmill system for him. After some negotiations they agreed on
the construction of the windmill for a consideration of P60,000.00 with a one-year
guaranty from the date of completion and acceptance by respondent Herce Jr. of the
project. Pursuant to the agreement respondent paid petitioner a down payment of
P30,000.00 and an installment payment of P15,000.00, leaving a balance of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent to pay the balance,
petitioner filed a complaint to collect the amount. In his Answer before the trial court
respondent denied the claim saying that he had already paid this amount to the San
Pedro General Merchandising Inc. (SPGMI) which constructed the deep well to which the
windmill system was to be connected. According to respondent, since the deep well
formed part of the system the payment he tendered to SPGMI should be credited to his
account by petitioner. Moreover, assuming that he owed petitioner a balance of
P15,000.00, this should be offset by the defects in the windmill system which caused the
structure to collapse after a strong wind hit their place. 1
Petitioner denied that the construction of a deep well was included in the agreement to
build the windmill system, for the contract price of P60,000.00 was solely for the
windmill assembly and its installation, exclusive of other incidental materials needed for
the project. He also disowned any obligation to repair or reconstruct the system and
insisted that he delivered it in good and working condition to respondent who accepted
the same without protest. Besides, its collapse was attributable to a typhoon, a force
majeure, which relieved him of any liability.
In finding for plaintiff, the trial court held that the construction of the deep well was not
part of the windmill project as evidenced clearly by the letter proposals submitted by
petitioner to respondent. 2 It noted that "[i]f the intention of the parties is to include the
construction of the deep well in the project, the same should be stated in the proposals.
In the absence of such an agreement, it could be safely concluded that the construction
of the deep well is not a part of the project undertaken by the plaintiff." 3 With respect to
the repair of the windmill, the trial court found that "there is no clear and convincing
proof that the windmill system fell down due to the defect of the construction." 4

52
The Court of Appeals reversed the trial court. It ruled that the construction of the deep
well was included in the agreement of the parties because the term "deep well" was
mentioned in both proposals. It also gave credence to the testimony of respondent's
witness Guillermo Pili, the proprietor of SPGMI which installed the deep well, that
petitioner Tanguilig told him that the cost of constructing the deep well would be
deducted from the contract price of P60,000.00. Upon these premises the appellate court
concluded that respondent's payment of P15,000.00 to SPGMI should be applied to his
remaining balance with petitioner thus effectively extinguishing his contractual
obligation. However, it rejected petitioner's claim of force majeure and ordered the latter
to reconstruct the windmill in accordance with the stipulated one-year guaranty.
His motion for reconsideration having been denied by the Court of Appeals, petitioner
now seeks relief from this Court. He raises two issues: firstly, whether the agreement to
construct the windmill system included the installation of a deep well and, secondly,
whether petitioner is under obligation to reconstruct the windmill after it collapsed.
We reverse the appellate court on the first issue but sustain it on the second.
The preponderance of evidence supports the finding of the trial court that the installation
of a deep well was not included in the proposals of petitioner to construct a windmill
system for respondent. There were in fact two (2) proposals: one dated 19 May 1987
which pegged the contract price at P87,000.00 (Exh. "1"). This was rejected by
respondent. The other was submitted three days later, i.e., on 22 May 1987 which
contained more specifications but proposed a lower contract price of P60,000.00 (Exh.
"A"). The latter proposal was accepted by respondent and the construction immediately
followed. The pertinent portions of the first letter-proposal (Exh. "1") are reproduced
hereunder
In connection with your Windmill System and Installation, we would like to quote to you
as follows:
One (1) Set Windmill suitable for 2 inches diameter deepwell, 2 HP, capacity, 14 feet
in diameter, with 20 pieces blade, Tower 40 feet high, including mechanism which is not
advisable to operate during extra-intensity wind. Excluding cylinder pump.
UNIT CONTRACT PRICE P87,000.00
The second letter-proposal (Exh. "A") provides as follows:
In connection with your Windmill system, Supply of Labor Materials and Installation,
operated water pump, we would like to quote to you as
follows
One (1) set Windmill assembly for 2 inches or 3 inches deep-well pump, 6 Stroke, 14
feet diameter, 1-lot blade materials, 40 feet Tower complete with standard
appurtenances up to Cylinder pump, shafting U.S. adjustable International Metal.
One (1) lot Angle bar, G.I. pipe, Reducer Coupling, Elbow Gate valve, cross Tee
coupling.

53
One (1) lot Float valve.
One (1) lot Concreting materials foundation.
F. O. B. Laguna
Contract Price P60,000.00
Notably, nowhere in either proposal is the installation of a deep well mentioned, even
remotely. Neither is there an itemization or description of the materials to be used in
constructing the deep well. There is absolutely no mention in the two (2) documents that
a deep well pump is a component of the proposed windmill system. The contract prices
fixed in both proposals cover only the features specifically described therein and no
other. While the words "deep well" and "deep well pump" are mentioned in both, these
do not indicate that a deep well is part of the windmill system. They merely describe the
type of deep well pump for which the proposed windmill would be suitable. As correctly
pointed out by petitioner, the words "deep well" preceded by the prepositions "for" and
"suitable for" were meant only to convey the idea that the proposed windmill would be
appropriate for a deep well pump with a diameter of 2 to 3 inches. For if the real intent of
petitioner was to include a deep well in the agreement to construct a windmill, he would
have used instead the conjunctions "and" or "with." Since the terms of the instruments
are clear and leave no doubt as to their meaning they should not be disturbed.
Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the
parties shall be accorded primordial consideration 5 and, in case
of doubt, their contemporaneous and subsequent acts shall be principally considered. 6
An examination of such contemporaneous and subsequent acts of respondent as well as
the attendant circumstances does not persuade us to uphold him.
Respondent insists that petitioner verbally agreed that the contract price of P60,000.00
covered the installation of a deep well pump. He contends that since petitioner did not
have the capacity to install the pump the latter agreed to have a third party do the work
the cost of which was to be deducted from the contract price. To prove his point, he
presented Guillermo Pili of SPGMI who declared that petitioner Tanguilig approached him
with a letter from respondent Herce Jr. asking him to build a deep well pump as "part of
the price/contract which Engineer (Herce) had with Mr. Tanguilig." 7
We are disinclined to accept the version of respondent. The claim of Pili that Herce Jr.
wrote him a letter is unsubstantiated. The alleged letter was never presented in court by
private respondent for reasons known only to him. But granting that this written
communication existed, it could not have simply contained a request for Pili to install a
deep well; it would have also mentioned the party who would pay for the undertaking. It
strains credulity that respondent would keep silent on this matter and leave it all to
petitioner Tanguilig to verbally convey to Pili that the deep well was part of the windmill
construction and that its payment would come from the contract price of P60,000.00.
We find it also unusual that Pili would readily consent to build a deep well the payment
for which would come supposedly from the windmill contract price on the mere
representation of petitioner, whom he had never met before, without a written
commitment at least from the former. For if indeed the deep well were part of the
windmill project, the contract for its installation would have been strictly a matter

54
between petitioner and Pili himself with the former assuming the obligation to pay the
price. That it was respondent Herce Jr. himself who paid for the deep well by handing
over to Pili the amount of P15,000.00 clearly indicates that the contract for the deep well
was not part of the windmill project but a separate agreement between respondent and
Pili. Besides, if the price of P60,000.00 included the deep well, the obligation of
respondent was to pay the entire amount to petitioner without prejudice to any action
that Guillermo Pili or SPGMI may take, if any, against the latter. Significantly, when asked
why he tendered payment directly to Pili and not to petitioner, respondent explained,
rather lamely, that he did it "because he has (sic) the money, so (he) just paid the
money in his possession." 8
Can respondent claim that Pili accepted his payment on behalf of petitioner? No. While
the law is clear that "payment shall be made to the person in whose favor the obligation
has been constituted, or his successor in interest, or any person authorized to receive it,"
9 it does not appear from the record that Pili and/or SPGMI was so authorized.
Respondent cannot claim the benefit of the law concerning "payments made by a third
person." 10 The Civil Code provisions do not apply in the instant case because no
creditor-debtor relationship between petitioner and Guillermo Pili and/or SPGMI has been
established regarding the construction of the deep well. Specifically, witness Pili did not
testify that he entered into a contract with petitioner for the construction of respondent's
deep well. If SPGMI was really commissioned by petitioner to construct the deep well, an
agreement particularly to this effect should have been entered into.
The contemporaneous and subsequent acts of the parties concerned effectively belie
respondent's assertions. These circumstances only show that the construction of the well
by SPGMI was for the sole account of respondent and that petitioner merely supervised
the installation of the well because the windmill was to be connected to it. There is no
legal nor factual basis by which this Court can impose upon petitioner an obligation he
did not expressly assume nor ratify.
The second issue is not a novel one. In a long line of cases 11 this Court has consistently
held that in order for a party to claim exemption from liability by reason of fortuitous
event under Art. 1174 of the Civil Code the event should be the sole and proximate
cause of the loss or destruction of the object of the contract. In Nakpil vs. Court of
Appeals, 12 four (4) requisites 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
unforeseeable 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.
Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous
event. Interestingly, the evidence does not disclose that there was actually a typhoon on
the day the windmill collapsed. Petitioner merely stated that there was a "strong wind."
But a strong wind in this case cannot be fortuitous unforeseeable nor unavoidable. On
the contrary, a strong wind should be present in places where windmills are constructed,
otherwise the windmills will not turn.
The appellate court correctly observed that "given the newly-constructed windmill
system, the same would not have collapsed had there been no inherent defect in it which

55
could only be attributable to the appellee." 13 It emphasized that respondent had in
his favor the presumption that "things have happened according to the ordinary course
of nature and the ordinary habits of life." 14 This presumption has not been rebutted by
petitioner.
Finally, petitioner's argument that private respondent was already in default in the
payment of his outstanding balance of P15,000.00 and hence should bear his own loss, is
untenable. 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.
15 When the windmill failed to function properly it became incumbent upon petitioner to
institute the proper repairs in accordance with the guaranty stated in the contract. Thus,
respondent cannot be said to have incurred in delay; instead, it is petitioner who should
bear the expenses for the reconstruction of the windmill. Article 1167 of the Civil Code is
explicit on this point that if a person obliged to do something fails to do it, the same shall
be executed at his cost.
WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE HERCE JR. is
directed to pay petitioner JACINTO M. TANGUILIG the balance of P15,000.00 with interest
at the legal rate from the date of the filing of the complaint. In return, petitioner is
ordered to "reconstruct subject defective windmill system, in accordance with the oneyear guaranty" 16 and to complete the same within three (3) months from the finality of
this decision.
SO ORDERED.

56
G.R. No. 101762 July 6, 1993
VERMEN REALTY DEVELOPMENT CORPORATION, petitioner,
vs.
THE COURT OF APPEALS and SENECA HARDWARE CO., INC., respondents.
Ramon P. Gutierrez for petitioner.
Adriano Velasco for private respondent.

BIDIN, J.:
Petitioner seeks a review of the decision of the Court of Appeals in CA-G.R. CV No. 15730,
which set aside the decision of the Regional Trial Court of Quezon City, Branch 92 in Civil
Case No. Q-45232. The dispositive portion of the assailed decision reads as follows:
WHEREFORE, the decision a quo is set aside. As prayed for by plaintiff-appellant, the
"Offsetting Agreement" (Exhibit "E" or "2") is hereby rescinded. Room 601 of Phase I of
the Vermen Pines Condominium should be returned by plaintiff-appellant to defendantappellee upon payment by the latter of the sum of P330,855.25 to the former, plus
damages in the sum of P5,000.00 and P50.00 for the furnishings of Phase I of Condo (sic)
Units Nos. 601 and 602, and three (3) day rental of Room 402 during the Holy Week of
1982, respectively. In addition, defendant-appellee is hereby ordered to pay plaintiffappellant, who was compelled to litigate and hire the services of counsel to protect its
interests against defendant-appellee's violation of their Offsetting Agreement, the sum of
P10,000.00 as an award for attorney's fee (sic) and other expenses of litigation. The
claim for unrealized profits in a sum equivalent to 10% to 20% percent or P522,000.00
not having been duly proved, is therefore DENIED. No costs. (Rollo, p. 31)
On March 2, 1981, petitioner Vermen Realty and Development Corporation, as First Party,
and private respondent Seneca Hardware Co., Inc., as Second Party, entered into a
contract denominated as "Offsetting Agreement". The said agreement contained the
following stipulations:
1.
That the FIRST PARTY is the owner/developer of VERMEN PINES CONDOMINIUM
located at Bakakeng Road, Baguio City;
2.
That the SECOND PARTY is in business of construction materials and other
hardware items;
3.
That the SECOND PARTY desires to buy from the FIRST PARTY two (2) residential
condominium units, studio type, with a total floor area of 76.22 square meter (sic) more
or less worth TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00) PESOS only;
4.
That the FIRST PARTY desires to but from the SECOND PARTY construction
materials mostly steel bars, electrical materials and other related items worth FIVE
HUNDRED FIFTY TWO THOUSAND (P552,000.00) PESOS only;

57
5.
That the FIRST PARTY shall pay the SECOND PARTY TWO HUNDRED SEVENTY SIX
THOUSAND (P276,000.00) PESOS in cash upon delivery of said construction materials
and the other TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00) PESOS shall be
paid in the form of two (2) residential condominium units, studio type, with a total floor
area of 76.22 square meter (sic) more or less also worth P276,000.00;
6.
That, for every staggered delivery of construction materials, fifty percent (50%)
shall be paid by the FIRST PARTY to the SECOND PARTY C.O.D. and, fifty percent (50%)
shall be credited to the said condominium unit in favor of the SECOND PARTY;
7.
That the SECOND PARTY shall deliver to the FIRST PARTY said construction
materials under the agreed price and conditions stated in the price quotation approved
by both parties and made an integral part of this document;
8.
That the SECOND PARTY is obliged to start delivering to the FIRST PARTY all items
in the purchase order seven (7) days from receipt of said purchase order until such time
that the whole amount of P552,000.00 is settled;
9.
That the place of delivery shall be Vermen Pines Condominium at Bakakeng Road,
Baguio City;
10. That the freight cost of said materials shall be borne fifty percent (50%) by the
FIRST PARTY and fifty percent (50%) by the SECOND PARTY;
11. That the FIRST PARTY pending completion of the VERMEN PINES CONDOMINIUM
PHASE II which is the subject of this contract, shall deliver to the SECOND PARTY the
possession of residential condominium, Phase I, Unit Nos. 601 and 602, studio type with
a total area of 76.22 square meters or less, worth P276,000.00;
12. That after the completion of Vermen Pines Condominium Phase II, the SECOND
PARTY shall be given by the FIRST PARTY the first option to transfer from Phase I to Phase
II under the same price, terms and conditions. (Rollo, pp. 26-28).
As found by the appellate court and admitted by both parties, private respondent had
paid petitioner the amount of P110,151.75, and at the same time delivered construction
materials worth P219,727.00. Pending completion of Phase II of the Vermen Pines
Condominiums, petitioner delivered to private respondent units 601 and 602 at Phase I
of the Vermen Pines Condominiums (Rollo, p. 28). In 1982, the petitioner repossessed
unit 602. As a consequence of the repossession, the officers of the private respondent
corporation had to rent another unit for their use when they went to Baguio on April 8,
1982. On May 10, 1982, the officers of the private respondent corporation requested for
a clarification of the petitioner's action of preventing them and their families from
occupying condominium unit 602.
In its reply dated May 24, 1982, the petitioner corporation averred that Room 602 was
leased to another tenant because private respondent corporation had not paid anything
for purchase of the condominium unit. Petitioner corporation demanded payment of
P27,848.25 representing the balance of the purchase price of Room 601.

58
In 1983, the loan application for the construction of the Vermen Pines Condominium
Phase II was denied. Consequently, construction of the condominium project stopped and
has not been resumed since then.
On June 21, 1985, private respondent filed a complaint with the Regional Trial Court of
Quezon City (Branch 92) for rescission of the Offsetting Agreement with damages. In said
complaint, private respondent alleged that petitioner Vermen Realty Corporation had
stopped issuing purchase orders of construction materials after April, 1982, without valid
reason, thus resulting in the stoppage of deliveries of construction materials on its
(Seneca Hardware) part, in violation of the Offsetting Agreement.
In its Answer filed on August 15, 1985, petitioner alleged that the fault lay with private
respondent (plaintiff therein): although petitioner issued purchase orders, it was private
respondent who could not deliver the supplies ordered, alleging that they were out of
stock. (However, during a hearing on January 28, 1987, the Treasurer of petitioner
corporation, when asked where the purchase orders were, alleged that she was going to
produce the same in court, but the same was never produced (Rollo, p. 30). Moreover,
private respondent quoted higher prices for the construction materials which were
available. Thus, petitioner had to resort to its other suppliers. Anent the query as to why
Unit 602 was leased to another tenant, petitioner averred that this was done because
private respondent had not paid anything for it.
As of December 16, 1986, private respondent had paid petitioner P110,151.75 in cash,
made deliveries of construction materials worth P219,727.00, leaving a balance of
P27,848.25 representing the purchase price of unit 601 (Rollo, p. 28). The price of one
condominium unit was P138,000.00.
After conducting hearings, the trial court rendered a decision dismissing the complaint
and ordering the plaintiff (private respondent in this petition) to pay defendant
(petitioner in this petition) on its counterclaim in the amount of P27,848.25 representing
the balance due on the purchase price of condominium unit 601.
On appeal, respondent court reversed the trial court's decision as adverted to above.
Petitioner now comes before us with the following assignment of errors:
I
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY THIS
HONORABLE COURT, WHEN IT SUPPLANTED CONTRARY TO THE EVIDENCE ON RECORD,
THE TRIAL COURT'S CONCLUSIONS THAT PETITIONER DID NOT VIOLATE THE "OFFSETTING
AGREEMENT" IT ENTERED INTO WITH THE SENECA HARDWARE CO., INC. WITH ITS
TOTALLY BASELESS "PERCEPTION" THAT IT WAS PETITIONER WHICH DISCONTINUED TO
ISSUE PURCHASE ORDERS DUE TO THE STOPPAGE OF THE CONSTRUCTION OF PHASE II
OF THE CONDOMINIUM PROJECT WHEN THE LOAN ON THE SAID PROJECT WAS STOPPED.
II
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY THIS
HONORABLE COURT, WHEN IT CONCLUDED THAT IT WAS PETITIONER WHICH BREACHED

59
THE "OFFSETTING AGREEMENT" BECAUSE IT DID NOT SEND PURCHASE ORDERS TO
PRIVATE RESPONDENT AND DISCONTINUED THE CONSTRUCTION OF THE CONDOMINIUM
PROJECT DESPITE THE FACT THAT THE EXHIBITS ATTESTING TO THIS FACT WAS
FORMALLY OFFERED IN EVIDENCE IN COURT AND MENTIONED BY IT IN ITS DECISION.
III
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY THIS
HONORABLE COURT, WHEN IT CONCLUDED THAT IT WAS PETITIONER WHICH BREACHED
THE "OFFSETTING AGREEMENT" DESPITE THE ADMISSION MADE BY PRIVATE
RESPONDENT'S OWN WITNESS THAT PETITIONER HAD THE DISCRETION TO ORDER OR
NOT TO ORDER THE CONSTRUCTION MATERIAL (SIC) FROM THE FORMER. (Rollo, p. )
The issue presented before the Court is whether or not the circumstances of the case
warrant rescission of the Offsetting Agreement as prayed for by Private Respondent
when he instituted the case before the trial court.
We rule in favor of private respondent. There is no controversy that the provisions of the
Offsetting Agreement are reciprocal in nature. Reciprocal obligations are those created or
established at the same time, out of the same cause, and which results in a mutual
relationship of creditor and debtor between parties. In reciprocal obligations, the
performance of one is conditioned on the simultaneous fulfillment of the other obligation
(Abaya vs. Standard Vacuum Oil Co., 101 Phil. 1262 [1957]). Under the agreement,
private respondent shall deliver to petitioner construction materials worth P552,000.00
under the conditions set forth in the Offsetting Agreement. Petitioner's obligation under
the agreement is three-fold: he shall pay private respondent P276,000.00 in cash; he
shall deliver possession of units 601 and 602, Phase I, Vermen Pines Condominiums (with
total value of P276,000.00) to private respondent; upon completion of Vermen Pines
Condominiums Phase II, private respondent shall be given option to transfer to similar
units therein.
Article 1191 of the Civil Code provides the remedy of rescission in (more appropriately,
the term is "resolution") in case of reciprocal obligations, where one of the obligors fails
to comply with that is incumbent upon him.
The general rule is that rescission of a contract will not be permitted for a slight or causal
breach, but only for such substantial and fundamental breach as would defeat the very
object of the parties in executing the agreement. The question of whether a breach of
contract is substantial depends upon the attendant circumstances (Universal Food Corp.
vs. Court of Appeals, 33 SCRA 1, [1970]).
In the case at bar, petitioner argues that it was private respondent who failed to perform
its obligation in the Offsetting Agreement. It averred that contrary to the appellate
court's ruling, the mere stoppage of the loan for the construction of Phase II of the
Vermen Pines Condominiums should not have had any effect on the fulfillment of the
obligations set forth in the Offsetting Agreement. Petitioner moreover stresses that
contrary to private respondent's averments, purchase orders were sent, but there was
failure to deliver the materials ordered because they were allegedly out of stock.
Petitioner points out that, as admitted by private respondent's witness, petitioner had
the discretion to order or not to order constructions materials, and that it was only after

60
petitioner approved the price, after making a canvass from other suppliers, that the
latter would issue a purchase order. Petitioner argues that this was the agreement, and
therefore the law between the parties, hence, when no purchase orders were issued, no
provision of the agreement was violated.
Private respondent, on the other hand, points out that the subject of the Offsetting
Agreement is Phase II of the Vermen Pines Condominiums. It alleges that since
construction of Phase II of the Vermen Pines Condominiums has failed to begin (Rollo, p.
104), it has reason to move for rescission of the Offsetting Agreement, as it cannot
forever wait for the delivery of the condominium units to it.
It is evident from the facts of the case that private respondent did not fail to fulfill its
obligation in the Offsetting Agreement. The discontinuance of delivery of construction
materials to petitioner stemmed from the failure of petitioner to send purchase orders to
private respondent. The allegation that petitioner had been sending purchase orders to
private respondent, which the latter could not fill, cannot be given credence. Perhaps in
the beginning, it would send purchase orders to private respondent (as evidenced by the
purchase orders presented in court), and the latter would deliver the construction
materials ordered. However, according to private respondent, after April, 1982, petitioner
stopped sending purchase orders. Petitioner failed to refute this allegation. When
petitioner's witness, Treasurer of the petitioner corporation, was asked to produce the
purchase orders in court, the latter promised to do so, but this was never complied with.
On the other hand, petitioner would never able to fulfill its obligation in allowing private
respondent to exercise the option to transfer from Phase I to Phase II, as the construction
of Phase II has ceased and the subject condominium units will never be available.
The impossibility of fulfillment of the obligation on the part of petitioner necessitates
resolution of the contract for indeed, the non-fulfillment of the obligation aforementioned
constitutes substantial breach of the Offsetting Agreement. The possibility of exercising
the option of whether or not to transfer to condominium units in Phase II was one of the
factors which were considered by private respondent when it entered into the
agreement. Since the construction of the Vermen Pines Condominium Phase II has
stopped, petitioner would be in no position to perform its obligation to give private
respondent the option to transfer to Phase II. It would be the height of injustice to make
private respondent wait for something that may never come.
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner.

61
G.R. No. 127695

December 3, 2001

HEIRS OF LUIS BACUS, namely: CLARA RESMA BACUS, ROQUE R. BACUS, SR., SATURNINO
R. BACUS, PRISCILA VDA. DE CABANERO, CARMELITA B. SUQUIB, BERNARDITA B.
CARDENAS, RAUL R. BACUS, MEDARDO R. BACUS, ANSELMA B. ALBAN, RICARDO R.
BACUS, FELICISIMA B. JUDICO, and DOMINICIANA B. TANGAL, petitioners,
vs.
HON. COURT OF APPEALS and SPOUSES FAUSTINO DURAY and VICTORIANA DURAY,
respondents.
QUISUMBING, J.:
This petition assails the decision dated November 29, 1996, of the Court of Appeals in
CA-G.R. CV No. 37566, affirming the decision dated August 3, 1991, of the Regional Trial
Court of Cebu City, Branch 6, in Civil Case No. CEB-8935.
The facts, as culled from the records, are as follows:
On June 1, 1984, Luis Bacus leased to private respondent Faustino Duray a parcel of
agricultural land in Bulacao, Talisay, Cebu. Designated as Lot No. 3661-A-3-B-2, it had an
area of 3,002 square meters, covered by Transfer Certificate of Title No. 48866. The lease
was for six years, ending May 31, 1990. The contract contained an option to buy clause.
Under said option, the lessee had the exclusive and irrevocable right to buy 2,000 square
meters of the property within five years from a year after the effectivity of the contract,
at P200 per square meter. That rate shall be proportionately adjusted depending on the
peso rate against the US dollar, which at the time of the execution of the contract was
fourteen pesos.1
Close to the expiration of the contract, Luis Bacus died on October 10, 1989. Thereafter,
on March 15, 1990, the Duray spouses informed Roque Bacus, one of the heirs of Luis
Bacus, that they were willing and ready to purchase the property under the option to buy
clause. They requested Roque Bacus to prepare the necessary documents, such as a
Special Power of Attorney authorizing him to enter into a contract of sale,2 on behalf of
his sisters who were then abroad.
On March 30, 1990, due to the refusal of petitioners to sell the property, Faustino Duray's
adverse claim was annotated by the Register of Deeds of Cebu, at the back of TCT No.
63269, covering the segregated 2,000 square meter portion of Lot No. 3661-A-3-B-2-A.3
Subsequently, on April 5, 1990, Duray filed a complaint for specific performance against
the heirs of Luis Bacus with the Lupon Tagapamayapa of Barangay Bulacao, asking that
he be allowed to purchase the lot specifically referred to in the lease contract with option
to buy. At the hearing, Duray presented a certification4 from the manager of Standard
Chartered Bank, Cebu City, addressed to Luis Bacus, stating that at the request of Mr.
Lawrence Glauber, a bank client, arrangements were being made to allow Faustino Duray
to borrow funds of approximately P700,000 to enable him to meet his obligations under
the contract with Luis Bacus.5
Having failed to reach an agreement before the Lupon, on April 27, 1990, private
respondents filed a complaint for specific performance with damages against petitioners

62
before the Regional Trial Court, praying that the latter, (a) execute a deed of sale over
the subject property in favor of private respondents; (b) receive the payment of the
purchase price; and (c) pay the damages.
On the other hand, petitioners alleged that before Luis Bacus' death, private respondents
conveyed to them the former's lack of interest to exercise their option because of
insufficiency of funds, but they were surprised to learn of private respondents' demand.
In turn, they requested private respondents to pay the purchase price in full but the
latter refused. They further alleged that private respondents did not deposit the money
as required by the Lupon and instead presented a bank certification which cannot be
deemed legal tender.
On October 30, 1990, private respondents manifested in court that they caused the
issuance of a cashier's check in the amount of P650,0006 payable to petitioners at
anytime upon demand.
On August 3, 1991, the Regional Trial Court ruled in favor of private respondents, the
dispositive portion of which reads:
Premises considered, the court finds for the plaintiffs and orders the defendants to
specifically perform their obligation in the option to buy and to execute a document of
sale over the property covered by Transfer Certificate of Title # T-63269 upon payment
by the plaintiffs to them in the amount of Six Hundred Seventy-Five Thousand Six
Hundred Seventy-Five (P675,675.00) Pesos within a period of thirty (30) days from the
date this decision becomes final.
SO ORDERED.7
Unsatisfied, petitioners appealed to the respondent Court of Appeals which denied the
appeal on November 29, 1996, on the ground that the private respondents exercised
their option to buy the leased property before the expiration of the contract of lease. It
held:
. . . After a careful review of the entire records of this case, we are convinced that the
plaintiffs-appellees validly and effectively exercised their option to buy the subject
property. As opined by the lower court, "the readiness and preparedness of the plaintiff
on his part, is manifested by his cautionary letters, the prepared bank certification long
before the date of May 31, 1990, the final day of the option, and his filing of this suit
before said date. If the plaintiff-appellee Francisco Duray had no intention to purchase
the property, he would not have bothered to write those letters to the defendantappellants (which were all received by them) and neither would he be interested in
having his adverse claim annotated at the back of the T.C.T. of the subject property, two
(2) months before the expiration of the lease. Moreover, he even went to the extent of
seeking the help of the Lupon Tagapamayapa to compel the defendants-appellants to
recognize his right to purchase the property and for them to perform their corresponding
obligation.8
xxx

xxx

xxx

We therefore find no merit in this appeal.

63
WHEREFORE, the decision appealed from is hereby AFFIRMED.9
Hence, this petition where petitioners aver that the Court of Appeals gravely erred and
abused its discretion in:
I.
. . . UPHOLDING THE TRIAL COURT'S RULING IN THE SPECIFIC PERFORMANCE CASE
BY ORDERING PETITIONERS (DEFENDANTS THEREIN) TO EXECUTE A DOCUMENT OF SALE
OVER THE PROPERTY IN QUESTION (WITH TCT NO. T-63269) TO THEM IN THE AMOUNT OF
P675,675.00 WITHIN THIRTY (30) DAYS FROM THE DATE THE DECISION BECOMES FINAL;
II.
. . . DISREGARDING LEGAL PRINCIPLES, SPECIFIC PROVISIONS OF LAW AND
JURISPRUDENCE IN UPHOLDING THE DECISION OF THE TRIAL COURT TO THE EFFECT
THAT PRIVATE RESPONDENTS HAD EXERCISED THEIR RIGHT OF OPTION TO BUY ON TIME;
THUS THE PRESENTATION OF THE CERTIFICATION OF THE BANK MANAGER OF A BANK
DEPOSIT IN THE NAME OF ANOTHER PERSON FOR LOAN TO RESPONDENTS WAS
EQUIVALENT TO A VALID TENDER OF PAYMENT AND A SUFFICIENT COMPLAINCE (SIC) OF
A CONDITION FOR THE EXERCISE OF THE OPTION TO BUY; AND
III.
. . . UPHOLDING THE TRIAL COURT'S RULING THAT THE PRESENTATION OF A
CASHER'S (SIC) CHECK BY THE RESPONDENTS IN THE AMOUNT OF P625,000.00 EVEN
AFTER THE TERMINATION OF THE TRIAL ON THE MERITS WITH BOTH PARTIES ALREADY
HAVING RESTED THEIR CASE, WAS STILL VALID COMPLIANCE OF THE CONDITION FOR
THE PRIVATE RESPONDENTS' (PLAINTIFFS THEREIN) EXERCISE OF RIGHT OF OPTION TO
BUY AND HAD A FORCE OF VALID AND FULL TENDER OF PAYMENT WITHIN THE AGREED
PERIOD.10
Petitioners insist that they cannot be compelled to sell the disputed property by virtue of
the nonfulfillment of the obligation under the option contract of the private respondents.
Private respondents first aver that petitioners are unclear if Rule 65 or Rule 45 of the
Rules of Court govern their petition, and that petitioners only raised questions of facts
which this Court cannot properly entertain in a petition for review. They claim that even
assuming that the instant petition is one under Rule 45, the same must be denied for the
Court of Appeals has correctly determined that they had validly exercised their option to
buy the leased property before the contract expired.
In response, petitioners state that private respondents erred in initially classifying the
instant petition as one under Rule 65 of the Rules of Court. They argue that the petition
is one under Rule 45 where errors of the Court of Appeals, whether evidentiary or legal in
nature, may be reviewed.
We agree with private respondents that in a petition for review under Rule 45, only
questions of law may be raised.11 However, a close reading of petitioners' arguments
reveal the following legal issues which may properly be entertained in the instant
petition:
a)
When private respondents opted to buy the property covered by the lease contract
with option to buy, were they already required to deliver the money or consign it in court
before petitioner executes a deed of transfer?

64
b)
Did private respondents incur in delay when they did not deliver the purchase price
or consign it in court on or before the expiration of the contract?
On the first issue, petitioners contend that private respondents failed to comply with
their obligation because there was neither actual delivery to them nor consignation in
court or with the Municipal, City or Provincial Treasurer of the purchase price before the
contract expired. Private respondents' bank certificate stating that arrangements were
being made by the bank to release P700,000 as a loan to private respondents cannot be
considered as legal tender that may substitute for delivery of payment to petitioners nor
was it a consignation.
Obligations under an option to buy are reciprocal obligations.12 The performance of one
obligation is conditioned on the simultaneous fulfillment of the other obligation.13 In
other words, in an option to buy, the payment of the purchase price by the creditor is
contingent upon the execution and delivery of a deed of sale by the debtor. In this case,
when private respondents opted to buy the property, their obligation was to advise
petitioners of their decision and their readiness to pay the price. They were not yet
obliged to make actual payment. Only upon petitioners' actual execution and delivery of
the deed of sale were they required to pay. As earlier stated, the latter was contingent
upon the former. In Nietes vs. Court of Appeals, 46 SCRA 654 (1972), we held that notice
of the creditor's decision to exercise his option to buy need not be coupled with actual
payment of the price, so long as this is delivered to the owner of the property upon
performance of his part of the agreement. Consequently, since the obligation was not yet
due, consignation in court of the purchase price was not yet required.
Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment and it generally
requires a prior tender of payment. In instances, where no debt is due and owing,
consignation is not proper.14 Therefore, petitioners' contention that private respondents
failed to comply with their obligation under the option to buy because they failed to
actually deliver the purchase price or consign it in court before the contract expired and
before they execute a deed, has no leg to stand on.
Corollary, private respondents did not incur in delay when they did not yet deliver
payment nor make a consignation before the expiration of the contract. 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. Only from the moment one
of the parties fulfills his obligation, does delay by the other begin.15
In this case, private respondents, as early as March 15, 1990, communicated to
petitioners their intention to buy the property and they were at that time undertaking to
meet their obligation before the expiration of the contract on May 31, 1990. However,
petitioners refused to execute the deed of sale and it was their demand to private
respondents to first deliver the money before they would execute the same which
prompted private respondents to institute a case for specific performance in the Lupong
Tagapamayapa and then in the RTC. On October 30, 1990, after the case had been
submitted for decision but before the trial court rendered its decision, private
respondents issued a cashier's check in petitioners' favor purportedly to bolster their
claim that they were ready to pay the purchase price. The trial court considered this in

65
private respondents' favor and we believe that it rightly did so, because at the time
the check was issued, petitioners had not yet executed a deed of sale nor expressed
readiness to do so. Accordingly, as there was no compliance yet with what was
incumbent upon petitioners under the option to buy, private respondents had not
incurred in delay when the cashier's check was issued even after the contract expired.
WHEREFORE, the instant petition is DENIED. The decision dated November 29, 1996 of
the Court of Appeals is hereby AFFIRMED.

66
G.R. No. 72405

May 29, 1987

PACMAC, INC, petitioner,

vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT and VULCAN INDUSTRIAL & MINERAL
EXPLORATION CORPORATION, respondents.

GUTIERREZ, JR., J.:

This is a petition for review on certiorari of the decision of the then Intermediate
Appellate Court, now the Court of Appeals, which set aside the earlier decision in Civil
Case No. Q-9386 of the then Court of First Instance of Rizal, 7th Judicial District Branch VQuezon City.
In Civil Case No. Q-9386, PACMAC Incorporated (hereinafter called PACMAC) alleged that
by virtue of an existing contract and arrangement with VULCAN Manufacturing Company
Incorporated (hereinafter called VULCAN), the former since 1953 continuously up to
August 3, 1965 has been the exclusive distributor of the latter's products and that in said
arrangement VULCAN was obliged to periodically deliver and sell, at its own dictated
price any number or volume of its products exclusively to PACMAC. PACMAC would. in
turn, exclusively sell and distribute said products to the open market, whether in
wholesale or retail, at a price set and commanded by VULCAN, and that on August 3,
1965 VULCAN unilaterally terminated the contract of exclusive distributorship causing
damages to PACMAC.
In its answer, VULCAN denied the contract of exclusive distributorship with PACMAC. By
way of counterclaim, VULCAN alleged that PACMAC is indebted to it as of September 30,
1965 in the sum of P320,220.25 plus interest representing the unpaid purchase price of
VULCAN's products sold and delivered to PACMAC.
The facts of the case as found by the trial court are not disputed. The appellate court
adopted these factual findings, to wit:
It appears from the evidence that plaintiff Pacmac, Inc., was organized in 1949 as a
trading concern with Russell T. Elliott as its president and general manager. Following
researches and experimentation conducted at Pacmac, Inc., Elliott subsequently
organized the defendant corporation in 1953, as a manufacturing concern, starting off
with the production of rubber cement. Upon the organization of defendant corporation,
then known as the Vulcan Manufacturing Co., Inc., Elliott also became its president and
general manager, at the same time that he remained president and general manager of
the Pacmac, Inc. Both corporations had their offices in the same building inside the
compound of Pacmac, Inc. from 1953 up to 1967. From the start, defendant sold its
products to plaintiff on 60-day terms, and plaintiff in turn dealt on said products in the
open market. It was understood that plaintiff would not sell similar products from other
sources competitive with those of defendant.
In 1956, Patrocinio Bautista who had known Elliott since 1952, became vice president
concurrently of both corporations, while Elliott continued to be president and general

67
manager also of both as from the start. At the same time, many if not all of the
members of the board of directors of plaintiff corporation were likewise members of the
board of directors of defendant corporation. The set-up remained as such until the early
part of 1960, when upon the suggestion of Elliott for the reason that the growth of both
corporations had made it difficult for him to manage both, Patrocinio Bautista was made
president and general manager of Pacmac, Inc. at the same time ceasing to be vice
president of Vulcan Manufacturing Co., Inc., while Elliott stayed on as president and
general manager only of the latter company. The shift in management responsibilities
over the two corporations was eventually followed by a change in the stock-holdings of
Elliott and Bautista, who were substantial stockholders in both. Elliott gave up his shares
in Pacmac, Inc. and acquired more shares in the Vulcan Manufacturing Co., Inc. while
Bautista gave up all his shares in the latter corporation and acquired more shares in
Pacmac, Inc. According to the evidence of plaintiff, this happened also in 1960, but the
evidence of defendant places this occurrence in 1962 after a power struggle over the
control in the management of Vulcan Manufacturing Co., Inc., between the group of
Elliott on one hand, and that of Bautista, on the other, which Bautista lost in the
showdown at the annual stockholders' meeting in that year.
The drift of events appears to lend more probability to the claim of defendant in this
respect. It appears that on February 17, 1962, the majority of the members of the board
of directors of defendant corporation approved an amendment to its articles of
incorporation thereby authorizing the said corporation to engage in the merchandizing
business as one of its secondary purposes and increasing the kind of products it could
manufacture. This amendment likewise was subsequently approved by the stockholders
of the corporation during the annual meeting held February 20, 1962. In the directors'
certificate to this amendment, dated March 20, 1962, Bautista still appears to have
signed as director of defendant corporation (Exhs. "8" and "8-A").
On December 6, 1962, both parties entered into a written contract (Exh. "6") of exclusive
distributorship for two years beginning November 16, 1962 over two products
manufactured by defendant, the most pertinent provision of which reads:
1.
That the PURCHASER shall have the exclusive right to distribute and resell the
MANUFACTURER'S SODIUM SILICATES and ADHESIVE products. However, in consideration
of this exclusive privilege, the PURCHASER agrees not to distribute or resell adhesives
and sodium silicates products of other manufacturers or brands; (This agreement does
not cover shoe cement products, moulds, dies, show ranks and other products
manufactured by Vulcan).
It appears that the two products subject of the written agreement of exclusive
distributorship were new products of defendant and the contract was prompted by an
agitation in the board of directors of defendant in view of a desire to go into the
merchandizing business, as was suggested to plaintiff. Along with that, defendant also
claims that there was dissatisfaction with an alleged lag in plaintiff's payments of its
accounts with defendant.
While the agreement (Exh. "6") was not renewed at the end of its two-year term the
purchase and sale by plaintiff of the two products continued. ...

68
... on August 3, 1965, defendant, ... wrote plaintiff a letter (Exh. "7") advising the latter
that as of that date defendant would no longer deliver any of its products to plaintiff
except those items for which orders had already been booked, unless the same would be
cancelled by plaintiff. Defendant justified its action on the 'knowledge that PACMAC is
now distributing' Durabond' Sole Attaching Cement as manufactured by Regional
Enterprise.' In a letter of reply of the same date (Exh. "15"), plaintiff, ... denied and
protested against the accusation ... On the other hand, it was recalled that Elliott had
previously admitted that defendant had been distributing its own products' despite (its)
existing relationship' with plaintiff. Plaintiff's letter also advised that its orders previously
booked still stood. It does not appear, however, that deliveries on the pending orders
were thereafter made, as it is admitted that defendant stopped deliveries as of August 3,
1965. The reason given by defendant for refusing to make further deliveries on the
pending orders from plaintiff was the latter's failure to pay a balance of P23,000.00 in
accordance with an understanding between them on August 10, 1965 (Exh. "17"). (Rollo,
pp. 44-47).
The trial court found for the petitioner. Considering however, that PACMAC owed VULCAN
the amount of P304,855.50 representing the unpaid purchase price of VULCAN's
products sold and delivered to PACMAC and that the damages due PACMAC was fixed in
the amount of P189,908.76, the trial court ordered PACMAC to pay VULCAN the sum of
P114,946.74 with interest therein at the legal rate from September 30, 1965 until the
same is paid.
Both parties appealed the decision to the then Intermediate Appellate Court.
As stated earlier, the appellate court set aside the trial court's decision. The dispositive
portion of the decision reads:
WHEREFORE, the decision appealed from is hereby set aside and judgment is rendered
on the counterclaim, ordering plaintiff PACMAC Incorporated to pay the defendant Vulcan
Manufacturing and Trading Corporation, the sum of P 304,855.50 with legal interest from
September 30, 1965 until the same is fully paid, with costs against plaintiff- appellant.
This amount was mutually submitted and agreed between the parties during the pre-trial
proceedings as the balance due the defendant from the plaintiff on said date. (Rollo, pp.
49-50).
The main issue in the instant petition hinges on the actual business relationship between
PACMAC and VULCAN on August 3, 1965 when the latter suddenly stopped deliveries of
its products to the former.
The conclusions of the appellate court on factual matters differ from those of the trial
court. Hence, a minute scrutiny by this Court is in order and resort to duly proven
evidence becomes necessary. (Serrano v. Court of Appeals, 139 SCRA 179; Legaspi v.
Court of Appeals, 69 SCRA 360; Tolentino v. De Jesus, 56 SCRA 167).
Although the appellate court found that there existed an implied contract of exclusive
distributorship between the two parties with PACMAC as distributor of VULCAN's products
beginning in 1953, it ruled that this implied contract was terminated when on December
6, 1962 both parties entered into a formal written contract (Exhibit '6') of exclusive
distributorship for two years beginning November 16, 1982 covering only two products,

69
namely sodium silicates and adhesive products manufactured by VULCAN. Under this
theory, the appellate court opined that the terms in the written contract superseded all
previous contracts between the two parties. Consequently, the appellate court concluded
that since the contract provides for the expiration of the exclusive distributorship after 2
years, specifically on November 16, 1964, there could have been no gross and evident
bad faith on the part of VULCAN when on August 3, 1965 it terminated the exclusive
distributors agreement embodied in Exhibit "6."
The appellate court came up with this conclusion applying the parol evidence rule which
is Section 7, Rule 130 of the Revised Rules of Court, to wit:
When the terms of an agreement have been reduced to writing, it is to be considered as
containing all such terms, and, therefore, there can be, between the parties and their
successors in interest, no evidence of the terms of the agreement other than the
contents of the writing, ...
The petitioner now contends that the parol evidence rule was erroneously applied by the
appellate court because there was evidence of an oral agreement and acts implementing
that agreement on the part of both parties subsequent to the execution of the written
contract which changed and added to the terms of the distributorship arrangement.
Under these circumstances, PACMAC argues that the written contract was an inadequate
measure of the entire agreement between the parties thereto.
The stand of the petitioner is rightly premised on the principle that the parol evidence
rule does not preclude the admission of extrinsic evidence to prove subsequent
agreements between the parties to a written contract, to wit:
The rule forbidding the admission of parol or extrinsic evidence to alter, vary, or
contradict a written instrument does not apply so as to prohibit the establishment by
parol of an agreement between the parties to a writing, entered into subsequent to the
time when the written instrument was executed, notwithstanding such agreement may
have the effect of adding to, changing, modifying, or even altogether abrogating the
contract of the parties as evidenced by the writing; for the parol evidence does not in
any way deny that the original agreement of the parties was that which the writing
purports to express, but merely goes to show that the parties have exercised their right
to change or abrogate the same, or to make a new and independent contract. (32 C.J.S.
1008-1009 cited in Francisco, Evidence, Volume VII Part I 1973, p. 167. See Canuto v.
Mariano, 37 Phil, 840)
The appellate court, therefore, erred when it failed to consider the evidence proving that
the exclusive contract of distributorship between the parties went beyond the expiration
of the two year written contract between the parties.
The petitioner presented evidence to show that after sensing VULCAN's desire to go into
distribution of its own products, Patrocinio Bautista, president and general manager of
PACMAC secured verbal assurances from Russel Elliott VULCAN's president and general
manager, to give the former at least a year's notice in advance before cutting off the
distributorship arrangement between the two parties. This was given credence by the
trial court over the denials of VULCAN.

70
Jose Basa, a witness for VULCAN testified that in a letter dated November 16, 1964
(Exh. "4," alleged true copy of letter) VULCAN notified PACMAC of the expiry date of the
2-year distributorship agreement; that in reply to this letter, PACMAC through P.E.
Bautista, asked for at least 3-months notice before the business relationship could be
effectively terminated by either of the parties. This letter, marked as Exh. 5, was an
alleged true copy of the letter written by P.E. Bautista. This was denied by Bautista.
With two conflicting pieces of evidence before it, the trial court said:
... Of the two conflicting evidence on the point, the Court is more inclined to give
credence to the testimony of Bautista, than to Exh. 5 of defendant which was testified to
by witness Jose Basa whose testimony has heretofore been found to suffer from doubtful
veracity. Moreover, considering the extent and volume of business carried on between
plaintiff and defendant under the distributorship arrangement, it is improbable that
plaintiff would have bargained for only a minimum of three months' notice within which
to adjust its business. One year's notice could not have been unreasonable it appearing
that for the year ending December 31, 1966, plaintiff managed to make a net income of
only P68,404.57 (Exh. D-4) as compared to its net income for the year 1964, when the
distributorship arrangement was still intact, in the amount of P218,313.33 (Exh. D-2). ...
(Joint Record on Appeal, pp. 99-100)
We find no substantial reason from the records to deviate from, much less reverse, these
factual findings of the trial court. The trial court's conclusion that evidence on the one
year notice to terminate the exclusive distributorship arrangement between the two
parties is more credible than the proof of a three-month notice alleged by VULCAN due to
the volume of business carried on by the two parties is bolstered by the unrebutted
evidence of PACMAC that before the distributorship arrangement was terminated, more
than 60% of its gross sales consisted of VULCAN's products. VULCAN continued to supply
the same amounts and under the same terms to PACMAC of its entire range of products.
After termination, gross sales of P2,621,857.46 were reduced by P1,570,000.00 in one
year's sales.
The records establish that after the termination of the two year written contract, the
parties agreed on another term regarding the duration of their distributorship
arrangement. They also agreed that the distributorship arrangement would remain in full
force until one year from and after notice of its termination would have been given to
PACMAC.
The inevitable conclusion, therefore, is that the parties' contract of exclusive
distributorship arrangement was still in existence on August 3, 1965 when VULCAN
decided to stop deliveries of its products to PACMAC. VULCAN's unilateral act of
terminating the contract without legal justification makes it liable for damages suffered
by PACMAC pursuant to Article 1170 of the New Civil Code which 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.
The petitioner argues on the basis of the evidence it presented before the trial court that
it is entitled to actual and compensatory damages of at least P360,000.00 plus interest,

71
exemplary damages of at least P100,000.00, attorney's fees of at least P50,000.00
and litigation expenses of at least P25,000,00.
The trial court reduced the claims for damages to more reasonable levels. We agree with
its findings that:
Neither can the Court reasonably go along with plaintiff that the measure of damages
due it should be based on the average monthly profit of P 31,307.68 it was getting out of
the sales of defendant's products during the existence of the distributorship
arrangement (Exh. D). Evidently and as can be gathered from the testimony of plaintiff's
witness Felicisimo S. de Ocampo, who prepared Exh. D, the average monthly profit
arrived at in the sum of P31,307.68 does not actually represent the average net monthly
profit from the sale of defendant's products, since the selling or administrative expenses
have not been taken into account. As a matter of fact, Ocampo could not state what part
of plaintiff's selling expenses referred to defendant's products. Moreover, it was
incumbent upon plaintiff to minimize its damages by getting other suppliers and selling
other products when defendant altogether stopped selling to plaintiff. It is reasonable to
assume that, indeed, plaintiff did just this. The more equitable basis then would be the
diminution in the net income of plaintiff during the entire year following the termination
of the distributorship arrangement, or the difference between its net income of
P218,313.33 in 1964, shown by its own evidence (Exh. D-2), as against P68,404.75 in
1966, also shown by its own evidence (Exh. D-4), which is P149,908.76. For having acted
in gross and evident bad faith, considering defendant's unjustified and sudden cutting off
of its sales to plaintiff, after having surreptitiously sold its products in the open market
(see E xhs 9-A, 10-A, 11-A and 12-A), all in a wilful breach of the distributorship
arrangement with plaintiff and mindless of the prejudice to the latter's business,
defendant is also liable to plaintiff for exemplary damages in the amount of P30,000.00
and attorney's fees in the amount of P10,000.00.
On the other hand, upon defendant's counterclaim, plaintiff is in turn liable for the
payment of its admitted account with defendant in the amount of P304,855.50 as of
September 30, 1965 (Exh. C or 1). Compensating the amounts due plaintiff under its
complaint in the total sum of P189,908.76 against the amount defendant under its
counterclaim in the sum of P304,855.50, there still remains a net amount of
P114,946.74, exclusive of interest, due defendant from plaintiff. Defendant's claim for
interest on plaintiff's account at twelve (12%) percent per annum is not sufficiently
supported by the evidence. Except for the sodium silicates and adhesives subject of the
written two-year agreement (Exh. 6), wherein it was stipulated that nonpayment within
sixty (60) days would make plaintiff liable to one (1%) percent interest charge per month
until the account is paid, there is nothing in the evidence to prove that the plaintiff's
accounts as to the other products were also subject to the same rate of penalty, or what
part, if any, of plaintiff's accounts pertained to unpaid purchases of sodium silicates and
adhesives. However, defendant is entitled to interest at the legal rate on the amount due
it from plaintiff after compensating their respective claims. (Joint Record on Appeal, pp.
100-103).
WHEREFORE, the instant petition is GRANTED. The questioned decision of the
Intermediate Appellate Court is REVERSED and SET ASIDE. The trial court's decision is
REINSTATED.

72
G.R. No. 122166 March 11, 1998
CRESENTE Y. LLORENTE, JR., petitioner,
vs.
SANDIGANBAYAN and LETICIA G. FUERTES, respondents.
PANGANIBAN, J.:
In a prosecution for violation of Section 3[e] of the Anti-Graft Law, that is, "causing
undue injury to any party," the government prosecutors must prove "actual" injury to the
offended party; speculative or incidental injury is not sufficient.
The Case
Before us is a petition for review of the Decision promulgated on June 23, 1995 and the
Resolution promulgated on October 12, 1995 of the Sandiganbayan in Criminal Case No.
18343, finding Cresente Y. Llorente, Jr. guilty as charged.
Llorente, then municipal mayor of Sindangan, Zamboanga del Norte, was charged with
violation of Sec. 3[e] of Republic Act No. 3019, otherwise known as the Anti-Graft and
Corrupt Practices Act, under an Information dated October 22, 1992, textually
reproduced as follows:1
That in or about and during the period of July, 1990 to October, 1991, or for sometime
subsequent thereto, in the Municipality of Sindangan, Province of Zamboanga del Norte,
Philippines, and within the jurisdiction of this Honorable Court, the above-named accused
Cresente Y. Llorente, Jr., a public officer, being then the Mayor of Sindangan, Zamboanga
del Norte, in the exercise of his official and administrative functions, did then and there,
willfully, unlawfully and criminally with evident bad faith refuse to sign and approve the
payrolls and vouchers representing the payments of the salaries and other emoluments
of Leticia G. Fuertes, without just valid cause and without due process of law, thereby
causing undue injury to the said Leticia G. Fuertes.
CONTRARY TO LAW.
Duly arraigned on March 29, 1993, petitioner, with the assistance of counsel, entered a
plea of "NOT GUILTY."2 After trial in due course, the Sandiganbayan3 rendered the
assailed Decision, disposing as follows:4
WHEREFORE, judgment is hereby rendered finding accused Mayor Cresente Y. Llorente,
Jr. GUILTY beyond reasonable doubt as principal of the crime of Violation of Section 3(e)
of Republic Act 3019, as amended, and he is hereby sentenced to suffer imprisonment of
SIX (6) YEARS and ONE (1) MONTH, as minimum to SEVEN (7) YEARS, as maximum; to
further suffer perpetual disqualification from public office; and to pay the costs.
Respondent Court denied the subsequent motion for reconsideration in the assailed
Resolution thus:5

73
WHEREFORE, accused's "Motion for Reconsideration and/or New Trial" is hereby
DENIED for lack of merit. His "Motion for Marking of Additional Exhibits Cum Offer of
Documentary Exhibits in Support of Motion for Reconsideration and/or New Trials' is now
rendered moot and academic.
Hence, this petition.6
The Facts
Version of the Prosecution
As found by Respondent Court, the prosecution's version of the facts of this case is as
follows:7
After appreciating all the evidence on both sides, the following uncontroverted facts may
be gleaned:
1.
Accused Mayor Cresente Y. Llorente, Jr., at the time the alleged act was committed,
was the Municipal Mayor of Sindangan, Zamboanga del Norte.
2.
Private [C]omplainant, Leticia C. Fuertes, is the duly appointed Assistant Municipal
Treasurer in the same municipality since October 18, 1985.
3.

Starting 1986, private complainant was detailed to different offices, as follows:

(a)
Municipality of Katipunan, Zamboanga del Norte from April, 1986 to August,
1987 as OIC Municipal Treasurer.
(b)
Municipality of Roxas, Zamboanga del Norte from September, 1987 to March,
1988 as OIC Municipal Treasurer.
(c)
Office of the Provincial Treasurer of Zamboanga del Norte from April, 1988 to
May, 1988.
(d)
Municipality of Pian, Zamboanga del Norte from June, 1988 to June, 1990 as
OIC Municipal Treasurer.
4.
In July, 1990, she was returned to her post as Assistant Municipal Treasurer in the
town of Sindangan.
She was not provided with office table and chair nor given any assignment; neither her
daily time record and application for leave acted upon by the municipal treasure per
instruction of accused Mayor (Exh. "G-2"; "G-3").
5.
On July 23, 1990, the Sangguniang Bayan of Sindangan, Zamboanga del Norte,
presided by accused Mayor, passed Resolution No. SB-214 (Exh. "3"), vehemently
objecting to the assignment of complainant as Assistant Municipal Treasurer of
Sindangan.

74
6.
On March 12, 1991, accused Municipal Mayor received a letter (SB Resolution
No. 36) from the Sangguniang Bayan of the Municipality of Pian, demanding from the
private complainant return of the amount overpaid to her as salaries (par. 9, p. 2 of Exh.
"4" counter-affidavit of accused Mayor).
7.
On May 22, 1991, private complainant filed a Petition for Mandamus with Damages
(Exh. "E") against the accused Mayor and the Municipality of Sindangan before Branch II,
Regional Trial Court of Sindangan, Zamboanga del Norte docketed as Special Proceedings
No. 45, for the alleged unjustified refusal of Mayor Llorente to sign and/or approve her
payrolls and/or vouchers representing her salaries and other emoluments as follows: (a)
salary for the month of June, 1990 in the amount of P5,452.00 under disbursement
voucher dated September 5, 1990 (Exh. "H"). Although complainant rendered services at
the municipality of Pian during this period, she could not collect her salary there
considering that as of that month, Pian had already appointed an Assistant Municipal
Treasurer. When she referred the matter to the Provincial Auditor, she was advised to
claim her salary for that month with her mother agency, the Municipality of Sindangan,
[(]p. 12, TSN of August 9, 1994; 10th paragraph of complainant's Supplemental Affidavit
marked Exh. "G"); (b) salary differential for the period from July 1, 1989 to April 30, 1990
in the total amount of P19,480.00 under disbursement voucher dated August, 1990 (Exh.
"I"); (c) 13th month pay, cash gift and clothing allowance under Supplemental Budget
No. 5, CY 1990 in the total amount of P7,275 per disbursement voucher dated December
4, 1990 (Exh. "J"); (d) vacation leave commutation for the period from October to
December 31, 1990 in the total amount of P16,356.00 per disbursement voucher dated
December 3, 1990 (Exh. "K"); (e) RATA for the months of July, August and September,
1990, January and February, 1991 in the total amount of P5,900.00 (par. 12 & 16 of Exh.
"E"); and (f) salaries for January and February, 1991 in the total amount of P10,904.00
(par. 17 of Exh. "E").
8.
Accused Mayor did not file an answer; instead, he negotiated for
settlement of the case (p. 24, TSN of August 10, 1994). Indeed, a
Agreement (Exh. "A") dated August 27, 1991, between the accused
complainant was submitted to and approved by the court, hereto quoted as

an amicable
Compromise
and private
follows:

COMPROMISE AGREEMENT
That the parties have agreed, as they hereby agree, to settle this case amicably on the
basis of the following terms and conditions, to wit:
(a)
That the respondent Mayor Cresente Y. Llorente, Jr. binds himself to sign and/or
approve all vouchers and/or payrolls for unpaid salaries, RATA, Cash-gifts, 13th month
pay, clothing allowance, salary differentials and other emoluments which the petitioner is
entitled as Assistant Municipal Treasurer of Sindangan, Zamboanga del Norte;
(b)
That the parties herein hereby waive, renounce and relinquish their other claims
and counter-claims against each other;
(c)
That the respondent Mayor Cresente Y. Llorente Jr. binds himself to sign and/or
approve all subsequent vouchers and payrolls of the herein petitioner.

75
9.
On August 27, 1991, a Decision (Exh. "B") was rendered by Judge Wilfredo
Ochotorena on the basis of the aforesaid compromise agreement.
10. For his failure to comply with the terms of the compromise agreement, private
complainant, thru counsel, filed a Motion for Execution on September 12, 1991. A Writ of
Execution (Exh. "C") was issued by the Court on September 17, 1991, and served [on]
the accused on September 23,1991.
11. As shown in the Sheriff's Return dated November 19, 1991 (Exh. "D"), private
complainant was paid her salaries for the period from January, 1991 to August, 1991,
while the rest of her salaries including the RATA and other emoluments were not paid
considering the alleged need of a supplemental budget to be enacted by the
Sangguniang Bayan of Sindangan per verbal allegation of the municipal treasurer.
12. Complainant was not also paid her salaries from July to December 1990;
September and October, 1991; RATA for the period from July 1990 to June 1994
(admission of accused, pp. 8-9, TSN of June 27, 1994, a.m.; Exh. "E"; p. 17, TSN of June
27, 1994).
13. Sometime in 1993, accused municipal mayor received from the Municipality of
Pian, Bill No. 93-08 (Exh. "1"), demanding from the Municipality of Sindangan
settlement of overpayment to complainant Fuertes in the amount of P50,643.93 per SE
Resolution No. 6 sent on July 23, 1990. The bill was settled by the Municipality of
Sindangan in December, 1993 per Disbursement Voucher No. 101-9312487 dated
December 2, 1993 (Exh. "2").
14. Private complainant was able to receive complete payment of her claims only on
January 4, 1993 in the form of checks all dated December 29, 1992 (as appearing on
Exhs. "H", "I", "J", "K" of the prosecution, Exhs. "6", "7", "8", of the defense) except her
RATA which was given to her only on July 25, 1994, covering the period from July 1990 to
December, 1993 amounting to P55,104.00, as evidenced by Disbursement Voucher
dated July 25, 1994 (Exh. "5").
Version of the Defense
While admitting some delays in the payment of the complainant's claims, petitioner
sought to prove the defense of good faith that the withholding of payment was due to
her failure to submit the required money and property clearance and to the Sangguniang
Bayan's delayed enactment of a supplemental budget to cover the claims. He adds that
such delays did not result in "undue injury" to complainant. In his memorandum,
petitioner restates the facts as follows:8
1.
Complainant . . . was appointed assistant municipal treasurer of Sindangan,
Zamboanga del Norte on October 18, 1985. However, starting 1986 until July 1990, or for
a period of about four (4) and one half (1/2) years, she was detailed in other
municipalities and in the Office of the Provincial Treasurer of Zamboanga del Norte. She
returned as assistant treasurer of Sindangan in July 1990. (Decision, pp. 5-6).
2.
As complainant had been working in municipalities and offices other than in
Sindangan for more than four (4) years, her name was removed from the regular payroll

76
of Sindangan, and payment of past salaries and other emoluments had to be done by
vouchers. When complainant . . . presented her vouchers to petitioner, the latter
required her to submit clearances from the different offices to which she was detailed, as
well as a certificate of last payment as required by COA regulations (Tsn, p. 11, Aug. 10,
1994). Instead of submitting the required documents, Mrs. Fuertes said that "what I did,
endorsed my voucher to the mayor through the municipal treasurer" (Tsn, p. 13, June 27,
1994). The municipal treasurer could not, however, process the vouchers and certify as
to the availability of funds until after the Sangguniang Bayan had passed a supplemental
budget for the purpose (Exhs. D and 6-c Motion), which came only in December 1992.
3.
Petitioner, in the meanwhile, received on March 12, 1991 SB Resolution No. 36
from the Municipality of Pian, demanding from Mrs. . . . Fuertes the reimbursement of
P105,915.00, and because of this demand, he needed time to verify the matter before
acting on Mrs. Fuertes' claims (Exh. 4). Mrs. Fuertes admitted that she had at the time
problems of accountability with the Municipality of Pinan. She testified.
Q.
Counsel now is asking you, when you went back to Sindangan there was [sic] still
problems of the claims either against you or against the Municipality of Sindangan by the
municipalities had, [sic] in their minds, overpaid you?
A.
Yes, your Honor, that was evidence[d] by the bill of the Municipality of Pinan to the
Municipality of Sindangan. (Tsn, p. 18, Aug. 3, 1994).
4.
Petitioner also stated that he could not act on complainant's claims because she
had not submitted the required money and property accountability clearance from Pinan
(Tsn, 11, Aug. 10, 1994) and that at the time the Sangguniang Bayan had not
appropriated funds for the purpose. (Tsn, pp. 18, 30, 42-43, Aug. 10, 1994). Nonetheless,
petitioner included Mrs. Fuertes' name in the regular annual budget beginning 1991
(Exhs. 4-b, 4-d, 4-f), as a result of which she had been since then receiving her regular
monthly salary.
5.
On May 21, 1991, Mrs. Fuertes filed a complaint . . . Petitioner filed his answer to
the complaint, alleging as a defense, that plaintiff did not exhaust administrative
remedies. (Annex B, p. 3, Petition; Exh. 1-Motion). On August 27, 1991, the parties
entered into a compromise agreement, which the trial court approved (Exh. B). . . .
6.
Upon motion of counsel for Mrs. Fuertes, the trial court issued a writ of execution of
the compromise judgment. However, the writ of execution was addressed only to
petitioner; it was not served on the municipal Sangguniang Bayan. . . .
Thus, Mrs. Fuertes had been receiving her regular salary from January, 1991 because
petitioner had included her name in the regular budget beginning 1991, which fact
complainant did not dispute. With respect to her other claims for past services in other
offices, Municipal Treasurer; Mrs. Narcisa Caber, informed that a supplemental budget for
such purpose to be passed by the Sangguniang Bayan was necessary before she could
be paid thereof. Being the municipal treasurer, Mrs. Caber knew that without such
supplemental budget, payment of Mrs. Fuertes' other claims could not be made because
the law requires that "disbursements shall be made in accordance with the ordinance
authorizing the annual or supplemental appropriations" (Sec. 346, RA 7160) and that "no

77
money shall be disbursed unless . . . the local treasurer certifies to the availability of
funds for the purpose." (Sec. 344, RA 7160).
7.
Petitioner had instructed the municipal budget officer to prepare the supplemental
budget for payment of complainant's unpaid claims for submission to the Sangguniang
[Bayan] for enactment. (Tsn, pp. 32-33, Aug. 10, 1994). The budget officer, Mr. Narciso
Siasico stated as follows:
1.
I am the budget officer for the Municipality of Sindangan, Zamboanga del Norte, a
position I have held since 1981.
xxx

xxx

xxx

3.
Immediately after said mandamus case was settled through a compromise
agreement, Mayor Llorente instructed me to prepare the necessary budget proposals for
the deliberation and approval of the Sangguniang Bayan;
xxx

xxx

xxx

8.
Instead of waiting for the Sangguniang Bayan to enact the budget or of securing
an alias writ of execution to compel the Sangguniang Bayan to pass the same, Mrs.
Fuertes filed a criminal complaint with the Office of the Ombudsman under date of
October 28, 1991, admitting receipt of her salaries from January 1991 and saying she
had not been paid her other claims in violation of the compromise judgment. (Exh. F).
She had thus made the Office of the Ombudsman a collecting agency to compel
payment of the judgment obligation.
9.
While the budget proposal had been prepared and submitted to the Sangguniang
Bayan for action, it took time for the Sangguniang Bayan to pass the supplemental
budget and for the Provincial Board to approve the same. It was only on December 27,
1992 that the municipal treasurer and the municipal accountant issued a certification of
availability of funds for the purpose. Petitioner approved the vouchers immediately, and
in a period of one week, Mrs. Fuertes was paid all claims, as evidenced by the
prosecution's Exhs. H, I, J and K, which were the four vouchers of Mrs. Fuertes, . . . .
xxx

xxx

xxx

11. Petitioner testified that he could not immediately sign or approve the vouchers of
Mrs. Fuertes for the following reasons:
a)
The Sangguniang Bayan had not appropriated the amounts to pay Mrs. Fuertes.
(Tsn, pp. 18, 30, 42-43, Aug. 10, 1994).
b)
Municipal Treasurer Caber, to whom Mrs. Fuertes endorsed her vouchers for
processing, and the Municipal Accountant issued the certificate of availability of funds
only on December 27, 1992 (Tsn, p. 42, Aug. 10, 1994; Exhs. H, I, J and K); and the delay
in the issuance of the certificate of availability of funds was due to the delay by the
Provincial Board to approve the supplemental budget. (Tsn, p. 43, Aug. 10, 1994).

78
[c]) He received on March 12, 1991 a demand from the Municipality of Pinan,
Zamboanga del Norte, where Mrs. Fuertes last worked, for the reimbursement of
P105,915.00, and the matter had to be clarified first. (Exh. 4). Mrs. Fuertes admitted that
she had some problem of accountability with the Municipality of Pinan. (Tsn, p. 18, 1994).
It took time before this matter could be clarified by the Municipality of Pinan reducing its
claim to P50,647.093 and the Municipality of Sindangan paying said claim. (Exh. 2;
Decision, p. 9).
[d]) Mrs. Fuertes had not submitted the required clearance from the Municipality of
Pinan. (Tsn, p. 11, Aug. 10, 1994). He did not insist on this requirement after the trial
court issued the writ of execution to implement the compromise judgment. (Tsn, p. 23,
Aug. 10, 1994). Nonetheless, in the post audit of Mrs. Fuertes' accountability, the
Commission on Audit issued a notice of suspension of the amount of P5,452.00 from Mrs.
Fuertes for her failure to submit: "1. Clearance for money & property accountability from
former office. 2. Certification as [sic] last day of service in former office. 3. Certification
of last salary received & issued by the disbursing officer in former office, certified by
chief accountant and verified by resident auditor." (Exh. 2-Motion).
12. The Information dated October 12, 1992 filed against petitioner alleged that
petitioner as mayor did not sign and approve the vouchers of Mrs. Fuertes for payment of
her salaries and other emoluments from July 1, 1990 to October 1991, which caused her
undue injury. However, the prosecution's Exh. "D", the sheriff's return dated November
19, 1991, stated that Mrs. Fuertes had received her salary from January 1, 1991 "up to
the present", which meant that even before the information was filed, she had been paid
her regular salaries from January 1, 1991 to October 1991. The supplemental budget to
cover payment of her other claims for past services was passed only in December 1992
and the municipal treasurer and accountant issued the certificate of availability of funds
only on December 27, 1992, and Mrs. Fuertes got paid of [sic] all her other claims,
including those not claimed in the Information, within one week therefrom. (Exhs. H, I, J,
and K).
xxx

xxx

xxx

Ruling of the Sandiganbayan

Respondent Court held that the delay or withholding of complainant's salaries and
emoluments was unreasonable and caused complainant undue injury. Being then the
sole breadwinner in their family, the withholding of her salaries caused her difficulties in
meeting her family's financial obligations like paying for the tuition fees of her four
children. Petitioner's defense that complainant failed to attach the required money and
property clearance to her vouchers was held to be an afterthought that was brought
about, in the first place, by his own failure to issue any memorandum requiring its
submission. That the voucher form listed the clearance as one of the requirements for its
approval had neither been brought to complainant's attention nor raised by petitioner as
defense in his answer. In any event, the payment of complainant's salary from January to
November 1991, confirmed by the sheriff's return, showed that the clearance was not an
indispensable requirement, because petitioner could have acted upon or approved the
disbursement even without it. The alleged lack of a supplemental budget was also
rejected, because it was petitioner's duty as municipal mayor to prepare and submit the
"executive and supplemental budgets" under Sections 318, 320, and 444 (3)(ii) of the

79
Local Government Code,9 and the complainant's claims as assistant municipal
treasurer, a permanent position included in the plantilla for calendar year 1990 and
1991, were classified as "current operating expenditures" for the same calendar years,
which were chargeable against the general funds of the town of Sindangan. Except for
the representation and transportation allowance, Fuertes' claims for thirteenth month
pay, cash gift and clothing allowance were already covered by Supplemental Budget No.
5 for calendar year 1990. Petitioner's contention that funds covering complainant's
claims were made available only in December 1992 was unbelievable, considering that
an ordinance enacting a supplemental budget takes effect upon its approval or on the
date fixed therein under Sec. 320 of the Local Government Code.
The Sandiganbayan also ruled that the petitioner's evident bad faith was the direct and
proximate cause of Fuertes' undue injury. Complainant's salaries and allowances were
withheld for no valid or justifiable reasons. Such delay was intended to harass
complainant, because petitioner wanted to replace her with his political protege whom
he eventually designated as municipal treasurer, bypassing Fuertes who was next in
seniority. Bad faith was further evidenced by petitioner's instructions to the outgoing
municipal treasurer not to give the complaining witness any work assignment, not to
provide her with office table and chair, not to act on her daily time record and application
for leave of absence, instructions which were confirmed in the municipal treasurer's
certification. (Exh. G-2).
The Issues
In his memorandum, petitioner submits the following issues:10
1.
Could accused be held liable under Sec. 3(e) of R.A. 3019 "in the discharge of his
official administrative duties", a positive act, when what was imputed to him was failing
and refusing to sign and/or approve the vouchers of Mr[s]. Fuertes on time or by
"inaction on his obligation under the compromise agreement" (ibid., p. 19), a passive
act? Did not the act come under Sec. 3(f) of R.A. 3019, of [sic] which accused was not
charged with?
2.
Assuming, arguendo, that his failure and refusal to immediately sign and approve
the vouchers of Mrs. Fuertes comes [sic] under Sec. 3(e), the questions are:
(a)
Did not the duty to sign and approve the same arise only after the Sangguniang
Bayan had passed an appropriations ordinance, and not before? In other words, was the
non-passage of the appropriation ordinance a justifiable reason for not signing the
vouchers?
(b)
Did Mrs. Fuertes suffer undue injury, as the term is understood in Sec. 3(e), she
having been paid all her claims?
(c)
Did petitioner not act in good faith in refusing to immediately sign the vouchers
and implement the compromise agreement until the Sangguniang Bayan had enacted
the appropriation ordinance and until Mrs. Fuertes submitted the clearance from the
Municipality of Pinan, Zamboanga del Norte?

80
Restated, petitioner claims that the prosecution failed to establish the elements of
undue injury and bad faith. Additionally, petitioner submits that a violation of Section
3[e] of RA 3019 cannot be committed through nonfeasance.
The Court's Ruling
The petition is meritorious. After careful review of the evidence on record and thorough
deliberation on the applicable provision of the Anti-Graft Law, the Court agrees with the
solicitor general's assessment that the prosecution failed to establish the elements of the
crime charged.
First Issue: Undue Inquiry
Petitioner was charged with violation of Section 3[e] of R.A. 3019, which states:
Sec. 3.
Corrupt practices of public officers. In addition to acts or omissions of
public officers already penalized by existing law, the following shall constitute corrupt
practices of any public officer and are hereby declared to be unlawful:
xxx

xxx

xxx

(e)
Causing any undue injury to any party, including the Government, or giving any
private party any unwarranted benefits, advantage or preference in the discharge of his
official, administrative or judicial functions through manifest partiality, evident bad faith
or gross inexcusable negligence. This provision shall apply to officers and employees of
offices or government corporations charged with the grant of licenses or permits or other
concessions.
To hold a person liable under this section, the concurrence of the following elements
must be established beyond reasonable doubt by the prosecution:
(1)
that the accused is a public officer or a private person charged in conspiracy with
the former;
(2)
that said public officer commits the prohibited acts during the performance of his
or her official duties or in relation to his or her public positions;
(3)
that he or she causes undue injury to any party, whether the government or a
private party; and
(4)
that the public officer has acted with manifest partiality, evident bad faith or gross
inexcusable negligence.11
The solicitor general, in his manifestation,12 points out that "undue injury" requires proof
of actual injury or damage, citing our ruling in Alejandro vs. People13 and Jacinto vs.
Sandiganbayan.14 Inasmuch as complainant was actually paid all her claims, there was
thus no "undue injury" established.
This point is well-taken. Unlike in actions for torts, undue injury in Sec. 3[e] cannot be
presumed even after a wrong or a violation of a right has been established. Its existence

81
must be proven as one of the elements of the crime. In fact, the causing of undue
injury or the giving of any unwarranted benefits, advantage or preference through
manifest partiality, evident bad faith or gross inexcusable negligence constitutes the
very act punished under this section. Thus, it is required that the undue injury be
specified, quantified and proven to the point of moral certainty.
In jurisprudence, "undue injury" is consistently interpreted as "actual damage." Undue
has been defined as "more than necessary, not proper, [or] illegal;" and injury as "any
wrong or damage done to another, either in his person, rights, reputation or property[;
that is, the] invasion of any legally protected interest of another." Actual damage, in the
context of these definitions, is akin to that in civil law.15
In turn, actual or compensatory damages is defined by Article 2199 of the Civil Code as
follows:
Art. 2199. Except as provided by law or by stipulation, one is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly proved. Such
compensation is referred to as actual or compensatory damages.
Fundamental in the law on damages is that one injured by a breach of a contract, or by a
wrongful or negligent act or omission shall have a fair and just compensation
commensurate to the loss sustained as a consequence of the defendant's act. Actual
pecuniary compensation is awarded as a general rule, except where the circumstances
warrant the allowance of other kinds of damages.16 Actual damages are primarily
intended to simply make good or replace the loss caused by the wrong.17
Furthermore, damages must not only be capable of proof, but must be actually proven
with a reasonable degree of certainty. They cannot be based on flimsy and nonsubstantial evidence or upon speculation, conjecture or guesswork.18 They cannot
include speculative damages which are too remote to be included in an accurate
estimate of the loss or injury.
In this case, the complainant testified that her salary and allowance for the period
beginning July 1990 were withheld, and that her family underwent financial difficulty
which resulted from the delay in the satisfaction of her claims.19 As regards her money
claim, payment of her salaries from January 1991 until November 19, 1991 was
evidenced by the Sheriffs Return dated November 19, 1991 (exh. D). She also admitted
having been issued a check on January 4, 1994 to cover her salary from June 1 to June
30, 1990; her salary differential from July 1, 1989 to April 30, 1990; her thirteenth-month
pay; her cash gift; and her clothing allowances. Respondent Court found that all her
monetary claims were satisfied. After she fully received her monetary claims, their is no
longer any basis for compensatory damages or undue injury, their being nothing more to
compensate.
Complainant's testimony regarding her family's financial stress was inadequate and
largely speculative. Without giving specific details, she made only vague references to
the fact that her four children were all going to school and that she was the breadwinner
in the family. She, however, did not say that she was unable to pay their tuition fees and
the specific damage brought by such nonpayment. The fact that the "injury" to her
family was unspecified or unquantified does not satisfy the element of undue injury, as

82
akin to actual damages. As in civil cases, actual damages, if not supported by
evidence on record, cannot be considered.20
Other than the amount of the withheld salaries and allowances which were eventually
received, the prosecution failed to specify and to prove any other loss or damage
sustained by the complainant. Respondent Court insists that complainant suffered by
reason of the "long period of time" that her emoluments were withheld.
This inconvenience, however, is not constitutive of undue injury. In Jacinto, this Court
held that the injury suffered by the complaining witness, whose salary was eventually
released and whose position was restored in the plantilla, was negligible; undue injury
entails damages that are more than necessary or are excessive, improper or illegal.21 In
Alejandro, the Court held that the hospital employees were not caused undue injury, as
they were in fact paid their salaries.22
Second Issue:

No Evident Bad Faith

In the challenged Decision, Respondent Court found evident bad faith on the part of the
petitioner, holding that, without any valid of justifiable reason, accused withheld the
payment of complainant's salaries and other benefits for almost two (2) years,
demonstrating a clear manifestation of bad faith.23 It then brushed aside the petitioner's
defenses that complainant failed to submit money and property clearances for her
vouchers, and that an appropriation by the Sangguniang Bayan was required before
complainant's vouchers could be approved. It said:24
Secondly, his reliance on the failure of complainant to submit the clearances which were
allegedly necessary for the approval of vouchers is futile in the light of the foregoing
circumstances:
xxx

xxx

xxx

b.
The evidence on record shows that complainant's salaries for the period from
January to November 1991 (included as subject matter in the mandamus case) were duly
paid, as confirmed in the Sheriff's Return dated November 19, 1991 (Exh. "D"). This
means that accused, even without the necessary clearance, could have acted upon or
approved complainant's disbursement vouchers if he wanted to.
c.
It may be true that a clearance is an indispensable requirement before
complainant will be paid of her claims, but accused could not just hide behind the cloak
of the clearance requirement in order to exculpate himself from liability. As the approving
officer, it was his duty to direct complainant to submit the same. Moreover, accused
could not just set aside the obligation he voluntarily imposed upon himself when he
entered into a compromise agreement binding himself to sign complainant's vouchers
without any qualification as to the clearance requirement. Perforce, he could have seen
to it that complainant secured the same in order that he could comply with the said
obligation.
xxx

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xxx

83
Fourthly, accused's contention that the delay in the release of complainant's claim
could not be attributed to him because the vouchers were only submitted to him for his
signature on December 24-27, 1992; that the approval of the budget
appropriations/resolutions depends on the Sangguniang Bayan, Budget Officer and the
Sangguniang Panlalawigan, is unavailing.
As revealed in the alleged newly discovered evidence themselves, particularly . . . SB
Res. No. 202 and Appropriation Ordinance No. 035, both dated May 21, 1990 (Exh. "5-a"Motion), the Sangguniang Bayan appropriated a budget of P5M in the General Fund for
calendar year 1991 [the Budget Officer does not approve the budget but assists the
Municipal Mayor and the Sangguniang Bayan in the preparation of the budget (Sec. 475,
Local Government Code of 1991)]. Complainant's claims consisted of her salaries and
other benefits for 1990 and 1991 which were classified as Current Operating
Expenditures chargeable against the General Fund. It is undisputed that she was holding
her position as Assistant Municipal Treasurer in a permanent capacity (her position was
also designated Assistant Department Head), which was included in the plantilla for
calender years 1990 and 1991 (Exhs. "4-a" & "4-b", Motion). In Program Appropriation
and Obligation by Object (Exhs. "4-c" & "4-c", Motion), appropriations were made for
current operating expenditures to which complainant's claims properly appertained. . . .
Verily, complainant's claims were covered by appropriations duly approved by the
officials concerned, signifying that adequate funds were available for the purpose. In
fact, even complainant's claims for her 13th month pay, cash gift and clothing allowance,
subject matter of Disbursement Voucher marked Exhibit "J" which would need a
supplemental budget was covered by "Supplemental Budget No. 5 for CY 1990 duly
approved by the authorities concerned" as shown in the voucher itself. This means that
the said claim was already obligated (funds were already reserved for it) as of calendar
year 1990. . . . It is clear, then, that as regards availability of funds, there was no
obstacle for the release of all the complainant's claims.
The Court disagrees. Respondent Court cannot shift the blame on the petitioner, when it
was the complainant who failed to submit the required clearance. This requirement,
which the complainant disregarded, was even printed at the back of the very vouchers
sought to be approved. As assistant municipal treasurer, she ought to know that this is a
condition for the payment of her claims. This clearance is required by Article 443 of the
Implementing Rules and Regulations of the Local Government Code of 1991:
Art. 443.
Property Clearances When an employee transfers to another government
office, retires, resigns, is dismissed, or is separated from the service, he shall be required
to secure supplies or property clearance from the supply officer concerned, the provincial
or city general services officer concerned, the municipal mayor and the municipal
treasurer, or the punong barangay and the barangay treasurer, as the case may be. The
local chief executive shall prescribe the property clearance form for this purpose.
For her own failure to submit the required clearance, complainant is not entirely
blameless for the delay in the approval of her claims.
Also, given the lack of corresponding appropriation ordinance and certification of
availability of funds for such purpose, petitioner had the duty not to sign the vouchers.
As chief executive of the municipality, Llorente could not have approved the voucher for
the payment of complainant's salaries under Sec. 344, Local Government Code of

84
1991.25 Also, Appropriation Ordinance No. 02026 adding a supplemental budget for
calendar year 1990 was approved on April 10, 1989, or almost a year before complainant
was transferred back to Sindangan. Hence, she could not have been included therein. SB
Resolution No. 202 and Appropriation Ordinance No. 035,27 which fixed the municipal
budget for calendar year 1991, was passed only on May 21, 1990, or almost another
year after the transfer took effect. The petitioner's failure to approve the complainant's
vouchers was therefore due to some legal obstacles,28 and not entirely without reason.
Thus, evident bad faith cannot be completely imputed to him.
Bad faith does not simply connote bad judgment or negligence; it imputes a dishonest
purpose or some moral obliquity and conscious doing of a wrong; a breach of sworn duty
through some motive or intent or ill will; it partakes of the nature of fraud. (Spiegel v.
Beacon Participations, 8 NE 2nd Series, 895, 1007). It contemplates a state of mind
affirmatively operating with furtive design or some motive of self interest or ill will for
ulterior purposes (Air France v. Carrascoso, 18 SCRA 155, 166-167). Evident bad faith
connotes a manifest deliberate intent on the part of the accused to do wrong or cause
damage.29
In Jacinto, evident bad faith was not appreciated because the actions taken by the
accused were not entirely without rhyme or reason; he refused to release the
complainant's salary because the latter failed to submit her daily time record; he refused
to approve her sick-leave application because he found out that she did not suffer any
illness; and he removed her name from the plantilla because she was moonlighting
during office hours. Such actions were measures taken by a superior against an erring
employee who studiously ignored, if not defied, his authority.30
In Alejandro, evident bad faith was ruled out, because the accused gave his approval to
the questioned disbursement after relying on the certification of the bookkeeper on the
availability of funds for such disbursement.31
Third Issue: Interpretation of Causing
The Court does not completely agree with petitioner's assertion that the imputed act
does not fall under Sec. 3[e] which, according to him, requires a positive act a
malfeasance or misfeasance. Causing means "to be the cause or occasion of, the effect
as an agent, to bring into existence, to make or to induce, to compel."32 Causing is,
therefore, not limited to positive acts only. Even passive acts or inaction may cause
undue injury. What is essential is that undue injury, which is quantifiable and
demonstrable, results from the questioned official act or inaction.
In this case, the prosecution accused petitioner of failing or refusing to pay complainant's
salaries on time, while Respondent Court convicted him of unduly delaying the payment
of complainant's claims. As already explained, both acts did not, however, legally result
in "undue injury" or in "giving any unwarranted benefits, advantage or preference in the
discharge of his official, [or] administrative . . . functions." Thus, these acts are not
punishable under Sec. 3[e].
It would appear that petitioner's failure or refusal to act on the complainant's vouchers,
or the delay in his acting on them more properly falls under Sec. 3[f]:

85
(f)
Neglecting or refusing, after due demand or request, without sufficient
justification, to act within a reasonable time on any matter pending before him for the
purpose of obtaining, directly or indirectly, from any person interested in the matter
some pecuniary or material benefit or advantage, or for purpose of favoring his own
interest or giving undue advantage in favor of or discriminating against any other
interested party.
Here, the neglect or refusal to act within a reasonable time is the criminal act, not the
causing of undue injury. Thus, its elements are:
1)

The offender is a public officer;

2)
Said officer has neglected or has refused to act without sufficient justification after
due demand or request has been made on him;
3)
Reasonable time has elapsed from such demand or request without the public
officer having acted on the matter pending before him; and
4)
Such failure to so act is "for the purpose of obtaining, directly or indirectly, from
any person interested in the matter some pecuniary or material benefit or advantage in
favor of an interested party, or discriminating against another.33
However, petitioner is not charged with a violation of Sec. 3[f]. Hence, further
disquisition is not proper. Neither may this Court convict petitioner under Sec. 3[f]
without violating his constitutional right to due process.
WHEREFORE, the petition is hereby GRANTED. Petitioner is ACQUITTED of violating
Section 3[e] of R.A. 3019, as amended. No costs.
SO ORDERED.
Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.

86
[G.R. No. 141910. August 6, 2002]
FGU INSURANCE CORPORATION, petitioner, vs. G.P. SARMIENTO TRUCKING CORPORATION
and LAMBERT M. EROLES, respondents.
DECISION
VITUG, J.:
G.P. Sarmiento Trucking Corporation (GPS) undertook to deliver on 18 June 1994 thirty
(30) units of Condura S.D. white refrigerators aboard one of its Isuzu truck, driven by
Lambert Eroles, from the plant site of Concepcion Industries, Inc., along South
Superhighway in Alabang, Metro Manila, to the Central Luzon Appliances in Dagupan City.
While the truck was traversing the north diversion road along McArthur highway in
Barangay Anupol, Bamban, Tarlac, it collided with an unidentified truck, causing it to fall
into a deep canal, resulting in damage to the cargoes.
FGU Insurance Corporation (FGU), an insurer of the shipment, paid to Concepcion
Industries, Inc., the value of the covered cargoes in the sum of P204,450.00. FGU, in
turn, being the subrogee of the rights and interests of Concepcion Industries, Inc., sought
reimbursement of the amount it had paid to the latter from GPS. Since the trucking
company failed to heed the claim, FGU filed a complaint for damages and breach of
contract of carriage against GPS and its driver Lambert Eroles with the Regional Trial
Court, Branch 66, of Makati City. In its answer, respondents asserted that GPS was the
exclusive hauler only of Concepcion Industries, Inc., since 1988, and it was not so
engaged in business as a common carrier. Respondents further claimed that the cause of
damage was purely accidental.
The issues having thus been joined, FGU presented its evidence, establishing the extent
of damage to the cargoes and the amount it had paid to the assured. GPS, instead of
submitting its evidence, filed with leave of court a motion to dismiss the complaint by
way of demurrer to evidence on the ground that petitioner had failed to prove that it was
a common carrier.
The trial court, in its order of 30 April 1996,[1] granted the motion to dismiss, explaining
thusly:
Under Section 1 of Rule 131 of the Rules of Court, it is provided that Each party must
prove his own affirmative allegation, xxx.
In the instant case, plaintiff did not present any single evidence that would prove that
defendant is a common carrier.
xxxxxxxxx
Accordingly, the application of the law on common carriers is not warranted and the
presumption of fault or negligence on the part of a common carrier in case of loss,
damage or deterioration of goods during transport under 1735 of the Civil Code is not
availing.

87
Thus, the laws governing the contract between the owner of the cargo to whom the
plaintiff was subrogated and the owner of the vehicle which transports the cargo are the
laws on obligation and contract of the Civil Code as well as the law on quasi delicts.
Under the law on obligation and contract, negligence or fault is not presumed. The law
on quasi delict provides for some presumption of negligence but only upon the
attendance of some circumstances. Thus, Article 2185 provides:
Art. 2185. Unless there is proof to the contrary, it is presumed that a person driving a
motor vehicle has been negligent if at the time of the mishap, he was violating any
traffic regulation.
Evidence for the plaintiff shows no proof that defendant was violating any traffic
regulation. Hence, the presumption of negligence is not obtaining.
Considering that plaintiff failed to adduce evidence that defendant is a common carrier
and defendants driver was the one negligent, defendant cannot be made liable for the
damages of the subject cargoes.[2]
The subsequent motion for reconsideration having been denied,[3] plaintiff interposed an
appeal to the Court of Appeals, contending that the trial court had erred (a) in holding
that the appellee corporation was not a common carrier defined under the law and
existing jurisprudence; and (b) in dismissing the complaint on a demurrer to evidence.
The Court of Appeals rejected the appeal of petitioner and ruled in favor of GPS. The
appellate court, in its decision of 10 June 1999, [4] discoursed, among other things, that "x x x in order for the presumption of negligence provided for under the law governing
common carrier (Article 1735, Civil Code) to arise, the appellant must first prove that the
appellee is a common carrier. Should the appellant fail to prove that the appellee is a
common carrier, the presumption would not arise; consequently, the appellant would
have to prove that the carrier was negligent.
"x x x x x x x x x
"Because it is the appellant who insists that the appellees can still be considered as a
common carrier, despite its `limited clientele, (assuming it was really a common carrier),
it follows that it (appellant) has the burden of proving the same. It (plaintiff-appellant)
`must establish his case by a preponderance of evidence, which means that the
evidence as a whole adduced by one side is superior to that of the other. (Summa
Insurance Corporation vs. Court of Appeals, 243 SCRA 175). This, unfortunately, the
appellant failed to do -- hence, the dismissal of the plaintiffs complaint by the trial court
is justified.
"x x x x x x x x x
"Based on the foregoing disquisitions and considering the circumstances that the
appellee trucking corporation has been `its exclusive contractor, hauler since 1970,
defendant has no choice but to comply with the directive of its principal, the inevitable
conclusion is that the appellee is a private carrier.

88
"x x x x x x x x x
"x x x the lower court correctly ruled that 'the application of the law on common carriers
is not warranted and the presumption of fault or negligence on the part of a common
carrier in case of loss, damage or deterioration of good[s] during transport under [article]
1735 of the Civil Code is not availing.' x x x.
"Finally, We advert to the long established rule that conclusions and findings of fact of a
trial court are entitled to great weight on appeal and should not be disturbed unless for
strong and valid reasons."[5]
Petitioner's motion for reconsideration was likewise denied;[6] hence, the instant
petition,[7] raising the following issues:
I
WHETHER RESPONDENT GPS MAY BE CONSIDERED AS A COMMON CARRIER AS DEFINED
UNDER THE LAW AND EXISTING JURISPRUDENCE.
II
WHETHER RESPONDENT GPS, EITHER AS A COMMON CARRIER OR A PRIVATE CARRIER,
MAY BE PRESUMED TO HAVE BEEN NEGLIGENT WHEN THE GOODS IT UNDERTOOK TO
TRANSPORT SAFELY WERE SUBSEQUENTLY DAMAGED WHILE IN ITS PROTECTIVE
CUSTODY AND POSSESSION.
III
WHETHER THE DOCTRINE OF RES IPSA LOQUITUR IS APPLICABLE IN THE INSTANT CASE.
On the first issue, the Court finds the conclusion of the trial court and the Court of
Appeals to be amply justified. GPS, being an exclusive contractor and hauler of
Concepcion Industries, Inc., rendering or offering its services to no other individual or
entity, cannot be considered a common carrier. Common carriers are persons,
corporations, firms or associations engaged in the business of carrying or transporting
passengers or goods or both, by land, water, or air, for hire or compensation, offering
their services to the public,[8] whether to the public in general or to a limited clientele in
particular, but never on an exclusive basis.[9] The true test of a common carrier is the
carriage of passengers or goods, providing space for those who opt to avail themselves
of its transportation service for a fee.[10] Given accepted standards, GPS scarcely falls
within the term common carrier.
The above conclusion nothwithstanding, GPS cannot escape from liability.
In culpa contractual, upon which the action of petitioner rests as being the subrogee of
Concepcion Industries, Inc., the mere proof of the existence of the contract and the
failure of its compliance justify, prima facie, a corresponding right of relief.[11] The law,
recognizing the obligatory force of contracts,[12] will not permit a party to be set free
from liability for any kind of misperformance of the contractual undertaking or a

89
contravention of the tenor thereof.[13] A breach upon the contract confers upon the
injured party a valid cause for recovering that which may have been lost or suffered. The
remedy serves to preserve the interests of the promisee that may include his
expectation interest, which is his interest in having the benefit of his bargain by being
put in as good a position as he would have been in had the contract been performed, or
his reliance interest, which is his interest in being reimbursed for loss caused by reliance
on the contract by being put in as good a position as he would have been in had the
contract not been made; or his restitution interest, which is his interest in having
restored to him any benefit that he has conferred on the other party.[14] Indeed,
agreements can accomplish little, either for their makers or for society, unless they are
made the basis for action.[15] The effect of every infraction is to create a new duty, that
is, to make recompense to the one who has been injured by the failure of another to
observe his contractual obligation[16] unless he can show extenuating circumstances,
like proof of his exercise of due diligence (normally that of the diligence of a good father
of a family or, exceptionally by stipulation or by law such as in the case of common
carriers, that of extraordinary diligence) or of the attendance of fortuitous event, to
excuse him from his ensuing liability.
Respondent trucking corporation recognizes the existence of a contract of carriage
between it and petitioners assured, and admits that the cargoes it has assumed to
deliver have been lost or damaged while in its custody. In such a situation, a default on,
or failure of compliance with, the obligation in this case, the delivery of the goods in its
custody to the place of destination - gives rise to a presumption of lack of care and
corresponding liability on the part of the contractual obligor the burden being on him to
establish otherwise. GPS has failed to do so.
Respondent driver, on the other hand, without concrete proof of his negligence or fault,
may not himself be ordered to pay petitioner. The driver, not being a party to the
contract of carriage between petitioners principal and defendant, may not be held liable
under the agreement. A contract can only bind the parties who have entered into it or
their successors who have assumed their personality or their juridical position.[17]
Consonantly with the axiom res inter alios acta aliis neque nocet prodest, such contract
can neither favor nor prejudice a third person. Petitioners civil action against the driver
can only be based on culpa aquiliana, which, unlike culpa contractual, would require the
claimant for damages to prove negligence or fault on the part of the defendant.[18]
A word in passing. Res ipsa loquitur, a doctrine being invoked by petitioner, holds a
defendant liable where the thing which caused the injury complained of is shown to be
under the latters management and the accident is such that, in the ordinary course of
things, cannot be expected to happen if those who have its management or control use
proper care. It affords reasonable evidence, in the absence of explanation by the
defendant, that the accident arose from want of care.[19] It is not a rule of substantive
law and, as such, it does not create an independent ground of liability. Instead, it is
regarded as a mode of proof, or a mere procedural convenience since it furnishes a
substitute for, and relieves the plaintiff of, the burden of producing specific proof of
negligence. The maxim simply places on the defendant the burden of going forward with
the proof.[20] Resort to the doctrine, however, may be allowed only when (a) the event is
of a kind which does not ordinarily occur in the absence of negligence; (b) other
responsible causes, including the conduct of the plaintiff and third persons, are
sufficiently eliminated by the evidence; and (c) the indicated negligence is within the

90
scope of the defendant's duty to the plaintiff.[21] Thus, it is not applicable when an
unexplained accident may be attributable to one of several causes, for some of which
the defendant could not be responsible.[22]
Res ipsa loquitur generally finds relevance whether or not a contractual relationship
exists between the plaintiff and the defendant, for the inference of negligence arises
from the circumstances and nature of the occurrence and not from the nature of the
relation of the parties.[23] Nevertheless, the requirement that responsible causes other
than those due to defendants conduct must first be eliminated, for the doctrine to apply,
should be understood as being confined only to cases of pure (non-contractual) tort since
obviously the presumption of negligence in culpa contractual, as previously so pointed
out, immediately attaches by a failure of the covenant or its tenor. In the case of the
truck driver, whose liability in a civil action is predicated on culpa acquiliana, while he
admittedly can be said to have been in control and management of the vehicle which
figured in the accident, it is not equally shown, however, that the accident could have
been exclusively due to his negligence, a matter that can allow, forthwith, res ipsa
loquitur to work against him.
If a demurrer to evidence is granted but on appeal the order of dismissal is reversed, the
movant shall be deemed to have waived the right to present evidence.[24] Thus,
respondent corporation may no longer offer proof to establish that it has exercised due
care in transporting the cargoes of the assured so as to still warrant a remand of the
case to the trial court.
WHEREFORE, the order, dated 30 April 1996, of the Regional Trial Court, Branch 66, of
Makati City, and the decision, dated 10 June 1999, of the Court of Appeals, are AFFIRMED
only insofar as respondent Lambert M. Eroles is concerned, but said assailed order of the
trial court and decision of the appellate court are REVERSED as regards G.P. Sarmiento
Trucking Corporation which, instead, is hereby ordered to pay FGU Insurance Corporation
the value of the damaged and lost cargoes in the amount of P204,450.00. No costs.
SO ORDERED.