This will confirm that Pure Foods Corporation has awarded to your
firm the project: Supply and Installation of two (2) units of 1500
SECOND DIVISION
[G.R. No. 128066. June 19, 2000]
JARDINE DAVIES INC., petitioner, vs. COURT OF APPEALS and FAR EAST
MILLS SUPPLY CORPORATION, respondents.
[G.R. No. 128069 June 19, 2000]
PURE FOODS CORPORATION, petitioner, vs. COURT OF APPEALS and FAR
EAST MILLS SUPPLY CORPORATION, respondents.
DECISION
BELLOSILLO, J.:
This is rather a simple case for specific performance with damages which could have
been resolved through mediation and conciliation during its infancy stage had the
parties been earnest in expediting the disposal of this case. They opted however to
resort to full court proceedings and denied themselves the benefits of alternative
dispute resolution, thus making the process more arduous and long-drawn.
The controversy started in 1992 at the height of the power crisis which the country
was then experiencing. To remedy and curtail further losses due to the series of
power failures, petitioner PURE FOODS CORPORATION (hereafter PUREFOODS)
decided to install two (2) 1500 KW generators in its food processing plant in San
Roque, Marikina City.
Sometime in November 1992 a bidding for the supply and installation of the
generators was held. Several suppliers and dealers were invited to attend a pre-
bidding conference to discuss the conditions, propose scheme and specifications that
would best suit the needs of PUREFOODS. Out of the eight (8) prospective bidders
who attended the pre-bidding conference, only three (3) bidders, namely, respondent
FAR EAST MILLS SUPPLY CORPORATION (hereafter FEMSCO), MONARK and
ADVANCE POWER submitted bid proposals and gave bid bonds equivalent to 5% of
their respective bids, as required.
Thereafter, in a letter dated 12 December 1992 addressed to FEMSCO President
Alfonso Po, PUREFOODS confirmed the award of the contract to FEMSCO -
Gentlemen:
KW/unit Generator Sets at the Processed Meats Plant, Bo. San
Roque, Marikina, based on your proposal number PC 28-92 dated
November 20, 1992, subject to the following basic terms and
conditions:
1. Lump sum contract of P6,137,293.00 (VAT included), for the
supply of materials and labor for the local portion and the labor for
the imported materials, payable by progress billing twice a month,
with ten percent (10%) retention. The retained amount shall be
released thirty (30) days after acceptance of the completed project
and upon posting of Guarantee Bond in an amount equivalent to
twenty percent (20%) of the contract price. The Guarantee Bond
shall be valid for one (1) year from completion and acceptance of
project. The contract price includes future increase/s in costs of
materials and labor;
2. The project shall be undertaken pursuant to the attached
specifications. It is understood that any item required to complete
the project, and those not included in the list of items shall be
deemed included and covered and shall be performed;
3. All materials shall be brand new;
4. The project shall commence immediately and must be completed
within twenty (20) working days after the delivery of Generator Set
to Marikina Plant, penalty equivalent to 1/10 of 1% of the purchase
price for every day of delay;
5. The Contractor shall put up Performance Bond equivalent to
thirty (30%) of the contract price, and shall procure All Risk
Insurance equivalent to the contract price upon commencement of
the project. The All Risk Insurance Policy shall be endorsed in favor
of and shall be delivered to Pure Foods Corporation;
6. Warranty of one (1) year against defective material and/or
workmanship.
Once finalized, we shall ask you to sign the formal contract
embodying the foregoing terms and conditions.
Immediately, FEMSCO submitted the required performance bond in the amount
of P1,841,187.90 and contractors all-risk insurance policy in the amount
of P6,137,293.00 which PUREFOODS through its Vice President Benedicto G. Tope
acknowledged in a letter dated 18 December 1992. FEMSCO also made
arrangements with its principal and started the PUREFOODS project by purchasing
the necessary materials. PUREFOODS on the other hand returned FEMSCOs
Bidders Bond in the amount of P1,000,000.00, as requested.
Later, however, in a letter dated 22 December 1992, PUREFOODS through its Senior
Vice President Teodoro L. Dimayuga unilaterally canceled the award as "significant
factors were uncovered and brought to (their) attention which dictate (the)
cancellation and warrant a total review and re-bid of (the) project." Consequently,
FEMSCO protested the cancellation of the award and sought a meeting with
PUREFOODS. However, on 26 March 1993, before the matter could be resolved,
PUREFOODS already awarded the project and entered into a contract with JARDINE
NELL, a division of Jardine Davies, Inc. (hereafter JARDINE), which incidentally was
not one of the bidders.
FEMSCO thus wrote PUREFOODS to honor its contract with the former, and to
JARDINE to cease and desist from delivering and installing the two (2) generators at
PUREFOODS. Its demand letters unheeded, FEMSCO sued both PUREFOODS and
JARDINE: PUREFOODS for reneging on its contract, and JARDINE for its
unwarranted interference and inducement. Trial ensued. After FEMSCO presented its
evidence, JARDINE filed a Demurrer to Evidence.
On 27 June 1994 the Regional Trial Court of Pasig, Br. 68,[1] granted
JARDINEs Demurrer to Evidence. The trial court concluded that "[w]hile it may seem
to the plaintiff that by the actions of the two defendants there is something
underhanded going on, this is all a matter of perception, and unsupported by hard
evidence, mere suspicions and suppositions would not stand up very well in a court of
law."[2] Meanwhile trial proceeded as regards the case against PUREFOODS.
On 28 July 1994 the trial court rendered a decision ordering PUREFOODS: (a) to
indemnify FEMSCO the sum of P2,300,000.00 representing the value of engineering
services it rendered; (b) to pay FEMSCO the sum of US$14,000.00 or its peso
equivalent, and P900,000.00 representing contractor's mark-up on installation work,
considering that it would be impossible to compel PUREFOODS to honor, perform
and fulfill its contractual obligations in view of PUREFOOD's contract with JARDINE
and noting that construction had already started thereon; (c) to pay attorneys fees in
an amount equivalent to 20% of the total amount due; and, (d) to pay the costs. The
trial court dismissed the counterclaim filed by PUREFOODS for lack of factual and
legal basis.
Both FEMSCO and PUREFOODS appealed to the Court of Appeals. FEMSCO
appealed the 27 June 1994 Resolution of the trial court which granted the Demurrer
to Evidence filed by JARDINE resulting in the dismissal of the complaint against it,
while PUREFOODS appealed the 28 July 1994 Decision of the same court which
ordered it to pay FEMSCO.
On 14 August 1996 the Court of Appeals affirmed in toto the 28 July 1994 Decision of
the trial court.[3] It also reversed the 27 June 1994 Resolution of the lower court and
ordered JARDINE to pay FEMSCO damages for inducing PUREFOODS to violate the
latters contract with FEMSCO. As such, JARDINE was ordered to pay
FEMSCO P2,000,000.00 for moral damages. In addition, PUREFOODS was also
directed to pay FEMSCO P2,000,000.00 as moral damages and P1,000,000.00 as
exemplary damages as well as 20% of the total amount due as attorney's fees.
On 31 January 1997 the Court of Appeals denied for lack of merit the separate
motions for reconsideration filed by PUREFOODS and JARDINE. Hence, these two
(2) petitions for review filed by PUREFOODS and JARDINE which were subsequently
consolidated.
PUREFOODS maintains that the conclusions of both the trial court and the appellate
court are premised on a misapprehension of facts. It argues that its 12 December
1992 letter to FEMSCO was not an acceptance of the latter's bid proposal and award
of the project but more of a qualified acceptance constituting a counter-offer which
required FEMSCO's express conforme. Since PUREFOODS never received
FEMSCOs conforme,PUREFOODS was very well within reason to revoke its qualified
acceptance or counter-offer. Hence, no contract was perfected between
PUREFOODS and FEMSCO. PUREFOODS also contends that it was never in bad
faith when it dealt with FEMSCO. Hence moral and exemplary damages should not
have been awarded.
Corollarily, JARDINE asserts that the records are bereft of any showing that it had
prior knowledge of the supposed contract between PUREFOODS and FEMSCO, and
that it induced PUREFOODS to violate the latters alleged contract with FEMSCO.
Moreover, JARDINE reasons that FEMSCO, an artificial person, is not entitled to
moral damages. But granting arguendo that the award of moral damages is
proper, P2,000,000.00 is extremely excessive.
In the main, these consolidated cases present two (2) issues: first, whether there
existed a perfected contract between PUREFOODS and FEMSCO; and second,
granting there existed a perfected contract, whether there is any showing that
JARDINE induced or connived with PUREFOODS to violate the latter's contract with
FEMSCO.
A contract is defined as "a juridical convention manifested in legal form, by virtue of
which one or more persons bind themselves in favor of another or others, or
reciprocally, to the fulfillment of a prestation to give, to do, or not to do." [4] There can
be no contract unless the following requisites concur: (a) consent of the contracting
parties; (b) object certain which is the subject matter of the contract; and, (c) cause of
the obligation which is established.[5] A contract binds both contracting parties and
has the force of law between them.
Contracts are perfected by mere consent, upon the acceptance by the offeree of the
offer made by the offeror. From that moment, the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the consequences
which, according to their nature, may be in keeping with good faith, usage and
law.[6] To produce a contract, the acceptance must not qualify the terms of the offer.
However, the acceptance may be express or implied.[7] For a contract to arise, the
acceptance must be made known to the offeror. Accordingly, the acceptance can be
withdrawn or revoked before it is made known to the offeror.
In the instant case, there is no issue as regards the subject matter of the contract and
the cause of the obligation. The controversy lies in the consent - whether there was
an acceptance of the offer, and if so, if it was communicated, thereby perfecting the
contract.
To resolve the dispute, there is a need to determine what constituted the offer and the
acceptance. Since petitioner PUREFOODS started the process of entering into the
contract by conducting a bidding, Art. 1326 of the Civil Code, which provides that
"[a]dvertisements for bidders are simply invitations to make proposals," applies.
Accordingly, the Terms and Conditions of the Bidding disseminated by petitioner
PUREFOODS constitutes the "advertisement" to bid on the project. The bid proposals
or quotations submitted by the prospective suppliers including respondent FEMSCO,
are the offers. And, the reply of petitioner PUREFOODS, the acceptance or rejection
of the respective offers.
Quite obviously, the 12 December 1992 letter of petitioner PUREFOODS to FEMSCO
constituted acceptance of respondent FEMSCOs offer as contemplated by law. The
tenor of the letter, i.e., "This will confirm that Pure Foods has awarded to your firm
(FEMSCO) the project," could not be more categorical. While the same letter
enumerated certain "basic terms and conditions," these conditions were imposed on
the performance of the obligation rather than on the perfection of the contract. Thus,
the first "condition" was merely a reiteration of the contract price and billing scheme
based on the Terms and Conditions of Bidding and the bid or previous offer of
respondent FEMSCO. The second and third "conditions" were nothing more than
general statements that all items and materials including those excluded in the list but
necessary to complete the project shall be deemed included and should be brand
new. The fourth "condition" concerned the completion of the work to be done, i.e.,
within twenty (20) days from the delivery of the generator set, the purchase of which
was part of the contract. The fifth "condition" had to do with the putting up of a
performance bond and an all-risk insurance, both of which should be given upon
commencement of the project. The sixth "condition" related to the standard warranty
of one (1) year. In fine, the enumerated "basic terms and conditions" were
prescriptions on how the obligation was to be performed and implemented. They were
far from being conditions imposed on the perfection of the contract.
In Babasa v. Court of Appeals[8] we distinguished between a condition imposed on the
perfection of a contract and a condition imposed merely on the performance of an
obligation. While failure to comply with the first condition results in the failure of a
contract, failure to comply with the second merely gives the other party options and/or
remedies to protect his interests.
We thus agree with the conclusion of respondent appellate court which affirmed the
trial court -
As can be inferred from the actual phrase used in the first portion of
the letter, the decision to award the contract has already been
made. The letter only serves as a confirmation of such decision.
Hence, to the Courts mind, there is already an acceptance made of
the offer received by Purefoods. Notwithstanding the terms and
conditions enumerated therein, the offer has been accepted and/or
amplified the details of the terms and conditions contained in the
Terms and Conditions of Bidding given out by Purefoods to
prospective bidders.[9]
But even granting arguendo that the 12 December 1992 letter of petitioner
PUREFOODS constituted a "conditional counter-offer," respondent FEMCO's
submission of the performance bond and contractor's all-risk insurance was an
implied acceptance, if not a clear indication of its acquiescence to, the "conditional
counter-offer," which expressly stated that the performance bond and the contractor's
all-risk insurance should be given upon the commencement of the contract.
Corollarily, the acknowledgment thereof by petitioner PUREFOODS, not to mention
its return of FEMSCO's bidder's bond, was a concrete manifestation of its knowledge
that respondent FEMSCO indeed consented to the "conditional counter-offer." After
all, as earlier adverted to, an acceptance may either be express or implied,[10] and this
can be inferred from the contemporaneous and subsequent acts of the contracting
parties.
Accordingly, for all intents and purposes, the contract at that point has been
perfected, and respondent FEMSCO's conforme would only be a mere surplusage.
The discussion of the price of the project two (2) months after the 12 December 1992
letter can be deemed as nothing more than a pressure being exerted by petitioner
PUREFOODS on respondent FEMSCO to lower the price even after the contract had
been perfected. Indeed from the facts, it can easily be surmised that petitioner
PUREFOODS was haggling for a lower price even after agreeing to the earlier
quotation, and was threatening to unilaterally cancel the contract, which it eventually
did. Petitioner PUREFOODS also makes an issue out of the absence of a purchase
order (PO). Suffice it to say that purchase orders or POs do not make or break a
contract. Thus, even the tenor of the subsequent letter of petitioner
PUREFOODS, i.e., "Pure Foods Corporation is hereby canceling the award to your
company of the project," presupposes that the contract has been perfected. For, there
can be no cancellation if the contract was not perfected in the first place.
Petitioner PUREFOODS also argues that it was never in bad faith. On the contrary, it
believed in good faith that no such contract was perfected. We are not convinced. We
subscribe to the factual findings and conclusions of the trial court which were affirmed
by the appellate court -
Hence, by the unilateral cancellation of the contract, the defendant
(petitioner PURE FOODS) has acted with bad faith and this was
further aggravated by the subsequent inking of a contract between
defendant Purefoods and erstwhile co-defendant Jardine. It is very
evident that Purefoods thought that by the expedient means of
merely writing a letter would automatically cancel or nullify the
existing contract entered into by both parties after a process of
bidding. This, to the Courts mind, is a flagrant violation of the
express provisions of the law and is contrary to fair and just
dealings to which every man is due.[11]
WHEREFORE, judgment is hereby rendered as follows:
(a) The petition in G.R. No. 128066 is GRANTED. The assailed Decision of the Court
of Appeals reversing the 27 June 1994 resolution of the trial court and ordering
petitioner JARDINE DAVIES, INC., to pay private respondent FAR EAST MILLS
SUPPLY CORPORATION P2,000,000.00 as moral damages is REVERSED and SET
ASIDE for insufficiency of evidence; and
(b) The petition in G.R. No. 128069 is DENIED. The assailed Decision of the Court of
Appeals ordering petitioner PURE FOODS CORPORATION to pay private
respondent FAR EAST MILLS SUPPLY CORPORATION the sum of P2,300,000.00
representing the value of engineering services it rendered, US$14,000.00 or its peso
equivalent, and P900,000.00 representing the contractor's mark-up on installation
work, as well as attorney's fees equivalent to twenty percent (20%) of the total
amount due, is AFFIRMED. In addtion, petitioner PURE FOODS CORPORATION is
ordered to pay private respondent FAR EAST MILLS SUPPLY CORPORATION
moral damages in the amount of P1,000,000.00 and exemplary damages in the
amount of P1,000,000.00. Costs against petitioner.
SO ORDERED.

This Court has awarded in the past moral damages to a corporation whose reputation
has been besmirched.[12] In the instant case, respondent FEMSCO has sufficiently
shown that its reputation was tarnished after it immediately ordered equipment from
its suppliers on account of the urgency of the project, only to be canceled later. We
thus sustain respondent appellate court's award of moral damages. We however
reduce the award from P2,000,000.00 to P1,000,000.00, as moral damages are never
intended to enrich the recipient. Likewise, the award of exemplary damages by way of
example for the public good is excessive and should be reduced to P100,000.00.

Petitioner JARDINE maintains on the other hand that respondent appellate court
erred in ordering it to pay moral damages to respondent FEMSCO as it supposedly
induced PUREFOODS to violate the contract with FEMSCO. We agree. While it may
seem that petitioners PUREFOODS and JARDINE connived to deceive respondent
FEMSCO, we find no specific evidence on record to support such perception.
Likewise, there is no showing whatsoever that petitioner JARDINE induced petitioner
PUREFOODS. The similarity in the design submitted to petitioner PUREFOODS by
both petitioner JARDINE and respondent FEMSCO, and the tender of a lower
quotation by petitioner JARDINE are insufficient to show that petitioner JARDINE
indeed induced petitioner PUREFOODS to violate its contract with respondent
FEMSCO.
 Republic of the Philippines

Supreme Court Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court, seeking the reversal and setting aside of the June 19, 2007 Decision1 and the
Manila October 11, 2007 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 79325.
THIRD DIVISION The assailed CA Decision affirmed with modification the Decision3 dated March 21,
2003 of the Regional Trial Court (RTC) of Quezon City, Branch 224, in Civil Case No.
MANILA INTERNATIONAL AIRPORT AUTHORITY, G.R. No. 180168 Q-98-34395, while the CA Resolution denied petitioner's Motion for Reconsideration.
Petitioner,
The factual and procedural antecedents are as follows:
Present:

VELASCO, JR., J., Chairperson,

In September 1990, herein petitioner Manila International Airport Authority (MIAA)
PERALTA,
entered into a contract of lease with herein respondent Avia Filipinas International
ABAD, Corporation (AFIC), wherein MIAA allowed AFIC to use specific portions of land as
versus well as facilities within the Ninoy Aquino International Airport exclusively for the
MENDOZA, and
latter's aircraft repair station and chartering operations. The contract was for one (1)
PERLAS-BERNABE, JJ. year, beginning September 1, 1990 until August 31, 1991, with a monthly rental
of P6,580.00.

Promulgated:

In December 1990, MIAA issued Administrative Order No. 1, Series of 1990, which
AVIA FILIPINAS INTERNATIONAL, INC., February 27, 2012 revised the rates of dues, charges, fees or assessments for the use of its properties,
facilities and services within the airport complex. The Administrative Order was made
Respondent. effective on December 1, 1990. As a consequence, the monthly rentals due from
AFIC was increased to P15,996.50. Nonetheless, MIAA did not require AFIC to pay
the new rental fee. Thus, it continued to pay the original fee of P6,580.00.
x-----------------------------------------------------------------------------------------x

After the expiration of the contract, AFIC continued to use and occupy the leased
premises giving rise to an implied lease contract on a monthly basis. AFIC kept on
paying the original rental fee without protest on the part of MIAA.

DECISION

Three years after the expiration of the original contract of lease, MIAA informed AFIC,
through a billing statement dated October 6, 1994, that the monthly rental over the
subject premises was increased to P15,966.50 beginning September 1, 1991, which
PERALTA, J. is the date immediately following the expiration of the original contract of lease. MIAA
sought recovery of the difference between the increased rental rate and the original
rental fee amounting to a total of P347,300.50 covering thirty-seven (37) months
between September 1, 1991 and September 31, 1994. Beginning October 1994, AFIC
paid the increased rental fee. However, it refused to pay the lump sum
of P347,300.50 sought to be recovered by MIAA. For the continued refusal of AFIC to
pay the said lump sum, its employees were denied access to the leased premises
from July 1, 1997 until March 11, 1998. This, notwithstanding, AFIC continued paying
its rentals. Subsequently, AFIC was granted temporary access to the leased
premises.
AFIC then filed with the RTC of Quezon City a Complaint for damages with injunction
against MIAA and its General Manager seeking uninterrupted access to the leased
premises, recovery of actual and exemplary damages, refund of its monthly rentals
with interest at the time that it was denied access to the area being rented as well as
attorney's fees.
In its Answer with Counterclaim, MIAA contended that under its lease contract with
AFIC, MIAA is allowed to either increase or decrease the monthly rental; AFIC has
rental arrears in the amount of P347,300.50; AFIC was wrong in claiming that MIAA
took the law into its own hands in denying AFIC and its employees access to the
leased premises, because under the lease contract, in case of failure on the part of
AFIC to pay rentals for at least two (2) months, the contract shall become
automatically terminated and canceled without need of judicial action or process and
it shall be lawful for MIAA or any person or persons duly authorized on its behalf to
take possession of the property either by padlocking the premises or posting its
guards to prevent the entry of any person. MIAA prayed for the award of exemplary
damages as well as attorney's fees and litigation expenses.
On March 21, 2003, the RTC rendered its Decision, the dispositive portion of which
reads as follows:
WHEREFORE, in view of the foregoing, judgment is
hereby rendered in favor of the plaintiff [AFIC] and as against the
defendants [MIAA] ordering the latter to pay plaintiff the following:
a) the amount of P2,000,000.00 as actual
damages;
b) the amount of P200,000.00 as exemplary
damages;
c) to refund the monthly rental payments
beginning July 1, 1997 up [to] March 11,
1998 with interest at twelve (12%) percent;
d) the amount of P100,000.00 as attorney's fees;
e) cost of suit.
IT IS SO ORDERED.4
MIAA filed an appeal with the CA contending that the RTC erred in: (1) finding that
MIAA is not entitled to apply the increase in rentals as against AFIC; (2) finding that
MIAA is not entitled to padlock the leased premises or post guards to prevent entry of
AFIC therein; and (3) awarding actual and exemplary damages and attorney's fees.
On June 19, 2007, the CA rendered its assailed Decision, the dispositive portion of
which reads, thus:
WHEREFORE, premises considered, the decision of the Regional
Trial Court of Quezon City in Civil Case No. Q-98-34395 is hereby
AFFIRMED with MODIFICATION. The awards of
actual/compensatory damages and exemplary damages are
deleted. The refund of monthly rental payments from July 1, 1997 to
March 11, 1998 shall earn interest of six percent (6%) per annum
from the date of the filing of the complaint until the finality of this
decision. An interest of twelve percent (12%) per annum shall be
imposed upon any unpaid balance from such finality until the
judgment amount is fully satisfied.
The award of attorney's fees stands.
SO ORDERED.5
MIAA filed a Motion for Reconsideration, but the CA denied it via its Resolution dated
October 11, 2007.
Hence, the present petition for review on certiorari raising the following issues:
WHETHER THE HONORABLE COURT OF APPEALS
CORRECTLY INTERPRETED THE PROVISIONS OF THE LEASE
CONTRACT IN LINE WITH THE PROVISIONS OF THE CIVIL
CODE AND EXISTING JURISPRUDENCE ON CONTRACTS.
WHETHER THE PRINCIPLE OF UNJUST ENRICHMENT IS
APPLICABLE TO THE INSTANT CASE.
WHETHER RESPONDENT IS ENTITLED TO ATTORNEY'S
FEES.6
Petitioner MIAA contends that, as an administrative agency possessed of quasi-
legislative and quasi-judicial powers as provided for in its charter, it is empowered to
make rules and regulations and to levy fees and charges; that its issuance of
Administrative Order No. 1, Series of 1990 is pursuant to the exercise of the
abovementioned powers; that by signing the lease contract, respondent AFIC already
agreed and gave its consent to any further increase in rental rates; as such, the
provisions of the lease contract being cited by the CA which provides that any
amendment, alteration or modification [of the lease contract] shall not be valid and
binding, unless and until made in writing and signed by the parties thereto is deemed
complied with because respondent already consented to having any subsequent
amendments to Administrative Order No. 1 automatically incorporated in the lease
contract; that the above-quoted provisions should not also be interpreted as having
the effect of limiting the authority of MIAA to impose new rental rates in accordance
with its authority under its charter.
Petitioner also argues that it is not guilty of unjust enrichment when it denied
respondent access to the leased premises, because there is nothing unlawful in its
act of imposing sanctions against respondent for the latter's failure to pay the
increased rental.
Lastly, petitioner avers that respondent is not entitled to attorney's fees, considering
that it was not compelled to litigate and incur expenses to protect its interest by
reason of any unjustified act on the part of petitioner. Petitioner reiterates that it was
merely exercising its right as the owner and administrator of the leased property and,
as such, its acts may not be deemed unwarranted.
The petition lacks merit.
Article 1306 of the Civil Code provides that [t]he contracting parties may establish
such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public
policy.
Moreover, Article 1374 of the Civil Code clearly provides that [t]he various stipulations
of a contract shall be interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken jointly. Indeed, in construing a contract, the
provisions thereof should not be read in isolation, but in relation to each other and in
their entirety so as to render them effective, having in mind the intention of the parties
and the purpose to be achieved.7 In other words, the stipulations in a contract and
other contract documents should be interpreted together with the end in view of giving
effect to all.8
In the present case, the Court finds nothing repugnant to law with respect to the
questioned provisions of the contract of lease between petitioner and respondent. It is
true that Article II, Paragraph 2.04 of the Contract of Lease states that
[a]ny subsequent amendment to Administrative Order No. 4, Series of 1982, which
will effect a decrease or escalation of the monthly rental or impose new and additional
fees and charges, including but not limited to government/MIAA circulars, rules and
regulation to this effect, shall be deemed incorporated herein and shall automatically
amend this Contract insofar as the monthly rental is concerned. 9 However, the Court
agrees with the CA that the abovequoted provision of the lease contract should not be
read in isolation. Rather, it should be read together with the provisions of Article VIII,
Paragraph 8.13, which provide that [a]ny amendment, alteration or modification
of th[e] Contract shall not be valid and binding, unless and until made in writing and
signed by the parties thereto.10 It is clear from the foregoing that the intention of the
parties is to subject such amendment to the conformity of both petitioner and
respondent. In the instant case, there is no showing that respondent gave his
acquiescence to the said amendment or modification of the contract.
The situation is different with respect to the payments of the increased rental fee
made by respondent beginning October 1994 because by then the amendment to the
contract was made in writing through a bill sent by petitioner to respondent. 11 The fact
that respondent subsequently settled the said bill proves that he acceded to the
increase in rental fee. The same may not be said with respect to the questioned rental
fees sought to be recovered by petitioner between September 1991 and September
1994 because no bill was made and forwarded to respondent on the basis of which it
could have given or withheld its conformity thereto.
It may not be amiss to point out that during the abovementioned period, respondent
continued to pay and petitioner kept on receiving the original rental fee
of P6,580.00 without any reservations or protests from the latter.12 Neither did
petitioner indicate in the official receipts it issued that the payments made by
respondent constitute only partial fulfillment of the latter's obligations. Article 1235 of
the Civil Code clearly states that [w]hen the obligee accepts the performance knowing
its incompleteness or irregularity, and without expressing any protest or objection, the
obligation is deemed fully complied with. For failing to make any protest or objection,
petitioner is already estopped from seeking recovery of the amount claimed.
Anent the second issue, since it has been established that petitioner has no legal
basis in requiring respondent to pay additional rental fees from September 1, 1991 to
September 30, 1994, it, thus, follows that petitioner's act of denying respondent and
its employees access to the leased premises from July 1, 1997 until March 11, 1998,
by reason of respondent's non-payment of the said additional fees, is likewise
unjustified.
Under Paragraph 3, Article 1654 of the Civil Code, the lessor is obliged [t]o maintain
the lessee in the peaceful and adequate enjoyment of the lease for the entire duration
of the contract.
Moreover, Article 1658 of the same Code provides that [t]he lessee may suspend the
payment of the rent in case the lessor fails to make the necessary repairs or to
maintain the lessee in peaceful and adequate enjoyment of the property leased.
Furthermore, as correctly cited by the RTC, Article 19 of the Civil Code provides that
[e]very person must, in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due, and observe honesty and good faith.
Article 22 of the same Code also states that [e]very person who through an act of
performance by another, or any other means, acquires or comes into possession of
something at the expense of the latter without just or legal ground, shall return the
same to him. In accordance with jurisprudence, there is unjust enrichment when a
person unjustly retains a benefit to the loss of another, or when a person retains
money or property of another against the fundamental principles of justice, equity and
good conscience.13 The principle of unjust enrichment essentially contemplates
payment when there is no duty to pay, and the person who receives the payment has
no right to receive it.14
In the instant case, it is clear that petitioner failed to maintain respondent in the
peaceful and adequate enjoyment of the leased premises by unjustifiably preventing
the latter access thereto. Consequently, in accordance with Article 1658 of the Civil
Code, respondent had no duty to make rent payments. Despite that, respondent still
continued to pay the rental fees agreed upon in the original contract. Thus, it would be
the height of inequity and injustice as well as unjust enrichment on the part of
petitioner if the rental fees paid by respondent during the time that it was denied
access to and prevented from using the leased premises be not returned to it.
With respect to attorney's fees, the Court finds no error on the part of the CA in
sustaining such award on the ground that petitioner's act of denying respondent and
its employees access to the leased premises has compelled respondent to litigate
and incur expenses to protect its interest.15 The Court likewise agrees with the CA
that, under the circumstances prevailing in the present case, attorney's fees may be
granted on grounds of justice and equity.16

Finally, the Court deems it proper to reiterate the provisions of Supreme Court
Administrative Circular No. 10-2000 which enjoins all judges of lower courts to
observe utmost caution, prudence and judiciousness in the issuance of writs of
execution to satisfy money judgments against government agencies and local
government units.

WHEREFORE, the petition is DENIED. The June 19, 2007 Decision and
October 11, 2007 Resolution of the Court of Appeals in CA-G.R. CV No. 79325
are AFFIRMED. The Regional Trial Court of Quezon City, Branch 224
is ORDERED to comply with the directives of Supreme Court Administrative Circular
No. 10-2000.

SO ORDERED.

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 176425
HEIRS OF MANUEL UY EK LIONG, represented by BELEN LIM VDA. DE
UY, Petitioners,
vs.
MAURICIA MEER CASTILLO, HEIRS OF BUENAFLOR C. UMALI, represented by
NANCY UMALI, VICTORIA H. CASTILLO, BERTILLA C. RADA, MARIETTA C.
CAVANEZ, LEOVINA C. JALBUENA and PHILIP M. CASTILLO, Respondents.
DECISION
PEREZ, J.:
Assailed in this Petition for Review on Certiorari filed pursuant to Rule 45 of the Rules
of Court is the Decision1dated 23 January 2007 rendered by the Fifteenth Division of
the Court of Appeals in CA-G.R. CV No. 84687,2 the dispositive portion of which
states:
WHEREFORE, premises considered, the assailed January 27, 2005 Decision of the
Regional Trial Court of Lucena City, Branch 59, in Civil Case No. 93-176, is hereby
REVERSED and SET ASIDE and a new one entered declaring the AGREEMENT and
the KASUNDUAN void ab initio for being contrary to law and public policy, without
prejudice to the attorneys filing a proper action for collection of reasonable attorneys
fees based on quantum meruit and without prejudice also to administrative charges
being filed against counsel for counsels openly entering into such an illegal
AGREEMENT in violation of the Canons of Professional Responsibility which action
may be instituted with the Supreme Court which has exclusive jurisdiction to impose
such penalties on members of the bar.
No pronouncement as to costs.
SO ORDERED.3 (Italics and Underscore Ours)
The Facts
Alongside her husband, Felipe Castillo, respondent Mauricia Meer Castillo was the
owner of four parcels of land with an aggregate area of 53,307 square meters,
situated in Silangan Mayao, Lucena City and registered in their names under Transfer
Certificate of Title (TCT) Nos. T-42104, T-32227, T-31752 and T-42103. With the
death of Felipe, a deed of extrajudicial partition over his estate was executed by his
heirs, namely, Mauricia, Buenaflor Umali and respondents Victoria Castillo, Bertilla
Rada, Marietta Cavanez, Leovina Jalbuena and Philip Castillo. Utilized as security for
the payment of a tractor purchased by Mauricias nephew, Santiago Rivera, from
Bormaheco, Inc., it appears, however, that the subject properties were subsequently
sold at a public auction where Insurance Corporation of the Philippines (ICP)
tendered the highest bid. Having consolidated its title, ICP likewise sold said parcels
in favor of Philippine Machinery Parts Manufacturing Co., Inc. (PMPMCI) which, in
turn, caused the same to be titled in its name.4
On 29 September 1976, respondents and Buenaflor instituted Civil Case No. 8085
before the then Court of First Instance (CFI) of Quezon, for the purpose of seeking
the annulment of the transactions and/or proceedings involving the subject parcels, as
well as the TCTs procured by PMPMCI.5 Encountering financial difficulties in the
prosecution of Civil Case No. 8085, respondents and Buenaflor entered into an
Agreement dated 20 September 1978 whereby they procured the legal services of
Atty. Edmundo Zepeda and the assistance of Manuel Uy Ek Liong who, as financier,
agreed to underwrite the litigation expenses entailed by the case. In exchange, it was
stipulated in the notarized Agreement that, in the event of a favorable decision in Civil
Case No. 8085, Atty. Zepeda and Manuel would be entitled to "a share of forty (40%)
percent of all the realties and/or monetary benefits, gratuities or damages" which may
be adjudicated in favor of respondents.6
On the same date, respondents and Buenaflor entered into another notarized
agreement denominated as a Kasunduan whereby they agreed to sell their remaining
sixty (60%) percent share in the subject parcels in favor of Manuel for the sum of
180,000.00. The parties stipulated that Manuel would pay a downpayment in the
sum of 1,000.00 upon the execution of the Kasunduan and that respondents and
Buenaflor would retain and remain the owners of a 1,750-square meter portion of said
real properties. It was likewise agreed that any party violating the Kasunduan would
pay the aggrieved party a penalty fixed in the sum of 50,000.00, together with the
attorneys fees and litigation expenses incurred should a case be subsequently filed in
court. The parties likewise agreed to further enter into such other stipulations as
would be necessary to ensure that the sale would push through and/or in the event of
illegality or impossibility of any part of the Kasunduan. 7
With his death on 19 August 1989,8 Manuel was survived by petitioners, Heirs of
Manuel Uy Ek Liong, who were later represented in the negotiations regarding the
subject parcels and in this suit by petitioner BelenLim Vda. de Uy. The record also
shows that the proceedings in Civil Case No. 8085 culminated in this Courts rendition
of a 13 September 1990 Decision in G.R. No. 895619 in favor of respondents and
Buenaflor.10 Subsequent to the finality of the Courts Decision,11 it appears that the
subject parcels were subdivided in accordance with the Agreement, with sixty (60%)
percent thereof consisting of 31,983 square meters equally apportioned among and
registered in the names of respondents and Buenaflor under TCT Nos. T-72027, T-
72028, T-72029, T-72030, T-72031, T-72032 and T-72033.12 Consisting of 21,324
square meters, the remaining forty (40%) percent was, in turn, registered in the
names of petitioners and Atty. Zepeda under TCT No. T-72026.13
Supposedly acting on the advice of Atty. Zepeda, respondents wrote petitioners a
letter dated 22 March 1993, essentially informing petitioners that respondents were
willing to sell their sixty (60%) percent share in the subject parcels for the
consideration of 500.00 per square meter.14 Insisting on the price agreed upon in
the Kasunduan, however, petitioners sent a letter dated 19 May 1993, requesting
respondents to execute within 15 days from notice the necessary Deed of Absolute
Sale over their 60% share as aforesaid, excluding the 1,750-square meter portion
specified in their agreement with Manuel. Informed that petitioners were ready to pay
the remaining 179,000.00 balance of the agreed price, 15 respondents wrote a 28
May 1993 reply, reminding the former of their purported refusal of earlier offers to sell
the shares of Leovina and of Buenaflor who had, in the meantime, died. 16 In a letter
dated 1 June 1993, respondents also called petitioners attention to the fact, among
others, that their right to ask for an additional consideration for the sale was
recognized under the Kasunduan.17
On 6 October 1993, petitioners commenced the instant suit with the filing of their
complaint for specific performance and damages against the respondents and
respondent Heirs of Buenaflor, as then represented by Menardo Umali. Faulting
respondents with unjustified refusal to comply with their obligation under the
Kasunduan, petitioners prayed that the former be ordered to execute the necessary
Deed of Absolute Sale over their shares in the subject parcels, with indemnities for
moral and exemplary damages, as well as attorneys fees, litigation expenses and the
costs of the suit.18 Served with summons, respondents filed their Answer with
Counterclaim and Motion to File Third Party Complaint on 3 December 1993.
Maintaining that the Agreement and the Kasunduan were illegal for being
unconscionable and contrary to public policy, respondents averred that Atty. Zepeda
was an indispensable party to the case. Together with the dismissal of the complaint
and the annulment of said contracts and TCT No. T-72026, respondents sought the
grant of their counterclaims for moral and exemplary damages, as well as attorneys
fees and litigation expenses.19
The issues thereby joined, the Regional Trial Court (RTC), Branch 54, Lucena City,
proveeded to conduct the mandatory preliminary conference in the case.20 After
initially granting respondents motion to file a third party complaint against Atty.
Zepeda,21 the RTC, upon petitioners motion for reconsideration, 22 went on to issue
the 18 July 1997 Order disallowing the filing of said pleading on the ground that the
validity of the Agreement and the cause of action against Atty. Zepeda, whose
whereabouts were then unknown, would be better threshed out in a separate
action.23 The denial24 of their motion for reconsideration of the foregoing
order25 prompted respondents to file a notice of appeal26 which was, however, denied
due course by the RTC on the ground that the orders sought to be appealed were
non-appealable.27 On 14 December 1997, Menardo died28 and was substituted by his
daughter Nancy as representative of respondent Heirs of Buenaflor. 29
In the ensuing trial of the case on the merits, petitioners called to the witness stand
Samuel Lim Uy Ek Liong30whose testimony was refuted by Philip31 and
Leovina32 during the presentation of the defense evidence. On 27 January 2005, the
RTC rendered a decision finding the Kasunduan valid and binding between
respondents and petitioners who had the right to demand its fulfillment as Manuels
successors-in-interest. Brushing aside Philips testimony that respondents were
forced to sign the Kasunduan, the RTC ruled that said contract became effective upon
the finality of this Courts 13 September 1990 Decision in G.R. No. 89561 which
served as a suspensive condition therefor. Having benefited from the legal services
rendered by Atty. Zepeda and the financial assistance extended by Manuel,
respondents were also declared estopped from questioning the validity of the
Agreement, Kasunduan and TCT No. T-72026. With the Kasunduan upheld as the
law between the contracting parties and their privies,33 the RTC disposed of the case
in the following wise:
WHEREFORE, premises considered, the Court finds for the petitioners and hereby:
1. Orders the respondents to execute and deliver a Deed of Conveyance in
favor of the petitioners covering the 60% of the properties formerly covered
by Transfer Certificates of Title Nos. T-3175, 42104, T-42103, T-32227 and
T-42104 which are now covered by Transfer Certificates of Title Nos. T-
72027, T-72028, T-72029, T-72030, T-72031, T-72032, T-72033 and T-
72026, all of the Registry of Deeds of Lucena City, for and in consideration
of the amount of 180,000.00 in accordance with the provisions of the
KASUNDUAN, and
2. Orders the petitioners to pay and deliver to the respondents upon the
latters execution of the Deed of Conveyance mentioned in the preceding
paragraph, the amount of 179,000.00 representing the balance of the
purchase price as provided in the KASUNDUAN, and
3. Orders the respondents to pay the petitioners the following amounts:
a). 50,000.00 as and for moral damages;
 b). 50,000.00 as and for exemplary damages; and
c). 50,000.00 as and for attorneys fees.
and to pay the costs.
SO ORDERED.34
Dissatisfied with the RTCs decision, both petitioners 35 and respondents perfected
their appeals36 which were docketed before the CA as CA-G.R. CV No. 84687. While
petitioners prayed for the increase of the monetary awards adjudicated a quo, as well
as the further grant of liquidated damages in their favor, 37 respondents sought the
complete reversal of the appealed decision on the ground that the Agreement and the
Kasunduan were null and void.38 On 23 January 2007, the CA rendered the herein
assailed decision, setting aside the RTCs decision, upon the following findings and
conclusions, to wit: (a) the Agreement and Kasunduan are byproducts of the
partnership between Atty. Zepeda and Manuel who, as a non-lawyer, was not
authorized to practice law; (b) the Agreement is void under Article 1491 (5) of the Civil
Code of the Philippines which prohibits lawyers from acquiring properties which are
the objects of the litigation in which they have taken part; (c) jointly designed to
completely deprive respondents of the subject parcels, the Agreement and the
Kasunduan are invalid and unconscionable; and (d) without prejudice to his liability for
violation of the Canons of Professional Responsibility, Atty. Zepeda can file an action
to collect attorneys fees based on quantum meruit.39
The Issue
Petitioners seek the reversal of the CAs decision on the following issue:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS, FIFTEENTH
DIVISION, COMITTED A REVERSIBLE ERROR WHEN IT REVERSED AND SET
ASIDE THE DECISION OF THE RTC BRANCH 59, LUCENA CITY, IN CIVIL CASE
NO. 93-176 DECLARING THE AGREEMENT AND KASUNDUAN VOID AB INITIO
FOR BEING CONTRARY TO LAW AND PUBLIC POLICY FOR BEING VIOLATIVE
OF ART. 1491 OF THE NEW CIVIL CODE AND THE CANONS OF PROFESSIONAL
RESPONSIBILITY.40
The Courts Ruling
We find the petition impressed with partial merit.
At the outset, it bears pointing out that the complaint for specific performance filed
before the RTC sought only the enforcement of petitioners rights and respondents
obligation under the Kasunduan. Although the answer filed by respondents also
assailed the validity of the Agreement and TCT No. T-72026, the record shows that
the RTC, in its order dated 18 July 1997, disallowed the filing of a third-party
complaint against Atty. Zepeda on the ground that the causes of action in respect to
said contract and title would be better threshed out in a separate action. As Atty.
Zepedas whereabouts were then unknown, the RTC also ruled that, far from
contributing to the expeditious settlement of the case, the grant of respondents
motion to file a third-party complaint would only delay the proceedings in the
case.41 With the 1 October 1998 denial of their motion for reconsideration of the
foregoing order, respondents subsequently filed a notice of appeal which was,
however, denied due course on the ground that the orders denying their motion to file
a third-party complaint and their motion for reconsideration were interlocutory and
non-appealable.42
Absent a showing that the RTCs ruling on the foregoing issues was reversed and set
aside, we find that the CA reversibly erred in ruling on the validity of the Agreement
which respondents executed not only with petitioners predecessor-in-interest,
Manuel, but also with Atty. Zepeda. Since it is generally accepted that no man shall
be affected by any proceeding to which he is a stranger,43 the rule is settled that a
court must first acquire jurisdiction over a party either through valid service of
summons or voluntary appearance for the latter to be bound by a court
decision.44 The fact that Atty. Zepeda was not properly impleaded in the suit and
given a chance to present his side of the controversy before the RTC should have
dissuaded the CA from invalidating the Agreement and holding that attorneys fees
should, instead, be computed on a quantum meruit basis. Admittedly, Article 1491
(5)45 of the Civil Code prohibits lawyers from acquiring by purchase or assignment the
property or rights involved which are the object of the litigation in which they intervene
by virtue of their profession. The CA lost sight of the fact, however, that the prohibition
applies only during the pendency of the suit46 and generally does not cover contracts
for contingent fees where the transfer takes effect only after the finality of a favorable
judgment.47
Although executed on the same day, it cannot likewise be gainsaid that the
Agreement and the Kasunduan are independent contracts, with parties, objects and
causes different from that of the other. Defined as a meeting of the minds between
two persons whereby one binds himself, with respect to the other to give something or
to render some service,48 a contract requires the concurrence of the following
requisites: (a) consent of the contracting parties; (b) object certain which is the subject
matter of the contract; and, (c) cause of the obligation which is
established.49 Executed in exchange for the legal services of Atty. Zepeda and the
financial assistance to be extended by Manuel, the Agreement concerned
respondents transfer of 40% of the avails of the suit, in the event of a favorable
judgment in Civil Case No. 8085. While concededly subject to the same suspensive
condition, the Kasunduan was, in contrast, concluded by respondents with Manuel
alone, for the purpose of selling in favor of the latter 60% of their share in the subject
parcels for the agreed price of 180,000.00. Given these clear distinctions, petitioners
correctly argue that the CA reversibly erred in not determining the validity of the
Kasunduan independent from that of the Agreement.
Viewed in the light of the autonomous nature of contracts enunciated under Article
130650 of the Civil Code, on the other hand, we find that the Kasunduan was correctly
found by the RTC to be a valid and binding contract between the parties. Already
partially executed with respondents receipt of 1,000.00 from Manuel upon the
execution thereof, the Kasunduan simply concerned the sale of the formers 60%
share in the subject parcel, less the 1,750-square meter portion to be retained, for the
agreed consideration of 180,000.00. As a notarized document that carries the
evidentiary weight conferred upon it with respect to its due execution, 51 the
Kasunduan was shown to have been signed by respondents with full knowledge of its
contents, as may be gleaned from the testimonies elicited from Philip 52 and Leovina.53
Although Philip had repeatedly claimed that respondents had been forced to sign the
Agreement and the Kasunduan, his testimony does not show such vitiation of consent
as would warrant the avoidance of the contract. He simply meant that respondents felt
constrained to accede to the stipulations insisted upon by Atty. Zepeda and Manuel
who were not otherwise willing to push through with said contracts. 54
At any rate, our perusal of the record shows that respondents main objection to the
enforcement of the Kasunduan was the perceived inadequacy of the 180,000.00
which the parties had fixed as consideration for 60% of the subject parcels. Rather
than claiming vitiation of their consent in the answer they filed a quo, respondents, in
fact, distinctly averred that the Kasunduan was tantamount to unjust enrichment and
"a clear source of speculative profit" at their expense since their remaining share in
said properties had "a current market value of 9,594,900.00, more or less." 55 In their
22 March 1993 letter to petitioners, respondents also cited prices then prevailing for
the sale of properties in the area and offered to sell their 60% share for the price of
500.00 per square meter56 or a total of 15,991,500.00. In response to petitioners
insistence on the price originally agreed upon by the parties,57respondents even
invoked the last paragraph58 of the Kasunduan to the effect that the parties agreed to
enter into such other stipulations as would be necessary to ensure the fruition of the
sale.59
In the absence of any showing, however, that the parties were able to agree on new
stipulations that would modify their agreement, we find that petitioners and
respondents are bound by the original terms embodied in the Kasunduan. Obligations
arising from contracts, after all, have the force of law between the contracting
parties60 who are expected to abide in good faith with their contractual commitments,
not weasel out of them.61 Moreover, when the terms of the contract are clear and
leave no doubt as to the intention of the contracting parties, the rule is settled that the
literal meaning of its stipulations should govern. In such cases, courts have no
authority to alter a contract by construction or to make a new contract for the parties.
Since their duty is confined to the interpretation of the one which the parties have
made for themselves without regard to its wisdom or folly, it has been ruled that
courts cannot supply material stipulations or read into the contract words it does not
contain.62 Indeed, courts will not relieve a party from the adverse effects of an unwise
or unfavorable contract freely entered into.63
Our perusal of the Kasunduan also shows that it contains a penal clause 64 which
provides that a party who violates any of its provisions shall be liable to pay the
aggrieved party a penalty fixed at 50,000.00, together with the attorneys fees and
litigation expenses incurred by the latter should judicial resolution of the matter
becomes necessary.65 An accessory undertaking to assume greater liability on the
part of the obligor in case of breach of an obligation, the foregoing stipulation is a
penal clause which serves to strengthen the coercive force of the obligation and
provides for liquidated damages for such breach.66 "The obligor would then be bound
to pay the stipulated indemnity without the necessity of proof of the existence and the
measure of damages caused by the breach."67Articles 1226 and 1227 of the Civil
Code state:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity
for damages and the payment of interests in case of noncompliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses
to pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.
Art. 1227. The debtor cannot exempt himself from the performance of the obligation
by paying the penalty, save in the case where this right has been expressly reserved
for him. Neither can the creditor demand the fulfillment of the obligation and the
satisfaction of the penalty at the same time, unless this right has been clearly granted
to him. However, if after the creditor has decided to require the fulfillment of the
obligation, the performance thereof should become impossible without his fault, the
penalty may be enforced."
In the absence of a showing that they expressly reserved the right to pay the penalty
in lieu of the performance of their obligation under the Kasunduan, respondents were
correctly ordered by the RTC to execute and deliver a deed of conveyance over their
60% share in the subject parcels in favor of petitiOners. Considering that the
Kasunduan stipulated that respondents would retain a portion of their share consisting
of 1,750 square meters, said disposition should, however, be modified to give full
effect to the intention of the contracting parties. Since the parties also fixed liquidated
damages in the sum of 50,000.00 in case of breach, we find that said amount should
suffice as petitioners' indemnity, without further need of compensation for moral and
exemplary damages. In obligations with a penal clause, the penalty generally
substitutes the indemnity for damages and the payment of interests in case of non-
compliance.68 Usually incorporated to create an effective deterrent against breach of
the obligation by making the consequences of such breach as onerous as it may be
possible, the rule is settled that a penal clause is not limited to actual and
compensatory damages69

The RTC's award of attorney's fees in the sum of 50,000.00 is, however,
proper.1wphi1 Aside from the fact that the penal clause included a liability for said
award in the event of litigation over a breach of the Kasunduan, petitioners were able
to prove that they incurred said sum in engaging the services of their lawyer to pursue
their rights and protect their interests.70

WHEREFORE, premises considered, the Court of Appeals' assailed 23 January 2007

Decision is REVERSED and SET ASIDE. In lieu thereof, the RTC's 27 January 2005
Decision is REINSTATED subject to the following MODIFICATIONS: (a) the exclusion
of a 1,750-square meter portion from the 60% share in the subject parcel respondents
were ordered to convey in favor of petitioners; and (b) the deletion of the awards of
moral and exemplary damages. The rights of the parties under the Agreement may be
determined in a separate litigation.

SO ORDERED.

THIRD DIVISION
[G.R. No. 138113. October 17, 2000]
EMILIO BUGATTI, petitioner, vs. COURT OF APPEALS and SPOUSES BEN
BAGUILAT and MARIA BAGUILAT, respondents.
DECISION
GONZAGA-REYES, J.:
Before us is a petition for review on certiorari of the August 7, 1998 Decision of
the Court of Appeals in CA-G.R. CV No. 48900, reversing the July 15, 1994 Decision
of the Regional Trial Court in Civil Case No. 348.
The present case traces its origins to an action for recovery of possession and
damages filed by respondents Ben and Maria Baguilat on July 11, 1989, with the
Regional Trial Court of Lagawe, Ifugao against petitioner Emilio Bugatti. [1] In their
complaint, respondents alleged that they are the owners of a parcel of land situated in
Lagawa, Ifugao and that sometime in December, 1987, petitioner offered to lease their
land. According to respondents, they discussed the terms and conditions of the lease
with petitioner, particularly that petitioner will lease a portion of respondents land for a
period of nine (9) years in return for a monthly rental of P500.00; that petitioner will
construct a building on such land, the cost of which shall not exceed P40,000.00; that
respondents shall reimburse petitioner for the cost of the building by applying the
rentals thereto; that after petitioner is fully reimbursed for the costs of construction in
the amount of P40,000.00, he shall continue to pay the monthly rental of P500.00 for
the duration of the lease; that upon the termination of the lease, the building shall
belong to respondents. It was agreed by petitioner and respondents that the aforesaid
terms and conditions should be included in a written contract of lease to be prepared
by petitioner and presented to respondents for their approval. However, even before
preparing the contract of lease, petitioner occupied respondents land and began
construction on January 18, 1988. Immediately objecting to the construction,
respondent Maria Baguilat demanded that the contract of lease should first be
signed. However, petitioner assured respondents that he was preparing the
contract. Sometime in March, 1988, petitioner finally presented the lease contract to
respondents but it did not contain the terms and conditions previously agreed
upon. Respondents insisted that petitioner re-draft the contract in accordance with their
discussions. The revised document, presented to respondents sometime in April, 1988,
contained counter-proposals. Respondents refused to accede to such counter-
proposals. Despite the fact that no contract was signed by the parties, petitioner
continued to occupy respondents land.
In an effort to resolve their differences, respondents resorted to extrajudicial
measures, such as asking the Barangay Captain to mediate in the hopes of arriving at
an amicable settlement. However, petitioner was not receptive and he walked out of
the proceedings before the Barangay Captain. Respondents then sent petitioner a
demand letter dated November 23, 1988, asking him to vacate their property. Again,
petitioner did not heed respondents demands. Subsequent efforts of respondents to
resolve the conflict proved equally futile. Eventually, respondents obtained the services
of counsel - Atty. Evelyn S. Dunuan, who sent petitioner a letter asking him to desist
from introducing any further improvements upon respondents property. Upon obtaining
a certification from the Barangay Captain, respondents filed the present case with the
Regional Trial Court for recovery of the land in question and damages. [2]
Contrary to respondents contentions, petitioner asserts that the lease contract
which he prepared in fact embodied the terms and conditions agreed upon, except for
the cost of the building. Petitioner claimed that respondents had agreed to the following
terms - to lease their entire property to him for a period of nine (9) years at a monthly
rental of P500.00; that petitioner would construct a building of strong materials on
respondents property, without any limit as to the cost of construction; that it was later
on decided by the parties to extend the period of the lease since the cost of the building
had exceeded the total amount of rentals for the nine year period; that the new lease
period would begin from the opening of petitioners business, and would continue at
least until the recovery by petitioner of the full amount incurred by him in the
construction of the building; that petitioner will only pay rentals when he has been fully
reimbursed for construction costs; and finally, that upon the expiration of the lease
contract, respondents would own the building.
Petitioner claims that when he first submitted a draft of the lease contract to
respondent Maria Baguilat, she did not voice out any objection thereto. About two
weeks later, Maria Baguilat told petitioner that she had lost the draft. Petitioner then
submitted a second draft, but respondents refused to accept it because it did not
conform to the terms and conditions agreed upon. Petitioner told respondents to wait
until the building was completely finished before he submitted another draft of the lease
contract so that the price of the building could be incorporated therein.
Petitioner claims that respondents did not object to the fact that he had started
construction before the signing of the lease contract. On the contrary, petitioner alleges
that he felt that respondents had agreed to his proposals and that they had actually
given him verbal permission to begin erecting the building. According to petitioner,
respondents did not express their disapproval of the ongoing construction during any
of their several visits to the construction site. He claims that Ben Baguilat even assisted
him in the levelling of the construction area; that Maria Baguilat made suggestions as
to the kind of materials that might be used; and that when petitioner informed Maria
Baguilat that he had already spent more than P90,000.00 for the construction, she
advised him to keep all his receipts in order to serve as a basis for the computation of
the total costs of the building. Petitioner further claims that when the building was
completed in June, 1988, respondent Ben Baguilat invited him and his wife to their
house for the drafting of the contract. However, when petitioner told respondents that
his expenses had reached P120,000.00, they pretended to be shocked and refused to
sign the lease contract.[3]
The trial court[4] held that no contract of lease was perfected between the parties
since the element of consent was missing. The drafting of the contract - a task entrusted
to petitioner - was deemed by respondents as a condition precedent to the perfection
of the lease contract and consequently, to any construction activity upon their
land. Although petitioner submitted two drafts , they did not contain the terms and
conditions spoken of by the parties during their negotiations and were accordingly
rejected by respondents. However, despite the absence of a perfected contract and in
total disregard of respondents repeated objections, petitioner occupied respondents
land and commenced construction thereon, making him a builder in bad faith. The
decretal portion of the trial courts decision provides -
WHEREFORE, premises considered, the Court hereby render[s] judgment ordering
the defendant as follows, to wit:
1) To vacate the plaintiffs land including the building thereon which is
forfeited to the plaintiffs by virtue of this decision;
2) To pay plaintiffs the sum of Twenty One Thousand (P21,000.00) Pesos
by way of damages representing the estimated cost of the building, and
the reasonable compensation for the unjustified occupation and use by
defendant of plaintiffs land for a period of more than six (6) years;
3) To pay plaintiffs the sum of Fourteen Thousand (P14,000.00) Pesos as
attorneys fees, and
4) To pay the cost.
No pronouncement as to moral and exemplary damages as no evidence was
introduced to prove the same.
SO ORDERED.[5]
Reversing the trial courts decision, the Court of Appeals [6] sustained the view that
there was in fact a perfected contract of lease between the parties, which was for a
period of nine years, beginning on January, 1988. [7] Accordingly, the appellate court
held that petitioner was in good faith when he acquired possession of the land and
started construction thereon, and that he is entitled to reimbursement for the value of
the improvements introduced upon the subject property, pursuant to article 1678 of the
Civil Code and principles of equity.[8] However, since the lease terminated on January,
1997, petitioner must vacate the property. The decretal portion of the assailed decision
states -
WHEREFORE, in view of the foregoing, the decision dated July 15, 1994 of the
Regional Trial Court in Lagawe, Ifugao (Branch 14) in Civil Case No. 348 is hereby
REVERSED and SET ASIDE. The defendant-appellant and all persons claiming
rights under him are hereby ordered to immediately vacate the subject property and
surrender the possession thereof to the plaintiffs-appellees, and to pay to them
(plaintiffs-appellees) rentals in arrears in accordance with the fair rental value or
reasonable compensation for the use and occupation of the property, which monthly
sum should be computed from January, 1988 until he has completely vacated the
subject property. On the other hand, the plaintiffs-appellees are ordered to pay the
value of the improvement introduced by the defendant-appellant. Further, the awards
of attorneys fees and costs are hereby DELETED. Consequently, let this case be
REMANDED to the Regional Trial Court for the determination of the current market
value of the improvements made by the defendant-appellant on the subject property,
in accordance with Article 1678 of the New Civil Code, and the fair rental value
thereof. No pronouncement as to costs.
SO ORDERED.[9]
Petitioner contends that the Court of Appeals varied the terms of his contract with
respondents. In his Memorandum, petitioner summarizes the errors committed by the
appellate court and asserts the terms which should have been enforced instead, as
follows -
The appellate court correctly reversed and set aside the decision of the trial court
finding for the private respondents as contrary to facts and applicable laws, but
committed the error, with due respect, of fixing an [sic] entirely new terms and
conditions and imposed the same on the parties, such as:
a) for the petitioner to vacate the premises. But the lease, which was upheld by the
appellate court, has not yet expired or terminated;
b) to pay rental or compensation for the petitioners use of the property to be
computed from January, 1988 until petitioner vacated the property. There is no
question as to payment of rentals [,] the parties having agreed [to] the sum of P500.00
a month to be deducted from the P120,000 petitioner spent in constructing the
building until exhausted, not to be computed form the year January, 1988, but to
commence on the date of the completion of the building and start of petitioners
business thereat.
c) the appellate court also ordered the private respondents to pay the value of the
building to the petitioner, to to [sic] this effect, ordered the case remanded back to the
trial court to determine the value of the building or improvement. The agreement of
the parties is for the building to be owned by the private respondents after the
P120,000 cost of the building is exhausted by the deduction of P500.00 as monthly
rental.
xxx xxx xxx
In lieu thereof, it is respectfully prayed that the petitioner and the private respondents
be ordered to comply faithfully and in good faith to the terms and conditions of their
lease - the petitioner to erect a building on the leased property and completed by him
at a cost of P120,000 in March, 1988. Of this amount, the P500.00 monthly rental
deducted until exhausted, also to start March, 1988 [-] date petitioner commenced his
business thereat. After exhaustion of the P120,000 by way of monthly rentals, private
respondents become owners of the building - which are clear and not contrary to law,
morals, good customs, public order, and public policy. Lease expires in March, 2008
therefor.[10]
The threshold issue in the present case is whether or not a contract of lease had
been perfected. After receiving the testimonial and documentary evidence of both
parties, the trial court concluded that no contract of lease existed and ruled in favor of
respondents herein. The court explained its decision in this wise -
The Court after a careful evaluation of the foregoing portion of plaintiffs testimony
cannot give its imprimatur to the conclusion reached by defendant to the effect that
plaintiffs allowed the defendant to enter into a portion of the land in question and
construct a building thereon, for such a conclusion is gratuitous as it does not portray
the true intention of the plaintiffs as alluded to by the defendant. A cursory reading of
the testimony under consideration indubitably show in its clear and unmistakable
terms that it is not a blanket authority or permission for defendant to enter the
premises of the land in question, but is subject to proviso or terms and conditions to
be embodied in writing in the lease contract, which terms and conditions are
elsewhere stated earlier in plaintiffs evidence. In this regard, it is worthy and
interesting to note, that at the inception of the work done by the defendant on the land
in question by levelling a portion of it, plaintiffs immediately protested and repeatedly
demanded the defendant who assumed to prepare the contract embodying the terms
and conditions originally agreed upon for their approval before defendant will start on
the construction, which never happened due to the dilatory tactics employed by the
defendant, a circumstance which belied defendants contention that plaintiffs allowed
defendant to occupy the land and construct a building thereon even before the
approval of the lease contract, which to the mind of this Court, is an orchestrated
scheme to dispossess the plaintiffs of their land as evidenced by defendants
maneuvers in successfully delaying by dubious means the finalization of a contract of
lease embodying the true terms and conditions agreed upon by the parties,
furthermore, defendant instead of preparing the supposed lease contract, and after
gaining entry on the land in question and had constructed a building thereon, made
counter-proposals which were rejected by plaintiffs.
xxx xxx xxx
With the foregoing as a background, the Court ... is of the considered view, that no
contract of lease was perfected and/or consumated [sic] between the parties, ... all
that was actually done was a negotiation of an intended lease contract which did not
actually materialize due to gross violation committed by the defendant of the terms
and conditions set or laid down by the plaintiffs in the course of the negotiation for
which reason plaintiffs refused to sign the draft prepared by the defendant. On the
issue of perfection, and/or consummation of the alleged contract of lease, the
evidence on record speaks loud and clear that in the course of the negotiation
defendant volunteered to prepare and deliver to plaintiffs [the contract of lease] for
their approval, but instead of preparing the intended contract of lease incorporating
the terms and conditions agreed upon, the defendant started the construction of a
building on plaintiffs land in January, 1988, whereupon plaintiff Maria Baguilat
immediately protested to defendant demanding that the contract of lease over the
property should first be signed by the parties before defendant starts any construction
work on the land in question, which was adamantly ignored by the defendant. The fact
that defendant deliberately failed to prepare and finalize the supposed contract, and
instead presented counter-proposals in Exhibit B constitute in legal contemplation a
unilateral abandonment and/or rejection by the defendant of the terms and conditions
originally agreed upon, without valid or legal ground which is indicia of his bad
faith. xxx [11]
xxx xxx xxx
Even assuming arguendo, that the proposal or offer made by the defendant to
construct a building on the land in question where he will later on conduct his
business was allowed or permitted by the plaintiffs during the negotiation stage
between the parties as the defendant wanted to impress this Court, yet the bare fact
as borne out by the evidence remains, that the supposed permission extended to
defendant is subject to the condition that the defendant should first prepare and
present to the plaintiffs the contract of lease embodying the terms and conditions as
proposed for the approval of the plaintiffs, which is clearly a condition precedent to be
complied with by the defendant. Hence, the acceptance on the part of the plaintiffs to
the offer made by the defendant to lease the property in question is not unqualified
and absolute, and a qualified acceptance by express provision of Article 1319 of the
New Civil Code constitutes a counter-offer.Incidentally, it has to be stressed that
defendant instead of complying with the qualified counter-offer of the plaintiffs,
defendant made a counter-proposal (Exhibits B and B-1), which contained the
following, to wit:
 1. Extension of period or
2. Buy the lot upon which it stands (referring to the building), or
3. Apply the remaining balance to the adjacent vacant lot, and emphasized
in said exhibit, the provision of Articles 445, 447, 448, 453, and 454 of the
New Civil Code.[12]
xxx xxx xxx
After a thorough and careful study of the records, the Court finds that the trial
court was correct in ruling that no contract of lease was perfected and accordingly, hold
that the appellate court committed reversible error in ruling to the contrary.
At the outset, it should be stated that the factual findings of the Court of Appeals
are usually binding on the Supreme Court unless there is a showing that: (1) the
conclusion is a finding grounded on speculations, surmises or conjectures; (2) the
inference is manifestly mistaken, absurd and impossible; (3) where there is a grave
abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5)
when the findings of fact are conflicting; and (6) when the Court of Appeals, in making
its findings, went beyond the issues of the case and the same is contrary to the
admission of both parties.[13] We find that the assailed ruling of the appellate court is
not borne out by the evidence presented in this case. In support of its conclusion that
a contract of lease was perfected, the appellate court offered a lengthy ratiocination
based merely on its own interpretation of the transcripts. However, it is a well
established principle that the evaluation of the testimonies of witnesses by the trial court
is entitled to the highest respect because such court has the direct opportunity to
observe the witnesses - their demeanor and manner of testifying - and thus, are in a
better position to assess their credibility.[14]
Now, to the merits of the case. We agree with the trial court that when the parties
met sometime in the latter part of December, 1997 and in the first week of 1998 in order
to discuss the terms and conditions of the lease, they were merely negotiating. A
contract undergoes three distinct stages - preparation or negotiation, its perfection, and
finally, its consummation. Negotiation begins from the time the prospective contracting
parties manifest their interest in the contract and ends at the moment of agreement of
the parties. The perfection or birth of the contract takes place when the parties agree
upon the essential elements of the contract. The last stage is the consummation of the
contract wherein the parties fulfill or perform the terms agreed upon in the contract,
culminating in the extinguishment thereof.[15] From the testimonies of respondent Maria
Baguilat and petitioner it could clearly be inferred that it was their intention that such
terms and conditions were to be embodied in a lease contract to be prepared by the
latter and presented to respondents for their approval before either party could be
considered bound by the same. On direct examination, Maria Baguilat testified as
follows -
ATTY. DUNUAN: (to the witness)
You mentioned that the defendant came to ask you to permit him to lease your
property located at herein Lagawe?
A: Yes, Mam.
Q: When did he come to ask your permission?
A: Late December, 1987
Q: Where did he come to ask your permission?
A: He came to our residence.
Q: Who were present at the time he came to ask your permission?
A: My husband and myself were present.
Q: And what exactly what did the defendant ask from you?
A: When he came, he ask[ed] if we were the owner[s] of the lot located just beside
the public highway and we said yes.
Q: What happened next after you informed him that you own the lot just beside
the public highway?
A: Immediately he was asking or pleading if he could construct a little hut there for
them to sell;
Q: What did your husband reply to such request?
A: We did not give him a definite yes or no. We said we will see first.
Q: What happen after that?
A: After a week, he came back asking for our final decision.
Q: This time what did you say to the request[?]
A: Because we decided with my husband, because of our relationship by affinity
and because we did not like that theyll have a bad comment on us, we
decided that well permit him.
Q: What did you tell him?
A: We said to him that you can construct a small hut but we are going to set some
terms and conditions to be followed: and he said yes.
Q: When you said that you will allow him the defendant to construct in the land but
you will set some terms and conditions, what did you do after that?
A: When we permitted him, we discussed some terms and conditions and he
acted as the secretary; he wrote down the terms and conditions we wanted
to be embodied in the contruct [sic].[16]
 Upon cross-examination, Maria Baguilat repeatedly emphasized that she and her
husband did not give petitioner permission to occupy their property and to start
construction thereon until after the written lease contract had met with their approval. As
proof of this, when petitioner started constructing upon respondents land before
presenting the written contract to the latter, Maria Baguilat repeatedly made known her
objections to petitioner. She testified thus -
A: We made the agreement first week of January and we advised him to type it
within the first week of that month, January, 1988.
Q: Within the second week of January, 1988, he already went to occupy a
portion of your land?
A: Yes.
Q: Before he went to occupy a portion of your land, according to your testimony,
he asked permission from you to occupy that portion of your land?
A: That was verbal, when he came to ask permission.
Q: That permission was given after you gave him permission to prepare the
lease agreement or simultaneously?
A: At the same time.
Q: So you gave him the authority to prepare the lease agreement at the same
time the permission that he was going to occupy that portion, you gave him
the permission to occupy the land?
A: After. We are supposed to sign the contract before he start.
Q: That was your intention but earlier, you testified that simultaneously you
allowed him to occupy a portion of you land?
A: Yes. Allowed him.
COURT: (to the witness)
Q: After the first negotiation allowing him to get that paper for typing, did he
come to you after that to ask permission to occupy a portion of your land?
A: After the drafting of the lease contract, he did not come back but he started
the work.
Q: You mean to impress the Court that even though there was no contract, he
just went there to occupy a portion of your property without your permission?
A: Yes.
ATTY. LUMASE:
You stated that he did not come back for permission. You mean there was a first
permission?
A: At the time we made the agreement and he jot it down and he said he will
type it, that was the time that we said that you may occupy but we have to
sign the lease agreement.
Q: So at the time he voluntarily offered his services to prepare the lease
agreement, he asked you that in the meantime he will occupy that portion of
your land and you permitted him?
A: No, we did not but what he told us is: Im going to type this and bring it to you
for your signature, no more.
COURT:
Q: You mean to imply to the Court that you did not give him authority yet to
occupy the land in question before the signing of the contract but what you
wanted to be done is for you to sign the contract before occupying the
premises?
A: Yes.
ATTY. LUMASE:
Q: Now, before he brought the typewritten contract, you became aware that he
occupied a portion of your land?
A: Yes.
Q: You became aware that he occupied the land because you allowed him?
A: We did not allow. I went to tell him to stop levelling.
Q: You stated that at the time you permitted him to draft the lease agreement,
you permitted him to occupy, now which is which?
A: There was no permission that he was going to start work before the signing of
the contract.
Q: So what you said a while ago that you permitted him was not correct. May we
go over the transcript. Did you permit him or not?
COURT: (to the witness)
Q: Did you allow him to occupy before the signing?
A: We did not allow him to start. We allowed him after the contract but before the
contract was signed, he started.
ATY. LUMASE:
Q: How did you come to know that he started? How?
A: I saw him already levelling the lot.
Q: And that was the first day when he started to level when you saw him?
A: No, there was a little part levelled.
Q: You and your husband went there and saw him levelling?
A: Yes.
Q: Aside from defendant, how many were helping, working with them?
A: There were two.
Q: After you saw them levelling, you returned to your house?
A: I told Emilio already, Why did you start the leveling when there was no
contract signed by us?
Q: But nevertheless, he started to occupy and made levellings?
A: Yes, he continued despite my protest.
Q: So what you did was to make a verbal protest to stop him?
A: Yes.
Q: Until after the levelling, you saw that construction materials were brought to
the area?
A: Yes.
Q: After you saw the materials, you saw that a building started to rise?
A: Yes.
Q: All the while you did not make objections?
A: I was the one always going to him but he still continued the construction.
Q: So you did not come with a desistance, you did not come to Court to stop
him?
A: I did not. Im always going to him telling him please stop the construction but I
did not think of going to Court.
Q: From the time you saw him levelling and until a building was put up, how
many months passed?
A: That was January-February and early part of March.
Q: And the building was first put up on what month?
A: Early part of March.
Q: When the building was constructed, you saw him occupy it, is it not?
A: I saw them staying there.
Q: So from January to March, the contract was not yet prepared by him and you
did nothing to have the contract be executed as construction of the building
took place?
A: I always go to him.
 Q: Aside from going to him, you did nothing more?
A: There was a time I went to a policeman to ask him to stop the construction of
Bugatti and he said, I do not have the order to stop him. I do not know there
was supposed to be an order before a policeman could go there, and kept
quiet.
Q: Now, what you did was go to the site and notice the construction and return
home. How many times did that happen?
A: Many times.[17]
Aside from their verbal objections, respondents sent petitioner two demand
letters. The first one, dated November 23, 1988 and signed and received by petitioner
on December 13, 1988, asked him to vacate the property.[18] A second letter dated April
3, 1989 and received by petitioner on the same day demanded that petitioner terminate
all construction work upon respondents property. [19] Respondents vehement protests
against petitioners construction activities are irreconcilable with the appellate courts
finding that the parties had entered into a lease contract. If respondents had considered
themselves bound by their discussions with petitioner, the former would not have cause
to object to the construction activities upon their land because such would have been
in accordance with the alleged terms of the lease. In this regard, neither could petitioner
unequivocally declare that respondents allowed him to commence construction prior to
the drafting of the contract of lease. He stated that -
Q: According to the testimony of Mrs. Maria Baguilat, she said she did not allow
you to occupy the land. What can you say to that?
A: I do not know of such disallowance.
Q: What is the truth?
A: I feel there was concurrence to my proposal. In fact and in truth the husband
joined in the earth moving.
Q: That permission to occupy or construct on their land, was it in writing?
A: Verbal.
Q: Who between the plaintiffs communicated to you and permitted you to start
occupying their land?
A: I suppose both of them.[20]
In a contract of lease, one of the parties binds himself to give to another the
enjoyment or use of a thing for a price certain, and for a period which may be definite
or indefinite.[21] Being a consensual contract, a lease is perfected at the moment there
is a meeting of the minds upon the thing and the cause or consideration which are to
constitute the contract.[22] The area of agreement must extend to all points that the
parties deem material.[23]
In the case at bar, there is a great degree of divergence between the parties as
to the terms of the lease. Respondent Maria Baguilat testified that she and her husband
were amenable to leasing out only a portion of their property for a period of nine years
to start in January, 1988. A monthly rental of P500.00 was to be set off against the
construction costs incurred by petitioner, which costs the parties had agreed to limit to
P40,000.00. At the end of the nine year period, ownership and possession of the
building would be transferred to respondents.[24]
Meanwhile, petitioner claimed that the agreement with respondents covered the
lease of the entire lot, to begin on the date petitioner opened for business
thereon. According to petitioner, the lease was initially intended to last for a period of
nine years, however, the same was subsequently extended for an indefinite period - up
until he is fully reimbursed for the full amount incurred in constructing the building (by
virtue of the setting-off of the monthly rental of P500.00 against such
expenses). Petitioner insists that during his discussions with respondents no mention
was made of any limits upon his construction costs.[25]
The extensive degree of ambiguity, insofar as the terms of the intended contract
were concerned, particularly with regard to the area to be leased and the amount to be
spent on the building to be constructed by him, was revealed by the uncertain and
evasive statements of petitioner during direct examination -
Q: By the way, you are going to lease their lot. Is that the entire lot?
A: What is in my mind is the entire lot.
Q: Did you communicate your desire to lease their lot?
A: Yes.
Q: What was their response?
A: Positive.
Q: When you said positive, what do you mean?
A: Yes.
Q: Who between the plaintiffs, Ben Baguilat and Maria Baguilat, did you
communicate your desire about their lot?
A: Both of them.
Q: You said while ago, they answered yes. Did the two of them answered [sic] in
the affirmative or only one of them?
A: Not exactly saying yes but the very good things that led to the drafting since
both of them were receptive, their answers were inclined- we will enter into
that.
Q: In other words, they are amenable to lease their lot to you?
A: Yes.
Q: For how much monthly rental?
A: 500 a month.
Q: For how many months or years?
A: Nine years but the nine years later on was amended because the cost of the
building was assessed after it was finished and it exceeded the suppose
rentals paid for nine years.
Q: Because it was amended, how long as to the lease of the lot?
A: Until, subject to the actual amount of expenses is fully paid.
Q: Do you recall when the lease started to consummate?
A: On the actual start of business, that was the agreement.
xxx xxx xxx
Q: According to the testimony of Mrs. Maria Baguilat, she confirms nine years,
rentals of P500.00 but according to her, she said what they wanted to lease
to you was only a portion of the lot. What can you say to that?
A: I am not aware of that.
Q: What was exactly your agreement with regards to the area of the lot?
A: We have not agreed on the area. I was referring to the lot which is .5 by 20
meters.
xxx xxx xxx
ATTY LUMASE continuing:
Q: How about the plaintiffs, did they state to you also any particular area they are
interested to lease to you?
A: None. No drawing plan.
Q: According to Maria Baguilat, she said that the amount of the materials to be
used in the construction should not exceed P40,000.00. What can you say to
that?
A: I am not aware.
Q: You want to impress the Honorable Court, the plaintiffs did not tell you that?
A: Yes, sir.
Q: With respect to the amount to be spent in the construction of the improvements
on the lease area, what is the particular agreement you had with the plaintiffs
regarding the amount?
A: Originally, it was not touch [sic] in the oral agreement. It was only later on when
the construction was being finished. I ran out of money and I tried to borrow
from them. I understand I told her I spent that much.[26]
That the area of the property to be leased to petitioner and the amount of the
construction costs, which would ultimately determine the period of the lease, remained
indeterminate only bolsters the trial courts conclusion that there has been no meeting
of minds between the parties insofar as the essential conditions of the proposed
contract are concerned. It is difficult to believe that respondents would give petitioner
unbridled discretion in determining such important matters.
It is worth noting that petitioner actually admitted that he made counter-proposals
to respondents. Sometime in March, 1988, the first draft of the lease contract was
presented by petitioner to respondents and promptly rejected by the latter since it did
not embody the terms and conditions as discussed by the parties. Respondents asked
petitioner to revise the draft so as to conform to their discussions; however, instead of
re-writing the document, petitioner came up with counter-proposals (Exhibit
B).[27] Petitioners acceptance obviously varied the terms of respondents offer, thus
giving rise to a counter-offer. This only proves that the element of consent is wanting,
there having been no concurrence of offer and acceptance with respect to the material
points of the intended lease.
In retrospect, petitioners improper intentions have become evident. During
negotiations, petitioner led respondents to believe that he was amenable to their terms,
but in truth, as clearly shown by the first draft he prepared (Exhibit A) and his counter-
proposals (Exhibit B), he harbored his own very different ideas regarding the essential
terms and conditions of the proposed lease. Although he was well aware that
respondents were withholding their assent to the lease until such time that the contract
containing all the material terms and conditions previously discussed by the parties had
been drafted by petitioner and presented to them for their approval, petitioner occupied
respondents property and began construction as early as January, 1988. By
commencing construction of the building so soon after the negotiations of the parties
and before submitting the promised draft to respondents, petitioner wanted to ensure
that respondents would no longer be able to back out of the proposed contract.
Petitioner is undoubtedly a builder in bad faith for despite the absence of a
perfected contract of lease and in utter disregard of respondents numerous protests,
he continued his construction activities upon respondents land. Under articles
449[28] and 450[29] of the Civil Code, respondents have the following options: (1) to
appropriate what petitioner has built, without any obligation to pay indemnity; (2) to ask
petitioner to remove what he has built; or (3) to compel petitioner to pay the value of
the land.[30] In addition, respondents are entitled to damages,[31] which shall be
equivalent to the fair rental value of the land beginning from January, 1988 until
respondents recover possession thereof. This case shall be remanded to the trial court
for the determination of the proper amount of rentals.

WHEREFORE, the Petition is GRANTED and the Decision of the Court of

Appeals promulgated on August 7, 1998 is hereby SET ASIDE.

SO ORDERED.

SECOND DIVISION
[G.R. No. 117355. April 5, 2002]
RIVIERA FILIPINA, INC., petitioner, vs. COURT OF APPEALS, JUAN L. REYES,
(now deceased), substituted by his heirs, namely, Estefania B. Reyes,
Juanita R. de la Rosa, Juan B. Reyes, Jr. and Fidel B. Reyes, PHILIPPINE
CYPRESS CONSTRUCTION & DEVELOPMENT CORPORATION,
CORNHILL TRADING CORPORATION AND URBAN DEVELOPMENT
BANK, respondents.
DECISION
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision[1] of the Court of
Appeals[2] dated June 6, 1994 in CA-G.R. CV No. 26513 affirming the Decision[3] dated
March 20, 1990 of the Regional Trial Court of Quezon City, Branch 89 dismissing Civil
Case No. Q-89-3371.
Civil Case No. Q-89-3371 is a suit instituted by Riviera Filipina, Inc. (Riviera) on
August 31, 1989[4] to compel the defendants therein Juan L. Reyes, now deceased,
Philippine Cypress Construction & Development Corporation (Cypress), Cornhill
Trading Corporation (Cornhill) and Urban Development Bank to transfer the title
covering a 1,018 square meter parcel of land located along EDSA, Quezon City for
alleged violation of Rivieras right of first refusal.
It appears that on November 23, 1982, respondent Juan L. Reyes (Reyes, for
brevity) executed a Contract of Lease with Riviera. The ten-year (10) renewable lease
of Riviera, which started on August 1, 1982, involved a 1,018 square meter parcel of
land located along Edsa, Quezon City, covered and described in Transfer Certificate of
Title No. 186326 of the Registry of Deeds of Quezon City in the name of Juan L.
Reyes.[5]
The said parcel of land was subject of a Real Estate Mortgage executed by Reyes
in favor of Prudential Bank. Since the loan with Prudential Bank remained unpaid upon
maturity, the mortgagee bank extrajudicially foreclosed the mortgage thereon. At the
public auction sale, the mortgagee bank emerged as the highest bidder. The
redemption period was set to expire on March 7, 1989. Realizing that he could not
possibly raise in time the money needed to redeem the subject property, Reyes decided
to sell the same.[6]
Since paragraph 11 of the lease contract expressly provided that the LESSEE
shall have the right of first refusal should the LESSOR decide to sell the property during
the term of the lease,[7] Reyes offered to sell the subject property to Riviera, through its
President Vicente C. Angeles, for Five Thousand Pesos (P5,000.00) per square
meter. However, Angeles bargained for Three Thousand Five Hundred Pesos
(P3,500.00) per square meter. Since Reyes was not amenable to the said price and
insisted on Five Thousand Pesos (P5,000.00) per square meter, Angeles requested
Reyes to allow him to consult the other members of the Board of Directors of Riviera. [8]
Seven (7) months later, or sometime in October 1988, Angeles communicated
with Reyes Rivieras offer to purchase the subject property for Four Thousand Pesos
(P4,000.00) per square meter. However, Reyes did not accept the offer. This time he
asked for Six Thousand Pesos (P6,000.00) per square meter since the value of the
property in the area had appreciated in view of the plans of Araneta to develop the
vicinity.[9]
In a letter dated November 2, 1988, Atty. Irineo S. Juan, acting as counsel for
Reyes, informed Riviera that Reyes was selling the subject property for Six Thousand
Pesos (P6,000.00) per square meter, net of capital gains and transfer taxes, registration
fees, notarial fees and all other attendant charges. He further stated therein that:
In this connection, conformably to the provisions stipulated in Paragraph/Item No. 11
of your CONTRACT OF LEASE (Doc. No. 365, Page No. 63, Book No. X, Series of
1982, of the Notarial Registry of Notary Public Leovillo S. Agustin), notice is served
upon your goodselves for you to exercise the right of first refusal in the sale of said
property, for which purpose you are hereby given a period of ten (10) days from your
receipt hereof within which to thus purchase the same under the terms and conditions
aforestated, and failing which you shall be deemed to have thereby waived such pre-
emptive right and my client shall thereafter be absolutely free to sell the subject
property to interested buyers.[10]
To answer the foregoing letter and confirm their telephone conversation on the
matter, Riviera sent a letter dated November 22, 1988 to Atty. Juan, counsel for Reyes,
expressing Rivieras interest to purchase the subject property and that Riviera is already
negotiating with Reyes which will take a couple of days to formalize. [11] Riviera
increased its offer to Five Thousand Pesos (P5,000.00) per square meter but Reyes
did not accede to said price as it was still lower than his quoted price of Six Thousand
Pesos (P6,000.00) per square meter.[12] Angeles asked Reyes to give him until the end
of November 1988 for Rivieras final decision.
In a letter dated December 2, 1988, Angeles wrote Reyes confirming Rivieras
intent to purchase the subject property for the fixed and final [13] price of Five Thousand
Pesos (P5,000.00) per square meter, complete payment within sixty (60) to ninety (90)
days which offer is what we feel should be the market price of your property. Angeles
asked that the decision of Reyes and his written reply to the offer be given within fifteen
(15) days since there are also other properties being offered to them at the moment. [14]
 In response to the foregoing letter, Atty. Juan sent a letter to Riviera dated
December 5, 1988 informing Riviera that Rivieras offer is not acceptable to his
client. He further expressed, let it be made clear that, much as it is the earnest desire
of my client to really give you the preference to purchase the subject property, you have
unfortunately failed to take advantage of such opportunity and thus lost your right of
first refusal in sale of said property.[15]
Meanwhile, on December 4, 1988, Reyes confided to Rolando P. Traballo, a close
family friend and President of Cypress, his predicament about the nearing expiry date
of the redemption period of the foreclosed mortgaged property with Prudential Bank,
the money for which he could not raise on time thereby offering the subject property to
him for Six Thousand Pesos (P6,000.00) per square meter. Traballo expressed interest
in buying the said property, told Reyes that he will study the matter and suggested for
them to meet the next day.[16]
They met the next day, December 5, 1988, at which time Traballo bargained for
Five Thousand Three Hundred Pesos (P5,300.00) per square meter. After considering
the reasons cited by Traballo for his quoted price, Reyes accepted the same. However,
since Traballo did not have the amount with which to pay Reyes, he told the latter that
he will look for a partner for that purpose.[17] Reyes told Traballo that he had already
afforded Riviera its right of first refusal but they cannot agree because Rivieras final
offer was for Five Thousand Pesos (P5,000.00) per square meter.[18]
Sometime in January 1989, apprehensive of the impending expiration in March
1989 of the redemption period of the foreclosed mortgaged property with Prudential
Bank and the deal between Reyes and Traballo was not yet formally concluded, Reyes
decided to approach anew Riviera. For this purpose, he requested his nephew, Atty.
Estanislao Alinea, to approach Angeles and find out if the latter was still interested in
buying the subject property and ask him to raise his offer for the purchase of the said
property a little higher. As instructed, Atty. Alinea met with Angeles and asked the latter
to increase his offer of Five Thousand Pesos (P5,000.00) per square meter but Angeles
said that his offer is Five Thousand Pesos (P5,000.00) per square meter.[19]
Following the meeting, Angeles sent a letter dated February 4, 1989 to Reyes,
through Atty. Alinea, that his offer is Five Thousand Pesos (P5,000.00) per square
meter payment of which would be fifty percent (50%) down within thirty (30) days upon
submission of certain documents in three (3) days, the balance payable in five (5) years
in equal monthly installments at twelve percent (12%) interest in diminishing
balance.[20] With the terms of this second offer, Angeles admittedly downgraded the
previous offer of Riviera on December 2, 1988.[21]
Atty. Alinea conveyed to Reyes Rivieras offer of Five Thousand Pesos
(P5,000.00) per square meter but Reyes did not agree. Consequently, Atty. Alinea
contacted again Angeles and asked him if he can increase his price. Angeles, however,
said he cannot add anymore.[22] Reyes did not expressly offer his subject property to
Riviera at the price of Five Thousand Three Hundred Pesos (P5,300.00) per square
meter.[23]
Sometime in February 1989, Cypress and its partner in the venture, Cornhill
Trading Corporation, were able to come up with the amount sufficient to cover the
redemption money, with which Reyes paid to the Prudential Bank to redeem the subject
property.[24] On May 1, 1989, a Deed of Absolute Sale covering the subject property
was executed by Reyes in favor of Cypress and Cornhill for the consideration of Five
Million Three Hundred Ninety Five Thousand Four Hundred Pesos
(P5,395,400.00).[25] On the same date, Cypress and Cornhill mortgaged the subject
property to Urban Development Bank for Three Million Pesos (P3,000,000.00).[26]
Thereafter, Riviera sought from Reyes, Cypress and Cornhill a resale of the
subject property to it claiming that its right of first refusal under the lease contract was
violated. After several unsuccessful attempts,[27] Riviera filed the suit to compel Reyes,
Cypress, Cornhill and Urban Development Bank to transfer the disputed title to the land
in favor of Riviera upon its payment of the price paid by Cypress and Cornhill.
Following trial on the merits, the trial court dismissed the complaint of Riviera as
well as the counterclaims and cross-claims of the other parties.[28] It ruled that the
defendants therein did not violate Rivieras right of first refusal, ratiocinating in this wise:
Resolving the first issue, this Court takes note that since the beginning of the
negotiation between the plaintiff and defendant Reyes for the purchase of the
property, in question, the plaintiff was firm and steadfast in its position, expressed in
writing by its President Vicente Angeles, that it was not willing to buy the said property
higher than P5,000.00, per square meter, which was far lower than the asking price of
defendant Reyes for P6,000.00, per square meter, undoubtedly, because, in its
perception, it would be difficult for other parties to buy the property, at a higher price
than what it was offering, since it is in occupation of the property, as lessee, the term
of which was to expire after about four (4) years more.
On the other hand, it was obvious, upon the basis of the last ditch effort of defendant
Reyes, thru his nephew, Atty. Alinea, to have the plaintiff buy the property, in
question, that he was willing to sell the said property at a price less than P6,000.00
and a little higher than P5,000.00, per square meter, precisely, because Atty. Alinea,
in behalf of his uncle, defendant Reyes, sought plaintiffs Angeles and asked him to
raise his price a little higher, indicating thereby the willingness of defendant Reyes to
sell said property at less than his offer of P6,000.00, per square meter.
This being the case, it can hardly be validly said by the plaintiff that he was deprived
of his right of first refusal to buy the subject property at a price of P5,300.00, per
square meter which is the amount defendants Cypress/Cornhill bought the said
property from defendant Reyes. For, it was again given such an opportunity to
exercise its right of first refusal by defendant Reyes had it only signified its willingness
to increase a little higher its purchase price above P5,000.00, per square meter, when
its President, Angeles, was asked by Atty. Alinea to do so, instead of adamantly
sticking to its offer of only P5,000.00 per square meter, by reason of which, therefore,
the plaintiff had lost, for the second time, its right of first refusal, even if defendant
Reyes did not expressly offer to sell to it the subject land at P5,300.00, per square
meter, considering that by the plea of Atty. Alinea, in behalf of defendant Reyes, for it
to increase its price a little, the plaintiff is to be considered as having forfeited again its
right of first refusal, it having refused to budged from its regid (sic) offer to buy the
subject property at no more than P5,000.00, per square meter.
As such, this Court holds that it was no longer necessary for the defendant Reyes to
expressly and categorically offer to the plaintiff the subject property at P5,300.00, per
square meter, in order that he can comply with his obligation to give first refusal to the
plaintiff as stipulated in the Contract of Lease, the plaintiff having had already lost its
right of first refusal, at the first instance, by refusing to buy the said property
at P6,000.00, per square meter, which was the asking price of defendant Reyes,
since to do so would be a useless ceremony and would only be an exercise in futility,
considering the firm and unbending position of the plaintiff, which defendant Reyes
already knew, that the plaintiff, at any event, was not amenable to increasing its price
at over P5,000.00, per square meter.
Dissatisfied with the decision of the trial court, both parties appealed to the Court
of Appeals.[29] However, the appellate court, through its Special Seventh Division,
rendered a Decision dated June 6, 1994 which affirmed the decision of the trial court in
its entirety.[30] In sustaining the decision of the trial court, the Court of Appeals adopted
the above-quoted ratiocination of the trial court and further added:
To put things in its proper perspective in accordance with the peculiar attendant
circumstances herein, particular stress should be given to RIVIERAs uncompromising
counter offer of only P5,000.00 per square meter on all the occasions when REYES
offered the subject property to it. RIVIERA, in its letter to REYES dated December 2,
1988 (Exhibit D, p. 68, Rollo) justified its rigid offer by saying that the above offer is
what we feel should be the market price of your property. If that be the case, We are
convinced, the same manner that REYES was, that RIVIERA was unwilling to
increase its counter offer at any present or future time. RIVIERAs unilateral valuation
of the subject property thus binds him, it cannot now be heard to claim that it could
have upped its offer had it been informed of CYPRESS and CORNHILLS offer
of P5,000.00 (sic) per square meter. Defendants CYPRESS and CORNHILL were
therefore right in saying that:
On the basic assumption that RIVIERA really meant what it said in its letter, DR.
REYES could not be faulted for believing that RIVIERA was definitely NOT WILLING
TO PAY MORE THAN P5,000.00 PER SQUARE METER ON HIS PROPERTY. The
fault lies with the deceptive and insincere words of RIVIERA.Injustice (sic) and equity,
RIVIERA must be deemed in estoppel in now belatedly asserting that it would have
been willing to pay a price higher than P5,000.00 x x x. (Defendants-Appellees
Cypress and Cornhills Brief, p. 8)
For this reason, no adverse inference can be drawn from REYES failure to disclose to
RIVIERA the intervening counter-offer of CYPRESS and CORNHILL.
It would have been far different had REYES non-disclosure of CYPRESS and
CORNHILLs counter-offer to RIVIERA resulted in the sale of the subject property at
equal or less than RIVIERAs offer; in which case, REYES would have been rightly
accused of cunningly circumventing RIVIERAs right of first refusal. But the
incontrovertible antecedents obtaining here clearly reveal REYES earnest efforts in
respecting RIVIERAs contractual right to initially purchase the subject property. Not
only once but twice did REYES approach RIVIERA, the last one being the most telling
indication of REYES sincerest intention in RIVIERA eventually purchasing the subject
property if only the latter would increase a little its offer of P5,000.00 per square
meter. And to this REYES was desperately willing to accede to despite the financial
quandary he was then in as the expiration of the redemption period drew closer and
closer, and despite the better offer of CYPRESS and CORNHILL. REYES
unquestionably had displayed good faith. Can the same be said of RIVIERA? We do
not think so. It appears that RIVIERA all along was trying to push REYES back
against the wall, for RIVIERA was well-aware of REYES precarious financial needs at
that time, and by clinging to its offer, REYES might eventually succumb to its offer out
of sheer desperation. RIVIERA was, to be frank, whimsically exercising its contractual
right to the prejudice of REYES who had commendably given RIVIERA extra leeway
in exercising it. And to this We say that no amount of jurisprudence RIVIERA might
avail of for the purpose of construing the right of first refusal, however enlightening
and persuasive they may be, will cover-up for its arrogant exercise of its right as can
be gleaned from the factual premises. Equity in this case tilts in favor of defendants
REYES, CYPRESS and CORNHILL that the consummated sale between them
concerning the subject property be given this Courts imprimatur, for if RIVIERA lost its
opportunity to acquire it, it has only itself to blame. For after all, REYES fundamental
and intrinsic right of ownership which necessarily carries with it the exclusive right to
dispose of it to whoever he pleases, must ultimately prevail over RIVIERAs right of
first refusal which it unscrupulously tried to exercise.
From this decision, Riviera filed a motion for reconsideration,[31] but the appellate court
denied the same in a Resolution dated September 22, 1994.[32]
Hence, Riviera interposed the instant petition anchored on the following errors: [33]
I
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF
DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN
RULING THAT PETITIONER RIVIERA FILIPINA, INC. ALREADY LOST ITS RIGHT
OF FIRST REFUSAL.
II
 THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF
DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION
IN NOT FINDING THAT IT WAS THE PETITIONER, NOT RESPONDENT
JUAN L. REYES, WHICH HAD BEEN THOROUGHLY DECEIVED BY THE
LATTER OUT OF ITS RIGHTS TO ITS CONTINUING PREJUDICE.
III
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF
DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION
IN DENYING RECONSIDERATION.
IV
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF
DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION
IN DECIDING PETITIONERS APPEAL AT A TIME WHEN THE PRINCIPAL
APPELLEE IS ALLEGEDLY DEAD AND NO PROPER SUBSTITUTION OF
THE ALLEGED DECEASED PARTY HAS BEEN MADE; HENCE, THE
DECISION OF THE COURT OF APPEALS AND ITS RESOLUTION DENYING
RECONSIDERATION, IS NULL AND VOID.
At the outset, we note that, while Riviera alleges that the Court of Appeals
committed grave abuse of discretion amounting to lack or excess of jurisdiction, the
instant petition is, as it should be, treated as a petition for review under Rule 45 and not
as a special civil action for certiorari under Rule 65 of the Revised Rules of Court, now
the 1997 Rules of Civil Procedure.
The distinctions between Rule 45 and 65 are far and wide, the most notable of
which is that errors of jurisdiction are best reviewed in a special civil action for certiorari
under Rule 65, while errors of judgment are correctible only by appeal in a petition for
review under Rule 45.[34] The rationale for the distinction is simple. When a court
exercises its jurisdiction an error committed while so engaged does not deprive it of the
jurisdiction being exercised when the error is committed. If it did, every error committed
by a court would deprive it of its jurisdiction and every erroneous judgment would be a
void judgment. This cannot be allowed. The administration of justice would not
countenance such a rule. Thus, an error of judgment that the court may commit in the
exercise of its jurisdiction is not correctible through the original special civil action of
certiorari.[35] Appeal from a final disposition of the Court of Appeals, as in the case at
bar, is by way of a petition for review under Rule 45. [36]
In the petition at bar, Riviera posits the view that its right of first refusal was totally
disregarded or violated by Reyes by the latters sale of the subject property to Cypress
and Cornhill. It contends that the right of first refusal principally amounts to a right to
match in the sense that it needs another offer for the right to be exercised.
The concept and interpretation of the right of first refusal and the consequences
of a breach thereof evolved in Philippine juristic sphere only within the last decade. It
all started in 1992 with Guzman, Bocaling & Co. v. Bonnevie[37] where the Court held
that a lease with a proviso granting the lessee the right of first priority all things and
conditions being equal meant that there should be identity of the terms and conditions
to be offered to the lessee and all other prospective buyers, with the lessee to enjoy
the right of first priority. A deed of sale executed in favor of a third party who cannot be
deemed a purchaser in good faith, and which is in violation of a right of first refusal
granted to the lessee is not voidable under the Statute of Frauds but rescissible under
Articles 1380 to 1381 (3) of the New Civil Code.
Subsequently in 1994, in the case of Ang Yu Asuncion v. Court of
Appeals,[38] the Court en banc departed from the doctrine laid down in Guzman,
Bocaling & Co. v. Bonnevie and refused to rescind a contract of sale which violated
the right of first refusal. The Court held that the so-called right of first refusal cannot be
deemed a perfected contract of sale under Article 1458 of the New Civil Code and, as
such, a breach thereof decreed under a final judgment does not entitle the aggrieved
party to a writ of execution of the judgment but to an action for damages in a proper
forum for the purpose.
In the 1996 case of Equatorial Realty Development, Inc. v. Mayfair Theater,
Inc.,[39] the Court en banc reverted back to the doctrine in Guzman Bocaling & Co. v.
Bonnevie stating that rescission is a relief allowed for the protection of one of the
contracting parties and even third persons from all injury and damage the contract may
cause or to protect some incompatible and preferred right by the contract.
Thereafter in 1997, in Paraaque Kings Enterprises, Inc. v. Court of
Appeals,[40] the Court affirmed the nature of and the concomitant rights and obligations
of parties under a right of first refusal. The Court, summarizing the rulings in Guzman,
Bocaling & Co. v. Bonnevie and Equatorial Realty Development, Inc. v. Mayfair
Theater, Inc., held that in order to have full compliance with the contractual right
granting petitioner the first option to purchase, the sale of the properties for the price
for which they were finally sold to a third person should have likewise been first offered
to the former. Further, there should be identity of terms and conditions to be offered to
the buyer holding a right of first refusal if such right is not to be rendered illusory. Lastly,
the basis of the right of first refusal must be the current offer to sell of the seller or offer
to purchase of any prospective buyer.
Thus, the prevailing doctrine is that a right of first refusal means identity of terms
and conditions to be offered to the lessee and all other prospective buyers and a
contract of sale entered into in violation of a right of first refusal of another person, while
valid, is rescissible.
However, we must remember that general propositions do not decide specific
cases. Rather, laws are interpreted in the context of the peculiar factual situation of
each proceeding. Each case has its own flesh and blood and cannot be ruled upon on
the basis of isolated clinical classroom principles. [41] Analysis and construction should
not be limited to the words used in the contract, as they may not accurately reflect the
parties true intent.[42] The court must read a contract as the average person would read
it and should not give it a strained or forced construction. [43]
In the case at bar, the Court finds relevant and significant the cardinal rule in the
interpretation of contracts that the intention of the parties shall be accorded primordial
consideration and in case of doubt, their contemporaneous and subsequent acts shall
be principally considered.[44] Where the parties to a contract have given it a practical
construction by their conduct as by acts in partial performance, such construction may
be considered by the court in construing the contract, determining its meaning and
ascertaining the mutual intention of the parties at the time for contracting. The parties
practical construction of their contract has been characterized as a clue or index to, or
as evidence of, their intention or meaning and as an important, significant, convincing,
persuasive, or influential factor in determining the proper construction of the contract. [45]
An examination of the attendant particulars of the case do not persuade us to
uphold Rivieras view. As clearly shown by the records and transcripts of the case, the
actions of the parties to the contract of lease, Reyes and Riviera, shaped their
understanding and interpretation of the lease provision right of first refusal to mean
simply that should the lessor Reyes decide to sell the leased property during the term
of the lease, such sale should first be offered to the lessee Riviera.And that is what
exactly ensued between Reyes and Riviera, a series of negotiations on the price per
square meter of the subject property with neither party, especially Riviera, unwilling to
budge from his offer, as evidenced by the exchange of letters between the two
contenders.
It can clearly be discerned from Rivieras letters dated December 2, 1988 and
February 4, 1989 that Riviera was so intractable in its position and took obvious
advantage of the knowledge of the time element in its negotiations with Reyes as the
redemption period of the subject foreclosed property drew near. Riviera strongly
exhibited a take-it or leave-it attitude in its negotiations with Reyes. It quoted its fixed
and final price as Five Thousand Pesos (P5,000.00) and not any peso more. It voiced
out that it had other properties to consider so Reyes should decide and make known
its decision within fifteen days. Riviera, in its letter dated February 4, 1989, admittedly,
even downgraded its offer when Reyes offered anew the property to it, such that
whatever amount Reyes initially receives from Riviera would absolutely be insufficient
to pay off the redemption price of the subject property. Naturally, Reyes had to disagree
with Rivieras highly disadvantageous offer.
Nary a howl of protest or shout of defiance spewed forth from Rivieras lips, as it
were, but a seemingly whimper of acceptance when the counsel of Reyes strongly
expressed in a letter dated December 5, 1989 that Riviera had lost its right of first
refusal. Riviera cannot now be heard that had it been informed of the offer of Five
Thousand Three Hundred Pesos (P5,300.00) of Cypress and Cornhill it would have
matched said price. Its stubborn approach in its negotiations with Reyes showed
crystal-clear that there was never any need to disclose such information and doing so
would be just a futile effort on the part of Reyes. Reyes was under no obligation to
disclose the same. Pursuant to Article 1339[46] of the New Civil Code, silence or
concealment, by itself, does not constitute fraud, unless there is a special duty to
disclose certain facts, or unless according to good faith and the usages of commerce
the communication should be made.[47] We apply the general rule in the case at bar
since Riviera failed to convincingly show that either of the exceptions are relevant to
the case at bar.
In sum, the Court finds that in the interpretation of the right of first refusal as
understood by the parties herein, the question as to what is to be included therein or
what is meant by the same, as in all other provisions of the contract, is for the parties
and not for the court to determine, and this question may not be resolved by what the
parties might have provided had they thought about it, which is evident from Riviera
claims, or by what the court might conclude regarding abstract fairness.[48]
The Court would be rewriting the contract of Reyes and Riviera under the guise
of construction were we to interpret the right of first refusal as Riviera propounds it,
despite a contrary construction as exhibited by its actions. A court, even the Supreme
Court, has no right to make new contracts for the parties or ignore those already made
by them, simply to avoid seeming hardships. Neither abstract justice nor the rule of
liberal construction justifies the creation of a contract for the parties which they did not
make themselves or the imposition upon one party to a contract of an obligation not
assumed.[49]
On the last error attributed to the Court of Appeals which is the effect on the
jurisdiction of the appellate court of the non-substitution of Reyes, who died during the
pendency of the appeal, the Court notes that when Riviera filed its petition with this
Court and assigned this error, it later filed on October 27, 1994 a Manifestation [50] with
the Court of Appeals stating that it has discovered that Reyes is already dead, in view
of which the appellate court issued a Resolution dated December 16, 1994 which noted
the manifestation of Riviera and directed the counsel of Reyes to submit a copy of the
latters death certificate and to file the proper motion for substitution of
party.[51] Complying therewith, the necessary motion for substitution of deceased
Reyes, who died on January 7, 1994, was filed by the heirs, namely, Estefania B.
Reyes, Juanita R. de la Rosa, Juan B. Reyes, Jr. and Fidel B. Reyes. [52] Acting on the
motion for substitution, the Court of Appeals granted the same. [53]
Notwithstanding the foregoing, Section 16[54] and 17[55] of Rule 3 of the Revised
Rules of Court, upon which Riviera anchors its argument, has already been amended
by the 1997 Rules of Civil Procedure.[56] Even applying the old Rules, the failure of a
counsel to comply with his duty under Section 16 of Rule 3 of the Revised Rules of
Court, to inform the court of the death of his client and no substitution of such is effected,
will not invalidate the proceedings and the judgment thereon if the action survives the
death of such party,[57] as this case does, since the death of Reyes did not extinguish
his civil personality. The appellate court was well within its jurisdiction to proceed as it
did with the case since the death of a party is not subject to its judicial notice. Needless
to stress, the purpose behind the rule on substitution of parties is the protection of the
right of every party to due process. This purpose has been adequately met in this case
since both parties argued their respective positions through their pleadings in the trial
court and the appellate court. Besides, the Court has already acquired jurisdiction over
the heirs of Reyes by voluntarily submitting themselves to our jurisdiction.[58]

In view of all the foregoing, the Court is convinced that the appellate court
committed no reversible error in its challenged Decision.

WHEREFORE, the instant petition is hereby DENIED, and the Decision of the
Court of Appeals dated June 6, 1994 in CA-G.R. CV No. 26513 is AFFIRMED. No
pronouncement as to costs.

SO ORDERED.

SECOND DIVISION
[G.R. No. 125761. April 30, 2003]
SALVADOR P. MALBAROSA, petitioner, vs. HON. COURT OF APPEALS and
S.E.A. DEVELOPMENT CORP. respondents.
DECISION
CALLEJO, SR., J.:
Philtectic Corporation and Commonwealth Insurance Co., Inc. were only two of
the group of companies wholly-owned and controlled by respondent S.E.A.
Development Corporation (SEADC). The petitioner Salvador P. Malbarosa was the
president and general manager of Philtectic Corporation, and an officer of other
corporations belonging to the SEADC group of companies. The respondent assigned
to the petitioner one of its vehicles covered by Certificate of Registration No.
04275865[1] described as a 1982 model Mitsubishi Gallant Super Saloon, with plate
number PCA 180 for his use. He was also issued membership certificates in the
Architectural Center, Inc. Louis Da Costa was the president of the respondent and
Commonwealth Insurance Co., Inc., while Senen Valero was the Vice-Chairman of the
Board of Directors of the respondent and Vice-Chairman of the Board of Directors of
Philtectic Corporation.
Sometime in the first week of January 1990, the petitioner intimated to Senen
Valero his desire to retire from the SEADC group of companies and requested that his
1989 incentive compensation as president of Philtectic Corporation be paid to him. On
January 8, 1990, the petitioner sent a letter to Senen Valero tendering his resignation,
effective February 28, 1990 from all his positions in the SEADC group of companies,
and reiterating therein his request for the payment of his incentive compensation for
1989.[2]
Louis Da Costa met with the petitioner on two occasions, one of which was on
February 5, 1990 to discuss the amount of the 1989 incentive compensation petitioner
was entitled to, and the mode of payment thereof. Da Costa ventured that the petitioner
would be entitled to an incentive compensation in the amount of around P395,000.
On March 14, 1990, the respondent, through Senen Valero, signed a letter-offer
addressed to the petitioner[3] stating therein that petitioners resignation from all the
positions in the SEADC group of companies had been accepted by the respondent,
and that he was entitled to an incentive compensation in the amount of P251,057.67,
and proposing that the amount be satisfied, thus:
- The 1982 Mitsubishi Super saloon car assigned to you by the company shall be
transferred to you at a value of P220,000.00. (Although you have indicated a value
of P180,000.00, our survey in the market indicates that P220,000.00 is a reasonable
reflection of the value of the car.)
- The membership share of our subsidiary, Tradestar International, Inc. in the
Architectural Center, Inc. will be transferred to you. (Although we do not as yet have
full information as to the value of these shares, we have been informed that the
shares have traded recently in the vicinity of P60,000.00.)[4]
The respondent required that if the petitioner agreed to the offer, he had to affix
his conformity on the space provided therefor and the date thereof on the right bottom
portion of the letter, thus:
Agreed:
SALVADOR P. MALBAROSA
Date: _____________________[5]
On March 16, 1990, Da Costa met with the petitioner and handed to him the
original copy of the March 14, 1990 Letter-offer for his consideration and
conformity. The petitioner was dismayed when he read the letter and learned that he
was being offered an incentive compensation of only P251,057.67. He told Da Costa
that he was entitled to no less than P395,000 as incentive compensation. The petitioner
refused to sign the letter-offer on the space provided therefor. He received the original
of the letter and wrote on the duplicate copy of the letter-offer retained by Da Costa,
the words: Recd original for review purposes. [6] Despite the lapse of more than two
weeks, the respondent had not received the original of the March 14, 1990 Letter-offer
of the respondent with the conformity of the petitioner on the space provided
therefor. The respondent decided to withdraw its March 14, 1990 Offer. On April 3,
1996, the Board of Directors of the respondent approved a resolution authorizing the
Philtectic Corporation and/or Senen Valero to demand from the petitioner for the return
of the car and to take such action against the petitioner including the institution of an
action in court against the petitioner for the recovery of the motor vehicle. [7]
On April 4, 1990, Philtectic Corporation, through its counsel, wrote the petitioner
withdrawing the March 14, 1990 Letter-offer of the respondent and demanding that the
petitioner return the car and his membership certificate in the Architectural Center, Inc.
within 24 hours from his receipt thereof. [8] The petitioner received the original copy of
the letter on the same day.
On April 7, 1990, the petitioner wrote the counsel of Philtectic Corporation
informing the latter that he cannot comply with said demand as he already accepted
the March 14, 1990 Letter-offer of the respondent when he affixed on March 28, 1990
his signature on the original copy of the letter-offer.[9] The petitioner enclosed a xerox
copy of the original copy of the March 14, 1990 Letter-offer of the respondent, bearing
his signature on the space provided therefore dated March 28, 1990. [10]
With the refusal of the petitioner to return the vehicle, the respondent, as plaintiff,
filed a complaint against the petitioner, as defendant, for recovery of personal property
with replevin with damages and attorneys fees, thus:
WHEREFORE, PREMISES CONSIDERED, it is respectfully prayed before this
Honorable Court that:
1. Before hearing and upon approval of plaintiffs bond, a writ be issued immediately
for the seizure of the vehicle described in paragraph 3 hereof, wherever it may be
found, and for its delivery to plaintiff;
2. After trial of the issues, judgment be rendered adjudging that plaintiff has the right
to the possession of the said motor vehicle, and, in the alternative, that defendant
must deliver such motor vehicle to plaintiff or pay to plaintiff the value thereof in case
delivery cannot be made;
3. After trial, hold the defendant liable to plaintiff for the use of the motor vehicle in the
amount of P1,000.00 per day from date of demand until the motor vehicle is returned
to plaintiff.
4. After trial, hold the defendant liable to plaintiff for attorneys fees and costs of
litigation in the amount of P100,000.00.
Plaintiffs likewise prays for such other reliefs as are just and equitable under the
circumstances.[11]
On April 30, 1990, the trial court issued an order for the issuance of a writ of
replevin.[12] Correspondingly, the writ of replevin was issued on May 8, 1990. [13]
On May 11, 1990, the Sheriff served the writ on the petitioner and was able to
take possession of the vehicle in question. On May 15, 1990, the petitioner was able to
recover the possession of the vehicle upon his filing of the counter-bond.[14]
In his Answer to the complaint, the petitioner, as defendant therein, alleged that
he had already agreed on March 28, 1990 to the March 14, 1990 Letter-offer of the
respondent, the plaintiff therein, and had notified the said plaintiff of his acceptance;
hence, he had the right to the possession of the car. Philtectic Corporation had no right
to withdraw the offer of the respondent SEADC. The petitioner testified that after
conferring with his counsel, he had decided to accept the offer of the respondent,
and had affixed his signature on the space below the word Agree in the March 14, 1990
Letter-offer, thus:
Agreed:
(Sgd.)
SALVADOR P. MALBAROSA
Date: 3 28 - 90[15]
The petitioner adduced evidence that on March 9, 1990, he had written Senen
Valero that he was agreeable to an incentive compensation of P218,000 to be settled
by the respondent by transferring the car to the petitioner valued at P180,000
and P38,000 worth of shares of the Architectural Center, Inc. on the claim of Da Costa
that respondent was almost bankrupt. However, the petitioner learned that the
respondent was financially sound; hence, he had decided to receive his incentive
compensation of P395,000 in cash.[16] On March 29, 1990, the petitioner called up the
office of Louis Da Costa to inform the latter of his acceptance of the letter-offer of the
respondent. However, the petitioner was told by Liwayway Dinglasan, the telephone
receptionist of Commonwealth Insurance Co, that Da Costa was out of the office. The
petitioner asked Liwayway to inform Da Costa that he had called him up and that he
had already accepted the letter-offer. Liwayway promised to relay the message to Da
Costa. Liwayway testified that she had relayed the petitioners message to Da Costa
and that the latter merely nodded his head.
After trial, the court a quo rendered its Decision[17] on July 28, 1992, the
dispositive portion of which reads as follows:
WHEREFORE, in view of all the foregoing, judgment is rendered ordering the
defendant:
1. To deliver the motor vehicle prescribed [sic] in the complaint to plaintiff
SEADC, or pay its value of P220,000 in case delivery cannot be
made;
2. pay plaintiff SEADC P50,000 as and for attorneys fees; and
3. Cost of litigation.
SO ORDERED.[18]
The trial court stated that there existed no perfected contract between the
petitioner and the respondent on the latters March 14, 1990 Letter-offer for failure of
the petitioner to effectively notify the respondent of his acceptance of said letter-offer
before the respondent withdrew the same. The respondent filed a motion for the
amendment of the decision of the trial court, praying that the petitioner should be
ordered to pay to the respondent reasonable rentals for the car. On October 10, 1992,
the court a quo issued an order, granting plaintiffs motion and amending the dispositive
portion of its July 28, 1992 Decision:
1. Ordering defendant to pay to plaintiff lease rentals for the use of the
motor vehicle at the rate of P1,000.00 per Day from May 8, 1990 up
to the date of actual delivery to the plaintiff of the motor vehicle; and
2. Ordering First Integrated Bonding & Insurance Co. to make good on its
obligations to plaintiff under the Counterbond issued pursuant to
this case.
SO ORDERED.[19]
The petitioner appealed from the decision and the order of the court a quo to the
Court of Appeals.
On February 8, 1996, the Court of Appeals rendered its Decision,[20] affirming the
decision of the trial court. The dispositive portion of the decision reads:
WHEREFORE, the Decision dated July 28, 1992 and the Order dated October 10,
1992 of the Regional Trial Court of Pasig (Branch 158) are herebyAFFIRMED with the
MODIFICATION that the period of payment of rentals at the rate of P1,000.00 per day
shall be from the time this decision becomes final until actual delivery of the
motor vehicle to plaintiff-appellee is made.
Costs against the defendant-appellant.
SO ORDERED.[21]
The Court of Appeals stated that the petitioner had not accepted the respondents
March 14, 1990 Letter-offer before the respondent withdrew said offer on April 4, 1990.
The petitioner filed a petition for review on certiorari of the decision of the Court
of Appeals.
The petitioner raises two issues, namely: (a) whether or not there was a valid
acceptance on his part of the March 14, 1990 Letter-offer of the respondent;[22] and (b)
whether or not there was an effective withdrawal by the respondent of said letter-offer.
The petition is dismissed.
Anent the first issue, the petitioner posits that the respondent had given him a
reasonable time from March 14, 1990 within which to accept or reject its March 14,
1990 Letter-offer. He had already accepted the offer of the respondent when he affixed
his conformity thereto on the space provided therefor on March 28, 1990 [23] and had
sent to the respondent corporation on April 7, 1990 a copy of said March 14, 1990
Letter-offer bearing his conformity to the offer of the respondent; hence, the respondent
can no longer demand the return of the vehicle in question. He further avers that he
had already impliedly accepted the offer when after said respondents offer, he retained
possession of the car.
For its part, the respondent contends that the issues raised by the petitioner are
factual. The jurisdiction of the Court under Rule 45 of the Rules of Court, as amended,
is limited to revising and correcting errors of law of the CA. As concluded by the Court
of Appeals, there had been no acceptance by the petitioner of its March 14, 1990 Letter-
offer. The receipt by the petitioner of the original of the March 14, 1990 Letter-offer for
review purposes amounted merely to a counter-offer of the petitioner. The findings of
the Court of Appeals are binding on the petitioner. The petitioner adduced no proof that
the respondent had granted him a period within which to accept its offer. The latter
deemed its offer as not accepted by the petitioner in light of petitioners ambivalence
and indecision on March 16, 1990 when he received the letter-offer of respondent.
We do not agree with the petitioner.
Under Article 1318 of the Civil Code, the essential requisites of a contract are as
follows:
Art. 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
Under Article 1319 of the New Civil Code, the consent by a party is manifested by
the meeting of the offer and the acceptance upon the thing and the cause which are to
constitute the contract. An offer may be reached at any time until it is accepted. An offer
that is not accepted does not give rise to a consent. The contract does not come into
existence.[24] To produce a contract, there must be acceptance of the offer which may
be express or implied[25] but must not qualify the terms of the offer. The acceptance
must be absolute, unconditional and without variance of any sort from the offer. [26]
The acceptance of an offer must be made known to the offeror. [27] Unless the
offeror knows of the acceptance, there is no meeting of the minds of the parties, no real
concurrence of offer and acceptance.[28] The offeror may withdraw its offer and revoke
the same before acceptance thereof by the offeree. The contract is perfected only from
the time an acceptance of an offer is made known to the offeror. If an offeror prescribes
the exclusive manner in which acceptance of his offer shall be indicated by the offeree,
an acceptance of the offer in the manner prescribed will bind the offeror. On the other
hand, an attempt on the part of the offeree to accept the offer in a different manner
does not bind the offeror as the absence of the meeting of the minds on the altered
type of acceptance.[29] An offer made inter praesentes must be accepted
immediately. If the parties intended that there should be an express acceptance, the
contract will be perfected only upon knowledge by the offeror of the express acceptance
by the offeree of the offer. An acceptance which is not made in the manner prescribed
by the offeror is not effective but constitutes a counter-offer which the offeror may
accept or reject.[30] The contract is not perfected if the offeror revokes or withdraws its
offer and the revocation or withdrawal of the offeror is the first to reach the
offeree.[31] The acceptance by the offeree of the offer after knowledge of the revocation
or withdrawal of the offer is inefficacious. The termination of the contract when the
negotiations of the parties terminate and the offer and acceptance concur, is largely a
question of fact to be determined by the trial court.[32]
In this case, the respondent made its offer through its Vice-Chairman of the Board
of Directors, Senen Valero. On March 16, 1990, Da Costa handed over the original of
the March 14, 1990 Letter-offer of the respondent to the petitioner. The respondent
required the petitioner to accept the offer by affixing his signature on the space provided
in said letter-offer and writing the date of said acceptance, thus foreclosing an implied
acceptance or any other mode of acceptance by the petitioner. However, when the
letter-offer of the respondent was delivered to the petitioner on March 16, 1990, he did
not accept or reject the same for the reason that he needed time to decide whether to
reject or accept the same.[33] There was no contract perfected between the petitioner
and the respondent corporation.[34] Although the petitioner claims that he had affixed
his conformity to the letter-offer on March 28, 1990, the petitioner failed to transmit the
said copy to the respondent. It was only on April 7, 1990 when the petitioner appended
to his letter to the respondent a copy of the said March 14, 1990 Letter-offer bearing
his conformity that he notified the respondent of his acceptance to said offer. But then,
the respondent, through Philtectic Corporation, had already withdrawn its offer and had
already notified the petitioner of said withdrawal via respondents letter dated April 4,
1990 which was delivered to the petitioner on the same day.Indubitably, there was no
contract perfected by the parties on the March 14, 1990 Letter-offer of the respondent.
The petitioners plaint that he was not accorded by the respondent reasonable
time to accept or reject its offer does not persuade. It must be underscored that there
was no time frame fixed by the respondent for the petitioner to accept or reject its
offer. When the offeror has not fixed a period for the offeree to accept the offer, and the
offer is made to a person present, the acceptance must be made immediately.[35] In this
case, the respondent made its offer to the petitioner when Da Costa handed over on
March 16, 1990 to the petitioner its March 14, 1990 Letter-offer but that the petitioner
did not accept the offer. The respondent, thus, had the option to withdraw or revoke the
offer, which the respondent did on April 4, 1990.
Even if it is assumed that the petitioner was given a reasonable period to accept
or reject the offer of the respondent, the evidence on record shows that from March 16,
1990 to April 3, 1990, the petitioner had more than two weeks which was more than
sufficient for the petitioner to accept the offer of the respondent. Although the petitioner
avers that he had accepted the offer of the respondent on March 28, 1990, however,
he failed to transmit to the respondent the copy of the March 14, 1990 Letter-offer
bearing his conformity thereto. Unless and until the respondent received said copy of
the letter-offer, it cannot be argued that a contract had already been perfected between
the petitioner and the respondent.
On the second issue, the petitioner avers that Philtectic Corporation, although a
wholly-owned and controlled subsidiary of the respondent, had no authority to withdraw
the offer of the respondent. The resolution of the respondent authorizing Philtectic
Corporation to take such action against the petitioner including the institution of an
action against him for the recovery of the subject car does not authorize Philtectic
Corporation to withdraw the March 14, 1990 Letter-offer of the respondent. The
withdrawal by Philtectic Corporation on April 4, 1990 of the offer of the respondent was
ineffective insofar as the petitioner was concerned. The respondent, for its part, asserts
that the petitioner had failed to put in issue the matter of lack of authority of Philtectic
Corporation to withdraw for and in behalf of the respondent its March 14, 1990 Letter-
offer. It contends that the authority of Philtectic Corporation to take such action
including the institution of an action against the petitioner for the recovery of the car
necessarily included the authority to withdraw the respondents offer. Even then, there
was no need for the respondent to withdraw its offer because the petitioner had already
rejected the respondents offer on March 16, 1990 when the petitioner received the
original of the March 14, 1990 Letter-offer of the respondent without the petitioner
affixing his signature on the space therefor.
We do not agree with the petitioner. Implicit in the authority given to Philtectic
Corporation to demand for and recover from the petitioner the subject car and to
institute the appropriate action against him to recover possession of the car is the
authority to withdraw the respondents March 14, 1990 Letter-offer. It cannot be argued
that respondent authorized Philtectic Corporation to demand and sue for the recovery
of the car and yet did not authorize it to withdraw its March 14, 1990 Letter-offer to the
petitioner. Besides, when he testified, Senen Valero stated that the April 4, 1990 letter
of Philtectic Corporation to the petitioner was upon his instruction and conformably with
the aforesaid resolution of the Board of Directors of the respondent:
Q Mr. Valero, after the Board passed this resolution. (sic) What action did
you take, if any?
A After that resolution was passed. (sic) I instructed our lawyers to proceed
with the demand letter for the recovery of the vehicle.
Q Do you know if that demand letter was every (sic) made by your lawyer?
A Yes. I know that because I was the one who gave the instruction and
before it was finally served on Malbarosa, I was shown about the
demand letter.
C/Pltf. - Your honor, or rather
 Mr. Valero, if I show you a copy of that letter, will you be able to identify the
same?

A Yes, sir.

Q I am now showing to you a copy of the letter dated April 4, 1990,

addressed to Mr. Salvador P. Malbarosa and signed by Romulo,
Mabanta, Buenaventura, Sayoc and Delos Angeles by _____. What
relation, if any, does that demand letter have with the demand letter
that you are talking about?

A Its the same one I am referring to.

C/Pltf. Your honor, we manifest that the letter has been previously marked
as our exh. D.

Q Mr. Valero, on the first paragraph of this demand letter, you stated that
the letter is written in behalf of Philtectic Corporation. Do you have any
knowledge why it was written this way?

A Yes. Because Philtectic, being the agent used here by S.E.A.

Development Corporation for the one using the car, it was only
deemed proper that Philtectic will be the one to send the demand letter.

Q In the second paragraph of that letter, Mr. Valero, you stated that there
was an allusion made to the offer made on March 14, 1990. That the
1982 Mitsubishi Galant Super Saloon car with plate# M-PCA-189
assigned to you by the company, and the membership share in the
Architectural Center Inc., be transferred to you in settlement. You
previously stated about this March 14 letter. What relation, if any, does
this second paragraph with the letter-offer that you previously stated.

C/Def. - Objection, your honor. This witness is incompetent

C/Pltf. - But he was the one who instructed, your honor.

Court - LET the witness answer.

Witness- (Stenographer reads back the previous question asked by counsel

for him to answer, and.)

A It is the same.[36]

IN LIGHT OF ALL THE FOREGOING, the petition is dismissed. The Decision of

the Court of Appeals is AFFIRMED.

SO ORDERED.

FIRST DIVISION
[G.R. No. 136054. September 5, 2001]
HEIRS OF SEVERINA SAN MIGUEL, namely: MAGNO LAPINA, PACENCIA
LAPINA, MARCELO LAPINA, SEVERINO LAPINA, ROSARIO LAPINA,
FRANCISCO LAPINA, CELIA LAPINA assisted by husband RODOLFO
TOLEDO, petitioners, vs. THE HONORABLE COURT OF APPEALS,
DOMINADOR SAN MIGUEL, GUILLERMO F. SAN MIGUEL, PACIENCIA F.
SAN MIGUEL, CELESTINO, assisted by husband, ANTERO CELESTINO,
represented by their Attorney-in-Fact ENRICO CELESTINO, AUGUSTO
SAN MIGUEL, ANTONIO SAN MIGUEL, RODOLFO SAN MIGUEL,
CONRADO SAN MIGUEL and LUCITA SAN MIGUEL, respondents.
DECISION
PARDO, J.:
The Case
The case is a petition for review on certiorari[1] of the decision of the Court of
Appeals,[2] affirming that of the Regional Trial Court, Cavite, Branch 19,
Bacoor[3] ordering petitioners, Heirs of Severina San Miguel (hereafter, Severinas heirs)
to surrender to respondents Dominador San Miguel, et al. (hereafter, Dominador, et
al.), Transfer Certificate of Title No. 223511 and further directing Severinas heirs to pay
for the capital gains and related expenses for the transfer of the two (2) lots to
Dominador, et al.
The Facts
This case involves a parcel of land originally claimed by Severina San Miguel
(petitioners predecessor-in-interest, hereafter, Severina). The land is situated in
Panapan, Bacoor, Cavite with an area of six hundred thirty two square meters (632 sq.
m.), more or less.
Without Severinas knowledge, Dominador managed to cause the subdivision of
the land into three (3) lots, to wit:[4]
LRC Psu 1312 - with an area of 108 square meters;
LRC Psu -1313 - Lot 1, with an area of 299 square meters;
LRC Psu -1313 - Lot 2, with an area of 225 square meters.
On September 25, 1974, Dominador, et al. filed a petition with the Court of First
Instance, Cavite, as a land registration court, to issue title over Lots 1 and 2 of LRC
Psu-1313, in their names.[5]
On July 19, 1977, the Land Registration Commission (hereafter LRC) rendered a
decision directing the issuance of Original Certificate of Title No. 0-1816 in the names
of Dominador, et al.
On or about August 22, 1978, Severina filed with the Court of First Instance of
Cavite a petition for review of the decision alleging that the land registration
proceedings were fraudulently concealed by Dominador from her. [6]
On December 27, 1982, the court resolved to set aside the decision of July 19,
1977, and declared Original Certificate of Title No. 0-1816 as null and void.
On July 13, 1987, the Register of Deeds of Cavite issued Transfer Certificate of
Title No. T-223511 in the names of Severina and her heirs.[7]
On February 15, 1990, the trial court issued an order in favor of Severinas heirs,
to wit:[8]
WHEREFORE, as prayed for, let the writ of possession previously issued in favor of
petitioner Severina San Miguel be implemented.
However, the writ was returned unsatisfied.
On November 28, 1991, the trial court ordered:[9]
WHEREFORE, as prayed for, let an alias writ of demolition be issued in favor of
petitioners, Severina San Miguel.
Again, the writ was not satisfied.
On August 6, 1993, Severinas heirs, decided not to pursue the writs of possession
and demolition and entered into a compromise with Dominador, et al. According to the
compromise, Severinas heirs were to sell the subject lots [10] to Dominador, et al. for one
and a half million pesos (P1.5 M) with the delivery of Transfer Certificate of Title No. T-
223511 (hereafter, the certificate of title) conditioned upon the purchase of another
lot[11] which was not yet titled at an additional sum of three hundred thousand pesos
(P300,000.00). The salient features of the compromise (hereafter kasunduan) are:[12]
5. Na ang Lot 1 at Lot 2, plano LRCPsu-1313 na binabanggit sa itaas na
ipinagkasundo ng mga tagapagmana ni Severina San Miguel na kilala sa kasulatang
ito sa taguring LAPINA (representing Severinas heirs), na ilipat sa pangalan nina SAN
MIGUEL (representing Dominadors heirs) alang alang sa halagang ISANG MILYON
AT LIMANG DAANG LIBONG PISO (P1,500,000.00) na babayaran nina SAN
MIGUEL kina LAPINA;
6. Na si LAPINA at SAN MIGUEL ay nagkakasundo na ang lote na sakop ng
plano LRC- Psu-1312, may sukat na 108 metro cuadrado ay ipagbibili na rin
kina SAN MIGUEL sa halagang TATLONG DAANG LIBONG PISO (P300,000.00);
7. Na kinikilala ni SAN MIGUEL na ang tunay na may-ari ng nasabing lote na sakop
ng plano LRC Psu-1312 ay sina LAPINA at sila na ang magpapatitulo nito at
sina LAPINA ay walang pananagutan sa pagpapatitulo nito at sa paghahabol ng sino
mang tao;
8. Na ang nasabing halaga na TATLONG DAANG LIBONG PISO (P300,000.00) ay
babayaran nina SAN MIGUEL kina LAPINA sa loob ng dalawang (2)buwan mula sa
petsa ng kasulatang ito at kung hindi mabayaran nina SAN MIGUEL ang nasabing
halaga sa takdang panahon ay mawawalan ng kabuluhan ang kasulatang ito;
9. Na sina LAPINA at SAN MIGUEL ay nagkakadunso (sic) rin na ang owners copy
ng Transfer Certificate of Title No. T-223511 na sumasakop sa Lots 1 at 2, plano LRC
Psu-1313 ay ilalagay lamang nina LAPINA kina SAN MIGUEL pagkatapos
mabayaran ang nabanggit na P300,000.00
On the same day, on August 6, 1993, pursuant to the kasunduan, Severinas heirs
and Dominador, et al. executed a deed of sale designated as kasulatan sa bilihan ng
lupa.[13]
On November 16, 1993, Dominador, et al. filed with the trial court, [14] Branch 19,
Bacoor, Cavite, a motion praying that Severinas heirs deliver the owners copy of the
certificate of title to them.[15]
In time, Severinas heirs opposed the motion stressing that under the kasunduan,
the certificate of title would only be surrendered upon Dominador, et al.s payment of
the amount of three hundred thousand pesos (P300,000.00) within two months from
August 6, 1993, which was not complied with.[16]
Dominador, et al. admitted non-payment of three hundred thousand pesos
(P300,000.00) for the reason that Severinas heirs have not presented any proof of
ownership over the untitled parcel of land covered by LRC- Psu-1312. Apparently, the
parcel of land is declared in the name of a third party, a certain Emiliano Eugenio. [17]
Dominador, et al. prayed that compliance with the kasunduan be deferred until
such time that Severinas heirs could produce proof of ownership over the parcel of
land.[18]
Severinas heirs countered that the arguments of Dominador, et al. were untenable
in light of the provision in the kasunduan where Dominador, et al. admitted their
ownership over the parcel of land, hence dispensing with the requirement that they
produce actual proof of title over it.[19] Specifically, they called the trial courts attention
to the following statement in the kasunduan:[20]
7. Na kinikilala ni SAN MIGUEL na ang tunay na may-ari ng nasabing lote na sakop
ng plano LRC Psu-1312 ay sina LAPINA at sila na ang magpapatitulo nito at
sina LAPINA ay walang pananagutan sa pagpapatitulo nito at sa paghahabol ng sino
mang tao;
According to Severinas heirs, since Dominador, et al. have not paid the amount
of three hundred thousand pesos (P300,000.00), then they were justified in withholding
release of the certificate of title.[21]
The trial court conducted no hearing and then rendered judgment based on the
pleadings and memoranda submitted by the parties.
The Trial Courts Ruling
On June 27, 1994, the trial court issued an order to wit: [22]
WHEREFORE, finding the Motion to Order to be impressed with merit, the
defendants-oppositors-vendors Heirs of Severina San Miguel are hereby ordered to
surrender to the movant-plaintiffs-vendees-Heirs of Dominador San Miguel the
Transfer Certificates of Title No. 223511 and for herein defendants-oppositors-
vendors to pay for the capital gains and related expenses for the transfer of the two
lots subject of the sale to herein movants-plaintiffs-vendees-Heirs of Dominador San
Miguel.
SO ORDERED.
On July 25, 1994, Severinas heirs filed with the trial court a motion for
reconsideration of the afore-quoted order.[23]
 On January 23, 1995, the trial court denied the motion for reconsideration for lack
of merit and further ordered:[24]
xxx...Considering that the Lots 1 and 2 covered by TCT No. T-223511 had already
been paid since August 6, 1993 by the plaintiffs-vendees Dominador San Miguel, et
al. (Vide, Kasulatan sa Bilihan ng Lupa, Rollo, pp. 174-176), herein defendants-
vendors-Heirs of Severina San Miguel is hereby ordered (sic) to deliver the aforesaid
title to the former (Dominador San Miguel, et al.) within thirty (30) days from receipt of
this order. In case the defendants-vendors-Heirs of Severina San Miguel fail and
refuse to do the same, then the Register of Deeds of Cavite is ordered to immediately
cancel TCT No. T-223511 in the name of Severina San Miguel and issue another one
in the name of plaintiffs Dominador San Miguel, et al.
Also send a copy of this Order to the Register of Deeds of the Province of Cavite,
Trece Martires City, for her information and guidance.
SO ORDERED.
On February 7, 1995, Severinas heirs appealed the orders to the Court of
Appeals.[25]
The Court of Appeals Ruling
On June 29, 1998, the Court of Appeals promulgated a decision denying the
appeal, and affirming the decision of the trial court. The Court of Appeals added that
the other matters raised in the petition were extraneous to the kasunduan.[26] The Court
of Appeals upheld the validity of the contract of sale and sustained the parties freedom
to contract. The Court of Appeals decided, thus:[27]
WHEREFORE, the decision appealed from is hereby AFFIRMED.
SO ORDERED.
On August 4, 1998, Severinas heirs filed with the Court of Appeals a motion for
reconsideration of the above decision.[28]
On October 14, 1998, the Court of Appeals denied the motion for reconsideration
for lack of merit.[29]
Hence, this appeal.[30]
The Issues
Severinas heirs submit that the Court of Appeals erred and committed grave
abuse of discretion: First, when it held that the kasunduan had no effect on
the kasulatan sa bilihan ng lupa. Second, when it ordered them to surrender the
certificate of title to Dominador, et al., despite non-compliance with their prior
obligations stipulated under the kasunduan. Third, when it did not find that
the kasunduan was null and void for having been entered into by Dominador, et al.
fraudulently and in bad faith.[31]
We find the above issues raised by Severinas heirs to be factual. The question
whether the prerequisites to justify release of the certificate of title to Dominador, et al.
have been complied with is a question of fact.[32]
However, we sift through the arguments and identify the main legal issue, which
is whether Dominador, et al. may be compelled to pay the three hundred thousand
pesos (P300,000.00) as agreed upon in the kasunduan (as a pre-requisite for the
release of the certificate of title), despite Severinas heirs lack of evidence of ownership
over the parcel of land covered by LRC Psu-1312.
The Courts Ruling
We resolve the issue in the negative, and find the petition without merit.
Severinas heirs anchor their claim on the kasunduan, stressing on their freedom
to stipulate and the binding effect of contracts. This argument is misplaced.[33] The Civil
Code provides:
Article 1306. The contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient provided they are not contrary to law,
morals, good customs, public order or public policy (underscoring ours).
It is basic that the law is deemed written into every contract.[34] Although a contract
is the law between the parties, the provisions of positive law which regulate contracts
are deemed written therein and shall limit and govern the relations between the
parties.[35] The Civil Code provisions on sales state:
Article 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay a
price certain in money or its equivalent. xxx
Article 1459. The thing must be licit and the vendor must have a right to transfer the Besides, we note that the certificate of title covers Lots 1 and 2 of LRC Psu-1313,
ownership thereof at the time it is delivered. which were fully paid for by Dominador, et al. Therefore, Severinas heirs are bound to
deliver the certificate of title covering the lots.
Article 1495. The vendor is bound to transfer the ownership of and deliver, as well as
The Fallo
warrant the thing which is the object of sale (underscoring ours).
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals
True, in contracts of sale, the vendor need not possess title to the thing sold at in CA-G. R. CV No. 48430 is AFFIRMED in toto.
the perfection of the contract.[36] However, the vendor must possess title and must be
No costs.
able to transfer title at the time of delivery. In a contract of sale, title only passes to the
vendee upon full payment of the stipulated consideration, or upon delivery of the thing SO ORDERED.
sold.[37]

Under the facts of the case, Severinas heirs are not in a position to transfer
title. Without passing on the question of who actually owned the land covered by LRC
Psu -1312, we note that there is no proof of ownership in favor of Severinas heirs. In
fact, it is a certain Emiliano Eugenio, who holds a tax declaration over the said land in
his name.[38] Though tax declarations do not prove ownership of the property of the
declarant, tax declarations and receipts can be strong evidence of ownership of land
when accompanied by possession for a period sufficient for prescription. [39] Severinas
heirs have nothing to counter this document.

Therefore, to insist that Dominador, et al. pay the price under such circumstances
would result in Severinas heirs unjust enrichment. [40] Basic is the principle in law,
Niguno non deue enriquecerse tortizamente condano de otro.[41] The essence of a sale
is the transfer of title or an agreement to transfer it for a price actually paid or
promised.[42] In Nool v. Court of Appeals,[43] we held that if the sellers cannot deliver the
object of the sale to the buyers, such contract may be deemed to be inoperative. By
analogy, such a contract may fall under Article 1405, No. 5 of the Civil Code, to wit:

Article 1405. The following contracts are inexistent and void from the beginning: xxx

(5) Those which contemplate an impossible service.

Severinas heirs insist that delivery of the certificate of title is predicated on a

condition - payment of three hundred thousand pesos (P300,000.00) to cover the sale
of Lot 3 of LRO Psu 1312. We find this argument not meritorious. The condition cannot
be honored for reasons afore-discussed. Article 1183 of the Civil Code provides that,

Impossible conditions, those contrary to good customs or public policy and those
prohibited by law shall annul the obligation which depends upon them. If the
obligation is divisible, that part thereof which is not affected by the impossible or
unlawful condition shall be valid. xxx

Hence, the non-payment of the three hundred thousand pesos (P300,000.00) is

not a valid justification for refusal to deliver the certificate of title.

EN BANC
[G.R. No. 122156. February 3, 1997]
MANILA PRINCE HOTEL, petitioner, vs. GOVERNMENT SERVICE INSURANCE
SYSTEM, MANILA HOTEL CORPORATION, COMMITTEE ON
PRIVATIZATION and OFFICE OF THE GOVERNMENT CORPORATE
COUNSEL, respondents.
DECISION
BELLOSILLO, J.:
The Filipino First Policy enshrined in the 1987 Constitution, i.e., in the grant of
rights, privileges, and concessions covering the national economy and patrimony, the
State shall give preference to qualified Filipinos,[1] is invoked by petitioner in its bid to
acquire 51% of the shares of the Manila Hotel Corporation (MHC) which owns the
historic Manila Hotel. Opposing, respondents maintain that the provision is not self-
executing but requires an implementing legislation for its enforcement. Corollarily, they
ask whether the 51% shares form part of the national economy and patrimony covered
by the protective mantle of the Constitution.
The controversy arose when respondent Government Service Insurance System
(GSIS), pursuant to the privatization program of the Philippine Government under
Proclamation No. 50 dated 8 December 1986, decided to sell through public bidding
30% to 51% of the issued and outstanding shares of respondent MHC. The winning
bidder, or the eventual strategic partner, is to provide management expertise and/or an
international marketing/reservation system, and financial support to strengthen the
profitability and performance of the Manila Hotel.[2] In a close bidding held on 18
September 1995 only two (2) bidders participated: petitioner Manila Prince Hotel
Corporation, a Filipino corporation, which offered to buy 51% of the MHC or 15,300,000
shares at P41.58 per share, and Renong Berhad, a Malaysian firm, with ITT-Sheraton
as its hotel operator, which bid for the same number of shares at P44.00 per share,
or P2.42 more than the bid of petitioner.
Pertinent provisions of the bidding rules prepared by respondent GSIS state -
I. EXECUTION OF THE NECESSARY CONTRACTS WITH GSIS/MHC -
1. The Highest Bidder must comply with the conditions set forth below by October 23,
1995 (reset to November 3, 1995) or the Highest Bidder will lose the right to purchase
the Block of Shares and GSIS will instead offer the Block of Shares to the other
Qualified Bidders:
a. The Highest Bidder must negotiate and execute with the GSIS/MHC the
Management Contract, International Marketing/Reservation System Contract or other
type of contract specified by the Highest Bidder in its strategic plan for the Manila
Hotel x x x x
b. The Highest Bidder must execute the Stock Purchase and Sale Agreement with
GSIS x x x x
K. DECLARATION OF THE WINNING BIDDER/STRATEGIC PARTNER -
The Highest Bidder will be declared the Winning Bidder/Strategic Partner after the
following conditions are met:
a. Execution of the necessary contracts with GSIS/MHC not later than October 23,
1995 (reset to November 3, 1995); and
b. Requisite approvals from the GSIS/MHC and COP (Committee on Privatization)/
OGCC (Office of the Government Corporate Counsel) are obtained.[3]
Pending the declaration of Renong Berhard as the winning bidder/strategic
partner and the execution of the necessary contracts, petitioner in a letter to respondent
GSIS dated 28 September 1995 matched the bid price of P44.00 per share tendered
by Renong Berhad.[4] In a subsequent letter dated 10 October 1995 petitioner sent a
managers check issued by Philtrust Bank for Thirty-three Million Pesos
(P33,000,000.00) as Bid Security to match the bid of the Malaysian Group, Messrs.
Renong Berhad x x x x[5] which respondent GSIS refused to accept.
On 17 October 1995, perhaps apprehensive that respondent GSIS has
disregarded the tender of the matching bid and that the sale of 51% of the MHC may
be hastened by respondent GSIS and consummated with Renong Berhad, petitioner
came to this Court on prohibition and mandamus. On 18 October 1995 the Court issued
a temporary restraining order enjoining respondents from perfecting and consummating
the sale to the Malaysian firm.
On 10 September 1996 the instant case was accepted by the Court En Banc after
it was referred to it by the First Division. The case was then set for oral arguments with
former Chief Justice Enrique M. Fernando and Fr. Joaquin G. Bernas, S.J., as amici
curiae.
 In the main, petitioner invokes Sec. 10, second par., Art. XII, of the 1987
Constitution and submits that the Manila Hotel has been identified with the Filipino
nation and has practically become a historical monument which reflects the vibrancy of
Philippine heritage and culture. It is a proud legacy of an earlier generation of Filipinos
who believed in the nobility and sacredness of independence and its power and
capacity to release the full potential of the Filipino people. To all intents and purposes,
it has become a part of the national patrimony.[6] Petitioner also argues that since 51%
of the shares of the MHC carries with it the ownership of the business of the hotel which
is owned by respondent GSIS, a government-owned and controlled corporation, the
hotel business of respondent GSIS being a part of the tourism industry is
unquestionably a part of the national economy. Thus, any transaction involving 51% of
the shares of stock of the MHC is clearly covered by the term national economy, to
which Sec. 10, second par., Art. XII, 1987 Constitution, applies. [7]
It is also the thesis of petitioner that since Manila Hotel is part of the national
patrimony and its business also unquestionably part of the national economy petitioner
should be preferred after it has matched the bid offer of the Malaysian firm. For the
bidding rules mandate that if for any reason, the Highest Bidder cannot be awarded the
Block of Shares, GSIS may offer this to the other Qualified Bidders that have validly
submitted bids provided that these Qualified Bidders are willing to match the highest
bid in terms of price per share.[8]
Respondents except. They maintain that: First, Sec. 10, second par., Art. XII, of
the 1987 Constitution is merely a statement of principle and policy since it is not a self-
executing provision and requires implementing legislation(s) x x x x Thus, for the said
provision to operate, there must be existing laws to lay down conditions under which
business may be done.[9]
Second, granting that this provision is self-executing, Manila Hotel does not fall
under the term national patrimony which only refers to lands of the public domain,
waters, minerals, coal, petroleum and other mineral oils, all forces of potential energy,
fisheries, forests or timber, wildlife, flora and fauna and all marine wealth in its territorial
sea, and exclusive marine zone as cited in the first and second paragraphs of Sec. 2,
Art. XII, 1987 Constitution. According to respondents, while petitioner speaks of the
guests who have slept in the hotel and the events that have transpired therein which
make the hotel historic, these alone do not make the hotel fall under the patrimony of
the nation. What is more, the mandate of the Constitution is addressed to the State, not
to respondent GSIS which possesses a personality of its own separate and distinct
from the Philippines as a State.
Third, granting that the Manila Hotel forms part of the national patrimony, the
constitutional provision invoked is still inapplicable since what is being sold is only 51%
of the outstanding shares of the corporation, not the hotel building nor the land upon
which the building stands. Certainly, 51% of the equity of the MHC cannot be
considered part of the national patrimony. Moreover, if the disposition of the shares of
the MHC is really contrary to the Constitution, petitioner should have questioned it right
from the beginning and not after it had lost in the bidding.
Fourth, the reliance by petitioner on par. V., subpar. J. 1., of the bidding rules
which provides that if for any reason, the Highest Bidder cannot be awarded the Block
of Shares, GSIS may offer this to the other Qualified Bidders that have validly submitted
bids provided that these Qualified Bidders are willing to match the highest bid in terms
of price per share, is misplaced. Respondents postulate that the privilege of submitting
a matching bid has not yet arisen since it only takes place if for any reason, the Highest
Bidder cannot be awarded the Block of Shares. Thus the submission by petitioner of a
matching bid is premature since Renong Berhad could still very well be awarded the
block of shares and the condition giving rise to the exercise of the privilege to submit a
matching bid had not yet taken place.
Finally, the prayer for prohibition grounded on grave abuse of discretion should
fail since respondent GSIS did not exercise its discretion in a capricious, whimsical
manner, and if ever it did abuse its discretion it was not so patent and gross as to
amount to an evasion of a positive duty or a virtual refusal to perform a duty enjoined
by law. Similarly, the petition for mandamus should fail as petitioner has no clear legal
right to what it demands and respondents do not have an imperative duty to perform
the act required of them by petitioner.
We now resolve. A constitution is a system of fundamental laws for the
governance and administration of a nation. It is supreme, imperious, absolute and
unalterable except by the authority from which it emanates. It has been defined as the
fundamental and paramount law of the nation. [10] It prescribes the permanent
framework of a system of government, assigns to the different departments their
respective powers and duties, and establishes certain fixed principles on which
government is founded. The fundamental conception in other words is that it is a
supreme law to which all other laws must conform and in accordance with which all
private rights must be determined and all public authority administered. [11]Under the
doctrine of constitutional supremacy, if a law or contract violates any norm of the
constitution that law or contract whether promulgated by the legislative or by the
executive branch or entered into by private persons for private purposes is null and void
and without any force and effect. Thus, since the Constitution is the fundamental,
paramount and supreme law of the nation, it is deemed written in every statute and
contract.
Admittedly, some constitutions are merely declarations of policies and
principles. Their provisions command the legislature to enact laws and carry out the
purposes of the framers who merely establish an outline of government providing for
the different departments of the governmental machinery and securing certain
fundamental and inalienable rights of citizens.[12] A provision which lays down a general
principle, such as those found in Art. II of the 1987 Constitution, is usually not self-
executing. But a provision which is complete in itself and becomes operative without
the aid of supplementary or enabling legislation, or that which supplies sufficient rule
by means of which the right it grants may be enjoyed or protected, is self-
executing. Thus a constitutional provision is self-executing if the nature and extent of
the right conferred and the liability imposed are fixed by the constitution itself, so that
they can be determined by an examination and construction of its terms, and there is
no language indicating that the subject is referred to the legislature for action.[13]
As against constitutions of the past, modern constitutions have been generally
drafted upon a different principle and have often become in effect extensive codes of
laws intended to operate directly upon the people in a manner similar to that of statutory
enactments, and the function of constitutional conventions has evolved into one more
like that of a legislative body. Hence, unless it is expressly provided that a legislative
act is necessary to enforce a constitutional mandate, the presumption now is that all
provisions of the constitution are self-executing. If the constitutional provisions are
treated as requiring legislation instead of self-executing, the legislature would have the
power to ignore and practically nullify the mandate of the fundamental law. [14] This can
be cataclysmic. That is why the prevailing view is, as it has always been, that -
x x x x in case of doubt, the Constitution should be considered self-executing rather
than non-self-executing x x x x Unless the contrary is clearly intended, the provisions
of the Constitution should be considered self-executing, as a contrary rule would give
the legislature discretion to determine when, or whether, they shall be
effective. These provisions would be subordinated to the will of the lawmaking body,
which could make them entirely meaningless by simply refusing to pass the needed
implementing statute.[15]
Respondents argue that Sec. 10, second par., Art. XII, of the 1987 Constitution is
clearly not self-executing, as they quote from discussions on the floor of the 1986
Constitutional Commission -
MR. RODRIGO. Madam President, I am asking this question as the
Chairman of the Committee on Style. If the wording of PREFERENCE
is given to QUALIFIED FILIPINOS, can it be understood as a
preference to qualified Filipinos vis-a-vis Filipinos who are not
qualified. So, why do we not make it clear? To qualified Filipinos as
against aliens?
THE PRESIDENT. What is the question of Commissioner Rodrigo? Is it to
remove the word QUALIFIED?
MR. RODRIGO. No, no, but say definitely TO QUALIFIED FILIPINOS as
against whom? As against aliens or over aliens ?
MR. NOLLEDO. Madam President, I think that is understood. We use the
word QUALIFIED because the existing laws or prospective laws will
always lay down conditions under which business may be done. For
example, qualifications on capital, qualifications on the setting up of
other financial structures, et cetera (underscoring supplied by
respondents).
MR. RODRIGO. It is just a matter of style.
MR. NOLLEDO. Yes.[16]
Quite apparently, Sec. 10, second par., of Art XII is couched in such a way as not
to make it appear that it is non-self-executing but simply for purposes of style. But,
certainly, the legislature is not precluded from enacting further laws to enforce the
constitutional provision so long as the contemplated statute squares with the
Constitution. Minor details may be left to the legislature without impairing the self-
executing nature of constitutional provisions.
In self-executing constitutional provisions, the legislature may still enact
legislation to facilitate the exercise of powers directly granted by the constitution, further
the operation of such a provision, prescribe a practice to be used for its enforcement,
provide a convenient remedy for the protection of the rights secured or the
determination thereof, or place reasonable safeguards around the exercise of the
right. The mere fact that legislation may supplement and add to or prescribe a penalty
for the violation of a self-executing constitutional provision does not render such a
provision ineffective in the absence of such legislation. The omission from a constitution
of any express provision for a remedy for enforcing a right or liability is not necessarily
an indication that it was not intended to be self-executing. The rule is that a self-
executing provision of the constitution does not necessarily exhaust legislative power
on the subject, but any legislation must be in harmony with the constitution, further the
exercise of constitutional right and make it more available.[17] Subsequent legislation
however does not necessarily mean that the subject constitutional provision is not, by
itself, fully enforceable.
Respondents also argue that the non-self-executing nature of Sec. 10, second
par., of Art. XII is implied from the tenor of the first and third paragraphs of the same
section which undoubtedly are not self-executing.[18] The argument is flawed. If the first
and third paragraphs are not self-executing because Congress is still to enact
measures to encourage the formation and operation of enterprises fully owned by
Filipinos, as in the first paragraph, and the State still needs legislation to regulate and
exercise authority over foreign investments within its national jurisdiction, as in the third
paragraph, then a fortiori, by the same logic, the second paragraph can only be self-
executing as it does not by its language require any legislation in order to give
preference to qualified Filipinos in the grant of rights, privileges and concessions
covering the national economy and patrimony. A constitutional provision may be self-
executing in one part and non-self-executing in another.[19]
Even the cases cited by respondents holding that certain constitutional provisions
are merely statements of principles and policies, which are basically not self-executing
and only placed in the Constitution as moral incentives to legislation, not as judicially
enforceable rights - are simply not in point. Basco v. Philippine Amusements and
Gaming Corporation[20] speaks of constitutional provisions on personal dignity, [21] the
sanctity of family life,[22] the vital role of the youth in nation-building,[23] the promotion of
social justice,[24] and the values of education.[25] Tolentino v. Secretary of
Finance[26] refers to constitutional provisions on social justice and human rights [27] and
on education.[28] Lastly, Kilosbayan, Inc. v. Morato[29] cites provisions on the promotion
of general welfare,[30] the sanctity of family life,[31] the vital role of the youth in nation-
building[32] and the promotion of total human liberation and development. [33] A reading
of these provisions indeed clearly shows that they are not judicially enforceable
constitutional rights but merely guidelines for legislation. The very terms of the
provisions manifest that they are only principles upon which legislations must be
based. Res ipsa loquitur.
On the other hand, Sec. 10, second par., Art. XII of the 1987 Constitution is a
mandatory, positive command which is complete in itself and which needs no further
guidelines or implementing laws or rules for its enforcement. From its very words the
provision does not require any legislation to put it in operation. It is per se judicially
enforceable. When our Constitution mandates that [i]n the grant of rights, privileges,
and concessions covering national economy and patrimony, the State shall give
preference to qualified Filipinos, it means just that - qualified Filipinos shall be
preferred. And when our Constitution declares that a right exists in certain specified
circumstances an action may be maintained to enforce such right notwithstanding the
absence of any legislation on the subject; consequently, if there is no statute especially
enacted to enforce such constitutional right, such right enforces itself by its own
inherent potency and puissance, and from which all legislations must take their
bearings. Where there is a right there is a remedy. Ubi jus ibi remedium.
As regards our national patrimony, a member of the 1986 Constitutional
Commission[34] explains -
The patrimony of the Nation that should be conserved and developed
refers not only to our rich natural resources but also to the cultural heritage
of our race. It also refers to our intelligence in arts, sciences and
letters. Therefore, we should develop not only our lands, forests, mines and
other natural resources but also the mental ability or faculty of our people.
We agree. In its plain and ordinary meaning, the term patrimony pertains to
heritage.[35] When the Constitution speaks of national patrimony, it refers not only to the
natural resources of the Philippines, as the Constitution could have very well used the
term natural resources, but also to thecultural heritage of the Filipinos.
Manila Hotel has become a landmark - a living testimonial of Philippine
heritage. While it was restrictively an American hotel when it first opened in 1912, it
immediately evolved to be truly Filipino. Formerly a concourse for the elite, it has since
then become the venue of various significant events which have shaped Philippine
history. It was called the Cultural Center of the 1930s. It was the site of the festivities
during the inauguration of the Philippine Commonwealth. Dubbed as the Official Guest
House of the Philippine Government it plays host to dignitaries and official visitors who
are accorded the traditional Philippine hospitality.[36]
The history of the hotel has been chronicled in the book The Manila Hotel: The
Heart and Memory of a City.[37] During World War II the hotel was converted by the
Japanese Military Administration into a military headquarters. When the American
forces returned to recapture Manila the hotel was selected by the Japanese together
with Intramuros as the two (2) places for their final stand. Thereafter, in the 1950s and
1960s, the hotel became the center of political activities, playing host to almost every
political convention. In 1970 the hotel reopened after a renovation and reaped
numerous international recognitions, an acknowledgment of the Filipino talent and
ingenuity. In 1986 the hotel was the site of a failed coup d etat where an aspirant for
vice-president was proclaimed President of the Philippine Republic.
For more than eight (8) decades Manila Hotel has bore mute witness to the
triumphs and failures, loves and frustrations of the Filipinos; its existence is impressed
with public interest; its own historicity associated with our struggle for sovereignty,
independence and nationhood. Verily, Manila Hotel has become part of our national
economy and patrimony. For sure, 51% of the equity of the MHC comes within the
purview of the constitutional shelter for it comprises the majority and controlling stock,
so that anyone who acquires or owns the 51% will have actual control and management
of the hotel. In this instance, 51% of the MHC cannot be disassociated from the hotel
and the land on which the hotel edifice stands.Consequently, we cannot sustain
respondents claim that the Filipino First Policy provision is not applicable since what is
being sold is only 51% of the outstanding shares of the corporation, not the Hotel
building nor the land upon which the building stands. [38]
The argument is pure sophistry. The term qualified Filipinos as used in our
Constitution also includes corporations at least 60% of which is owned by Filipinos. This
is very clear from the proceedings of the 1986 Constitutional Commission -
THE PRESIDENT. Commissioner Davide is recognized.
MR. DAVIDE. I would like to introduce an amendment to the Nolledo
amendment. And the amendment would consist in substituting the
words QUALIFIED FILIPINOS with the following: CITIZENS OF THE
PHILIPPINES OR CORPORATIONS OR ASSOCIATIONS WHOSE
CAPITAL OR CONTROLLING STOCK IS WHOLLY OWNED BY
SUCH CITIZENS.
xxxx
MR. MONSOD. Madam President, apparently the proponent is agreeable,
but we have to raise a question. Suppose it is a corporation that is 80-
percent Filipino, do we not give it preference?
MR. DAVIDE. The Nolledo amendment would refer to an individual
Filipino. What about a corporation wholly owned by Filipino citizens?
MR. MONSOD. At least 60 percent, Madam President.
MR. DAVIDE. Is that the intention?
 MR. MONSOD. Yes, because, in fact, we would be limiting it if we say that
the preference should only be 100-percent Filipino.
MR. DAVIDE. I want to get that meaning clear because QUALIFIED
FILIPINOS may refer only to individuals and not to juridical
personalities or entities.
MR. MONSOD. We agree, Madam President.[39]
xxxx
MR. RODRIGO. Before we vote, may I request that the amendment be read
again.
MR. NOLLEDO. The amendment will read: IN THE GRANT OF RIGHTS,
PRIVILEGES AND CONCESSIONS COVERING THE NATIONAL
ECONOMY AND PATRIMONY, THE STATE SHALL GIVE
PREFERENCE TO QUALIFIED FILIPINOS. And the word Filipinos
here, as intended by the proponents, will include not only individual
Filipinos but also Filipino-controlled entities or entities fully-controlled
by Filipinos.[40]
The phrase preference to qualified Filipinos was explained thus -
MR. FOZ. Madam President, I would like to request Commissioner Nolledo
to please restate his amendment so that I can ask a question.
MR. NOLLEDO. IN THE GRANT OF RIGHTS, PRIVILEGES AND
CONCESSIONS COVERING THE NATIONAL ECONOMY AND
PATRIMONY, THE STATE SHALL GIVE PREFERENCE TO
QUALIFIED FILIPINOS.
MR. FOZ. In connection with that amendment, if a foreign enterprise is
qualified and a Filipino enterprise is also qualified, will the Filipino
enterprise still be given a preference?
MR. NOLLEDO. Obviously.
MR. FOZ. If the foreigner is more qualified in some aspects than the Filipino
enterprise, will the Filipino still be preferred?
MR. NOLLEDO. The answer is yes.
MR. FOZ. Thank you.[41]
Expounding further on the Filipino First Policy provision Commissioner Nolledo
continues
MR. NOLLEDO. Yes, Madam President. Instead of MUST, it will be SHALL
- THE STATE SHALL GIVE PREFERENCE TO QUALIFIED
FILIPINOS.This embodies the so-called Filipino First policy. That
means that Filipinos should be given preference in the grant of
concessions, privileges and rights covering the national patrimony.[42]
The exchange of views in the sessions of the Constitutional Commission
regarding the subject provision was still further clarified by Commissioner Nolledo[43] -
Paragraph 2 of Section 10 explicitly mandates the Pro-Filipino bias in all economic
concerns. It is better known as the FILIPINO FIRST Policy x x x x This provision was
never found in previous Constitutions x x x x
The term qualified Filipinos simply means that preference shall be given to those
citizens who can make a viable contribution to the common good, because of credible
competence and efficiency. It certainly does NOT mandate the pampering and
preferential treatment to Filipino citizens or organizations that are incompetent or
inefficient, since such an indiscriminate preference would be counterproductive and
inimical to the common good.
In the granting of economic rights, privileges, and concessions, when a choice has to
be made between a qualified foreigner and a qualified Filipino, the latter shall be
chosen over the former.
Lastly, the word qualified is also determinable. Petitioner was so considered by
respondent GSIS and selected as one of the qualified bidders.It was pre-qualified by
respondent GSIS in accordance with its own guidelines so that the sole inference here
is that petitioner has been found to be possessed of proven management expertise in
the hotel industry, or it has significant equity ownership in another hotel company, or it
has an overall management and marketing proficiency to successfully operate the
Manila Hotel.[44]
The penchant to try to whittle away the mandate of the Constitution by arguing
that the subject provision is not self-executory and requires implementing legislation is
quite disturbing. The attempt to violate a clear constitutional provision - by the
government itself - is only too distressing.To adopt such a line of reasoning is to
renounce the duty to ensure faithfulness to the Constitution. For, even some of the
provisions of the Constitution which evidently need implementing legislation have
juridical life of their own and can be the source of a judicial remedy. We cannot simply
afford the government a defense that arises out of the failure to enact further enabling,
implementing or guiding legislation. In fine, the discourse of Fr. Joaquin G. Bernas,
S.J., on constitutional government is apt -
The executive department has a constitutional duty to implement laws, including the
Constitution, even before Congress acts - provided that there are discoverable legal
standards for executive action. When the executive acts, it must be guided by its own
understanding of the constitutional command and of applicable laws. The
responsibility for reading and understanding the Constitution and the laws is not the
sole prerogative of Congress. If it were, the executive would have to ask Congress, or Paragraph V. J. 1 of the bidding rules provides that [i]f for any reason the Highest
perhaps the Court, for an interpretation every time the executive is confronted by a Bidder cannot be awarded the Block of Shares, GSIS may offer this to other Qualified
constitutional command. That is not how constitutional government operates.[45] Bidders that have validly submitted bids provided that these Qualified Bidders are
willing to match the highest bid in terms of price per share. [47] Certainly, the
Respondents further argue that the constitutional provision is addressed to the constitutional mandate itself is reason enough not to award the block of shares
State, not to respondent GSIS which by itself possesses a separate and distinct immediately to the foreign bidder notwithstanding its submission of a higher, or even
personality. This argument again is at best specious. It is undisputed that the sale of the highest, bid. In fact, we cannot conceive of a stronger reason than the constitutional
51% of the MHC could only be carried out with the prior approval of the State acting injunction itself.
through respondent Committee on Privatization. As correctly pointed out by Fr. Joaquin
In the instant case, where a foreign firm submits the highest bid in a public bidding
G. Bernas, S.J., this fact alone makes the sale of the assets of respondents GSIS and
concerning the grant of rights, privileges and concessions covering the national
MHC a state action. In constitutional jurisprudence, the acts of persons distinct from
economy and patrimony, thereby exceeding the bid of a Filipino, there is no question
the government are considered state action covered by the Constitution (1) when the
that the Filipino will have to be allowed to match the bid of the foreign entity. And if the
activity it engages in is a public function; (2) when the government is so significantly
Filipino matches the bid of a foreign firm the award should go to the Filipino. It must be
involved with the private actor as to make the government responsible for his action;
so if we are to give life and meaning to the Filipino First Policy provision of the 1987
and, (3) when the government has approved or authorized the action. It is evident that
Constitution. For, while this may neither be expressly stated nor contemplated in the
the act of respondent GSIS in selling 51% of its share in respondent MHC comes under
bidding rules, the constitutional fiat is omnipresent to be simply disregarded. To ignore
the second and third categories of state action. Without doubt therefore the transaction,
it would be to sanction a perilous skirting of the basic law.
although entered into by respondent GSIS, is in fact a transaction of the State and
therefore subject to the constitutional command.[46] This Court does not discount the apprehension that this policy may discourage
foreign investors. But the Constitution and laws of the Philippines are understood to be
When the Constitution addresses the State it refers not only to the people but also
always open to public scrutiny. These are given factors which investors must consider
to the government as elements of the State. After all, government is composed of three
when venturing into business in a foreign jurisdiction. Any person therefore desiring to
(3) divisions of power - legislative, executive and judicial. Accordingly, a constitutional
do business in the Philippines or with any of its agencies or instrumentalities is
mandate directed to the State is correspondingly directed to the three (3) branches of
presumed to know his rights and obligations under the Constitution and the laws of the
government. It is undeniable that in this case the subject constitutional injunction is
forum.
addressed among others to the Executive Department and respondent GSIS, a
government instrumentality deriving its authority from the State. The argument of respondents that petitioner is now estopped from questioning
the sale to Renong Berhad since petitioner was well aware from the beginning that a
It should be stressed that while the Malaysian firm offered the higher bid it is not
foreigner could participate in the bidding is meritless. Undoubtedly, Filipinos and
yet the winning bidder. The bidding rules expressly provide that the highest bidder shall
foreigners alike were invited to the bidding. But foreigners may be awarded the sale
only be declared the winning bidder after it has negotiated and executed the necessary
only if no Filipino qualifies, or if the qualified Filipino fails to match the highest bid
contracts, and secured the requisite approvals. Since the Filipino First Policy provision
tendered by the foreign entity. In the case before us, while petitioner was already
of the Constitution bestows preference on qualified Filipinos the mere tending of the
preferred at the inception of the bidding because of the constitutional mandate,
highest bid is not an assurance that the highest bidder will be declared the winning
petitioner had not yet matched the bid offered by Renong Berhad. Thus it did not have
bidder. Resultantly, respondents are not bound to make the award yet, nor are they
the right or personality then to compel respondent GSIS to accept its earlier bid. Rightly,
under obligation to enter into one with the highest bidder. For in choosing the awardee
only after it had matched the bid of the foreign firm and the apparent disregard by
respondents are mandated to abide by the dictates of the 1987 Constitution the
respondent GSIS of petitioners matching bid did the latter have a cause of action.
provisions of which are presumed to be known to all the bidders and other interested
parties. Besides, there is no time frame for invoking the constitutional safeguard unless
perhaps the award has been finally made. To insist on selling the Manila Hotel to
Adhering to the doctrine of constitutional supremacy, the subject constitutional
foreigners when there is a Filipino group willing to match the bid of the foreign group is
provision is, as it should be, impliedly written in the bidding rules issued by respondent
to insist that government be treated as any other ordinary market player, and bound by
GSIS, lest the bidding rules be nullified for being violative of the Constitution. It is a
its mistakes or gross errors of judgment, regardless of the consequences to the Filipino
basic principle in constitutional law that all laws and contracts must conform with the
people.The miscomprehension of the Constitution is regrettable. Thus we would rather
fundamental law of the land. Those which violate the Constitution lose their reason for
remedy the indiscretion while there is still an opportunity to do so than let the
being.
government develop the habit of forgetting that the Constitution lays down the basic
conditions and parameters for its actions.
Since petitioner has already matched the bid price tendered by Renong Berhad
pursuant to the bidding rules, respondent GSIS is left with no alternative but to award
to petitioner the block of shares of MHC and to execute the necessary agreements and
documents to effect the sale in accordance not only with the bidding guidelines and
procedures but with the Constitution as well. The refusal of respondent GSIS to execute
the corresponding documents with petitioner as provided in the bidding rules after the
latter has matched the bid of the Malaysian firm clearly constitutes grave abuse of
discretion.
The Filipino First Policy is a product of Philippine nationalism. It is embodied in
the 1987 Constitution not merely to be used as a guideline for future legislation but
primarily to be enforced; so must it be enforced. This Court as the ultimate guardian of
the Constitution will never shun, under any reasonable circumstance, the duty of
upholding the majesty of the Constitution which it is tasked to defend. It is worth
emphasizing that it is not the intention of this Court to impede and diminish, much less
undermine, the influx of foreign investments. Far from it, the Court encourages and
welcomes more business opportunities but avowedly sanctions the preference for
Filipinos whenever such preference is ordained by the Constitution. The position of the
Court on this matter could have not been more appropriately articulated by Chief Justice
Narvasa -
As scrupulously as it has tried to observe that it is not its function to substitute its
judgment for that of the legislature or the executive about the wisdom and feasibility of
legislation economic in nature, the Supreme Court has not been spared criticism for
decisions perceived as obstacles to economic progress and development x x x x in
connection with a temporary injunction issued by the Courts First Division against the
sale of the Manila Hotel to a Malaysian Firm and its partner, certain statements were
published in a major daily to the effect that that injunction again demonstrates that the
Philippine legal system can be a major obstacle to doing business here.
Let it be stated for the record once again that while it is no business of the Court to
intervene in contracts of the kind referred to or set itself up as the judge of whether
they are viable or attainable, it is its bounden duty to make sure that they do not
violate the Constitution or the laws, or are not adopted or implemented with grave
abuse of discretion amounting to lack or excess of jurisdiction. It will never shirk that
duty, no matter how buffeted by winds of unfair and ill-informed criticism.[48]
Privatization of a business asset for purposes of enhancing its business viability
and preventing further losses, regardless of the character of the asset, should not take
precedence over non-material values. A commercial, nay even a budgetary, objective
should not be pursued at the expense of national pride and dignity. For the Constitution
enshrines higher and nobler non-material values. Indeed, the Court will always defer to
the Constitution in the proper governance of a free society; after all, there is nothing
so sacrosanct in any economic policy as to draw itself beyond judicial review when the
Constitution is involved.[49]
Nationalism is inherent in the very concept of the Philippines being a democratic
and republican state, with sovereignty residing in the Filipino people and from whom all
government authority emanates. In nationalism, the happiness and welfare of the
people must be the goal. The nation-state can have no higher purpose. Any
interpretation of any constitutional provision must adhere to such basic
concept. Protection of foreign investments, while laudible, is merely a policy. It cannot
override the demands of nationalism.[50]
The Manila Hotel or, for that matter, 51% of the MHC, is not just any commodity
to be sold to the highest bidder solely for the sake of privatization. We are not talking
about an ordinary piece of property in a commercial district. We are talking about a
historic relic that has hosted many of the most important events in the short history of
the Philippines as a nation. We are talking about a hotel where heads of states would
prefer to be housed as a strong manifestation of their desire to cloak the dignity of the
highest state function to their official visits to the Philippines.Thus the Manila Hotel has
played and continues to play a significant role as an authentic repository of twentieth
century Philippine history and culture. In this sense, it has become truly a reflection of
the Filipino soul - a place with a history of grandeur; a most historical setting that has
played a part in the shaping of a country.[51]
This Court cannot extract rhyme nor reason from the determined efforts of
respondents to sell the historical landmark - this Grand Old Dame of hotels in Asia - to
a total stranger. For, indeed, the conveyance of this epic exponent of the Filipino
psyche to alien hands cannot be less than mephistophelian for it is, in whatever manner
viewed, a veritable alienation of a nations soul for some pieces of foreign silver. And so
we ask: What advantage, which cannot be equally drawn from a qualified Filipino, can
be gained by the Filipinos if Manila Hotel - and all that it stands for - is sold to a non-
Filipino? How much of national pride will vanish if the nations cultural heritage is
entrusted to a foreign entity? On the other hand, how much dignity will be preserved
and realized if the national patrimony is safekept in the hands of a qualified, zealous
and well-meaning Filipino?This is the plain and simple meaning of the Filipino First
Policy provision of the Philippine Constitution. And this Court, heeding the clarion call
of the Constitution and accepting the duty of being the elderly watchman of the nation,
will continue to respect and protect the sanctity of the Constitution.
WHEREFORE, respondents GOVERNMENT SERVICE INSURANCE SYSTEM,
MANILA HOTEL CORPORATION, COMMITTEE ON PRIVATIZATION and OFFICE
OF THE GOVERNMENT CORPORATE COUNSEL are directed to CEASE and
DESIST from selling 51% of the shares of the Manila Hotel Corporation to RENONG
BERHAD, and to ACCEPT the matching bid of petitioner MANILA PRINCE HOTEL
CORPORATION to purchase the subject 51% of the shares of the Manila Hotel
Corporation at P44.00 per share and thereafter to execute the necessary agreements
and documents to effect the sale, to issue the necessary clearances and to do such
other acts and deeds as may be necessary for the purpose.

SO ORDERED.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-5671 August 24, 1910
BENITO DE LOS REYES, plaintiff-appellant,
vs.
VERONICA ALOJADO, defendant-appellee.
Ramon Diokno, for appellant.
No appearance for appellee.
TORRES, J.:
On or about January 22, 1905, Veronica Alojado received, as a loan, from Benito de
los Reyes that the sum P67 .60, for the purpose of paying a debt she owed to Olimpia
Zaballa. It was agreed between Alojado and Reyes that the debtor should remain as a
servant in the house and in the service of her creditor, without any renumeration
whatever, until she should find some one who would furnish her with the said sum
where with to repeat the loan. The defendant, Veronica Alojado, afterwards left the
house of the plaintiff, on March 12, 1906, without having paid him her debt, nor did
she do so at any subsequent date, notwithstanding his demands. The plaintiff,
therefore, on the 15th of march, 1906, filed suit in the court of the justice of the peace
of Santa Rosa, La Laguna, against Veronica Alojado to recover the said sum or, in a
contrary case, to compel her to return to his service. The trial having been had, the
justice of the peace, on April 14, 1906, rendered judgment whereby he sentenced the
defendant to pay to the plaintiff the sum claimed and declared that, in case the debtor
should be insolvent, she should be obliged to fulfill the agreement between her and
the plaintiff. The costs of the trial were assessed against the defendant.
The defendant appealed from the said judgment to the Court of First Instance to
which the plaintiff, after the case had been docketed by the clerk of court, made a
motion on May 4, 1906, requesting that the appeal interposed by the defendant be
disallowed, with the costs of both instances against her. The grounds alleged in
support of this motion. were that the appeal had been filed on the sixth day following
that when judgment was rendered in the trial, on April 14th, and that it, therefore, did
not come within the period of the five days prescribed by section 76 of the Code of
Civil Procedure, as proven by the certificate issued by the justice of the peace of
Santa Rosa. The Court of First Instance, however, by order of July 16, 1906,
overruled the motion of the plaintiff-appellee, for the reasons therein stated, namely,
that the defendant was not notified of the judgment rendered in the case on April 14th
of that year until the 16th of the same month, and the appeal having been filed four
days later, on the 20th, it could having seen that the five days specified by section 76
of the Code of Civil Procedure had not expired. The plaintiff was advised to reproduce
his complaint within ten days, in order that due procedure might he had thereupon.
The plaintiff took exception to the aforementioned order and at the same time
reproduced the complaint he had filed in the court of the justice of the peace, in
which, after relating to the facts hereinbefore stated, added that the defendant,
besides the sum above-mentioned, had also received from the plaintiff, under the
same conditions, various small amounts between the dates of January 22, 1905, and
March 10, 1906, aggregating altogether P11.97, and that they had not been repaid to
him. He therefore asked that judgment be rendered sentencing the defendant to
comply with the said contract and to pay to the plaintiff the sums referred to,
amounting in all to P79.57, and that until this amount should have been in paid, the
defendant should remain gratuitously in the service of plaintiff's household, and that
she should pay the costs of the trial.
The defendant, in her written answer of August 15, 1906, to the aforesaid complaint,
denied the allegations contained in paragraphs 1 and 2 of the complaint and alleged
that, although she had left the plaintiff's service, it was because the latter had paid her
no sum whatever for the services she had rendered in his house. The defendant
likewise denied the conditions expressed in paragraph 4 of the complaint, averring
that the effects purchased, to the amount of P11.97, were in the possession of the
plaintiff, who refused to deliver them to her. She therefore asked that she be absolved
from the complaint and that the plaintiff be absolved from the complaint the wages
due her for the services she had rendered.
The case came to trial on October 19, 1906, and, after the production of testimony by
both parties, the judge, on November 21st of the same year, rendered judgment
absolving the defendant from the complain, with the costs against the plaintiff, and
sentencing the latter to pay to the former the sum of P2.43, the balance found to exist
between the defendant's debt of P79.57 and the wages due her by the plaintiff, which
amounted to P82. The plaintiff, on the 6th of December, filed a written exception to
the judgment aforesaid through the regular channels, and moved for a new trial on the
ground that the findings of fact set forth in the judgment were manifestly contrary to
the weight of the evidence. This motion was overruled on the 17th of the same month,
to which exception was taken by the appellant, who afterwards filed the proper bill of
exceptions, which was approved, certified, and forwarded to the clerk of this court.
The present suit, initiated in a justice of the peace court and appealed to the Court of
First Instance of La Laguna at a time prior to the enactment of Act No. 1627, which
went into effect on July 1, 1907, which limited to two instances the procedure to be
observed in verbal actions, concerns the collection of certain sum received as a loan
by the defendant from the plaintiff, and of the wages earned by the former for services
rendered as a servant in the said plaintiff's house.
Notwithstanding the denial of the defendant, it is a fact clearly proven, as found in the
judgment appealed from, that the plaintiff did deliver to Hermenegildo de los Santos
the sum of P67.60 to pay a debt was paid by De los Santos with the knowledge and in
behalf of the said defendant who, of her free will, entered the service of the plaintiff
and promised to pay him as soon as she should find the money wherewith to do so.
The duty to pay the said sum, as well as that of P11.97 delivered to the defendant in
small amounts during the time that she was in the plaintiff's house, is unquestionable,
inasmuch as it is a positive debt demandable of the defendant by her creditor. (Arts.
1754, 1170, Civil Code.) However, the reason alleged by the plaintiff as a basis for
the loan is untenable, to wit, that the defendant was obliged to render service in his
house as a servant without remuneration whatever and to remain therein so long as
she had not paid her debt, inasmuch as this condition is contrary to law and morality.
(Art. 1255, Civil Code.)
When legal regulations prohibit even a usurious contract and all abuses prejudicial to
subordinates and servant, in connection with their salaries and wages, it will be
understood at once that the compact whereby service rendered by a domestic servant
in the house of any inhabitant of this country is to be gratuitous, is in all respects
reprehensible and censurable; and consequently, the contention of the plaintiff, that
until the defendant shall have paid him her debt she must serve him in his house
gratuitously is absolutely inadmissible.
The trial record discloses no legal reason for the rejection of the findings of fact and of
law contained in the judgment appealed from, nor for an allowance of the errors
attributed appealed from, nor for an allowance of the errors attributed thereto; on the
contrary, the reasons hereinabove stated show the propriety of the said judgment.
For the foregoing reasons, and accepting those set forth in the judgment appealed
from, it is proper, in our opinion, to affirm and we hereby affirm the said judgment,
with the costs against the appellant.

Domestic services are always to be remunerated, and no agreement may subsist in

law in which it is stipulated that any domestic service shall be absolutely gratuitous,
unless it be admitted that slavery may be established in this country through a
covenant entered into between the interested parties.

Articles 1583, 1584, and 1585 of the Civil Code prescribe rules governing the hiring of
services of domestics servants, the conditions of such hire, the term during which the
service may rendered and the wages that accrue to the servant, also the duties of the
latter and of the master. The first of the articles cited provides that a hiring for life by
either of the contracting parties is void, and, according to the last of three articles just
mentioned, besides what is prescribed in the preceding articles with regard to masters
and servants, the provisions of special laws and local ordinances shall be observed.

During the regime of the former sovereignty, the police regulations governing
domestic service, of the date of September 9, 1848, were in force, article 19 of which
it is ordered that all usurious conduct toward the servants and employees of every
class is prohibited, and the master who, under pretext of an advance of pay or of
having paid the debts or the taxes of his servant, shall have succeeded in retaining
the latter in his service at his house, shall be compelled to pay to such servant all
arrears due him and any damages he may have occasioned him, and the master shall
also be fined.

The aforementioned article 1585 of the Civil Code undoubtedly refers to the
provisions of the regulations just cited.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-47806 April 14, 1941
LEONCIO GABRIEL, petitioner,
vs.
MONTE DE PIEDAD Y CAJA DE AHARROS and THE COURT OF
APPEALS, respondents.
Vicente J. Francisco and Rody M. Jalandoni for petitioner.
Cavanna, Jazmines and Tianco for respondent.
LAUREL, J.:
The herein petitioner was employed as appraiser of jewels in the pawnshop of the
Monte de Piedad from 1913 up to May, 1933. On December 13, 1932, he executed a
chattel mortgage to secure the payment of the deficiencies which resulted from his
erroneous appraisal of the jewels pawned to the appellee, amounting to P14,679.07,
with six per cent (6%) interest from said date. In this chattel mortgage, the appellant
promised to pay to the appellee the sum of P300 a month until the sum of
P14,679.07, with interest is fully paid. The document was registered on December 22,
1932 (statement, decision of Court of Appeals). To recover the aforementioned sum
less what had been paid, amounting to P3,333.25 or the balance of P11,345.75, and
in case of default to effectuate the chattel mortgage, an action was instituted against
the petitioner by the respondent Monte de Piedad in the Court of First Instance of
Manila (civil case No. 50847). The petitioner answered, denying generally and
specifically all the specifications therein, and also denied under oath the genuiness of
the execution of the alleged chattel mortgage attached thereto. By way of special
defense, he alleged (1) that the chattel mortgage was a part of a scheme on the part
of the management of the Monte de Piedad to cover up supposed losses incurred in
its pawnshop department; (2) that a criminal action had been instituted at the instance
of the plaintiff against him wherein said chattel mortgage was presented by the
prosecution with regard his supposed responsibility as expert appraiser of jewels of
the plaintiff entity but he was therein acquitted; and (3) that said acquittal constituted a
bar to the civil case. By way of cross-complaint, the petitioner alleged (1) that the
chattel mortgage was entered into by E. Marco for and in behalf of the Monte de
Piedad without being duly authorized to do so by the latter; (2) that the defendant was
induced, through false representation, to sign said chattel mortgage against his will;
(3) that the chattel mortgage was based upon all non-existing subject matter and non-
existing consideration; and (4) that the chattel mortgage was null and void ab initio.
By way of counterclaim, the petitioner alleged (1) that the payments made by for him
the account of the chattel mortgage amounting to P3,333.25 were made through
deceit and without his consent and consisted of P300 monthly deductions from his
salary, printing job for plaintiff done by him in his printing press, and reimbursement
made from the pocket of E. Marco; (2) that he has received P356.25 a month as
expert appraiser of the plaintiff and that he was separated arbitrarily at the end of the
month of May 1933, from notice and plaintiff failed to pay him his salary for the month
of May, 1933 and the month of June, 1933, in accordance with law; and (3) that due
to the malicious and systematic prosecution brought in criminal case No. 49078 and
in the present case, he suffered damages and losses both materially and in his
reputation in the amount of at least P15,000. Wherefore, petitioner, among others,
prayed that the Monte de Piedad be ordered to return the unlawful deductions from
his monthly remuneration, to pay his salary for the months of May and June, 1933,
and damages and losses he suffered amounting to P15,000.
The lower court rendered judgment in favor of the Monte de Piedad against the herein
petitioner. Petitioner brought the case on appeal to the Court of Appeals, which
affirmed the judgment of the lower court in a decision rendered May 29, 1940. Hence,
this petition for review by certiorari.
Petitioner contends that the provisions of the chattel mortgage contract by which he
guaranteed to pay the deficiencies amounting of P14,679.07 are contrary to law,
morals and public policy, and hence, the chattel mortgage contract is ineffective and
the principal obligation secured by it is void. A contract is to be judge by its character,
and courts will look to the substances and not to the mere form of the transaction. The
freedom of contract is both a constitutional and statutory right and to uphold this right,
courts should move with all the necessary caution and prudence in holding contracts
void. (People vs. Pomar, 46 Phil., 440; Ferrazzini vs. Gsell, 34 Phil., 697.) At any rate,
courts should not rashly extend the rule which holds that a contract is void as against
public policy. The term "public policy" is vague and uncertain in meaning, floating and
changeable in connotation. It may be said, however, that, in general, a contract which
is neither prohibited by law nor condemned by judicial decision, nor contrary to public
morals, contravenes no public policy. In the absence of express legislation or
constitutional prohibition, a court, in order to declare a contract void as against public
policy, must find that the contract as to the consideration or thing to be done, has a
tendency to injure the public, is against the public good, or contravenes some
established interests of society, or is inconsistent with sound policy and good morals,
or tends clearly to undermine the security of individual rights, whether of personal
liability or of private property. Examining the contract at bar, we are of the opinion that
it does not in anyway militate against the public good. Neither does it contravene the
policy of the law nor the established interests of society.
Petitioner also contends that the chattel mortgage in question is void because it lacks August 20, 1931. Exhibit F-22 can not be given any probative value, it was
consideration. A consideration, in the legal sense of the word, is some right, interest, undated during the hearing of the case.
benefit, or advantage conferred upon the promisor, to which he is otherwise not
lawfully entitled, or any detriment, prejudice, loss, or disadvantage suffered or We do not find it necessary to discuss the last assignment of error.
undertaken by the promisee other than to such as he is at the time of consent bound
to suffer. We think that there is sufficient consideration in this contract, for accounting The petition is hereby dismissed and the judgment sought to be reviewed is affirmed,
to the Court of Appeals, "it has been satisfactorily established that it was executed with costs against the petitioner. So ordered.
voluntarily by the latter to guarantee the deficiencies resulting from his erroneous
appraisals of the jewels." A preexisting admitted liability is a good consideration for a
promise. The fact that the bargain is a hard one will not deprived it of validity. The
exception to this rule in modern legislation is where the inadequacy is so gross as to
amount to fraud, oppression or undue influence, or when statutes require the
consideration to be adequate. We are not convinced that the instant case falls within
the exception.

Another objection raised is that the requirement of section 5 of Act No. 1508 has not
been complied with. We think that there is substantial compliance with the
requirements of the Chattel Mortgage Law on this point. The wording of the affidavit
under discussion, as it appears from the record, is almost in the same language of the
statute. Likewise, it appears that it was signed by E. Marco, who was Director-
General of the Monte de Piedad at the time of the execution of the contract of chattel
mortgage. The Court of Appeals found that "the contention that director Marco had no
authority to enter into the agreement is without merit. It appears that there was
confirmation of Exhibit A by the Consejo de Administracion of the Monte de Piedad."
Statutory requirements as to forms or words of the affidavits in chattel mortgage
contracts must be substantially, but need not be literally, complied with.

The second assignment of error made by the petitioner is that the Court of Appeals
erred in not holding that the acquittal of the petitioner in criminal case No. 49078 of
the Court of First Instance of Manila bars the action to enforce any civil liability under
said chattel mortgage. We do not need to dwell at length on this assignment of error,
for we find no reason for distributing the conclusion reached by the Court of Appeals
on this point:

The appellant claims that his acquittal in criminal case No. 49078 of the
Court of First Instance of Manila is a bar to the institution of the present
case. The evidence of record does not bear out this contention. There is no
identity of subject matter between the two cases; nor is the instant case
defendant upon the said criminal action. We agree with the trial court that the
transactions involved in this case are different from those involved in criminal
case No. 49078. The court's finding that the transactions involved in the
case at the bar commenced in August, 1932, can not be considered
erroneous simply because Exhibit F-32 of the plaintiff is allegedly dated

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-20175 October 30, 1967
MARIA A. GARCIA, ET AL., petitioners,
vs.
RITA LEGARDA, INC., respondent.
Picazo and Agcaoili for petitioners.
Gregorio Fajardo for respondent.
DIZON, J.:
Appeal taken by the spouses Maria A. Garcia and Marcelino A. Timbang
hereinafter referred to as petitioners from the decision of the Court of Appeals in
CA-G.R. No. 27194-R reversing the one rendered on January 9, 1960 by the Court of
First Instance of Manila in Civil Case No. 1962 entitled "Maria A. Garcia, et al. vs. Rita
Legarda, Inc." The latter is a corporation organized under Philippine laws, and is
engaged in the sale and resale of residential lots in Manila and suburbs. We shall
refer to it hereinafter as the respondent.
On May 20, 1953 the petitioners instituted the civil case mentioned above against the
respondent to have certain contracts numbered 322, 324, and 965 declared as
existing and subsisting; to compel the respondent to accept payments tendered by
them; and to recover moral and exemplary damages and attorney's fees in the
amounts of P6,000.00 and P1,500.00, respectively.
The three causes of action alleged in their complaint involved the three parcels of
land subject matter of the contracts aforesaid. Each had an area of about 150 square
meters, and formed part of the Rita Legarda Estate situated in Manila, and subdivided
into lots sold on installment basis.
(1) Contract to Sell No. 322 (Exhs. A and A-1) covering Lot 40, Block 8-CC, was
executed by the respondent in favor of Emiliano Orellana on March 1, 1947. On June
26, 1947, the latter transferred all his rights, and interest thereunder to Encarnacion
Vito who, in turn, on November 3 of the same year, made a similar transfer of rights in
favor of Delfin Bacho. Finally, on May 29, 1948, Bacho also transferred all his rights
and interest to the petitioners.
(2) On March 1, 1947, Contract to Sell No. 324 (Exh. 2) covering Lot No. 20, Block 5-
CC was executed by respondent in favor of Jesusa Felix. Two months later, Felix,
with the written consent of the respondent, sold her rights and interest to petitioners.
(3) Contract to Sell No. 965 (Exh. 3) covering Lot No. 27, Block 5-CC was executed
by the respondent in favor of Angela Alvarez Solomon on January 8, 1948. With the
written consent of the former, Solomon also sold her rights and interest to the
petitioners on May 11, 1948.
In its answer to the complaint, the respondent averred that in relation to the Contracts
to Sell Nos. 822, 965 and 324, petitioners paid on November 7, 1951 the 53rd, 43rd
and 53rd installments, respectively, corresponding to the installments for the month of
July, 1951; that the petitioners, as of June 11, 1952, had failed to pay the stipulated
monthly installments for Contracts Nos. 322 and 324 corresponding to the period from
August, 1951 through June, 1952, and in the case of Contract No. 965, from August,
1951 through May, 1952; that despite several demands for payment of arrears made
between December, 1951 and June, 1952 by the respondent, the petitioners had
failed to pay the amounts due; and that upon the expiration of the 90-day grace period
on June 11, 1952 stipulated in the sixth paragraph of the contracts, the respondent
had cancelled them. The answer also prayed for an award of damages and attorney's
fees in the sum of P2,000.00.
On April 20, 1954 the petitioners filed a reply denying that they were in arrears as to
their obligations under the three contracts and, further averred as affirmative defense
that the cancellation thereof was unlawful and arbitrary.
After trial the Court rendered judgment declaring Contracts Nos. 322, 324 and 965 as
existing and subsisting; ordering the respondent to accept the payments tendered by
the petitioners and to pay attorney's fees in the sum of P1,500.00. but denied the
award of moral and exemplary damages. From this decision the respondent appealed
to the Court of Appeals from whose decision reversing that of the lower court
the instant appeal was taken.
Petitioners now urge Us, in turn, to reverse the decision of the Court of Appeals,
claiming that the latter had committed the following errors:
I. The Honorable Court of Appeals erred in declaring that the respondent
Rita Legarda, Inc. had not waived its rights to cancel its contracts with the
petitioners on the ground that it had previously accepted late payments of
the installments due on such contracts.
II. The Honorable Court of Appeals erred in declaring that par. 9 of the
contracts in question is not in violation of Art. 1308 of the New Civil Code.
 III. The Honorable Court of Appeals erred in not declaring that the
respondent Rita Legarda, Inc., after having tolerated and accepted
previously late payments on the installments due on the contracts, suddenly
and without suitable warning and giving of further opportunity to pay the
same could not and should not have precipitously decided to forfeit, as it
actually forfeited, all the payments which have already been made to it by
petitioners.
IV. The Honorable Court of Appeals erred in reversing and in not affirming
the decision of the Court of First Instance of Manila in its entirety.
The second assignment of error is based on petitioners' contention that the
questioned stipulations of the contracts are in violation of the provisions of Article
1308 of the New Civil Code, while the first and third are based on the claim that the
respondent having previously accepted late payments of installments due on the
contracts aforesaid, must be deemed to have waived its right to cancel said contracts
on the ground of late payment of installments, and that, at any rate, after having
tolerated and accepted said late payments, it was arbitrary on its part to cancel the
contracts suddenly and without suitable warning. The fifth and last assignment of
error is merely a consequence of the others.
Article 1308 of the New Civil Code reads as follows:
The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.
The above legal provision is a virtual reproduction of Article 1256 of the old Civil Code
but it was so phrased as to emphasize the principle that the contract must
bind both parties. This, of course, is based firstly, on the principle that obligations
arising from contracts have the force of law between the contracting parties and
secondly, that there must be mutuality between the parties based on their essential
equality to which is repugnant to have one party bound by the contract leaving the
other free therefrom (8 Manresa 556). Its ultimate purpose is to render void a contract
containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties.
Paragraph 6 of the contracts in question which is the one claimed to be violative of
the legal provision above quoted reads as follows:
SIXTH In case the party of the SECOND PART fails to satisfy any
monthly installments, or any other payments herein agreed upon, he is
granted a month of grace within which to make the retarded payment,
together with the one corresponding to the said month of grace; it is
understood, however, that should the month of grace herein granted to the
party of the SECOND PART expire, without the payments corresponding to
both months having been satisfied, an interest of 10% per annum will be
charged on the amounts he should have paid; it is understood further, that
should a period of 90 days elapse, to begin from the expiration of the month
of grace herein mentioned, and the party of the SECOND PART has not paid
all the amounts he should have paid with the corresponding interest up to
that date, the party of the FIRST PART has the right to declare this contract
cancelled and of no effect, and as consequence thereof, the party of the
FIRST PART may dispose of the parcel or parcels of land covered by this
contract in favor of other persons, as if this contract had never been entered
into. In case of such cancellation of this contract, all the amounts paid in
accordance with this agreement together with all the improvements made on
the premises, shall be considered as rents paid for the use and occupation
of the above mentioned premises, and as payment for the damages suffered
by failure of the party of the SECOND PART to fulfill his part of this
agreement; and the party of the SECOND PART hereby renounces all his
right to demand or reclaim the return of the same and obliges himself to
peacefully vacate the premises and deliver the same to the party of the
FIRST PART.
The above stipulation, to our mind, merely gives the vendor "the right to declare this
contract cancelled and of no effect" upon fulfillment of the conditions therein set forth.
It does not leave the validity or compliance of the contract entirely "to the will of one of
the contracting parties"; the stipulation or agreement simply says that in case of
default in the payment of installments by the vendee, he shall have (1) "a month of
grace", and that (2) should said month of grace expire without the vendee paying his
arrears, he shall have another "period of 90 days" to pay "all the amounts he should
have paid", etc., then the vendor "has the right to declare this contract cancelled and
of no effect." We have heretofore upheld the validity of similar stipulations. In Taylor
vs. Ky Tieng Piao, etc., 43 Phil. 873, 876-878 the ruling was that a contract expressly
giving to one party the right to cancel, the same if a resolutory condition therein
agreed upon similar to the one under consideration is not fulfilled, is valid, the
reason being that when the contract is thus cancelled, the agreement of the parties is
in reality being fulfilled. Indeed, the power thus granted can not be said to be immoral,
much less unlawful, for it could be exercised not arbitrarily but only upon the
other contracting party committing the breach of contract of non-payment of the
installments agreed upon. Obviously, all that said party had to do to prevent the other
from exercising the power to cancel the contract was for him to comply with his part of
the contract. And in this case, after the maturity of any particular installment and its
non-payment, the contract gave him not only a month grace but an additional period
of 90 days.
Having arrived at the above conclusions, We now come to the question of whether or
not by having previously accepted payments of overdue installments the respondent
had waived its right to declare the contracts cancelled and of no effect.
In this connection the record shows that on June 11, 1952 when the Contracts to Sell
Nos. 234 and 965 were cancelled, the vendees were ten months in arrears and that in
the case of contract to Sell No. 322 the vendees had never resumed payment of a
single installment from the date when, upon their petition, said contract was reinstated
on September 28, 1952. The contracts under consideration are not of absolute sale
but mere contracts to sell on installment. They give the respondent's (vendor) the
right to declare the contracts cancelled and of no effect as in fact it did upon
fulfillment of certain conditions. All said conditions so the record shows have
been fulfilled. Consequently, respondent's (vendor) right to cancel the contracts can
not be doubted.

That prior to the cancellation it had in fact accepted payment of installments in arrears
was but another act of forbearance on its part to give the petitioners an additional
opportunity to keep the contracts alive. Rather than give rise to the presumption that
by such act of humanity it waived its right to cancel the contracts, it strengthens its
right to do so, considering that even after such act of accommodation beneficial to the
petitioners, the latter subsequently defaulted again and again in the fulfillment of their
obligation.

It is, of course, painful for the petitioners to lose not only the right they had acquired
under the contracts but also whatever amounts they had already paid thereunder, but
such consequences had been foreseen by the contracting parties. To avoid them, all
that petitioners had to do as already said heretofore was to comply with their
part of the bargain. Having failed to do so, they really have no valid reason to
complain. That one contracting party appears to have made a poor bargain is no
reason for setting aside the agreement (Fernandez vs. Manila Railroad, 14 Phil. 274,
287).

WHEREFORE, the appealed judgment being in accordance with law and the facts of
the case, the same is hereby affirmed.

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 174433 February 24, 2014
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
SPOUSES ENRIQUE MANALO & ROSALINDA JACINTO, ARNOLD J. MANALO,
ARNEL J. MANALO, and ARMA J. MANALO, Respondents.
DECISION
BERSAMIN, J.:
Although banks are free to determine the rate of interest they could impose on their
borrowers, they can do so only reasonably, not arbitrarily. They may not take
advantage of the ordinary borrowers' lack of familiarity with banking procedures and
jargon. Hence, any stipulation on interest unilaterally imposed and increased by them
shall be struck down as violative of the principle of mutuality of contracts.
Antecedents
Respondent Spouses Enrique Manalo and Rosalinda Jacinto (Spouses Manalo)
applied for an All-Purpose Credit Facility in the amount of 1,000,000.00 with
Philippine National Bank (PNB) to finance the construction of their house. After PNB
granted their application, they executed a Real Estate Mortgage on November 3,
1993 in favor of PNB over their property covered by Transfer Certificate of Title No. S-
23191 as security for the loan.1 The credit facility was renewed and increased several
times over the years. On September 20, 1996, the credit facility was again renewed
for 7,000,000.00. As a consequence, the parties executed a Supplement to and
Amendment of Existing Real Estate Mortgage whereby the property covered by TCT
No. 171859 was added as security for the loan.
The additional security was registered in the names of respondents Arnold, Arnel,
Anthony, and Arma, all surnamed Manalo, who were their children.2
It was agreed upon that the Spouses Manalo would make monthly payments on the
interest. However, PNB claimed that their last recorded payment was made on
December, 1997. Thus, PNB sent a demand letter to them on their overdue account
and required them to settle the account. PNB sent another demand letter because
they failed to heed the first demand.3
After the Spouses Manalo still failed to settle their unpaid account despite the two
demand letters, PNB foreclose the mortgage. During the foreclosure sale, PNB was
the highest bidder for 15,127,000.00 of the mortgaged properties of the Spouses
Manalo. The sheriff issued to PNB the Certificate of Sale dated November 13, 2000.4
After more than a year after the Certificate of Sale had been issued to PNB, the
Spouses Manalo instituted this action for the nullification of the foreclosure
proceedings and damages. They alleged that they had obtained a loan for
1,000,000.00 from a certain Benito Tan upon arrangements made by Antoninus
Yuvienco, then the General Manager of PNBs Bangkal Branch where they had
transacted; that they had been made to understand and had been assured that the
1,000,000.00 would be used to update their account, and that their loan would be
restructured and converted into a long-term loan;5 that they had been surprised to
learn, therefore, that had been declared in default of their obligations, and that the
mortgage on their property had been foreclosed and their property had been sold; and
that PNB did not comply with Section 3 of Act No. 3135, as amended.6
PNB and Antoninus Yuvienco countered that the 1,000,000.00 loan obtained by the
Spouses Manalo from Benito Tan had been credited to their account; that they did not
make any assurances on the restructuring and conversion of the Spouses Manalos
loan into a long-term one;7 that PNBs right to foreclose the mortgage had been clear
especially because the Spouses Manalo had not assailed the validity of the loans and
of the mortgage; and that the Spouses Manalo did not allege having fully paid their
indebtedness.8
Ruling ofthe RTC
After trial, the RTC rendered its decision in favor of PNB, holding thusly:
In resolving this present case, one of the most significant matters the court has noted
is that while during the pre-trial held on 8 September 2003, plaintiff-spouses Manalo
with the assistance counsel had agreed to stipulate that defendants had the right to
foreclose upon the subject properties and that the plaintiffs[] main thrust was to prove
that the foreclosure proceedings were invalid, in the course of the presentation of their
evidence, they modified their position and claimed [that] the loan document executed
were contracts of adhesion which were null and void because they were prepared
entirely under the defendant banks supervision. They also questioned the interest
rates and penalty charges imposed arguing that these were iniquitous,
unconscionable and therefore likewise void.
Not having raised the foregoing matters as issues during the pre-trial, plaintiff-
spouses are presumably estopped from allowing these matters to serve as part of
their evidence, more so because at the pre-trial they expressly recognized the
defendant banks right to foreclose upon the subject property (See Order, pp. 193-
195).
However, considering that the defendant bank did not interpose any objection to
these matters being made part of plaintiffs evidence so much so that their
memorandum contained discussions rebutting plaintiff spouses arguments on these
issues, the court must necessarily include these matters in the resolution of the
present case.9
The RTC held, however, that the Spouses Manalos "contract of adhesion" argument
was unfounded because they had still accepted the terms and conditions of their
credit agreement with PNB and had exerted efforts to pay their obligation; 10 that the
Spouses Manalo were now estopped from questioning the interest rates unilaterally
imposed by PNB because they had paid at those rates for three years without
protest;11 and that their allegation about PNB violating the notice and publication
requirements during the foreclosure proceedings was untenable because personal
notice to the mortgagee was not required under Act No. 3135.12
The Spouses Manalo appealed to the CA by assigning a singular error, as follows:
THE COURT A QUO SERIOUSLY ERRED IN DISMISSING PLAINTIFF-
APPELLANTS COMPLAINT FOR BEING (sic) LACK OF MERIT
NOTWITHSTANDING THE FACT THAT IT WAS CLEARLY SHOWN THAT THE
FORECLOSURE PROCEEDINGS WAS INVALID AND ILLEGAL.13
The Spouses Manalo reiterated their arguments, insisting that: (1) the credit
agreements they entered into with PNB were contracts of adhesion; 14 (2) no interest
was due from them because their credit agreements with PNB did not specify the
interest rate, and PNB could not unilaterally increase the interest rate without first
informing them;15 and (3) PNB did not comply with the notice and publication
requirements under Section 3 of Act 3135.16 On the other hand, PNB and Yuvienco
did not file their briefs despite notice.17
Ruling ofthe CA
In its decision promulgated on March 28, 2006,18 the CA affirmed the decision of the
RTC insofar as it upheld the validity of the foreclosure proceedings initiated by PNB,
but modified the Spouses Manalos liability for interest. It directed the RTC to see to
the recomputation of their indebtedness, and ordered that should the recomputed
amount be less than the winning bid in the foreclosure sale, the difference should be
immediately returned to the Spouses Manalo.
The CA found it necessary to pass upon the issues of PNBs failure to specify the
applicable interest and the lack of mutuality in the execution of the credit agreements
considering the earlier cited observation made by the trial court in its decision.
Applying Article 1956 of the Civil Code, the CA held that PNBs failure to indicate the
rate of interest in the credit agreements would not excuse the Spouses Manalo from
their contractual obligation to pay interest to PNB because of the express agreement
to pay interest in the credit agreements. Nevertheless, the CA ruled that PNBs
inadvertence to specify the interest rate should be construed against it because the
credit agreements were clearly contracts of adhesion due to their having been
prepared solely by PNB.
The CA further held that PNB could not unilaterally increase the rate of interest
considering that the credit agreements specifically provided that prior notice was
required before an increase in interest rate could be effected. It found that PNB did
not adduce proof showing that the Spouses Manalo had been notified before the
increased interest rates were imposed; and that PNBs unilateral imposition of the
increased interest rate was null and void for being violative of the principle of
mutuality of contracts enshrined in Article 1308 of the Civil Code. Reinforcing its
"contract of adhesion" conclusion, it added that the Spouses Manalos being in dire
need of money rendered them to be not on an equal footing with PNB. Consequently,
the CA, relying on Eastern Shipping Lines, v. Court of Appeals,19 fixed the interest
rate to be paid by the Spouses Manalo at 12% per annum, computed from their
default.
The CA deemed to be untenable the Spouses Manalos allegation that PNB had failed
to comply with the requirements for notice and posting under Section 3 of Act 3135.
The CA stated that Sheriff Norberto Magsajos testimony was sufficient proof of his
posting of the required Notice of Sheriffs Sale in three public places; that the
notarized Affidavit of Publication presented by Sheriff Magsajo was prima facie proof
of the publication of the notice; and that the Affidavit of Publication enjoyed the
presumption of regularity, such that the Spouses Manalos bare allegation of non-
publication without other proof did not overcome the presumption.
On August 29, 2006, the CA denied the Spouses Manalos Motion for
Reconsideration and PNBs Partial Motion for Reconsideration. 20
Issues
In its Memorandum,21 PNB raises the following issues:
I
WHETHER OR NOT THE COURT OF APPEALS WAS CORRECT IN NULLIFYING
THE INTEREST RATES IMPOSED ON RESPONDENT SPOUSES LOAN AND IN
FIXING THE SAME AT TWELVE PERCENT (12%) FROM DEFAULT, DESPITE THE
FACT THAT (i) THE SAME WAS RAISED BY THE RESPONDENTS ONLY FOR
THE FIRST TIME ON APPEAL (ii) IT WAS NEVER PART OF THEIR COMPLAINT
(iii) WAS EXLUDED AS AN ISSUE DURING PRE-TRIAL, AND WORSE, (iv) THERE
WAS NO FORMALLY OFFERED PERTAINING TO THE SAME DURING TRIAL.
II
WHETHER OR NOT THE COURT OF APPEALS CORRECTLY RULED THAT
THERE WAS NO MUTUALITY OF CONSENT IN THE IMPOSITION OF INTEREST
RATES ON THE RESPONDENT SPOUSES LOAN DESPITE THE EXISTENCE OF
FACTS AND CIRCUMSTANCES CLEARLY SHOWING RESPONDENTS ASSENT
TO THE RATES OF INTEREST SO IMPOSED BY PNB ON THE LOAN.
Anent the first issue, PNB argues that by passing upon the issue of the validity of the
interest rates, and in nullifying the rates imposed on the Spouses Manalo, the CA
decided the case in a manner not in accord with Section 15, Rule 44 of the Rules of
Court, which states that only questions of law or fact raised in the trial court could be
assigned as errors on appeal; that to allow the Spouses Manalo to raise an issue for
the first time on appeal would "offend the basic rules of fair play, justice and due
process;"22 that the resolution of the CA was limited to the issues agreed upon by the
parties during pre-trial;23 that the CA erred in passing upon the validity of the interest
rates inasmuch as the Spouses Manalo did not present evidence thereon; and that
the Judicial Affidavit of Enrique Manalo, on which the CA relied for its finding, was not
offered to prove the invalidity of the interest rates and was, therefore, inadmissible for
that purpose.24
As to the substantive issues, PNB claims that the Spouses Manalos continuous
payment of interest without protest indicated their assent to the interest rates
imposed, as well as to the subsequent increases of the rates; and that the CA erred in
declaring that the interest rates and subsequent increases were invalid for lack of
mutuality between the contracting parties.
Ruling
The appeal lacks merit.
1.
Procedural Issue
Contrary to PNBs argument, the validity of the interest rates and of the increases,
and on the lack of mutuality between the parties were not raised by the Spouses
Manalos for the first time on appeal. Rather, the issues were impliedly raised during
the trial itself, and PNBs lack of vigilance in voicing out a timely objection made that
possible.
It appears that Enrique Manalos Judicial Affidavit introduced the issues of the validity
of the interest rates and the increases, and the lack of mutuality between the parties
in the following manner, to wit:
5. True to his words, defendant Yuvienco, after several days, sent us a
document through a personnel of defendant PNB, Bangkal, Makati City
Branch, who required me and my wife to affix our signature on the said
document;
6. When the document was handed over me, I was able to know that it was a
Promissory Note which was in ready made form and prepared solely by the
defendant PNB;
xxxx
21. As above-noted, the rates of interest imposed by the defendant bank
were never the subject of any stipulation between us mortgagors and the
defendant PNB as mortgagee;
22. The truth of the matter is that defendant bank imposed rate of interest
which ranges from 19% to as high as 28% and which changes from time to
time;
23. The irregularity, much less the invalidity of the imposition of iniquitous
rates of interest was aggravated by the fact that we were not informed,
notified, nor the same had our prior consent and acquiescence therefor. x x
x25
PNB cross-examined Enrique Manalo upon his Judicial Affidavit. There is no showing
that PNB raised any objection in the course of the cross examination. 26 Consequently,
the RTC rightly passed upon such issues in deciding the case, and its having done so
was in total accord with Section 5, Rule 10 of the Rules of Court, which states:
Section 5. Amendment to conform to or authorize presentation of evidence. When
issues not raised by the pleadings are tried with the express or implied consent of the
parties, they shall be treated in all respects as if they had been raised in the
pleadings. Such amendment of the pleadings as may be necessary to cause them to
conform to the evidence and to raise these issues may be made upon motion of any
party at any time, even after judgment; but failure to amend does not affect the result
of the trial of these issues. If evidence is objected to at the trial on the ground that it is
not within the issues made by the pleadings, the court may allow the pleadings to be
amended and shall do so with liberality if the presentation of the merits of the action
and the ends of substantial justice will be subserved thereby. The court may grant a
continuance to enable the amendment to be made.
In Bernardo Sr. v. Court of Appeals,27 we held that:
It is settled that even if the complaint be defective, but the parties go to trial thereon,
and the plaintiff, without objection, introduces sufficient evidence to constitute the
particular cause of action which it intended to allege in the original complaint, and the
defendant voluntarily produces witnesses to meet the cause of action thus
established, an issue is joined as fully and as effectively as if it had been previously
joined by the most perfect pleadings. Likewise, when issues not raised by the
pleadings are tried by express or implied consent of the parties, they shall be treated
in all respects as if they had been raised in the pleadings.
The RTC did not need to direct the amendment of the complaint by the Spouses
Manalo. Section 5, Rule 10 of the Rules of Court specifically declares that the "failure
to amend does not affect the result of the trial of these issues." According to Talisay-
Silay Milling Co., Inc. v. Asociacion de Agricultores de Talisay-Silay, Inc.:28
The failure of a party to amend a pleading to conform to the evidence adduced during
trial does not preclude an adjudication by the court on the basis of such evidence
which may embody new issues not raised in the pleadings, or serve as a basis for a
higher award of damages. Although the pleading may not have been amended to
conform to the evidence submitted during trial, judgment may nonetheless be
rendered, not simply on the basis of the issues alleged but also on the basis of issues
discussed and the assertions of fact proved in the course of trial.1wphi1 The court
may treat the pleading as if it had been amended to conform to the evidence,
although it had not been actually so amended. Former Chief Justice Moran put the
matter in this way:
When evidence is presented by one party, with the expressed or implied consent of
the adverse party, as to issues not alleged in the pleadings, judgment may be
rendered validly as regards those issues, which shall be considered as if they have
been raised in the pleadings. There is implied, consent to the evidence thus
presented when the adverse party fails to object thereto." (Emphasis supplied)
Clearly, a court may rule and render judgment on the basis of the evidence before it
even though the relevant pleading had not been previously amended, so long as no
surprise or prejudice is thereby caused to the adverse party. Put a little differently, so
long as the basic requirements of fair play had been met, as where litigants were
given full opportunity to support their respective contentions and to object to or refute
each other's evidence, the court may validly treat the pleadings as if they had been
amended to conform to the evidence and proceed to adjudicate on the basis of all the
evidence before it.
There is also no merit in PNBs contention that the CA should not have considered
and ruled on the issue of the validity of the interest rates because the Judicial Affidavit
of Enrique Manalo had not been offered to prove the same but only "for the purpose
of identifying his affidavit."29 As such, the affidavit was inadmissible to prove the nullity
of the interest rates.
We do not agree.
Section 5, Rule 10 of the Rules of Court is applicable in two situations.1wphi1 The
first is when evidence is introduced on an issue not alleged in the pleadings and no
objection is interposed by the adverse party. The second is when evidence is offered
on an issue not alleged in the pleadings but an objection is raised against the
offer.30 This case comes under the first situation. Enrique Manalos Judicial Affidavit
would introduce the very issues that PNB is now assailing. The question of whether
the evidence on such issues was admissible to prove the nullity of the interest rates is
an entirely different matter. The RTC accorded credence to PNBs evidence showing
that the Spouses Manalo had been paying the interest imposed upon them without
protest. On the other hand, the CAs nullification of the interest rates was based on
the credit agreements that the Spouses Manalo and PNB had themselves submitted.
Based on the foregoing, the validity of the interest rates and their increases, and the
lack of mutuality between the parties were issues validly raised in the RTC, giving the
Spouses Manalo every right to raise them in their appeal to the CA. PNBs contention
was based on its wrong appreciation of what transpired during the trial. It is also
interesting to note that PNB did not itself assail the RTCs ruling on the issues
obviously because the RTC had decided in its favor. In fact, PNB did not even submit
its appellees brief despite notice from the CA.
2.
Substantive Issue
The credit agreement executed succinctly stipulated that the loan would be subjected
to interest at a rate "determined by the Bank to be its prime rate plus applicable
spread, prevailing at the current month."31 This stipulation was carried over to or
adopted by the subsequent renewals of the credit agreement. PNB thereby arrogated
unto itself the sole prerogative to determine and increase the interest rates imposed
on the Spouses Manalo. Such a unilateral determination of the interest rates
contravened the principle of mutuality of contracts embodied in Article 1308 of the
Civil Code.32
The Court has declared that a contract where there is no mutuality between the
parties partakes of the nature of a contract of adhesion, 33 and any obscurity will be
construed against the party who prepared the contract, the latter being presumed the
stronger party to the agreement, and who caused the obscurity. 34 PNB should then
suffer the consequences of its failure to specifically indicate the rates of interest in the
credit agreement. We spoke clearly on this in Philippine Savings Bank v. Castillo, 35 to
wit:
The unilateral determination and imposition of the increased rates is violative of the
principle of mutuality of contracts under Article 1308 of the Civil Code, which provides
that [t]he contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them. A perusal of the Promissory Note will readily show
that the increase or decrease of interest rates hinges solely on the discretion of
petitioner. It does not require the conformity of the maker before a new interest rate
could be enforced. Any contract which appears to be heavily weighed in favor of one
of the parties so as to lead to an unconscionable result, thus partaking of the nature of
a contract of adhesion, is void. Any stipulation regarding the validity or compliance of
the contract left solely to the will of one of the parties is likewise invalid. (Emphasis
supplied)
PNB could not also justify the increases it had effected on the interest rates by citing
the fact that the Spouses Manalo had paid the interests without protest, and had
renewed the loan several times. We rule that the CA, citing Philippine National Bank
v. Court of Appeals,36 rightly concluded that "a borrower is not estopped from
assailing the unilateral increase in the interest made by the lender since no one who
receives a proposal to change a contract, to which he is a party, is obliged to answer
the same and said partys silence cannot be construed as an acceptance thereof." 37
Lastly, the CA observed, and properly so, that the credit agreements had explicitly
provided that prior notice would be necessary before PNB could increase the interest
rates. In failing to notify the Spouses Manalo before imposing the increased rates of
interest, therefore, PNB violated the stipulations of the very contract that it had
prepared. Hence, the varying interest rates imposed by PNB have to be vacated and
declared null and void, and in their place an interest rate of 12% per annum computed
from their default is fixed pursuant to the ruling in Eastern Shipping Lines, Inc. v.
Court of Appeals.38
The CAs directive to PNB (a) to recompute the Spouses Manalos indebtedness
under the oversight of the RTC; and (b) to refund to them any excess of the winning
bid submitted during the foreclosure sale over their recomputed indebtedness was
warranted and equitable. Equally warranted and equitable was to make the amount to
be refunded, if any, bear legal interest, to be reckoned from the promulgation of the
CAs decision on March 28, 2006.39Indeed, the Court said in Eastern Shipping Lines,
Inc. v. Court of Appeals40 that interest should be computed from the time of the
judicial or extrajudicial demand. However, this case presents a peculiar situation, the
peculiarity being that the Spouses Manalo did not demand interest either judicially or
extrajudicially. In the RTC, they specifically sought as the main reliefs the nullification
of the foreclosure proceedings brought by PNB, accounting of the payments they had
made to PNB, and the conversion of their loan into a long term one. 41 In its judgment,
the RTC even upheld the validity of the interest rates imposed by PNB.42 In their
appellants brief, the Spouses Manalo again sought the nullification of the foreclosure
proceedings as the main relief.43 It is evident, therefore, that the Spouses Manalo
made no judicial or extrajudicial demand from which to reckon the interest on any
amount to be refunded to them. Such demand could only be reckoned from the
promulgation of the CAs decision because it was there that the right to the refund
was first judicially recognized. Nevertheless, pursuant to Eastern Shipping Lines, Inc.
v. Court of Appeals,44 the amount to be refunded and the interest thereon should earn
interest to be computed from the finality of the judgment until the full refund has been
made.
Anent the correct rates of interest to be applied on the amount to be refunded by
PNB, the Court, in Nacar v. Gallery Frames45 and S.C. Megaworld Construction v.
Parada,46 already applied Monetary Board Circular No. 799 by reducing the interest
rates allowed in judgments from 12% per annum to 6% per annum. 47 According to
Nacar v. Gallery Frames, MB Circular No. 799 is applied prospectively, and
judgments that became final and executory prior to its effectivity on July 1, 2013 are
not to be disturbed but continue to be implemented applying the old legal rate of 12%
per annum. Hence, the old legal rate of 12% per annum applied to judgments
becoming final and executory prior to July 1, 2013, but the new rate of 6% per annum
applies to judgments becoming final and executory after said dater.
Conformably with Nacar v. Gallery Frames and S.C. Megaworld Construction v.
Parada, therefore, the proper interest rates to be imposed in the present case are as
follows:
1. Any amount to be refunded to the Spouses Manalo shall bear interest of
12% per annum computed from March 28, 2006, the date of the
promulgation of the CA decision, until June 30, 2013; and 6% per annum
computed from July 1, 2013 until finality of this decision; and
2. The amount to be refunded and its accrued interest shall earn interest of
6% per annum until full refund.
WHEREFORE, the Court AFFIRMS the decision promulgated by the Court of Appeals
on March 28, 2006 in CA-G.R. CV No. 84396, subject to the MODIFICATION that any
amount to be refunded to the respondents shall bear interest of 12% per annum
computed from March 28, 2006 until June 30, 2013, and 6% per annum computed
from July 1, 2013 until finality hereof; that the amount to be refunded and its accrued
interest shall earn interest at 6o/o per annum until full refund; and DIRECTS the
petitioner to pay the costs of suit.

SO ORDERED.
 FIRST DIVISION
G.R. No. 172652, November 26, 2014
METROPOLITAN BANK AND TRUST COMPANY, Petitioner, v. WILFRED N.
CHIOK, Respondent.
G.R. No. 175302
BANK OF THE PHILIPPINE ISLANDS, Petitioner, v. WILFRED N.
CHIOK, Respondent.
G.R. No. 175394
GLOBAL BUSINESS BANK, INC., Petitioner, v. WILFRED N. CHIOK, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
The three consolidated petitions herein all assail the Decision1 of the Court of Appeals
in CA-G.R. CV No. 77508 dated May 5, 2006, and the Resolution 2 in the same case
dated November 6, 2006.
Respondent Wilfred N. Chiok (Chiok) had been engaged in dollar trading for several
years. He usually buys dollars from Gonzalo B. Nuguid (Nuguid) at the exchange rate
prevailing on the date of the sale. Chiok pays Nuguid either in cash or managers
check, to be picked up by the latter or deposited in the latters bank account. Nuguid
delivers the dollars either on the same day or on a later date as may be agreed upon
between them, up to a week later. Chiok and Nuguid had been dealing in this manner
for about six to eight years, with their transactions running into millions of pesos. For
this purpose, Chiok maintained accounts with petitioners Metropolitan Bank and
Trust Company (Metrobank) and Global Business Bank, Inc. (Global Bank), the
latter being then referred to as the Asian Banking Corporation (Asian Bank). Chiok
likewise entered into a Bills Purchase Line Agreement (BPLA) with Asian Bank. Under
the BPLA, checks drawn in favor of, or negotiated to, Chiok may be purchased by
Asian Bank. Upon such purchase, Chiok receives a discounted cash equivalent of the
amount of the check earlier than the normal clearing period.
On July 5, 1995, pursuant to the BPLA, Asian Bank bills purchased Security Bank &
Trust Company (SBTC) Managers Check (MC) No. 037364 in the amount of
P25,500,000.00 issued in the name of Chiok, and credited the same amount to the
latters Savings Account No. 2-007-03-00201-3.
On the same day, July 5, 1995, Asian Bank issued MC No. 025935 in the amount of
P7,550,000.00 and MC No. 025939 in the amount of P10,905,350.00 to Gonzalo
Bernardo, who is the same person as Gonzalo B. Nuguid. The two Asian Bank
managers checks, with a total value of P18,455,350.00 were issued pursuant to
Chioks instruction and was debited from his account. Likewise upon Chioks
application, Metrobank issued Cashiers Check (CC) No. 003380 in the amount of
P7,613,000.00 in the name of Gonzalo Bernardo. The same was debited from Chioks
Savings Account No. 154-42504955. The checks bought by Chiok for payee Gonzalo
Bernardo are therefore summarized as follows:
Drawee Bank/Check No. Amount (P) Source of fund
Asian Bank MC No. 7,550,000.00 Chioks Asian Bank Savings
025935 Account No. 2-007-03-00201-3,
which had been credited with the
value of SBTC MC No.
037364 (P25,500,000.00) when
the latter was purchased by
Asian Bank from Chiok pursuant
to their BPLA.
Asian Bank MC No. 10,905,350.00 (aggregate value of Asian Bank
025939 MCs: 18,455,350.00)
Metrobank CC No. 003380 7,613,000.00 Chioks Metrobank Savings
Account No. 154-425049553
TOTAL 26,068,350.00
Chiok then deposited the three checks (Asian Bank MC Nos. 025935 and 025939,
and Metrobank CC No. 003380), with an aggregate value of P26,068,350.00 in
Nuguids account with Far East Bank & Trust Company (FEBTC), the predecessor-in-
interest of petitioner Bank of the Philippine Islands (BPI). Nuguid was supposed to
deliver US$1,022,288.50,4 the dollar equivalent of the three checks as agreed upon,
in the afternoon of the same day. Nuguid, however, failed to do so, prompting Chiok
to request that payment on the three checks be stopped. Chiok was allegedly advised
to secure a court order within the 24-hour clearing period.
On the following day, July 6, 1995, Chiok filed a Complaint for damages with
application for ex parterestraining order and/or preliminary injunction with the
Regional Trial Court (RTC) of Quezon City against the spouses Gonzalo and
Marinella Nuguid, and the depositary banks, Asian Bank and Metrobank, represented
by their respective managers, Julius de la Fuente and Alice Rivera. The complaint
was docketed as Civil Case No. Q-95-24299 and was raffled to Branch 96. The
complaint was later amended5to include the prayer of Chiok to be declared the legal
owner of the proceeds of the subject checks and to be allowed to withdraw the entire
proceeds thereof.
On the same day, July 6, 1995, the RTC issued a temporary restraining order
(TRO) directing the spouses Nuguid to refrain from presenting the said checks
for payment and the depositary banks from honoring the same until further
orders from the court.6
Asian Bank refused to honor MC Nos. 025935 and 025939 in deference to the TRO.
Metrobank claimed that when it received the TRO on July 6, 1995, it refused to honor
CC No. 003380 and stopped payment thereon. However, in a letter also dated July 6,
1995, Ms. Jocelyn T. Paz of FEBTC, Cubao-Araneta Branch informed Metrobank that
the TRO was issued a day after the check was presented for payment. Thus,
according to Paz, the transaction was already consummated and FEBTC had already
validly accepted the same. In another letter, FEBTC informed Metrobank that the
restraining order indicates the name of the payee of the check as GONZALO
NUGUID, but the check is in fact payable to GONZALO BERNARDO. We believe
there is a defect in the restraining order and as such should not bind your
bank.7 Alice Rivera of Metrobank replied to said letters, reiterating Metrobanks
position to comply with the TRO lest it be cited for contempt by the trial court.
However, as would later be alleged in Metrobanks Answer before the trial court,
Metrobank eventually acknowledged the check when it became clear that nothing
more can be done to retrieve the proceeds of the check. Metrobank furthermore
claimed that since it is the issuer of CC No. 003380, the check is its primary obligation
and should not be affected by any prior transaction between the purchaser (Chiok)
and the payee (Nuguid).
In the meantime, FEBTC, as the collecting bank, filed a complaint against Asian Bank
before the Philippine Clearing House Corporation (PCHC) Arbitration Committee for
the collection of the value of Asian Bank MC No. 025935 and 025939, which FEBTC
had allegedly allowed Nuguid to withdraw on July 5, 1995, the same day the checks
were deposited. The case was docketed as Arbicom Case No. 95-082. The PCHC
Arbitration Committee later relayed, in a letter dated August 4, 1995, its refusal to
assume jurisdiction over the case on the ground that any step it may take might be
misinterpreted as undermining the jurisdiction of the RTC over the case or a violation
of the July 6, 1995 TRO.
On July 25, 1995, the RTC issued an Order directing the issuance of a writ of
preliminary prohibitory injunction:
WHEREFORE, upon filing by the plaintiff of a sufficient bond in the amount of
P26,068,350.00, to be executed in favor of the defendants under the condition that
the same shall answer for whatever damages they may sustain by reason of this
injunction should the Court ultimately determine that he was not entitled thereto, let a
writ of preliminary prohibitory injunction issue restraining and preventing during the
pendency of the case:
a) Defendant Asian Bank from paying Managers Checks No. 025935 in the amount
of P7,550,000.00 and No. 025939 in the amount of P10,905,350.00; and
b) Defendant Metro Bank from paying Cashiers Check No. 003380 in the amount of
P7,613,000.00.
The application for preliminary mandatory injunction is hereby denied and the order
issued on July 7, 1995 directing defendant Metro Bank (Annapolis, Greenhills Branch)
to allow the plaintiff to withdraw the proceeds of Cashiers Check No. 003380 in the
amount of P7,613,000.00 is hereby set aside.
The plaintiffs urgent motion to declare defendants Asian Bank and Metro Bank in
contempt of court filed last July 13, 1995 is hereby denied for lack of legal basis.
The writ of preliminary prohibitory injunction and a copy of this order shall be served
on the defendants by Deputy Sheriff Jose Martinez of this Branch. 8
Upon the filing by Chiok of the requisite bond, the Writ was subsequently issued on
July 26, 1995.
Before the RTC, Asian Bank pointed out that SBTC returned and issued a Stop
Payment Order on SBTC MC No. 037364 (payable to Chiok in the amount of
P25,500,000.00) on the basis of an Affidavit of Loss & Undertaking executed by a
certain Helen Tan. Under said Affidavit of Loss & Undertaking, Tan claims that she
purchased SBTC MC No. 037364 from SBTC, but the managers check got lost on
that day. Asian Bank argued that Chiok would therefore be liable for the dishonor of
the managers check under the terms of the BPLA, which provides for recourse
against the seller (Chiok) of the check when it is dishonored by the drawee (SBTC) for
any reason, whether valid or not.
On October 18, 1995, FEBTC filed a Complaint-in-Intervention in Civil Case No. Q-
95-24299. On February 6, 1996, the RTC initially denied FEBTCs intervention in the
case. On Motion for Reconsideration, however, the RTC, on April 15, 1996, reversed
itself and allowed the same.
In the Complaint-in-Intervention, FEBTC claimed that it allowed the immediate
withdrawal of the proceeds of Asian Bank MC Nos. 025935 and 025939 on the
ground that, as managers checks, they were the direct obligations of Asian Bank and
were accepted in advance by Asian Bank by the mere issuance thereof. FEBTC
presented the checks for payment on July 5, 1995 through the PCHC. Asian Bank, as
admitted in its Answer before the RTC, received the same on that day. Consequently,
Asian Bank was deemed to have confirmed and booked payment of the subject
checks in favor of FEBTC or, at the latest, during the first banking hour of July 6,
1995, when payment should have been made. FEBTC claimed that Asian Bank
exhibited bad faith when, in anticipation of the TRO, it opted to float the checks until it
received the TRO at 12:00 noon of July 6, 1995 to justify the nonpayment thereof.
In their own Answer, the spouses Nuguid claimed that Gonzalo Nuguid had delivered
much more dollars than what was required for the three checks at the time of
payment. By way of special affirmative defense, the spouses Nuguid also claims that
since the subject checks had already been paid to him, Chiok is no longer entitled to
an injunction (to hold the payment of the subject checks), and Civil Case No. Q-95-
24299 has already become moot.
On August 29, 2002, the RTC rendered its Decision, the dispositive portion of which
states:
WHEREFORE, judgment is rendered:
1. Declaring as permanent the writ of preliminary injunction issued under the Order of
July 25, 1995;
2. Ordering Global Business Bank, Inc. to pay the plaintiff
[Chiok]:chanroblesvirtuallawlibrary
a.) The amount of P34,691,876.71 (less the attorneys fees of P255,000.00 which
shall remain with Global Business Bank, Inc.), plus interest at the legal rate of
12%/p.a. from September 30, 1999 until fully paid;
b.) The amount of P215,000.00, representing the excess amount debited from the
plaintiffs deposit in his account with Global Business Bank, Inc. on July 7, 1995, plus
interest of 12%/p.a. from July 7, 1995, until fully paid;
c.) Attorneys fees equivalent of 5% of the total amount due; and
3. Ordering Metropolitan Bank & Trust Company to pay the
plaintiff:chanroblesvirtuallawlibrary
a. The amount of his deposit of P7,613,000.00, plus interest of 12%/p.a. from July 5,
1995 until said amount is fully paid; and
b. Attorneys fees of 5% of the total amount due;
4. Ordering Spouses Gonzalo B. Nuguid and Marinella O. Nuguid liable jointly and
severally with Global Business Bank, Inc. and Metropolitan Bank & Trust
Company, Inc. for the respective attorneys fees;
5. Dismissing the complaint-in-intervention of BPI for lack of merit;
6. Ordering the defendants and the intervenor to pay, jointly and severally, the costs
of suit.9 (Emphases supplied.)
The RTC held that Nuguid failed to prove the delivery of dollars to Chiok. According to
the RTC, Nuguids claim that Chiok was still liable for seven dishonored China
Banking Corporation (CBC) checks with a total worth of P72,984,020.00 is highly
doubtful since such claim was not presented as a counterclaim in the case.
Furthermore, the court ruled that the certification of CBC stating the reasons 10 for the
stop payment order are indicative of Chioks non-liability to Nuguid. The RTC further
noted that there was a criminal case filed by Chiok against Nuguid on March 29, 1996
for estafa and other deceit on account of Nuguids alleged failure to return the
originals of the seven CBC checks.11
The RTC went on to rule that managers checks and cashiers checks may be the
subject of a Stop Payment Order from the purchaser on the basis of the payees
contractual breach. As explanation for this ruling, the RTC adopted its
pronouncements when it issued the July 25, 1995 Order:
Defendant Nuguids argument that the injunction could
render managers and cashierschecks unworthy of the faith they should have and
could impair their nature as independent undertakings of the issuing banks is
probably an undistinguished simplification. While the argument may be applicable to
such checks in general, it does not adequately address the situation, as here,
when specific managers and cashiers checksare already covered by reciprocal
undertakings between their purchaser and their payee, in which the latter allegedly
failed to perform. The agreement herein was supposedly one in which Nuguid would
deliver the equivalent amount in US dollars ($1,022,288.23) on the same date that
the plaintiff purchased and delivered the managers and cashiers checks
(P26,068,350.00). Assuming that such a reciprocity was true, the purchaser should
have the legal protection of the injunctive writ (which, after all, the legal departments
of the issuing banks themselves allegedly advised the plaintiff to obtain), since the
usual order or instruction to stop payment available in case of ordinary checks did not
avail. This was probably the reason that Asian Bank has expressly announced in its
own comment/opposition of July 14, 1995 that it was not opposing the application for
the prohibitory injunction.
The dedication of such checks pursuant to
specific reciprocal undertakings between their purchasers and payees authorizes
rescission by the former to prevent substantial and material damage to themselves,
which authority includes stopping the payment of the checks.12
According to the RTC, both managers and cashiers checks are still subject to regular
clearing under the regulations of the Bangko Sentral ng Pilipinas. Since managers
and cashiers checks are the subject of regular clearing, they may consequently be
refused for cause by the drawee, which refusal is in fact provided for in the PCHC
Rule Book.
The RTC found the argument by BPI that the managers and cashiers checks are
pre-cleared untenable under Section 60 of the New Central Bank Act and Article 1249
of the Civil Code, which respectively provides:
Section 60. Legal Character. Checks representing demand deposits do not have
legal tender power and their acceptance in the payment of debts, both public and
private, is at the option of the creditor; Provided, however, that a check which has
been cleared and credited to the account of the creditor shall be equivalent to a
delivery to the creditor of cash in an amount equal to the amount credited to his
account.
Art. 1249. The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which is legal
tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in the
abeyance.
The RTC went on to rule that due to the timely service of the TRO and the injunction,
the value of the three checks remained with Global Bank and Metrobank.13 The RTC
concluded that since Nuguid did not have a valid title to the proceeds of the
managers and cashiers checks, Chiok is entitled to be paid back everything he had
paid to the drawees for the checks.14
With respect to Global Bank, the RTC ruled that the entire amount of P34,691,876.71
it recovered from SBTC from the September 15, 1997 PCHC Decision, as reflected in
the September 29, 1999 Charge Slip No. 114977, less the sum of P225,000.00
awarded by the arbitration committees decision as attorneys fees, should be paid to
Chiok, with interest at 12% per annum from September 30, 1999 until full payment.
The RTC likewise ordered Global Bank to pay Chiok the amount of P215,390.00, an
amount debited from Chioks account as payment for outstanding bills purchase. 15
With respect to Metrobank, the RTC ruled that it should pay Chiok P7,613,000.00, the
amount paid by Chiok to purchase the CC, plus interest of 12 percent per annum from
July 5, 1995 until full payment. The RTC explained this finding as follows:
The same conclusion is true with respect to Metro Bank, with whom the funds
amounting to P7,613,000.00 for the purchase of CC No. 003380 has remained.
According to Chiok, Metro Bank used such funds in its operations.
In the hearing on May 17, 2001, Lita Salonga Tan was offered as a witness for Metro
Bank, but in lieu of her testimony, the parties agreed to stipulate on the following as
her testimony, to wit:
1. That Metro Bank paid the amount of CC No. 003280;
2. That the payment on July 12, 1995 was made while the TRO of July
5, 1995 was in force;
3. [That] the payment on July 12, 1995 was on the third clearing of CC
No. 003380; and
4. That the PCHC Rule book was the authority on the rules and
regulations on the clearing operations of banks.
The payment to FEBTC by Metro Bank of CC No. 003380 on July 12, 1995 was an
open defiance of the TRO of July 6, 1995. Metro Banks Branch Manager Alice
Rivera, through her letter of July 10, 1995 to FEBTC as the collecting
bank, returned the CC to FEBTC in compliance with the TRO which was received
about 12:10 noon of July 6, 1999. Hence, Metro Bank should not have paid because
the TRO was served within the 24-hour period to clear checks.
Moreover, the payment, being made on third clearing, was unjustified for violating
existing regulations, particularly paragraph 1 of the Clearing House Operating Memo
(CHOM), effective September 1, 1984, which prohibited the reclearing of a check after
its first presentation if it was returned for the reason of stop payment or closed
account.
It also seems that Metro Bank paid the CC without first checking whether, in fact, any
actual payment of the 3 checks had been made on July 5, 1995 to the payee when
the checks were deposited in payees account with FEBTC on July 5, 1995. The
records show no such payment was ever made to render the TRO of July 6, 1995 or
the writ of preliminary injunction applied for moot and academic.
Jessy A. Degaos adopted by Metro Bank as its own witness in injunction hearing
of July 24, 1995 stated that the payment of the 3 checks consisted of the accounting
entry made at the PCHC during the presenting process by debiting the respective
accounts of the drawees and crediting the account of collecting bank FEBTC. Yet, as
already found hereinabove, such process was reversed due to the return by the
drawees of the checks which they dishonored on account of the TRO.
Also, Degaos, testifying on January 17, 2002 for intervenor BPI, was asked in
what formwas the withdrawal of the amounts of the checks made by Nuguid on July 5,
1995, that is, whether:- 1) cash withdrawal; or 2) credit to Nuguids account; or 3) draft
issued to Nuguid. His reply was that only the banks branch which serviced the
payees account could provide the answer. Yet, BPI did not present any competent
personnel from the branch concerned to enlighten the Court on this material point.
This amount of P7,613,000.00, having remained with Metro Bank since the service of
the TRO of July 6, 1995 and the writ of preliminary injunction issued under the Order
of July 25, 1998, should be returned to Chiok with interest of 12%/p.a. from July 7,
1995 until full payment.16 (Citations omitted.)
The RTC likewise denied BPIs complaint-in-intervention to recover the value of the
three checks from drawees Global Bank and Metrobank for lack of merit. The RTC,
after reprimanding Global Bank and Metrobank for siding with BPI on this issue, held
that BPI, as a mere collecting bank of the payee with a void title to the checks, had no
valid claim as to the amounts of such checks. The RTC explained:
Firstly: BPI, being a collecting bank in relation to the 3 checks, was merely performing
collection services as an agent of Nuguid, the payee. If, as found hereinbefore,
Nuguid could not have legal title to the 3 checks, it follows that BPI could not stake
any claim for title better than Nuguids own void title. Consequently, BPI has no right
to claim the amounts of the 3 checks from the drawee-banks.
Secondly: The purpose of the delivery of the 3 checks to BPI which was not even
accompanied by Nuguids endorsement was solely for deposit in the account of
payee Nuguid. Assuming, for the sake of argument, that BPI as the collecting bank
paid the value of the checks of which fact there has been no proof whatsoever
BPI was nonetheless, at best, a mere transferee whose title was no better than the
void title of the transferor, payee Nuguid. Under such circumstance, BPI has no legal
basis to demand payment of the amounts of the 3 checks from the drawee-banks.
Thirdly: Under Sec. 49, Negotiable Instruments Law, BPI, as transferee without
indorsement, was not considered a holder of the instrument since it was neither a
payee nor an indorsee. It would become so only when and if the indorsement
is actually made, and only as of then, but not before, is the issue whether BPI was a
holder in due course or not is determined.
Consequently, any alleged payment by BPI as the collecting bank, through
the supposedthough unproved withdrawal of the amounts of the 3 checks by Nuguid
upon the deposit of the checks on July 5, 1995, is not the payment which discharges
liability under the 3 checks because BPI is neither the party primarily liable nor the
drawee.
Such a payment, if true, is akin to, if it is not, drawing against uncollected
deposits (DAUD). In such a case, BPI was in duty bound to send the 3 checks to the
PCHC for clearing pursuant to Section 1603.c.1 of the BSP Manual of Regulations
and Sec. 60, R.A. No. 7653. It serves well to note herein that Global Bank and Metro
Bank returned the checks through the PCHC on July 6, 1995, well within the 24-hour
clearing period, in compliance with the TRO of July 6, 1995.
Finally: As earlier noted and discussed, there is no evidence of any prior valid
payment by the collecting bank to support its claim of the amounts of the 3 checks
against the defendant banks.17 (Citation omitted.)
The RTC held Global Bank and Metrobank liable for attorneys fees equivalent to 5%
of the total amount due them, while the spouses Nuguid were held solidarily liable for
said fees.
Defendants Global Bank, Metrobank, and the spouses Nuguid, and intervenor BPI
filed separate notices of appeal, which were approved in the Order 18 dated April 3,
2003. Chiok filed a Motion to Dismiss against the appeal of Global Bank, on the
ground that the latter had ceased to operate as a banking institution.
On May 26, 2004, the Court of Appeals dismissed the appeal of the spouses Nuguid
pursuant to Section 1(e), Rule 50 of the Rules of Court, on account of their failure to
file their appellants brief. In the same Resolution, the Court of Appeals denied
Chioks Motion to Dismiss.
On May 5, 2006, the Court of Appeals rendered the assailed Decision affirming the
RTC Decision with modifications. The fallo of the Decision reads:
WHEREFORE, premises considered, the Decision dated August 29, 2000 of the
RTC, Branch 96, Quezon City is AFFIRMED with the following MODIFICATIONS:
1.) The contract to buy foreign currency in the amount of $1,022,288.50 between
plaintiff-appellee Wilfred N. Chiok and defendant Gonzalo B. Nuguid is
hereby rescinded. Corollarily, Managers Check Nos. 025935 and 025939
and Cashiers Check No. 003380 are ordered cancelled.
2.) Global Business Holdings, Inc. is ordered to credit Savings Account No. 2-
007-03-00201-3 with:
a) The amount of P25,500,000.00, plus interest at 4% from September 29,
1999 until withdrawn by plaintiff-appellee;
b) The amount of P215,390.00, plus interest at 4% from July 7, 1995 until
withdrawn by plaintiff-appellee.
3.) Metropolitan Bank & Trust Company is ordered to credit Savings Account
No. 154-42504955 the amount of P7,613,000.00, with interest at 6% [per
annum] from July 12, 1995 until the same is withdrawn;
4.) The Spouses Gonzalo B. Nuguid and Marinella O. Nuguid are ordered to pay
attorneys fees equivalent to 5% of the total amount due to plaintiff-appellee
from both depository banks, as well as the costs of suit.19
According to the Court of Appeals, Article 1191 of the Civil Code provides a legal
basis of the right of purchasers of MCs and CCs to make a stop payment order on the
ground of the failure of the payee to perform his obligation to the purchaser. The
appellate court ruled that such claim was impliedly incorporated in Chioks complaint.
The Court of Appeals held:
By depositing the subject checks to the account of Nuguid, Chiok had already
performed his obligation under the contract, and the subsequent failure of Nuguid to
comply with what was incumbent upon him gave rise to an action for rescission
pursuant to Article 1191 of the Civil Code, which states:chanroblesvirtuallawlibrary
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
xxxx
Although the complaint a quo was entitled DAMAGES, W/ EX PARTE
RESTRAINING ORDER/INJUNCTION when the action was really one for rescission
and damages, it is an elementary rule of procedure that what controls or determines
the nature of the action is not the caption of the complaint but the allegations
contained therein. And even without the prayer for a specific remedy, proper relief
may nevertheless be granted by the court if the facts alleged in the complaint and the
evidence introduced so warrant.
That Chiok had intended rescission is evident from his prayer to be declared the legal
owner of the proceeds of the subject checks and to be allowed to withdraw the same.
Therefore, the argument of BPI that the obligation on the part of Nuguid to deliver the
dollars still subsists is untenable. Article 1385 of the same Code provides that
rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest. The object of the
contract herein to buy foreign currency is the peso-value of the dollars bought but in
the form of negotiable instruments Managers Check/Cashiers Check. Hence, it by Nuguid; and (2) BPI never presented its alleged bills purchase agreement with
respecting the negotiation thereof, and in order to afford complete relief to Chiok,
there arose the necessity for the issuance of the injunction restraining the payment of
the subject checks with the end in view of the eventual return of the proceeds to give
effect to Article 1385. In other words, the injunctive relief was necessary in order not
to render ineffectual the judgment in the instant case. We quote with approval the
following disquisition of the trial court, to wit:chanroblesvirtuallawlibrary
xxxx
There is no question about the nature of managers and cashiers checks being as
good as cash, being primary obligations of the issuing bank and accepted in
advance by their mere issuance. But even as such nature of unconditional
commitment to pay on the part of the issuing bank may be conceded, the Court
opines that the injunctive relief cannot be denied to a party
who purchased the managers or cashiers check to stop its payment to the payee in a
suit against the payee and the issuing banks upon a claim that the payee himself had
not performed his reciprocal obligation for which the issuance and delivery of the self-
same managers or cashiers check were, in the first place, made x x x.
It bears stressing that the subject checks would not have been issued were it not for
the contract between Chiok and Nuguid. Therefore, they cannot be disassociated
from the contract and given a distinct and exclusive signification, as the purchase
thereof is part and parcel of the series of transactions necessary to consummate the
contract. Taken in this light, it cannot be argued that the issuing banks are bound to
honor only their unconditional undertakings on the subject checks vis--vis the payee
thereof regardless of the failed transaction between the purchaser of the checks and
the payee on the ground that the banks were not privy to the said transaction.
Lest it be forgotten, the purchase of the checks was funded by the account of Chiok
with the banks. As such, the banks were equally obligated to treat the account of their
depositor with meticulous care bearing in mind the fiduciary nature of their
relationship with the depositor. Surely, the banks would not allow their depositor to sit
idly by and watch the dissipation of his livelihood considering that the business of
foreign currency exchange is a highly volatile undertaking where the probability of
losing or gaining is counted by the ticking of the clock. With the millions of money
involved in this transaction, Chiok could not afford to be complacent and his vigilance
for his rights could not have been more opportune under the
circumstances.20 (Citations omitted.)
The Court of Appeals proceeded to sustain the dismissal of BPIs complaint-in-
intervention, which sought to recover from Global Bank the amounts allegedly paid to
Nuguid. The Court of Appeals pointed out that BPI failed to prove the alleged
withdrawal by Nuguid of the proceeds of the two managers checks, as BPIs
representative, Jessy A. Degaos, failed to answer the question on the form of the
alleged withdrawal. Furthermore, BPI failed to prove that it was a holder in due course
of the subject managers checks, for two reasons: (1) the checks were not indorsed to
Nuguid.21
The Court of Appeals likewise modified the order by the RTC for Global Bank and
Metrobank to pay Chiok. The Court of Appeals held that Chioks cause of action
against Global Bank is limited to the proceeds of the two managers checks. Hence,
Global Bank was ordered to credit Chioks Savings Account No. 2-007-03-00201-3
with the amount of P25,500,000.00, the aggregate value of the two managers
checks, instead of the entire P34,691,876.71 recovered from SBTC from the
September 15, 1997 PCHC Decision. The interest was also reduced from 12% per
annum to that imposed upon savings deposits, which was established during the trial
as 4% per annum.22

As regards Metrobank, the appellate court noted that there was no evidence as to the
interest rate imposed upon savings deposits at Metrobank. Metrobank was ordered to
credit the amount of P7,613,000.00 to Chioks Savings Account No. 154-42504955,
with interest at 6% per annum.23
Global Bank and BPI filed separate Motions for Reconsideration of the May 5, 2006
Court of Appeals Decision. On November 6, 2006, the Court of Appeals denied the
Motions for Reconsideration.
Metrobank (G.R. No. 172652), BPI (G.R. No. 175302), and Global Bank (G.R. No.
175394) filed with this Court separate Petitions for Review on Certiorari. In
Resolutions dated February 21, 200724 and March 12, 2007,25 this Court resolved to
consolidate the three petitions.
Metrobank submitted the following issues for the consideration of this Court:
(A) WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN
RULING THAT IT IS LEGALLY POSSIBLE FOR A PURCHASER OF A
MANAGERS CHECK OR CASHIERS CHECK TO STOP PAYMENT THEREON
THROUGH A COURT ORDER ON THE GROUND OF THE PAYEES ALLEGED
BREACH OF CONTRACTUAL OBLIGATION AMOUNTING TO AN ABSENCE
OF CONSIDERATION THEREFOR.
(B) GRANTING ARGUENDO THAT A MANAGERS CHECK OR CASHIERS
CHECK, IN VIEW OF THE PECULIAR CIRCUMSTANCES OF THIS CASE
MAY BE SUBJECT TO A STOP PAYMENT ORDER BY THE PURCHASER
THEREOF THROUGH A COURT ORDER, WHETHER OR NOT THE
HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT
PETITIONER HEREIN HAD KNOWLEDGE OF CIRCUMSTANCES THAT
WOULD DEFEAT THE TITLE OF THE PAYEE TO THE CHECKS WITHOUT,
HOWEVER, CITING ANY SPECIFIC EVIDENCE WHICH WOULD PROVE THE
EXISTENCE OF SUCH KNOWLEDGE.
(C) WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN
SUSTAINING THE TRIAL COURTS ORDER FOR PETITIONER HEREIN TO
PAY (TO CHIOK) THE VALUE OF CASHIERS CHECK NO. 003380 IN THE
AMOUNT OF P7,613,000.00, WHICH WAS DEBITED AGAINST CHIOKS
SAVINGS ACCOUNT # 154-42504955 ON THE OBSERVATION THAT THE
PAYMENT TO FEBTC BY METROBANK OF CC NO. 003380 ON JULY 12, 1995
WAS AN OPEN DEFIANCE OF THE TRO OF JULY 6, 1995.26
BPI, on the other hand, presented the following issues:
I.
Whether or not the Court of Appeals detracted from well-settled concepts and
principles in commercial law regarding the nature, causes, and effects of a managers
check and cashiers check in ruling that [the] power of the court can be invoked by the
purchaser [Chiok] in a proper action, which the Court su[b]stantially construed as a
rescissory action or the power to rescind obligations under Article 1191 of the Civil
Code.
II.
Whether or not the Honorable Court of Appeals erred in ruling that where a purchaser
invokes rescission due to an alleged breach of the payees contractual obligation, it is
deemed as peculiar circumstance which justifies a stop payment order issued by the
purchaser or a temporary restraining order/injunction from a Court to prevent payment
of a Managers Check or a Cashiers Check.
III.
Whether or not the Honorable Court of Appeals erred in ruling that judicial admissions
in the pleadings of Nuguid, BPI, Asian Bank, Metrobank and even Chiok himself that
Nuguid had withdrawn the proceeds of the checks will not defeat Chioks substantial
right to restrain the drawee bank from paying BPI, the collecting bank or presenting
bank in this case who paid the value of the Cashiers/Managers Checks to the
payee.27
Finally, Global Bank rely upon the following grounds in its petition with this Court:
A.
THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT PETITIONER
GLOBAL BANK HAD NO JUSTIFICATION FOR ITS RIGHT OF RECOURSE
AGAINST RESPONDENT CHIOK NOTWITHSTANDING THE CLEAR AND
UNMISTAKABLE PROVISIONS OF THE BILLS PURCHASE AGREEMENT.
B.
THE COURT OF APPEALS GRAVELY ERRED IN MAKING PETITIONER GLOBAL
BANK LIABLE FOR INTEREST OF 4% PER ANNUM DESPITE THE FACT THAT:
1. RESPONDENT DID NOT ASK FOR SUCH RELIEF IN HIS
COMPLAINT;
2. RESPONDENT HAD WAIVED HIS RIGHT TO ANY INTEREST;
AND
3. THERE IS NO EVIDENCE ON RECORD AS THE BASIS FOR ANY
INTEREST.28

Before delving into the merits of these cases, we shall first dispose of a procedural
development during their pendency with the Court.
Joint Manifestation and Motion allegedly
filed by Metrobank, Global Bank and
respondent Chiok
On May 28, 2013, this Court received a Joint Manifestation and Motion allegedly filed
by petitioners Metrobank, Global Bank, and respondent Chiok, which reads:
PETITIONERS METROPOLITAN BANK & TRUST COMPANY & GLOBAL
BUSINESS BANK, INC., and RESPONDENT WILFRED N. CHIOK, by their
respective counsels, unto this Honorable Court, respectfully state that after a
thorough consideration, the parties herein have decided to forego their respective
claims against each other, including, past, present and/or contingent, in relation to the
above-referenced cases.
PRAYER
WHEREFORE, it is respectfully prayed that no further action be taken by this
Honorable Court on the foregoing petitions, that the instant proceedings be declared
CLOSED and TERMINATED, and that an Order be rendered dismissing the above-
referenced cases with prejudice.
In the above Joint Manifestation and Motion, respondent Chiok was not represented
by his counsel of record, Cruz Durian Alday and Cruz-Matters, but was assisted by
Espiritu Vitales Espiritu Law Office, with Atty. Cesar D. Vitales as signatory, by way of
special appearance and assistance.
On June 19, 2013, this Court issued a Resolution requiring petitioner BPI to comment
on the Joint Manifestation and Motion filed by its co-petitioners Metrobank, Global
Bank, and respondent Chiok. The Resolution reads:
Considering the joint manifestation and motion of petitioners Metropolitan Bank and
Trust Company and Global Business Bank, Inc., and respondent, that after a
thorough consideration, they have decided to forego their respective claims against
each other, including past, present and/or contingent, in these cases and praying that
the instant proceedings in G.R. Nos. 172652 and 175394 be declared closed and
terminated, the Court resolves to require petitioner Bank of the Philippine Islands
to COMMENT thereon within ten (10) days from notice thereof x x x.
On September 12, 2013, respondent Chiok, this time assisted by his counsel of
record, Cruz Durian Alday & Cruz-Matters, filed a Motion for Reconsideration of our
Resolution dated June 19, 2013. The signatory to the Motion for Reconsideration,
Atty. Angel Cruz, grossly misread our Resolution requiring BPI to comment on the
Joint Manifestation and Motion, and apparently contemplated that we are already
granting said Motion. Atty. Cruz objected to the Joint Manifestation and Motion,
labeling the same as tainted with fraud. According to Atty. Cruz, Espiritu Vitales and
Espiritus failure to give prior notice to him is in violation of Canon 8 of the Code of
Professional Responsibility. Atty. Cruz prays that Metrobank and Global Bank be
ordered to submit a document of their settlement showing the amounts paid to Chiok,
and for the June 19, 2013 Resolution of this Court be reconsidered and set aside.
On October 9, 2013, BPI filed its comment to the Joint Manifestation and Motion,
opposing the same for being an implied procedural shortcut to a Compromise
Agreement. It averred that while the courts encourage parties to amicably settle
cases, such settlements are strictly scrutinized by the courts for approval. BPI also
pointed out that the Joint Manifestation and Motion was not supported by any required
appropriate Board Resolution of Metrobank and Global Bank granting the supposed
signatories the authority to enter into a compromise. BPI prayed that the Joint
Manifestation and Motion of Metrobank, Global Bank, and Chiok be denied, and to
render a full Decision on the merits reversing the Decision of the Court of Appeals.
On January 20, 2014, Global Bank filed a Comment to Atty. Cruzs Motion for
Reconsideration on behalf of Chiok, praying that said Motion be expunged from the
records for failure of Atty. Cruz to indicate the number and date of issue of his MCLE
Certificate of Compliance or Certificate of Exemption for the immediately preceding
compliance period.
As far as this Court is concerned, the counsel of record of respondent Chiok is still
Cruz Durian Alday & Cruz-Matters. The requisites of a proper substitution of counsel
of record are stated and settled in jurisprudence:
No substitution of counsel of record is allowed unless the following essential
requisites of a valid substitution of counsel concur: (1) there must be a written request
for substitution; (2) it must be filed with the written consent of the client; (3) it must be
with the written consent of the attorney to be substituted; and (4) in case the consent
of the attorney to be substituted cannot be obtained, there must be at least a proof of
notice that the motion for substitution was served on him in the manner prescribed by
the Rules of Court.29 (Citation omitted.)
Therefore, while we should indeed require Atty. Cruz to indicate the number and date
of issue of his MCLE Certificate of Compliance or Certificate of Exemption for the
immediately preceding compliance period, he is justified in pointing out the violation of
Canon 830 of the Code of Professional Responsibility, Rule 8.02 of which provides:
Rule 8.02. A lawyer shall not, directly or indirectly, encroach upon the professional
employment of another lawyer; however, it is the right of any lawyer, without fear or
favor, to give proper advice and assistance to those seeking relief against unfaithful or
neglectful counsel.
We should also give weight to the opposition of BPI to the supposed compromise
agreement. As stated above, the consolidated petitions filed by Metrobank, BPI, and
Global Bank all assail the Decision of the Court of Appeals in CA-G.R. CV No. 77508
dated May 5, 2006, and the Resolution on the same case dated November 6, 2006.
BPI itself has a claim against Global Bank, which appear to be intimately related to
issues brought forth in the other consolidated petitions.
Furthermore, the failure of the parties to the Joint Manifestation and Motion to declare
with particularity the terms of their agreement prevents us from approving the same
so as to allow it to attain the effect of res judicata. A judicial compromise is not a mere
contract between the parties. Thus, we have held that:
A compromise agreement intended to resolve a matter already under litigation is a
judicial compromise. Having judicial mandate and entered as its determination of the
controversy, such judicial compromise has the force and effect of a judgment. It
transcends its identity as a mere contract between the parties, as it becomes a
judgment that is subject to execution in accordance with the Rules of Court. Thus, a
compromise agreement that has been made and duly approved by the court attains
the effect and authority of res judicata, although no execution may be issued unless
the agreement receives the approval of the court where the litigation is pending and
compliance with the terms of the agreement is decreed.31 (Citation omitted.)
We are therefore constrained to deny the Joint Manifestation and Motion filed with this
Court on May 28, 2013 and to hereby decide the consolidated petitions on their
merits.
The Courts ruling on the merits
of these consolidated petitions
Whether or not payment of managers
and cashiers checks are subject to the
condition that the payee thereof should
comply with his obligations to the
purchaser of the checks
The legal effects of a managers check and a cashiers check are the same. A
managers check, like a cashiers check, is an order of the bank to pay, drawn upon
itself, committing in effect its total resources, integrity, and honor behind its issuance.
By its peculiar character and general use in commerce, a managers check or a
cashiers check is regarded substantially to be as good as the money it
represents.32 Thus, the succeeding discussions and jurisprudence on managers
checks, unless stated otherwise, are applicable to cashiers checks, and vice versa.
The RTC effectively ruled that payment of managers and cashiers checks are
subject to the condition that the payee thereof complies with his obligations to the
purchaser of the checks:
The dedication of such
checks pursuant to specific reciprocal undertakings between their purchasers
and payees authorizes rescission by the former to prevent substantial and material
damage to themselves, which authority includes stopping the payment of the checks.
Moreover, it seems to be fallacious to hold that the unconditional payment
of managers and cashiers checks is the rule. To begin with, both managers and
cashiers checks are still subject to regular clearing under the regulations of the
Bangko Sentral ng Pilipinas, a fact borne out by the BSP manual for banks and
intermediaries, which provides, among others, in its Section 1603.1, c, as
follows:chanroblesvirtuallawlibrary
xxxx
c. Items for clearing. All checks and documents payable on demand and drawn
against a bank/branch, institution or entity allowed to clear may be exchanged
through the Clearing Office in Manila and the Regional Clearing Units in regional
clearing centers designated by the Central Bank x x x. 33
The RTC added that since managers and cashiers checks are the subject of regular
clearing, they may consequently be refused for cause by the drawee, which refusal is
in fact provided for in Section 20 of the Rule Book of the
PCHC:chanroblesvirtuallawlibrary
Sec. 20 REGULAR RETURN ITEM PROCEDURE
20.1 Any check/item sent for clearing through the PCHC on which payment should be
refused by the Drawee Bank in accordance with long standing and accepted banking
practices, such as but not limited to the fact that:chanroblesvirtuallawlibrary
(a) it bears the forged or unauthorized signature of the drawer(s); or
(b) it is drawn against a closed account; or
(c) it is drawn against insufficient funds; or
(d) payment thereof has been stopped; or
(e) it is post-dated or stale-dated; and
(f) it is a cashiers/managers/treasurers check of the drawee which has been
materially altered;
shall be returned through the PCHC not later than the next regular clearing for local
exchanges and the acceptance of said return by the Sending Bank shall be
mandatory.
It goes without saying that under the aforecited clearing rule[,] the enumeration of
causes to return checks is not exclusive but may include other causes which are
consistent with long standing and accepted banking practices. The reason of plaintiffs
can well constitute such a justifiable cause to enjoin payment. 34
The RTC made an error at this point. While indeed, it cannot be said that managers
and cashiers checks are pre-cleared, clearing should not be confused
with acceptance. Managers and cashiers checks are still the subject of clearing to
ensure that the same have not been materially altered or otherwise completely
counterfeited. However, managers and cashiers checks are pre-accepted by the
mere issuance thereof by the bank, which is both its drawer and drawee. Thus, while
managers and cashiers checks are still subject to clearing, they cannot be
countermanded for being drawn against a closed account, for being drawn against
insufficient funds, or for similar reasons such as a condition not appearing on the face
of the check. Long standing and accepted banking practices do not countenance the
countermanding of managers and cashiers checks on the basis of a mere allegation
of failure of the payee to comply with its obligations towards the purchaser. On the
contrary, the accepted banking practice is that such checks are as good as cash.
Thus, in New Pacific Timber & Supply Company, Inc. v. Hon. Seneris,35 we held:
It is a well-known and accepted practice in the business sector that a Cashier's
Check is deemed as cash. Moreover, since the said check had been certified by the
drawee bank, by the certification, the funds represented by the check are transferred
from the credit of the maker to that of the payee or holder, and for all intents and
purposes, the latter becomes the depositor of the drawee bank, with rights and duties
of one in such situation. Where a check is certified by the bank on which it is drawn,
the certification is equivalent to acceptance. Said certification implies that the check
is drawn upon sufficient funds in the hands of the drawee, that they have been set
apart for its satisfaction, and that they shall be so applied whenever the check is
presented for payment. It is an understanding that the check is good then, and
shall continue good, and this agreement is as binding on the bank as its notes
in circulation, a certificate of deposit payable to the order of the depositor, or
any other obligation it can assume. The object of certifying a check, as regards
both parties, is to enable the holder to use it as money. When the holder
procures the check to be certified, the check operates as an assignment of a part of
the funds to the creditors. Hence, the exception to the rule enunciated under Section
63 of the Central Bank Act to the effect that a check which has been cleared and
credited to the account of the creditor shall be equivalent to a delivery to the creditor
in cash in an amount equal to the amount credited to his account shall apply in this
case. x x x. (Emphases supplied, citations omitted.)
Even more telling is the Courts pronouncement in Tan v. Court of Appeals,36 which
unequivocally settled the unconditional nature of the credit created by the issuance of
managers or cashiers checks:
A cashiers check is a primary obligation of the issuing bank and accepted in
advance by its mere issuance. By its very nature, a cashiers check is the banks
order to pay drawn upon itself, committing in effect its total resources, integrity and
honor behind the check. A cashiers check by its peculiar character and general use
in the commercial world is regarded substantially to be as good as the money which it
represents. In this case, therefore, PCIB by issuing the check created
an unconditional credit in favor of any collecting bank. (Emphases supplied,
citations omitted.)
Furthermore, under the principle of ejusdem generis, where a statute describes things
of a particular class or kind accompanied by words of a generic character, the generic
word will usually be limited to things of a similar nature with those particularly
enumerated, unless there be something in the context of the statute which would
repel such inference.37 Thus, any long standing and accepted banking practicewhich
can be considered as a valid cause to return managers or cashiers checks should be
of a similar nature to the enumerated cause applicable to managers or cashiers
checks: material alteration. As stated above, an example of a similar cause is the
presentation of a counterfeit check.
Whether or not the purchaser of
managers and cashiers checks has
the right to have the checks cancelled
by filing an action for rescission of its
contract with the payee
The Court of Appeals affirmed the order of the RTC for Global Bank and Metrobank to
pay Chiok for the amounts of the subject managers and cashiers checks. However,
since it is clear to the appellate court that the payment of managers and cashiers
checks cannot be considered to be subject to the condition the payee thereof
complies with his obligations to the purchaser of the checks, the Court of Appeals
provided another legal basis for such liability rescission under Article 1191 of the
Civil Code:
WHEREFORE, premises considered, the Decision dated August 29, 2000 of the
RTC, Branch 96, Quezon City is AFFIRMED with the following MODIFICATIONS:
1.) The contract to buy foreign currency in the amount of $1,022,288.50 between
plaintiff-appellee Wilfred N. Chiok and defendant Gonzalo B. Nuguid is hereby
rescinded. Corollarily, Managers Check Nos. 025935 and 025939 and Cashiers
Check No. 003380 are ordered cancelled.38
According to the Court of Appeals, while such rescission was not mentioned in
Chioks Amended Complaint, the same was evident from his prayer to be declared
the legal owner of the proceeds of the subject checks and to be allowed to withdraw
the same. Since rescission creates the obligation to return the things which are the
object of the contract, together with the fruits, the price and the interest, 39injunctive
relief was necessary to restrain the payment of the subject checks with the end in
view of the return of the proceeds to Chiok.40
Thus, as it was construed by the Court of Appeals, the Amended Complaint of Chiok
was in reality an action for rescission of the contract to buy foreign currency between
Chiok and Nuguid. The Court of Appeals then proceeded to cancel the managers and
cashiers checks as a consequence of the granting of the action for rescission,
explaining that the subject checks would not have been issued were it not for the
contract between Chiok and Nuguid. Therefore, they cannot be disassociated from
the contract and given a distinct and exclusive signification, as the purchase thereof is
part and parcel of the series of transactions necessary to consummate the contract. 41
We disagree with the above ruling.
The right to rescind invoked by the Court of Appeals is provided by Article 1191 of the
Civil Code, which reads:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
The cause of action supplied by the above article, however, is clearly predicated upon
the reciprocity of the obligations of the injured party and the guilty party. Reciprocal
obligations are those which arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon
the obligation of the other. They are to be performed simultaneously such that the
performance of one is conditioned upon the simultaneous fulfillment of the
other.42 When Nuguid failed to deliver the agreed amount to Chiok, the latter had a
cause of action against Nuguid to ask for the rescission of their contract. On the other
hand, Chiok did not have a cause of action against Metrobank and Global Bank that
would allow him to rescind the contracts of sale of the managers or cashiers checks,
which would have resulted in the crediting of the amounts thereof back to his
accounts.
Otherwise stated, the right of rescission43 under Article 1191 of the Civil Code can
only be exercised in accordance with the principle of relativity of contracts under
Article 1131 of the same code, which provides:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. x x x.
In several cases, this Court has ruled that under the civil law principle of relativity of
contracts under Article 1131, contracts can only bind the parties who entered into it,
and it cannot favor or prejudice a third person, even if he is aware of such contract
and has acted with knowledge thereof.44 Metrobank and Global Bank are not parties
to the contract to buy foreign currency between Chiok and Nuguid. Therefore, they
are not bound by such contract and cannot be prejudiced by the failure of Nuguid to
comply with the terms thereof.
Neither could Chiok be validly granted a writ of injunction against Metrobank and
Global Bank to enjoin said banks from honoring the subject managers and cashiers
checks. It is elementary that (a)n injunction should never issue when an action for
damages would adequately compensate the injuries caused. The very foundation of
the jurisdiction to issue the writ of injunction rests in the fact that the damages caused
are irreparable and that damages would not adequately compensate. 45 Chiok could
have and should have proceeded directly against Nuguid to claim damages for
breach of contract and to have the very account where he deposited the subject
checks garnished under Section 7(d)46 and Section 8,47 Rule 57 of the Rules of Court.
Instead, Chiok filed an action to enjoin Metrobank and Global Bank from complying
with their primary obligation under checks in which they are liable as both drawer and
drawee.
It is undisputed that Chiok personally deposited the subject managers and cashiers
checks to Nuguids account. If the intention of Chiok was for Nuguid to be allowed to
withdraw the proceeds of the checks after clearing, he could have easily deposited
personal checks, instead of going through the trouble of purchasing managers and
cashiers checks. Chiok therefore knew, and actually intended, that Nuguid will be
allowed to immediately withdraw the proceeds of the subject checks. The deposit of
the checks which were practically as good as cash was willingly and voluntarily made
by Chiok, without any assurance that Nuguid will comply with his end of the bargain
on the same day. The explanation for such apparently reckless action was admitted
by Chiok in the Amended Complaint itself:
That plaintiff [Chiok] due to the number of years (five to seven years) of business
transactions with defendant [Nuguid] has reposed utmost trust and confidence on
the latter that their transactions as of June 1995 reaches millions of pesos. x x
x.48(Emphases supplied.)
As between two innocent persons, one of whom must suffer the consequences of a
breach of trust, the one who made it possible by his act of confidence must bear the
loss.49 Evidently, it was the utmost trust and confidence reposed by Chiok to Nuguid
that caused this entire debacle, dragging three banks into the controversy, and having
their resources threatened because of an alleged default in a contract they were not
privy to.
Whether or not the peculiar
circumstances of this case justify
the deviation from the general
principles on causes and effects of
managers and cashiers checks
The Court of Appeals, while admitting that the general principles on the causes and
effects of managers and cashiers checks do not allow the countermanding of such
checks on the basis of an alleged failure of consideration of the payee to the
purchaser, nevertheless held that the peculiar circumstances of this case justify a
deviation from said general principles, applying the aforementioned case of Mesina.
The Court of Appeals held:
At the core of the appeal interposed by the intervenor BPI, as well as the depository
banks, Global Bank and Metrobank, is the issue of whether or not it is legally possible
for a purchaser of a Managers Check or Cashiers Check to stop payment thereon
through a court order on the ground of the payees alleged breach of contractual
obligation amounting to an absence of consideration therefor.
In view of the peculiar circumstances of this case, and in the interest of
substantial justice, We are constrained to rule in the affirmative.
xxxx
In the case of Mesina v. Intermediate Appellate Court, cited by BPI in its appeal brief,
the Supreme Court had the occasion to rule that general principles on causes and
effects of a cashiers check, i.e., that it cannot be countermanded in the hands of a
holder in due course and that it is a bill of exchange drawn by the bank against itself,
cannot be applied without considering that the bank was aware of facts (in this case,
the cashiers check was stolen) that would not entitle the payee thereof to collect on
the check and, consequently, the bank has the right to refuse payment when the
check is presented by the payee.
While the factual milieu of the Mesina case is different from the case at bench, the
inference drawn therein by the High Court is nevertheless applicable. The refusal of
Nuguid to deliver the dollar equivalent of the three checks in the amount of
$1,022,288.50 in the afternoon of July 5, 1995 amounted to a failure of consideration
that would not entitle Nuguid to collect on the subject checks.
xxxx
Let it be emphasized that in resolving the matter before Us, We do not detract from
well-settled concepts and principles in commercial law regarding the nature, causes
and effects of a managers check and cashiers check. Such checks are primary
obligations of the issuing bank and accepted in advance by the mere issuance
thereof. They are a banks order to pay drawn upon itself, committing in effect its total
resources, integrity, and honor. By their peculiar character and general use in the
commercial world, they are regarded substantially as good as the money they
represent. However, in view of the peculiar circumstances of the case at bench,
We are constrained to set aside the foregoing concepts and principles in favor
of the exercise of the right to rescind a contract upon the failure of
consideration thereof.50 (Emphases ours, citations omitted.)
In deviating from general banking principles and disposing the case on the basis of
equity, the courts a quo should have at least ensured that their dispositions were
indeed equitable. This Court observes that equity was not served in the dispositions
below wherein Nuguid, the very person found to have violated his contract by not
delivering his dollar obligation, was absolved from his liability, leaving the banks who
are not parties to the contract to suffer the losses of millions of pesos.
The Court of Appeals reliance in the 1986 case of Mesina was likewise inappropriate.
In Mesina, respondent Jose Go purchased from Associated Bank a cashiers check
for P800,000.00, payable to bearer.51 Jose Go inadvertently left the check on the top
desk of the bank manager when he left the bank. The bank manager entrusted the
check for safekeeping to a certain bank official named Albert Uy, who then had a
certain Alexander Lim as visitor. Uy left his desk to answer a phone call and to go to
the mens room. When Uy returned to his desk, Lim was gone. Jose Go inquired for
his check from Uy, but the check was nowhere to be found. At the advice of Uy, Jose
Go accomplished a Stop Payment Order and executed an affidavit of loss. Uy
reported the loss to the police. Petitioner Marcelo Mesina tried to encash the check
with Prudential Bank, but the check was dishonored by Associated Bank by sending it
back to Prudential Bank with the words Payment Stopped stamped on it. When the
police asked Mesina how he came to possess the check, he said it was paid to him by
Alexander Lim in a certain transaction but refused to elucidate further. Associated
Bank filed an action for Interpleader against Jose Go and Mesina to determine which
of them is entitled to the proceeds of the check. It was in the appeal on said
interpleader case that this Court allowed the deviation from the general principles on
cashiers checks on account of the banks awareness of certain facts that would
prevent the payee to collect on the check.
There is no arguing that the peculiar circumstances in Mesina indeed called for such
deviation on account of the drawee banks awareness of certain relevant facts. There
is, however, no comparable peculiar circumstance in the case at bar that would justify
applying the Mesina disposition. In Mesina, the cashiers check was stolen while it
was in the possession of the drawee bank. In the case at bar, the managers and
cashiers checks were personally deposited by Chiok in the account of Nuguid. The
only knowledge that can be attributed to the drawee banks is whatever was relayed
by Chiok himself when he asked for a Stop Payment Order. Chiok testified on this
matter, to wit:
Q: Now, Mr. witness, since according to you the defendant failed to deliver [this]
amount of P1,023,288.23 what action have you undertaken to protect your
interest Mr. witness?
A: I immediately call my lawyer, Atty. Espiritu to seek his legal advise in this
matter.
Q: Prior to that matter that you sought the advise of your lawyer, Atty. Espiritu
insofar as the issuing bank is concerned, namely, Asian Bank, what did you
do in order to protect your interest?
A: I immediately call the bank asking them if what is the procedure for stop
payment and the bank told me that you have to secure a court order as soon
as possible before the clearing of these checks.52 (Emphasis supplied.)
Asian Bank, which is now Global Bank, obeyed the TRO and denied the clearing of
the managers checks. As such, Global Bank may not be held liable on account of the
knowledge of whatever else Chiok told them when he asked for the procedure to
secure a Stop Payment Order. On the other hand, there was no mention that
Metrobank was ever notified of the alleged failure of consideration. Only Asian Bank
was notified of such fact. Furthermore, the mere allegation of breach on the part of
the payee of his personal contract with the purchaser should not be considered a
sufficient cause to immediately nullify such checks, thereby eroding their integrity and
honor as being as good as cash.
In view of all the foregoing, we resolve that Chioks complaint should be denied
insofar as it prayed for the withdrawal of the proceeds of the subject managers and
cashiers checks. Accordingly, the writ of preliminary prohibitory injunction enjoining
Metrobank and Global Bank from honoring the subject managers and cashiers
checks should be lifted.
Since we have ruled that Chiok cannot claim the amounts of the checks from
Metrobank and Global Bank, the issue concerning the setting off of Global Banks
judgment debt to Chiok with the outstanding obligations of Chiok is hereby mooted.
We furthermore note that Global Bank had not presented 53 such issue as a
counterclaim in the case at bar, preventing us from ruling on the same.
BPIs right to the proceeds of the
managers checks from Global Bank
While our ruling in Mesina is inapplicable to the case at bar, a much more relevant
case as regards the effect of a Stop Payment Order upon a managers check would
be Security Bank and Trust Company v. Rizal Commercial Banking
Corporation,54 which was decided by this Court in 2009. In said case, SBTC issued a
managers check for P8 million, payable to CASH, as proceeds of the loan granted
to Guidon Construction and Development Corporation (GCDC). On the same day, the
managers check was deposited by Continental Manufacturing Corporation (CMC) in
its current account with Rizal Commercial Banking Corporation (RCBC). RCBC
immediately honored the managers check and allowed CMC to withdraw the same.
GCDC issued a Stop Payment Order to SBTC on the next day, claiming that the
check was released to a third party by mistake. SBTC dishonored and returned the
managers check to RCBC. The check was returned back and forth between the two
banks, resulting in automatic debits and credits in each banks clearing balance.
RCBC filed a complaint for damages against SBTC. When the case reached this
Court, we held:
At the outset, it must be noted that the questioned check issued by SBTC is not just
an ordinary check but a managers check. A managers check is one drawn by a
banks manager upon the bank itself. It stands on the same footing as a certified
check, which is deemed to have been accepted by the bank that certified it. As the
banks own check, a managers check becomes the primary obligation of the
bank and is accepted in advance by the act of its issuance.
In this case, RCBC, in immediately crediting the amount of P8 million to CMCs
account, relied on the integrity and honor of the check as it is regarded in
commercial transactions. Where the questioned check, which was payable to
Cash, appeared regular on its face, and the bank found nothing unusual in the
transaction, as the drawer usually issued checks in big amounts made payable to
cash, RCBC cannot be faulted in paying the value of the questioned check.
In our considered view, SBTC cannot escape liability by invoking Monetary Board
Resolution No. 2202 dated December 21, 1979, prohibiting drawings against
uncollected deposits. For we must point out that the Central Bank at that time issued
a Memorandum dated July 9, 1980, which interpreted said Monetary Board
Resolution No. 2202. In its pertinent portion, said Memorandum reads:
MEMORANDUM TO ALL BANKS
July 9, 1980
For the guidance of all concerned, Monetary Board Resolution No. 2202 dated
December 31, 1979 prohibiting, as a matter of policy, drawing against uncollected
deposit effective July 1, 1980, uncollected deposits
representing managers/cashiers/treasurers checks, treasury warrants, postal money
orders and duly funded on us checks which may be permitted at the discretion of
each bank, covers drawings against demand deposits as well as withdrawals from
savings deposits.
Thus, it is clear from the July 9, 1980 Memorandum that banks were given the
discretion to allow immediate drawings on uncollected deposits of managers checks,
among others. Consequently, RCBC, in allowing the immediate withdrawal against
the subject managers check, only exercised a prerogative expressly granted to it by
the Monetary Board.
Moreover, neither Monetary Board Resolution No. 2202 nor the July 9, 1980
Memorandum alters the extraordinary nature of the managers check and the relative
rights of the parties thereto. SBTCs liability as drawer remains the same by
drawing the instrument, it admits the existence of the payee and his then capacity
to indorse; and engages that on due presentment, the instrument will
be accepted, or paid, or both, according to its tenor.55 (Emphases supplied, citations
omitted.)
As in SBTC, BPI in the case at bar relied on the integrity and honor of the managers
and cashiers checks as they are regarded in commercial transactions when it
immediately credited their amounts to Nuguids account.
The Court of Appeals, however, sustained the dismissal of BPIs complaint-in-
intervention to recover the amounts of the managers checks from Global Bank on
account of BPIs failure to prove the supposed withdrawal by Nuguid of the value of
the checks:
BPIs cause of action against Asian Bank (now Global Bank) is derived from the
supposed withdrawal by Nuguid of the proceeds of the two Managers Checks it
issued and the refusal of Asian Bank to make good the same. That the admissions
in the pleadings to the effect that Nuguid had withdrawn the said proceeds
failed to satisfy the trial court is understandable. Such withdrawal is an essential
fact that, if properly substantiated, would have defeated Chioks right to an injunction.
BPI could so easily have presented withdrawal slips or, with Nuguids consent,
statements of account or the passbook itself, which would indubitably show that
money actually changed hands at the crucial period before the issuance of the TRO.
But it did not.56
We disagree with this ruling. As provided for in Section 4, Rule 129 of the Rules of
Court, admissions in pleadings are judicial admissions and do not require proof:
Section 4. Judicial admissions. An admission, verbal or written, made by a party in
the course of the proceedings in the same case, does not require proof. The
admission may be contradicted only by showing that it was made through palpable
mistake or that no such admission was made.
Nuguid has admitted that FEBTC (now BPI) has paid him the value of the subject
checks.57 This statement by Nuguid is certainly against his own interest as he can be
held liable for said amounts. Unfortunately, Nuguid allowed his appeal with the Court
of Appeals to lapse, without taking steps to have it reinstated. This course of action,
which is highly unlikely if Nuguid had not withdrawn the value of the managers and
cashiers checks deposited into his account, likewise prevents us from ordering
Nuguid to deliver the amounts of the checks to Chiok. Parties who did not appeal will
not be affected by the decision of an appellate court rendered to appealing parties.58
Another reason given by the Court of Appeals for sustaining the dismissal of BPIs
complaint-in-intervention was that BPI failed to prove that it was a holder in due
course with respect to the managers checks. 59
We agree with the finding of the Court of Appeals that BPI is not a holder in due
course with respect to managers checks. Said checks were never indorsed by
Nuguid to FEBTC, the predecessor-in-interest of BPI, for the reason that they were
deposited by Chiok directly to Nuguids account with FEBTC. However, in view of our
ruling that Nuguid has withdrawn the value of the checks from his account, BPI has
the rights of an equitable assignee for value under Section 49 of the Negotiable
Instruments Law, which provides:
Section 49. Transfer without indorsement; effect of. Where the holder of an
instrument payable to his order transfers it for value without indorsing it, the transfer
vests in the transferee such title as the transferor had therein, and the transferee
acquires in addition, the right to have the indorsement of the transferor. But for the
purpose of determining whether the transferee is a holder in due course, the
negotiation takes effect as of the time when the indorsement is actually made.
As an equitable assignee, BPI acquires the instrument subject to defenses and
equities available among prior parties60 and, in addition, the right to have the
indorsement of Nuguid. Since the checks in question are managers checks, the
drawer and the drawee thereof are both Global Bank. Respondent Chiok cannot be
considered a prior party as he is not the checks drawer, drawee, indorser, payee or
indorsee. Global Bank is consequently primarily liable upon the instrument, and
cannot hide behind respondent Chioks defenses. As discussed above, managers
checks are pre-accepted. By issuing the managers check, therefore, Global Bank
committed in effect its total resources, integrity and honor towards its payment. 61
Resultantly, Global Bank should pay BPI the amount of P18,455,350.00, representing
the aggregate face value of MC No. 025935 and MC No. 025939. Since Global Bank
was merely following the TRO and preliminary injunction issued by the RTC, it cannot
be held liable for legal interest during the time said amounts are in its possession.
Instead, we are adopting the formulation of the Court of Appeals that the amounts be
treated as savings deposits in Global Bank. The interest rate, however, should not be
fixed at 4% as determined by the Court of Appeals, since said rates have fluctuated The liabilities of spouses Gonzalo B. Nuguid and Marinella O. Nuguid under the
since July 7, 1995, the date Global Bank refused to honor the subject managers Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 77508
checks. Thus, Global Bank should pay BPI interest based on the rates it actually paid remain VALID and SUBSISTING, computed from the amounts adjudged by the Court
its depositors from July 7, 1995 until the finality of this Decision, in accordance with of Appeals, without prejudice to any further action that may be filed by Wilfred N.
the same compounding rules it applies to its depositors. The legal rate of 6% per Chiok.
annum shall apply after the finality of this Decision.62
SO ORDERED.
We have to stress that respondent Chiok is not left without recourse. Respondent
Chioks cause of action to recover the value of the checks is against Nuguid.
Unfortunately, Nuguid allowed his appeal with the Court of Appeals to lapse, without
taking steps to have it reinstated. As stated above, parties who did not appeal will not
be affected by the decision of the appellate court rendered to appealing
parties.63Moreover, since Nuguid was not impleaded as a party to the present
consolidated cases, he cannot be bound by our judgment herein. Respondent Chiok
should therefore pursue his remedy against Nuguid in a separate action to recover
the amounts of the checks.

Despite the reversal of the Court of Appeals Decision, the liability of Nuguid therein to
respondent Chiok for attorneys fees equivalent to 5% of the total amount due
remains valid, computed from the amounts stated in said Decision. This is a
consequence of the finality of the Decision of the Court of Appeals with respect to
him.

WHEREFORE, the Court resolves to DENY the Joint Manifestation and Motion filed
with this Court on May 28, 2013.

The petitions in G.R. No. 172652 and G.R. No. 175302 are GRANTED. The Decision
of the Court of Appeals in CA-G.R. CV No. 77508 dated May 5, 2006, and the
Resolution on the same case dated November 6, 2006 are hereby REVERSED AND
SET ASIDE, and a new one is issued ordering the DENIAL of the Amended
Complaint in Civil Case No. Q-95-24299 in Branch 96 of the Regional Trial Court of
Quezon City for lack of merit. The Writ of Preliminary Prohibitory Injunction enjoining
Asian Banking Corporation (now Global Business Bank, Inc.) from honoring MC No.
025935 and MC No. 025939, and Metropolitan Bank & Trust Company from honoring
CC No. 003380, is hereby LIFTED and SET ASIDE.

Global Business Bank, Inc. is ORDERED TO PAY the Bank of the Philippine Islands,
as successor-in-interest of Far East Bank & Trust Company, the amount of
P18,455,350.00, representing the aggregate face value of MC No. 025935 and MC
No. 025939, with interest based on the rates it actually paid its depositors from July 7,
1995 until the finality of this Decision, in accordance with the same compounding
rules it applies to its depositors.

The petition in G.R. No. 175394 is hereby rendered MOOT.


FIRST DIVISION
G.R. No. 209370, March 25, 2015
FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner, v. VALENTIN L.
FONG, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated May 17, 2013
and the Resolution3 dated September 2, 2013 rendered by the Court of Appeals (CA)
in CA-G.R. CV. No. 93407, which affirmed the Decision4 dated January 28, 2009 of
the Regional Trial Court of Mandaluyong City, Branch 214 (RTC) in Civil Case No.
MC06-2928, finding petitioner Fort Bonifacio Development Corporation (FBDC) liable
to respondent Valentin L. Fong (Fong), as proprietor of VF Industrial Sales, for the
amount of P1,577,115.90 with legal interest computed from February 13, 2006.
The Facts
On June 5, 2000, FBDC, a domestic corporation engaged in the real estate
development business,5entered into a Trade Contract6 with MS Maxco Company, Inc.
(MS Maxco), then operating under the name L&M Maxco, Specialist Engineering
Construction, for the execution of the structural and partial architectural works of one
of its condominium projects in Taguig City, the Bonifacio Ridge Condominium
(Project).7 Records show that FBDC had the right to withhold five percent (5%) of the
contract price as retention money.8
Under the Trade Contract, FBDC had the option to hire other contractors to rectify any
errors committed by MS Maxco by reason of its negligence, act, omission, or default,
as well as to deduct or set-off any amount from the contract price in such
cases.9Hence, when MS Maxco incurred delays and failed to comply with the terms of
the Trade Contract, FBDC took over and hired other contractors to complete the
unfinished construction.10 Unfortunately, corrective work had to likewise be done on
the numerous defects and irregularities caused by MS Maxco, which cost
P11,567,779.12.11 Pursuant to the Trade Contract, FBDC deducted the said amount
from MS Maxcos retention money.12
The Trade Contract likewise provided that MS Maxco is prohibited from assigning or
transferring any of its rights, obligations, or liabilities under the said Contract without
the written consent of FBDC.13
Sometime in April 2005, FBDC received a letter14 dated April 18, 2005 (April 18, 2005
letter) from the counsel of Fong informing it that MS Maxco had already assigned its
receivables from FBDC to him (Fong) by virtue of a notarized Deed of
Assignment15 dated February 28, 2005.16 Under the Deed of Assignment, MS Maxco
assigned the amount of P1,577,115.90 to Fong as payment of the formers obligation
to the latter, which amount was to be taken from the retention money with FBDC. 17 In
its letter-reply18 dated October 11, 2005, FBDC acknowledged the five percent (5%)
retention money of MS Maxco, but asserted that the same was not yet due and
demandable and that it was already the subject of garnishment 19 by MS Maxcos
other creditors.
Despite Fongs repeated requests,20 FBDC refused to deliver to Fong the amount
assigned by MS Maxco. Finally, in a letter21 dated January 31, 2006, FBDC informed
Fong that after the rectification of the defects in the Project, as well as the
garnishment made by MS Maxcos creditors, nothing was left of its retention money
with FBDC from which Fongs claims may be satisfied. This prompted Fong, doing
business under the name VF Industrial Sales to file the instant civil case,22 before
the RTC, against MS Maxco or FBDC for the payment of the sum of P1,577,115.90,
with legal interest due, costs of suit, and litigation expenses. 23
In its defense,24 FBDC reiterated its position that,since MS Maxco incurred delays
and rendered defective works on the Project, FBDC was constrained to hire other
contractors to repair the defects and complete the work therein, the cost of which it
deducted from MS Maxcos retention money, pursuant to the express stipulations in
the Trade Contract.25 Likewise, the said retention money was due only in January
2006, and was already garnished in favor of MS Maxcos other creditors. 26 As a result
of the deductions and the garnishment, no amount due to MS Maxco was left from the
retention money; and, FBDC was, therefore, under no obligation to satisfy Fongs
claim.27 FBDC likewise asserted, inter alia, that it was not bound by the Deed of
Assignment between Fong and MS Maxco, not being a party thereto. 28 However,
Fong, being a mere substitute or assignee of MS Maxco, was bound to observe the
terms and conditions of the Trade Contract.29 FBDC also stressed that it paid the
creditors of MS Maxco in compliance with valid court orders.30
The RTC Ruling
In a Decision31 dated January 28, 2009, the RTC found FBDC liable to pay Fong the
amount of P1,577,115.90, with legal interest computed from the time of the filing of
the complaint on February 13, 2006.32
In so ruling, the RTC held that the instant case was one of assignment of credit under
Article 162433 of the Civil Code, hence, did not require FBDCs consent as debtor for
its validity and enforceability.34 What the law requires is not the consent of the debtor,
but merely notice to him, as the assignment takes effect only from the time of his
knowledge thereof.35 With respect to third persons without notice of the assignment,
the same becomes effective only if the assignment appears in a public instrument. 36
Also, the RTC observed that FBDC did not dispute the genuineness and due
execution of the Deed of Assignment between MS Maxco and Fong. As such, FBDC
became bound thereby upon its receipt of Fongs April 18, 2005 letter informing it of
the assignment. Effectively, Fong became subrogated to the right of MS Maxco to
collect from FBDC the credit assigned to him.37 Likewise, FBDC was bound to
recognize the assignment, which appears in a public instrument. 38
With respect to the garnishment of the retention money, the RTC held that it could not
adversely affect Fongs rights as assignee of MS Maxco, considering that the amount
indicated in the Deed of Assignment was no longer MS Maxcos property, but Fongs.
Effectively, when MS Maxco assigned the sum of P1,577,115.90 to Fong, the said
amount can no longer be considered MS Maxcos property that could be garnished or
attached by its creditors. As records show that the garnishment of the retention
money was made on July 30, 2005 and January 26, 2006, or after FBDC was notified
of MS Maxcos assignment in favor of Fong on April 18, 2005, for all intents and
purposes, FBDC must be considered to have paid MS Maxcos other creditors out of
its own funds.39
Finally, with regard to the provision in the Trade Contract requiring the written consent
of FBDC before MS Maxco may validly assign or transfer any of its rights, obligations,
or liabilities thereunder, the RTC held that Fong was not bound thereby. It ruled that
Fong did not automatically become party to the provisions of the Trade Contract by
virtue of its being the assignee of MS Maxco, as the said provisions are matters which
exclusively pertain to the parties thereto.40
In any event, however, the RTC recognized FBDCs right of recourse against its co-
defendant MS Maxco for the latters breach of undertaking under the Trade
Contract.41
Aggrieved, FBDC appealed42 to the CA, assailing the RTCs conclusion that the Deed
of Assignment was binding upon it and that it was liable to satisfy Fongs claims.
The CA Ruling
In a Decision43 dated May 17, 2013, the CA denied FBDCs appeal and affirmed the
RTC ruling,44concurring with the latters finding that when FBDC was notified of the
assignment through the April 18, 2005 letter, the assignment produced legal effects
and operated as a transfer of a portion of the receivables of MS Maxco to
Fong.45Considering that FBDCs consent as debtor is not required under the law, as
mere notice to it is sufficient, and taking into account the fact that the Deed of
Assignment was a public instrument, the assignment therefore bound FBDC and third
persons as well.46
Likewise, upon a review of the evidence offered by FBDC, the CA found that as of
December 6, 2005, there was still sufficient amount left in the retention money with
which to pay Fong even after the deduction of the rectification costs for the Project.
As correctly held by the RTC, the payments made by FBDC to MS Maxcos judgment
creditors cannot prejudice Fong since the Deed of Assignment was valid and
enforceable against FBDC and the said creditors.47
FBDCs motion for reconsideration48 was denied in a Resolution49 dated September
2, 2013, hence, this petition.
The Issues Before the Court
The issues for the Courts resolution are whether or not the CA erred in ruling that
FBDC was bound by the Deed of Assignment between MS Maxco and Fong, and
even assuming that it was, whether or not FBDC was liable to pay Fong the amount
of ?1,577,115.90, representing a portion of MS Maxcos retention money.
The Courts Ruling
The petition is meritorious.
Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.50 As such, the stipulations in
contracts are binding on them unless the contract is contrary to law, morals, good
customs, public order or public policy.51
The same principle on obligatory force applies by extension to the contracting partys
assignees, in turn, by virtue of the principle of relativity of contracts which is fleshed
out in Article 1311 of the Civil Code, viz.:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is not
liable beyond the value of the property he received from the decedent.
x x x x (Emphasis supplied)
The reason that a contracting partys assignees, although seemingly a third party to
the transaction, remain bound by the original partys transaction under the relativity
principle further lies in the concept of subrogation, which inheres in assignment.
Case law states that when a person assigns his credit to another person, the latter is
deemed subrogated to the rights as well as to the obligations of the former. 52 By
virtue of the Deed of Assignment, the assignee is deemed subrogated to the rights
and obligations of the assignor and is bound by exactly the same conditions as those
which bound the assignor.53 Accordingly, an assignee cannot acquire greater rights
than those pertaining to the assignor.54 The general rule is that an assignee of a non-
negotiable chose in action acquires no greater right than what was possessed by his
assignor and simply stands into the shoes of the latter. 55
Applying the foregoing, the Court finds that MS Maxco, as the Trade Contractor,
cannot assign or transfer any of its rights, obligations, or liabilities under the Trade
Contract without the written consent of FBDC, the Client, in view of Clause 19.0 on
Assignment and Sub-letting of the Trade Contract between FBDC and MS Maxco
which explicitly provides that:
The vendor in bad faith shall always be answerable for the payment of all expenses,
and for damages.
WHEREFORE, the petition is GRANTED. The assailed Decision dated May 17, 2013
and the Resolution dated September 2, 2013 rendered by the Court of Appeals in CA-
G.R. CV. No. 93407 are hereby REVERSED and SET ASIDE, and a new one is
entered DISMISSING the instant complaint against petitioner Fort Bonifacio
Development Corporation.
SO ORDERED.

19.0 ASSIGNMENT AND SUB-LETTING

19.1 The Trade Contractor [Ms Maxco] shall not, without written consent of the
Client [FBDC], assign or transfer any of his rights, obligations or liabilities under
this Contract. The Trade Contractor shall not, without the written consent of the
Client, sub-let any portion of the Works and such consent, if given, shall not relieve
the Trade Contractor from any liability or obligation under this Contract.56 (Emphases
supplied)

Fong, as mere assignee of MS Maxcos rights under the Trade Contract it had
previously entered with FBDC, i.e., the right to recover any credit owing to any
unutilized retention money, is equally bound by the foregoing provision and hence,
cannot validly enforce the same without FBDCs consent.

Without any proof showing that FBDC had consented to the assignment, Fong cannot
validly demand from FBDC the delivery of the sum of P1,577,115.90 that was
supposedly assigned to him by MS Maxco as a portion of its retention money with
FBDC. The practical efficacy of the assignment, although valid between Fong and MS
Maxco, remains contingent on FBDCs consent. Without the happening of said
condition, only MS Maxco, and not Fong, can collect on the credit. Note, however,
that this finding does not preclude any recourse that Fong may take against MS
Maxco. After all, an assignment of credit for a consideration and covering a
demandable sum of money is considered as a sale of personal property. 57To this,
Article 1628 of the Civil Code provides:

Art. 1628. The vendor in good faith shall be responsible for the existence and legality
of the credit at the time of the sale, unless it should have been sold as doubtful; but
not for the solvency of the debtor, unless it has been so expressly stipulated or unless
the insolvency was prior to the sale and of common knowledge.

Even in these cases he shall only be liable for the price received and for the expenses
specified in No. 1 of Article 1616.58

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-23276 November 29, 1968
MELECIO COQUIA, MARIA ESPANUEVA and MANILA YELLOW TAXICAB CO.,
INC., plaintiffs-appellees,
vs.
FIELDMEN'S INSURANCE CO., INC., defendant-appellant.
Antonio de Venecia for plaintiffs-appellees.
Rufino Javier for defendant-appellant.
CONCEPCION, C.J.:
This is an appeal from a decision of the Court of First Instance of Manila, certified to
us by the Court of Appeals, only questions of law being involved therein. Indeed, the
pertinent facts have been stipulated and/or, admitted by the parties at the hearing of
the case in the trial court, to dispense with the presentation of evidence therein.
It appears that on December 1, 1961, appellant Fieldmen's Insurance Company, Inc.
hereinafter referred to as the Company issued, in favor of the Manila Yellow
Taxicab Co., Inc. hereinafter referred to as the Insured a common carrier
accident insurance policy, covering the period from December 1, 1961 to December
1, 1962. It was stipulated in said policy that:
The Company will, subject to the Limits of Liability and under the Terms of
this Policy, indemnify the Insured in the event of accident caused by or
arising out of the use of Motor Vehicle against all sums which the Insured will
become legally liable to pay in respect of: Death or bodily injury to any fare-
paying passenger including the Driver, Conductor and/or Inspector who is
riding in the Motor Vehicle insured at the time of accident or injury. 1
While the policy was in force, or on February 10, 1962, a taxicab of the Insured,
driven by Carlito Coquia, met a vehicular accident at Mangaldan, Pangasinan, in
consequence of which Carlito died. The Insured filed therefor a claim for P5,000.00 to
which the Company replied with an offer to pay P2,000.00, by way of compromise.
The Insured rejected the same and made a counter-offer for P4,000.00, but the
Company did not accept it. Hence, on September 18, 1962, the Insured and Carlito's
parents, namely, Melecio Coquia and Maria Espanueva hereinafter referred to as
the Coquias filed a complaint against the Company to collect the proceeds of the
aforementioned policy. In its answer, the Company admitted the existence thereof,
but pleaded lack of cause of action on the part of the plaintiffs.
After appropriate proceedings, the trial court rendered a decision sentencing the
Company to pay to the plaintiffs the sum of P4,000.00 and the costs. Hence, this
appeal by the Company, which contends that plaintiffs have no cause of action
because: 1) the Coquias have no contractual relation with the Company; and 2) the
Insured has not complied with the provisions of the policy concerning arbitration.
As regards the first defense, it should be noted that, although, in general, only parties
to a contract may bring an action based thereon, this rule is subject to exceptions,
one of which is found in the second paragraph of Article 1311 of the Civil Code of the
Philippines, reading:
If a contract should contain some stipulation in favor of a third person, he
may demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a person
is not sufficient. The contracting parties must have clearly and deliberately
conferred a favor upon a third person.2
This is but the restatement of a well-known principle concerning contracts pour autrui,
the enforcement of which may be demanded by a third party for whose benefit it was
made, although not a party to the contract, before the stipulation in his favor has been
revoked by the contracting parties. Does the policy in question belong to such class of
contracts pour autrui?
In this connection, said policy provides, inter alia:
Section I Liability to Passengers. 1. The Company will, subject to the
Limits of Liability and under the Terms of this Policy, indemnify the Insured in
the event of accident caused by or arising out of the use of Motor Vehicle
against all sums which the Insured will become legally liable to pay in
respect of: Death or bodily injury to any fare-paying passenger including the
Driver ... who is riding in the Motor Vehicle insured at the time of accident or
injury.
Section II Liability to the Public
xxx xxx xxx
 3. In terms of and subject to the limitations of and for the purposes of this
Section, the Company will indemnify any authorized Driver who is driving the
Motor Vehicle....
Conditions
xxx xxx xxx
7. In the event of death of any person entitled to indemnity under this Policy,
the Company will, in respect of the liability incurred by such person,
indemnify his personal representatives in terms of and subject to the
limitations of this Policy, provided, that such representatives shall, as though
they were the Insured, observe, fulfill and be subject to the Terms of this
Policy insofar as they can apply.
8. The Company may, at its option, make indemnity payable directly to the
claimants or heirs of claimants, with or without securing the consent of or
prior notification to the Insured, it being the true intention of this Policy to
protect, to the extent herein specified and subject always to the Terms Of
this Policy, the liabilities of the Insured towards the passengers of the Motor
Vehicle and the Public.
Pursuant to these stipulations, the Company "will indemnify any authorized
Driver who is driving the Motor Vehicle" of the Insured and, in the event of death of
said driver, the Company shall, likewise, "indemnify his personal representatives." In
fact, the Company "may, at its option, make indemnity payable directly to
the claimants or heirs of claimants ... it being the true intention of this Policy to
protect ... the liabilities of the Insured towards the passengers of the Motor Vehicle
and the Public" in other words, third parties.
Thus, the policy under consideration is typical of contracts pour autrui, this character
being made more manifest by the fact that the deceased driver paid fifty percent
(50%) of the corresponding premiums, which were deducted from his weekly
commissions. Under these conditions, it is clear that the Coquias who, admittedly,
are the sole heirs of the deceased have a direct cause of action against the
Company,3 and, since they could have maintained this action by themselves, without
the assistance of the Insured, it goes without saying that they could and did properly
join the latter in filing the complaint herein.4
The second defense set up by the Company is based upon Section 17 of the policy
reading:
If any difference or dispute shall arise with respect to the amount of the
Company's liability under this Policy, the same shall be referred to the
decision of a single arbitrator to be agreed upon by both parties or failing
such agreement of a single arbitrator, to the decision of two arbitrators, one
to be appointed in writing by each of the parties within one calendar month
after having been required in writing so to do by either of the parties and in
case of disagreement between the arbitrators, to the decision of an umpire
who shall have been appointed in writing by the arbitrators before entering
on the reference and the costs of and incident to the reference shall be dealt
with in the Award. And it is hereby expressly stipulated and declared that it
shall be a condition precedent to any right of action or suit upon this Policy
that the award by such arbitrator, arbitrators or umpire of the amount of the
Company's liability hereunder if disputed shall be first obtained.
The record shows, however, that none of the parties to the contract invoked this
section, or made any reference to arbitration, during the negotiations preceding the
institution of the present case. In fact, counsel for both parties stipulated, in the trial
court, that none of them had, at any time during said negotiations, even suggested
the settlement of the issue between them by arbitration, as provided in said section.
Their aforementioned acts or omissions had the effect of a waiver of their respective
right to demand an arbitration. Thus, in Kahnweiler vs. Phenix Ins. Co. of Brooklyn,5 it
was held:
Another well-settled rule for interpretation of all contracts is that the court will
lean to that interpretation of a contract which will make it reasonable and
just. Bish. Cont. Sec. 400. Applying these rules to the tenth clause of this
policy, its proper interpretation seems quite clear. When there is a difference
between the company and the insured as to the amount of the loss the policy
declares: "The same shall then be submitted to competent and impartial
arbitrators, one to be selected by each party ...". It will be observed that the
obligation to procure or demand an arbitration is not, by this clause, in terms
imposed on either party. It is not said that either the company or the insured
shall take the initiative in setting the arbitration on foot. The company has no
more right to say the insured must do it than the insured has to say the
company must do it. The contract in this respect is neither unilateral nor self-
executing. To procure a reference to arbitrators, the joint and concurrent
action of both parties to the contract is indispensable. The right it gives and
the obligation it creates to refer the differences between the parties to
arbitrators are mutual. One party to the contract cannot bring about an
arbitration. Each party is entitled to demand a reference, but neither can
compel it, and neither has the right to insist that the other shall first demand
it, and shall forfeit any right by not doing so. If the company demands it, and
the insured refuses to arbitrate, his right of action is suspended until he
consents to an arbitration; and if the insured demands an arbitration, and the
company refuses to accede to the demand, the insured may maintain a suit
on the policy, notwithstanding the language of the twelfth section of the
 policy, and, where neither party demands an arbitration, both parties thereby
waive it.6

To the same effect was the decision of the Supreme Court of Minnesota in
Independent School Dist. No. 35, St. Louis County vs. A. Hedenberg & Co., Inc. 7 from
which we quote:

This rule is not new in our state. In Meyer v. Berlandi, 53 Minn. 59, 54 N.W.
937, decided in 1893, this court held that the parties to a construction
contract, having proceeded throughout the entire course of their dealings
with each other in entire disregard of the provision of the contract regarding
the mode of determining by arbitration the value of the extras, thereby
waived such provision.

xxx xxx xxx

The test for determining whether there has been a waiver in a particular case
is stated by the author of an exhaustive annotation in 117 A.L.R. p. 304, as
follows: "Any conduct of the parties inconsistent with the notion that they
treated the arbitration provision as in effect, or any conduct which might be
reasonably construed as showing that they did not intend to avail themselves
of such provision, may amount to a waiver thereof and estop the party
charged with such conduct from claiming its benefits".

xxx xxx xxx

The decisive facts here are that both parties from the inception of their
dispute proceeded in entire disregard of the provisions of the contract
relating to arbitration and that neither at any stage of such dispute, either
before or after commencement of the action, demanded arbitration, either by
oral or written demand, pleading, or otherwise. Their conduct was as
effective a rejection of the right to arbitrate as if, in the best Coolidge
tradition, they had said, "We do not choose to arbitrate". As arbitration under
the express provisions of article 40 was "at the choice of either party," and
was chosen by neither, a waiver by both of the right to arbitration followed as
a matter of law.

WHEREFORE, the decision appealed from should be as it is hereby affirmed in toto,

with costs against the herein defendant-appellant, Fieldmen's Insurance Co., Inc. It is
so ordered.

THIRD DIVISION
[G.R. No. 119850. June 20, 1996]
MANDARIN VILLA, INC., petitioner, vs. COURT OF APPEALS and CLODUALDO
DE JESUS, respondents.
RESOLUTION
FRANCISCO, J.:
With ample evidentiary support are the following antecedent facts:
In the evening of October 19, 1989, private respondent, Clodualdo de Jesus, a
practicing lawyer and businessman, hosted a dinner for his friends at the petitioner's
restaurant the Mandarin Villa Seafoods Village, Greenhills, Mandaluyong City. After
dinner the waiter handed to him the bill in the amount of P2,658.50. Private respondent
offered to pay the bill through his credit card issued by Philippine Commercial Credit
Card Inc. (BANKARD). This card was accepted by the waiter who immediately
proceeded to the restaurant's cashier for card verification. Ten minutes later, however,
the waiter returned and audibly informed private respondent that his credit card had
expired.[1] Private respondent remonstrated that said credit card had yet to expire on
September 1990, as embossed on its face.[2] The waiter was unmoved, thus, private
respondent and two of his guests approached the restaurant's cashier who again
passed the credit card over the verification computer. The same information was
produced, i.e., CARD EXPIRED. Private respondent and his guests returned to their
table and at this juncture, Professor Lirag, another guest, uttered the following
remarks: "Clody [referring to Clodualdo de Jesus], may problema ba? Baka kailangang
maghugas na kami ng pinggan?"[3] Thereupon, private respondent left the restaurant
and got his BPI Express Credit Card from his car and offered it to pay their bill. This
was accepted and honored by the cashier after verification.[4] Petitioner and his
companions left afterwards.
The incident triggered the filing of a suit for damages by private
respondent. Following a full-dress trial, judgment was rendered directing the petitioner
and BANKARD to pay jointly and severally the private respondent: (a) moral damages
in the amount of P250,000.00; (b) exemplary damages in the amount of P100,000.00;
and (c) attorney's fees and litigation expenses in the amount of P50,000.00.
Both the petitioner and BANKARD appealed to the respondent Court of Appeals
which rendered a decision, thus:
"WHEREFORE, the decision appealed from is hereby MODIFIED by:
1. Finding appellant MANDARIN solely responsible for damages in favor of appellee;
2. Absolving appellant BANKARD of any responsibility for damages;
3. Reducing moral damages awarded to appellee to TWENTY FIVE THOUSAND and
00/100 (P25,000.00) PESOS;
4. Reducing exemplary damages awarded to appellee to TEN THOUSAND and
00/100 (P10,000.00) PESOS;
5. Reversing and setting aside the award of P50,000.00 for attorney's fees as well as
interest awarded; and
6. AFFIRMING the dismissal of all counterclaims and cross-claims.
Costs against appellant Mandarin.
SO ORDERED."[5]
Mandarin Villa, thus, interposed this present petition, faulting the respondent court
with six (6) assigned errors which may be reduced to the following issues, to wit: (1)
whether or not petitioner is bound to accept payment by means of credit card; (2)
whether or not petitioner is negligent under the circumstances obtaining in this case;
and (3) if negligent, whether or not such negligence is the proximate cause of the
private respondent's damage.
Petitioner contends that it cannot be faulted for its cashier's refusal to accept
private respondent's BANKARD credit card, the same not being a legal tender. It
argues that private respondent's offer to pay by means of credit card partook of the
nature of a proposal to novate an existing obligation for which petitioner, as creditor,
must first give its consent otherwise there will be no binding contract between
them. Petitioner cannot seek refuge behind this averment.
We note that Mandarin Villa Seafood Village is affiliated with BANKARD. In fact,
an "Agreement"[6] entered into by petitioner and BANKARD dated June 23, 1989,
provides inter alia:
"The MERCHANT shall honor validly issued PCCCI credit cards presented by their
corresponding holders in the purchase of goods and/or services supplied by it
provided that the card expiration date has not elapsed and the card number does not
appear on the latest cancellation bulletin of lost, suspended and cancelled PCCCI
credit cards and, no signs of tampering, alterations or irregularities appear on the face
of the credit card."[7]
While private respondent may not be a party to the said agreement, the above-
quoted stipulation conferred a favor upon the private respondent, a holder of credit card
validly issued by BANKARD. This stipulation is a stipulation pour autri and under Article
1311 of the Civil Code private respondent may demand its fulfillment provided he
communicated his acceptance to the petitioner before its revocation. [8] In this case,
private respondent's offer to pay by means of his BANKARD credit card constitutes not
only an acceptance of the said stipulation but also an explicit communication of his
acceptance to the obligor.
In addition, the record shows that petitioner posted a logo inside Mandarin Villa
Seafood Village stating that "Bankard is accepted here." [9] This representation is
conclusive upon the petitioner which it cannot deny or disprove as against the private
respondent, the party relying thereon.Petitioner, therefore, cannot disclaim its
obligation to accept private respondent's BANKARD credit card without violating the
equitable principle of estoppel.[10]
Anent the second issue, petitioner insists that it is not negligent. In support
thereof, petitioner cites its good faith in checking, not just once but twice, the validity of
the aforementioned credit card prior to its dishonor. It argues that since the verification
machine flashed an information that the credit card has expired, petitioner could not be
expected to honor the same much less be adjudged negligent for dishonoring
it. Further, petitioner asseverates that it only followed the guidelines and instructions
issued by BANKARD in dishonoring the aforementioned credit card. The argument is
untenable.
The test for determining the existence of negligence in a particular case may be
stated as follows: Did the defendant in doing the alleged negligent act use the
reasonable care and caution which an ordinary prudent person would have used in the
same situation? If not, then he is guilty of negligence.[11] The Point of Sale (POS)
Guidelines which outlined the steps that petitioner must follow under the circumstances
provides:
"x x x x x x x x x
"CARD EXPIRED
a. Check expiry date on card.
b. If unexpired, refer to CB.
b.1. If valid, honor up to maximum of SPL only.
b.2. If in CB as Lost, do procedures 2a to 2e.,
b.3. If in CB as Suspended/Cancelled, do not honor card.
c. If expired, do not honor card."[12]
A cursory reading of said rule reveals that whenever the words CARD EXPIRED
flashes on the screen of the verification machine, petitioner should check the credit
card's expiry date embossed on the card itself. If unexpired, petitioner should honor the
card provided it is not invalid, cancelled or otherwise suspended. But if expired,
petitioner should not honor the card. In this case, private respondent's BANKARD credit
card has an embossed expiry date of September 1990.[13] Clearly, it has not yet expired
on October 19,1989, when the same was wrongfully dishonored by the
petitioner. Hence, petitioner did not use the reasonable care and caution which an
ordinary prudent person would have used in the same situation and as such petitioner
is guilty of negligence. In this connection, we quote with approval the following
observations of the respondent Court.
"Mandarin argues that based on the POS Guidelines (supra), it has three options
in case the verification machine flashes 'CARD EXPIRED.' It chose to exercise option
(c) by not honoring appellee's credit card. However, appellant apparently intentionally
glossed over option '(a) Check expiry date on card" (id.) which would have shown
without any shadow of doubt that the expiry date embossed on the BANKARD was
'SEP 90.' (Exhibit "D".) A cursory look at the appellee's BANKARD would also reveal
that appellee had been as of that date a cardholder since 1982, a fact which would
have entitled the customer the courtesy of better treatment." [14]
Petitioner, however, argues that private respondent's own negligence in not
bringing with him sufficient cash was the proximate cause of his damage. It likewise
sought exculpation by contending that the remark of Professor Lirag [15] is a supervening
event and at the same time the proximate cause of private respondent's injury.
We find this contention also devoid of merit. While it is true that private respondent
did not have sufficient cash on hand when he hosted a dinner at petitioner's restaurant,
this fact alone does not constitute negligence on his part. Neither can it be claimed that
the same was the proximate cause of private respondent's damage. We take judicial
notice[16] of the current practice among major establishments, petitioner included, to
accept payment by means of credit cards in lieu of cash. Thus, petitioner accepted
private respondent's BPI Express Credit Card after verifying its validity, [17] a fact which
all the more refutes petitioner's imputation of negligence on the private respondent.
Neither can we conclude that the remark of Professor Lirag was a supervening
event and the proximate cause of private respondent's injury.The humiliation and
embarrassment of the private respondent was brought about not by such a remark of
Professor Lirag but by the fact of dishonor by the petitioner of private respondent's valid
BANKARD credit card. If at all, the remark of Professor Lirag served only to aggravate
the embarrassment then felt by private respondent, albeit silently within himself.
WHEREFORE, the instant petition is hereby DISMISSED. SO ORDERED.