G.R. No.

L-25071 March 29, 1972
GEORGE W. BATCHELDER, doing business under the name and style of Batchelder
Equipment, plaintiff-appellant,
vs.
THE CENTRAL BANK OF THE PHILIPPINES, defendant-appellant.
Quasha, Asperilla, Blanco, Zafra, and Tayag for plaintiff-appellant.
Defendant Central Bank specifically denied in its answer certain facts set forth in the
complaint and was quite insistent on the absence of any such right on the part of plaintiff to
re-acquire from it the sum of $170,210.60 at the preferred rate of exchange. It would follow
accordingly that it was not liable either to plaintiff for the difference between its peso cost
at the rate prevailing on the date of the satisfaction of whatever judgment there may be in
plaintiff's favor and the peso cost of $170,210.60 at said preferred rate. There was likewise a
denial of liability for compensatory and exemplary damages, attorney's fees, and costs of
the suit.

F.E. Evangelista, Cruz-Espiritu & Associates for defendant-appellant.
FERNANDO, J.:p
In essence, the pivotal legal question presented by this appeal of defendant Central Bank of
the Philippines,1 is whether or not the issuance of a monetary policy by it, thereafter
implemented by the appropriate resolutions, as to the rate of exchange at which dollars
after being surrendered and sold to it could be re-acquired, creates a contractual obligation.
It was the holding of the lower court that in law there was such a contract, the terms of
which had to be respected by defendant Central Bank. Such a conclusion is challenged in
this appeal. For reasons to be hereinafter set forth, we find that the lower court was far too
generous in its appreciation of the claim of plaintiff George W. Batchelder. The law in our
opinion does not go that far, and accordingly, we reverse.
This is a suit filed by plaintiff George W. Batchelder to compel defendant Central Bank of the
Philippines, now appellant, to resell to him $170,210.60 at the preferred rate of exchange of
two Philippine pesos for one American dollar, more specifically P2.00375, or, in the
alternative, to pay to him the difference between the peso cost of such amount at the
market rate prevailing on the date of the satisfaction of the judgment in his favor and the
peso cost of $170,210.60 at said preferred rate. Plaintiff likewise sought compensatory
damages consisting of actual expenses of litigation and attorney's fees as well as exemplary
damages.
According to the appealed decision: "From the evidence on record, it appears that the
plaintiff is an American citizen who has been permanently residing in the Philippines and
who is engaged in the construction business under the name and style of Batchelder
Equipment. The defendant is a government corporation duly organized and existing under
Republic Act No. 265."2 Then came this portion: "On December 9, 1949, the defendant
issued Central Bank Circular No. 20 imposing exchange contract in this jurisdiction ... . To
implement the program of exchange controls, the defendant issued subsequent circulars,
one of which was Circular No. 44 dated June 12, 1953 ... . On July 16, 1959, Republic Act No.
2609 was approvedwhich, among other things, provides that "the monetary authorities shall
take steps for the adoption of a four-year program of gradual decontrol." To implement this
program of gradual decontrol, defendant Central Bank issued Circular No. 105 on April 25,
1960 ..., providing for the gradual lifting of the restrictions on transactions involving gold
and foreign exchange. Likewise, on the same date, it issued Circular No. 106 ... governing the
sale agent banks — of foreign exchange in the free market. On September 12, 1960, Circular
No. 105 was amended by Circular No. 111 ... and by Circular No. 117 ... on November 28,
1960. This last Circular No. 117 was amended by Circular No. 121 ... on March 2. 1961, which
in return, was amended by Circular No. 133 ... on January 21, 1962, providing, among
others, that "only authorized agent banks may sell foreign exchange for imports" and that
"such exchange should be sold at the prevailing free market rate to any applicant, without
requiring prior specific licensing from the Central Bank." "3 The appealed decision went on
to state "that on March 30, 1960, the U.S. Navy accepted the proposal of the plaintiff of
March 18, 1960 in the sum of $188,000.00 for the construction of the Mindanao Weather
Station, Bukidnon, Mindanao, Philippines, in accordance with Bid Item 3, Yards and Docks
Specifications No. 13374/59 ... ."4
Reference was then therein made to the specific resolution of defendant Central Bank. Thus:
"In connection with construction projects in U.S. military bases in the Philippines, the
defendant through its Monetary Board, promulgated Monetary Board Resolution No. 857
on June 17, 1960 ... which, in part, provided: "I. General Policy — Filipino and resident
American contractors undertaking construction projects in U.S. military bases in the
Philippines shall be authorized to utilize ninety per cent (90%) of the proceeds of their
contracts for the purchase of construction equipment, spare parts and either supplies,
regardless of commodity classification, to be used in projects inside the U.S. military bases in
the Philippines, as well as for payment of imports of construction equipment, materials and
supplies, except those commodity items falling under "NEC" and "UI" categories, either for
resale or to be used in their projects outside the U.S. military bases; provided, that in the
latter case (where the imported items will be used outside of their projects in the U.S.
military bases) the margin levy shall be imposed." "5
There was moreover an implementation of the above resolution with the Central Bank
issuing "its Memorandum to Authorized Agent Banks ID-FM No. 11 dated June 23, 1960 ... .
Under Resolution No. 857 of the Monetary Board, which was fully quoted in the
Memorandum to Authorized Agent Banks of the defendant ..., it was specifically provided
that: "For imports against proceeds of contracts entered into prior to April 25, 1960, the
preferred buying rate shall govern, regardless of the present commodity classifications." "
6 There was however a modification arising from Monetary Board Resolution No. 695 of
April 28, 1961, which specified that the agent bank should, upon compliance with its terms,
credit the contractor's accounts in pesos, the buying rate being governed by the appropriate
rules and regulations.7
The following facts as found by the lower court are likewise relevant: "It appears that in
compliance with defendant's Monetary Board Resolutions Nos. 857 and 695 ..., plaintiff
surrendered to the Central Bank, through the latter's authorized agents, his dollar earnings
amounting to U.S. $199,966.00 ... . The plaintiff also appears to have applied with the
defendant for licences to utilize 90% of his surrendered earnings or the sum of U.S.
$25,847.84 ... or 21.41% of the amount applied for. The plaintiff demanded from the
defendant that it be allowed to utilize the balance of the 90% of his surrendered dollar
earnings. However, it was only on March 21, 1963, after the plaintiff had filed the complaint
in the present case and after full decontrol had been established through Circular No. 133
dated January 21, 1962 ..., that the defendant informed the plaintiff, through its
communication ..., that the lattercould utilize at the free market rate the balance of his said
90% of surrendered earnings which had not been previously granted by the defendant for
his importations.The present action, therefore, seeks to compel the defendant to permit the
plaintiff to utilize the said balance of his 90% surrendered earnings for importation at the
preferred rate of exchange which is P2.00 per U.S. $1.00"8
The appealed decision took note that in answer to the contention of defendant Central Bank
that the Monetary Board Resolutions Nos. 857 and 695 relied upon simply laid down a mere
policy without in any way giving rise to a valid and binding agreement to which the law
should give effect, plaintiff Batchelder would stress that the enunciation of the policy
embodied in the appropriate resolution did give rise to a contract that must be complied
with. That argument found favor with the lower court, for in its opinion, "considering the
facts surrounding the transaction between the plaintiff and the defendant, the defendant is
now bound by a contract, which could be implied from its stated policy, as enunciated in
Monetary Board Resolutions Nos. 857 and 695, and the plaintiff's reliance on said
resolutions,to resell in favor of the plaintiff 90% of the U.S. dollars earned by him under his
U.S. Navy Contract aforementioned which were duly surrendered to the defendant."9
The appealed decision recapitulated matters thus: "In short, it is apparent that by the
issuance of its various resolutions and circulars aforementioned the defendant had
considered the plaintiff and other contractors similarly situated with contracts with the U.S.
military authorities predating April 25, 1960, as exempted from decontrol, pursuant to
defendant's Monetary Board Resolutions Nos. 857 and 695. Hence, they are entitled to the
utilization of the 90% of the U.S. dollars surrendered by them to the defendant at the
preferred rate of exchange." 10
Judgment was thus rendered in favor of plaintiff George W. Batchelder, ordering defendant
Central Bank "to resell to plaintiff U.S. $154,094.56 at the rate of exchange Philippine peso
P2.00375 per U.S. $1.00 or, in the alternative, to pay to the plaintiff in pesos the difference
between the peso cost of said U.S. $154,094.56 at the rate prevailing on the date of the
satisfaction of judgment and the peso cost of said $154,094.56 at said preferred rate." 11 As
noted earlier, an appeal was interposed by defendant Central Bank, raising as a principal
legal question that there was no such contractual obligation by virtue of which it could be
held liable. It is its contention that its refusal to honor plaintiff's claim is impressed with
validity in accordance with the governing provision of the existing rules and regulations
governing the sale of foreign exchange. That, to repeat, is the crux of the litigation now
before us. The appeal which plaintiff did likewise interpose, complaining against the alleged
failure of the lower court to grant him actual expenses of litigation, attorney's fees as well as
exemplary damages, is dependent on the disposition of such decisive issue posed as to the
existence of a valid contractual commitment on the part of defendant Central Bank.
After carefully going over the records of the case a well as the briefs of the parties, it is the
conclusion of Court, as set forth at the outset, that the governing principle of law applicable
to actuation of administrative agencies, like the Central Bank, precludes a finding that under
the circumstances disclosed by the case, there was a contract in law giving rise to an
obligation which must be fulfilled by such governmental body. A reversal, as already
mentioned, is thus indicated.
1. We start with fundamentals. The Civil Code expressly provides that a contract is a meeting
of minds between two persons whereby one binds himself with respect to the other to give
something or render some service. 12 The above provision is practically a restatement, with
slight modification, of Article1254 of the Civil Code of Spain of 1889, formerly enforced in
our jurisdiction. Such an article, in the opinion of Justice J.B.L. Reyes, speaking for the Court,
in A. Magsaysay, Inc. v. Cebu Portland Cement Co., 13 requires that "the area of agreement
must extend to all points that the parties deem material or there is no contract." 14 It is
noteworthy that in his Outlines on Civil Law, with JudgeRicardo Puno as co-author, he
speaks highly of Article 1321 of the Civil Code of Italy. It reads thus: "A contract is the accord
of two (or more) persons (with previously diverging interests) for the purpose of creating,
modifying or extinguishing a juridical relation between them." 15 Likewise all commentators
on the Civil Code have agreed that the birth or perfection of a consensual contract, Article
1315, commences from the moment the parties come to an agreementon a definite subject
matter and valid consideration. Justice Capistrano, who was with the Code Commission, and
Senators Ambrosio Padilla and Arturo Tolentino,all three distinguished in the field of civil
law, are substantially in agreement." 16
Planiol states the following: "The consent of the parties, that is to say, the accord of wills, is
the essential element of every contract ... . The consent, in the matter of contracts, is
composed of a double operation. (1) The parties must commence by agreeing as to the
contents the "convention" that is to say, by making sufficiently precise the object and the
essential conditions, and discussing the particular clauses which they desire to introduce to
modify or to complete the ordinary effects ... . (2) This first operation having been
terminated, the parties are in accord on the projected contract: there is between them what
Littre calls the uniformity of opinions, which is one sense of the word "consent", but the
contract is not included, it still exists in a projected state. There remains to give its
obligatory force by an act of will, expressing the individual adherence of each one of the
parties to the act thus prepared. ... . When all the necessary consents (sic) are obtained, and
manifested in legal form, the contract is formed, the lien of law is tied. It is therefore the
union of these adherences (sic) which constitute the contract and which gives birth to the
obligations which are derived from it. It is an act of volition, while the preliminary operation
of discussion of the project is a work of the mind and reasoning. 17
In their Jurisprudence and Legal Philosophy, the late Professors Morris R. Cohen and Felix R.
Cohen, father and son and jurists of note, noted that the concepts found in the Civil Code of
Spain showing basic contract rules are "equally valid in France, Chile, Columbia, Germany,
Holland, Italy, Mexico, Portugal and many other lands, and equally honored across eighteen
and more centuries ... ." Even more impressive is their conclusion that the views of such
common law scholars as Maine, Williston, Pound, Holdsworth, Llewellyn, and Kessler, are
not dissimilar. Thus Pollock could describe the English common law quoting whole
paragraphs from a German scholar's description of the law of ancient Rome. It is in that
sense that for them the Roman phrasing contrahitur obligatio "throws more light than
volumes of exegesis: One contracts an obligation as one contracts pneumonia or any
otherdisability. Contract is that part of our legal burdens that we bring on ourselves." 18
If there be full cognizance of the implications of the controlling principles as thus
expounded, impressive for their well-nigh unanimity of approach, the conclusion reached by
the lower court certainly cannot be accepted as correct.
2. As is so evident from the recital of facts made in the lower court and equally so in the
brief of plaintiff Batchelder, as appellant, what was done by the Central Bank was merely to
issue in pursuance of its rule-making power the resolutions relied upon by plaintiff, which
for him should be impressed with a contractual character. Insofar as this aspect of the
matter is concerned, his brief speaks for itself. "In July, 1959, the Republic of the Philippines
adopted a gradual decontrol program through the enactment of Republic Act No. 2609. To
implement this legislation defendant Central Bank issued Circular Nos. 105 and 106 both
dated April 25, 1960 ... . The exchange rate under the decontrol program was higher than
the prevailing rate before decontrol of P2.00 per US$1.00. On March 30, 1960, plaintiff-
appellant entered into a contract with the United States Navy for the construction of a
weather station in Bukidnon, Mindanao covered by U.S. Navy Contract No. NBy-13374 ... .
On June 17, 1960, the defendant-appellant through its governing Monetary Board
promulgated Resolution No. 857 ... and implemented this resolution through its
Memorandum to Authorized Agent Banks, I.D.-FM No. 11 dated June 23, 1960 ... . Under
Resolution No. 857 and the implementing circular aforesaid, Filipino and American resident
contractors for constructions in U.S. military bases in the Philippines whose contracts
antedated April 25, 1960 were required to surrender to the defendant-appellant Central
Bank their dollar earnings under their respective contracts but were entitled to utilize 90%
of their surrendered dollars for importation at the preferred rate of commodities for use
within or outside said U.S. military bases. The defendant-appellant pursuant to the
decontrol program also promulgated Circulars Nos. 111, 117, and 121, dated September 12,
1960 ..., November 28, 1960 ...; and March 2, 1961 ..., respectively, and finally adopted full
decontrol through its Circular No. 133 dated January 21, 1962 ... . Defendant-appellant also
promulgated Monetary Board Resolution No. 695 dated April 28, 1961 ... amending MB
Resolution No. 857 of June 23, 1960, and implementing the former through Memorandum
ID-FM No. 30 on May 18, 1961 ... ." 19
There is no question that the Central Bank as a public corporation could enter into
contracts. It is so provided for among the corporate powers vested in it. Thus:"The Central
Bank is hereby authorized to adopt, alter, and use a corporate seal which shall be judicially
noticed; to make contracts; to lease or own real personal property, and to sell or otherwise
dispose of the same; to sue and be sued; and otherwise to do and perform any and all things
that may be necessary or proper to carry out the purposes of this Act." 20 No doubt would
have arisen therefore if defendant Central Bank, utilizing a power expressly granted, did
enter into a contract with plaintiff. It could have done so, but it did not do so. How could it
possibly be maintained then that merely through the exercise of its regulatory power to
implement statutory provisions, a contract as known to the law was thereby created?.
Yet that is precisely what the lower court held in reaching such a conclusion. It was not only
unmindful of the controlling doctrines as to when a contract exists, but itwas equally
oblivious of the competence lodged in an administrative agency like the Central Bank. Even
the most cursory perusal of Republic Act No. 265 would yield the irresistible conclusion that
the establishment of the Central Bankwas intended to attain basic objectives in the field of
currency and finance. In the language of the Act: "It shall be the responsibility of the Central
Bankof the Philippines to administer the monetary and banking system of the Republic. It
shall be the duty of the Central Bank to use the powers granted to it under this Act to
achieve the following objectives: (a) to maintain monetary stability in the Philippines; (b) to
preserve the international value of the pesoand the convertibility of the peso into other
freely convertible currencies; and (c) to promote a rising level of production, employment
and real income in the Philippines." 21
It would be then to set at naught fundamental concepts in administrative law that accord
due recognition to the vesting of quasi-legislative and quasi-judicial power in administrative
law for the purpose of attaining statutory objectives, especially now that government is
saddled with greater responsibilities due to the complex situation of the modern era, if the
lower court is to be upheld. For if such be the case then, by the judiciary failing to exercise
due care in itsoversight of an administrative agency, substituting its own discretion for what
usually is the more expert appraisal of such an instrumentality, there may even be a
frustration if not a nullification of the objective of the law.
Nor is this to deal unjustly with plaintiff. Defendant Central Bank in its motion to dismiss
before the lower court was quite explicit as to why under the circumstances, no right could
be recognized as possessed by him. As set forth in such pleading: "We contend that
Monetary Board Resolution No. 857, dated June 17, 1960, as amended by Monetary Board
Resolution No. 695, dated April 28, 1961, does not give right to Filipino and resident
American contractors undertaking construction projects in U.S. military bases to
reacquire at the preferred rate ninety per cent (90%) of the foreign exchange sold or
surrendered to defendant Central Bank thru the authorized agent banks. Nor does said
resolution serve as a general authorization or license granted by the Central Bank to utilize
the ninety per cent (90%) of their dollar earnings. M.B. Resolution No. 857, as
amended, merely laid down a general policy on the utilization of the dollar earnings of
Filipino and resident American contractors undertaking projects in U.S. military bases, ...
." 22 Further, there is this equally relevant portion in such motion to dismiss: "It is clear from
the aforecited provisions of said memorandum that not all imports againt proceeds of
contracts entered into prior to April 25, 1960 are entitled to the preferred buying rate of
exchange. Only imports against proceeds of contracts entered into prior to April 25,
1960, not otherwise classified as dollar-to-dollar transactions, are entitled to the preferred
rate of exchange. It is for this reason that the contractor is required to first file an
application with defendant Central Bank (Import Department) thru theAuthorized Agent
Banks, for the purpose of determining whether the imports against proceeds of contracts
entered into prior to April 25, 1960 are classified asdollar-to-dollar transactions (which are
not entitled to the preferred rate of exchange), or not (which are entitled to the preferred
rate of exchange), and that if said imports are entitled to the preferred rate of exchange,
defendant Central Bank would issue a license to the contractor for authority to buy foreign
exchange at the preferred rate for the payment of said imports." 33
Had there been greater care therefore on the part of the plaintiff to show why in his opinion
he could assert a right in accordance not with a contract binding on the Central Bank,
because there is none, but by virtue of compliance with rules and regulations of an
administrative tribunal, then perhaps a different outcome would have been justified.
3. With the disposition of this Court makes on this appeal of defendant Central Bank, there
is no need to consider at all the appeal of the plaintiff insofar as the lower court denied his
plea for the recovery of the actual expenses of litigation, attorney's fees and exemplary
damages. Clearly there is no ground for the award of such items sought.
WHEREFORE, the decision of the lower court of January 10, 1963 is reversed and the
complaint of the plaintiff dismissed, without prejudice to his taking the appropriate action
to enforce whatever rights he possesses against defendant Central Bank in accordance with
its valid and binding rules and regulations. With costs against plaintiff.
Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Villamor and Makasiar, JJ., concur.
Castro, Teehankee and Barredo, JJ., concur in the result.
G.R. No. L-18841 January 27, 1969
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, defendant-appellant.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio A. Torres
and Solicitor Camilo D. Quiason for plaintiff-appellant.
Ponce Enrile, Siguion Reyna, Montecillo and Belo for defendant-appellant.
REYES, J.B.L., J.:
Direct appeals, upon a joint record on appeal, by both the plaintiff and the defendant from
the dismissal, after hearing, by the Court of First Instance of Manila, in its Civil Case No.
35805, of their respective complaint and counterclaims, but making permanent a
preliminary mandatory injunction theretofore issued against the defendant on the
interconnection of telephone facilities owned and operated by said parties.
The plaintiff, Republic of the Philippines, is a political entity exercising governmental
powers through its branches and instrumentalities, one of which is the Bureau of
Telecommunications. That office was created on 1 July 1947, under Executive Order No. 94,
with the following powers and duties, in addition to certain powers and duties formerly
vested in the Director of Posts: 1awphil.ñêt
SEC. 79. The Bureau of Telecommunications shall exercise the following powers and duties:
(a) To operate and maintain existing wire-telegraph and radio-telegraph offices,
stations, and facilities, and those to be established to restore the pre-war
telecommunication service under the Bureau of Posts, as well as such additional
offices or stations as may hereafter be established to provide telecommunication
service in places requiring such service;
 (b) To investigate, consolidate, negotiate for, operate and maintain wire-telephone
or radio telephone communication service throughout the Philippines by utilizing
such existing facilities in cities, towns, and provinces as may be found feasible and
under such terms and conditions or arrangements with the present owners or
operators thereof as may be agreed upon to the satisfaction of all concerned;
(c) To prescribe, subject to approval by the Department Head, equitable rates of
charges for messages handled by the system and/or for time calls and other services
that may be rendered by said system;
(d) To establish and maintain coastal stations to serve ships at sea or aircrafts and,
when public interest so requires, to engage in the international telecommunication
service in agreement with other countries desiring to establish such service with the
Republic of the Philippines; and
(e) To abide by all existing rules and regulations prescribed by the International
Telecommunication Convention relative to the accounting, disposition and
exchange of messages handled in the international service, and those that may
hereafter be promulgated by said convention and adhered to by the Government of
the Republic of the Philippines. 1
The defendant, Philippine Long Distance Telephone Company (PLDT for short), is a public
service corporation holding a legislative franchise, Act 3426, as amended by Commonwealth
Act 407, to install, operate and maintain a telephone system throughout the Philippines and
to carry on the business of electrical transmission of messages within the Philippines and
between the Philippines and the telephone systems of other countries. 2 The RCA
Communications, Inc., (which is not a party to the present case but has contractual relations
with the parties) is an American corporation authorized to transact business in the
Philippines and is the grantee, by assignment, of a legislative franchise to operate a
domestic station for the reception and transmission of long distance wireless messages (Act
2178) and to operate broadcasting and radio-telephone and radio-telegraphic
communications services (Act 3180). 3
Sometime in 1933, the defendant, PLDT, and the RCA Communications, Inc., entered into
an agreement whereby telephone messages, coming from the United States and received by
RCA's domestic station, could automatically be transferred to the lines of PLDT; and vice-
versa, for calls collected by the PLDT for transmission from the Philippines to the United
States. The contracting parties agreed to divide the tolls, as follows: 25% to PLDT and 75% to
RCA. The sharing was amended in 1941 to 30% for PLDT and 70% for RCA, and again
amended in 1947 to a 50-50 basis. The arrangement was later extended to radio-telephone
messages to and from European and Asiatic countries. Their contract contained a stipulation
that either party could terminate it on a 24-month notice to the other.4 On 2 February 1956,
PLDT gave notice to RCA to terminate their contract on 2 February 1958. 5
Soon after its creation in 1947, the Bureau of Telecommunications set up its own
Government Telephone System by utilizing its own appropriation and equipment and by
renting trunk lines of the PLDT to enable government offices to call private parties. 6 Its
application for the use of these trunk lines was in the usual form of applications for
telephone service, containing a statement, above the signature of the applicant, that the
latter will abide by the rules and regulations of the PLDT which are on file with the Public
Service Commission. 7 One of the many rules prohibits the public use of the service furnished
the telephone subscriber for his private use. 8 The Bureau has extended its services to the
general public since 1948, 9 using the same trunk lines owned by, and rented from, the PLDT,
and prescribing its (the Bureau's) own schedule of rates. 10 Through these trunk lines, a
Government Telephone System (GTS) subscriber could make a call to a PLDT subscriber in
the same way that the latter could make a call to the former.
On 5 March 1958, the plaintiff, through the Director of Telecommunications, entered into
an agreement with RCA Communications, Inc., for a joint overseas telephone service
whereby the Bureau would convey radio-telephone overseas calls received by RCA's station
to and from local residents. 11 Actually, they inaugurated this joint operation on 2 February
1958, under a "provisional" agreement. 12
On 7 April 1958, the defendant Philippine Long Distance Telephone Company, complained
to the Bureau of Telecommunications that said bureau was violating the conditions under
which their Private Branch Exchange (PBX) is inter-connected with the PLDT's facilities,
referring to the rented trunk lines, for the Bureau had used the trunk lines not only for the
use of government offices but even to serve private persons or the general public, in
competition with the business of the PLDT; and gave notice that if said violations were not
stopped by midnight of 12 April 1958, the PLDT would sever the telephone
connections. 13 When the PLDT received no reply, it disconnected the trunk lines being
rented by the Bureau at midnight on 12 April 1958. 14 The result was the isolation of the
Philippines, on telephone services, from the rest of the world, except the United States. 15
At that time, the Bureau was maintaining 5,000 telephones and had 5,000 pending
applications for telephone connection. 16 The PLDT was also maintaining 60,000 telephones
and had also 20,000 pending applications. 17Through the years, neither of them has been
able to fill up the demand for telephone service.
The Bureau of Telecommunications had proposed to the PLDT on 8 January 1958 that both
enter into an interconnecting agreement, with the government paying (on a call basis) for all
calls passing through the interconnecting facilities from the Government Telephone System
to the PLDT. 18 The PLDT replied that it was willing to enter into an agreement on overseas
telephone service to Europe and Asian countries provided that the Bureau would submit to
the jurisdiction and regulations of the Public Service Commission and in consideration of 37
1/2% of the gross revenues. 19 In its memorandum in lieu of oral argument in this Court
dated 9 February 1964, on page 8, the defendant reduced its offer to 33 1/3 % (1/3) as its
share in the overseas telephone service. The proposals were not accepted by either party.
On 12 April 1958, plaintiff Republic commenced suit against the defendant, Philippine Long
Distance Telephone Company, in the Court of First Instance of Manila (Civil Case No. 35805),
praying in its complaint for judgment commanding the PLDT to execute a contract with
plaintiff, through the Bureau, for the use of the facilities of defendant's telephone system
throughout the Philippines under such terms and conditions as the court might consider
reasonable, and for a writ of preliminary injunction against the defendant company to
restrain the severance of the existing telephone connections and/or restore those severed.
Acting on the application of the plaintiff, and on the ground that the severance of
telephone connections by the defendant company would isolate the Philippines from other
countries, the court a quo, on 14 April 1958, issued an order for the defendant:
(1) to forthwith reconnect and restore the seventy-eight (78) trunk lines that it has
disconnected between the facilities of the Government Telephone System, including
its overseas telephone services, and the facilities of defendant; (2) to refrain from
carrying into effect its threat to sever the existing telephone communication
between the Bureau of Telecommunications and defendant, and not to make
connection over its telephone system of telephone calls coming to the Philippines
from foreign countries through the said Bureau's telephone facilities and the radio
facilities of RCA Communications, Inc.; and (3) to accept and connect through its
telephone system all such telephone calls coming to the Philippines from foreign
countries — until further order of this Court.
On 28 April 1958, the defendant company filed its answer, with counterclaims.
It denied any obligation on its part to execute a contrary of services with the Bureau of
Telecommunications; contested the jurisdiction of the Court of First Instance to compel it to
enter into interconnecting agreements, and averred that it was justified to disconnect the
trunk lines heretofore leased to the Bureau of Telecommunications under the existing
agreement because its facilities were being used in fraud of its rights. PLDT further claimed
that the Bureau was engaging in commercial telephone operations in excess of authority, in
competition with, and to the prejudice of, the PLDT, using defendants own telephone poles,
without proper accounting of revenues.
After trial, the lower court rendered judgment that it could not compel the PLDT to enter
into an agreement with the Bureau because the parties were not in agreement; that under
Executive Order 94, establishing the Bureau of Telecommunications, said Bureau was not
limited to servicing government offices alone, nor was there any in the contract of lease of
the trunk lines, since the PLDT knew, or ought to have known, at the time that their use by
the Bureau was to be public throughout the Islands, hence the Bureau was neither guilty of
fraud, abuse, or misuse of the poles of the PLDT; and, in view of serious public prejudice that
would result from the disconnection of the trunk lines, declared the preliminary injunction
permanent, although it dismissed both the complaint and the counterclaims.
Both parties appealed.
 Taking up first the appeal of the Republic, the latter complains of the action of the trial
court in dismissing the part of its complaint seeking to compel the defendant to enter into
an interconnecting contract with it, because the parties could not agree on the terms and
conditions of the interconnection, and of its refusal to fix the terms and conditions therefor.
We agree with the court below that parties can not be coerced to enter into a contract
where no agreement is had between them as to the principal terms and conditions of the
contract. Freedom to stipulate such terms and conditions is of the essence of our
contractual system, and by express provision of the statute, a contract may be annulled if
tainted by violence, intimidation, or undue influence (Articles 1306, 1336, 1337, Civil Code
of the Philippines). But the court a quo has apparently overlooked that while the Republic
may not compel the PLDT to celebrate a contract with it, the Republic may, in the exercise
of the sovereign power of eminent domain, require the telephone company to permit
interconnection of the government telephone system and that of the PLDT, as the needs of
the government service may require, subject to the payment of just compensation to be
determined by the court. Nominally, of course, the power of eminent domain results in the
taking or appropriation of title to, and possession of, the expropriated property; but no
cogent reason appears why the said power may not be availed of to impose only a burden
upon the owner of condemned property, without loss of title and possession. It is
unquestionable that real property may, through expropriation, be subjected to an easement
of right of way. The use of the PLDT's lines and services to allow inter-service connection
between both telephone systems is not much different. In either case private property is
subjected to a burden for public use and benefit. If, under section 6, Article XIII, of the
Constitution, the State may, in the interest of national welfare, transfer utilities to public
ownership upon payment of just compensation, there is no reason why the State may not
require a public utility to render services in the general interest, provided just compensation
is paid therefor. Ultimately, the beneficiary of the interconnecting service would be the
users of both telephone systems, so that the condemnation would be for public use.
The Bureau of Telecommunications, under section 78 (b) of Executive Order No. 94, may
operate and maintain wire telephone or radio telephone communications throughout the
Philippines by utilizing existing facilities in cities, towns, and provinces under such terms and
conditions or arrangement with present owners or operators as may be agreed upon to the
satisfaction of all concerned; but there is nothing in this section that would exclude resort to
condemnation proceedings where unreasonable or unjust terms and conditions are exacted,
to the extent of crippling or seriously hampering the operations of said Bureau.
A perusal of the complaint shows that the Republic's cause of action is predicated upon the
radio telephonic isolation of the Bureau's facilities from the outside world if the severance
of interconnection were to be carried out by the PLDT, thereby preventing the Bureau of
Telecommunications from properly discharging its functions, to the prejudice of the general
public. Save for the prayer to compel the PLDT to enter into a contract (and the prayer is no
essential part of the pleading), the averments make out a case for compulsory rendering of
inter-connecting services by the telephone company upon such terms and conditions as the
court may determine to be just. And since the lower court found that both parties "are
practically at one that defendant (PLDT) is entitled to reasonable compensation from
plaintiff for the reasonable use of the former's telephone facilities" (Decision, Record on
Appeal, page 224), the lower court should have proceeded to treat the case as one of
condemnation of such services independently of contract and proceeded to determine the
just and reasonable compensation for the same, instead of dismissing the petition.
This view we have taken of the true nature of the Republic's petition necessarily results in
overruling the plea of defendant-appellant PLDT that the court of first instance had no
jurisdiction to entertain the petition and that the proper forum for the action was the Public
Service Commission. That body, under the law, has no authority to pass upon actions for the
taking of private property under the sovereign right of eminent domain. Furthermore, while
the defendant telephone company is a public utility corporation whose franchise,
equipment and other properties are under the jurisdiction, supervision and control of the
Public Service Commission (Sec. 13, Public Service Act), yet the plaintiff's
telecommunications network is a public service owned by the Republic and operated by an
instrumentality of the National Government, hence exempt, under Section 14 of the Public
Service Act, from such jurisdiction, supervision and control. The Bureau of
Telecommunications was created in pursuance of a state policy reorganizing the
government offices —
to meet the exigencies attendant upon the establishment of the free and
independent Government of the Republic of the Philippines, and for the purpose of
 promoting simplicity, economy and efficiency in its operation (Section 1, Republic
Act No. 51) —
and the determination of state policy is not vested in the Commission (Utilities Com. vs.
Bartonville Bus Line, 290 Ill. 574; 124 N.E. 373).
Defendant PLDT, as appellant, contends that the court below was in error in not holding
that the Bureau of Telecommunications was not empowered to engage in commercial
telephone business, and in ruling that said defendant was not justified in disconnecting the
telephone trunk lines it had previously leased to the Bureau. We find that the court a quo
ruled correctly in rejecting both assertions.
Executive Order No. 94, Series of 1947, reorganizing the Bureau of Telecommunications,
expressly empowered the latter in its Section 79, subsection (b), to "negotiate for, operate
and maintain wire telephone or radio telephone communication service throughout the
Philippines", and, in subsection (c), "to prescribe, subject to approval by the Department
Head, equitable rates of charges for messages handled by the system and/or for time calls
and other services that may be rendered by the system". Nothing in these provisions limits
the Bureau to non-commercial activities or prevents it from serving the general public. It
may be that in its original prospectuses the Bureau officials had stated that the service
would be limited to government offices: but such limitations could not block future
expansion of the system, as authorized by the terms of the Executive Order, nor could the
officials of the Bureau bind the Government not to engage in services that are authorized by
law. It is a well-known rule that erroneous application and enforcement of the law by public
officers do not block subsequent correct application of the statute (PLDT vs. Collector of
Internal Revenue, 90 Phil. 676), and that the Government is never estopped by mistake or
error on the part of its agents (Pineda vs. Court of First Instance of Tayabas, 52 Phil. 803,
807; Benguet Consolidated Mining Co. vs. Pineda, 98 Phil. 711, 724).
The theses that the Bureau's commercial services constituted unfair competition, and that
the Bureau was guilty of fraud and abuse under its contract, are, likewise, untenable.
First, the competition is merely hypothetical, the demand for telephone service being very
much more than the supposed competitors can supply. As previously noted, the PLDT had
20,000 pending applications at the time, and the Bureau had another 5,000. The telephone
company's inability to meet the demands for service are notorious even now. Second, the
charter of the defendant expressly provides:
SEC. 14. The rights herein granted shall not be exclusive, and the rights and power
to grant to any corporation, association or person other than the grantee franchise
for the telephone or electrical transmission of message or signals shall not be
impaired or affected by the granting of this franchise: — (Act 3436)
And third, as the trial court correctly stated, "when the Bureau of Telecommunications
subscribed to the trunk lines, defendant knew or should have known that their use by the
subscriber was more or less public and all embracing in nature, that is, throughout the
Philippines, if not abroad" (Decision, Record on Appeal, page 216).
The acceptance by the defendant of the payment of rentals, despite its knowledge that the
plaintiff had extended the use of the trunk lines to commercial purposes, continuously since
1948, implies assent by the defendant to such extended use. Since this relationship has
been maintained for a long time and the public has patronized both telephone systems, and
their interconnection is to the public convenience, it is too late for the defendant to claim
misuse of its facilities, and it is not now at liberty to unilaterally sever the physical
connection of the trunk lines.
..., but there is high authority for the position that, when such physical connection
has been voluntarily made, under a fair and workable arrangement and guaranteed
by contract and the continuous line has come to be patronized and established as a
great public convenience, such connection shall not in breach of the agreement be
severed by one of the parties. In that case, the public is held to have such an
interest in the arrangement that its rights must receive due consideration. This
position finds approval in State ex rel. vs. Cadwaller, 172 Ind. 619, 636, 87 N.E. 650,
and is stated in the elaborate and learned opinion of Chief Justice Myers as follows:
"Such physical connection cannot be required as of right, but if such connection is
voluntarily made by contract, as is here alleged to be the case, so that the public
acquires an interest in its continuance, the act of the parties in making such
connection is equivalent to a declaration of a purpose to waive the primary right of
 independence, and it imposes upon the property such a public status that it may not
be disregarded" — citing Mahan v. Mich. Tel. Co., 132 Mich. 242, 93 N.W. 629, and
the reasons upon which it is in part made to rest are referred to in the same
opinion, as follows: "Where private property is by the consent of the owner
invested with a public interest or privilege for the benefit of the public, the owner
can no longer deal with it as private property only, but must hold it subject to the
right of the public in the exercise of that public interest or privilege conferred for
their benefit." Allnut v. Inglis (1810) 12 East, 527. The doctrine of this early case is
the acknowledged law. (Clinton-Dunn Tel. Co. v. Carolina Tel. & Tel. Co., 74 S.E. 636,
638).
It is clear that the main reason for the objection of the PLDT lies in the fact that said
appellant did not expect that the Bureau's telephone system would expand with such
rapidity as it has done; but this expansion is no ground for the discontinuance of the service
agreed upon.
The last issue urged by the PLDT as appellant is its right to compensation for the use of its
poles for bearing telephone wires of the Bureau of Telecommunications. Admitting that
section 19 of the PLDT charter reserves to the Government —
the privilege without compensation of using the poles of the grantee to attach one
ten-pin cross-arm, and to install, maintain and operate wires of its telegraph system
thereon; Provided, however, That the Bureau of Posts shall have the right to place
additional cross-arms and wires on the poles of the grantee by paying a
compensation, the rate of which is to be agreed upon by the Director of Posts and
the grantee; —
the defendant counterclaimed for P8,772.00 for the use of its poles by the plaintiff,
contending that what was allowed free use, under the aforequoted provision, was one ten-
pin cross-arm attachment and only for plaintiff's telegraph system, not for its telephone
system; that said section could not refer to the plaintiff's telephone system, because it did
not have such telephone system when defendant acquired its franchise. The implication of
the argument is that plaintiff has to pay for the use of defendant's poles if such use is for
plaintiff's telephone system and has to pay also if it attaches more than one (1) ten-pin
cross-arm for telegraphic purposes.
As there is no proof that the telephone wires strain the poles of the PLDT more than the
telegraph wires, nor that they cause more damage than the wires of the telegraph system,
or that the Government has attached to the poles more than one ten-pin cross-arm as
permitted by the PLDT charter, we see no point in this assignment of error. So long as the
burden to be borne by the PLDT poles is not increased, we see no reason why the
reservation in favor of the telegraph wires of the government should not be extended to its
telephone lines, any time that the government decided to engage also in this kind of
communication.
In the ultimate analysis, the true objection of the PLDT to continue the link between its
network and that of the Government is that the latter competes "parasitically" (sic) with its
own telephone services. Considering, however, that the PLDT franchise is non-exclusive;
that it is well-known that defendant PLDT is unable to adequately cope with the current
demands for telephone service, as shown by the number of pending applications therefor;
and that the PLDT's right to just compensation for the services rendered to the Government
telephone system and its users is herein recognized and preserved, the objections of
defendant-appellant are without merit. To uphold the PLDT's contention is to subordinate
the needs of the general public to the right of the PLDT to derive profit from the future
expansion of its services under its non-exclusive franchise.
WHEREFORE, the decision of the Court of First Instance, now under appeal, is affirmed,
except in so far as it dismisses the petition of the Republic of the Philippines to compel the
Philippine Long Distance Telephone Company to continue servicing the Government
telephone system upon such terms, and for a compensation, that the trial court may
determine to be just, including the period elapsed from the filing of the original complaint or
petition. And for this purpose, the records are ordered returned to the court of origin for
further hearings and other proceedings not inconsistent with this opinion. No costs.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano,
Teehankee and Barredo, JJ., concur.

G.R. No. L-40424 June 30, 1980
R. MARINO CORPUS, petitioner,
vs.
COURT OF APPEALS and JUAN T. DAVID, respondents
MAKASIAR, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals promulgated
on February 14, 1975 in CA-G.R. No. 40583-R, affirming the decision of the court of Instance
of Manila, Branch V. dated september 4, 1967, in Civil Case no. 61802 entitled "Juan T.
David,plaintiff, versus R. Mariano Corpus, defendant', for the recovery of attorneys fees for
professional services rendered by the plaintiff, private respondent herein, to defendant,
petitioner herein.
A dismiss. On June 14, 1960, Judge Lantin dismissed Civil Case No. 41226 for
Having been close friends, aside from being membres Civil Liberties Union, petitioner Corpus
intimately calls respondent David by his nickname "Juaning" and the latter addresses the
former simply as "Marino".
The factual setting of this case is stated in the decision of the lower court, thus:
It appears that in March, 1958, the defendant was charged administratively
by several employee of the Central Bank Export Department of which the
defendant is the director. The defendant was represented by Atty. Rosauro
Alvarez. Pending the investigation and effective March 18, 1958, he
defendant was suspended from office. After the investigating committee
found the administrative charges to be without merit, and subsequently
recommended the immediate reinstatement of the defendant, the then
Governor of Central Bank, Miguel Cuaderno, Sr., recommended that the
defendant be considered resigned as on the ground that he had lost
confidence in him. The Monetary Board, by a resolution of July 20, 1959,
declared the defendant as resigned as of the date of suspension.
On August 18, 1959, the defendant, thru Atty. Alvarez, filed the Court of
First Instance of Manila a petition for certiorari, mandamus and quo
warranto with preliminary mandatory injuction and damages against Miguel
Cuaderno, Sr., the Central Bank and Mario Marcos who was appointed to
the position of the defendant, said case having been docketed as Civil Case
No. 41226 and assigned to Branch VII presided over by Judge Gregorio T.
Lantin. On September 7, 1959, the respondent filed a motion to dismiss the
petition, alleging among other grounds, the failure of the defendant to
exhaust, available administrative remedies (Exh. X). On September 25, 1959,
the defendant, thru Atty. Alvarez, filed his opposition to the said motion. On
March 17, 1960, during the course of the presentation of the evidence for
the petition for a writ of preliminary mandatory injunction, Atty. Alvarez
manifested that the defendant was abandoning his prayer for a writ of
preliminary mandatory injunction and asked for a ruling on the motion to
failure to exhaust she administrative remedies available to the herein
defendant.
On June 24, 1960, Atty. Alverez received a copy of the order of dismissal It
was at this state that the plaintiff entered into the case under circumstances
about which the parties herein have given divergent versions.
According to the plaintiff, six or seven days prior to the expiration of the
period for appeal from the order of dismissal, he chanced to meet the late
Rafael Corpus, father of the defendant, at the Taza de Oro coffee shop.
After they talked about the defendant's having lost his case before Judge
Lantin, and knowing that the plaintiff and the defendant were both
members of the Civil Liberties Union, Rafael Corpus requested the plaintiff
to go over the case and further said that he would send his son, the herein
defendant, to the plaintiff to find out what could be done about the case.
The defendant called up the plaintiff the following morning for an
appointment, and the plaintiff agreed to am him in the latter's office. At said
conference, the defendant requested the plaintiff to handle the case
because Atty. Alvarez had already been disenchanted and wanted to give up
the case. Although at first reluctant to handle the case, the plaintiff finally
agreed on condition that he and Atty. Alverez would collaborate in the case.
The defendant's version of how the plaintiff came into the case is as follows:
After the order of dismissal issued by Judge Lantin was published in the
newspapers, the plaintiff sought a conference with the defendant at Taza de
Oro, but the defendant told him that he would rather meet the plaintiff at
the Swiss Inn. Even before the case was dismissed the plaintiff had shown
interest in the same by being present during the hearings of said case in the
sala of Judge Lantin When the plaintiff and the defendant met at the Swiss
Inn, the plaintiff handed the defendant a memorandum prepared by him on
how he can secure the reversal of the order of dismissal by means of a
formula stated in said memorandum. During the said occasion the plaintiff
scribbled some notes on a paper napkin (Exhibit 19). On June 28, 1960, the
defendant wrote the plaintiff, sending with it a copy of the order of Judge
Lantin dated June 14, 1960 (Exhibit S Inasmuch as said letter, Exhibit S
already mentions the 'memorandum' of the plaintiff, the defendant
contends that it was not six or seven days prior to the expiration of the
period of appeal (which should be on or about July 2 or 3, 1960) but on a
date even earlier than June 28, 1960 that the plaintiff and the defendant
met together to discuss the latter's case.
Laying aside for the moment the true circumstances under which the
plaintiff started rendering professional services to the defendant, the
undisputed evidence shows that on July 7, 1960, the plaintiff filed a motion
for reconsideration of the order of dismissal under the joint signatures of
the plaintiff and Atty. Alverez (Exhibit B). The plaintiff argued the said
motion during the hearing thereof On August 8, 1960, he file a 13-page
'Memorandum of Authorities in support of said motion for reconsideration
(Exhibit C). A 3-page supplemental memorandum of authorities was filed by
the plaintiff on September 6, 1960 (Exhibit D)
On November 15, 1960, Judge Lantin denied the motion for reconsideration.
On November 19, 1960, the plaintiff perfected the appeal from the order of
dismissal dated June 14, 1960. For purposes of said appeal the plaintiff
prepared a 232-page brief and submitted the same before the Supreme
Court in Baguio City on April 20, 1961. The plaintiff was the one who orally
argued the case before the Supreme Court. In connection with the trip to
Baguio for the said oral argument, the plaintiff used his car hich broke down
and necessitated extensive repairs paid for by the plaintiff himself.
On March 30, 1962, the Supreme Court promulgated its decision reversing
the order of dismissal and remanding the case for further proceedings. On
April 18, 1962, after the promulgation of the decision of the Supreme Court
reversing the dismissal of the case the defendant wrote the plaintiff the
following letter, Exhibit 'Q'. .
xxxxxxxxx
Dear Juaning
Will you please accept the attached check in the amount of TWO
THOUSAND P2,000.00) PESOS for legal services in the handling of L-17860
recently decided by the Court? I wish I could give more but as y•u know we
were banking on a SC decision reinstating me and reimburse my backstage I
had been wanting to offer some token of my appreciation of your legal fight
for and in my behalf, and it was only last week that I received something on
account of a pending claim.
Looking forward to a continuation of the case in the lower court, I remain
Sincerely yours, Illegible
xxxxxxxxx
In a reply letter dated April 25, 1962, the plaintiff returned the check,
explaining said act as follows:
April 25, 1962
My dear Marino:
Yesterday, I received your letter of April 18th with its enclosure. I wished
thank you for your kind thoughts, however, please don't take offense if I
have to return the check. I will explain.
When I decided to render professional services in your case, I was motivated
by the value to me of the very intimate relations which you and I have
enjoyed during the past many years. It was nor primarily, for a professional
fee.
Although we were not fortunate to have obtained a decision in your case
which should have put an end to it. I feel that we have reason to be jubilant
over the outcome, because, the final favorable outcome of the case seems
certain irrespective of the length of time required to terminate the same.
Your appreciation of the efforts I have invested in your case is enough
compensation therefor, however, when you shall have obtained a decision
which would have finally resolved the case in your favor, remembering me
then will make me happy. In the meantime, you will make me happier by
just keeping the check.
Sincerely yours,
JUANING
xxxxxxxxx
When the case was remanded for further proceedings before Judge Lantin,
the evidence for the defendant was presented by Atty. 'Alvarez with the
plaintiff cooperating in the same-'On June 24, 1963, Judge Lantin rendered
his decision in favor of the defendant declaring illegal the resolution of the
Monetary Board of July 20, 1959, and ordering the defendant's
reinstatement and the payment of his back salaries and allowances - The
respondents in said Civil Case No. 41226 filed a motion for reconsideration
which was opposed by the herein plaintiff. The said decision was appealed
by the respondents, as well as by the herein defendant with respect to the
award of P5, 000. 00 attorney's feed The plaintiff prepared two briefs for
submission to the Court of Appeals one as appellee (Exhibit H) and the other
as appellant (Exhibit H-1). The Court of Appeal however, certified the case to
the Supreme Court in 1964.
On March 31, 1965, the Supreme Court rendered a decision affirming the
judgment of the Court of first Instance of Manila.
On April 19, 1965 the plaintiffs law office made a formal de command upon
the defendant for collection of 50% of the amount recovered by the
defendant as back salaries and other emoluments from the Central Bank
(Exhibit N). This letter was written after the defendant failed to appear at an
appointment with the plaintiff so that they could go together to the Central
Bank to claim the possession of the office to which the defendant was
reinstated and after a confrontation in the office of the plaintiff wherein the
plaintiff was remanding 50% of the back salaries and other emoluments
amounting to P203,000.00 recoverable by the defendant. The defendant
demurred to this demand inasmuch as he had plenty of outstanding
obligations and that his tax liability for said back salaries was around
P90,000.00, and that he expected to net only around P10,000.00 after
deducting all expenses and taxes.
On the same date, April 19,1965 the plaintiff wrote the Governor for of
Central Bank requesting that the amount representing the sack salaries of
the defendant be made out in two one in favor of the defendant and the
 other representing the professional fees equivalent to 50% of the said back
salaries being claimed by the plaintiff (Exhibit 8). F to obtain the relief from
the Governor of Central Bank, the plaintiff instituted this action before this
Court on July 20, 1965 (Emphasis supplied).
As therein defendant, herein petitioner Marino Corpus filed in August 5, 1965 an answer
with counter-claim. On August 30, 1965, private respondent Atty. Juan T. David, plaintiff
therein, filed a reply with answer to the counterclaim of petitioner.
After due trial, the lower court rendered judgment on September 4, 1967, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered, ordering the defendant to pay
plaintiff the sum of P30,000.00 in the concept of professional fees, and to
pay the costs (pp. 112-113, CA Record on Appeal p. 54, rec.)
After receipt on September 7, 1967 of a copy of the aforequoted judgment, petitioner
Marino Corpus, defendant therein, filed on October 7, 1967 a notice of appeal from said
judgment to the Court of Appeals. In his appeal, he alleged that the lower court erred:
1. In not holding that the plaintiff's professional services were offered and
rendered gratuitously;
2. Assuming that plaintiff is entitled to compensation — in holding that he
was entitled to attorney's fees in the amount of P30,000.00 when at most
he would be entitled to only P2,500.00;
3. In not dismissing plaintiff's complaint; and
4. In not awarding damages and attorney's fees to the defendant (p. 2, CA
Decision, p. 26, rec.)
Likewise, private respondent Atty. Juan T. David, plaintiff therein, appealed to the Court of
Appeals on October 9, 1967 assigning one error, to wit:
The lower court erred in ordering the defendant to pay the plaintiff only the
sum of P30,000.00 in the concept of attorney's fees (p. 1, CA Decision, p. 25,
rec.).
On February 14, 1975, respondent Court of Appeals promulgated its decision affirming in
toto the decision of the lower court, with costs against petitioner Marino Corpus (Annex A,
Petition for Certiorari, p. 25, rec.)
Hence, the instant petition for review on certiorari, petitioner — contending that the
respondent Court of Appeals erred in finding that petitioner accepted private respondent's
services "with the understanding of both that he (private respondent) was to be
compensated" in money; and that the fee of private respondent was contingent (pp. 3 & 5,
Petition for Certiorari, pp. 17 & 19, rec.).
On October 1, 1975, the case was deemed submitted for decision (p. 177, rec.), after the
parties filed their respective memoranda.
B
On January 31, 1978, private respondent Atty. Juan T. David filed a petition to remand the
case to the court a quo for execution of the latter's decision in Civil Case No. 61802, dated
September 4, 1967, alleging that said decision is already deemed affirmed pursuant to
Section 11(2), Article X of the New Constitution by reason of the failure of this Tribunal to
decide the case within 18 months. Then on July 7, 1978, another petition to remand the
case to the lower court to execution was filed by herein private respondent.
Subsequently, private respondent Atty. Juan T. David filed with The court a quo a motion
dated September 13, 1978 for the issuance of a writ of execution of the lower court's
decision in the aforesaid civil case, also invoking Section 11 (2), Article X of the 1973
Constitution. In an order dated September 19, 1978, the lower court, through Judge Jose H.
Tecson, directed the issuance of a writ of execution. The writ of execution was issued on
October 2, 1978 and a notice of garnishment was also issued n October 13, 1978 to garnish
the bank deposits of herein petitioner Marino Corpus in the Commercial Bank and Trust
Company, Makati Branch.
It appears that on October 13, 1978, herein petitioner filed a motion for reconsideration of
the September 19, 1978 order. Private respondent Atty. Juan T. David filed on October 19,
1978 an opposition to said motion and herein petitioner filed a reply on October 30, 1978.
The lower court denied said motion for reconsideration in its over dated November 7, 1978.
It appears also that in a letter dated October 18, 1978, herein petitioner Marino Corpus
requested this Court to inquire into what appears to be an irregularity in the issuance of the
aforesaid garnishment notice to the Commercial Bank and Trust Company, by virtue of
which his bank deposits were garnished and he was prevented from making withdrawals
from his bank account.
In OUR resolution of November 3, 1978, WE required private respondent Atty. Juan T. David
and the Commercial Bank and Trust Company to comment on petitioner's letter, and for the
bank to explain why it did not honor petitioner's withdrawals from his bank deposits when
no garnishment order has been issued by the Supreme Court. This Court further inquired
from the lower court whether it has issued any garnishment order during the pendency of
the present case.
On November 27, 1978, the Commercial Bank and Trust Company filed its comment which
was noted in the Court's resolution of December 4, 1978. In said resolution, the Court also
required Judge Jose H. Tecson to comply with the resolution of November 3, 1978, inquiring
as to whether he had issued any garnishment order, and to explain why a writ of execution
was issued despite the pendency of the present case before the Supreme Court.
Further, WE required private respondent Atty. Juan T. David Lo explain his failure to file his
comment, and to file the same as directed by the resolution of the Court dated November 3,
1978. Private respondent's compliance came on December 13, 1978, requesting to be
excused from the filing of his comment because herein petitioner's letter was unverified.
Judge Tecson's compliance was filed on December 15, 1978, to which herein petitioner
replied on January 11, 1979.
In OUR resolution dated January 3, 1979, WE set aside the order of Judge Jose H. Tecson
dated September 19, 1978, the writ of execution as well as the notice of garnishment, and
required private respondent Atty. Juan T. David to show cause why he should not be cited
for contempt for his failure to file his comment as directed by the resolution of the Court
dated December 4, 1978, and for filing a motion for execution knowing that the case is
pending appeal and review before this Court Likewise, the Court required Judge Jose H.
Tecson to show cause why he should not be cited for contempt for issuing an order directing
the issuance of a writ of execution and for issuing such writ despite the pendency of the
present case in the Supreme Court.
On January 12, 1979, Judge Jose H. Tecson filed his compliance explanation as directed by
the aforesaid resolution of January 3, 1979, while private respondent Atty. Juan T. David
filed on January 30, 19 79 his compliance and motion for reconsideration after the Court has
granted him an extension of time to file his compliance.
Private respondent Atty. Juan T. David filed on February 28, 1979, a petition praying that the
merits of his compliance be resolved by the Court en banc. Subsequently, on March 26,
1979, another petition was filed by herein private respondent asking the Chief
Justice and the members of the First Division to inhibit themselves from participating in the
determination of the merits of his compliance and for its merits to be resolved by the
Court en banc.
C
The main thrust of this petition for review is whether or not private respondent Atty. Juan T.
David is entitled to attorney's fees.
Petitioner Marino Corpus contends that respondent David is not entitled to attorney's fees
because there was no contract to that effect. On the other hand, respondent David
contends that the absence of a formal contract for the payment of the attorney's fees will
not negate the payment thereof because the contract may be express or implied, and there
was an implied understanding between the petitioner and private respondent that the
former will pay the latter attorney's fees when a final decision shall have been rendered in
favor of the petitioner reinstating him to -his former position in the Central Bank and paying
his back salaries.
I lawyer, Atty. Alvarez, was already disenchanted and wanted to give up the case; and that
WE find respondent David's position meritorious. While there was express agreement
between petitioner Corpus and respondent David as regards attorney's fees, the facts of the
case support the position of respondent David that there was at least an implied agreement
for the payment of attorney's fees.
Petitioner's act of giving the check for P2,000.00 through his aforestated April 18, 1962
letter to respondent David indicates petitioner's commitment to pay the former attorney's
fees, which is stressed by expressing that "I wish I could give more but as you know we were
banking on a SC decision reinstating me and reimbursing my back salaries This last
sentiment constitutes a promise to pay more upon his reinstatement and payment of his
back salaries. Petitioner ended his letter that he was "looking forward to a continuation of
the case in the lower court, ... to which the certiorari-mandamus-quo warranto case was
remanded by the Supreme Court for further proceedings.
Moreover, respondent David's letter-reply of April 25, 1962 confirms the promise of
petitioner Corpus to pay attorney's fees upon his reinstatement and payment of back
salaries. Said reply states that respondent David decided to be his counsel in the case
because of the value to him of their intimate relationship over the years and "not, primarily,
for a professional fee." It is patent then, that respondent David agreed to render
professional services to petitioner Corpus secondarily for a professional fee. This is stressed
by the last paragraph of said reply which states that "however, when you shall have
obtained a decision which would have finally resolved the case in your favor, remembering
me then will make me happy. In the meantime, you will make me happier by just keeping
the check." Thereafter, respondent David continued to render legal services to petitioner
Corpus, in collaboration with Atty. Alverez until he and Atty. Alvarez secured the decision
directing petitioner's reinstatement with back salaries, which legal services were
undisputedly accepted by, and benefited petitioner.
Moreover, there is no reason to doubt respondent David's assertion that Don Rafael Corpus,
the late father of petitioner Corpus, requested respondent to help his son, whose suit for
reinstatement was dismissed by the lower court; that pursuant to such request, respondent
conferred in his office with petitioner, who requested respondent to handle the case as his
respondent agreed on the case. It would have been unethical for respondent to even offer
his services when petitioner had a competent counsel in the person of Atty. Alvarez, who
has been teaching political, constitutional and administrative law for over twenty years.
Likewise, it appears that after the Supreme Court affirmed on March 31, 1965 the order of
the lower court reinstating petitioner Corpus with back salaries and awarding attorney's
fees of P5,000.00, respondent David made a written demand on April 19, 1965 upon
petitioner Corpus for the payment of his attorney's fees in an amount equivalent to 50% of
what was paid as back salaries (Exh. N p. 75, Folder of Exhibits, Civil Case No. 61802).
Petitioner Corpus, in his reply dated May 7, 1965 to the aforesaid written demand, while
disagreeing as to the amount of attorney's fees demanded, did not categorically deny the
right of respondent David to attorney's fees but on the contrary gave the latter the amount
of P2,500.00, which is one-half (½) of the court-awarded attorney's fees of P5,000.00, thus
impliedly admitting the right of respondent David to attorney's fees (Exh. K, p. 57, Folder of
Exhibits, Civil Case No. 61802).
It is further shown by the records that in the motion filed on March 5, 1975 by petitioner
Corpus before the Court of Appeals for the reconsideration of its decision the order of the
lower court granting P30,000.00 attorney's fee's to respondent David, he admitted that he
was the first to acknowledge that respondent David was entitled to tion for legal services
rendered when he sent the chock for P2,000.00 in his letter of April 18, 1962, and he is still
to compensate the respondent but only to the extent of P10,000.00 (p. 44, rec.). This
admission serves only to further emphasize the fact that petitioner Corpus was aware all the
time that he was liable to pay attorney's fees to respondent David which is therefore
inconsistent with his position that the services of respondent David were gratuitous, which
did not entitle said respondent to compensation.
It may be advanced that respondent David may be faulted for not reducing the agreement
for attorney's fees with petitioner Corpus in writing. However, this should be viewed from
their special relationship. It appears that both have been friends for several years and were
co-members of the Civil Liberties Union. In addition, respondent David and petitioner's
father, the late Rafael Corpus, were also close friends. Thus, the absence of an express
contract for attorney's fees between respondent David and petitioner Corpus is no
argument against the payment of attorney's fees, considering their close relationship which
signifies mutual trust and confidence between them.
II
Moreover, the payment of attorney's fees to respondent David may also be justified by
virtue of the innominate contract of facio ut des (I do and you give which is based on the
principle that "no one shall unjustly enrich himself at the expense of another." innominate
contracts have been elevated to a codal provision in the New Civil Code by providing under
Article 1307 that such contracts shall be regulated by the stipulations of the parties, by the
general provisions or principles of obligations and contracts, by the rules governing the most
analogous nominate contracts, and by the customs of the people. The rationale of this
article was stated in the 1903 case of Perez vs. Pomar (2 Phil. 982). In that case, the Court
sustained the claim of plaintiff Perez for payment of services rendered against defendant
Pomar despite the absence of an express contract to that effect, thus:
It does not appear that any written contract was entered into between the
parties for the employment of the plaintiff as interpreter, or that any other
innominate contract was entered into but
whethertheplaintiffsservicesweresolicitedorwhethertheywereoffered to the
defendant for his assistance, inasmuch as these services were accepted and
made use of by the latter, we must consider that there was a tacit and
mutual consent as to the rendition of the services. This gives rise to the
obligation upon the person benefited by the services to make compensation
therefor, since the bilateral obligation to render service as interpreter, on
the one hand, and on the other to pay for the service rendered, is thereby
incurred. (Arts. 1088, 1089, and 1262 of the Civil Code).
xxxxxxxxx
... Whether the service was solicited or offered, the fact remains that Perez
rendered to Pomar services as interpreter. As it does not appear that he did
this gratuitously, the duty is imposed upon the defendant, he having
accepted the benefit of the service, to pay a just compensation therefor, by
virtue of the innominate contract of facio ut des implicitly established.
xxxxxxxxx
... because it is a well-known principle of law that no one should permitted
to enrich himself to the damage of another" (emphasis supplied; see also
Tolentino, Civil Code of the Philippines, p. 388, Vol. IV 119621, citing Estate
of Reguera vs. Tandra 81 Phil. 404 [1948]; Arroyo vs. Azur 76 Phil.
493119461; and Perez vs. Pomar. 2 Phil. 682 [1903]).
WE reiterated this rule in Pacific Merchandising Corp. vs. Consolacion Insurance & Surety
Co., Inc. (73 SCRA 564 [1976]) citing the case of Perez v. Pomar, supra thus:
Where one has rendered services to another, and these services are
accepted by the latter, in the absence of proof that the service was
rendered gratuitously, it is but just that he should pay a reasonable
remuneration therefor because 'it is a well-known principle of law, that no
one should be permitted to enrich himself to the damage of another
(emphasis supplied).
Likewise, under American law, the same rule obtains (7 CJS 1079; FL Still & Co. v. Powell, 114
So 375).
III
There was no contract for contingent fee between Corpus and respondent David.
Contingent fees depend on an express contract therefor. Thus, "an attorney is not entitled
to a percentage of the amount recovered by his client in the absence of an express contract
to that effect" (7 C.J.S. 1063 citing Thurston v. Travelers Ins. Co., 258 N.W. 66, 128 Neb.
141).
Where services were rendered without any agreement whatever as to the
amount or terms of compensation, the attorney is not acting under a
 contract for a contingent fee, and a letter by the attorney to the client
stating that a certain sum would be a reasonable amount to charge for his
services and adding that a rate of not less than five percent nor more than
ten would be reasonable and customary does not convert the original
agreement into a contract for a contingent fee (7 C.J.S. 1063 citing Fleming
v. Phinizy 134 S.E. 814).
While there was no express contract between the parties for the payment of attorney's
fees, the fact remains that respondent David rendered legal services to petitioner Corpus
and therefore as aforestated, is entitled to compensation under the innominate contract of
facio lit des And such being the case, respondent David is entitled to a reasonable
compensation.
IV
In determining a reasonable fee to be paid to respondent David as compensation for his
services, on a quantum meruit basis, it is proper to consider all the facts and circumstances
obtaining in this case particularly the following:
The extent of the services rendered by respondent David should be considered together
with the extent of the services of Petitioner's other counsel, Atty. Rosauro Alvarez, It is
undisputed that Atty. Rosauro Alvarez had rendered legal services as principal counsel for
more shall six (6) years while respondent David has rendered legal services as collaborating
counsel for almost four (4) years. It appears that Atty. Alvarez started to render legal
services after the administrative case was filed on March 7, 1958 against petitioner Corpus.
He represented petitioner Corpus in the hearing of said case which was conducted from
May 5, 1958 to October 8, 1958, involving 56 sessions, and this resulted in the complete
exoneration by the Investigating Committee of all the charges against the petitioner. It
appears further that after the Monetary Board, in its resolution of July 20, 1959, declared
petitioner Corpus as being considered resigned from the service, Atty. Alvarez instituted on
August 18, 1958 Civil Case No. 41126 in the Court of First Instance of Manila for the setting
aside of the aforestated resolution and for the reinstatement of petitioner Corpus. Atty.
Alvarez actively participated in the proceedings.
On the other hand, respondent David entered his appearance as counsel for petitioner
Corpus sometime after the dismissal on June 14, 1960 of the aforesaid civil case. From the
time he entered his appearance, both he and Atty. Alvarez rendered legal services to
petitioner Corpus in connection with the appeals of the aforementioned civil case to the
Court of Appeals and to the Supreme Court. The records disclose that in connection with the
appeal from the June 14, 1960 order of dismissal, respondent David prepared and signed
pleadings although the same were made for and on behalf of Atty. Alvarez and himself And
it is not far-fetched to conclude that all appearances were made by both counsels
considering that Atty. Alverez was the principal counsel and respondent David was the
collaborating counsel. Thus, when the case was called for oral argument on April 20, 1961
before the Supreme Court, respondent David and Atty. Alverez appeared for petitioner
Corpus although it was David who orally argued the case.
When the Supreme Court, in its decision of March 30, 1962, remanded the case to the lower
court for further it was Atty. Alverez who conducted the presentation of evidence while
respondent David assisted him The records also review that respondent David prepared and
signed for Atty. Alverez and himself. certain pleadings, including a memorandum. Moreover,
after the lower court rendered judgment on June 2 4, 1963 ordering the reinstatement and
payment of back salaries to petitioner Corpus and awarding him P5,000.00 by way of
attorney's fees, both petitioner Corpus and the respondents in said case appealed the
judgment. At that stage, respondent David again prepared and signed for Atty. Alvarez and
himself, the necessary pleadings, including two appeal briefs. And in addition, he made oral
arguments in the hearings of motions filed in the lower court before the records of the case
were forwarded to the appellate court. Furthermore, while it appears that it was Atty.
Alvarez who laid down the basic theory and foundation of the case of petitioner Corpus in
the administrative case and later in the civil case, respondent David also advanced legal
propositions. Petitioner Corpus contends that said legal propositions were invariably
rejected by the courts. This is, however, of no moment because the fact remains that
respondent David faithfully rendered legal services for the success of petitioner's case.
The benefits secured for petitioner Corpus may also be considered in ascertaining what
should be the compensation of respondent David. It cannot be denied that both Atty.
Alvarez and respondent David were instrumental in obtaining substantial benefits for
petitioner Corpus which consisted primarily of his reinstatement, recovery of back salaries
and the vindication of his honor and reputation. But, note should also be taken of the fact
that respondent David came at the crucial stage when the case of petitioner Corpus was
dismissed by the lower court.
Atty. Rosauro Alvarez admittedly was paid by petitioner Corpus the sum of P20,000.00 or at
most P22,500.00 (T.s.n., Jan. 11, 1967, pp. 34-35; T.s.n., Feb. 10, 1967, pp. 48-49). On the
other hand, petitioner Corpus, after WE suggested on August 15, 1975 that they settle the
case amicably has, in his September 15, 1975 pleading filed before this Court (p. 166, rec.),
manifested his willingness to pay P10,000.00 for the services of respondent David. However,
respondent David has not manifested his intention to accept the offer.
In his complaint in the instant case, he asked for P75,000.00 as his attorney's fees. The
records reveal that petitioner Corpus actually received only P150,158.50 as back salaries and
emoluments after deducting taxes as well as retirement and life insurance premiums due to
the GSIS. The amount thus claimed by respondent David represents 50% of the amount
actually received by petitioner Corpus. The lower court, however, awarded only P30,000.00
and it was affirmed by the Court of Appeals.
Considering the aforestated circumstances, WE are of the opinion that the reasonable
compensation of respondent David should be P20,000.00.
V were not given due consideration. And knowing this, respondent David should have been
WE find private respondent Juan T. David and Judge Jose H. Tecson, Presiding Judge of the
Court of First Instance of Manila, Branch V, guilty of contempt of court.
Respondent David filed on or about September 13, 1978 a motion with the court a quo for
the issuance of a writ of execution to enforce its decision in Civil Case No 61802, subject of
the present petition, knowing fully well that it was then still pending appeal before this
Court. In addition, no certification that the aforesaid decision is already deemed affirmed
had as yet been issued by the Chief Justice pursuant to Section 11, paragraph 2, Article X of
the New Constitution; because respondent David's petitions filed with the Supreme Court
on January 31, 1978 and on July 7, 1978 to remand the case to the trial court for execution
and for the issuance of such certification had not yet been acted upon as the same were still
pending consideration by this Court. In fact, this Court has not as of this time made any
pronouncement on the aforesaid provision of the New Constitution.
This act of respondent David constitutes disrespect to, as well as disregard of, the authority
of this Court as the final arbiter of all cases duly appealed to it, especially constitutional
questions. It must be emphasized that as a member of the Philippine Bar he is required "to
observe and maintain the respect due to the court of justice and judicial officers" (Section
20 (b), 138 of the Revised Rules of Court). Likewise, Canon 1 of. the Canons of Professional
Ethic expressly provide that: "It is the duty of the lawyer to maintain towards the Courts a
respectful attitude, not for the sake of the temporary incumbent of the judgement office,
but for the maintenance of its supreme importance." And this Court had stressed that "the
duty of an attorney to the courts 'can only be maintained by rendering no service involving
any disrespect to the judicial office which he is bound to uphold'" (Rheem of the Philippines
v. Ferrer, 20 SCRA 441, 444 [1967] citing the case of Lualhati v. Albert, 67 Phil. 86, 92
[1932]).
Moreover, this Court takes judicial notice of the fact that herein respondent David, in the
previous case of Integrated Construction Services, Inc. and Engineering Construction, Inc. v.
Relova (65 SCRA 638 [1975]), had sent letters addressed to the then Chief Justice Querube
C. Makalintal and later to the late Chief Justice Fred Ruiz Castro, requesting for the issuance
of certification on the basis of the aforementioned provision of the New Constitution which
more prudent and cautious in g with the court a quo any motion for execution.
Furthermore, there was even a taint of arrogance and defiance on the part of respondent
David in not filing his comment to the letter- complaint dated October 18, 1978 of petitioner
Corpus, as required by this Court in its November 3, 1978 and December 4,1978 resolutions
which were duly received by him, and instead, he sent on December 13, 1978 a letter
requesting to be excused from the filing of his comment on the lame excuse that
petitioner's letter-complaint was not verified.
On the part of Judge Jose H. Tecson, his presumptuous and precipitate act of granting the
motion for execution of dent David likewise constitutes disrespect to, as well as of, the
authority of this Court because he know for a that the case was still pending apply as the
had not yet been remanded to it and that no certification has been issued by this Court. As a
judicial officer, Judge Tecson is charged with the knowledge of the fact that this Court has
yet to make a definite pronouncement on Section 11, paragraph 2, Article X of the New
Constitution. Judge Tecson should know that only the Supreme Court can authoritatively
interpret Section 11 (2) of Article X of the 1973 Constitution. Yet, Judge Tecson assumed the
role of the Highest Court of the Land. He should be reminded of what Justice Laurel
speaking for the Court, has said in People v. Vera (65 Phil 56, 82 [1937]):
A becoming modesty of inferior courts demands conscious realization of the
position that they occupy in the interrelation and operation of the
integrated judged system of the nation.
It may also be added that the improvident act of respondent David in firing the motion for
execution and the precipitate act of Judge Tecson in issuing the writ of execution are
intriguing as they invite suspicion that there was connivance between the two. Respondent
David would seem to imply that his claim for attorney's fees should be given preference
over the other cams now pending in this Court. Certainly, such should not be the case
because there are cases which by their nature require immediate or preferential attention
by this Tribunal like habeas corpus cases, labor cases and c cases involving death sentence,
let alone cases involving properties and property rights of poor litigants pending decision or
resolution long before the New Constitution of 1973. Nobility and exempt forbearance were
expected of Atty. David, who is old and experienced in the practice of the legal profession,
from which he has derived a great measure. of economic well-being and independence
Consequently, the filing of the motion for immediate tion and the issuance of the writ of
execution constitute a defiance and usurpation of the jurisdiction of the Supreme Court. As
a disciplinary measure for the preservation and vindication of the dignity of this Supreme
Tribunal respondent Atty. Juan T. David should be REPRIMANDED for his precipitate action
of filing a motion for execution as well as Judge Jose H. Tecson for his improvident issuance
of a writ of execution while the case is pending appeal before the Supreme Court, and a
repetition of said acts would be dealt with more severely.
WHEREFORE, PETITIONER R. MARINO CORPUS IS HEREBY DIRECTED TO PAY RESPONDENT
ATTY. JUAN T. DAVID THE SUM OF TWENTY THOUSAND (P20,000.00) PESOS AS ATTORNEY'S
FEES.
RESPONDENT ATTY. JUAN T. DAVID AND JUDGE JOSE H. TECSON OF THE COURT OF FIRST
INSTANCE OF MANILA, BRANCH V, ARE HEREBY DECLARED GUILTY OF CONTEMPT AND ARE
HEREBY REPRIMANDED, WITH A WARNING THAT REPETITION TION OF THE SAME OR
SIMILAR ACTS WILL BE DEALT WITH MORE SEVERELY.
COSTS AGAINST PETITIONER.
SO ORDERED.
G.R. No. 192099, July 08, 2015
PAULINO M. EJERCITO, JESSIE M. EJERCITO AND JOHNNY D.
CHANG, Petitioners, v. ORIENTAL ASSURANCE CORPORATION, Respondent.
DECISION
SERENO, C.J.:
This is a Petition for Review on Certiorari1 filed by Paulino M. Ejercito, Jessie M. Ejercito and
Johnny D. Chang (petitioners) under Rule 45 of the 1997 Rules of Civil Procedure assailing
the Court of Appeals (CA) Decision dated 2 October 20092 and Resolution dated 14 April
20103 in CA-G.R. CV No. 90828. The Special Third Division of the CA reversed and set aside
the Regional Trial Court (RTC) Decision in Civil Case No. 01-
101999:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the present appeal is hereby GRANTED. The Decision
dated February 2, 2007 of the Regional Trial Court of Manila, Branch 36 in Civil Case No. 01-
101999 is hereby SET ASIDE.
A new judgment is hereby entered ordering the defendants-appellees Merissa C. Somes,
Paulino M. Ejercito, Jessie M. Ejercito and Johnny D. Chang jointly and severally liable to pay
plaintiff-appellant Oriental Assurance Corporation the following
sums:chanRoblesvirtualLawlibrary
1. The principal amount of P3,000,000.00 with interest at the rate of 12% per annum from
the time of the filing of the complaint until the same shall have been fully paid;
2. Attorney's fees in the amount of P30,000.00; and
3. Costs of suit.chanroblesvirtuallawlibrary
SO ORDERED.4
The Facts
The facts of the case, as found by the CA, are as follows:ChanRoblesVirtualawlibrary
On 10 May 1999, respondent Oriental Assurance Corporation, through its Executive Vice
President Luz N. Cotoco issued a Surety Bond in favor of FFV Travel & Tours, Inc. (Company).
The bond was intended to guarantee the Company's payment of airline tickets purchased on
credit from participating members of International Air Transport Association (IATA) to the
extent of P3 million.
On the same day, petitioners and Merissa C. Somes (Somes) executed a Deed of Indemnity
in favor of respondent. The Surety Bond was effective for one year from its issuance until 10
May 2000. It was renewed for another year, from 10 May 2000 to 10 May 2001, as shown in
Bond Endorsement No. OAC-2000/0145 dated 17 April 2000. The corresponding renewal
premium amounting to P15,024.54 was paid by the insured corporation under Official
Receipt No. 100262.
FFV Travel & Tours, Inc. has been declared in default for failure to pay its obligations
amounting to P5,484,086.97 and USD 18,760.98 as of 31 July 2000. Consequently, IATA
demanded payment of the bond, and respondent heeded the demand on 28 November
2000 as evidenced by China Bank Check No. 104949. IATA executed a Release of Claim on 29
November 2000 acknowledging payment of the surety bond.
Respondent sent demand letters to petitioners and Somes for reimbursement of the P3
million pursuant to the indemnity agreement. For their failure to reimburse respondent, the
latter filed a collection suit.
The RTC Ruling
After trial, the RTC rendered a Decision dismissing the complaint against petitioners for lack
of merit and pronouncing Somes liable to pay the amount of P3 million and interest per
annum at the rate of 12% of the principal obligation from the date the complaint was filed
up to the date the obligation would have been fully paid.
The RTC found that there was no written agreement to show the intention of petitioners to
renew the Deed of Indemnity. The absence thereof was evidenced by the nonappearance of
any signature on the Renewal Notice, which was not signed by Somes. However, she was
held liable to pay the surety value of the cost of tickets as she had paid the premium for the
renewal of the Surety Bond and used the renewed bond by submitting it to IATA.
The CA Ruling
The CA reversed the finding of the RTC and ruled that petitioners could not escape liability,
as they had authorized respondent to grant any renewals or extensions pursuant to the
indemnity agreement. The Deed of Indemnity contained a stipulation that the signatories
(petitioners) were authorizing the Company (respondent) to grant or consent to the grant of
any extension, continuation, increase, modification, change or alteration, and/or renewal of
the original bond. Petitioners voluntarily signed the agreement and, are educated persons
(Paulino, being a lawyer), so they could not have misunderstood the legal effects of the
undertaking they had signed.
Issues
Petitioners raise the following issues:chanRoblesvirtualLawlibrary
Whether or not the Honorable Court of Appeals erred in ruling that petitioners are liable to
indemnify the respondent under the deed of indemnity considering that petitioners did not
give their consent to be bound thereby beyond the one (1) year effectivity period of the
original surety bond.

Whether or not the Honorable Court of Appeals erred in ruling that petitioners are liable to
pay the respondent attorney's fees considering that petitioners did not breach their
obligation under the deed of indemnity to indemnify the respondent during the one (1) year
effectivity period of the original surety bond.5
The Court's Ruling
We find no merit in the Petition.
The contract of indemnity is the law between the parties.6 It is a cardinal rule in the
interpretation of a contract that if its terms are clear and leave no doubt on the intention of
the contracting parties, the literal meaning of its stipulation shall control.7 The CA aptly
found provisions in the contract that could not exonerate petitioners from their liability.
The Deed of Indemnity contains the following stipulations:ChanRoblesVirtualawlibrary
INDEMNITY: - To indemnify the COMPANY for any damages, payments, advances,
prejudices, loss, costs and expenses of whatever kind and nature, including counsel or
attorney's fees, which the Company may at any time, sustain or incur, as a consequence of
having executed the above-mentioned Bond, its renewals, extensions, modifications or
substitutions and said attorney's fees shall not be less than fifteen (15%) per cent of the
amount claimed by the Company in each action, the same to be due and payable,
irrespective of whether the case is settled judicially or extrajudicially.
xxxx
MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: - The said indemnities will be
paid to the COMPANY as soon as demand is received from the Creditor, or as soon as it
becomes liable to make payment of any sum under the terms of the above-mentioned
Bond, its renewals, extension, modifications or substitutions, whether the said sum or sums
or part thereof, have been actually paid or not. We authorize the COMPANY to accept in any
case and at its entire discretion, from any of us, payment on account of the pending
obligation, and to grant extensions to any of us, to liquidate said obligations, without
necessity of previous knowledge or consent from the obligors.
xxxx
INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY:ChanRoblesVirtualawlibrary
-- Any payment or disbursement made by the COMPANY on account of the above-
mentioned Bond, its renewals, extensions, modifications or substitutions either in the belief
that the Company was obligated to make such payment or in the belief that said payment
was necessary in order to avoid greater losses or obligation for which the company might be
liable by virtue of the terms of the above-mentioned Bond, its renewals, extensions,
modifications or substitutions shall be final and will not be disputed by the undersigned
who jointly and severally bind themselves to indemnify the COMPANY of any and all such
payments as stated in the preceding clauses.
xxx
WAIVER: — The undersigned hereby waive all the rights, privileges, and benefits that they
have or may have under Articles 2077, 2078, 2079, 2080 and 2081 of the Civil Code.
xxx
RENEWALS, ALTERATIONS AND SUBSTITUTIONS: - The undersigned hereby empower and
authorize the Company to grant or consent to the granting of, any extension,
continuation, increase, modifications, change, alteration and/or renewal of the original
bond herein referred to, and to execute or consent to the execution of any substitution for
said bond with the same or different conditions and parties, and the undersigned hereby
hold themselves jointly and severally liable to the Company for the original
bond hereinabove mentioned or for any extension, continuation, increase, modification,
change, alteration, renewal or substitution thereof until the full amount including principal
interests, premiums, costs and other expenses due to the Company thereunder is fully paid
up.8 (Emphasis on the original)
Clearly, as far as respondent is concerned, petitioners have expressly bound themselves to
the contract, which provides for the terms granting authority to the Company to renew the
original bond. The terms of the contract are clear, explicit and unequivocal. Therefore, the
subsequent acts of the Company, through Somes, that led to the renewal of the surety bond
are binding on petitioners as well. relieving them of liability.13chanrobleslaw

The intention of Somes to renew the bond cannot be denied, as she paid the renewal WHEREFORE, premises considered, the Petition is DENIED. The Court of Appeals Decision
premium and even submitted the renewed bond to IATA.9chanrobleslaw dated 2 October 2009 and Resolution dated 14 April 2010 in CA-G.R. CV No. 90828
are AFFIRMED.
The claim of petitioners that they only consented to the one-year validity of the surety bond
must be directed against Somes in a separate action. She allegedly convinced them that the SO ORDERED.c
bond was valid for one year only. The allegation of petitioners is an agreement outside of
the contract. In other words, respondent is not privy to the alleged agreement between
Somes and petitioners. For respondent, there was a valid indemnity agreement executed by
the parties, and contained a proviso that became the basis for the authority to renew the
original bond. G.R. No. 163512 February 28, 2007

With regard to the contention that the Deed of Indemnity is a contract of adhesion, the DAISY B. TIU, Petitioner
Court has consistently held that contracts of adhesion are not invalid per se and that their vs.
binding effects have been upheld on numerous occasions.10 The pretension that petitioners PLATINUM PLANS PHIL., INC., Respondent.
did not consent to the renewal of the bond is belied by the fact that the terms of the
contract which they voluntarily entered into contained a clause granting authority to the DECISION
Company to grant or consent to the renewal of the bond. Having entered into the contract
with full knowledge of its terms and conditions, petitioners are estopped from asserting that QUISUMBING, J.:
they did so under the ignorance of the legal effect of the contract or the undertaking.
For review on certiorari are the Decision1 dated January 20, 2004 of the Court of Appeals in
It is true that on some occasions, the Court has struck down such contract as void when the CA-G.R. CV No. 74972, and its Resolution2 dated May 4, 2004 denying reconsideration. The
weaker party is imposed upon in dealing with the dominant party and is reduced to the Court of Appeals had affirmed the decision3 dated February 28, 2002 of the Regional Trial
alternative of accepting the contract or leaving it, completely deprived of the opportunity to Court (RTC) of Pasig City, Branch 261, in an action for damages, ordering petitioner to pay
bargain on equal footing.11 This reasoning cannot be used in the instant case. One of the respondent ₱100,000 as liquidated damages.
petitioners, Paulino M. Ejercito, is a lawyer who cannot feign ignorance of the legal effect of
his undertaking. Petitioners could have easily inserted a remark in the clause granting The relevant facts are as follows:
authority to the Company to renew the original bond, if the renewal thereof was not their
intention. Respondent Platinum Plans Philippines, Inc. is a domestic corporation engaged in the pre-
need industry. From 1987 to 1989, petitioner Daisy B. Tiu was its Division Marketing
The rule that ignorance of the contents of an instrument does not ordinarily affect the Director.
liability of the one who signs it12 may also be applied to this Indemnity Agreement. And the
mistake of petitioners as to the legal effect of their obligation is ordinarily no reason for
On January 1, 1993, respondent re-hired petitioner as Senior Assistant Vice-President and
Territorial Operations Head in charge of its Hongkong and Asean operations. The parties
executed a contract of employment valid for five years.4
On September 16, 1995, petitioner stopped reporting for work. In November 1995, she
became the Vice-President for Sales of Professional Pension Plans, Inc., a corporation
engaged also in the pre-need industry.
Consequently, respondent sued petitioner for damages before the RTC of Pasig City, Branch
261. Respondent alleged, among others, that petitioner’s employment with Professional
Pension Plans, Inc. violated the non-involvement clause in her contract of employment, to
wit:
8. NON INVOLVEMENT PROVISION – The EMPLOYEE further undertakes that during his/her
engagement with EMPLOYER and in case of separation from the Company, whether
voluntary or for cause, he/she shall not, for the next TWO (2) years thereafter, engage in or
be involved with any corporation, association or entity, whether directly or indirectly,
engaged in the same business or belonging to the same pre-need industry as the
EMPLOYER. Any breach of the foregoing provision shall render the EMPLOYEE liable to the
EMPLOYER in the amount of One Hundred Thousand Pesos (P100,000.00) for and as
liquidated damages.5
Respondent thus prayed for ₱100,000 as compensatory damages; ₱200,000 as moral
damages; ₱100,000 as exemplary damages; and 25% of the total amount due plus ₱1,000
per counsel’s court appearance, as attorney’s fees.
Petitioner countered that the non-involvement clause was unenforceable for being against
public order or public policy: First, the restraint imposed was much greater than what was
necessary to afford respondent a fair and reasonable protection. Petitioner contended that
the transfer to a rival company was an accepted practice in the pre-need industry. Since the
products sold by the companies were more or less the same, there was nothing peculiar or
unique to protect. Second, respondent did not invest in petitioner’s training or
improvement. At the time petitioner was recruited, she already possessed the knowledge
and expertise required in the pre-need industry and respondent benefited tremendously
from it. Third, a strict application of the non-involvement clause would amount to a
deprivation of petitioner’s right to engage in the only work she knew.
In upholding the validity of the non-involvement clause, the trial court ruled that a contract
in restraint of trade is valid provided that there is a limitation upon either time or place. In
the case of the pre-need industry, the trial court found the two-year restriction to be valid
and reasonable. The dispositive portion of the decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant, ordering the latter to pay the following:
1. the amount of One Hundred Thousand Pesos (P100,000.00) for and as damages,
for the breach of the non-involvement provision (Item No. 8) of the contract of
employment;
2. costs of suit.
There being no sufficient evidence presented to sustain the grant of attorney’s fees, the
Court deems it proper not to award any.
SO ORDERED.6
On appeal, the Court of Appeals affirmed the trial court’s ruling. It reasoned that petitioner
entered into the contract on her own will and volition. Thus, she bound herself to fulfill not
only what was expressly stipulated in the contract, but also all its consequences that were
not against good faith, usage, and law. The appellate court also ruled that the stipulation
prohibiting non-employment for two years was valid and enforceable considering the nature
of respondent’s business.
Petitioner moved for reconsideration but was denied. Hence, this appeal by certiorari where
petitioner alleges that the Court of Appeals erred when:
A.
… [IT SUSTAINED] THE VALIDITY OF THE NON-INVOLVEMENT CLAUSE IN PETITIONER’S
CONTRACT CONSIDERING THAT THE PERIOD FIXED THEREIN IS VOID FOR BEING OFFENSIVE
TO PUBLIC POLICY
B.
… [IT SUSTAINED] THE AWARD OF LIQUIDATED DAMAGES CONSIDERING THAT IT BEING IN
THE NATURE OF A PENALTY THE SAME IS EXCESSIVE, INIQUITOUS OR UNCONSCIONABLE7
Plainly stated, the core issue is whether the non-involvement clause is valid.
Petitioner avers that the non-involvement clause is offensive to public policy since the
restraint imposed is much greater than what is necessary to afford respondent a fair and
reasonable protection. She adds that since the products sold in the pre-need industry are
more or less the same, the transfer to a rival company is acceptable. Petitioner also points
out that respondent did not invest in her training or improvement. At the time she joined
respondent, she already had the knowledge and expertise required in the pre-need industry.
Finally, petitioner argues that a strict application of the non-involvement clause would
deprive her of the right to engage in the only work she knows.
Respondent counters that the validity of a non-involvement clause has been sustained by
the Supreme Court in a long line of cases. It contends that the inclusion of the two-year non-
involvement clause in petitioner’s contract of employment was reasonable and needed
since her job gave her access to the company’s confidential marketing strategies.
Respondent adds that the non-involvement clause merely enjoined her from engaging in
pre-need business akin to respondent’s within two years from petitioner’s separation from
respondent. She had not been prohibited from marketing other service plans.
As early as 1916, we already had the occasion to discuss the validity of a non-involvement
clause. In Ferrazzini v. Gsell,8 we said that such clause was unreasonable restraint of trade
and therefore against public policy. In Ferrazzini, the employee was prohibited from
engaging in any business or occupation in the Philippines for a period of five years after the
termination of his employment contract and must first get the written permission of his
employer if he were to do so. The Court ruled that while the stipulation was indeed limited
as to time and space, it was not limited as to trade. Such prohibition, in effect, forces an
employee to leave the Philippines to work should his employer refuse to give a written
permission.
In G. Martini, Ltd. v. Glaiserman,9 we also declared a similar stipulation as void for being an
unreasonable restraint of trade. There, the employee was prohibited from engaging in any
business similar to that of his employer for a period of one year. Since the employee was
employed only in connection with the purchase and export of abaca, among the many
businesses of the employer, the Court considered the restraint too broad since it effectively
prevented the employee from working in any other business similar to his employer even if
his employment was limited only to one of its multifarious business activities.
However, in Del Castillo v. Richmond,10 we upheld a similar stipulation as legal, reasonable,
and not contrary to public policy. In the said case, the employee was restricted from
opening, owning or having any connection with any other drugstore within a radius of four
miles from the employer’s place of business during the time the employer was operating his
drugstore. We said that a contract in restraint of trade is valid provided there is a limitation
upon either time or place and the restraint upon one party is not greater than the
protection the other party requires.
Finally, in Consulta v. Court of Appeals,11 we considered a non-involvement clause in
accordance with Article 130612 of the Civil Code. While the complainant in that case was an
independent agent and not an employee, she was prohibited for one year from engaging
directly or indirectly in activities of other companies that compete with the business of her
principal. We noted therein that the restriction did not prohibit the agent from engaging in
any other business, or from being connected with any other company, for as long as the
business or company did not compete with the principal’s business. Further, the prohibition
applied only for one year after the termination of the agent’s contract and was therefore a
reasonable restriction designed to prevent acts prejudicial to the employer.
Conformably then with the aforementioned pronouncements, a non-involvement clause is
not necessarily void for being in restraint of trade as long as there are reasonable limitations
as to time, trade, and place.
In this case, the non-involvement clause has a time limit: two years from the time
petitioner’s employment with respondent ends. It is also limited as to trade, since it only
prohibits petitioner from engaging in any pre-need business akin to
respondent’s.1awphi1.net
More significantly, since petitioner was the Senior Assistant Vice-President and Territorial
Operations Head in charge of respondent’s Hongkong and Asean operations, she had been
privy to confidential and highly sensitive marketing strategies of respondent’s business. To
allow her to engage in a rival business soon after she leaves would make respondent’s trade
secrets vulnerable especially in a highly competitive marketing environment. In sum, we find
the non-involvement clause not contrary to public welfare and not greater than is necessary
to afford a fair and reasonable protection to respondent.13
In any event, Article 1306 of the Civil Code provides that parties to a contract may establish
such stipulations, clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order, or public policy.
Article 115914 of the same Code also provides that obligations arising from contracts have
the force of law between the contracting parties and should be complied with in good faith.
Courts cannot stipulate for the parties nor amend their agreement where the same does not
contravene law, morals, good customs, public order or public policy, for to do so would be
to alter the real intent of the parties, and would run contrary to the function of the courts to
give force and effect thereto.15 Not being contrary to public policy, the non-involvement
clause, which petitioner and respondent freely agreed upon, has the force of law between
them, and thus, should be complied with in good faith.16
Thus, as held by the trial court and the Court of Appeals, petitioner is bound to pay
respondent ₱100,000 as liquidated damages. While we have equitably reduced liquidated
damages in certain cases,17 we cannot do so in this case, since it appears that even from the
start, petitioner had not shown the least intention to fulfill the non-involvement clause in
good faith.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 20, 2004,
and the Resolution dated May 4, 2004, of the Court of Appeals in CA-G.R. CV No. 74972, are
AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. L-15127 May 30, 1961
EMETERIO CUI, plaintiff-appellant,
vs.
ARELLANO UNIVERSITY, defendant-appellee.
G.A.S. Sipin, Jr., for plaintiff-appellant.
E. Voltaire Garcia for defendant-appellee.
CONCEPCION, J.:
Appeal by plaintiff Emeterio Cui from a decision of the Court of First Instance of Manila,
absolving defendant Arellano University from plaintiff's complaint, with costs against the
plaintiff, and dismissing defendant's counter claim, for insufficiency of proof thereon.
In the language of the decision appealed from:
The essential facts of this case are short and undisputed. As established by the
agreement of facts Exhibits X and by the respective oral and documentary evidence
introduced by the parties, it appears conclusive that plaintiff, before the school year
1948-1949 took up preparatory law course in the defendant University. After
finishing his preparatory law course plaintiff enrolled in the College of Law of the
defendant from the school year 1948-1949. Plaintiff finished his law studies in the
defendant university up to and including the first semester of the fourth year.
During all the school years in which plaintiff was studying law in defendant law
college, Francisco R. Capistrano, brother of the mother of plaintiff, was the dean of
the College of Law and legal counsel of the defendant university. Plaintiff enrolled
for the last semester of his law studies in the defendant university but failed to pay
his tuition fees because his uncle Dean Francisco R. Capistrano having severed his
connection with defendant and having accepted the deanship and chancellorship of
the College of Law of Abad Santos University, plaintiff left the defendant's law
college and enrolled for the last semester of his fourth year law in the college of law
of the Abad Santos University graduating from the college of law of the latter
university. Plaintiff, during all the time he was studying law in defendant university
was awarded scholarship grants, for scholastic merit, so that his semestral tuition
fees were returned to him after the ends of semester and when his scholarship
grants were awarded to him. The whole amount of tuition fees paid by plaintiff to
defendant and refunded to him by the latter from the first semester up to and
including the first semester of his last year in the college of law or the fourth year, is
in total P1,033.87. After graduating in law from Abad Santos University he applied to
take the bar examination. To secure permission to take the bar he needed the
transcripts of his records in defendant Arellano University. Plaintiff petitioned the
latter to issue to him the needed transcripts. The defendant refused until after he
had paid back the P1,033 87 which defendant refunded to him as above stated. As
he could not take the bar examination without those transcripts, plaintiff paid to
defendant the said sum under protest. This is the sum which plaintiff seeks to
recover from defendant in this case.
Before defendant awarded to plaintiff the scholarship grants as above stated, he
was made to sign the following contract covenant and agreement:
"In consideration of the scholarship granted to me by the University, I hereby waive
my right to transfer to another school without having refunded to the University
(defendant) the equivalent of my scholarship cash.
(Sgd.) Emeterio Cui".
It is admitted that, on August 16, 1949, the Director of Private Schools issued Memorandum
No. 38, series of 1949, on the subject of "Scholarship," addressed to "All heads of private
schools, colleges and universities," reading:
1. School catalogs and prospectuses submitted to this, Bureau show that some
schools offer full or partial scholarships to deserving students — for excellence in
scholarship or for leadership in extra-curricular activities. Such inducements to poor
but gifted students should be encouraged. But to stipulate the condition that such
scholarships are good only if the students concerned continue in the same school
nullifies the principle of merit in the award of these scholarships.
2. When students are given full or partial scholarships, it is understood that such
scholarships are merited and earned. The amount in tuition and other fees
corresponding to these scholarships should not be subsequently charged to the
recipient students when they decide to quit school or to transfer to another
institution. Scholarships should not be offered merely to attract and keep students
in a school.
3. Several complaints have actually been received from students who have enjoyed
scholarships, full or partial, to the effect that they could not transfer to other
schools since their credentials would not be released unless they would pay the fees
corresponding to the period of the scholarships. Where the Bureau believes that the
right of the student to transfer is being denied on this ground, it reserves the right
to authorize such transfer.
that defendant herein received a copy of this memorandum; that plaintiff asked the Bureau
of Private Schools to pass upon the issue on his right to secure the transcript of his record in
defendant University, without being required to refund the sum of P1,033.87; that the
Bureau of Private Schools upheld the position taken by the plaintiff and so advised the
defendant; and that, this notwithstanding, the latter refused to issue said transcript of
records, unless said refund were made, and even recommended to said Bureau that it issue
a written order directing the defendant to release said transcript of record, "so that the case
may be presented to the court for judicial action." As above stated, plaintiff was,
accordingly, constrained to pay, and did pay under protest, said sum of P1,033.87, in order
that he could take the bar examination in 1953. Subsequently, he brought this action for the
recovery of said amount, aside from P2,000 as moral damages, P500 as exemplary damages,
P2,000 as attorney's fees, and P500 as expenses of litigation.
In its answer, defendant reiterated the stand it took, vis-a-vis the Bureau of Private Schools,
namely, that the provisions of its contract with plaintiff are valid and binding and that the
memorandum above-referred to is null and void. It, likewise, set up a counterclaim for
P10,000.00 as damages, and P3,000 as attorney's fees.
The issue in this case is whether the above quoted provision of the contract between
plaintiff and the defendant, whereby the former waived his right to transfer to another
school without refunding to the latter the equivalent of his scholarships in cash, is valid or
not. The lower court resolved this question in the affirmative, upon the ground that the
aforementioned memorandum of the Director of Private Schools is not a law; that the
provisions thereof are advisory, not mandatory in nature; and that, although the contractual
provision "may be unethical, yet it was more unethical for plaintiff to quit studying with the
defendant without good reasons and simply because he wanted to follow the example of his
uncle." Moreover, defendant maintains in its brief that the aforementioned memorandum
of the Director of Private Schools is null and void because said officer had no authority to
issue it, and because it had been neither approved by the corresponding department head
nor published in the official gazette.
We do not deem it necessary or advisable to consider as the lower court did, the question
whether plaintiff had sufficient reasons or not to transfer from defendant University to the
Abad Santos University. The nature of the issue before us, and its far reaching effects,
transcend personal equations and demand a determination of the case from a high
impersonal plane. Neither do we deem it essential to pass upon the validity of said
Memorandum No. 38, for, regardless of the same, we are of the opinion that the stipulation
in question is contrary to public policy and, hence, null and void. The aforesaid
memorandum merely incorporates a sound principle of public policy. As the Director of
Private Schools correctly pointed, out in his letter, Exhibit B, to the defendant,
There is one more point that merits refutation and that is whether or not the
contract entered into between Cui and Arellano University on September 10, 1951
was void as against public policy. In the case of Zeigel vs. Illinois Trust and Savings
Bank, 245 Ill. 180, 19 Ann. Case 127, the court said: 'In determining a public policy of
the state, courts are limited to a consideration of the Constitution, the judicial
decisions, the statutes, and the practice of government officers.' It might take more
than a government bureau or office to lay down or establish a public policy, as
alleged in your communication, but courts consider the practices of government
officials as one of the four factors in determining a public policy of the state. It has
been consistently held in America that under the principles relating to the doctrine
of public policy, as applied to the law of contracts, courts of justice will not
recognize or uphold a transaction which its object, operation, or tendency is
calculated to be prejudicial to the public welfare, to sound morality or to civic
honesty (Ritter vs. Mutual Life Ins. Co., 169 U.S. 139; Heding vs. Gallaghere 64 L.R.A.
811; Veazy vs. Allen, 173 N.Y. 359). If Arellano University understood clearly the real
essence of scholarships and the motives which prompted this office to issue
Memorandum No. 38, s. 1949, it should have not entered into a contract of waiver
with Cui on September 10, 1951, which is a direct violation of our Memorandum
and an open challenge to the authority of the Director of Private Schools because
the contract was repugnant to sound morality and civic honesty. And finally, in
Gabriel vs. Monte de Piedad, Off. Gazette Supp. Dec. 6, 1941, p. 67 we read: 'In
order to declare a contract void as against public policy, a court must find that the
contract as to consideration or the thing to be done, contravenes some established
interest of society, or is inconsistent with sound policy and good moralsor tends
clearly to undermine the security of individual rights. The policy enunciated in
Memorandum No. 38, s. 1949 is sound policy. Scholarship are awarded in
recognition of merit not to keep outstanding students in school to bolster its
prestige. In the understanding of that university scholarships award is a business
scheme designed to increase the business potential of an education institution. Thus
conceived it is not only inconsistent with sound policy but also good morals. But
what is morals? Manresa has this definition. It is good customs; those generally
accepted principles of morality which have received some kind of social and
practical confirmation. The practice of awarding scholarships to attract students and
keep them in school is not good customs nor has it received some kind of social and
practical confirmation except in some private institutions as in Arellano University.
The University of the Philippines which implements Section 5 of Article XIV of the
 Constitution with reference to the giving of free scholarships to gifted children, does
not require scholars to reimburse the corresponding value of the scholarships if they
transfer to other schools. So also with the leading colleges and universities of the
United States after which our educational practices or policies are patterned. In
these institutions scholarships are granted not to attract and to keep brilliant
students in school for their propaganda mine but to reward merit or help gifted
students in whom society has an established interest or a first lien. (Emphasis
supplied.)
WHEREFORE, the decision appealed from is hereby reversed and another one shall be
entered sentencing the defendant to pay to the plaintiff the sum of P1,033.87, with interest
thereon at the legal rate from September 1, 1954, date of the institution of this case, as well
as the costs, and dismissing defendant's counterclaim. It is so ordered.
G.R. No. L-13403 March 23, 1960
RAMON E. SAURA, plaintiff-appellant,
vs.
ESTELA P. SINDICO, defendant-appellee.
Anacleto Magno for appellant.
Espeque and Jalandoni for appellee.
REYES, J. B. L., J.:
Appeal on issues of law from an order of the Court of First Instance of Pangasinan dismissing
plaintiff's complaint for damages.
From the records it appears that Ramon E. Saura and Estela P. Sindico were contesting for
nomination as the official candidate of the Nacionalista Party in the fourth district of
Pangasinan in the congressional elections of November 12, 1957. On August 23, 1957, the
parties entered into a written agreement bearing the same date, containing among other
matters stated therein, a pledge that —
Each aspirant shall respect the result of the aforesaid convention, i.e., no one of us
shall either run as a rebel or independent candidate after losing in said convention.
In the provincial convention held by the Nacionalista Party on August 31, 1957, Saura was
elected and proclaimed the Party's official congressional candidate for the aforesaid district
of Pangasinan. Nonetheless, Sindico, in disregard of the covenant, filed, on September 6,
1957, her certificate of candidacy for the same office with the Commission on Elections, and
she openly and actively campaigned for her election. Wherefore, on October 5, 1957,
plaintiff Saura commenced this suit for the recovery of damages. Upon motion of the
defendant, the lower court, in its order of November 19, 1957, dismissed the complaint on
the basis that the agreement sued upon is null and void, in tat (1) the subject matter of the
contract, being a public office, is not within the commerce of man; and (2) the "pledge" was
in curtailment of the free exercise of elective franchise and therefore against public policy.
Hence, this appeal.
We agree with the lower court in adjudging the contract or agreement in question a nullity.
Among those that may not be the subject matter (object) of contracts are certain rights of
individuals, which the law and public policy have deemed wise to exclude from the
commerce of man. Among them are the political rights conferred upon citizens, including,
but not limited to, once's right to vote, the right to present one's candidacy to the people
and to be voted to public office, provided, however, that all the qualifications prescribed by
law obtain. Such rights may not, therefore, be bargained away curtailed with impunity, for
they are conferred not for individual or private benefit or advantage but for the public good
and interest.
Constitutional and statutory provision fix the qualifications of persons who may be eligible
for certain elective public offices. Said requirements may neither be enlarged nor reduced
by mere agreements between private parties. A voter possessing all the qualifications
required to fill an office may, by himself or through a political party or group, present his
candidacy without further limitations than those provided by law.
 Every voter has a right to be a candidate for public office if he possesses the consideration for such a withdrawal, said agreement or consideration should be held valid
qualifications required to fill the office. It does not necessarily follow that he can be or given effect.
the candidate of a particular political party. The statute provides when and how one
may be a candidate of a political party. If he cannot fill the requirement so as to be We find it unnecessary to discuss the other points raised by the parties.
the candidates of the political party of his choice, he may still be a candidate at the
general election by petition. The right of the voter to vote at the general election for Wherefore, the order of dismissal appealed from is hereby affirmed. No pronouncement as
whom he pleases cannot be limited. (Roberts vs. Cleveland, Secretary of State of to costs.
State of New Mexico, 48 NM 226, 149 P (2d) 120, 153 A.L.R. 635, 637-638)
(Emphasis supplied)

In common law, certain agreements in consideration of the withdrawal of candidates for

office have invariably been condemned by the courts as being against public policy, be it a
withdrawal from the race for nomination or, after nomination, from the race for election.
(See notes in 37 L. R. A. (N.S.) 289 and cases cited therein; 18 Am. Jur. Sec. 352, pp. 399-400)
In the case at hand, plaintiff complains on account of defendant's alleged violation of the
"pledge" in question by filing her own certificate o candidacy for a seat in the Congress of
the Philippines and in openly and actively campaigning for her election. In the face of the
preceding considerations, we certainly cannot entertain plaintiff's action, which would
result in limiting the choice of the electors to only those persons selected by a small group
or by party boses.
G.R. No. L-65425 November 5, 1987
IRENEO LEAL, JOSE LEAL, CATALINA LEAL, BERNABELA LEAL, VICENTE LEAL EUIOGIA LEAL
PATERNO RAMOS, MACARIO DEL ROSARIO, MARGARITA ALBERTO, VICTORIA TORRES,
JUSTINA MANUEL, JULIAN MANUEL, MELANIA SANTOS, CLEMENTE SAMARIO, MARIKINA
VALLEY, INC., MIGUELA MENDOZA, and REGISTER OF DEEDS OF RIZAL, petitioners,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT (4th Civil Cases Division), and
VICENTE SANTIAGO (Substituted by SALUD M. SANTIAGO), respondents.

The case of Pendleton vs. Pace, 9 S.W. (2nd) 437, cited by the appellant, is clearly
inapplicable. The court there only sanctioned the validity of an agreement by the opposing
candidates for nomination setting aside and re-submitting the nomination for another SARMIENTO, J.:
primary election on account of the protest or contest filed by the losing candidate in the
first primary election. To abandon the contest proceedings, the candidates for nomination In its resolution dated September 27, 1983, the respondent Intermediate Appellate
agreed to submit again their nomination to the electors in the subsequent primary. Court, 1 speaking through Justice Porfirio V, Sison, ordered, in part, the petitioners to accept
the sum of P5,600.00 from the private respondent as repurchase price of the lots described
Appellant likewise cites and quotes a portion of our ruling in Monsale vs. Nico, 83 Phil., 758; in the "Compraventa" and, thereafter, to execute a Deed of Repurchase to effect transfer
46 Off. Gaz., 210, to the effect that it is not incompetent or a candidate to withdraw or over ownership over the same properties to the private respondent.
annul his certificate of candidacy. This is not in point, for while we stated there that he may
do so, there being no legal prohibition against such a voluntary withdrawal, it does not
follow, nor did we imply anywhere in the decision, that in case there is any agreement or
This ruling was a complete reversal of the earlier decision, 2 dated June 28, 1.978, penned by
Justice Paras, of the Court of Appeals, in the same case, affirming the trial court's dismissal
of the private respondent's complaint.
The petitioners, feeling aggrieved and astonished by the complete turnaround of the
respondent court, come to Us with this petition for review by certiorari.
The antecedent facts are undisputed.
This case brings us back almost half a century ago, on March 21, 1941, when a document
entitled "Compraventa," written entirely in the Spanish language, involving three parcels of
land, was executed by the private respondent's predecessors-in-interest, Vicente Santiago
and his brother, Luis Santiago, in favor of Cirilio Leal the deceased father of some of the
petitioners, Pursuant to this "Compraventa," the title over the three parcels of land in the
name of the vendors was cancelled and a new one was issued in the name of Cirilo Leal who
immediately took possession and exercised ownership over the said lands. When Cirilo died
on December 10, 1959, the subject lands were inherited by his six children, who are among
the petitioners, and who caused the consolidation and subdivision of the properties among
themselves.
Between the years 1960 and 1965, the properties were either mortgaged or leased by the
petitioners-children of Cirilo Leal — to their co-petitioners.
Sometime before the agricultural year 1966-1967, Vicente Santiago approached the
petitioners and offered re- repurchase the subject properties. Petitioners, however, refused
the offer. Consequently, Vicente Santiago instituted a complaint for specific performance
before the then Court of First Instance of Quezon City on August 2, 1967.
All the trial, the court a quo rendered its decision,-dismissing the complaint on the ground
that the same was still premature considering that there was, as yet, no sale nor any
alienation equivalent to a sale. Not satisfied with this decision, the private respondent
appealed to the Court of Appeals and the latter, acting through the Fourth Division and with
Justice Edgardo Paras as ponente affirmed the decision of the court a quo.
The petitioners seasonably filed a motion to amend the dispositive portion of the decision
so as to include an order for the cancellation of the annotations at the back of the Transfer
certificates of Title issued in their favor. The private respondent,-on the other hand, filed a-
timely motion for reconsideration of the above decision and an opposition to petitioners'
motion to amend. These incidents were not resolved until then Court of Appeals was
abolished and in lieu of which the Intermideate Appellate Court was established In view of
the said reorganization, case was reassigned to the Fourth Civil in this cases Division.
Resolving the abovestated motion for reconsideration, the respondent court, in a resolution
penned by Justice Sison and promulgated on September 27, 1983, ruled, as follows:
WHEREFORE, Our decision of June 28, 1978 is hereby reversed and set aside
and another one is rendered ordering: (1) defendants-appellees surnamed
Leal to accept the sum of P5,600.00 from plaintiff-appellant (substituted by
Salud M. Santiago) as repurchase price of the lots described in the
"Compraventa" of March 21, 1941, and thereafter to execute a deed of
repurchase sufficient in law to transfer ownership of the properties to
appellant Salud M. Santiago, the same to be done within five (5) days from
payment; (2) ordering the same defendants Leals and defendant Clemente
Samario to indemnify appellant in the sum of P3,087.50 as rental for the
year 1967-1968 and the same amount every year thereafter; (3) ordering an
the defendants jointly and severally to pay the sum of Pl,500.00 as
attorney's fees and other expenses of litigation; and (4) ordering defendant
Register of Deeds of Rizal to cancel Transfer Certificate of Title No. 42535 in
the names of Vicente Santiago and Luis Santiago upon presentation of the
deed of sale herein ordered to be executed by the appellees in favor of
Salud M. Santiago and to issue thereof another Transfer Certificate of Title
in the name alone of Salud M. Santiago. No costs here and in the courts (sic)
below.
SO ORDERED.
Verily, the well-spring whence the present controversy arose is the abovementioned
"Compraventa," more particularly paragraph (b) thereof, to wit:
 xxx xxx xxx
(b) En caso de venta, no podran vender a otros dichos tres lotes de terreno
sino al aqui vendedor Vicente Santiago, o los herederos o sucesores de este
por el niismo precio de CINCO MIL SEISCIENTOS PESOS (P5,600.00) siempre
y cuando estos ultimos pueden hacer la compra. 3
xxx xxx xxx
which is now the subject of varying and conflicting interpretations.
xxx xxx xxx
It is admitted by both parties that the phrase "they shall not sell to others these three lots
but only to the seller Vicente Santiago or to his heirs or successors" is an express prohibition
against the sale of the lots described in the "Compraventa" to third persons or strangers to
the contract. However, while private respondent naturally lauds the resolution of Justice
Sison, which sustains the validity of this prohibition, the petitioners, on the other hand,
endorse the decision penned by Justice Paras, which states, in part:
xxx xxx xxx
Finally, there is grave doubt re the validity of the ostensible resolutory
condition here, namely, the prohibition to sell the lots to persons other than
the vendor (appellant); uncertainly, a prohibition to alienate should not
exceed at most a period of twenty years, otherwise there would be
subversion of public policy, which naturally frowns on unwarranted
restrictions on the right of ownership. 4
xxx xxx xxx
We agree with the Paras ponencia.
Contracts are generally binding between the parties, their assigns and heirs; however, under
Art. 1255 of the Civil Code of Spain, which is applicable in this instance, pacts, clauses, and
conditions which are contrary to public order are null and void, thus, without any binding
effect.
Parenthetically, the equivalent provision in the Civil Code of the Philippines is that of Art.
1306, which states: "That 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. Public order signifies the public weal — public
policy. 5 Essentially, therefore, public order and public policy mean one and the same thing.
Public policy is simply the English equivalent of "order publico" in Art. 1255 of the Civil Code
of Spain. 6
One such condition which is contrary to public policy is the present prohibition to self to
third parties, because the same virtually amounts to a perpetual restriction to the right of
ownership, specifically the owner's right to freely dispose of his properties. This, we hold
that any such prohibition, indefinite and stated as to time, so much so that it shall continue
to be applicable even beyond the lifetime of the original parties to the contract, is, without
doubt, a nullity. In the light of this pronouncement, we grant the petitioners' prayer for the
cancellation of the annotations of this prohibition at the back of their Transfer Certificates
'Title.
It will be noted, moreover, that the petitioners have never sold, or even attempted to sell,
the properties subject of the "Compraventa. "
We now come to what we believe is the very issue in this case which is, whether or not
under the aforequoted paragraph (b) of the "Compraventa" a right of repurchase in favor of
the private respondent exist.
The ruling of the Fourth Division (Justice Paras) is that the said stipulation does not grant a
right to repurchase. Contrarily, the resolution of the Fourth Civil Cases Division (Justice P. V.
Sison) interpreted the same provision as granting the right to repurchase subject to a
condition precedent.
Thus, the assailed Resolution, reversing the earlier decision of the same respondent court,
ruled
xxx xxx xxx
The all-importartant phrase "en caso de venta," must of necessity refer to
the sale of the properties either by Cirilo or his heirs to the Santiago
brothers themselves or to their heirs, including appellants Vicente Santiago
including appellants Vicente Santiago and Salud M Santiago, for the same
sum of P5,600.00, "siempre y cuando estos ultimos pueden hacer la
compra" (when the latter shall be able to buy it).
xxx xxx xxx
... We repeat, The words envision the situation contemplated by the
contracting parties themselves, the resale of the lots to their owners, and
NOT to a sale of the lots to third parties or strangers to the contracts. ... 7
xxx xxx xxx
The law provides that for conventional redemption to take place, the vendor should reserve,
in no uncertain terms, the right to repurchase the thing sold.8 Thus, the right to redeem
must be expressly stipulated in the contract of sale in order that it may have legal existence.
In the case before us, we cannot and any express or implied grant of a right to repurchase,
nor can we infer, from any word or words in the questioned paragraph, the existence of any
such right. The interpretation in the resolution (Justice Sison) is rather strained. The phrase
"in case case" of should be construed to mean "should the buyers wish to sell which is the
plain and simple import of the words, and not "the buyers should sell," which is clearly a
contorted construction of the same phrase. The resort to Article 1373 of the Civil Code of
the Philippines is erroneous. The subject phrase is patent and unambiguous, hence, it must
not be given another interpretation
But even assuming that such a right of repurchase is granted under the "Compraventa," the
petitioner correctly asserts that the same has already prescribed. Under Art. 1508 of the
Civil Code of Spain (Art,. 1606 of the Civil Code of the Philippines), the right to redeem or
repurchase, in the absence of an express agreement as to time, shall last four years from the
date of the contract. In this case then, the right to repurchase, if it was at four guaranteed
under in the "Compraventa," should have been exercise within four years from March 21,
1941 (indubitably the date of execution of the contract), or at the latest in 1945.
In the respondent court's resolution, it is further ruled that the right to repurchase was
given birth by the condition precedent provided for in the phrase "siempre y cuando estos
ultimos pueden hacer la compra" (when the buyer has money to buy). In other words, it is
the respondent court's contention that the right may be exercised only when the buyer has
money to buy. If this were so, the second paragraph of Article 1508 would apply — there is
agreement as to the time, although it is indefinite, therefore, the right should be exercised
within ten years, because the law does not favor suspended ownership. Since the alleged
right to repurchase was attempted to be exercised by Vicente Santiago only in 1966, or 25
years from the date of the contract, the said right has undoubtedly expired.
WHEREFORE, in view of the foregoing, the Resolution dated September 27, 1983, of the
respondent court is SET ASIDE and the Decision promulgated on June 28, 1978 is hereby
REINSTATED. The annotations of the prohibition to sell at the back of TCT Nos. 138837,
138838, 138839, 138840, 138841, and 138842 are hereby ordered CANCELLED. Costs
against the private respondent.
SO ORDERED.
G.R. No. L-46591 July 28, 1987
BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner,
vs.
HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXI
and FLORANTE DEL VALLE, respondents.
MELENCIO-HERRERA, J.:
This is a Petition to review on certiorari the Decision of respondent Court, the dispositive
portion of which decrees:
WHEREFORE, the Court finds that the enforcement of the escalation clause
retroactively before the lapse of the 15-year period stated in the promissory note is
contrary to Sec. 3 of Presidential Decree No. 116 and Sec. 109 of Republic Act No.
265, and hereby declares null and void the said escalation clause. The respondent
Banco Filipino Savings and Mortgage Bank is hereby ordered to desist from
enforcing the increased rate of interest on petitioner's loan.
SO ORDERED.
The facts are not in dispute:
On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan secured
by a real estate mortgage (the LOAN, for short) from petitioner BANCO FILIPINO 1 in the sum
of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be amortized
within fifteen (15) years at twelve (12%) per cent interest annually. Hence, the LOAN still
had more than 730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was
issued by the Central Bank.
Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as
follows:
I/We hereby authorize Banco Filipino to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event law should
be enacted increasing the lawful rates of interest that may be charged on this
particular kind of loan.
The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2,
1976, the pertinent portion of which reads:
3. The maximum rate of interest, including commissions, premiums, fees and other
charges on loans with maturity of more than seven hundred thirty (730) days, by
banking institutions, including thrift banks and rural banks, or by financial
intermediaries authorized to engage in quasi-banking functions shall be nineteen
percent (19%) per annum.
xxx xxx xxx
7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof
shall continue to be governed by the Usury Law, as amended."
CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by
Presidential Decree No. 116 (Amending Further Certain Sections of the Usury Law)
promulgated on January 29, 1973, the applicable section of which provides:
Sec. 2. The same Act is hereby amended by adding the following section
immediately after section one thereof, which reads as follows:
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate
or rates of interest for the loan or renewal thereof or the forbearance of any money,
goods or credits, and to change such rate or rates whenever warranted by prevailing
economic and social conditions: Provided, that such changes shall not be made
oftener than once every twelve months.
The same grant of authority appears in P.D. No. 858, promulgated on December 31, 1975,
except that the limitation on the frequency of changes was eliminated.
On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on
June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum
effective on March 1, 1976.
On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a letter to the
BORROWER as follows:
September 24, 1976
Mr. Florante del Valle
14 Palanca Street
B.F. Homes, Paranaque
Rizal
Dear Mr. del Valle:
This refers to your letter dated August 28, 1976 addressed to the Governor, Central Bank of
the Philippines, seeking clarification and our official stand on Banco Filipino's recent decision
to raise interest rates on lots bought on installment from 12% to 17% per annum.
A verification made by our Examiner of the copy of your Promissory Note on file with Banco
Filipino showed that the following escalation clause with your signature is stamped on the
Promissory Note:
I /We hereby authorize Banco Filipino to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event a law
should be enacted increasing the lawful rates of interest that may be charged on
this particular kind of loan.
In this connection, please be advised that the Monetary Board, in its Resolution No. 1155
dated June 11, 1976, adopted the following guidelines to govern interest rate adjustments
by banks and non-banks performing quasi-banking functions on loans already existing as of
January 3, 1976, in the light of Central Bank Circulars Nos. 492-498:
l. Only banks and non-bank financial intermediaries performing quasi-banking
functions may increase interest rates on loans already existings of January 2, 1976,
provided that:
a. The pertinent loan contracts/documents contain escalation clauses
expressly authorizing lending bank or non-bank performing quasi-banking
functions to increase the rate of interest stipulated in the contract, in the
event that any law or Central Bank regulation is promulgated increasing the
maximum interest rate for loans; and
b. Said loans were directly granted by them and the remaining maturities
thereof were more than 730 days as of January 2, 1976; and
2. The increase in the rate of interest can be effective only as of January 2, 1976 or
on a later date.
The foregoing guidelines, however, shall not be understood as precluding affected parties
from questioning before a competent court of justice the legality or validity of such
escalation clauses.
We trust the above guidelines would help you resolve your problems regarding additional
interest charges of Banco Filipino.
Very truly yours,
(Sgd.) MERCEDES C. PAREDES
Director
Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of
the promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory
Relief" with respondent Court, praying that the Escalation Clause be declared null and void
and that BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest
on the BORROWER's real estate loan.
For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the
BORROWER authorized it to increase the interest rate once a law was passed increasing the
rate of interest and that its authority to increase was provided for by CIRCULAR No. 494.
In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO
FILIPINO to desist from enforcing the increased rate of interest on the BORROWER's loan. It
reasoned out that P.D. No. 116 does not expressly grant the Central Bank authority to
maximize interest rates with retroactive effect and that BANCO FILIPINO cannot legally
impose a higher rate of interest before the expiration of the 15-year period in which the
loan is to be paid other than the 12% per annum in force at the time of the execution of the
loan.
It is from that Decision in favor of the BORROWER that BANCO FILIPINO has come to this
instance on review by Certiorari. We gave due course to the Petition, the question being one
of law.
On February 24, 1983, the parties represented by their respective counsel, not only moved
to withdraw the appeal on the ground that it had become moot and academic "because of
recent developments in the rules and regulations of the Central Bank," but also prayed that
"the decision rendered in the Court of First Instance be therefore vacated and declared of
no force and effect as if the case was never filed," since the parties would like to end this
matter once and for all."
However, "considering the subject matter of the controversy in which many persons
similarly situated are interested and because of the need for a definite ruling on the
question," the Court, in its Resolution of February 24, 1983, impleaded the Central Bank and
required it to submit its Comment, and encouraged homeowners similarly situated as the
BORROWER to intervene in the proceedings.
At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage homeowner at B.F.
Resort Subdivision, was present and manifested that he was in a similar situation as the
BORROWER. Since then, he has written several letters to the Court, pleading for early
resolution of the case. The Court allowed the intervention of Lolita Perono2and issued a
temporary restraining order enjoining the Regional Trial Court (Pasay City Branch) in the
case entitled "Banco Filipino Savings and Mortgage Bank vs. Lolita Perono" from issuing a
writ of possession over her mortgaged property. Also snowed to intervene were Enrique
Tabalon, Jose Llopis, et als., who had obtained loans with Identical escalation clauses from
Apex Mortgage and Loans Corporation, apparently an affiliate of BANCO FILIPINO, Upon
motion of Jose Llopis, a Temporary Restraining Order was likewise issued enjoining the
foreclosure of his real estate mortgage by BANCO FILIPINO.
The Court made it explicit, however, that intervention was allowed only for the purpose of
"joining in the discussion of the legal issue involved in this proceedings, to wit, the validity of
the so-called "escalation clause," or its applicability to existing contracts of loan."
The Central Bank has submitted its Comment and Supplemental Comment and like BANCO
FILIPINO, has taken the position that the issuance of its Circulars is a valid exercise of its
authority to scribe maximum rates of interest and that, based on general principles of
contract, the Escalation Clause is a valid provision in the loan agreement provided that "(1)
the increased rate imposed or charged by petitioner does not exceed the ceiling fixed by law
or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of
the law or regulation authorizing such an increase; and (3) the remaining maturities of the
loans are more than 730 days as of the effectivity of the law or regulation authorizing such
an increase. However, with respect to loan agreements entered into,on or after March 17,
1980, such agreement, in order to be valid, must also include a de-escalation clause as
required by Presidential Decree No. 1684."3
The substantial question in this case is not really whether the Escalation Clause is a valid or
void stipulation. There should be no question that the clause is valid.
Some contracts contain what is known as an "escalator clause," which is defined as
one in which the contract fixes a base price but contains a provision that in the
event of specified cost increases, the seller or contractor may raise the price up to a
fixed percentage of the base. Attacks on such a clause have usually been based on
the claim that, because of the open price-provision, the contract was too indefinite
to be enforceable and did not evidence an actual meeting of the minds of the
parties, or that the arrangement left the price to be determined arbitrarily by one
party so that the contract lacked mutuality. In most instances, however, these
attacks have been unsuccessful.4
The Court further finds as a matter of law that the cost of living index adjustment, or
escalator clause, is not substantively unconscionable.
 Cost of living index adjustment clauses are widely used in commercial contracts in
an effort to maintain fiscal stability and to retain "real dollar" value to the price
terms of long term contracts. The provision is a common one, and has been
universally upheld and enforced. Indeed, the Federal government has recognized
the efficacy of escalator clauses in tying Social Security benefits to the cost of living
index, 42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of
the major labor unions are other examples. That inflation, expected or otherwise,
will cause a particular bargain to be more costly in terms of total dollars than
originally contemplated can be of little solace to the plaintiffs.5
What should be resolved is whether BANCO FILIPINO can increase the interest rate on the
LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion
that it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino to correspondingly increase
the interest rate stipulated in this contract without advance notice to me/us in the
event
a law
increasing
the lawful rates of interest that may be charged
on this particular
kind of loan. (Paragraphing and emphasis supplied)
It is clear from the stipulation between the parties that the interest rate may be increased
"in the event a law should be enacted increasing the lawful rate of interest that may be
charged on this particular kind of loan." " The Escalation Clause was dependent on an
increase of rate made by "law" alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly
issued is not strictly a statute or a law, it has, however, the force and effect of law."6 (Italics
supplied). "An administrative regulation adopted pursuant to law has the force and effect of
law."7 "That administrative rules and regulations have the force of law can no longer be
questioned. "8
The distinction between a law and an administrative regulation is recognized in the
Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of
September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject
to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing
the increase "in the event that any law or Central Bank regulation is promulgated increasing
the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank
regulation is not within the term "any law."
The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980,
adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a
loan could stipulate that the rate of interest agreed upon may be increased in the event that
the applicable maximum rate of interest is increased "by law or by the Monetary Board." To
quote:
Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money,
goods or credits may stipulate that the rate of interest agreed upon may be
increased in the event that the applicable maximum rate of interest
is increased by law or by the Monetary Board:
Provided, That such stipulation shall be valid only if there is also a stipulation in the
agreement that the rate of interest agreed upon shall be reduced in the event that
the applicable maximum rate of interest is reduced by law or by the Monetary
Board;
 Provided, further, That the adjustment in the rate of interest agreed upon shall take
effect on or after the effectivity of the increase or decrease in the maximum rate of
interest. (Paragraphing and emphasis supplied).
It is now clear that from March 17, 1980, escalation clauses to be valid should specifically
provide: (1) that there can be an increase in interest if increased by law or by the Monetary
Board; and (2) in order for such stipulation to be valid, it must include a provision for
reduction of the stipulated interest "in the event that the applicable maximum rate of
interest is reduced by law or by the Monetary Board."
While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation
clause in the Escalation Clause in question provides another reason why it should not be
given effect because of its one-sidedness in favor of the lender.
2. The Escalation Clause specifically stipulated that the increase in interest rate was to be
"on this particular kind of loan, " meaning one secured by registered real estate mortgage.
Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals continue to be
governed by the Usury Law, as amended." So do Circular No. 586 of the Central Bank, which
superseded Circular No. 494, and Circular No. 705, which superseded Circular No. 586. The
Usury Law, as amended by Acts Nos. 3291, 3998 and 4070, became effective on May 1,
1916. It provided for the maximum yearly interest of 12% for loans secured by a mortgage
upon registered real estate (Section 2), and a maximum annual interest of 14% for loans
covered by security other than mortgage upon registered real estate (Section 3). Significant
is the separate treatment of registered real estate loans and other loans not secured by
mortgage upon registered real estate. It appears clear in the Usury Law that the policy is to
make interest rates for loans guaranteed by registered real estate lower than those for loans
guaranteed by properties other than registered realty.
On June 15, 1948, Congress approved Republic Act No. 265, creating the Central Bank, and
establishing the Monetary Board. That law provides that "the Monetary Board may, within
the limits prescribed in the Usury law,9 fix the maximum rates of interest which banks may
charge for different types of loans and for any other credit operations, ... " and that "any
modification in the maximum interest rates permitted for the borrowing or lending
operations of the banks shall apply only to future operations and not to those made prior to
the date on which the modification becomes effective" (Section 109).1avvphi1
On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The Decree
gave authority to the Monetary Board "to prescribe maximum rates of interest for the loan
or renewal thereof or the forbearance of any money goods or credits, and to change such
rate or rates whenever warranted by prevailing economic and social conditions. In one
section,10 the Monetary Board could prescribe the maximum rate of interest for loans
secured by mortgage upon registered real estate or by any document conveying such real
estate or an interest therein and, in another separate section,11 the Monetary Board was
also granted authority to fix the maximum interest rate for loans secured by types of
security other than registered real property. The two sections read:
SEC. 3. Section two of the same Act is hereby amended to read as follows:
SEC. 2. No person or corporation shall directly or indirectly take or receive in
money or other property, real or personal, or choses in action, a higher rate
of interest or greater sum or value, including commissions, premiums, fines
and penalties, for the loan or renewal thereof or forbearance of money,
goods, or credits, where such loan or renewal or forbearance is secured in
whole or in part by a mortgage upon real estate the title to which is duly
registered or by any document conveying such real estate or an interest
therein, than twelve per centum per annum or the maximum rate
prescribed by the Monetary Board and in force at the time the loan or
renewal thereof or forbearance is granted: Provided, That the rate of
interest under this section or the maximum rate of interest that may be
prescribed by the Monetary Board under this section may likewise apply to
loans secured by other types of security as may be specified by the
Monetary Board.
SEC. 4. Section three of the same Act is hereby amended to read as follows:
SEC. 3. No person or corporation shall directly or indirectly demand, take,
receive, or agree to charge in money or other property, real or personal, a
 higher rate or greater sum or value for the loan or forbearance of money,
goods, or credits, where such loan or forbearance is not secured as provided
in Section two hereof, than fourteen per centum per annum or the
maximum rate or rates prescribed by the Monetary Board and in force at
the time the loan or forbearance is granted.
Apparent then is that the separate treatment for the two classes of loans was maintained.
Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to
unlike Circular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1, 1979,
which fix the effective rate of interest on loan transactions with maturities of more than 730
days to not exceeding 19% per annum (Circular No. 586) and not exceeding 21% per annum
(Circular No. 705) "on both secured and unsecured loans as defined by the Usury Law, as
amended."
In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan was
meant by the Monetary Board, the more equitable construction is to limit CIRCULAR No. 494
to loans guaranteed by securities other than mortgage upon registered realty.
WHEREFORE, the Court rules that while an escalation clause like the one in question can
ordinarily be held valid, nevertheless, petitioner Banco Filipino cannot rely thereon to raise
the interest on the borrower's loan from 12% to 17% per annum because Circular No. 494 of
the Monetary Board was not the "law" contemplated by the parties, nor should said Circular
be held as applicable to loans secured by registered real estate in the absence of any such
specific indication and in contravention of the policy behind the Usury Law. The judgment
appealed from is, therefore, hereby affirmed in so far as it orders petitioner Banco Filipino
to desist from enforcing the increased rate of interest on petitioner's loan.
The Temporary Restraining Orders heretofore issued are hereby made permanent if the
escalation clauses are Identical to the one herein and the loans involved have applied the
increased rate of interest authorized by Central Bank Circular No. 494.
SO ORDERED.
G.R. No. 187930 February 23, 2015
NEW WORLD DEVELOPERS AND MANAGEMENT, INC., Petitioner,
vs.
AMA COMPUTER LEARNING CENTER, INC., Respondent.
x-----------------------x
G.R. No. 188250
AMA COMPUTER LEARNING CENTER, INC., Petitioner.
vs.
NEW WORLD DEVELOPERS AND MANAGEMENT, INC., Respondent,
DECISION
SERENO, CJ:
Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of
Court assailing the Court of Appeals (CA) Decision1 dated 22 January 2009 and
Resolution2 dated 18 May 2009 in CA-G.R. CV No. 89483.
The CA Decision ordered AMA Computer Learning Center, Inc. (AMA) to pay New World
Developers and Management, Inc. (New World) unpaid rentals for 2 months, as well
asliquidated damages equivalent to 4 months’ rent. The CA Resolution denied the separate
motions for reconsideration filed by the parties.
FACTS
New World is the owner of a commercial building located at No. 1104-1118 España corner
Paredes Streets, Sampaloc, Manila.3 In 1998, AMA agreed to lease the entire second floor of
the building for its computer learning center, and the parties entered into a Contract of
Lease4 covering the eight-year period from 15 June 1998 to 14 March 2006.
The monthly rental for the first year was set at ₱181,500, with an annual escalation rate
equivalent to 15% for the succeeding years.5 It was also provided that AMA may
preterminate the contract by sending notice in writing to New World at least six months
before the intended date.6 In case of pretermination, AMA shall be liable for liquidated
damages in an amount equivalent to six months of the prevailing rent.
In compliance with the contract, AMA paid New World the amount of ₱450,000 as advance
rental and another ₱450,000 as security deposit.7
For the first three years, AMA paid the monthly rent as stipulated in the contract, with the
required adjustment in accordance with the escalation rate for the second and the third
years.8
In a letter dated 18 March 2002, AMA requested the deferment of the annual increase in
the monthly rent by citing financial constraints brought about by a decrease in its
enrollment. New World agreed to reduce the escalation rate by 50% for the next six months.
The following year, AMA again requested the adjustment of the monthly rent and New
World obliged by granting a 45% reduction of the monthly rent and a 5% reduction of the
escalation rate for the remaining term of the lease. For this purpose, the parties entered
into an Addendum to the Contract of Lease.9
On the evening of 6 July 2004, AMA removed all its office equipment and furniture from the
leased premises. The following day, New World received a letter from AMA dated 6 July
200410 stating that the former had decided to preterminate the contract effective
immediately on the ground of business losses due to a drastic decline in enrollment. AMA
also demanded the refund of its advance rental and security deposit.
11
New World replied in a letter dated 12 July 2004, to which was attached a Statement of
Account12 indicating the following amounts to be paid by AMA: 1) unpaid two months’ rent
in the amount of ₱466,620; 2) 3% monthly interest for the unpaid rent in the amount of
₱67,426.59; 3) liquidated damages equivalent to six months of the prevailing rent in the
amount of ₱1,399,860; and 4) damage to the leased premises amounting to ₱15,580. The
deduction of the advance rental and security deposit paid by AMA still left an unpaid
balance in the amount of ₱1,049,486.59.
Despite the meetings between the parties, they failed to arrive at a settlement regarding
the payment of the foregoing amounts.13
On 27 October 2004, New World filed a complaint for a sum of money and damages against
AMA before the Regional Trial Court of Marikina City, Branch 156 (RTC).14
RULING OF THE RTC
In a Decision15 dated 31 January 2007, the RTC ordered AMA to pay New World ₱466,620 as
unpaid rentals plus 3% monthly penalty interest until payment; ₱1,399,860 as liquidated
damages equivalent to six months’ rent, with the advance rental and security deposit paid
by AMA to be deducted therefrom; ₱15,580 for the damage to the leased premises;
₱100,000 as attorney’s fees; and costs of the suit.
According to the RTC, AMA never denied that it had arrearages equivalent to two months’
rent. Other than its allegation that it did not participate in the preparation of the Statement
of Account, AMA did not proffer any evidence disputing the unpaid rent. For its part, New
World clearly explained the existence of the arrears.
While sympathizing with AMA in view of its business losses, the RTC ruled that AMA could
not shirk from its contractual obligations, which provided that it had to pay liquidated
damages equivalent to six months’ rent in case of a pretermination of the lease.
The RTC provided no bases for awarding ₱15,580 for the damage to the leased premises and
₱100,000 for attorney’s fees, while denying the prayer for exemplary and moral damages.
Upon the denial of its motion for reconsideration, AMA filed an appeal before the CA. 16
RULING OF THE CA
In the assailed Decision dated 22 January 2009, the CA ordered AMA to pay New World
₱466,620 for unpaid rentals and ₱933,240 for liquidated damages equivalent to four
months’ rent, with the advance rental and security deposit paid by AMA to be deducted
therefrom.17
The appellate court ruled that the RTC erred in imposing a 3% monthly penalty interest on
the unpaid rent, because there was no stipulation either in the Contract of Lease or in the
Addendum to the Contract of Lease concerning the imposition of interest in the event of a
delay in the payment of the rent.18 Thus, the CA ruled that the rent in arrears should earn
interest at the rate of 6% per annum only, reckoned from the date of the extrajudicial
demand on 12 July 2004 until the finality of the Decision. Thereafter, interest at the rate
of12% per annum shall be imposed until full payment.
The CA also ruled that the RTC’s imposition of liquidated damages equivalent to six months’
rent was iniquitous.19While conceding that AMA was liable for liquidated damages for
preterminating the lease, the CA also recognized that stipulated penalties may be equitably
reduced by the courts based on its sound discretion. Considering that the unexpired portion
of the term of lease was already less than two years, and that AMA had suffered business
losses rendering it incapable of paying for its expenses, the CA deemed that liquidated
damages equivalent to four months’ rent was reasonable.20
The appellate court deleted the award for the damage to the leased premises, because no
proof other than the Statement of Account was presented by New World.21 Furthermore,
noting that the latter was already entitled to liquidated damages, and that the trial court did
not give any justification for attorney’s fees, the CA disallowed the award thereof.22
Both parties filed their respective motions for reconsideration, which were denied in the
assailed Resolution dated 10 May 2009.
Hence, the present petitions for review on certiorari. On 3 August 2009, the Court resolved
to consolidate the petitions, considering that they involve the same parties and assail the
same CA Decision and Resolution.23
PARTIES’ POSITIONS
According to New World, when parties freely stipulate on the manner by which one may
preterminate the lease, that stipulation has the force of law between them and should be
complied with in good faith.24 Since AMA preterminated the lease, it became liable to
liquidated damages equivalent to six months’ rent. Furthermore, its failure to give notice to
New World six months prior to the intended pretermination of the contract and its leaving
the leased premises in the middle of the night, with all its office equipment and furniture,
smacked of gross bad faith that renders it undeserving of sympathy from the courts. 25 Thus,
the CA erred in reducing the liquidated damages from an amount equivalent to six months’
rent to only four months.
New World also challenges the CA Decision and Resolution for disallowing the imposition of
the 3% monthly interest on the unpaid rentals. It is argued that AMA never disputed the
imposition of the 3% monthly interest; rather, it only requested that the interest rate be
reduced.26
On the other hand, AMA assails the CA ruling for not recognizing the fact that compensation
took place between the unpaid rentals and the advance rental paid by AMA.27 Considering
that the obligation of AMA as to the arrears has been extinguished by operation of law,
there would be no occasion for the imposition of interest.28
AMA also prays for the further reduction of the liquidated damages to an amount
equivalent to one month’s rent up to one and a half months, arguing that four months’
worth of rent is still iniquitous on account of the severe financial losses it suffered.29
ISSUES
1. Whether AMA is liable to pay six months’ worth of rent as liquidated damages.
2. Whether AMA remained liable for the rental arrears.
OUR RULING
I.
AMA is liable for six months’ worth of rent as liquidated damages.
Item No. 14 of the Contract of Lease states:
That [AMA] may pre-terminate this Contract of Lease by notice in writing to [New World] at
least six (6) months before the intended date of pretermination, provided, however, that in
such case, [AMA] shall be liable to [New World] for an amount equivalent to six (6) months
current rental as liquidated damages;30
Quite notable is the fact that AMA never denied its liability for the payment of liquidated
damages in view of its pretermination of the lease contract with New World. What it claims,
however, is that it is entitled to the reduction of the amount due to the serious business
losses it suffered as a result of a drastic decrease in its enrollment.
This Court is, first and foremost, one of law. While we are also a court of equity, we do not
employ equitable principles when well-established doctrines and positive provisions of the
law clearly apply.31
The law does not relieve a party from the consequences of a contract it entered into with all
the required formalities.32 Courts have no power to ease the burden of obligations
voluntarily assumed by parties, just because things did not turn out as expected at the
inception of the contract.33 It must also be emphasized that AMA is an entity that has had
significant business experience, and is not a mere babe in the woods.
Articles 1159 and 1306 of the Civil Code state:
Art. 1159. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.
xxxx
Art. 1306. The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy.
The fundamental rule is that a contract is the law between the parties. Unless it has been
shown that its provisions are wholly or in part contrary to law, morals, good customs, public
order, or public policy, the contract will be strictly enforced by the courts.34
In rebuttal, AMA invokes Article 2227 of the Civil Code, to wit:
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable.
In Ligutan v. CA, we held that the resolution of the question of whether a penalty is
reasonable, or iniquitous or unconscionable would depend on factors including but not
limited to the type, extent and purpose of the penalty; the nature of the obligation; the
mode of the breach and its consequences; the supervening realities; and the standing and
relationship of the parties.35 The appreciation of these factors is essentially addressed to the
sound discretion of the court.36
It is quite easy to understand the reason why a lessor would impose liquidated damages in
the event of the pretermination of a lease contract. Pretermination is effectively the breach
of a contract, that was originally intended to cover an agreed upon period of time. A definite
period assures the lessor a steady income for the duration. A pretermination would
suddenly cut short what would otherwise have been a longer profitable relationship. Along
the way, the lessor is bound to incur losses until it is able to find a new lessee, and it is this
loss of income that is sought to be compensated by the payment of liquidated damages.
There might have been other ways to work around its difficult financial situation and lessen
the impact of the pretermination to both parties. However, AMA opted to do the following:
1. It preterminated the lease without notifying New World at least six months
before the intended date.
2. It removed all its office equipment and left the premises in the middle of the
night.
3. Only after it had cleared the premises did it send New World a notice of
pretermination effective immediately.
 4. It had the gall to demand a full refund of the advance rental and security deposit,
albeit without prejudice to their removal of the improvements introduced in the
premises.
We cannot understand the inability of AMA to be forthright with New World, considering
that the former had been transparent about its business losses in its previous requests for
the reduction of the monthly rental. The drastic decrease in AMA’s enrollment had been
unfolding since 2002. Thus, it cannot be said that the business losses had taken it by
surprise. It is also highly unlikely that the decision to preterminate the lease contract was
made at the last minute. The cancellation of classes, the transfer of students, and
administrative preparations for the closure of the computer learning center and the removal
of office equipment therefrom should take at least weeks, if not months, of logistic
planning. Had AMA come clean about the impending pretermination, measures beneficial to
both parties could have been arrived at, and the instant cases would not have reached this
Court. Instead, AMA forced New World to share in the former’s losses, causing the latter to
scramble for new lessees while the premises remained untenanted and unproductive.
In the sphere of personal and contractual relations governed by laws, rules and regulations
created to promote justice and fairness, equity is deserved, not demanded. The application
of equity necessitates a balancing of the equities involved in a case,37 for "[h]e who seeks
equity must do equity, and he who comes into equity must come with clean
hands."38 Persons in dire straits are never justified in trampling on other persons’ rights.
Litigants shall be denied relief if their conduct has been inequitable, unfair and dishonest as
to the controversy in issue.39 The actions of AMA smack of bad faith.
We cannot abide by the prayer for the further reduction of the liquidated damages. We find
that, in view of the surrounding circumstances, the CA even erred in reducing the liquidated
damages to four month’s worth of rent. Under the terms of the contract, and in light of the
failure of AMA to show that it is deserving of this Court’s indulgence, the payment of
liquidated damages in an amount equivalent to six months’ rent is proper.
Also proper is an award of exemplary damages. Article 2234 of the Civil Code provides:
Art. 2234. While the amount of the exemplary damages need not be proved, the plaintiff
must show that he is entitled to moral, temperate or compensatory damages before the
court may consider the question of whether or not exemplary damages should be awarded.
In case liquidated damages have been agreed upon, although no proof of loss is necessary in
order that such liquidated damages may be recovered, nevertheless, before the court may
consider the question of granting exemplary in addition to the liquidated damages, the
plaintiff must show that he would be entitled to moral, temperate or compensatory
damages were it not for the stipulation for liquidated damages. (Emphasis supplied)
In this case, it is quite clear that New World sustained losses as a result of the unwarranted
acts of AMA. Further, were it not for the stipulation in the contract regarding the payment
of liquidated damages, we would be awarding compensatory damages to New World.
"Exemplary damages are designed by our civil law to permit the courts to reshape behaviour
that is socially deleterious in its consequence by creating negative incentives or deterrents
against such behaviour."40 As such, they may be awarded even when not pleaded or prayed
for.41 In order to prevent the commission of a similar act in the future, AMA shall pay New
World exemplary damages in the amount of ₱100,000.
II.
AMA’s liability for the rental arrears has already been extinguished.
AMA assails the CA ruling mainly for the imposition of legal interest on the rent in arrears.
AMA argues that the advance rental has extinguished its obligation as to the arrears. Thus, it
says, there is no more basis for the imposition of interest at the rate of 6% per annum from
the date of extrajudicial demand on 12 July 2004 until the finality of the Decision, plus
interest at the rate of 12% per annum from finality until full payment.
At this juncture, it is necessary to look into the contract to determine the purpose of the
advance rental and security deposit.
Item Nos. 2, 3 and 4 of the Contract of Lease provide:
 xxxx 4. Upon signing of the Contract, [AMA] shall pay [New World] a Security Deposit in
the amount of FOUR HUNDRED FIFTY THOUSAND PESOS (₱450,000.00) which shall
2. That [AMA] shall pay to [New World] in advance within the first 5 days of each be applied for any unpaid rental balance and damages on the leased premises, and
calendar month a monthly rental in accordance with the following schedule for the the balance of which shall be refunded by [New World] to [AMA] within sixty (60)
entire term of this Contract of Lease; days after the termination of the Contract, it being understood that such balance is
being held by [New World] in trust for [AMA].42
PERIOD MONTHLY RENTAL RATES
Based on Item No. 4, the security deposit was paid precisely to answer for unpaid rentals
Year 1 June 15, 1998 – Mar 14, 1999 181,500.00 that may be incurred by AMA while the contract was in force. The security deposit was held
in trust by New World, and whatever may have been left of it after the termination of the
Year 2 Mar 15, 1999 – Mar 14, 2000 ₱208,725.00 lease shall be refunded to AMA.
Year 3 Mar 15, 2000 – Mar 14, 2001 ₱240,033.75
Based on Item No. 3 in relation to Item No. 2, the parties divided the advance rental of
Year 4 Mar 15, 2001 – Mar 14, 2002 ₱276,038.81 ₱450,000 by 12 months. They came up with ₱37,500, which they intended to deduct from
the monthly rental to be paid by AMA for the last year of the lease term. Thus, unlike the
Year 5 Mar 15, 2002 – Mar 14, 2003 ₱317,444.63 security deposit, no part of the advance rental was ever meant to be refunded to AMA.
Year 6 Mar 15, 2003 – Mar 14, 2004 ₱365,061.33 Instead, the parties intended to apply the advance rental, on a staggered basis, to a portion
of the monthly rental in the last year of the lease term.
Year 7 Mar 15, 2004 – Mar 14, 2005 ₱419,820.53
Considering the pretermination of the lease contract in the present case, this intent of the
Year 8 Mar 15, 2005 – Mar 14, 2006 ₱482,793.61 parties as regards the advance rental failed to take effect. The advance rental, however,
(₱482,793.61 – 37,500 = retains its purpose of answering for the outstanding amounts that AMA may owe New
₱445,293.61) World.

The monthly rentals referred to above were computed at an escalation rate of
Fifteen Percent (15%) every year for the entire duration of this lease contract.
3. Upon signing of this Contract, [AMA] shall pay advance rental in the amount of
FOUR HUNDRED FIFTY THOUSAND PESOS (₱450,000.00); Said advance rental shall
be applied as part of the rental for the last year of the Contract with a remaining
balance of Four Hundred Forty Five Thousand Two Hundred Ninety Three and
61/100 Pesos (₱445,293.61) as monthly rental for the tenth [sic] and last year of the
lease term;
We now delve into the actual application of the security deposit and the advance rental.
At the time of the pretermination of the contract of lease, the monthly rent stood at
₱233,310, inclusive of taxes;43hence, the two-month rental arrears in the amount of
₱466,620.
Applying the security deposit of ₱450,000 to the arrears will leave a balance of ₱16,620 in
New World’s favor.1âwphi1Given that we have found AMA liable for liquidated damages
equivalent to six months’ rent in the amount of ₱1,399,860 (monthly rent of ₱233,310
multiplied by 6 months), its total liability to New World is ₱1,416,480.
We then apply the advance rental of ₱450,000 to this amount to arrive at a total
extinguishment of the liability for the unpaid rentals and a partial extinguishment of the
liability for liquidated damages. This shall leave AMA still liable to New World in the amount
of ₱966,480 (₱1,416,480 total liability less ₱450,000 advance rental).
Not constituting a forbearance of money,44 this amount shall earn interest pursuant to Item
II(2)45 of our pronouncement in Eastern Shipping Lines v. CA.46 This item remained
unchanged by the modification made in Nacar v. Gallery Frames.47 Interest at the rate of 6%
per annum is hereby imposed on the amount of 966,480 from the time of extrajudicial
demand on 12 July 2004 until the finality of this Decision.
Thereafter – this time pursuant to the modification in Nacar– the amount due shall earn
interest at the rate of 6% per annum until satisfaction, this interim period being deemed to
be by then equivalent to a forbearance of credit.48
Considering the foregoing, there was no occasion for the unpaid two months’ rental to earn
interest. Besides, we cannot sanction the imposition of 3% monthly penalty interest
thereon. We quote with approval the ruling of the CA on this issue:
If the obligation consists in the payment of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment
of the interest agreed upon and in the absence of stipulation, the legal interest, which is six
per cent per annum.
In the instant case, the Contract of Lease and the Addendum to the Contract of Lease do not
specify any interest in the event of delay of payment of rentals. Accordingly, there being no
stipulation concerning interest, the trial court erred in imposing 3% interest per month on
the two-month unpaid rentals.
[New World] argues that the said3% interest per month on the unpaid rentals was agreed
upon by the parties as allegedly shown in Exhibits "A-4", "A-5", "A-6", "B-4", and "B-5".
We are not persuaded.
[New World’s] letter dated 12 July 2004 to [AMA], Statement of Account dated 07 July 2004;
and another Statement of Account dated 27 October 2004 were all prepared by [New
World], with no participation or any indication of agreement on [AMA’s] part. The alleged
proposal of [AMA] as contained in the Schedule of Receivable/Payable is just a computer
print-out and does not contain any signature showing [AMA’s] conformity to the same.49
Having relied on the Contract of Lease for its demand for payment of liquidated damages,
New World should have also referred to the contract to determine the proper application of
the advance rental and security deposit. Had it done so in the first instance, it would have
known that there is no occasion for the imposition of interest, 3% or otherwise, on the
unpaid rentals. WHEREFORE, the Court of Appeals Decision dated 22 January 2009 and
Resolution dated 10 May 2009 in CA-G.R. CV No. 89483 is AFFIRMED with MODIFICATION.
AMA Computer Learning Center, Inc. is ordered to pay New World Developers and
Management, Inc. the amount of ₱966,480, with interest at the rate of 6% per annum from
12 July 2004 until full payment.
In addition, AMA shall pay New World exemplary damages in the amount of ₱100,000,
which shall earn interest at the rate of 6% per annum from the finality of this Decision until
full payment.
SO ORDERED.